U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

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: 333-130446

 

PRAXSYN CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Nevada		20-3191557
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

18011 Sky Park Circle, Suite N Irvine, CA		92614
(Address of Principal Executive Offices)		(Zip Code)

 

(949) 777-6112

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

The number of shares outstanding of the registrant’s common stock as May 15, 2015 was 603,970,157 shares.

 

 

 

PRAXSYN CORPORATION

FORM 10-Q

MARCH 31, 2015

 

INDEX

 

Part I – Financial Information
Item 1.	Consolidated Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition or Plan of Operation	3
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6
Item 4.	Controls and Procedures	6
Part II – Other Information
Item 1.	Legal Proceedings	7
Item 1A.	Risk Factors	8
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8
Item 3.	Defaults Upon Senior Securities	8
Item 4.	Mine Safety Disclosures	8
Item 5.	Other Information	8
Item 6.	Exhibits	8
Signatures
		9
Certifications

 

 

PART I — FINANCIAL INFORMATION

 

ITEM I – CONSOLIDATED FINANCIAL STATEMENTS

 

PRAXSYN CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		March 31, 2015				December 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	1,896,910			$	1,222,084
Accounts receivable, net of allowance			12,335,330				10,134,743
Inventories			294,169				201,639
Other current assets			21,025				15,981
Total current assets			14,547,434				11,574,447
Property and equipment, net			90,780				79,543
Accounts receivable, net of current portion			3,716,941				4,139,543
Other assets			7,548				7,549
Deferred tax assets			577,774				902,941
Total assets		$	18,940,477			$	16,704,023
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable		$	734,158			$	482,648
Accrued interest			1,656,685				1,573,467
Accrued marketing			6,893,281				5,896,197
Other accrued liabilities			1,810,471				1,088,299
Notes payable to related parties			149,067				199,067
Notes payable, current portion			3,529,045				3,676,492
Settlement liabilities			105,000				70,000
Liabilities of discontinued operations			961,831				961,831
Deferred tax liabilities			468,449				897,433
Total current liabilities			16,307,987				14,845,434
Notes payable, non-current			209,688				226,755
Total liabilities			16,517,675				15,072,189
Commitments and contingencies (Note 10)
Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized:
Series D – 210,405 and 332,336 shares outstanding at March 31, 2015 and December 31, 2014, respectively; liquidation preference $8,416,200 and $13,293,440, respectively			—				—
Series B – 61,988 and 63,838 issued and outstanding at March 31, 2015 and December 31, 2014, respectively; liquidation preference $1,859,640 and $1,915,140, respectively			—				—
Series C – 20 issued and outstanding at March 31, 2015 and December 31, 2014, liquidation preference $2,000			—				—
Series A – none issued and outstanding at March 31, 2015 and December 31, 2014, liquidation preference $0			—				—
Common stock, no par value: 1,400,000,000, 592,782,157 and 451,889,263 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively			—				—
Additional paid-in capital			54,258,591				54,239,832
Accumulated deficit			(51,635,789	)			(52,407,998	)
Treasury stock at cost, 389,623 shares at March 31, 2015 and December 31, 2014			(200,000	)			(200,000	)
Total shareholders’ equity			2,422,802				1,631,834
Total liabilities and shareholders’ equity		$	18,940,477			$	16,704,023

 

See accompanying Notes to Consolidated Financial Statements.

 

 

PRAXSYN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended March 31,
		2015				2014
Net revenues		$	14,183,398			$	9,219,563
Cost of net revenues			1,131,549				331,783
Gross profit			13,051,849				8,887,780
Operating expenses:
Selling and marketing – stock based			—				3,803,299
Selling and marketing – non stock-based			6,749,482				3,577,418
Total selling and marketing			6,749,482				7,380,717
General and administrative – stock based			—				100,000
General and administrative – non stock based			1,331,131				499,953
Total general and administrative			1,331,131				599,953
Total operating expenses			8,080,613				7,980,670
Operating income			4,971,236				907,110
Other income (expense):
Interest expense			(3,760,336	)			(5,708,066	)
Warrant modification expense			—				(7,111,444	)
Gain (loss) on extinguishment of debt			70,002				(100,000	)
Total other income (expense)			(3,690,334	)			(12,919,510	)
Income (loss) before income taxes			1,280,902				(12,012,400	)
Provision for income taxes			508,693				—
Net income (loss)		$	772,209			$	(12,012,400	)
Income (loss) per common share - basic		$	0.00			$	(0.00	)
Income (loss) per common share - diluted		$	0.00			$	(0.00	)
Weighted average number of common shares used in basic calculations			520,413,184				—
Weighted average number of common shares used in diluted calculations			1,472,751,004				—

 

See accompanying Notes to Consolidated Financial Statements.

 

 

PRAXSYN CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

		Series D Preferred Stock								Series B Preferred Stock								Series C Preferred Stock								Series A Preferred Stock								Common Stock								Additional Paid-in Capital				Accumulated Deficit				Treasury Stock				Total Stockholders’ Equity
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount
Balance — December 31, 2014			332,336			$	—				63,838			$	—				20			$	—				—			$	—				451,889,263			$	—			$	54,239,832			$	(52,407,998	)		$	(200,000	)		$	1,631,834
Conversion of convertible debt			—				—				—				—				—				—				—				—				461,894				—				18,000				—				—				18,000
Series D Preferred stock conversions			(121,931	)			—				—				—				—				—				—				—				121,931,000				—				—				—				—				—
Series B Preferred stock conversions			—				—				(1,850	)			—				—				—				—				—				18,500,000				—				—				—				—				—
Stock options expense			—				—				—				—				—				—				—				—				—				—				759				—				—				759
Net income			—				—				—				—				—				—				—				—				—				—				—				772,209				—				772,209
Balance — March 31, 2015			210,405			$	—				61,988			$	—				20			$	—				—			$	—				592,782,157			$	—			$	54,258,591			$	(51,635,789	)		$	(200,000	)		$	2,422,802

 

See accompanying Notes to Consolidated Financial Statements.

 

 

PRAXSYN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended March 31,
		2015				2014
Cash flows from operating activities:
Net income (loss)		$	772,209			$	(12,012,400	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Warrant modification expense			—				7,111,444
(Gain) loss on extinguishment of debt			(70,002	)			100,000
Stock issued for services rendered			—				3,903,299
Loss on accounts receivables sold to factor			3,619,104				5,020,403
Depreciation and amortization			9,395				2,103
Amortization of debt discount			—				115,059
Amortization of debt issuance costs			—				18,450
Stock option expense			759
Changes in operating assets and liabilities:
Accounts receivable			(8,544,136	)			(9,120,181	)
Inventories			(92,530	)			(33,482	)
Other current assets			320,123				(13,095	)
Accounts payable			251,511				11,775
Accrued interest			128,720				153,183
Accrued marketing			1,101,584				1,004,078
Other accrued liabilities			293,188				(7,468	)
Settlement liabilities			(40,000	)			(40,000	)
Net cash used in operating activities			(2,250,075	)			(3,786,832	)
Cash flows from investing activities:
Capital expenditures			(20,632	)			(320	)
Cash acquired in connection with reverse merger			—				485,012
Net cash used in investing activities			(20,632	)			484,692
Cash flows from financing activities:
Proceeds from sale of accounts receivable to factor			3,147,047				3,861,848
Borrowings from related parties			—				245,294
Repayment of notes payable
Non-related parties			(151,514	)			(22,500	)
Related parties			(50,000	)			—
Net cash provided by (used in) financing activities			2,945,533				4,084,642
Increase (decrease) in cash and cash equivalents			674,826				782,502
Cash and cash equivalents at beginning of period			1,222,084				37,494
Cash and cash equivalents at end of period		$	1,896,910			$	819,996
Supplemental disclosure of cash flow information:
Cash paid for interest		$	12,512			$	120,736
Cash paid for income taxes		$	—			$	—
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued in exchange for cancellation of note payable		$	—			$	345,334
Conversion of accrued interest into note payable		$	—			$	20,584
Common stock issued in conversion of note payable and accrued interest		$	18,000			$	—
Creation of obligations through settlements		$	75,000			$	500,000
Net liabilities assumed from reverse merger		$	—			$	2,185,778

 

See accompanying Notes to Consolidated Financial Statements.

 

 

PRAXSYN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(UNAUDITED)

 

1. Business

 

Business

 

Praxsyn Corporation (the “Company” or “Praxsyn”) is a health care company dedicated to providing medical practitioners with medications and services for their patients. Through our retail pharmacy facility in Irvine, California, we currently formulate healthcare practitioner-prescribed medications to serve patients who experience chronic pain. Our focus with these products is on non-narcotic and non-habit forming medications using therapeutic and preventative agents for pain management. In addition, we prepare innovative products that address erectile dysfunction and metabolic issues, and other ancillary products. Our products are either picked up directly at our pharmacy facility or shipped to patients covered under the California workers’ compensation system, as well as preferred provider (“PPO”) contracts. Billings are mainly made to, and collections received from, the insurance companies which cover the patients.

 

Merger

 

On December 31, 2013, we entered into a First Amended Securities Exchange Agreement (“SEA”) with Mesa Pharmacy, Inc. (“Mesa”), a wholly-owned subsidiary of Pharmacy Development Corporation (“PDC”), to acquire all of Mesa. On March 20, 2014, we replaced the SEA by entering into an Agreement and Plan of Merger (the “APM”) with PDC whereby we agreed to acquire all the issued and outstanding shares of PDC in exchange for 500,000 shares of our Series D Preferred Stock. Each share of Series D preferred stock is convertible into 1,000 shares of our common stock. On January 23, 2014, we entered into an agreement with our then primary marketing consultant, Trestles Pain Management Specialists, LLC (“TPS”), whereby we agreed to issue them 166,664 shares of our Series D Preferred Stock (representing approximately one-third of the 500,000 shares) in exchange for services they agreed to perform. Additionally, in accordance with the APM, certain of our convertible promissory notes were exchanged for new convertible promissory notes, convertible into shares of Series D Preferred Stock at the rate of one (1) share of Series D Preferred Stock for each One Hundred Dollars ($100) of unpaid principal and interest. The APM closed on March 31, 2014 (the “Acquisition Date”). During 2014, TPS performed the required services we issued them the 166,664 shares of Series D Preferred Stock. However, as the end of 2014 approached, TPS determined that they did not want to incur the potential tax liability that would be associated with the fair market value of shares issued and, effective December 31, 2014, they returned the shares to us for cancellation.

 

For accounting purposes, this transaction was treated as a reverse-acquisition in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, since control of our Company passed to the PDC shareholders. We determined for accounting and reporting purposes that PDC was the acquirer because of the significant holdings and influence of its control group (which includes Mesa) before and after the acquisition. Immediately subsequent to this transaction, the PDC control group owned approximately 40% of our issued and outstanding common stock on a diluted basis. In addition, the Series D preferred shares are the only preferred shares with voting rights. With these voting rights, the PDC control group controlled approximately 63% of our voting power on a diluted basis after the acquisition. Additionally, the PDC control group, pre-acquisition, was significantly larger than Praxsyn in terms of assets and operations. Finally, the future operations of the PDC control group will be our Company’s primary operations and more indicative of the operations of the consolidated entity on a going forward basis.

 

 

Accordingly, the consolidated assets and liabilities of PDC are reported at historical costs and the historical consolidated results of operations of PDC will be reflected in our filings subsequent to the acquisition as a change in reporting entity. The assets and liabilities of Praxsyn are reported at their carrying value, which approximated their fair value, on the Acquisition Date and no goodwill was recorded. Praxsyn’s results of operations will be included from the Acquisition Date. The following is a schedule of Praxsyn’s assets and liabilities at the Acquisition Date:

 

Assets:
Cash		$	485,012
Fixed assets			5,184
Total assets			490,196
Liabilities:
Accounts payable			362,582
Accrued expenses			588,401
Accrued interest			96,362
Convertible debentures			666,798
Liabilities of discontinued operations			961,831
Total liabilities			2,675,974
Net liabilities assumed		$	(2,185,778	)

 

The following is pro-forma revenue and earnings information for the three months ended March 31, 2014 assuming both our Company and PDC had been combined as of January 1, 2014. Amounts have been rounded to the nearest thousand and are unaudited:

 

		Three Months Ended March 31, 2014
Net revenues		$	9,220,000
Net loss from continuing operations		$	(20,501,000	)
Net loss		$	(20,504,000	)
Net loss per share – basic and diluted		$	(0.13	)

 

2. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the notes to the consolidated financial statements, we have omitted disclosures which would substantially duplicate those contained in the audited consolidated financial statements for the year ended December 31, 2014 as reported in our Form 10-K filed on April 15, 2015. In the opinion of management, the consolidated financial statements include all adjustments, consisting of normal recurring accruals necessary to present fairly our consolidated financial position, results of operation and cash flows. The consolidated results of operations for the three-month periods ended March 31, 2015 and 2014 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and related notes which are part of previously mentioned Form 10-K.

 

Principles of Consolidation

 

The accompanying consolidated financial statements for the period ended March 31, 2015 include the accounts of Praxsyn and all subsidiaries. The accompanying consolidated financial statements for the three months ended March 31, 2014 include the accounts of PDC, including Mesa, and Praxsyn as of the Acquisition Date of March 31, 2014. All significant intercompany transactions have been eliminated in consolidation. Management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Actual results could differ from those estimates.

 

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. Since inception, management has funded operations primarily through proceeds received in connection with factoring of accounts receivable on a nonrecourse basis from two primary factors, issuances of notes payable, and sales of common stock. Also, our business has been concentrated within the workers compensation market for which the collection of payments on receivables may be delayed for a significant period depending on various factors. Additionally, we have been dependent upon a few third party marketing services, one of which was previously a related party, and we derive almost 100% of our revenues from customers referred by the marketing services. During the three-month periods ended March 31, 2015 and 2014, we generated net income before income taxes of $1,280,902 and incurred a net loss of before income taxes of $12,012,400, respectively. The 2014 net loss contained $11,014,743 of stock-based expenses and warrant modification expense. We also had negative working capital of $1,760,553 as of March 31, 2015. While Management believes that our new PPO business will greatly improve our operating performance, we understand that we will need additional accounts receivable factoring, or debt/equity financing to be able to implement our business plan. Given the indicators described above, there is substantial doubt about our ability to continue as a going concern.

 

We are attempting to find additional financing sources to build our operations to profitable levels, however, there is no assurance we will be successful. The successful outcome of future activities cannot be determined at this time, and there are no assurances that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.

 

The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Use of Estimates

 

Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates made by management are revenue recognition along with the related allowance for doubtful accounts and contractual receivables, the allocation of accounts receivable between current and long-term, the value of stock-based compensation awards, the amount of potential legal settlements and contingencies, the fair market value of assets and liabilities of Praxsyn and the realization of deferred tax assets. Actual results could differ from those estimates. Management performs a periodic retrospective review of estimates and modifies assumptions as deemed appropriate.

 

Revenue Recognition

 

We sell our products directly through our pharmacy and record the associated revenues using the net method, as required under ASC 954-605-25, Health Care Entities – Revenue Recognition. Our prescription revenue is recorded at established billing rates less estimated contractual adjustments, where applicable, with each respective insurance carrier. Net revenues represent the amount each respective insurance company and the California Workers Compensation Fund are expected to pay us. We recognize revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the sales price is fixed or determinable, and collection is probable. Our pharmacy revenues are recognized when prescriptions are verified and filled and customer shipments are performed.

 

Net revenues consisted of the following for the three months ended March 31, 2015 and 2014:

 

		Three Months Ended March 31,
		2015				2014
Gross billing revenues
Workers compensation		$	12,735,954			$	20,480,163
PPO			8,283,672
Other			11,800				18,783
Less: estimated contractual and other adjustments related mainly to workers compensation billings			(6,848,028	)			(11,279,383	)
Net billing revenues		$	14,183,398			$	9,219,563

 

 

Shipping and Handling

 

Shipping and handling costs incurred are included in general and administrative expenses. The amount of revenue received for shipping and handling is less than 0.5% of revenues for each period presented.

 

Cash Equivalents

 

We consider all highly liquid, income bearing investments purchased with original maturities of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable represent amounts due from insurance companies, through various networks, for pharmaceutical products delivered to patients. We record an allowance for doubtful accounts and contractual reimbursements based on analyses of historical collections over the expected period until such cases are closed or settled. Management also assesses specific identifiable accounts considered at risk or uncollectible. As discussed above, we have factored a significant amount of our accounts receivable. The difference between the estimated net realizable value of accounts receivable, which we have recorded as net revenues, and the factored amounts has been recorded in the consolidated statements of operations as interest expense.

 

Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required in order to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they may have to be revised or updated as additional information becomes available. It is possible that management’s estimates could change, which could have an impact on operations and cash flows. Specifically, the complexity of many billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded.

 

Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or market. Our inventories consist of pharmaceutical ingredients used within our compounding products. Our inventories for all periods presented is predominantly raw materials.

 

Property and Equipment

 

Property and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the lesser of the useful lives or the remaining term of the lease. For tax purposes, accelerated tax methods are used. We expense all purchases of equipment with individual costs of under $1,000. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.

 

Impairment of Long-Lived Assets

 

We review our long-lived assets in accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets. Under that directive, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Such group is tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.

 

Convertible Debt and Warrants Issued with Convertible Debt

 

Convertible debt is accounted for under the guidelines established by ASC 470, Debt with Conversion and Other Options and ASC 740, Beneficial Conversion Features. We record a beneficial conversion feature (“BCF”) when convertible debt is issued with conversion features at fixed or adjustable rates that are below market value when issued. If, however, the conversion feature is dependent upon a condition being met or the occurrence of a specific event, the BCF will be recorded when the related contingency is met or occurs. The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized to interest over the life of the underlying debt using the effective interest method.

 

 

We calculate the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718, Compensation – Stock Compensation, except that the contractual life of the warrant is used. Under these guidelines, we allocate the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense. For a conversion price change of a convertible debt issue, the additional intrinsic value of the debt conversion feature, calculated as the number of additional shares issuable due to a conversion price change multiplied by the previous conversion price, is recorded as additional debt discount and amortized over the remaining life of the debt.

 

For modifications of convertible debt, we record the modification that changes the fair value of an embedded conversion feature, including a BCF, as a debt discount which we amortize to interest expense over the remaining life of the debt. If modification is considered substantial (i.e. greater than 10% of the carrying value of the debt), an extinguishment of debt is deemed to have occurred, resulting in the recognition of an extinguishment gain or loss.

 

Fair Value of Financial Instruments

 

We utilize ASC 820-10, Fair Value Measurement and Disclosure, for valuing financial assets and liabilities measured on a recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect our Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

As of March 31, 2015 and December 31, 2014, we did not have any level 2 or 3 assets or liabilities.

 

Stock Based Compensation

 

We account for our share-based compensation in accordance ASC 718-20, Stock-based Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite vesting period.

 

We have issued warrants exercisable into our common stock and preferred stock as compensation to debt holders. The fair value of each warrant is estimated on the date of grant using the Black-Scholes pricing model. Assumptions are determined at the time of grant. No warrants were granted during the three month periods ended March 31, 2015 and 2014.

 

The assumptions used in the Black Scholes models referred to above are based upon the following data: (1) the expected life of the warrant is estimated by considering the contractual term of the warrant, (2) the expected stock price volatility of the underlying shares over the expected term of the warrant is based upon historical share price data of an index of comparable publicly-traded companies, (3) the risk free interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying warrants, (4) expected dividends are based on historical dividend data and expected future dividend activity, and (5) the expected forfeiture rate is based on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.

 

 

Income Taxes

 

We account for income taxes in accordance with ASC 740-10, Income Taxes. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the consolidated financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

 

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.

 

We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.

 

During the three months ended March 31, 2015, we have recorded our income tax provision and adjustments to deferred income taxes based on our estimated effective tax rate for the entire 2015 year of 39.7%.

 

Net Income (Loss) Per Share

 

Basic earnings per share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period.

 

Concentrations, Uncertainties and Other Risks

 

Cash and cash equivalents - Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000 per institution that pays Federal Deposit Insurance Corporation (FDIC) insurance premiums. We have never experienced any losses related to these balances.

 

Revenues and accounts receivable - Financial instruments that potentially subject us to credit risk principally consist of receivables. Amounts owed to us by insurance companies account for a substantial portion of the receivables. This risk is limited due to the number of insurance companies comprising our customer base and their geographic dispersion. The risk is further limited by our ability to factor our receivables. For the three month periods ended March 31, 2015 and 2014, no single customer represented more than 10% of revenues or accounts receivable, net.

 

The majority of our accounts receivable arise from product sales and are primarily due from insurance companies. We monitor the financial performance and creditworthiness of our customers so that we can properly assess and respond to changes in their credit profile. For accounts receivable that are held and not factored, we do not expect to have write-offs or adjustments to accounts receivable which could have a material adverse effect on our consolidated financial position, results of operations or cash flows as the portion which is deemed uncollectible is already taken into account when the revenue is recognized.

 

During the three months ended March 31, 2015, revenues were generated from sales of products to both workers compensation patients and PPO patients. For the same period in 2014, nearly 100% of revenues were generated from sales of products to worker’s compensation patients located throughout Southern California. For a significant portion of the workers compensation receivables, the collection can take in excess of one year, during which we may attend legal hearings, file liens to securitize claims, negotiate before worker’s compensation administrative judges, resolve liens with stipulations and orders for defendants to pay, and transmit demands to settle liens filed with the adjuster or defense attorneys.

 

 

During the three months ended March 31, 2015 and 2014, we retained two principal consultants in each period to market our products to licensed healthcare practitioners who treat patients covered under workers compensation and PPO insurance programs. For each period presented, nearly 100% of our net revenue resulted from the consultants’ marketing efforts, and fees for the two consultants represented nearly all of our selling and marketing expense. In January 2015, our consulting agreement with TPS expired and we replaced them with another marketing consultant. For the three months ended March 31, 2015 and 2014, the consultants earned the following:

 

Three Months Ended:
March 31, 2015		$	6,749,482		Includes no stock-based compensation
March 31, 2014		$	7,380,717		Includes stock-based compensation of $3,803,299

 

The amounts payable to the consultants at March 31, 2015 and December 31, 2014 were $6,893,281 and $5,896,197, respectively.

 

The pharmaceutical industry is highly competitive and regulated, and our future revenue growth and profitability is dependent on our timely product development, ability to retain proprietary formulas, and continued compliance. The compounding, processing, formulation, packaging, labeling, testing, storing, distributing, advertising and sale of our products are subject to regulation by one or more U.S. and California agencies, including the Board of Pharmacy, the Food and Drug Administration, the Federal Trade Commission, and the Drug Enforcement Administration as well as several other state and local agencies in localities in which our products are sold. In addition, we compound and market certain of our products in accordance with standards set by organizations, such as the United States Pharmacopeia Convention, Inc. We believe our policies, operations and products comply in all material respects with existing regulations. Healthcare reform and a reduction in the coverage and reimbursement levels by insurance companies and government agencies and/or a change in the regulations or compliance with related agencies and/or a disruption in our ability to maintain our competitiveness may have a material impact on our consolidated financial position, results of operations, and cash flows.

 

Vendors - As of March 31, 2015 and December 31, 2014, three suppliers made up substantially 100% of our direct materials. Management believes the loss of any of these suppliers to this organization would have a material impact on our consolidated financial position, results of operations, and cash flows. If our Company’s relationship with one of our vendors was disrupted, we could have temporary difficulty filling prescriptions until a replacement for that vendor was found, which would negatively impact our business.

 

For the three months ended March 31, 2015 and 2014, purchases made for materials obtained from these vendors were $982,393, and $272,090, respectively. The amounts payable at March 31, 2015 and December 31, 2014 for such costs were $202,142 and $12,158, respectively.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new standard requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASU 2014-09 defines a five-step approach for recognizing revenue which may require a company to use more judgment and make more estimates than under the current guidance. This ASU will be effective for us starting in the first quarter of 2018. The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the fiscal 2018 opening retained earnings balance. We are in the process of determining the adoption method as well as the effects the adoption will have on our consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. Management is still in the process of assessing the impact of ASU 2014-15 on the Company’s consolidated financial statements.

 

There are no other recently issued accounting pronouncements or standards updates that we have yet to adopt that are expected to have a material effect on our consolidated financial position, results of operations, or cash flows.

 

 

3. Accounts Receivable

 

Accounts receivable consist of the following at:

 

		March 31, 2015				December 31, 2014
Accounts receivable		$	36,199,455			$	36,364,280
Allowance for doubtful accounts and contractual write-offs			(20,147,184	)			(22,089,994	)
Subtotal			16,052,271				14,274,286
Less: long-term portion			(3,716,941	)			(4,139,543	)
Current portion		$	12,335,330			$	10,134,743

 

We have computed the long-term portion of our accounts receivable using amounts and timing historical collection information.

 

Our accounts receivable resulting from our PPO business are generally collected within 90 days. For our accounts receivable resulting from our workers compensation business, we have sold a significant portion of these receivables, in groups of receivables, to various factors on a non-recourse basis. Prior to funding, the factor performs due diligence testing on a sampling of accounts receivable to determine that the accounts meet their criteria for purchase. After funding, if it is determined that an account receivable does not meet their purchase criteria, we will exchange it for a different account and pursue collection of the account returned. If we do not have a different account to exchange with the factor, we would have to return the proceeds from an account that they are putting back to us. However, as long as we continue to generate new accounts receivable, we are not at risk of having to return any factoring proceeds.

 

Under the factoring agreements, we receive initial net proceeds ranging from 20% to 25% of the gross accounts receivable sold in each group. The agreements also allow for our receipt of additional proceeds once the factors’ collections have reached a certain collection benchmark for each group of receivables sold. In addition, for certain groups of receivables, we may also receive additional proceeds upon the passage of eighteen months. It is unclear whether we will receive additional proceeds from our factors and, therefore, we will not record any additional receipts until such funds have actually been received. The difference between the recorded amount of the accounts receivable and the amount received has been treated as interest expense.

 

We have granted one factor a first security interest in all accounts receivable that have not been sold to another factor. In addition, we provided the same factor with a first right of refusal to purchase future receivables.

 

During the three months ended March 31, 2015 and 2014, our factoring activity has been as follows:

 

		Three Months Ended March 31,
		2015				2014
Gross billing receivables soldt		$	15,735,235			$	19,309,242
Adjustment to net revenues (for estimated contractual and other adjustments)			(8,969,084	)			(10,426,991	)
Interest expense for factored accounts receivable			(3,619,104	)			(5,020,403	)
Proceeds received from factors		$	3,147,047			$	3,861,848

 

4. Property and Equipment, Net

 

Property and equipment consist of the following at:

 

		March 31, 2015				December 31, 2014
Machinery and equipment		$	42,338			$	27,229
Computer equipment			36,396				31,473
Furniture and fixtures			3,997				3,997
Leasehold improvements			70,384				69,784
			153,115				132,483
Less: accumulated depreciation			(62,335	)			(52,940	)
		$	90,780			$	79,543

 

Depreciation expense for the three months ended March 31, 2015 and 2014 amounted to $9,395 and $2,103, respectively.

 

 

5. Notes Payable and Accrued Interest

 

Notes payable and accrued interest consisted of the following at:

 

		March 31, 2015								December 31, 2014
		Principal				Accrued Interest				Principal				Accrued Interest
Non-related parties:
2007 – 2009 convertible notes		$	315,000			$	142,562			$	315,000			$	124,334
2010 profit sharing notes			175,000				527,012				175,000				527,012
2010 and 2011 secured bridge notes			439,275				88,940				449,275				86,945
2012 convertible promissory notes			2,164,750				765,704				2,288,250				706,384
Promissory notes			319,708				3,197				350,722				3,507
Convertible debentures			325,000				120,520				325,000				114,110
Less: unamortized discount			—				—				—				—
Subtotal – non-related parties			3,738,733				1,647,935				3,903,247				1,562,292
Related parties:
Promissory notes			96,667				4,990				146,667				7,414
Convertible note			52,400				3,760				52,400				3,761
Subtotal – related parties			149,067				8,750				199,067				11,175
Total			3,887,800				1,656,685				4,102,314				1,573,467
Current portion			(3,678,112	)			(1,656,685	)			(3,875,559	)			(1,573,467	)
Long-term portion		$	209,688			$	—			$	226,755			$	—

 

2007 – 2009 Convertible Notes

 

The 2007 – 2009 Convertible Notes, which were initially issued in 2007 to 2009 to a series of individuals, are unsecured and bear interest rates ranging from 18% to 33% per annum. Upon finalization of the merger on March 31, 2014 as discussed in Note 1, the notes in this category were rewritten and the maturity date was modified to allow for future payment of principal and accrued interest when our company’s resources would allow.

 

Because these notes were previously past-due and now have no fixed maturity date, we have reflected them as current liabilities at each balance sheet date in the accompanying consolidated financial statements.

 

2010 Profit Sharing Notes

 

These Profit Sharing Notes were initially issued in 2010, have a term of four (4) years, and pay interest monthly at rates ranging from 0.25% to 1.5% of the cash receipts from certain prescription sales. These notes are collateralized by all receivables generated by sales of prescriptions.

 

At both March 31, 2015 and December 31, 2014, these 2010 Profit Sharing Notes are past-due and are reflected as current liabilities at each balance sheet date. There have been no demands for repayment or claims of default, and no conversions have taken place to date.

 

 

2010 and 2011 Secured Bridge Notes

 

These Secured Bridge Notes were initially issued in 2010 and 2011 and were to be repaid at the time of a major funding from a specified funding source. Certain of the notes accrue interest at one-time flat-rates ranging from 15% to 22.5% and others at an annual rate of 15% per annum. The notes are collateralized by all receivables generated by sales of prescriptions.

 

During the three months ended March 31, 2015, we repaid one of these notes with a face value of $10,000.

 

At both March 31, 2015 and December 31, 2014, these 2010 and 2011 Secured Bridge Notes are reflected as current liabilities at each balance sheet date since funding from the funding source was never obtained.

 

2012 Convertible Promissory Notes

 

These Convertible Promissory Notes were issued during the second half of 2012, have a term of four (4) years and bear interest at 18% per annum. Each note, including accrued interest, may be converted at the option of the note holder at any time on or after the second anniversary of the note into an amount of our common shares calculated by dividing the amount to be converted by 95% of the average daily volume weighted average price of our common stock during the five days immediately prior to the date of conversion. No conversion may be made at less than $0.02 per share.

 

During the three months ended March 31, 2015, a note holder converted $18,000 of his note ($13,000 in principal and $5,000 in accrued interest) into 461,894 shares of our common stock in accordance with the provisions of his note. Also during the three months ended March 31, 2015, we entered into a settlement agreement to repay one of these notes with principal and interest totaling $148,125 for a payment of $110,500. The note had been previously acquired from the original note holder by a related party. In connection with this repayment, we recorded a gain on extinguishment of debt in the amount of $37,625 during the three months ended March 31, 2015.

 

At both March 31, 2015 and December 31, 2014, we were in default of the interest payments required under the 2012 Convertible Promissory notes. Therefore these notes are reflected as current liabilities at each balance sheet date presented.

 

Promissory Notes

 

The Promissory Notes consist of the following at:

 

		March 31, 2015				December 31, 2014
Non-related parties:
Note #1 dated October 10, 2014		$	275,004			$	290,151
Note #2 dated October 10, 2014			44,704				60,571
Subtotal			319,708				350,722
Related parties:
Note dated February 20, 2014			96,667				96,667
Note dated March 11, 2014			—				50,000
Subtotal			96,667				146,667
		$	416,375			$	497,389

 

On October 10, 2014, we issued a Secured Promissory Note with a principal amount of $300,000 to an individual. The note has a term of four (4) years, bears interest at 12% per annum, and has a monthly payment including principal and interest of $7,900. The note, which was issued as part of a settlement of a previous note, is secured by certain of our accounts receivable.

 

Also on October 10, 2014, we issued a Promissory Note with a principal amount of $65,756 to another individual. The note bears interest at 12% per annum and is payable over twelve months with monthly payments of $5,842, which includes interest. The note, which was issued as part of a settlement of a previous note, is unsecured.

 

 

On February 20, 2014 we issued an Unsecured Promissory Note for $96,667 to a company whose Managing Member is a shareholder. This note, which had a stated interest rate of 0.5% per month (6% per annum), was repayable in thirty (30) days. We issued a similar Unsecured Promissory Note for $50,000 to the same company on March 11, 2014. The second note contained the same interest rate as the first and was also payable in thirty (30) days. The notes are past due as of December 31, 2014. On February 24, 2015, we entered into a settlement agreement under which we agreed to repay the second note with principal and accrued interest totaling $52,877 for a payment of $50,000. In connection with this repayment, we recorded a gain on extinguishment of debt in the amount of $2,877 during the three months ended March 31, 2015.

 

Convertible Debentures

 

The Convertible Debentures were assumed March 31, 2014 as a result of the Merger discussed in Note 1. The convertible debentures, which bear interest at 8% per annum, were due in August 2013 and are therefore past due. They are convertible into shares of our common stock at the rate of $0.50 per share. There was no activity with respect to these convertible debentures during the three months ended March 31, 2015.

 

Convertible Note (Related Party)

 

On March 5, 2014, we issued a convertible note in the amount of $42,500 to a shareholder. The convertible note, which has a stated interest rate of 6% per annum, was to be repaid in April 2014 and is therefore past due. The note is convertible at the option of the note holder into 260 shares of Series B Preferred Stock. At March 31, 2015 and December 31, 2014, the total principal amount outstanding for this note was $52,400. Subsequent to March 31, 2015, we entered into a settlement agreement under which we agreed to repay this note for a payment of $42,500.

 

6. Settlement Liabilities

 

Settlement liabilities consist of the following at:

 

		March 31, 2015				December 31, 2014
Myhill		$	40,000			$	70,000
C&C Professional			65,000				—
Subtotal			105,000				70,000

 

Myhill

 

On August 28, 2012, we received a claim from Roger Saxton, Loren Myhill, Lucas Myhill, Beryl Myhill, and Ann Marie Kaumo (collectively the “Myhill Litigants”) seeking $358,433 for delayed public entry and illiquidity stemming from an investment made by the Myhill Litigants. On January 6, 2014, we entered into a Settlement and Mutual General Release Agreement with the Myhill Litigants under which they agreed to release all claims against us and relinquish all shares of PDC they owned in exchange for $200,000, $20,000 of which was payable on execution of the settlement agreement and the remainder payable at $10,000 per month over the following 18 months. In connection with this transaction, the $200,000 has been recorded as Treasury Stock.

 

The settlement agreement requires Counsel for the Plaintiffs to hold the PDC stock certificates during pendency of the payout period. During such period, Plaintiffs shall have no right to vote such shares, transfer such shares, or encumber such shares, and will not be entitled to receive cash dividends or stock dividends or any distributions based on ownership of such shares. The Plaintiffs shall return each of their stock certificates to the Company with a full executed stock power sufficient to transfer such shares. In the event of any transaction by the Company, including merger or buyout, that results in Plaintiffs’ shares of PDC to be converted to shares of another entity, such obligations and restrictions stated herein shall apply to such new or different shares.

 

C&C Professional

 

On March 19, 2015, we entered into a Settlement Agreement and Mutual Release with C&C Professional Consultants, Inc. (“C&C”) under we agreed to pay $75,000 in full satisfaction of an accrued marketing obligation to C&C recorded at $104,500. During the three months ended March 31, 2015, we recorded a gain on extinguishment of debt in the amount of $29,500 in connection with this transaction.

 

 

7. Liabilities of Discontinued Operations

 

Liabilities of discontinued operations totaling $961,831 represent the liabilities of our interest in our subsidiary Pet Airways, Inc. and consist of the following as of March 31, 2015:

 

Accrued airline leases		$	360,679
Other accrued liabilities			376,924
Amounts owed to credit card merchants			102,315
Unearned revenue			121,913
Total		$	961,831

 

On March 26, 2014, prior to the reverse acquisition by us on March 31, 2014, former management issued 60,000,000 common shares to a company controlled by two former officers of our Company in exchange for the former officers’ agreement to purchase our interest in Pet Airways and to forgive their unpaid wages. The former officers’ agreement to purchase our interest in Pet Airways was meant to relieve us of these debts. As of March 31, 2015, the former officers had not fulfilled their obligation to purchase our interest in Pet Airways, and other matters between the parties are in dispute.

 

We have endeavored to resolve our disputes with the former officers, including their fulfillment of their obligation to purchase the interest in Pet Airways, but to date have been unsuccessful. During the fourth quarter of 2014, we agreed to participate in non-binding mediation for the matters in dispute. However to date, the former officers have not made themselves available for the mediation process. If we are unable to come to a satisfactory resolution through this process, we will likely pursue litigation.

 

Because of the foregoing factors, we have continued to recognize these liabilities in the accompanying consolidated balance sheets.

 

8. Capital Stock

 

Common Stock

 

We are authorized to issue 1,400,000,000 shares of no par value common stock. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders and are not entitled to cumulate their votes in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the Board of Directors out of funds legally available therefore subject to the prior rights of holders of any outstanding shares of preferred stock and any contractual restrictions against the payment of dividends on common stock. In the event of liquidation or dissolution of our Company, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive or other subscription rights and no right to convert their common stock into any other securities.

 

During the three months ended March 31, 2015, we issued 461,894 common shares upon the conversion of a portion of his 2012 Convertible Promissory Note. See Note 5. In addition, we issued 121,931,000 common shares upon conversion of Series D Shares and 18,500,000 common shares upon conversion of Series B Shares.

 

Preferred Stock

 

We are authorized to issue 10,000,000 shares of no par value preferred stock and as of March 31, 2015 have designated four (4) series of preferred stock whose rights are described below.

 

 

Series D Preferred Stock - on December 30, 2013, we filed a Certificate of Designations with the State of Illinois under which we designated 500,000 shares of Preferred Stock as Series D Preferred Stock (the “Series D Preferred”). The following describes certain information with respect to the Series D Preferred Stock:

 

Ranking – The Series D Preferred ranks, with respect to rights upon liquidation, dissolution or winding-up of the affairs of our Company (collectively “Liquidation”), (i) senior to the Common Stock, (ii) equal to the Series B Preferred Stock, (iii) senior to any and all other classes or series of our Preferred Stock whether authorized now, or at any time in the future, unless any such subordination to any other class or series of Preferred Stock, is expressly agreed to, pursuant to an affirmative vote or written consent of holders of at least sixty-seven percent (67%) of the Series D Preferred issued and outstanding at the time of any such vote or written consent, and (iv) junior to any and all existing and future indebtedness of the Company.

 

Right of Conversion – Any holder of Series D Preferred shall have the right to convert any or all of the their Series D Preferred into a number of fully paid and non-assessable shares of common stock at the rate of 1,000 common shares for each share of Series D Preferred. No conversion will be allowed which would cause the common share beneficial ownership of the holder and its affiliates to exceed 4.9% of our issued and outstanding common shares after such conversion unless such provision is waived by the holder with 61 days’ notice.

 

Dividends – Series D Preferred shall not be entitled to dividends.

 

Liquidation – In the event of any Liquidation, holders of Series D Preferred shall be entitled to $40 per share. If upon any Liquidation, our remaining assets are insufficient to pay the Series D Preferred holders the full $40 per share to which they are entitled, then the remaining assets shall be distributed on a pro rata basis to all holders of the Series D Preferred and any other class of our capital stock that ranks equal to the Series D Preferred.

 

Series B Preferred Stock - on March 15, 2013, we filed a Certificate of Designations with the State of Illinois under which we designated 80,000 shares of our Preferred Stock as Series B Preferred Stock (the “Series B Preferred”). The following describes certain information with respect to the Series B Preferred Stock:

 

Ranking – The Series B Preferred has the same ranking as the Series D Preferred described above.

 

Right of Conversion – Any holder of Series B Preferred shall have the right to convert each of their Series B Preferred shares into a number of fully paid and non-assessable shares of common stock calculated as follows: 0.001% of the number of shares of the our Common Stock that would be issued and outstanding after the hypothetical conversion and issuance of all of the outstanding shares of any and all classes of convertible stock and/or any and all other convertible debt instruments, options and/or warrants outstanding at the time of conversion (the “Series B Conversion Ratio”). In no event shall the Series B Conversion Ratio be less than 4,300 shares of common stock for each Series B Preferred share and more than 10,000 shares of Common Stock for each Series B Preferred share. No conversion will be allowed which would cause the common share beneficial ownership of the holder and its affiliates to exceed 4.9% of our issued and outstanding common shares after such conversion unless such provision is waived by the holder with 61 days’ notice.

 

Dividends – Series B Preferred shall not be entitled to dividends.

 

Liquidation – In the event of any liquidation, dissolution or winding-up of the affairs of our Company (collectively, a “Liquidation”), holders of Series B Preferred shall be entitled to $30 per share. If upon any Liquidation, our remaining assets are insufficient to pay the Series B Preferred holders the full $30 per share to which they are entitled, then the remaining assets shall be distributed on a pro rata basis to all holders of the Series B Preferred and any other class of our capital stock that ranks equal to or higher than the Series B Preferred.

 

Series C Preferred Stock - on May 15, 2013, we filed a Certificate of Designations with the State of Illinois under which we designated 50,000 shares of our Preferred Stock as Series C Preferred Stock (the “Series C Preferred”). The following describes certain information with respect to the Series C Preferred Stock:

 

Ranking – The Series C Preferred ranks, with respect to rights upon Liquidation, (i) senior to the Common Stock, The Series A Preferred Stock and any and all other classes or series of our Preferred Stock whether authorized now, or at any time in the future, unless any such subordination to any other class or series of Preferred Stock, is expressly agreed to, pursuant to an affirmative vote or written consent of holders of at least sixty-seven percent (67%) of the Series C Preferred issued and outstanding at the time of any such vote or written consent, (ii) junior to the Series D Preferred and Series B Preferred, and (iii) junior to any and all existing and future indebtedness of the Company.

 

 

Right of Conversion – Any holder of Series C Preferred shall have the right to convert each of their Series C Preferred shares into a number of fully paid and non-assessable shares of common stock calculated as follows: the face value of Series C preferred shares (calculated at $100 per share) divided by ninety percent (90%) of the lowest closing price for our common stock, as quoted on any exchange or market upon which the common stock is traded over the sixty (60) calendar days preceding the date of conversion (the “Series C Conversion Rate”). In no event shall the Series C Conversion Rate be less 10,000 shares of common stock for each Series C Preferred share and more than 20,000 shares of Common Stock for each Series C Preferred share. No conversion will be allowed which would cause the common share beneficial ownership of the holder and its affiliates to exceed 4.9% of our issued and outstanding common shares after such conversion unless such provision is waived by the holder with 61 days’ notice.

 

Dividends – Series C Preferred shall not be entitled to dividends.

 

Liquidation – In the event of any Liquidation, holders of Series C Preferred shall be entitled to $100 per share after payments have been made to holders of the Series D Preferred and Series B Preferred. If upon any Liquidation, our remaining assets are insufficient to pay the Series C Preferred holders the full $100 per share to which they are entitled, then the remaining assets shall be distributed on a pro rata basis to all holders of the Series C Preferred and any other class of our capital stock that ranks equal to or higher than the Series C Preferred.

 

Series A Preferred Stock - on May 27, 2011, we filed a Certificate of Designations with the State of Illinois under which we designated 500 shares of our Preferred Stock as Series A Preferred Stock (the “Series A Preferred”). The following describes certain information with respect to the Series A Preferred Stock:

 

Ranking – The Series A Preferred ranks, with respect to rights upon Liquidation, (i) senior to the Common Stock, (ii) junior to the Series D Preferred, Series B Preferred, and Series C Preferred and (iii) junior to any and all existing and future indebtedness of the Company.

 

Right of Conversion – The Series A Preferred is not convertible into any of our capital stock.

 

Dividends – Series A Preferred shall be entitled to dividends at the rate of 10% per annum which are payable upon redemption of the Series A Preferred. So long as any shares of Series A Preferred are outstanding, no dividends or other distributions may be paid or declared to any securities which are junior to the Series A Preferred other than dividends or other distributions payable on the common stock solely in the form of additional shares of common stock. After payment of dividends at the annual rate set forth above, any additional dividends declared shall be distributed ratably among all holders of the Series A Preferred and common stock in proportion to the number of shares of common stock that would be held by each such holder of Series A Preferred as if the Series A Preferred were converted into common stock by taking the Series A Liquidation Value (as defined below) divided by the market price of one share of common stock on the date of distribution.

 

Liquidation – In the event of any Liquidation, any payments to holders of Series A Preferred shall be made only after Liquidation payments have been made to holders of the Series D Preferred, the Series C Preferred and Series B Preferred. After such payments have been made, our remaining assets shall be paid to holders of the Series A Preferred up to the amount of $10,000 per Series A Preferred share plus any accrued but unpaid dividends (the “Series A Liquidation Value”). Any remaining assets shall be distributed on a pro rata basis to both the Series A Preferred shareholders and the common shareholders as if the Series A Preferred were converted into common stock.

 

Redemption – The Company may redeem any or all of the Series A Preferred at any time at a redemption price per share equal to the Series A Liquidation Value.

 

Warrants

 

On March 31, 2015, we had outstanding warrants to purchase 43,424,989 of our common shares. The warrants, the majority of which were issued under a June 3, 2011 securities purchase agreement, expire at various dates through June 3, 2016 and are exercisable at various per share prices ranging from $0.01 to $1.02.

 

Stock Incentive Plans

 

Under our 2010 Stock Incentive Plan (the “2010 Plan”), options to purchase 4,000,000 shares of our common stock had been approved and reserved for grants to employees, officers, directors and outside advisors at fair market value on the date of grant. At March 31, 2015, we had 367,000 option shares outstanding at an average exercise price of $0.16 per share and 3,633,000 option shares available for grant.

 

 

Under our 2012 Stock Incentive Plan (the “2012 Plan”), we had 10,000,000 common shares and shares underlying stock options approved and reserved for the issuance to employees, officers, directors and outside advisors. At March 31, 2015, the Company had issued 6,170,950 common shares under the 2012 Plan and have 3,829,050 common shares available for issuance.

 

9. Other Related Party Information

 

Following is a summary of total cash compensation, including base salary, bonus and other compensation for Edward Kurtz, our CEO and all employees related to him for the three months ended March 31, 2015 and 2014:

 

Three months ended March 31, 2015	$	252,012
Three months ended March 31, 2014	$	174,691

 

A relative of our former Pharmacist in Charge was a consultant to the Company providing management consulting and other business advisory services. During the three months ended March 31, 2015 and 2014, the consultant’s fees totaled were zero and $13,500, respectively.

 

10. Commitments and Contingencies

 

Leases

 

Our facilities, consisting of approximately 7,343 square feet of space, are located in Irvine, California under a rental agreement that expires on September 30, 2016. The rental agreement includes operating expenses such as common area maintenance, property taxes and insurance. Total rent expense, which is reflected in general and administrative expenses in the accompanying consolidated statements of operations, was $27,382 and $17,238 during the three months ended March 31, 2015 and 2014, respectively.

 

Other Commitments and Contingencies

 

There are various other pending legal commitments and contingencies involving our Company, principally first right of refusal conflicts, material breach of contract, and committed shares with consultants that were never issued. While it is not feasible to predict the outcome of such commitments, threats, and potential liabilities, in our opinion, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such obligations is not expected to be material to our financial position, results of operations or cash flows either individually or in the aggregate. In the opinion of our legal counsel, we have filed cross complaints which should mitigate some or our potential liability.

 

HIPAA – The Health Insurance Portability and Accountability Act (“HIPAA”) was enacted on August 21, 1996, to assure health insurance portability, reduce healthcare fraud and abuse, guarantee security and privacy of health information, and enforce standards for health information. Organizations are required to be in compliance with HIPAA provisions by April 2005. Effective August 2009, the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) was introduced imposing notification requirements in the event of certain security breaches relating to protected health information. Organizations are subject to significant fines and penalties if found not to be compliant with the provisions outlined in the regulations. The Company continues to be in compliance with HIPAA as of December 31, 2014.

 

Our decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing at the time such decisions are made. We have evaluated our risks and has determined that the cost of obtaining product liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certain product liabilities effective May 1, 2006.

 

We believe that there are no compliance issues associated with applicable pharmaceutical laws and regulations that would have a material adverse effect on us.

 

 

11. Litigation

 

We are involved in various lawsuits and claims regarding shareholder derivative actions, third-party billing agency actions, negligent misrepresentation, and breach of contract, that arise from time to time in the ordinary course of our business.

 

Nokley Group LLC

 

In February 2014, we were served with a complaint from Nokley Group LLC (“Nokley”) for breach of contract under a Fee and First Right of Refusal Agreement dated May 25, 2012 between our company and Nokley. In the complaint, which was filed in Nevada, Nokley stated, among other things, that we sold certain of our accounts receivable to factoring organizations without offering Nokley first right of refusal which they allege was required under the agreement. While we estimate we would have cross-complaints against Nokley that would significantly mitigate any potential damages, we first filed a motion to dismiss based on improper venue. On July 31, 2014, our Company and Nokley agreed to dismiss the action without prejudice, and to have each party to bear its own attorney fees and costs.

 

The Company estimates that the potential range of exposure for this matter, if refiled in a proper venue, is $17,000 to $30,000. As of March 31, 2015, we have accrued the minimum amount of potential exposure under our estimation that a loss would be probable.

 

MedCapGroup LLC

 

In May 2014, we were served with a complaint from MedCapGroup LLC (“MedCap”) for breach of contract, breach of covenant of good faith and fair dealing, intentional misrepresentation, fraud in the inducement, and deceptive trade practices under a November 2012 Healthcare Accounts Receivable Purchase Agreement between our company and MedCap. MedCap alleged in its complaint that because we sell our accounts receivable based on dates of service, and not by patient, that only the original purchaser of a patient’s claims controls all payments and settlement negotiations with the insurer. As a result, MedCap alleged that we had misrepresented the collectability of certain accounts receivable they had purchased from us and that they had therefore been damaged. While we estimate we have significant defenses against MedCap’s complaint, we first filed a motion to dismiss based on improper venue. On July 30, 2014, our motion to dismiss was granted.

 

In November 2014, MedCap filed a complaint in the US District Court of Nevada similar to that discussed above. In December 2014, we counterclaimed against MedCap for intentional and negligent interference of contract based on their agency relationship with David Brown, the broker/collector retained by MedCap to collect on the accounts receivable they purchased. In addition, third party complaint along with our answer to bring Mr. Brown into this litigation. At of this date, we cannot reasonably estimate a potential range of loss with respect to this matter, however we believe we have significant defenses to this complaint, intend to defend it vigorously, and believe that no loss is probable.

 

Andrew Warner

 

On September 16, 2014, a former officer of the Company, Andrew Warner, filed a lawsuit against us in the Superior Court of California, Santa Clara (Case No. 114CV270653). In the lawsuit, Mr. Warner is alleging that we breached an oral contract for management services performed by Mr. Warner, by not paying him certain monies for those services. In the complaint, he is asking for damages of approximately $300,000. We believe that this action is without merit, and will defend it vigorously. We have cross sued for breach of fiduciary duty, fraudulent concealment and nondisclosure, conversion, breach of duty of good faith and fair dealing and unfair business practices for actions Mr. Warner took while a former officer of our Company. Mediation is to occur this summer.

 

Trestles Pain Specialists

 

On March 11, 2015, we filed a lawsuit in the Superior Court of California, Orange County (Case No. 30-2015-00776389) against Trestles Pain Specialists, LLC (“TPS”), John Garbino and David Fish. We first allege that TPS breached the terms of the consulting services agreement due to lack of performance by TPS of the agreed upon services. Second, we allege that we were fraudulently induced into entering into the consulting services agreement due to the misrepresentation made by Mr. Garbino that Mr. Fish, who has some unsettling issues that were of concern to us, was not an owner of TPS. Had we known that Mr. Fish did have a stake in TPS, we would not have entered into the consulting services agreement. We allege additional causes of action for unfair business practices, breach of good faith and fair dealing, intentional interference of contract, intentional interference with prospective advantage, and conspiracy to defraud. In addition to damages of over $1,500,000 we are seeking rescission of the consulting services agreement so that all moneys paid would be refunded to us, which exceed $17,000,000. On April 30, 2015 we amended the complaint to include actions against Ray Riley for tortious interference of contract.

 

 

TPS v. Mesa, Praxsyn, et al

 

TPS filed a lawsuit against Mesa/Praxsyn and a host of other codefendants in April 2015 (30-2015-00781113-CU-BC-CJC) alleging 23 various causes of action. Mesa/Praxsyn has demurred as many of the causes of action should be stayed until the outcome of our action against TPS (described above) is determined. They have sued vendors, shareholders, officers and various individuals based on an iteration of facts that are largely disputed by Praxsyn and all co-defendants. Praxsyn counsel believes this lawsuit to be largely baseless due to various writings and releases signed by John Garbino, a former director of our Company. Discovery on this lawsuit is on hold until late August due to an Anti Slapp motion filed against TPS. We do not believe there is any new exposure to Praxsyn under this suit, as the underlying claims are already reserved for in the Praxsyn V. Trestles Pain Specialists suit.

 

Bellevue Holdings, Inc.

 

We have been included as a necessary party in a Federal complaint in Arizona (Case CV-15-00552-PHX-SRB) over a dispute between an outside party and a shareholder over shares of common stock and a $30,000 obligation. Praxsyn does not appear to have liability.

 

Judgments and Orders

 

In prior years, a number of judgments and orders were obtained against Pet Airways, Inc. as detailed below. In connection with the 2014 Merger discussed above, two former officers of our Company agreed to purchase our interest in Pet Airways which was meant to relieve us of the Pet Airways debts. As such, we believe that any obligations of Pet Airways rests with the two former officers of our Company and not with us. Notwithstanding the foregoing, we have included certain amounts in our balance sheets in the accompanying consolidated financial statements in the category Liabilities of Discontinued Operations in connection with these matters.

 

Sky Way Enterprises

 

In April 2012, a judgment was entered against Pet Airways in Circuit Court in and for Palm Beach County, Florida by Sky Way Enterprises, Inc. in the sum of $187,827 for services rendered, damages, including costs, statutory interest and attorneys’ fees. We have recorded a liability of $198,500 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

Suburban Air Freight

 

On March 4, 2013, a judgment was entered against Pet Airways in District Court of Douglas County, Nebraska by Suburban Air Freight in the sum of $87,491 for services rendered, including statutory interest and attorneys’ fees. In August 2014, Suburban moved to enforce the judgment against Praxsyn in Orange County, California and in November 2014, the Orange County court vacated Suburban’s motion to enforce judgment as it did not arise in any transaction with Praxsyn. We have recorded a liability of $90,532 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

Alyce Tognotti

 

On March 6, 2013, an order was issued by the labor commissioner of the State of California for Pet Airways, Inc., to pay a former employee Alyce Tognotti wages and penalties in the sum of $17,611 for services rendered, including penalties, statutory interest and liquidated damages. We have recorded a liability of $18,771 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

AFCO Cargo

 

On May 31, 2013, a motion for final judgment was filed against our subsidiary, Pet Airways, Inc., in Circuit Court in and for Broward County, Florida by AFCO Cargo BWI, LLC in the sum of $31,120 for services rendered, including statutory interest and attorneys’ fees. We have recorded a liability of $32,331 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

 

We record accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. As of March 31, 2015 and December 31, 2014, we accrue for liabilities associated with certain litigation matters if they are both probable and can be reasonably estimated. We have accrued for these matters and will continue to monitor each related legal issue and adjust accruals for new information and further developments in accordance with ASC 450-20-25, Contingencies. For these and other litigation and regulatory matters currently disclosed for which a loss is probable or reasonably possible, we are unable to determine an estimate of the possible loss or range of loss beyond the amounts already accrued. These matters can be affected by various factors, including whether damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.

 

In our opinion, based on our examination of these matters, our experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in our consolidated balance sheet, is not expected to have a material adverse effect on our consolidated financial position. However, the resolution in any reporting period of one or more of these matters, either alone or in the aggregate, may have a material adverse effect on our consolidated results of operations and cash flows for that period.

 

12. Income (Loss) Per Share

 

Basic and diluted income (loss) per share amounts were calculated by dividing net income (loss) by the weighted average number of common shares outstanding. The numerators and denominators used to calculate basic and diluted income (loss) per share are as follows for the three months ended March 31, 2015 and 2014:

 

		Three Months Ended March 31,
		2015				2014
Numerator for income (loss) per share:
Net income (loss) attributable to common shareholders for basic income (loss) per share		$	772,209			$	(12,012,400	)
Interest on 2007 – 2009 convertible notes			10,968
Interest on 2012 convertible promissory notes			60,500				—
Interest on convertible note – related party			378				—
Interest on convertible debentures			3,857
Net income (loss) attributable to common shareholders for diluted income (loss) per share		$	847,912			$	(12,012,400	)
Denominator for income (loss) per share:
Denominator - basic income (loss) per share – weighted average shares			520,413,184				—
2007 – 2009 convertible notes			3,150,000
2012 convertible promissory notes			42,933,116				—
Convertible note – related party			2,600,000				—
Convertible debentures			650,000
Preferred stock:
Series D			274,317,789				—
Series B			628,074,444				—
Series C			400,000				—
Warrants			212,471				—
Denominator - diluted income (loss) per share			1,472,751,004				—

 

 

The following weighted-average shares of dilutive common share equivalents are not included in the computation of diluted income (loss) per share, because their conversion prices exceeded the average market price or their inclusion would be anti-dilutive:

 

		Three Months Ended March 31,
		2015				2014
Convertible Notes			—				19,800,063
Preferred Stock			—				697,080,005
Options			367,000				367,000
Warrants			43,212,518				40,953,414
			43,579,518				758,200,482

 

Effective December 31, 2014, a holder of Series B Preferred stock agreed not to convert 16,000 of his Series B Preferred shares (the “Locked-Up Shares”) until April 1, 2016. Accordingly, the common stock equivalents for the Locked-Up Shares have not been included in the tables shown above. If all dilutive securities had been exercised at March 31, 2015, excluding the Locked-Up Shares, the total number of common shares outstanding would be approximately 1.353 billion which is below the 1.4 billion authorized.

 

13. Subsequent Events

 

Conversion of Preferred Stock

 

Subsequent to March 31, 2015, shareholders converted preferred stock into common stock as follows:

 

		Preferred Shares				Common Shares
Series D Preferred			3,488				3,488,000
Series B Preferred			770				7,700,000

 

Debt Settlement

 

As noted in Note 5, effective April 10, 2015, we entered into a settlement agreement with a related party under which we agreed to repay a note with principal and accrued interest totaling $52,400 for a payment of $42,500. In connection with this repayment, we will record a gain on extinguishment of debt in the amount of $9,900 during the three months ended June 30, 2015.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION

 

Disclaimer Regarding Forward-Looking Statements

 

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

Description of Business

 

Praxsyn Corporation (the “Company” or “Praxsyn”) is a health care company dedicated to providing medical practitioners with medications and services for their patients. Through our retail pharmacy facility in Irvine, California, we currently formulate healthcare practitioner-prescribed medications to serve patients who experience chronic pain. Our focus with these products is on non-narcotic and non-habit forming medications using therapeutic and preventative agents for pain management. In addition, we prepare innovative products that address erectile dysfunction and metabolic issues, and other ancillary products. Our products are either picked up directly at our pharmacy facility or shipped to patients covered under the California workers’ compensation system, as well as preferred provider (“PPO”) contracts. Billings are mainly made to, and collections received from, the insurance companies which cover the patients.

 

Management’s Plan of Operations

 

In prior years, our business has been concentrated within the workers compensation market. Given the industry and the reimbursement environment of this market, our estimate of net realizable value of our billings is often substantially less than the gross billing we are allowed to charge. In addition, the collection of payments on receivables in this market may be delayed for a significant period depending on various factors. We are in the process of diversifying our business and, in that regard, our net revenues for the three months ended March 31, 2015 included $8,283,672 of billings to the PPO market. These billings are approved by insurance carriers before we fill the prescriptions and, once filled and delivered to the patient, are generally collected within 90 days. While Management believes that our new PPO business will greatly improve our operating performance, we understand that we will need additional accounts receivable factoring, or debt/equity financing to be able to implement our business plan.

 

There have been two significant influences that have had a negative impact on our operating results. First, as noted above, our revenue recognition is based on our estimate of the net realizable value of our customer billings. We invoiced most of our customers, those which are insurance companies for workers compensation cases, in accordance with the fees permitted according to the State of California fee schedule. This is our gross billing. Given the nature of our industry and the reimbursement environment in which we operate, our estimate of the net realizable value of our billings is often less than the gross billing we are allowed to charge. We have recorded our revenue based on historical collection trends. Second, we have had to finance our operations by selling our accounts receivable (recorded at net realizable value) to a number of factors. The cost of factoring, which we record as interest expense, can be quite high – anywhere from 70% to 75% of the gross accounts receivable billing.

 

While these two influences have had a material adverse impact on our operating results, they also offer a major opportunity for profit growth as we move forward. In August 2014, we formed a subsidiary named NexGen Med Solutions, LLC, which we expect will allow us to expand our accounts receivable collection effort, both internally and externally. We believe this will allow us to improve our collections, increase the net realizable value of our gross billing revenues, and reduce our dependency on factoring. In addition we continue to seek more conventional financing which will allow us to move away from factoring and reduce our interest expense.

 

Finally, we continue to seek new markets for our products which will diversify our business, increase profitability and improve shareholder value. While there is no certainty that we will be able to achieve these goals, Management is hopeful we will be successful.

 

 

Critical Accounting Policies

 

The preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenue and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the interim financial statements, the Company utilized available information, including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of the Company’s results of operations to other companies in its industry. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to its business.

 

There have been no material changes during the three months period ended March 31, 2015 to the items that the Company disclosed as its critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K filed on April 15, 2015 for the year ended December 31, 2014.

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2015 and March 31, 2014

 

Net Revenues and Cost of Net Revenues

 

Net revenues for the first quarter of 2015 were $14,183,398 compared to $9,219,563 for the comparable period in 2014. The 2015 period contains nearly $8.3 million in PPO net revenue compared to zero in the 2014 period. Net revenue related to workers compensation billings was approximately $5.9 million in the first quarter of 2015 versus $9.2 million for the same period in 2014. This decrease is mainly attributable to the changeover from one marketing services consultant to another in the 2015 period. For the first quarter of 2015, our cost of net revenues was $1,131,549 (8.0% of net revenues) compared to $331,783 (3.6% of net revenues) for the same period in 2014. While the PPO business is typically more profitable overall than the workers compensation business, the cost of materials required in filling these prescriptions is higher. In addition, in the 2015 period, there was a higher percentage of labor in the cost of net revenues as we had hired additional personnel in reaction to various regulatory requirements and in anticipation of increased volume during the remainder of the year.

 

Selling and Marketing Expense

 

Our selling and marketing expense results almost entirely from the services provided by our marketing services consultants. For the three months ended March 31, 2015, these expenses were $6,749,482. For the comparable period in 2014, our selling and marketing expense was $7,380,717, $3,803,299 of which was stock-based. The non-stock-based expense was higher in 2015 than in 2014 as the cost of marketing services related to our PPO business is higher than similar costs related to our workers compensation business. The 2014 stock-based expense results from the issuance of Series D Preferred shares to TPS under our January 23, 2014 agreement with them.

 

General and Administrative Expense

 

Our general and administrative expense for the three months ended March 31, 2015 was $1,331,131 compared to $599,953 for the comparable period in 2014. $100,000 of the 2014 expense was stock-based. In the 2015 period, we had 40 employees in this expense category versus 17 for the same period in 2014. The increase in employees mainly resulted from public company requirements as well as increases in our billing and collection staffs. In addition, a number of our staff were given salary increases to accommodate the additional public company responsibilities and the anticipated increase in revenue. These increases were the main contributors to higher costs in certain categories in 2015 versus 2014 – salaries and wages ($600,000), insurance ($86,000) and office supplies ($51,000). Additionally, our legal expense was $83,000 higher in 2015 than 2014 due to a greater level of litigation.

 

Interest Expense

 

Interest expense for the first quarter of 2015 was $3,760,336. $3,619,104 of this amount was interest on factored accounts receivable and other factor-related interest which resulted from net revenues for the three-month period. In addition, the first quarter of 2015 included other interest of $141,232 which mainly represented interest on notes payable. For the comparable period of 2014, interest expense was $5,708,066 and consisted of factoring-related interest of $5,223,295, discount amortization of $115,059 and other interest of $369,712. Factoring-related interest expense decreased on lower revenue in the workers compensation market.

 

 

Gain (Loss) on Extinguishment of Debt

 

During the three months ended March 31, 2015, the gain on extinguishment of debt of $70,002 consisted gains related to settlements of two notes payable with a related party and an accrued marketing obligation. For the comparable period in 2014, there was a loss on the settlement of a note payable.

 

Warrant Modification Expense

 

During the first quarter of 2014, prior to the Merger discussed in Note 1 to the accompanying consolidated financial statements, all of the outstanding warrants of the PDC control group were exchanged for PDC common stock. The conversion, which resulted in an issuance of 155,823 Series D Preferred shares, was treated as a modification of the exercise price of the warrants. Accordingly, the warrants were revalued on the conversion date, resulting in a loss of $7,111,444 being recorded within the accompanying consolidated statement of operations.

 

Liquidity and Capital Resources

 

The report of our independent registered public accounting firm on the consolidated financial statements for the year ended December 31, 2014 contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern as a result of recurring losses and negative cash flows. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that would be necessary if we are unable to continue as a going concern.

 

As of March 31, 2015, our principal source of liquidity is from collections from our PPO accounts receivable and the factoring of our workers compensation accounts receivable, all of which result from the sale of our prescription products. During the three months ended March 31, 2015, we received proceeds of approximately $3.1 million from factoring and collected in excess of $5.0 million against PPO receivables. At March 31, 2015 we had cash in excess of $1.8 million and a working capital deficit of slightly more than $1.7 million. This compares to the cash of $1.2 million and a working capital deficit of nearly $3.3 million as of December 31, 2014.

 

Financings

 

We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution. To date in 2015, we have self-funded our PPO business from funds received from prior factoring workers compensation accounts receivable. In prior years, we issued a number of notes payable and used the proceeds to fund operations.

 

While we have recently established our own collections company, we will need to complete additional financing transactions in order to transition from factoring to in-house collections. Financing transactions, if any, may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to generate sufficient revenue, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if the Company issues additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our capital stock. If additional financing is not available or is not available on acceptable terms, we may have to continue factoring our receivables.

 

Cash Flows

 

The following table sets forth our cash flows for the three months ended March 31:

 

		2015				2014				Change
Operating activities
Net income (loss)		$	772,209			$	(12,012,400	)		$	12,784,609
Change in non-cash items			3,559,256				16,270,758				(12,711,502	)
Change in working capital			(6,581,540	)			(8,045,190	)			1,463,650
Total			(2,250,075	)			(3,786,832	)			1,536,757
Investing activities			(20,632	)			484,692				(505,324	)
Financing activities			2,945,533				4,084,642				(1,139,109	)
Total		$	674,826			$	782,502			$	(107,676	)

 

 

Operating Activities

 

The change in non-cash items primarily includes warrant modification expense, gain (loss) on extinguishment of debt, stock issued for services rendered, loss on accounts receivables sold to factor, depreciation and amortization, amortization of debt discount, amortization of debt issuance costs, and deferred tax provision. The change in working capital is mainly related to increases in accounts receivable partially offset by an increase in associated accrued marketing expense.

 

Investing Activities

 

Cash used in investing activities consists of capital expenditures, along with cash acquired in connection with the merger.

 

Financing Activities

 

Cash provided from the sale of accounts receivable to factors was $3,147,047 and $3,861,848 in 2015 and 2014, respectively. In addition, we had borrowings from related parties in 2014 and we made repayments on notes payable in both periods.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2014 our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our management has identified certain material weaknesses in our internal control over financial reporting.

 

Our management, in consultation with our independent registered public accounting firm, concluded that material weaknesses existed in the following areas as of March 31, 2015:

 

(1) we have inadequate segregation of duties consistent with the control objectives including but not limited to the disbursement process, transaction or account changes, account reconciliations and approval and the performance of bank reconciliations;

 

(2) we do not have a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls, approvals and procedures.

 

Due to the material weaknesses that management identified, it was unable to conclude that our disclosure controls and procedures were effective as of March 31, 2015.

 

 

Changes in Internal Control over Financial Reporting.

 

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the calendar quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we are involved in legal proceedings, claims, and litigation that occur in connection with our business. We routinely assess our liabilities and contingencies in connection with these matters based upon the latest available information and, when necessary, we seek input from our third-party advisors when making these assessments. Described below are material pending legal proceedings (other than ordinary routine litigation incidental to our business), material proceedings known to be contemplated by governmental authorities, other proceedings arising under federal, state, or local environmental laws and regulations (including governmental proceedings involving potential fines, penalties, or other monetary sanctions in excess of $10,000) and such other pending matters that we determine to be appropriate.

 

Nokley Group LLC

 

In February 2014, we were served with a complaint from Nokley Group LLC (“Nokley”) for breach of contract under a Fee and First Right of Refusal Agreement dated May 25, 2012 between our company and Nokley. In the complaint, which was filed in Nevada, Nokley stated, among other things, that we sold certain of our accounts receivable to factoring organizations without offering Nokley first right of refusal which they allege was required under the agreement. While we estimate we would have cross-complaints against Nokley that would significantly mitigate any potential damages, we first filed a motion to dismiss based on improper venue. On July 31, 2014, our Company and Nokley agreed to dismiss the action without prejudice, and to have each party to bear its own attorney fees and costs.

 

The Company estimates that the potential range of exposure for this matter, if refiled in a proper venue, is $17,000 to $30,000. As of March 31, 2015, we have accrued the minimum amount of potential exposure under our estimation that a loss would be probable.

 

MedCapGroup LLC

 

In May 2014, we were served with a complaint from MedCapGroup LLC (“MedCap”) for breach of contract, breach of covenant of good faith and fair dealing, intentional misrepresentation, fraud in the inducement, and deceptive trade practices under a November 2012 Healthcare Accounts Receivable Purchase Agreement between our company and MedCap. MedCap alleged in its complaint that because we sell our accounts receivable based on dates of service, and not by patient, that only the original purchaser of a patient’s claims controls all payments and settlement negotiations with the insurer. As a result, MedCap alleged that we had misrepresented the collectability of certain accounts receivable they had purchased from us and that they had therefore been damaged. While we estimate we have significant defenses against MedCap’s complaint, we first filed a motion to dismiss based on improper venue. On July 30, 2014, our motion to dismiss was granted.

 

In November 2014, MedCap filed a complaint in the US District Court of Nevada similar to that discussed above. In December 2014, we counterclaimed against MedCap for intentional and negligent interference of contract based on their agency relationship with David Brown, the broker/collector retained by MedCap to collect on the accounts receivable they purchased. In addition, third party complaint along with our answer to bring Mr. Brown into this litigation. At of this date, we cannot reasonably estimate a potential range of loss with respect to this matter, however we believe we have significant defenses to this complaint, intend to defend it vigorously, and believe that no loss is probable.

 

 

Andrew Warner

 

On September 16, 2014, a former officer of the Company, Andrew Warner, filed a lawsuit against us in the Superior Court of California, Santa Clara (Case No. 114CV270653). In the lawsuit, Mr. Warner is alleging that we breached an oral contract for management services performed by Mr. Warner, by not paying him certain monies for those services. In the complaint, he is asking for damages of approximately $300,000. We believe that this action is without merit, and will defend it vigorously. We have cross sued for breach of fiduciary duty, fraudulent concealment and nondisclosure, conversion, breach of duty of good faith and fair dealing and unfair business practices for actions Mr. Warner took while a former officer of our Company. Mediation is to occur this summer.

 

Trestles Pain Specialists

 

On March 11, 2015, we filed a lawsuit in the Superior Court of California, Orange County (Case No. 30-2015-00776389) against Trestles Pain Specialists, LLC (“TPS”), John Garbino and David Fish. We first allege that TPS breached the terms of the consulting services agreement due to lack of performance by TPS of the agreed upon services. Second, we allege that we were fraudulently induced into entering into the consulting services agreement due to the misrepresentation made by Mr. Garbino that Mr. Fish, who has some unsettling issues that were of concern to us, was not an owner of TPS. Had we known that Mr. Fish did have a stake in TPS, we would not have entered into the consulting services agreement. We allege additional causes of action for unfair business practices, breach of good faith and fair dealing, intentional interference of contract, intentional interference with prospective advantage, and conspiracy to defraud. In addition to damages of over $1,500,000 we are seeking rescission of the consulting services agreement so that all moneys paid would be refunded to us, which exceed $17,000,000. On April 30, 2015 we amended the complaint to include actions against Ray Riley for tortious interference of contract.

 

TPS v. Mesa, Praxsyn, et al

 

TPS filed a lawsuit against Mesa/Praxsyn and a host of other codefendants in April 2015 (30-2015-00781113-CU-BC-CJC) alleging 23 various causes of action. Mesa/Praxsyn has demurred as many of the causes of action should be stayed until the outcome of our action against TPS (described above) is determined. They have sued vendors, shareholders, officers and various individuals based on an iteration of facts that are largely disputed by Praxsyn and all co-defendants. Praxsyn counsel believes this lawsuit to be largely baseless due to various writings and releases signed by John Garbino, a former director of our Company. Discovery on this lawsuit is on hold until late August due to an Anti Slapp motion filed against TPS. We do not believe there is any new exposure to Praxsyn under this suit, as the underlying claims are already reserved for in the Praxsyn V. Trestles Pain Specialists suit.

 

Bellevue Holdings, Inc.

 

We have been included as a necessary party in a Federal complaint in Arizona (Case CV-15-00552-PHX-SRB) over a dispute between an outside party and a shareholder over shares of common stock and a $30,000 note that Praxsyn allegedly owns. Praxsyn does not appear to have liability.

 

Judgments and Orders

 

In prior years, a number of judgments and orders were obtained against Pet Airways, Inc. as detailed below. In connection with the 2014 Merger discussed above, two former officers of our Company agreed to purchase our interest in Pet Airways which was meant to relieve us of the Pet Airways debts. As such, we believe that any obligations of Pet Airways rests with the two former officers of our Company and not with us. Notwithstanding the foregoing, we have included certain amounts in our balance sheets in the accompanying consolidated financial statements in the category Liabilities of Discontinued Operations in connection with these matters.

 

Sky Way Enterprises

 

In April 2012, a judgment was entered against Pet Airways in Circuit Court in and for Palm Beach County, Florida by Sky Way Enterprises, Inc. in the sum of $187,827 for services rendered, damages, including costs, statutory interest and attorneys’ fees. We have recorded a liability of $198,500 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

Suburban Air Freight

 

In March 4, 2013, a judgment was entered against Pet Airways in District Court of Douglas County, Nebraska by Suburban Air Freight in the sum of $87,491 for services rendered, including statutory interest and attorneys’ fees. In August 2014, Suburban moved to enforce the judgment against Praxsyn in Orange County, California and in November 2014, the Orange County court vacated Suburban’s motion to enforce judgment as it did not arise in any transaction with Praxsyn. We have recorded a liability of $90,532 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

 

Alyce Tognotti

 

On March 6, 2013, an order was issued by the labor commissioner of the State of California for Pet Airways, Inc., to pay a former employee Alyce Tognotti wages and penalties in the sum of $17,611 for services rendered, including penalties, statutory interest and liquidated damages. We have recorded a liability of $18,771 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

AFCO Cargo

 

On May 31, 2013, a motion for final judgment was filed against our subsidiary, Pet Airways, Inc., in Circuit Court in and for Broward County, Florida by AFCO Cargo BWI, LLC in the sum of $31,120 for services rendered, including statutory interest and attorneys’ fees. We have recorded a liability of $32,331 within Liabilities of discontinued operations at March 31, 2015 in connection with this matter.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

 

There have been no events which are required to be reported under this item.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

There have been no events which are required to be reported under this item.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

31.1		Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 302, of the Sarbanes-Oxley Act of 2002.*
32.1		Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS		XBRL Instance Document**
101.SCH		XBRL Taxonomy Extension Schema Document**
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB		XBRL Taxonomy Extension Label Linkbase Document**
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document**

 

* Filed herewith

** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed”.

 

 

SIGNATURES

 

In accordance with 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, duly authorized.

 

Dated: May 15, 2015	PRAXSYN CORPORATION
		(Registrant)
	By:	/s/ Edward Kurtz
		Edward Kurtz
	Its:	Chief Executive Officer and Chief Financial Officer