UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2020
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number: 001-39199
TRXADE GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 46-3673928 | |
(State or other jurisdiction of incorporation or organization) | (Identification Number) | |
| 3840 Land O’ Lakes Blvd. | ||
| Land O’ Lakes, Florida | 34639 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code:(800)-261-0281
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.00001 Par Value Per Share | MEDS | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [X] | Smaller reporting company | [X] |
| Emerging growth company | [X] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
There were 7,702,335 shares of the registrant’s common stock outstanding on May 1, 2020, and no shares of preferred stock outstanding.
FORM 10-Q
For the Quarter Ended March 31, 2020
INDEX
Consolidated Balance Sheets
March 31, 2020 and December 31, 2019
(unaudited)
| March 31, 2020 | December 31, 2019 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 7,701,305 | $ | 2,871,694 | ||||
| Accounts Receivable, net | 877,097 | 792,050 | ||||||
| Inventory | 368,401 | 56,761 | ||||||
| Prepaid Assets | 267,375 | 82,452 | ||||||
| Deposits for Inventory purchases | 580,800 | - | ||||||
| Total Current Assets | 9,794,978 | 3,802,957 | ||||||
| Property Plant and Equipment, Net | 197,242 | 174,987 | ||||||
| Other Assets | ||||||||
| Deposits | 21,636 | 21,636 | ||||||
| Deferred Offering Costs | - | 88,231 | ||||||
| Right of use leased assets | 734,075 | 757,710 | ||||||
| Goodwill | 725,973 | 725,973 | ||||||
| Total Assets | $ | 11,473,904 | $ | 5,571,494 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $ | 320,238 | $ | 334,614 | ||||
| Accrued Liabilities | 233,560 | 98,852 | ||||||
| Current Portion Lease Liabilities | 90,759 | 87,350 | ||||||
| Customer Deposits | 305,972 | - | ||||||
| Total Current Liabilities | 950,529 | 520,816 | ||||||
| Long Term Liabilities | ||||||||
| Notes Payable – Related Parties | 225,000 | 225,000 | ||||||
| Other Long-term Liabilities – Leases | 661,078 | 685,461 | ||||||
| Total Liabilities | 1,836,607 | 1,431,277 | ||||||
| Shareholders’ Equity | ||||||||
| Series A Preferred Stock, $0.00001 par value; 10,000,000 shares authorized; none issued and outstanding as of March 31, 2020 and December 31, 2019, respectfully | - | - | ||||||
| Common Stock, $0.00001 par value; 100,000,000 shares authorized; 7,484,370 and 6,539,415 shares issued and outstanding, as of March 31, 2020 and December 31, 2019, respectively | 75 | 65 | ||||||
| Additional Paid-in Capital | 17,852,422 | 12,535,655 | ||||||
| Retained Deficit | (8,215,200 | ) | (8,395,503 | ) | ||||
| Total Shareholders’ Equity | 9,637,297 | 4,140,217 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 11,473,904 | $ | 5,571,494 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
| 1 |
Trxade Group, Inc.
Consolidated Statements of Operations
Three Months Ended March 31, 2020 and 2019
(unaudited)
| 2020 | 2019 | |||||||
| Revenues | $ | 2,203,320 | $ | 1,512,521 | ||||
| Cost of Sales | 563,184 | 365,839 | ||||||
| Gross Profit | 1,640,136 | 1,146,682 | ||||||
| Operating Expenses | ||||||||
| General and Administrative | 1,451,909 | 974,923 | ||||||
| Operating Income | 188,227 | 171,759 | ||||||
| Share in Equity Loss Investment | - | (28,972 | ) | |||||
Interest Expense, net | (7,924 | ) | (17,558 | ) | ||||
| Net Income | $ | 180,303 | $ | 125,229 | ||||
| Net Income per Common Share – Basic: | $ | 0.03 | $ | 0.02 | ||||
| Net Income per Common Share – Diluted: | $ | 0.02 | $ | 0.02 | ||||
| Weighted average Common Shares Outstanding Basic | 6,971,427 | 5,560,695 | ||||||
| Weighted average Common Shares Outstanding Diluted | 7,423,669 | 5,998,056 | ||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
| 2 |
Consolidated Statements of Changes in Shareholders’ Equity
Three Months Ended March 31, 2020 and 2019
(unaudited)
| Preferred Stock | Common Stock | Additional Paid-in- | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2019 | - | $ | - | 6,539,415 | $ | 65 | $ | 12,535,655 | $ | (8,395,503 | ) | $ | 4,140,217 | |||||||||||||||
| Common Stock issued from offering | - | - | 922,219 | 10 | 5,994,414 | - | 5,994,424 | |||||||||||||||||||||
Fractional shares issued due to reverse split | - | - | 40 | - | - | - | - | |||||||||||||||||||||
| Stock Issuance Costs | - | - | - | - | (820,586 | ) | - | (820,586 | ) | |||||||||||||||||||
| Options Exercised for Cash | - | - | 167 | - | 501 | - | 501 | |||||||||||||||||||||
| Warrants Exercised for Cash | - | - | 22,529 | - | 1,352 | - | 1,352 | |||||||||||||||||||||
| Warrants Expense | - | - | - | - | 79,089 | - | 79,089 | |||||||||||||||||||||
| Options Expense | - | - | - | - | 61,997 | - | 61,997 | |||||||||||||||||||||
| Net Income | - | - | - | - | - | 180,303 | 180,303 | |||||||||||||||||||||
| Balance at March 31, 2020 | - | $ | - | 7,484,370 | $ | 75 | $ | 17,852,422 | $ | (8,215,200 | ) | $ | 9,637,297 | |||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-in- | Accumulated | Total Shareholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2018 | - | $ | - | 5,547,638 | $ | 55 | $ | 8,955,688 | $ | (8,111,075 | ) | $ | 844,668 | |||||||||||||||
| Common Stock issued for convertible debt and accrued interest | - | - | 70,666 | 1 | 211,982 | - | 211,983 | |||||||||||||||||||||
| Warrants Exercised for Cash | - | - | 2,778 | - | 166 | - | 166 | |||||||||||||||||||||
| Options Expense | - | - | - | - | 35,979 | - | 35,979 | |||||||||||||||||||||
| Net Income | - | - | - | - | - | 125,229 | 125,229 | |||||||||||||||||||||
| Balance at March 31, 2019 | - | $ | - | 5,621,082 | $ | 56 | $ | 9,203,815 | $ | (7,985,846 | ) | $ | 1,218,025 | |||||||||||||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
| 3 |
Consolidated Statements of Cash Flows
Three months ended March 31, 2020 and 2019
(unaudited)
| 2020 | 2019 | |||||||
| Operating Activities: | ||||||||
| Net Income | $ | 180,303 | $ | 125,229 | ||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation Expense | 1,250 | 1,250 | ||||||
| Options expense | 61,997 | 35,979 | ||||||
| Warrant Expense | 79,089 | - | ||||||
| Bad Debt Expense | 9,000 | - | ||||||
| Share in Equity Losses in Investment | - | 28,972 | ||||||
| Amortization of right to use asset | 23,635 | 21,744 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts Receivable | (94,047 | ) | (295,169 | ) | ||||
| Prepaid Assets and other Current Assets | (184,923 | ) | (84,621 | ) | ||||
| Inventory | (311,640 | ) | 17,743 | |||||
| Deposits for Inventory purchases | (580,800 | ) | - | |||||
| Lease Liability | (20,974 | ) | (17,913 | ) | ||||
| Accounts Payable | (14,376 | ) | 11,222 | |||||
| Customer Deposits | 305,972 | - | ||||||
| Accrued Liabilities and Other Liabilities | 134,708 | 29,770 | ||||||
| Net Cash (used in) operating activities | (410,806 | ) | (125,794 | ) | ||||
| Investing Activities: | ||||||||
| Purchase of Fixed Assets | (23,505 | ) | - | |||||
| Purchase of equity method investment | - | (210,000 | ) | |||||
| Net cash Used in Investing activities | (23,505 | ) | (210,000 | ) | ||||
| Financing Activities: | ||||||||
| Payment of Stock Issuance Costs | (732,355 | ) | - | |||||
| Proceeds from exercise of Warrants | 1,352 | 166 | ||||||
| Proceeds from exercise of Stock Options | 501 | - | ||||||
| Proceeds from Issuance of Common Stock | 5,994,424 | - | ||||||
| Net Cash provided by financing activities | 5,263,922 | 166 | ||||||
| Net increase (decrease) in Cash | 4,829,611 | (335,628 | ) | |||||
| Cash at Beginning of the Year | 2,871,694 | 869,557 | ||||||
| Cash at March 31, 2020 and 2019 | $ | 7,701,305 | $ | 533,929 | ||||
| Supplemental Cash Flow Information | ||||||||
| Cash Paid for Interest | $ | 2,348 | $ | 1,704 | ||||
| Cash Paid for Income Taxes | $ | - | $ | - | ||||
| Non-Cash Transactions | ||||||||
| Common Stock Issued for Conversion of Note and Accrued Interest | $ | - | $ | 211,983 | ||||
| ROU assets and operating lease obligations recognized | $ | - | $ | 847,441 | ||||
| Equity Method Investment recorded to accrued liabilities | $ | - | $ | 40,000 | ||||
The accompanying notes are an integral part of the unaudited consolidated financial statements.
| 4 |
Notes to Unaudited Consolidated Financial Statements
For the three months ended March 31, 2020 and 2019
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Trxade Group, Inc. (“we”, “our”, “Trxade”, and the “Company”) owns 100% of Trxade, Inc., Integra Pharma Solutions, LLC, Community Specialty Pharmacy, LLC, Alliance Pharma Solutions, LLC and Bonum Health, LLC. The merger of Trxade, Inc. and Trxade Group, Inc. occurred in May 2013. Community Specialty Pharmacy was acquired in October 2018.
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, is a licensed pharmaceutical wholesaler and sells brand, generic and non-drug products.
Community Specialty Pharmacy, LLC, is an accredited independent retail pharmacy with a focus on specialty medications. The company operates with an innovative pharmacy model which offers home delivery services to patients thereby providing convenience.
Alliance Pharma Solutions, LLC, has developed a same day Pharma delivery software – Delivmeds.com, and invested in SyncHealth MSO, LLC, a managed services organization during January 2019, which investment was divested in February 2020.
Bonum Health, LLC was formed to hold certain telehealth assets acquired in October 2019. The “Bonum Health Hub” was launched in November 2019 and was expected to be operational in April 2020; however, due to the uncertainty regarding the COVID-19 pandemic, however, at present time the Company does not anticipate such installation moving forward until sometime in 2021, at the earliest. The hub connects patients to board-certified medical care at any time, and from anywhere, through the Bonum Health mobile app and website portal or by visiting Bonum Health Hubs at select independent pharmacy locations.
On October 9, 2019, the Company’s Board of Directors, and on October 15, 2019, stockholders holding a majority of the Company’s outstanding voting shares, approved resolutions authorizing a reverse stock split of the outstanding shares of the Company’s common stock in the range from one-for-two (1-for-2) to one-for-ten (1-for-10), and provided authority to the Company’s Board of Directors to select the ratio of the reverse stock split in their discretion (the “Stockholder Authority”). On February 12, 2020, the Board of Directors of the Company approved a stock split ratio of 1-for-6 (“Reverse Stock Split”) in connection with the Stockholder Authority and the Company filed a Certificate of Amendment with the Secretary of Delaware to affect the Reverse Stock Split.
Proportional 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. The Reverse Stock Split did not affect any stockholder’s ownership percentage of the Company’s common stock, except to the limited extent that the Reverse Stock Split resulted in any stockholder owning a fractional share. Fractional shares of common stock were rounded up to the nearest whole share based on each holder’s aggregate ownership of the Company. All issued and outstanding shares of common stock, options and warrants to purchase common stock and per share amounts contained in these financial statements, have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.
Basis of Presentation - The accompanying unaudited interim consolidated financial statements of Trxade Group, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020.
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, 2019 as reported in the Company’s Annual Report on Form 10-K have been omitted.
| 5 |
Income 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 while the dilutive effect of our convertible notes is computed using the if-converted method.
The following table sets forth the computation of basic and diluted Income per Share:
For three months ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Numerator: | ||||||||
| Net Income | $ | 180,303 | $ | 125,229 | ||||
| Numerator for basic and diluted EPS - income available to common Shareholders | 180,303 | $ | 125,229 | |||||
| Denominator: | ||||||||
| Denominator for basic EPS – Weighted average shares | 6,971,427 | 5,560,695 | ||||||
| Dilutive Effect of Warrants, Options and Convertible Debt | 452,242 | 437,361 | ||||||
| Denominator for diluted EPS – adjusted Weighted average shares and assumed Conversions | 7,423,669 | 5,998,056 | ||||||
| Basic income per common share | $ | 0.03 | $ | 0.02 | ||||
| Diluted income per common share | $ | 0.02 | $ | 0.02 | ||||
NOTE 2– LONG TERM DEBT – RELATED PARTIES
In October 2018, in connection with the acquisition of Community Specialty Pharmacy, LLC, a $300,000 promissory note was issued to Nikul Panchal, a non-executive officer of the Company, accruing simple interest at the rate of 10% per annum, payable annually, and having a maturity date in October 15, 2021. In October 2019, $75,000 of the note was converted into 25,000 common shares at $3.00 per share. There was a loss recognized on this conversion of $76,500. The outstanding balance at March 31, 2020 is $225,000.
In February 2019, convertible promissory notes issued in 2015 in the amount of $181,500, were amended to include a conversion price of $3.00 per share, and the principal and accrued interest totaling $211,983 was then converted into 70,666 common shares.
In February 2019, warrants to purchase 2,778 shares of common stock granted in 2014 with an exercise price of $0.06 per share were exercised for $166 in cash and the Company issued 2,778 common shares.
| 6 |
On February 13, 2020, we entered into an underwriting agreement (the “Underwriting Agreement”) with Dawson James Securities, Inc. (the “Representative”), as representative of the several underwriters named therein, relating to the sale of 806,452 shares of common stock in a firm commitment underwritten offering (the “Offering”). The transactions contemplated by the Underwriting Agreement closed on February 18, 2020 (the “Closing Date”), at which time we sold 806,452 shares of common stock to the underwriters. On February 21, 2020, the Representative exercised their overallotment option and purchased an additional 115,767 shares of common stock. The shares were sold at a public offering price of $6.50 per share.
The Company received proceeds of approximately $5.99 million from the Offering. The Company paid the underwriters a cash fee equal to 8% of the aggregate gross proceeds received by the Company in connection with the Offering and reimbursed certain expenses. The total costs of the Offering were $820,586,including $88,213 paid in prior year, which was in deferred offering cost as of December 31, 2019. The net proceeds of the Offering were approximately $5.17 million. The Company intends to use the net proceeds from the offering for working capital and general corporate purposes and possibly to fund acquisitions of other companies, products or technologies.
In September 2019, the Company entered into a financial consulting agreement. As compensation, the Company agreed to pay the consultant $15,000 over six months and to grant the consultant warrants to purchase 5,000 shares of common stock with an exercise price of $0.06 per share. The warrants have not been formally granted as of the date of this Report.
In February 2020, 22,529 warrants to purchase 22,529 shares of common stock were exercised at $0.06 per share by a related party.
In March 2020, 167 options to purchase 167 shares of common stock were exercised at $3.00 per share or $501 in proceeds.
NOTE 4 - WARRANTS
For the three month period ended March 31, 2020, warrants to purchase 22,529 shares of common stock were exercised for proceeds of $1,352, and none were granted or forfeited. See “Note 3 – Shareholders’ Equity”.
The compensation cost related to the warrants granted in prior year was $79,089 and $0 for the three months ended March 31, 2020 and 2019.
The Company’s outstanding and exercisable warrants as of March 31, 2020 are presented below:
Number Outstanding | Weighted Average Exercise Price | Contractual Life in Years | Intrinsic Value | |||||||||||||
| Warrants Outstanding as of December 31, 2019 | 524,480 | $ | 0.42 | 2.39 | $ | 3,273,897 | ||||||||||
| Warrants granted | - | $ | - | - | - | |||||||||||
| Warrants forfeited | - | - | - | - | ||||||||||||
| Warrants exercised | (22,529 | ) | $ | 0.06 | - | - | ||||||||||
| Warrants Outstanding as of March 31, 2020 | 501,951 | $ | 0.44 | 2.36 | $ | 2,693,397 | ||||||||||
| 7 |
NOTE 5 – OPTIONS
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 1,333,333 shares.
For the three month period ended March 31, 2020, 16,667 options were issued, none were forfeited or expired and options to purchase 167 shares of common stock were exercised.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of the grant. The following table summarizes the assumptions used to estimate the fair value of the stock options granted during the quarter ended March 31, 2020.
| 2020 | ||||
| Expected dividend yield | 0% | |||
| Weighted-average expected volatility | 133-226% | |||
| Weighted-average risk-free interest rate | 0.25% | |||
| Expected life of options | 10 years | |||
Total compensation cost related to stock options granted in the current quarter and prior years was $61,997 and $35,979 for the three months ended March 31, 2020 and 2019, respectively.
The following table represents stock option activity for the three month period ended March 31, 2020:
Number Outstanding | Weighted Average Exercise Price | Contractual Life in Years | Intrinsic Value | |||||||||||||
| Options Outstanding as of December 31, 2019 | 346,998 | $ | 4.39 | 6.77 | $ | 817,220 | ||||||||||
| Options Exercisable as of December 31, 2019 | 207,485 | $ | 5.29 | 5.53 | $ | 312,338 | ||||||||||
| Options granted | 16,667 | $ | 7.50 | 9.64 | - | |||||||||||
| Options forfeited | - | $ | - | - | - | |||||||||||
| Options expired | - | $ | - | - | - | |||||||||||
| Options exercised | 167 | $ | 3.00 | 8.01 | - | |||||||||||
| Options Outstanding as of March 31, 2020 | 363,498 | $ | 4.53 | 6.67 | $ | 557,589 | ||||||||||
| Options Exercisable as of March 31, 2020 | 216,536 | $ | 5.32 | 5.36 | $ | 184,039 | ||||||||||
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 and Annapurna Gundlapalli, Gajan Mahendiran and Nexgen Memantine, certain unrelated persons (collectively, defendants), in the Circuit Court of Madison County, Alabama (Case:47-CV-2019-902216.00). The complaint alleges 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 relates 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. The complaint seeks $425,000 in compensatory damages and $1,275,000 in punitive damages. The Company and Mr. Ajjarapu deny in their entirety the plaintiffs’ allegations and plan to promptly seek to file a motion to dismiss the plaintiffs’ claims against the Company and Mr. Ajjarapu. The Company and Mr. Ajjarapu further refute any connections for the purpose of the suit to the other named defendants. To the Company’s and Mr. Ajjarapu’s knowledge, the complaint has no merit whatsoever and each of the Company and Mr. Ajjarapu intend to vigorously defend themselves and oppose the relief sought in the complaint. The Company is unable to determine the estimate of the probable or reasonable possible loss or range of losses arising from the above legal proceeding. The Company has filed a motion to dismiss this lawsuit and a hearing was scheduled for March 2020, however, because of the COVID-19 outbreak, the hearing was postponed until further notice from the court.
| 8 |
NOTE 7 – LEASES
The Company elected the practical expedient under 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 | December 2017 to January 2021 | November 2018 to November 2023 | ||||||
| Renewal Term | January 2021 to December 2024 | November 2023 to November 2028 | ||||||
| Initial Recognition of Right to use assets at January 1, 2019 | $ | 534,140 | $ | 313,301 | ||||
| Incremental Borrowing Rate | 10 | % | 10 | % | ||||
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, 2020.
| Amounts due within twelve months of March 31 | ||||
| 2020 | $ | 161,906 | ||
| 2021 | 166,745 | |||
| 2022 | 171,756 | |||
| 2023 | 176,922 | |||
| 2024 | 149,067 | |||
| Thereafter | 201,097 | |||
| Total minimum lease payments | 1,027,493 | |||
| Less: effect of discounting | (275,656 | ) | ||
| Present value of future minimum lease payments | 751,837 | |||
| Less: current obligations under leases | 90,759 | |||
| Long-term lease obligations | $ | 661,078 | ||
For the three months ended March 31, 2020 and 2019, amortization of assets was $23,635 and $21,744, respectively.
For the three months ended March 31, 2020 and 2019, operating lease liabilities paid was $20,974 and $17,913, respectively.
NOTE 8 – 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.
| 9 |
| Three Months Ended March 31, 2020 | Trxade, Inc. | Community Specialty Pharmacy, LLC | Integra Pharma, LLC | Other | Total | |||||||||||||||
| Revenue | $ | 1,519,907 | $ | 432,929 | $ | 245,016 | $ | 5,468 | $ | 2,203,320 | ||||||||||
| Gross Profit | $ | 1,519,907 | $ | 36,108 | $ | 78,653 | $ | 5,468 | $ | 1,640,136 | ||||||||||
| Segment Assets | $ | 2,055,429 | $ | 280,514 | $ | 1,817,170 | $ | 7,320,791 | $ | 11,473,904 | ||||||||||
| Segment Profit (Loss) | $ | 972,993 | $ | (41,245 | ) | $ | (28,883 | ) | $ | (722,562 | ) | $ | 180,303 | |||||||
| Three Months Ended March 31, 2019 | Trxade, Inc. | Community Specialty Pharmacy, LLC | Integra Pharma, LLC | Other | Total | |||||||||||||||
| Revenue | $ | 1,043,810 | $ | 442,423 | $ | 26,288 | $ | - | $ | 1,512,521 | ||||||||||
| Gross Profit | $ | 1,043,810 | $ | 95,559 | $ | 7,313 | $ | - | $ | 1,146,682 | ||||||||||
| Segment Assets | $ | 1,474,690 | $ | 186,496 | $ | 379,476 | $ | 1,258,819 | $ | 3,299,481 | ||||||||||
| Segment Profit (Loss) | $ | 542,151 | $ | (6,797 | ) | $ | (71,734 | ) | $ | (338,391 | ) | $ | 125,229 | |||||||
NOTE 9 – EQUITY METHOD INVESTMENT
In January 2019, the Company, through its wholly-owned subsidiary Alliance Pharma Solution, LLC (“Alliance”), entered into a joint venture transaction to form SyncHealth MSO, LLC (“SyncHealth”). SyncHealth is owned by PanOptic Health, LLC (“PanOptic”) and Alliance. Alliance contributed $250,000 for the acquisition of a 30% equity interest in SyncHealth and the option to acquire the remaining ownership from PanOptic shareholders. Prior to March 31, 2019, $210,000 was paid with the remaining $40,000 paid in April 2019. Pursuant to the operating agreement, PanOptic owned 70% of SyncHealth and Alliance owned 30%; however, pursuant to the Letter Agreement, PanOptic would transfer to Alliance an additional 6% of SyncHealth’s membership units on May 1, 2019, an additional 6% on August 1, 2019 and an additional 7% on November 1, 2019, and at Alliance’s option, the 51% balance on January 31, 2020, upon transfer of between 378,888 and 2,462,773 shares of Company common stock based on 2019 Gross Revenue Quotas. As of December 31, 2019, the additional interests had not been transferred and Alliance still owned 30% of SyncHealth. We did not realize any income from the joint venture and we terminated the joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned the 30% ownership of SyncHealth back to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of the agreements relating to confidentiality, nonsolicitation and each party’s obligation to cease use of the other party’s intellectual property survive the termination. The investment loss recognized during the year ended December 31, 2019 was $250,000.
NOTE 10 – SUBSEQUENT EVENTS
Return of Inventory Deposits
In April 2020, $295,800 of inventory deposits were returned to the Company as the providers were out of stock of the specific product ordered.
U. S Small Business Association’s Economic Injury Disaster Loan
In April 2020, the Company received $10,000 as part of the U.S. Small Business Association’s Economic Injury Disaster Loan program, which provides vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing as a result of the COVID-19 pandemic. The Company is in the process of returning the money to the Small Business Administration as of the date of this report.
Options Granted
In April 2020, the Company granted options to purchase 30,353 shares of common stock at an exercise price of $0.06 per share, vesting in August 2020, to a consultant who agreed to provide consulting services for a period of 12 months.
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2019 Chief Executive Officer and President Bonuses
On April 14, 2020, the Board of Directors (the “Board”) and the Compensation Committee of the Board approved the award to Suren Ajjarapu, the Company’s Chief Executive Officer and Prashant Patel, the Company’s President, of bonuses equal to 1% of the Company’s outstanding shares, equivalent to 74,484 shares of common stock, and 50,000 shares of common stock, respectively. The awards were made under and pursuant to the Company’s 2019 Equity Incentive Plan (the “Plan”).
2020 Equity Compensation Awards
Also on April 14, 2020, the Compensation Committee approved the grant of options to purchase an aggregate of 31,750 shares of our common stock to certain employees of the Company, in consideration for services to be rendered by such individuals through 2024. The options vest at the rate of 1/4th 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 Plan and the option agreements entered into to evidence such grants. The options were granted pursuant to, and are subject to the Plan, and have a term of five years from the grant date. The options have an exercise price of $6.12 per share, the closing price of the Company’s common stock on the date of the grant of such options.
On the same date, the Board of Directors approved the grant of (a) 5,000 shares of restricted common stock to the Company’s legal counsel; and (b) 12,500 shares of restricted common stock to Howard A. Doss, the Company’s Chief Financial Officer, which shares are subject to forfeiture and vest at the rate of 1/4th of such shares on July 1 and October 1, 2020 and January 1 and April 1, 2021, subject to such persons continuing to provide services to the Company on such dates, subject to the terms of the Plan and the Restricted Stock Grant Agreements entered into to evidence such awards.
Independent Director Compensation Plan
On April 14, 2020, the Board of Directors approved an independent director compensation policy (the “Policy”). Pursuant to the policy, the independent members of the Board of Directors of the Company are to receive a $35,000 annual retainer for services on the Board of Directors, and the chairpersons of the various committees of the Board of Directors receive additional annual compensation equal to between $10,000 (the chairperson of the Compensation Committee and Nominating and Corporate Governance Committee) and $20,000 (the chairperson of the Audit Committee), payable quarterly in arrears.
Additionally, each independent member of the Board of Directors is to receive an annual grant of restricted common stock of the Company equal to $55,000 in value, on April 1st of each year, and valued on such same date, based on the closing sales price on such date (or the first business day thereafter), which restricted stock awards will vest at the rate of 1/4th of such awards over the following four calendar quarters, subject to such directors continued service to the Company.
In connection with and pursuant to the compensation plan, the three independent members of the Board of Directors (Mr. Donald G. Fell, Dr. Pamela Tenaerts, and Mr. Michael L. Peterson), were awarded 8,987 shares of restricted stock, which vest at the rate of 1/4th of such shares on July 1 and October 1, 2020 and January 1 and April 1, 2021, subject to such persons continuing to provide services to the Company on such dates, subject to the terms of the Plan and the Restricted Stock Grant Agreements entered into to evidence such awards.
Employment Agreement with Suren Ajjarapu, Chief Executive Officer
Effective on April 14, 2020, we entered into a new employment agreement with Mr. Suren Ajjarapu, our Chief Executive Officer, which replaced and superseded his prior employment agreement with the Company. The agreement, which provides for Mr. Ajjarapu to serve as our Chief Executive Officer, has a term extending through December 31, 2025, provided that the agreement automatically extends for additional one year terms thereafter in the event neither party provides the other at least 60 days prior notice of their intention not to renew the terms of the agreement. The agreement also requires the Board, subject to certain exceptions, to nominate Mr. Ajjarapu to serve on the Board at each stockholders’ meeting which occurs during the term of the agreement and to serve as the Chairman of the Board.
Pursuant to the terms of the agreement, Mr. Ajjarapu’s annual compensation package includes (1) a base salary of $300,000 per year, subject to annual increases as determined in the sole discretion of the Compensation Committee (the “Base Salary”), and (2) a performance bonus equal to up to 100% of his Base Salary each year, based on the Company meeting certain performance metrics as determined from time to time by the Compensation Committee and Mr. Ajjarapu (“Performance Metrics”). Additionally, in the event that Mr. Ajjarapu meets at least 70% of the requirements for any annual performance bonus, as determined in the reasonable discretion of the Compensation Committee of the Board, Mr. Ajjarapu’s Base Salary is increased by 20%. Mr. Ajjarapu is eligible for the Base Salary increase on an annual basis, with such increases being cumulative. Such increases in Base Salary do not require an amendment to the agreement. For 2020, those performance metrics include ((1) hitting a revenue goal of $12.5 million (50% of restricted shares described below vest); (2) reaching 50,000 Bonum Health patients (30% of restricted shares described below vest); (3) placing e-hubs in 100 stores (10% of restricted shares described below vest); and (4) obtaining net operating income of 10% of total sales (20% of restricted shares described below vest). The determination of whether the Performance Metrics have been met are determined in the reasonable discretion of the Compensation Committee, no later than 90 days after (a) December 31, 2020, in connection with the 2020 Performance Metrics; and (b) the end of such calendar year for subsequent years. Mr. Ajjarapu was also awarded 49,020 shares of restricted common stock (the “2020 Restricted Stock”), which vest in the percentages set forth in the 2020 Performance Metrics (described above), if at all, which shares are subject to forfeiture based on the determination of the Compensation Committee no later than 90 days after December 31, 2020, and are subject to the terms and conditions of the restricted stock award agreement entered into between Mr. Ajjarapu and the Company to evidence such awards and the Plan. Mr. Ajjarapu may also receive additional bonuses awarded from time to time in the discretion of the Board and/or Compensation Committee. Mr. Ajjarapu is also paid an automobile allowance of $1,000 per month during the term of the agreement and is eligible to participate in the Company’s stock option plan and other benefit plans.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Report”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, and in other reports the Company files with the Securities and Exchange Commission (“SEC”), including the Company’sAnnual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 30, 2020. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason, except as otherwise required by law.
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, including under “Item 1A. Risk Factors” below, 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.
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, 2019, filed with the Securities and Exchange Commission on March 30, 2020 (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.
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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 “Item 1A. 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 Group, Inc., is also based on our good faith estimates.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Trxade”, “Trxade Group” and “Trxade Group, Inc.” refer specifically to Trxade Group, Inc. and its consolidated subsidiaries.
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 affected 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.
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 atwww.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 website atwww.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 website address iswww.rx.trxade.com. The information on, or that may be accessed through, our website is not incorporated by reference into this Report and should not be considered a part of this Report.
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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:
| ● | Overview. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A. | |
| ● | 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, 2020 and 2019. | |
| ● | 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
We have designed and developed, and now own and operate business-to-business web-based marketplace focused on the US pharmaceutical industry. Our core service brings the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
We began operations as Trxade Group, Inc., a Nevada corporation (“Trxade Nevada”) in August of 2010 and spent over two years creating and enhancing our web-based services. Our services provide enhanced pricing transparency, purchasing capabilities and other value-added services on a single platform to focus on serving the nation’s approximately 22,000 independent pharmacies with an annual purchasing power of $78 billion (according to the National Community of Pharmacists Association’s 2018 Digest). Our national supplier partners are able to fulfill orders on our platform immediately and provide the pharmacy with cost saving payment terms and next day delivery capabilities in unrestrictive states under the Model State Pharmacy Act and Model Rules of the National Association of Boards of Pharmacy (Model Act). We have expanded rapidly since 2015 and now have over 11,400 registered pharmacy members purchasing products on our sales platform.
Company Organization
Trxade Group, 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. The reverse triangular merger of Trxade, Inc. and Trxade Group, Inc. occurred in July 2013. 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 and our joint venture with SyncHealth MSO, LLC, which was terminated in February 2020, was formed in January 2019. We acquired our Bonum Health operations in October 2019. Trxade, is a web-based market platform that enables commerce among healthcare buyers and sellers of pharmaceuticals, accessories and services.
Liquidity and Capital Resources
Cash
Cash was $7,701,305 at March 31, 2020. 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.
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Liquidity
Cash, current assets,current liabilities, short term debt and working capital at the end of each period were as follows:
| March 31, 2020 | December 31, 2019 | |||||||
| Cash | $ | 7,701,305 | $ | 2,871,694 | ||||
| Current assets (excluding cash) | 2,093,673 | 931,263 | ||||||
| Current liabilities | 950,529 | 520,816 | ||||||
| Working Capital | 8,844,449 | 3,282,141 | ||||||
Our principal sources of liquidity have been cash provided by operations, sales of equity and borrowings under various debt arrangements. Our principal uses of cash have been for operating expenses and acquisitions. We anticipate these uses will continue to be our principal uses of cash in the future.
The increase in cash was primarily due to $5,994,424 of cash raised through the sale of common stock in our February 2020 underwritten offering, as described in greater detail above in “Part I. Financial Statements – Item 1. Financial Statements” – “Note 3 – Shareholders’ Equity”.
Liquidity Outlook cash explanation.
Cash Requirements
Our primary objectives for the remainder of 2020 are to continue the development of the Trxade Platform and increase our client base and operational revenue. As a result of our cash generated through operations and the cash raised in the underwritten offering, we believe we have sufficient cash to support our operations for the foreseeable future. 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 estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows:
| Projected Expenses for 2020-2021 | Amount | |||
| General and administrative (1) | $ | 5,000,000 | ||
| Total | $ | 5,000,000 | ||
(1) Includes wages and payroll, legal and accounting, marketing, rent and web development.
Since inception, we have funded our operations primarily through debt and equity capital raises and operational revenue. To date in 2020, we have raised $5,994,424 through the sale of common stock in our February 2020 underwritten offering.
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. In the event we require additional funding, we plan to raise that through the sale of debt or equity, 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.
As of 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 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 reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that we anticipate will have a negative impact on our wholesalers and certain technology outsourcing in India and the Philippines. 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 consolidated results for the second quarter and full year 2020.
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Cash Flows
The following table summarizes our Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019:
| Three months Ended | ||||||||
| March 31, 2020 | March 31, 2019 | |||||||
| Net Income | $ | 180,303 | $ | 125,229 | ||||
| Net Cash Provided by (used in): | ||||||||
| Operating Activities | (410,806 | ) | (125,794 | ) | ||||
| Investing Activities | (23,505 | ) | (210,000 | ) | ||||
| Financing Activities | 5,263,922 | 166 | ||||||
| Net increase (decrease) in cash | $ | 4,829,611 | $ | (335,628 | ) | |||
Cash used in operations for the three months ended March 31, 2020 was $410,806. This compared to $125,794 used in operating activities for the three months ended March 31, 2019. This increase was mainly due to inventory deposits required of $580,800, made for delivery of specific products.
Investing activities in 2019 include the $210,000 investment in SyncHealth MSO, LLC.
Financing activities in 2019 included $166 of proceeds from a warrant exercise. Financing activities in 2020 included the sale of common stock in the February 2020 underwritten offering which generated $5,994,424 proceeds and approximately $5.26 million in cash to the Company.
Results of Operations
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes to these statements included above.
Three Month Period Ended March 31, 2020 Compared to Three Month Period Ended March 31, 2019
| Three Months Ended | Percent | |||||||||||||||
| March 31, 2020 | March 31, 2019 | Change | Change | |||||||||||||
| Revenues | $ | 2,203,320 | $ | 1,512,521 | $ | 690,799 | 45.7 | % | ||||||||
| Cost of Sales | 563,184 | 365,839 | 197,345 | 53.9 | % | |||||||||||
| Gross Profit | 1,640,136 | 1,146,682 | 493,454 | 43.0 | % | |||||||||||
| Operating Expenses: | ||||||||||||||||
| General and Administrative (less warrants and option expense) | 1,310,823 | 938,944 | 371,879 | 39.6 | % | |||||||||||
| Warrants and Options Expense | 141,086 | 35,979 | 105,107 | 292.1 | % | |||||||||||
| Total General and Administrative/Operating Expense | 1,451,909 | 974,923 | 476,986 | 48.9 | % | |||||||||||
| Share in Equity Losses in Investment | - | (28,972 | ) | 28,872 | 100 | % | ||||||||||
Interest Income (Expense) | (7,924 | ) | (17,558 | ) | 9,634 | 54.9 | % | |||||||||
| Net Income | $ | 180,303 | $ | 125,229 | $ | 55,074 | 44.0 | % | ||||||||
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Our revenues during the three months ended March 31, 2020 were from the Trxade platform, Community Specialty Pharmacy and Integra Pharma Solutions. Revenues increased by $690,799 compared to the prior period. In Trxade, Inc. this increase was attributable to an increase in generic brands being sold on the platform during 2020, compared to 2019. The fee for generics is higher than brands. Our sales department has continued to add customers throughout 2019 and into 2020 through direct marketing and customer training. Integra Pharma Solutions increased revenue to $245,016 in 2020, compared to $26,288 in 2019. Cost of Goods Sold and Gross Profit for the periods were $563,184 and $1,640,136 in 2020 and $365,839 and $1,146,682 in 2019.
General and administrative expenses increased for the three months ended March 31, 2020 to $1,310,823 compared to $938,944 for the comparable period in 2019. The increase was mainly due to legal expenses, filing fees and marketing expenses.
Total warrants and option expense increased by 292.1% for the three months ended March 30, 2020, compared to the prior year’s period due to warrants issued to consultants and new Board of Director option grants.
We had $28,972 of investment loss for the quarter ended March 30, 2019 in connection with the SyncHealth, LLC joint venture which has been terminated effective as of January 31, 2020.
We had interest expense of $7,924 for the three months ended March 31, 2020, compared to interest expense of $17,558 for the three months ended March 31, 2019.
Off-Balance Sheet Arrangements
We had no outstanding off-balance sheet arrangements as of March 31, 2020.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Revenue Recognition
In general, the Company accounts for revenue recognition in accordance with ASC 606, “Revenue from Contracts with Customers.”
Trxade, Inc. provides an online website service, a buying and selling marketplace for licensed Pharmaceutical Wholesalers to sell products and services to licensed pharmacies. The Company charges suppliers a transaction fee, a percentage of the purchase price of the Prescription Drugs and other products sold through its website service. The fulfillment of confirmed orders, including delivery and shipment of Prescription Drugs and other products, is the responsibility of the supplier and not of the Company. The Company holds no inventory and assumes no responsibility for the shipment or delivery of any products or services from our website. The Company considers itself an agent for this revenue stream and as such, reports revenue as net. Step One: Identify the contract with the customer – Trxade, Inc.’s Terms and Use Agreement is acknowledged between the Wholesaler and Trxade, Inc. which outlines the terms and conditions. The collection is probable based on the credit evaluation of the Wholesaler. Step Two: Identify the performance obligations in the contract – The Company provides to the Supplier access to the online website, uploading of catalogs of products and Dashboard access to review status of inventory posted and processed orders. The Agreement requires the supplier to provide a catalog of pharmaceuticals for posting on the platform, deliver the pharmaceuticals and upon shipment remit the stated platform fee. Step Three: Determine the transaction price – The Fee Agreement outlines the fee based on the type of product, generic, brand or non-drug. There are no discounts for volume of transactions or early payment of invoices. Step Four: Allocate the transaction price – The Fee Agreement outlines 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 the day the order has been processed by the Supplier.
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Integra Pharma Solutions, LLC is a licensed wholesaler and sells to licensed pharmacies brand, generic and non-drug products. The Company takes orders for product and 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 – The Company requires that an application and a credit card for payment is 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 the Company. 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 is in the retail pharmacy business. The Company 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 Customer and delivered to the Company. The prescription identifies the performance obligations in the contract. The Company fills the prescription and delivers to the Customer the drugs, fulfilling the contract. The collection is probable because there is confirmation that the customer has insurance for the reimbursement to the Company 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 and Supplemental Data”.
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).
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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, Mr. Ajjarapu and Mr. Doss, 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 30, 2020, 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 recently 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.
Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial reporting that occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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 – 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.
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, 2019, filed with the Commission on March 30, 2020 (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, 2019, 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.
Epidemics, including the recent outbreak of coronavirus, and other crises could negatively impact our business and results of operations.
Our results of operations could be harmed if the fear of communicable and rapidly spreading diseases or other crises such as natural disasters result in travel restrictions or cause people to avoid group meetings or gatherings or interactions with other people. It is difficult to predict the impact on our business, if any, of the emergence of new epidemics or other crises. We currently anticipate that the outbreak of the COVID-19 coronavirus, the global response to such coronavirus, including travel restrictions and quarantines that governments are instituting, may have a significant negative impact on our results of operations, the production of pharmaceuticals and our ability to timely obtain pharmaceuticals for resale. In addition, if we experience further production difficulties, quality control problems or further shortages in supply of pharmaceuticals, this could also harm our business and results of operations, any of which could have a material adverse effect on our operations and the value of our securities. Currently, we are experiencing reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that we anticipate will have a negative impact on our wholesalers and certain technology outsourcing in India and the Philippines. 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 consolidated results for the second quarter and full year for 2020.
The Company’s employees started working remotely around March 17, 2020, and as a result, productivity may drop, which could impact revenues and profitability.
Additionally, as a result of the recent coronavirus outbreak, various states have adopted price gouging laws. Our failure to comply with such laws and regulations could subject us to claims, penalties, fines or lawsuits.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no sales of unregistered securities during the quarter ended March 31, 2020 and from the period from April 1, 2020 to the filing date of this report, which have not previously been disclosed in a prior Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
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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 Group, Inc. | ||
| By: | /s/ Suren Ajjarapu | |
| Suren Ajjarapu | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 4, 2020 | ||
| By: | /s/ Howard Doss | |
| Howard Doss | ||
Chief Financial Officer (Principal Accounting/Financial Officer) | ||
| Date: May 4, 2020 | ||
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EXHIBIT INDEX
| * | Filed herewith. |
| ** | Furnished herewith. |
| *** | Indicates management contract or compensatory plan or arrangement. |
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