SCNX 10-Q
Scienture Holdings, Inc. (SCNX)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
the Quarterly Period Ended
OR
For the Transition Period from _______ to _______
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There were shares the registrant’s common stock outstanding on May 6, 2022 and no shares of preferred stock outstanding.
TRxADE HEALTH, INC.
FORM 10-Q
For the Quarter Ended March 31, 2022
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”), including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements, within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995, 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. These factors include, but are not limited to:
| ● | Risks of our operations not being profitable; | |
| ● | Claims relating to alleged violations of intellectual property rights of others; | |
| ● | Technical problems with our websites; | |
| ● | Risks relating to implementing our acquisition strategies; | |
| ● | Our ability to manage our growth; | |
| ● | Negative effects on our operations associated with the opioid pain medication health crisis; | |
| ● | Regulatory and licensing requirement risks; | |
| ● | Risks related to changes in the U.S. healthcare environment; | |
| ● | The status of our information systems, facilities and distribution networks; | |
| ● | Risks associated with the operations of our more established competitors; | |
| ● | Regulatory changes; | |
| ● | Healthcare fraud; | |
| ● | The continued effects of COVID-19, governmental responses thereto, economic downturns and possible recessions caused thereby; | |
| ● | Inflation; | |
| ● | Changes in laws or regulations relating to our operations; | |
| ● | Privacy laws; | |
| ● | System errors; | |
| ● | Dependence on current management; | |
| ● | Our growth strategy; and | |
| ● | Other risks disclosed below under, and incorporated by reference in, “Risk Factors”. |
You should read the matters described and incorporated by reference in “Risk Factors” and the other cautionary statements made in this Report, and incorporated by reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements.
Forward-looking statements speak only as of the date of this Report or the date of any document incorporated by reference in this Report, as applicable. Except to the extent required by applicable law or regulation, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
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. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, and in other reports we file with the SEC, and in our most recent Annual Report on Form 10-K. All references to years relate to the calendar year ended December 31 of the particular year.
| 3 |
Summary Risk Factors
We face risks and uncertainties related to our business, many of which are beyond our control. In particular, risks associated with our business include:
| ● | We have in the past been adversely affected by COVID-19 and may continue to be adversely affected by COVID-19 and/or governmental responses thereto, as well as supply chain issues relating thereto; | |
| ● | We are currently unprofitable, have generated net losses, and we may incur losses in the future; | |
| ● | We may need additional financing in the future, which may not be available on favorable terms, if at all; | |
| ● | We may not be able to manage our future growth; | |
| ● | Many of our competitors are better established and have resources significantly greater than ours; | |
| ● | We face risks associated with our operations within the pharmaceutical distribution market; | |
| ● | We are dependent on our current management; | |
| ● | We rely on third party contracts, which may not be renewed or may be terminated; | |
| ● | We are currently facing and may in the future face difficulties in sourcing products and inventory due to a variety of causes; | |
| ● | We have in the past, and may in the future, not be able to sell our inventory, at or above the price we acquired such inventory for, have in the past, and may in the future, be forced to write-down inventory and certain of our other assets which may have a material adverse effect on our balance sheet; | |
| ● | We have in the past, and may in the future, not receive products or receive refunds for deposited amounts and have experience losses in connection with such deposits; | |
| ● | We may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could require us to pay significant damages and limit our ability to operate; | |
| ● | Our business and operations depend on the proper functioning of information systems, critical facilities and distribution networks and a disruption, cyber-attack, failure or destruction of such networks, systems, or technologies may disrupt our business or result in liability; | |
| ● | There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could subject the Company to significant reputational, financial, legal and operational consequences; | |
| ● | We face risks associated with our business in the telehealth market, including risks associated with legal challenges, relationships with third parties and affiliated professionals, our network of qualified providers, competition for services; new technologies, failure to develop widespread brand awareness and regulatory risks from the Office of Inspector General, U.S. Department of Health and Human Services (OIG) and the United States Department of Justice (DOJ) around the practice of telehealth and expiring COVID-19 waivers; | |
| ● | Our certificate of incorporation limits the liability of our officers and directors and provides for indemnification rights, mandatory forum selection provisions and limits the ability of stockholders to call special meetings of stockholders; | |
| ● | We incur significant costs to ensure compliance with U.S. and NASDAQ Capital Market reporting and corporate governance requirements; | |
| ● | We may not be able to comply with NASDAQ’s continued listing standards; | |
| ● | Regulatory changes that affect our distribution channels could harm our business; | |
| ● | Healthcare fraud laws are often vague and uncertain, exposing us to potential liability; | |
| ● | New and expanded laws or regulations could have a material adverse effect on our business operations, cash flows or future prospects; | |
| ● | The public health crisis involving the abuse of prescription opioid pain medication could have a material negative effect on our business; | |
| ● | Consolidation in the U.S. healthcare industry may negatively impact our results of operations; | |
| ● | We have identified material weaknesses in our internal control over financial reporting and controls and procedures; | |
| ● | There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price of our comment stock may continue to be volatile; | |
| ● | Stockholders may experience dilution to future equity sales, the exercise or conversion of outstanding convertible securities or future transactions; | |
| ● | Our Chief Executive Officer and President are our two largest stockholders and, as a result, they can exert control over us and have actual or potential interests that may differ from yours; | |
| ● | Risks associated with the JOBS Act and our status as an emerging growth company; | |
| ● | Risks associated with future acquisitions, including unknown liabilities and difficulty integrating such acquisitions; | |
| ● | Cyber security attacks and website problems; | |
| ● | Claims, litigation, government investigations, and other proceedings that may adversely affect our business and results of operations; and | |
| ● | Other risk factors included under “Risk Factors” in our latest Annual Report on Form 10-K and set forth below under “Risk Factors”. |
| 4 |
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRxADE HEALTH, INC.
Consolidated Balance Sheets
March 31, 2022, and December 31, 2021
(unaudited)
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid Assets | ||||||||
| Undeposited funds | - | |||||||
| Total Current Assets | ||||||||
| Property Plant and Equipment, Net | ||||||||
| Intangible Asset, net | - | |||||||
| Other Assets | ||||||||
| Deposits | ||||||||
| Right of use Leased Assets | ||||||||
| Research and Development | - | |||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | ||||||||
| Accrued Liabilities | ||||||||
| Current Portion Lease Liabilities | ||||||||
| Customer Deposits | - | |||||||
| Notes Payable— Related Party | - | |||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Notes Payable—Related Party | - | |||||||
| Other Long-Term Liabilities — Leases | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Series A Preferred Stock, $par value; shares authorized; issued and outstanding, as of March 31, 2022 and December 31, 2021 | ||||||||
| Common Stock, $ par value; shares authorized; and shares issued and outstanding, as of March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional Paid-in Capital | ||||||||
| Retained Deficit | ( | ) | ( | ) | ||||
| Total TRxADE HEALTH, INC. stockholders’ equity | ||||||||
| Non-Controlling Interest | - | |||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
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TRxADE HEALTH, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2022, and 2021
(unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross Profit | ||||||||
| Operating Expense | ||||||||
| Wage and Salary Expense | ||||||||
| Professional Fees | ||||||||
| Accounting and Legal Expense | ||||||||
| Technology Expense | ||||||||
| General and Administrative | ||||||||
| Operating Loss | ( | ) | ( | ) | ||||
| Gain on Disposal of Asset | - | |||||||
| Interest Expense | ( | ) | ( | ) | ||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to TRxADE HEALTH, Inc. | ( | ) | ( | ) | ||||
| Net loss attributable to non-controlling interests | ( | ) | - | |||||
| Net loss per Common Share — Basic and Diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average Common Shares Outstanding – Basic and Diluted | ||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
| 6 |
TRxADE HEALTH, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2022, and 2021
(unaudited)
| Stockholders’ | ||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||
| Attributable to | ||||||||||||||||||||||||||||||||
Series A Preferred Stock | Common Stock | Non- Controlling | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | $ Amount | Shares | $ Amount | Interest | Capital | (Deficit) | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | | |||||||||||||||||||||||
| Capital Contributions | - | - | - | - | - | |||||||||||||||||||||||||||
| Common Stock Issued for Services | - | - | - | - | ||||||||||||||||||||||||||||
| Warrants Exercised for Cash | - | - | - | - | ||||||||||||||||||||||||||||
| Options Expense | - | - | - | - | - | |||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||
| Attributable to | ||||||||||||||||||||||||||||||||
Series A Preferred Stock | Common Stock | Non Controlling | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | $ Amount | Shares | $ Amount | Interest | Capital | (Deficit) | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2020 | - | - | ( | ) | ||||||||||||||||||||||||||||
| Common Stock Issued for Services | - | - | - | |||||||||||||||||||||||||||||
| Options Expense | - | - | - | - | ||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | - | $ | $ | ( | ) | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements
| 7 |
TRxADE HEALTH, INC.
Consolidated Statements of Cash Flows
For the Three months ended March 31, 2022, and 2021
(unaudited)
| 2022 | 2021 | |||||||
| Operating Activities: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income (loss) to net cash used in Operating activities: | ||||||||
| Depreciation Expense | ||||||||
| Options Expense | ||||||||
| Common Stock Issued for Services | ||||||||
| Bad Debt Expense | - | |||||||
| Gain on sale of asset | ( | ) | - | |||||
| Amortization of Right of Use Assets | ||||||||
| Changes in Operating assets and liabilities: | ||||||||
| Other assets | ( | ) | - | |||||
| Accounts Receivable, net | ( | ) | ( | ) | ||||
| Prepaid Assets | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Undeposited Customer Funds | ( | ) | - | |||||
| Investment in Sub | - | |||||||
| Lease Liability | ( | ) | ( | ) | ||||
| Accounts Payable | ||||||||
| Accrued Liabilities | ||||||||
| Customer Deposits | - | |||||||
| Net Cash Used in operating activities | ( | ) | ( | ) | ||||
| Investing Activities: | ||||||||
| Sale of Fixed Assets | - | |||||||
| Net Cash Provided by investing activities | - | |||||||
| Financing Activities: | ||||||||
| Distributions to Non-Controlling Interest | ( | ) | - | |||||
| Proceeds from Exercise of Warrants | - | |||||||
| Net Cash Used in financing activities | ( | ) | - | |||||
| Net Increase (Decrease) in Cash | ( | ) | ( | ) | ||||
| Cash at beginning of the Period | ||||||||
| Cash at End of the Period | $ | $ | ||||||
| Supplemental Cash Flow Information | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
| Cash Paid for Income Taxes | $ | $ | ||||||
| Non-Cash Transactions | ||||||||
| Insurance Premium Financed | $ | $ | ||||||
| Note Issued as SOSRx Contribution | $ | $ | ||||||
| Intangible Asset Contribution from Non-controlling interest | $ | $ | ||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
| 8 |
TRxADE HEALTH, INC.
Notes to Unaudited Consolidated Financial Statements
For the Three months ended March 31, 2022, and 2021
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
TRxADE
HEALTH, INC. (“we”, “our”, “Trxade”, and the “Company”) owns
Trxade, Inc., operates a web-based market platform that enables commerce among healthcare buyers and sellers of pharmaceuticals, accessories and services.
Integra Pharma Solutions, LLC (d.b.a. Trxade Prime), is a licensed pharmaceutical wholesaler and sells brand, generic and non-drug products to customers. Trxade Prime customers include all healthcare markets including government organizations, hospitals, clinics and independent pharmacies nationwide.
Alliance Pharma Solutions, LLC (d.b.a. DelivMeds) invested in SyncHealth MSO, LLC, a managed services organization, in January 2019, which investment was divested in February 2020. DelivMeds is currently being rebranded and the consumer-based app is still being developed. To date we have not generated any revenue from this product.
Community Specialty Pharmacy, LLC, is an accredited independent retail pharmacy with a focus on a community-based model offering home delivery services to patients.
Bonum
Health, LLC, was formed to hold certain telehealth assets acquired in October 2019. The “Bonum Health Hub” was launched
in February 2020; however, due to the COVID-19 pandemic the Company does not anticipate installations moving forward, and has taken a
write off of the hubs purchased at June 30, 2021, in Loss on Inventory Investments of $
On
February 15, 2022 the Company entered into a relationship with Exchange Health, LLC, a technology company providing an online platform
for manufacturers and suppliers to sell and purchase pharmaceuticals (“Exchange Health”). SOSRx LLC, the created entity
relating to the relationship, a Delaware limited liability company, was formed in February 2022, and is owned
Basis of Presentation - The accompanying unaudited interim consolidated financial statements of TRxADE HEALTH, 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 Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 28, 2022.
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, 2021, as reported in the Company’s Annual Report on Form 10-K have been omitted.
Accounts
Receivable – The Company’s receivables are from customers and are typically collected within 90 days. The Company determines
the allowance based on known troubled accounts, historical experience, and other currently available evidence. During the three-months
ended March 31, 2022, and 2021, bad debt expense was $
The
Company had an Account Receivable with a single customer, GSG PPE, LLC, for the amount of $
Income
(loss) Per Common Share – Basic net income per common share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding. Diluted net income per common share is computed similar to basic net income
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 dilutive. The dilutive effect of the Company’s
options and warrants is computed using the treasury stock method. As of March 31, 2022, we had
| 9 |
For the three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Numerator: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Numerator for basic and diluted EPS - income (loss) available to common Shareholders | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Denominator for basic and diluted EPS – Weighted average shares | ||||||||
| Basic and diluted loss per common share | $ | ( | ) | $ | ( | ) | ||
NOTE 2– SHORT TERM DEBT – RELATED PARTIES
On
February 15, 2022, the Company entered into a relationship with Exchange Health, a technology company providing an online platform for
manufacturers and suppliers to sell and purchase pharmaceuticals. SOSRx, was formed, which is owned
At
March 31, 2022, total related party debt was $
In
October 2018, in connection with the acquisition of Community Specialty Pharmacy, LLC, a $
At March 31, 2021, related party debt was $
NOTE 3 – STOCKHOLDERS’ EQUITY
2021 Equity Compensation Awards
On April 15, 2021, the Board of Directors, with the recommendation of the Compensation Committee, approved the grant of options to purchase an aggregate of shares of our common stock to certain employees of the Company, in consideration for services to be rendered by such individuals through 2025. The options vest at the rate of ¼th of such options per year, on the first, second, third and fourth anniversaries of the grant date, subject to such option holders continuing to provide services to the Company on such dates, subject to the terms of the Company’s Second Amended and Restated 2019 Equity Incentive Plan (the “Plan”) and the option agreements entered into evidence such grants. The options were granted pursuant to, and are subject to, the Plan, and have a term of from the grant date. The options have an exercise price of $ per share, the closing price of the Company’s common stock on the date of the grant of such options.
| 10 |
In
connection with and pursuant to the independent director compensation policy previously adopted by the Board of Directors, on April 15,
2021, the then three independent members of the Board of Directors (Mr. Donald G. Fell, Dr. Pamela Tenaerts, and Mr. Michael L. Peterson),
were each awarded shares of restricted stock, valued at $
The Board of Directors of the Company, on May 27, 2021, confirmed the vesting of shares of common stock previously issued to each of Michael L. Peterson and Dr. Pamela Tenaerts on July 1, 2021, which were subject to forfeiture subject to such persons continued service on the Board of Directors prior to the vesting date.
In
connection with and pursuant to the independent director compensation policy previously adopted by the Board of Directors, on May 27,
2021, the Board of Directors awarded Charles L. Pope, and Christine L. Jennings, each independent members of the Board of Directors appointed
to the Board of Directors on May 27, 2021, shares of restricted stock each, valued at $
Employment Agreement with Suren Ajjarapu, Chief Executive Officer
In
connection with our employment agreement with Mr. Suren Ajjarapu, our Chief Executive Officer, which was effective on April 14, 2020,
we granted restricted shares of common stock which vest upon the Company reaching certain performance metrics established by the
Compensation Committee on the same date and further amended on May 5, 2020. The fair value of the shares at the grant date was determined
to be $
Stock Repurchase Program
On
May 27, 2021, the Board of Directors of the Company authorized and approved a share repurchase program for up to $
On July 18, 2021, our Board of Directors approved an “at-the-market” offering and paused the Stock Repurchase Program until the offering was complete.
On July 22, 2021, our Board of Directors delayed the “at-the-market” offering and reactivated the Stock Repurchase Program.
On August 5, 2021, our Board of Directors paused the Stock Repurchase Program until a planned “at-the-market” offering was complete, which “at-the-market” offering was terminated effective on December 5, 2021.
On
December 10, 2021, the Board of Directors authorized and approved the resumption of the Company’s prior share repurchase program
(as modified), as discussed above. The share repurchase program as approved by the Board of Directors on December 10, 2021, modified
the prior repurchase program to allow for the repurchase of up to of the currently outstanding shares of the Company’s
common stock.
To date, shares of common stock have been repurchased by the Company.
| 11 |
NOTE 4 – WARRANTS
For
the three-month period ended March 31, 2022, warrants were granted, and expired. For the three-month period of ended
March 31, 2022, warrants to purchase
The Company uses the Black-Scholes pricing model to estimate the fair value of stock-based awards on the date of the grant.
There was compensation cost related to the warrants granted for the three months ended March 31, 2022 and 2021 respectively.
The Company’s outstanding and exercisable warrants as of March 31, 2022, are presented below:
| Weighted | ||||||||||||||||
| Number | Average Exercise | Contractual Life | Intrinsic | |||||||||||||
| Warrants | Outstanding | Price | in Years | Value | ||||||||||||
| Warrants Outstanding as of December 31, 2021 | $ | $ | ||||||||||||||
| Warrants granted | - | - | ||||||||||||||
| Warrants forfeited, expired, cancelled | - | - | ||||||||||||||
| Warrants exercised | ( | ) | - | - | ||||||||||||
| Warrants Outstanding as of March 31, 2022 | $ | $ | ||||||||||||||
| Warrants Exercisable as of March 31, 2022 | $ | $ | ||||||||||||||
The Company maintains stock option plans under which certain employees are awarded option grants based on a combination of performance and tenure. The stock option plans provide for the grant of up to shares, and the Company’s Second Amended and Restated 2019 Equity Incentive Plan provides for automatic increases in the number of shares available under such plan (currently shares) on April 1st of each calendar year,
For the three-month period ended March 31, 2022, options to purchase shares were granted, were forfeited, and expired. For the three-month period ended March 31, 2022, options to purchase shares of common stock were exercised.
Total compensation cost related to stock options granted was $ and $ for the three-months ended March 31, 2022, and 2021, respectively.
| Number Outstanding | Weighted Average Exercise Price | Contractual Life in Years | Intrinsic Value | |||||||||||||
| Options Outstanding as of December 31, 2021 | $ | $ | ||||||||||||||
| Options Exercisable as of December 31, 2021 | $ | $ | ||||||||||||||
| Options granted | - | $ | - | - | - | |||||||||||
| Options forfeited | - | $ | - | - | - | |||||||||||
| Options expired | - | $ | - | - | - | |||||||||||
| Options exercised | - | $ | - | - | - | |||||||||||
| Options Outstanding as of March 31, 2022 | $ | $ | ||||||||||||||
| Options Exercisable as of March 31, 2022 | $ | $ | ||||||||||||||
| 12 |
NOTE 6 – OTHER RECEIVABLES
In
July 2020, the Company’s wholly-owned subsidiary, Integra Pharma Solutions, LLC (“Integra”), entered into an agreement
with Studebaker Defense Group, LLC (“Studebaker”) wherein Integra would pay Studebaker a down payment of $
In
August 2020, Integra, entered into an agreement with Sandwave Group Dsn Bhd (“Sandwave”), wherein Integra would pay Sandwave
a down payment of $
On
November 19, 2021, Integra filed a complaint against GSG PPE, LLC (“GSG”) and Gary Waxman (“Waxman”), the owner,
alleging three counts of breach of contract for a purchase agreement, a promissory note, and a personal guaranty. Collectively, the company
alleges that GSG and Waxman have materially breached all three contracts. In late 2020, GSG and Integra executed a valid initial contract
setting the terms of a business transaction. GSG failed to pay Integra approximately 75% of the amount owed to Integra. GSG acknowledged
it owed the money and executed a promissory note in favor of Integra in the amount of $
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NOTE 7 – CONTINGENCIES
Jain, et al., v. Memantine, et al.
In January 2020, we became aware of a complaint filed by Jitendra Jain, Manish Arora, Scariy Kumaramangalam, Harsh Datta and Balvant Arora (collectively, plaintiffs), against our wholly-owned subsidiary, Trxade, Inc. and our Chief Executive Officer, Suren Ajjarapu as well as certain unrelated persons, Annapurna Gundlapalli, Gajan Mahendiran and Nexgen Memantine (collectively, defendants), in the Circuit Court of Madison County, Alabama (Case:47-CV-2019-902216.00). The complaint alleged causes of actions against the defendants including fraud in the inducement, relating to certain investments alleged to have been made by plaintiffs in Nexgen Memantine, breach of fiduciary duty, conversion and voidable transactions. The complaint related to certain investments alleged made by the plaintiffs in Nexgen Memantine and certain alleged fraudulent transfers of assets and funds alleged to have been taken by the defendants which are unrelated to the Company.
On
May 14, 2021, Plaintiffs filed a second amended complaint against the defendants. The second amended complaint alleges causes of action
against the defendants including securities fraud, breach of fiduciary duty, violation of the Florida RICO Act, and breach of contract.
The operative complaint relates to certain investments alleged to have been made by the plaintiffs in Nexgen Memantine and certain alleged
transfers of assets and funds alleged to have been taken by the defendants which are unrelated to the Company. The amended complaint
seeks injunctive relief, $
In
February 2022, a settlement as to Suren Ajjarapu, Annapurna Gundlapalli and Trxade Group has been reached and signed. This settlement
involves no admission of liability and a full and complete release of all actions after a lump-sum payment of $
NOTE 8 – LEASES
The Company elected the practical expedient under Accounting Standards Update (ASU) 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019, but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing leases upon adoption. No impact was recorded to the beginning retained earnings for Topic 842. The Company has two operating leases for corporate offices. The following table outlines the details:
| Lease 1 | Lease 2 | |||||||
| Initial Lease Term | ||||||||
| Renewal Term | ||||||||
| Initial Recognition of right-of-use assets at January 1, 2019 | $ | $ | ||||||
| Incremental Borrowing Rate | % | % | ||||||
The
Company entered into a new corporate office lease (Lease 1) on January 1, 2022. The Company determined that entering into a new lease
required remeasurement of the lease liability resulting in the increase of the right-of-use asset and the associated lease liability
by $
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The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the operating lease liabilities recorded in the Consolidated Balance Sheet as of March 31, 2022.
| Amounts due within twelve months of March 31, 2022 | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: effect of discounting | ( | ) | ||
| Present value of future minimum lease payments | ||||
| Less: current obligations under leases | ||||
| Long-term lease obligations | $ | |||
For
the three months ended March 31, 2022, and 2021, amortization of Right of Use Assets was $
For
the three months ended March 31, 2022, and 2021, amortization of Lease Liability was $
NOTE 9 – SEGMENT REPORTING
The Company classifies its business interests into reportable segments which are Trxade, Inc., Community Specialty Pharmacy, LLC, Integra Pharma, LLC and Other. Operating segments are defined as the components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability, cash flows, and growth opportunities of each respective segment.
| Three Months Ended March 31, 2022 | Trxade, Inc. | CSP | Integra | Unallocated | Total | |||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Gross Profit | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
| Segment Assets | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
| Segment Profit/Loss | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
| Cost of Sales | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||
| Three Months Ended March 31, 2021 | Trxade, Inc. | CSP | Integra | Unallocated | Total | |||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Gross Profit | $ | $ | $ | $ | $ | |||||||||||||||
| Segment Assets | $ | $ | (405,348 | ) | $ | $ | $ | |||||||||||||
| Segment Profit/Loss | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
| Cost of Sales | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
NOTE 10 – SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date through May 9, 2022 the date that the financial statements were issued.
On April 18, 2022 the Company formed Bonum Health, Inc., a Delaware corporation. This subsidiary will serve as the parent company for Bonum Health, LLC.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Information
This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II. Other Information – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 28, 2022 (the “Annual Report”).
Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited consolidated financial statements included above under “Part I – Financial Information” – “Item 1. Financial Statements”.
Please see the section entitled “Glossary” in our Annual Report for a list of abbreviations and definitions used throughout this Report.
Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
The market data and certain other statistical information used throughout this Report are based on independent industry publications, reports by market research firms or other independent sources that we believe to be reliable sources. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosures contained in this Report, and we believe these industry publications and third-party research, surveys and studies are reliable. While we are not aware of any misstatements regarding any third-party information presented in this Report, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under, and incorporated by reference in, the section entitled “Risk Factors” of this Report. These and other factors could cause our future performance to differ materially from our assumptions and estimates. Some market and other data included herein, as well as the data of competitors as they relate to TRxADE HEALTH, INC., is also based on our good faith estimates.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” and “Trxade”, refer specifically to TRxADE HEALTH, INC. and its consolidated subsidiaries. References to “Q1” refer to the first quarter of the applicable year. Unless otherwise stated or the context otherwise requires, comparisons from one period to another are to the same period of the prior fiscal year.
In addition, unless the context otherwise requires and for the purposes of this report only:
| ● | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; | |
| ● | SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and | |
| ● | “Securities Act” refers to the Securities Act of 1933, as amended. |
Effective on February 12, 2020, the Company effected a stock split of its outstanding common stock in a ratio of 1-for-6 (“Reverse Stock Split”). Proportional retroactive adjustments were made to the conversion and exercise prices of the Company’s outstanding warrants and stock options, and to the number of shares issued and issuable under the Company’s stock incentive plans in connection with the Reverse Stock Split in the disclosures below.
Effective May 27, 2021, the Company filed a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware, to change the Company’s name to “TRxADE HEALTH, INC.”, which amendment was effective on June 1, 2021.
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Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “NASDAQ: MEDS,” “SEC Filings” page of our corporate website at www.rx.trxade.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report. Our corporate website address is www.rx.trxade.com. The information on, or that may be accessed through, our corporate website is not incorporated by reference into this Report and should not be considered a part of this Report.
Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
| ● | Company Overview. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A. | |
| ● | Recent Events. Summary of material transactions occurring during the three months ended March 31, 2022. | |
| ● | Liquidity and Capital Resources. An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition. | |
| ● | Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2022, and 2021. | |
| ● | Critical Accounting Policies. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. |
Company Overview
TRxADE HEALTH, INC. owns 100 percent of Trxade, Inc., and Integra Pharma Solutions, LLC (formerly Pinnacle Tek, Inc.), Alliance Pharma Solutions, LLC, Community Specialty Pharmacy, LLC, and Bonum Health, LLC. Integra was acquired in July 2013. We acquired 100 percent of Community Specialty Pharmacy, LLC, in October 2018. Alliance Pharma Solutions, LLC was formed in January 2018. On January 8, 2014, Trxade Group, Inc., a privately held Nevada corporation, which began operations in August 2020, merged with and into XCEL, and XCEL changed its name to “Trxade Group, Inc.” We acquired our Bonum Health operations in October 2019. Trxade, Inc. is a web-based market platform that enables commerce among healthcare buyers and sellers of pharmaceuticals, accessories and services. On February 15, 2022, the Company entered into a relationship with Exchange Health, LLC, a technology company providing an online platform for manufacturers and suppliers to sell and purchase pharmaceuticals (“Exchange Health”). SOSRx LLC, the created entity relating to the relationship, a Delaware limited liability company, was formed in February 2022, and is owned 51% by the Company and 49% by Exchange Health (“SOSRx”).
The Company changed its name on June 1, 2021, from “Trxade Group, Inc” to “TRxADE HEALTH, INC.” Our services provide pricing transparency, purchasing capabilities and other value-added services on a single platform focused on serving the nation’s approximately 19,397 independent pharmacies with annual purchasing power of $67.1 billion (according to the National Community of Pharmacists Association’s 2021 Digest). Our national wholesale supply partners are able to fulfill orders on our platform in real-time and provide pharmacies 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). We have expanded significantly since 2015 and now have around 13,475+ registered members on our sales platform.
TRxADE HEALTH is a technology-enabled health services platform. Through our subsidiary companies we focus on digitalizing the retail pharmacy and health services experience by optimizing drug procurement, the prescription journey, access to physicians in the patient’s home and patient engagement in the U.S.
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TRxADE Inc
Trxade.com is a web-based pharmaceutical marketplace engaged in promoting and enabling commerce among independent pharmacies, small chains, hospitals, clinics and alternate dispensing sites with large pharmaceutical suppliers nationally. Our marketplace has over 72 national and regional pharmaceutical suppliers providing over 120,000 branded and generic drugs, including over the counter drugs and drugs available for purchase by pharmacists. We generate revenue from these services by charging a transaction fee to the seller of the products for sales conducted on the Trxade platform. The buyers do not bear the cost of transaction fees for the purchases that they make, nor do they pay a fee to join or register with our platform. Our core service has the goal of bringing the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
As of March 31, 2022, the TRxADE platform increased its registered users by 915 or 7.3% compared to prior period in 2021. For the quarter ended March 31, 2022, new registrations were 339 compared to 223 for the prior period in 2021. As of March 31, 2022, total registered users increased to 13,475 from 12,560 from the prior period in 2021.
The table below summarizes the key metrics that management evaluated in relation to the activity on the Trxade platform for the three month period ended March 31, 2022 compared to the same period in 2021:
Integra Pharma Solutions, LLC
Integra Pharma Solutions, LLC (“Trxade Prime”) is a licensed wholesaler of brand, generic and non-drug products to customers. Trxade Prime takes orders for products, creates invoices for each order and recognizes revenue at the time the customer receives the product. We utilize “just in time” inventory and drop ship partnerships to ship orders to customers. The focus of Trxade Prime is to be the pharmaceutical supplier of choice for healthcare organizations of all sizes. Our expertise in the distribution of products extends to all healthcare markets including government organizations, hospitals, clinics, and independent pharmacies nationwide.
For the three months ended March 31, 2022, Trxade Prime processed sales increased over 600% from the three months ended March 31, 2021, and unique buyers increased by 184% compared to the same period for the three months ended March 31, 2021. These increases are a result of strong marketing and advertising campaigns designed to draw new potential buyers to the Trxade Prime platform. Management expects growth to continue throughout the fiscal year 2022.
The table below summarizes the key metrics that management evaluated in relation to the activity on the Trxade Prime platform for the three month period ended March 31, 2022 as compared to the same period in 2021:
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Community Specialty Pharmacy, LLC
Community Specialty Pharmacy, LLC (“CSP”) is a licensed retail pharmacy. CSP was founded in 2010 with a goal of providing customer care at a level above and beyond anything the market had experienced before. CSP has carved a niche in the competitive independent pharmacy industry with its patient-driven approach.
Alliance Pharma Solutions, LLC
Alliance Pharma Solutions, LLC, a.k.a. DelivMeds, (“DelivMeds”) was established in 2018 as a digital option to traditional prescription delivery. DelivMeds is currently being rebranded and the digital technology continues to be developed. DelivMeds has generated no revenue and we continue to incur significant technology expenses. We incurred approximately $285,000 of research and development expense for the 12 months ended December 31, 2021. For the three month period ended March 31, 2022 we incurred approximately $149,000 of research and development expense which was capitalized in March 2022 in line with GAAP guidance.
Bonum Health, LLC
Our Bonum Health, LLC (“Bonum”) operations were acquired in October of 2019. Bonum is a digital healthcare technology platform focused on making healthcare affordable, accessible and convenient through Telehealth services. Patients can use the Bonum Health mobile app or website to access board-certified medical providers, for non-emergent services. Additional services also available include Men’s and Women’s Health, Dermatology, Pediatrics and Ophthalmology in the comfort of their home or from anywhere. These services can be affordably accessed by the under-insured, non-insured and under-served communities seeking access to essential healthcare services. For employers Bonum provides Telehealth solutions allowing employers to provide convenient and affordable health coverage to their employees without requiring health insurance. Our Bonum health subsidiary provides affordable access to medical professionals in the patient’s home. As discussed below, we have started a process to explore strategic alternatives for Bonum.
SOSRx, LLC
On February 15, 2022 the Company entered into a relationship with Exchange Health, LLC, a technology company providing an online platform for manufacturers and suppliers to sell and purchase pharmaceuticals. SOSRx, LLC (“SOSRx”) provides pharmaceutical manufacturers with an efficient platform in which to divest short-dated, overstock, and slow-moving products to direct purchasers. SOSRx’s proprietary method researches the current market, allowing the manufacturer to list the optimal selling price for their products. Manufacturers list their short-dated overstock and slow-moving products by lot with pictures and descriptions. The manufacturer then determines which vetted and registered customers can bid on or outright purchase their products. SOSrx charges purchasers (suppliers) a transaction fee, a percentage of the purchase price of the products sold through its website service. Fulfillment of confirmed orders, including delivery and shipment of products, is the responsibility of the supplier, not SOSRx. SOSRx holds no inventory and assumes no responsibility for the shipment or delivery of any products or services from our website. SOSRx, the created entity relating to the relationship, a Delaware limited liability company, was formed in February 2022, and is owned 51% by the Company and 49% by Exchange Health.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020, and a global pandemic on March 11, 2020. In March and April 2020, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders. For example, the state of Florida, where the Company’s principal business operations are, issued a ‘stay-at-home’ order effective on April 1, 2020, which remained in place, subject to certain exceptions, through June 2020, when the order was gradually lifted until September 2020, when the order was completely lifted. The U.S. in general and Florida specifically, has recently seen decreases in total new COVID-19 infections (after sharp increases in infections in mid-to-late January 2022), as vaccines and boosters are now widely available and the number of individuals who have received vaccines has increased, and the pool of persons who do not have natural or vaccine immunity have declined; however, it is unknown whether such decreases will continue, new strains of the virus will cause current vaccines to be less effective or whether infection numbers will increase, and/or whether the state of Florida, or other jurisdictions in which we operate, will issue new or expanded ‘stay-at-home’ orders, or how those orders, or others, may affect our operations or whether such locations will see increases in infection rates, hospitalizations and deaths.
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To date, we have been deemed an essential healthcare technology provider under applicable governmental orders based on the critical nature of the products we offer and the community we serve. As such, our business operations were not materially impacted by the prior restrictions put in place by the State of Florida to slow the spread of COVID-19, which have since expired. Additionally, as shown in our results of operations below, we have to date, not experienced any significant material negative impact to our operations, revenues or gross profit due to COVID-19. We have however been adversely affected by reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that have had a negative impact on our wholesalers, certain technology outsourcing in India and the Philippines and finding qualified staff due to the pandemic, which may become more frequent or material in the future. We are carefully managing our inventory supply network while we work to overcome these hopefully temporary challenges. As a result of the above, the full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the continued scope and duration of the global pandemic.
Since the start of the pandemic, we have taken steps to prioritize the health and safety of our employees. The Company’s employees started working remotely around March 17, 2020, and our corporate office was closed through December 31, 2021. The office reopened for our management team on January 3, 2022, while our remaining employees will continue to work remotely until further notice.
Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations and potential future equity sales, to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the ongoing pandemic. We may also raise additional funding in the future through sales of debt or equity.
Recent Events
SOSRx Formation
On February 15, 2022, we entered into a relationship with Exchange Health, LLC, a technology company providing an online platform for manufacturers and suppliers to sell and purchase pharmaceuticals. SOSRx LLC, a Delaware limited liability company, was formed, which is owned 51% by the Company and 49% by Exchange Health.
On February 15, 2022, the Company contributed cash to SOSRx in the amount of $325,000, issued a promissory note to SOSRx in the amount of $500,000, which was immediately assigned to Exchange Health (the “Promissory Note”), and agreed to make an earn out payment of up to $400,000, payable, at the Company’s discretion, in cash or common stock of the Company, based on SOSRx achieving certain revenue targets of SOSRx as discussed below (the “Earn Out Payments”); and entered into a Distribution Services Agreement with SOSRx (the “Distribution Agreement”).
The Earn Out Payments require the Company to pay (a) $25,000 to Exchange Health if total revenue for SOSRx are over $0.7 million, and $25,000 to Exchange Health if total EBITDA is over $0.5 million, for the fiscal year ending 2022; (b) $87,500 to Exchange Health if total revenue for SOSRx is over $3.3 million, and $87,500 to Exchange Health if total EBITDA is over $2.95 million, for the fiscal year ending 2023; and (c) $87,500 to Exchange Health if total revenue for SOSRx is over $5.7 million, and $87,500 to Exchange Health if total EBITDA is over $4.9 million, for the fiscal year ending 2024, provided that certain amounts will be payable in the event at least 95% of such milestones are met, and such payments will be grossed up or down by up to 5% of such amounts, if such milestone amounts are between 95% and 105% of the required thresholds. At the Company’s option, the Earn Out Payments may be paid in cash or shares of common stock, valued at the then current trading price of the Company’s common stock. If one year’s milestones are not achieved, no earnout will be payable for that year and those earn out payments will not be eligible to be earned in any other year.
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Exchange Health contributed certain property, contracts and licenses to SOSRx, having an agreed value of $792,500, in exchange for its 49% membership interest in SOSRx and received a cash payment of $275,000 from SOSRx, LLC, pursuant to a Member Asset Contribution Agreement (the “Asset Contribution Agreement”), also entered into on February 15, 2022.
Promissory Note
The Promissory Note, which was immediately assigned to Exchange Health, and represents amounts currently due to Exchange Health, bears interest at the rate of the prime rate, plus 2% per annum (currently 5.25% per annum), with (i) one-third of the principal ($166,666.67) and interest payable after one year (on February 15, 2023) and (ii) the remaining two-thirds of principal payable quarterly over the next two years in eight equal installments of $41,666.67, together with any unpaid accrued interest thereupon, at the end of every full fiscal quarter, beginning, June 20, 2023. The Promissory Note may be prepaid by the Company, at its discretion, in whole or in part at any time, without premium or penalty.
Notwithstanding the foregoing, if the Company effectuates a Voluntary Withdrawal (defined below) under the Company Agreement (as discussed below) prior to February 15, 2024 (the “Earn Out Period”), and SOSRx has failed to meet any of the revenue targets required by the Earn Out Payments prior to the expiration of the Earn Out Period, then all remaining amounts of interest and principal not yet due and payable under the Promissory Note shall immediately terminate and all related indebtedness evidenced hereby shall be deemed canceled.
Amounts owed under the Promissory Note are secured by the Company’s membership interests in the SOSRx and are a non-recourse obligation of the Company, secured solely by such membership interests.
In the event that the Company is delinquent to pay when due (whether at maturity, by reason of acceleration or otherwise) any principal of or interest on the Promissory Note, then if such payment is not made within fifteen days of the due date, then Exchange Health may declare an additional interest fee of 2% of the delinquent amount to be due. If the delinquency is thirty days or more late from the due date, then Exchange Health may declare another additional interest fee of 3%, to make a total of 5%, for the delinquent payment.
In the event that we fail to pay when due (whether at maturity, by reason of acceleration or otherwise) any principal of or interest on the Promissory Note, then if such payment is not made within sixty days of the due date, then Exchange Health may declare all obligations (including without limitation, outstanding principal and accrued and unpaid interest thereon) under the Promissory Note to be immediately due and payable.
SOSRx Operating Agreement
The rights of the Company and Exchange Health in connection with SOSRx are set forth in the Operating Agreement of SOSRx (the “Operating Agreement”), effective February 15, 2022. Pursuant to the Operating Agreement, SOSRx is to be managed by a management committee consisting of three members, two of which are nominated by the Company, who currently include Suren Ajjarapu, the Company’s Chief Executive Officer and Chairman, and Prashant Patel, the Company’s President and director, and one person nominated by Exchange Health. If either the Company or Exchange Health shall ever hold less than 25% of the membership interests of SOSRx, such entity shall forfeit its management appointment rights, and such appointment rights shall be held by such other member which holds over 50% of the membership interests.
The Operating Agreement includes customary transfer restrictions on the SOSRx membership interests, right of first refusal rights upon receipt of a bona fide third party offer for purchase of a member’s membership interest (exercisable first by SOSRx and then the other members), preemptive rights (subject to certain exceptions), tag-along rights, and drag-along rights (applying if any greater than 50% owner desires to transfer their ownership in SOSRx).
Any member of SOSRx has the right to effect a voluntary withdrawal from the Company (a “Voluntary Withdrawal”), provided that such member must give ninety days prior written notice to all other members. Any member who effectuates a Voluntary Withdrawal is not permitted to receive the fair value or any value of the member’s membership interest as of the date of the Voluntary Withdrawal, and may instead effect a Voluntary Withdrawal by forfeiture of its membership interests in SOSRx without compensation or consideration; provided however, that if the Company (a) effectuates a Voluntary Withdrawal prior to February 15, 2024, and (b) SOSRx has failed to meet any of the revenue targets required by the Earn Out Payments prior to the date of withdrawal, then all obligations of the Company under the Earn Out Payments and the Promissory Note shall terminate.
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The Company or its assigns may at any time by written notice to any other member, offer to purchase all (but not less than all) of such other member’s membership interests, which shall be calculated and payable pursuant to a discounted cash flow model. If the buyout is paid to Exchange Health or its successors or assigns, any remaining amounts payable under the Promissory Note become immediately due and payable upon such payment.
The Operating Agreement also provides, that without the prior written approval of the unanimous consent of the management committee, a manager or member may not, directly or indirectly, (a) enter into a business relationship with any other person that is materially adverse to the business of SOSRx or an affiliate of SOSRx, or (b) cause any person to reduce or terminate its relationship with SOSRx or any affiliate of SOSRx. The foregoing covenants apply to each member, and each manager during the period in which each manager is a member.
Distribution Agreement
On February 15, 2022, SOSRx entered into the Distribution Agreement with Integra Pharma Solutions LLC, the Company’s wholly-owned subsidiary (“Integra”). Pursuant to the Distribution Agreement, Integra agreed to supply each SOSRx member an active account for Manufacturer Non-Control (Schedule 2-5 as classified by the US Drug Enforcement Agency) products bought on the SOSRx platform. The agreement remains in effect until December 31, 2023, and renews thereafter on a yearly basis until terminated; which agreement can only be terminated by the non-breaching party, upon the breach of the agreement by a party thereto, with a 30 day cure right. Pursuant to the Distribution Agreement, for each calendar quarter (or portion thereof) during the term, SOSRx agreed to pay Integra a fee equal to 2% of the net price of all purchases of products during such period. Integra also agreed to participate in SOSRx’s annual trade show, once established. Integra made certain representations and warranties in the Distribution Services Agreement, and agreed to indemnify SOSRx against certain damages and losses. The Distribution Services Agreement included customary confidentiality obligations.
Informal Monthly Credit Arrangement
On March 1, 2022, we entered into an informal understanding with Masters Drug Company, Inc. and its affiliated companies (“Masters”), which is owned by McKesson Pharmaceutical (“McKesson”), under which Masters agreed to extend up to $500,000 of monthly credit to the Company in connection with monthly pharmaceutical purchases from Masters (the “Monthly Credit”). The Company also entered into a Guaranty in favor of McKesson to guaranty the payment of the Monthly Credit, which includes customary terms, rights of McKesson and requirements for the guarantors to pay the costs and expenses of McKesson in enforcing the Guaranty. The Monthly Credit is paid to McKesson each month automatically, via an ACH debit from the Company’s bank account. Pursuant to Master’s terms and conditions, and in order to secure the payment of the Monthly Credit, we provided Masters a security interest in all of our right, title and interest in and to our personal property, whether now owned or after acquired, including, without limitation, all accounts, cash, chattel paper, deposit accounts, documents, equipment, general intangibles, goods, health care insurance receivables, instruments, inventory, investment property, letter-of-credit rights and promissory notes, together with all attachments, replacements, substitutions, additions and accessions, and all proceeds and products thereof and all books and records relating to any of the foregoing (collectively, the “Collateral”) and authorized Masters to file security interests securing the same. Past due amounts will accrue interest at the highest rate permitted by law. Masters has the right to change a payment term (including imposing cash payment upon delivery), to limit total credit and/or to suspend the provision of products or services to the Company if Masters concludes that there has been a material change to the Company’s financial condition or payment performance or the Company has ceased or is likely to cease to meet Masters’ credit requirements.
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Plans For Bonum Health Moving Forward
In April 2022, the Board of Directors authorized the Chief Executive Officer to explore strategic alternatives for the Company’s Bonum Health, LLC subsidiary. As part of this process, the Board will consider a wide range of options for Bonum Health, LLC including, among other things, a potential sale, spin-off, fund raising, combination or other strategic transaction, which may also include the winding down of such entity.
Liquidity and Capital Resources
Cash
Cash was $1,870,682 at March 31, 2022. We expect that our future available capital resources will consist primarily of cash generated from operations, remaining cash balances, borrowings, and additional funds raised through sales of debt and/or equity securities.
Liquidity
Cash, current assets, current liabilities, short term debt and working capital at the end of each period were as follows:
| As of | ||||||||||||||||
March 31, 2022 | December 31, 2021 | Change | Percent Change | |||||||||||||
| Cash | $ | 1,870,682 | $ | 3,122,578 | (1,251,896 | ) | (40 | )% | ||||||||
| Current assets (excluding cash) | 1,726,385 | 1,251,666 | 474,719 | 38 | % | |||||||||||
| Current liabilities (excluding short term debt) | 1,429,666 | 926,026 | 503,641 | 54 | % | |||||||||||
| Short term debt | 166,667 | - | 166,667 | 100 | % | |||||||||||
| Working Capital | 2,000,734 | 3,448,218 | (1,447,485 | ) | (42 | )% | ||||||||||
Our principal sources of liquidity have historically been cash provided by operations, sales of equity, and borrowings under various debt arrangements. Our principal uses of cash have been for operating expenses, technology development, and acquisitions. We anticipate these uses will continue to be our principal sources of, and uses of, cash in the future.
The decrease in cash as of March 31, 2022, compared to December 31, 2021, was primarily due to increased spending for the technology development and marketing of Bonum Health and our DelivMeds app. Also paid was $225,000 as part of the legal settlement (See “NOTE 7 – CONTINGENCIES” to the Notes to Consolidated Financial Statements included herein under “PART I. – ITEM 1. FINANCIAL STATEMENTS”), and $275,000 paid in connection with the SOSRx, LLC formation, as discussed above under “Recent Events”.
Liquidity Outlook cash explanation
Cash Requirements
Our primary objectives for the remainder of 2022 are to continue the development of the DelivMeds technology to take steps in an effort to increase our client base and operational revenue on our Trxade Inc. and Trxade Prime platforms and a potential strategic transaction with Bonum Health telehealth services which may include a potential sale, spin-off, fund raising, combination or other strategic transaction, and also include the winding down of such entity. There can be no assurance that our operations will generate significant positive cash flow, or that additional funds will be available to us, through borrowings or otherwise, on favorable terms if required in the future, or at all. We may also raise additional funding in the future through the sale of equity.
We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows:
| Projected Expenses from April 2022 to February 2023 | Amount | |||
| General and administrative (1) | $ | 7,000,000 | ||
| Total | $ | 7,000,000 | ||
| (1) | Includes estimated wages and payroll, legal and accounting, marketing, rent and web development. |
We currently anticipate paying the estimated expenses described above through cash on hand and revenues generated from our operations.
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We may require additional funding in the future to expand or complete acquisitions. The sources of this capital are expected to be equity investments and notes payable. Our plan for the next twelve months is to continue using the same marketing and management strategies and continue providing a quality product with excellent customer service while also seeking to expand our operations organically or through acquisitions, as funding and opportunities arise. As our business continues to grow, customer feedback will be integral in making small adjustments to improve our products and overall customer experience. If in the future we require additional funding, we plan to raise such funds through the sale of debt or, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues.
We believe that we have adequate cash to implement our plan to operate a business-to-business web-based marketplace focused on the United States pharmaceutical industry. Our core service is designed to bring the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
Since the first quarter of 2020 and through the date of this filing, there has been a global viral outbreak that world governments have responded to with travel and other restrictions, including ‘stay-at-home’ orders, among other steps. The continued extent and duration of business disruptions and related financial impacts from the COVID-19 coronavirus cannot be reasonably estimated at this time; however, our exposure includes potential continued reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that have had a negative impact on our wholesalers and certain technology outsourcing in India and the Philippines in the past and finding qualified staff due to the pandemic In addition, employee sicknesses and remote working environments related to the coronavirus and the federal, state and local responses to such virus, could materially impact our future consolidated results; however, we do not currently forecast any material adverse effects on our 2022 operating results due to COVID-19; although the ultimate impact and duration of the pandemic remains unknown. See also “Novel Coronavirus (COVID-19)”, above.
Cash Flows
The following table summarizes our Consolidated Statements of Cash Flows for the three months ended March 31, 2022, and 2021:
| Three Months Ended | ||||||||||||||||
| March 31, 2022 | March 31, 2021 | Change | Percent Change | |||||||||||||
| Net Loss | $ | (965,836 | ) | $ | (651,519 | ) | $ | (314,317 | ) | (48 | )% | |||||
| Net Cash Provided by (Used in): | ||||||||||||||||
| Operating Activities | (1,000,771 | ) | (710,298 | ) | (290,473 | ) | (80 | )% | ||||||||
| Investing Activities | 23,000 | - | 23,000 | 100 | % | |||||||||||
| Financing Activities | (274,125 | ) | - | (274,125 | ) | 100 | % | |||||||||
| Net increase (decrease) in cash | $ | (1,251,896 | ) | $ | (710,298 | ) | $ | (541,598 | ) | (76 | )% | |||||
Cash used in operations for the three months ended March 31, 2022, was $1,000,771, compared to cash used in operations for the three months ended March 31, 2021, of $710,298. The increase in cash used in operations for the three months ended March 31, 2022, compared to March 31, 2021 was mainly due to $225,000 paid as part of a legal settlement (See “NOTE 7 – CONTINGENCIES” to the Notes to Consolidated Financial Statements included herein under “PART I. - ITEM 1. FINANCIAL STATEMENTS”).
Cash provided by investing activities for the three months ended March 31, 2022, was $23,000 and $0 for the three months ended March 31, 2021. The increase in cash provided by investing activities was due to the sale of an asset that was no longer needed by the Company.
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Cash used in financing activities for the three months ended March 31, 2022, was $274,125, which was mainly due to the $275,000 paid as part of the $325,000 contribution of capital in the SOSRx formation, compared to cash used for financing activities for the three months ended March 31, 2021, which was $0.
Results of Operations
The following selected consolidated financial data should be read in conjunction with the unaudited consolidated financial statements and the notes to these statements included above.
Three Month Period Ended March 31, 2022, compared to Three Month Period Ended March 31, 2021
| Three Months Ended | ||||||||||||||||
March 31, 2022 | March 31, 2021 | Change |
Percentage Change | |||||||||||||
| Revenues | $ | 3,240,272 | $ | 3,053,235 | 187,037 | 6 | % | |||||||||
| Cost of Sales | 1,904,569 | 1,669,924 | 234,645 | 14 | % | |||||||||||
| Gross Profit | 1,335,703 | 1,383,311 | (47,608 | ) | (3 | )% | ||||||||||
| Operating Expenses: | ||||||||||||||||
| Technology Expense | 245,785 | 214,890 | 30,895 | 14 | % | |||||||||||
| Wage and Salary Expense | 1,069,958 | 939,634 | 130,324 | 14 | % | |||||||||||
| Accounting and Legal Expense | 236,221 | 160,047 | 76,174 | 48 | % | |||||||||||
| Professional Fees | 101,009 | 264,819 | (163,810 | ) | (62 | )% | ||||||||||
| Other General and Administrative | 586,436 | 274,191 | 312,245 | 114 | % | |||||||||||
| Warrants, Options and Stock Issuance Expense | 64,866 | 173,985 | (109,119 | ) | (63 | )% | ||||||||||
| Total Operating Expense | 2,304,275 | 2,027,566 | 276,709 | 14 | % | |||||||||||
| Interest Expense | (1,364 | ) | (7,264 | ) | 5,900 | (81 | )% | |||||||||
| Gain on Disposal of Asset | 4,100 | - | 4,100 | 100 | % | |||||||||||
| Net Loss | $ | (965,836 | ) | $ | (651,519 | ) | (314,317 | ) | 49 | % | ||||||
Our revenues for the three months ended March 31, 2022, were from the Trxade platform, Community Specialty Pharmacy, Integra Pharma Solutions and Bonum Health. Revenues increased by $187,037, compared to the same period ended March 31, 2021. Trxade Inc revenue generated from platform sales increased 11% and revenue generated by Trxade Prime increased 12% for the three months ended March 31, 2022 compared to the same period ended March 31, 2021. CSP had a decrease in revenue of $129,489 compared to the same period ended March 31, 2021.
Cost of goods sold, and gross profit were $1,904,569 and $1,335,703 for the three month period ended March 31, 2022, respectively, and for the three-month period ended March 31, 2021, were $1,669,924 and $1,383,311, respectively. Gross profit as a percentage of sales was 41% for the three months ended March 31, 2022, compared to 45% for the three months ended March 31, 2021. The decrease in gross profit is a result of Integra Pharma Solutions, LLC.
General and administrative expenses (less stock-based compensation expense) increased for the three months ended March 31, 2022, to $586,436 compared to $274,191 for the comparable period in 2021. The increase was mainly due to a $225,000 legal settlement paid and increased marketing and IT related expenses.
We had interest expense of $1,364 for the three months ended March 31, 2022, compared to interest expense of $7,264 for the three months ended March 31, 2021, which decreased due to decreases in the amount of outstanding debt we had as of the current period.
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Net losses increased $314,317 to a net loss of $965,836 for the three months ended March 31, 2022, compared to a net loss of $651,519 for the three months ended March 31, 2021, mainly due to decreased gross profit margins of Trxade Prime, and the $225,000 legal settlement as described in greater detail above under “PART I. – ITEM 1. FINANCIAL STATEMENTS”.
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.”
Trxade, Inc. provides an online web-based buying and selling platform for licensed pharmaceutical wholesalers (“Suppliers”) to sell products and services to licensed pharmacies (“Customers”). Trxade, Inc. charges Suppliers a transaction fee, a percentage of the purchase price of the prescription drugs and other products sold through its website service. Fulfillment of confirmed orders, including delivery and shipment of prescription drugs and other products, is the responsibility of the Supplier, not Trxade, Inc. Trxade, Inc. holds no inventory and assumes no responsibility for the shipment or delivery of any products or services from our website. Trxade, Inc. considers itself an agent for this revenue stream and as such, reports revenue as net. Step One: Identify the contract with the Customers – Trxade, Inc.’s Terms and Use “Agreement,” which outlines the terms and conditions between Trxade, Inc. and the Supplier, is acknowledged and agreed to by the Supplier. Collection is probable based on a credit evaluation of the Supplier. Step Two: Identify the performance obligations in the Agreement – Trxade, Inc. provides the Supplier access to the online website, ability to upload catalogs of products and Dashboard access to review status of inventory as well as posted and processed orders. The Agreement requires the Supplier to post a catalog of pharmaceuticals on the platform, deliver the pharmaceuticals and, upon shipment, remit the stated platform fee. Step Three: Determine the transaction price – the Agreement outlines the fee, which is based on the type of product: generic, brand or non-drug. There are no discounts for volume transactions or early payment of invoices. Step Four: Allocate the transaction price – the Agreement details the fee. There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – revenue is recognized upon Supplier’s fulfillment of the applicable order.
SoSRx provides pharmaceutical manufacturers with an efficient platform in which to divest short-dated, overstock, and slow-moving products to direct purchasers. SoSrx’s proprietary method researches the current market, allowing the manufacturer to list the optimal selling price for their products. Manufacturers list their short-dated overstock and slow-moving products by lot with pictures and descriptions. The manufacturer then determines which vetted and registered customers can bid on or outright purchase their products.
Once products from a manufacturer have been entered into SoSRx’s platform a bid cycle begins. Each bid cycle is 3 days. Each buyer (wholesaler, distributor or chain) will have 3 options. The options are buy now, bid, or pass. In the buy now option the manufacturer has an established price in which they would sell the product. The bid option allows the buyers to put in a price if they value the product and at the end of the bid cycle the manufacturer has several options. The manufacturer can accept the highest bidder if the buyer has met the minimum bid requirement, counter if the bid is below the minimum bid requirement, or begin a negotiation to an agreed upon price or accepted bid, regardless of minimum bid requirement. The fourth option is to decline.
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If one of the four options described above, except decline, have been selected a committed offer is generated in the system. The buyer then submits a purchase order to the manufacturer. The manufacturer then processes the purchase order and sends the product directly to the buyer. This is when revenue is recognized as a transaction fee. At no point does SoSRx take possession of the inventory. SoSRx bills the manufacturer per committed offer at a fee percentage of total offer value.
Integra Pharma Solutions, LLC (“Trxade Prime”) is a licensed wholesaler of brand, generic and non-drug products to Customers. Integra LLC takes orders for products, creates invoices for each order and recognizes revenue at the time the Customer receives the product. Customer returns are not material. Step One: Identify the contract with the Customer – Integra LLC requires that an application and a credit card for payment be completed by the Customer prior to the first order. Each transaction is evidenced by an order form sent by the Customer and an invoice for the product is sent by Integra LLC. The collection is probable based on the application and credit card information provided prior to the first order. Step Two: Identify the performance obligations in the contract – Each order is distinct and evidenced by the shipping order and invoice. Step Three: Determine the transaction price – The consideration is variable if product is returned. The variability is determined based on the return policy of the product manufacturer. There are no sales or volume discounts. The transaction price is determined at the time of the order evidenced by the invoice. Step Four: Allocate the transaction price – There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – The Revenue is recognized when the Customer receives the product.
Community Specialty Pharmacy, LLC (“CSP”) is a licensed retail pharmacy. CSP fills prescriptions for drugs written by a doctor and recognizes revenue at the time the patient confirms delivery of the prescription. Customer returns are not material. Step One: Identify the contract with the Customer – The prescription is written by a doctor for a patient and presented by the patient to the Customer and is in turn delivered to CSP. The prescription identifies the performance obligations in the contract. CSP fills the prescription and delivers to the Customer the drugs, fulfilling the contract. The collection is probable because there is confirmation that the patient has insurance for reimbursement to CSP prior to filling of the prescription. Step Two: Identify the performance obligations in the contract – Each prescription is distinct to the Customer. Step Three: Determine the transaction price – The consideration is not variable. The transaction price is determined to be the price of prescription at the time of delivery which considers the expected reimbursements from third party payors (e.g., pharmacy benefit managers, insurance companies and government agencies). Step Four: Allocate the transaction price – The price of the prescription invoiced represents the expected amount of reimbursement from third party payors. There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – Revenue is recognized after the delivery of the prescription.
Stock-Based Compensation
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. Stock option forfeitures are recognized at the date of employee termination. Effective January 1, 2019, the Company adopted ASU 2018-07 for the accounting of share-based payments granted to non-employees for goods and services.
Recently Issued Accounting Standards
For more information on recently issued accounting standards, see “NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION”, to the Notes to Consolidated Financial Statements included herein under “PART I. - ITEM 1. FINANCIAL STATEMENTS”.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (our principal executive officer and principal accounting/financial officer), Mr. Ajjarapu and Mrs. Huffman, respectively, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2022, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
As a result of the formative stage of our development, the Company has not fully implemented the necessary internal controls. The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses under the standards of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) were: (1) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of accounting principles generally accepted in the United States of America (“GAAP”) and SEC disclosure requirements; and (2) ineffective controls over period end financial disclosure and reporting processes.
Management believes that the material weaknesses set forth above did not have an effect on the Company’s financial results reported herein. We are committed to improving our financial organization. As part of this commitment, we have increased our personnel resources and technical accounting expertise as we develop the internal and financial resources of the Company. In addition, the Company will prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.
Management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses (i) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements; and (ii) ineffective controls over period end financial close and reporting processes.
We have improved our financial organization as we have increased our personnel resources and technical accounting expertise. We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis.
Limitations on Effectiveness of Controls and Procedures
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.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting that occurred during the quarter ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we may become a party to lawsuits involving various matters. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We believe the ultimate resolution of any such current proceeding will not have a material adverse effect on our continued financial position, results of operations or cash flows.
Such current litigation or other legal proceedings are described in, and incorporated by reference in, this “ITEM 1. LEGAL PROCEEDINGS” of this Form 10-Q from, “PART I – ITEM 1. FINANCIAL STATEMENTS” in the Notes to Consolidated Financial Statements in “NOTE 6 – OTHER RECEIVABLES” and “NOTE 7 – CONTINGENCIES”. The Company believes that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. However, assessment of the current litigation or other legal claims could change in light of the discovery of facts not presently known to the Company or by judges, juries or other finders of fact, which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.
Additionally, the outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Commission on March 28, 2022 (the “Form 10-K”), under the heading “Risk Factors”, except as set forth below, and investors should review the risks provided in the Form 10-K and below, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Form 10-K for the year ended December 31, 2021, under “Risk Factors”, and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.
We owe significant amounts to Exchange Health and may owe additional amounts in the event certain earn out payments are due.
In February 2022, we entered into various agreements with Exchange Health, whereby we agreed to capitalize and fund SOSRx. In connection therewith, on February 15, 2022, we issued a promissory note to SOSRx in the amount of $500,000, which was immediately assigned to Exchange Health, and agreed to make an earn out payment of up to $400,000, payable, at the Company’s discretion, in cash or common stock of the Company, based on SOSRx achieving certain revenue targets of SOSRx. Specifically, the Earn Out Payments require the Company to pay (a) $25,000 to Exchange Health if total revenue for SOSRx are over $0.7 million, and $25,000 to Exchange Health if total EBITDA is over $0.5 million, for the fiscal year ending 2022; (b) $87,500 to Exchange Health if total revenue for SOSRx is over $3.3 million, and $87,500 to Exchange Health if total EBITDA is over $2.95 million, for the fiscal year ending 2023; and (c) $87,500 to Exchange Health if total revenue for SOSRx is over $5.7 million, and $87,500 to Exchange Health if total EBITDA is over $4.9 million, for the fiscal year ending 2024, provided that certain amounts will be payable in the event at least 95% of such milestones are met, and such payments will be grossed up or down by up to 5% of such amounts, if such milestone amounts are between 95% and 105% of the required thresholds. At the Company’s option, the Earn Out Payments may be paid in cash or shares of common stock, valued at the then current trading price of the Company’s common stock. If one year’s milestones are not achieved, no earnout will be payable for that year and those earn out payments will not be eligible to be earned in any other year.
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We may not be able to pay amounts due under the Promissory Note on a timely basis and may default under our obligations thereunder, which could have a material adverse effect on our relationship with Exchange Health, our operations, financial condition, or the value of our securities. Additionally, in the event the Earn Out Payments are due, it could have a material adverse effect on our liquidity, the funds we have available for future expansion, and our results of operations.
Our obligations under our informal monthly credit arrangement with one of our suppliers are secured by a first priority security interest in substantially all of our assets.
On March 1, 2022, we entered into an informal understanding with Masters Drug Company, Inc. and its affiliated companies (“Masters”), which is owned by McKesson Pharmaceutical (“McKesson”), under which Masters agreed to extend up to $500,000 of monthly credit to the Company in connection with monthly pharmaceutical purchases from Masters (the “Monthly Credit”). The Company also entered into a Guaranty in favor of McKesson to guaranty the payment of the Monthly Credit, which includes customary terms, rights of McKesson and requirements for the guarantors to pay the costs and expenses of McKesson in enforcing the Guaranty. The Monthly Credit is paid to McKesson each month automatically, via an ACH debit from the Company’s bank account. Pursuant to Master’s terms and conditions, and in order to secure the payment of the Monthly Credit, we provided Masters a security interest in all of our right, title and interest in and to our personal property, whether now owned or after acquired, including, without limitation, all accounts, cash, chattel paper, deposit accounts, documents, equipment, general intangibles, goods, health care insurance receivables, instruments, inventory, investment property, letter-of-credit rights and promissory notes, together with all attachments, replacements, substitutions, additions and accessions, and all proceeds and products thereof and all books and records relating to any of the foregoing (collectively, the “Collateral”) and authorized Masters to file security interests securing the same. Past due amounts will accrue interest at the highest rate permitted by law. Masters has the right to change a payment term (including imposing cash payment upon delivery), to limit total credit and/or to suspend the provision of products or services to the Company if Masters concludes that there has been a material change to the Company’s financial condition or payment performance or the Company has ceased or is likely to cease to meet Masters’ credit requirements.
As such, Masters may enforce its security interests over our assets which secure the payment of such Monthly Credit, take control of our assets, force us to seek bankruptcy protection, or force us to curtail or abandon our current business plans and operations. If that were to happen, any investment in the Company could become worthless.
We have started a process to explore strategic alternatives for the Company’s Bonum Health, LLC subsidiary
In April 2022, the Board of Directors authorized the Company’s Chief Executive Officer to explore strategic alternatives for the Company’s Bonum Health, LLC subsidiary. As part of this process, the Board will consider a wide range of options for Bonum Health, LLC including, among other things, a potential sale, spin-off, fund raising, combination or other strategic transaction, which may also include the winding down of such entity. The outcome of this process may result in the liquidation of the Bonum Health assets for significantly less than we paid for them, the write-off of prior expenses incurred in connection with the development of such assets or such assets, and may have a material adverse effect on our results of operations and liquidity. Notwithstanding the above, the Board of Directors will seek to maximize the value of such assets and operations to the extent possible.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
There have been no sales of unregistered securities during the quarter ended March 31, 2022, and from the period from April 1, 2022, to the filing date of this report, which have not previously been disclosed in a prior Current Report on Form 8-K, except as described below.
In January 2022, warrants to purchase 14,584 shares of common stock were exercised with an exercise price of $0.06 per share; the Company issued 14,584 shares of common stock, and $875 in proceeds were received in connection with such exercise.
We claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the foregoing issuances did not involve a public offering, the recipients were (a) “accredited investors”; and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth share repurchase activity for the respective periods:
| Period | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||
| January 1, 2022- January 31, 2022 | — | $ | — | — | $ | 100,000 | ||||||||||
| February 1, 2022- February 28, 2022 | — | $ | — | — | $ | 100,000 | ||||||||||
| March 1, 2022- March 31, 2022 | — | — | — | $ | 100,000 | |||||||||||
| Total | — | $ | — | — | $ | 100,000 | ||||||||||
(1) On May 27, 2021, our Board of Directors authorized the repurchase up to $1 million of the currently outstanding shares of the Company’s common stock. Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws. Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. Open market purchases will be conducted in accordance with the limitations set forth in Rule 10b-18 of Exchange Act and other applicable legal requirements. Repurchases may also be made under a Rule 10b5-1 plan. There was no time frame or expiration date for the repurchase program, and such program was to remain in place until a maximum of $1.0 million of the Company’s common stock had been repurchased or until such program was suspended or discontinued by the Board of Directors.
On July 18, 2021, our Board of Directors approved an “at-the-market” offering and paused the Stock Repurchase Program until the offering was complete.
On July 22, 2021, our Board of Directors delayed the “at-the-market” offering and reactivated the Stock Repurchase Program.
On August 5, 2021, our Board of Directors paused the Stock Repurchase Program until a planned “at-the-market” offering was complete, which “at-the-market” offering was terminated effective on December 5, 2021.
On December 10, 2021, the Board of Directors authorized and approved the resumption of the Company’s prior share repurchase program (as modified), as discussed above. The share repurchase program as approved by the Board of Directors on December 10, 2021, modified the prior repurchase program to allow for the repurchase of up to 100,000 of the currently outstanding shares of the Company’s common stock. There is no time frame for the repurchase program, and such program will remain in place until a maximum of 100,000 shares of the Company’s common stock have been repurchased or until such program is discontinued by the Board of Directors.
To date, no shares of common stock have been repurchased by the Company.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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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.
| Trxade Health, Inc. | ||
| By: | /s/ Suren Ajjarapu | |
| Suren Ajjarapu | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 9, 2022 | ||
| By: | /s/ Janet Huffman | |
| Janet Huffman | ||
Chief Financial Officer (Principal Accounting/Financial Officer) | ||
| Date: May 9, 2022 | ||
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