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EX-32.B - EXHIBIT 32-B SECTION 906 CERTIFICATION - TRXADE GROUP, INC.f10q093015_ex32zb.htm
EX-32.A - EXHIBIT 32-A SECTION 906 CERTIFICATION - TRXADE GROUP, INC.f10q093015_ex32za.htm
EX-31.A - EXHIBIT 31-A SECTION 302 CERTIFICATION - TRXADE GROUP, INC.f10q093015_ex31za.htm
EX-31.B - EXHIBIT 31-B SECTION 302 CERTIFICATION - TRXADE GROUP, INC.f10q093015_ex31zb.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


  X .

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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: 000-55218


TRXADE GROUP, INC.

(Exact name of registrant as specified in its charter)


 

 

 

Delaware

 

46-3673928

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)


 

 

 

 

1115 Gunn Hwy

 

 

Odessa, Florida 33556

 

(Address of Principal Executive Offices) (Zip Code)


Registrant’s telephone number, including area code: (800)-261-0281


Former name, former address and former fiscal year, if changed since last report: None


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


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


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


Large accelerated filer

      .

Accelerated filer

      .

Non-accelerated filer

      . (Do not check if a smaller reporting company)

Smaller reporting company

  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 .


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class

Outstanding at

November 2, 2015

 

 

Common Stock, $0.00001 par value per share

31,269,160 shares






TRXADE GROUP, INC.
FORM 10-Q
For the Quarter Ended September 30, 2015
INDEX


 

 

 

Page 

PART I.

 FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

a)

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

3

 

 

 

 

 

b)

Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2015 and 2014 (unaudited)

4

 

 

 

 

 

c)

Consolidated Statements of Cash Flows for Nine Months Ended September

30, 2015 and 2014 (unaudited)

5

 

 

 

 

 

d)

Notes to (unaudited) Financial Statements

6

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

9

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

14

 

 

 

Item 4. 

Controls and Procedures

14

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

14

 

 

 

Item 1A.

Risk Factors

14

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

15

 

 

 

Item 3.

Defaults Upon Senior Securities

15

 

 

 

Item 4.

Mine Safety Disclosures

15

 

 

 

Item 5.

Other Information

15

 

 

 

Item 6.

Exhibits

15

 

 

 

SIGNATURES

16

 

 

 





2




PART 1: FINANCIAL INFORMATION


Item 1: Financial Statements


Trxade Group, Inc.
Consolidated Balance Sheets
September 30, 2015 and December 31, 2014
(unaudited)


 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

Assets

 

 

 

 

Current Assets

 

 

 

 

 

Cash

$

324,622

$

705,602

 

Accounts Receivable, net

 

443,598

 

349,025

 

Inventory

 

358,036

 

46,429

 

Prepaid Assets

 

202,068

 

57,676

 

Other Assets

 

24,210

 

59,584

 

Total Current Assets

 

1,352,534

 

1,218,316

 

 

 

 

 

 

Property and Equipment (net)

 

-

 

3,802

 

 

 

 

 

 

Total Assets

$

1,352,534

$

1,222,118

 

 

 

 

 

 

Liabilities and Shareholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts Payable

$

332,084

$

291,059

 

Accrued Liabilities

 

273,893

 

175,786

 

Other Liabilities

 

5,044

 

64,264

 

Promissory Note, net of $26,250 and $0 discount

 

223,750

 

-

 

Convertible Note, net of $62,470 and $0 discount

 

137,530

 

-

 

Deferred Income

 

-

 

22,568

 

Total Current Liabilities

 

972,301

 

553,677

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Preferred Stock, $0.00001 par value; 100,000,000

 shares authorized; 0 shares issued and outstanding,

 as of September 30, 2015 and December 31, 2014,

 respectively

 

-

 

-

 

Common Stock, $0.00001 par value; 100,000,000

 shares authorized; 31,269,160 and 31,269,160

 shares issued and outstanding, as of September 30, 2015

 and December 31, 2014, respectively

 

312

 

312

 

Additional Paid-in Capital

 

5,533,447

 

5,199,917

 

Retained Earnings (Deficit)

 

(5,153,526)

 

(4,531,788)

 

Total Shareholders’ Equity

 

380,233

 

668,441

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

$

1,352,534

$

1,222,118



The accompanying notes are an integral part of the unaudited consolidated financial statements.




3




Trxade Group, Inc.
Consolidated Statements of Operations
Three months and nine months ended September 30, 2015 and 2014
(unaudited)


 

 

Three Months Ended

 

Nine Months Ended

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Revenues

$

1,637,875

$

372,690

$

3,501,203

$

904,603

 

 

 

 

 

 

 

 

 

Cost of Sales

 

700,637

 

77,153

 

1,313,104

 

275,129

Gross Profit

 

937,238

 

295,537

 

2,188,099

 

629,474

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

General and Administrative

 

1,013,801

 

645,363

 

2,733,761

 

1,623,847

 

 

 

 

 

 

 

 

 

Operating Loss

 

(76,563)

 

(349,826)

 

(545,662)

 

(994,373)

 

 

 

 

 

 

 

 

 

Loss on Debt Conversion

 

-

 

-

 

-

 

576,417

Interest Expense

 

47,199

 

2,057

 

76,076

 

4,109

Net Loss

$

(123,762)

$

(351,883)

$

(621,738)

$

(1,574,899)

 

 

 

 

 

 

 

 

 

Basic loss per Common Share

$

(0.00)

$

(0.01)

$

(0.02)

$

(0.05)

 

 

 

 

 

 

 

 

 

Diluted loss per Common Share

$

(0.00)

$

(0.01)

$

(0.02)

$

(0.05)

 

 

 

 

 

 

 

 

 

Basic weighted average number of

Common Shares outstanding

 

31,269,160

 

29,595,609

 

31,269,160

 

29,385,234

 

 

 

 

 

 

 

 

 

Diluted weighted average number of

Common Shares outstanding

 

31,269,160

 

29,595,609

 

31,269,160

 

29,385,234



The accompanying notes are an integral part of the unaudited consolidated financial statements.





4




Trxade Group, Inc.

Consolidated Statements of Cash Flows

Nine months ended September 30, 2015 and 2014

(unaudited)


 

 

 

 

2015

 

2014

Operating Activities:

 

 

 

 

 

Net Loss

$

(621,738)

$

(1,574,899)

 

Adjustments to reconcile net loss to net cash provided by

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

Depreciation

 

3,802

 

3,600

 

 

Bad debt expense

 

40,934

 

-

 

 

Loss from Debt Conversion

 

-

 

576,417

 

 

Options expense

 

226,437

 

282,832

 

 

Amortization of debt discount

 

63,373

 

-

 

Changes in Operating assets and Liabilities:

 

 

 

 

 

 

Accounts Receivable

 

(135,507)

 

(79,421)

 

 

Prepaid Assets

 

(144,392)

 

(49,064)

 

 

Inventory

 

(311,607)

 

13,759

 

 

Other Assets

 

35,374

 

-

 

 

Accounts Payable

 

41,025

 

56,370

 

 

Accrued Liabilities

 

98,107

 

71,076

 

 

Other Liabilities

 

(59,220)

 

-

 

 

Deferred Income

 

(22,568)

 

-

 

Net Cash used in operating activities

 

(785,980)

 

(699,330)

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Repayments of Short Term Debt – Related Parties

 

-

 

(105,639)

 

Proceeds from Short Term Debt – Related Parties

 

-

 

52,250

 

Repayments of Short Term Promissory Note

 

-

 

(10,000)

 

Proceeds from Short Term Convertible Debt

 

200,000

 

-

 

Proceeds from Short Term Promissory Note

 

205,000

 

10,000

 

Proceeds from subscription receivable

 

-

 

160,000

 

Proceeds from issuance of Common Stock

 

-

 

404,250

 

Proceeds from issuance of Preferred Stock

 

-

 

375,000

 

Net Cash provided by financing activities

 

405,000

 

885,861

 

 

 

 

 

 

Net increase or (Decrease) in Cash

 

(380,980)

 

186,531

Cash at Beginning of the Year

 

705,602

 

84,317

Cash at September 30, 2015 and 2014

$

324,622

$

270,848

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

Cash Paid for Interest

$

28,967

$

4,109

Cash Paid for Income Taxes

$

-

$

-

 

 

 

 

 

Non –Cash Transactions

 

 

 

 

Beneficial conversion features and relative fair value of warrants

$

107,093

$

-

Shares issued for Related Party Debt

$

-

$

19,333

Series A Convertible Preferred Shares converted to Common Stock

$

-

$

10


The accompanying notes are an integral part of the unaudited consolidated financial statements.





5




Trxade Group, Inc.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the nine months ended September 30, 2015 and 2014


NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION


Trxade Group, Inc. (“Company”) owns 100% of Trxade, Inc., Westminster Pharmaceutical LLC and Pinnacle Tek, Inc. The merger of Trxade, Inc. and Trxade Group, Inc. occurred in July 2013. Pinnacle Tek was merged with Trxade Group, Inc. in July 2013. Westminster Pharmaceutical LLC was formed in January 2013.


Trxade, Inc. is a web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals, accessories and services.


Westminster Pharmaceutical LLC, provides US state licensed pharmacies and other buying groups with FDA approved pharmaceuticals as well as access to current benchmark pricing of pharmaceuticals.


Pinnacle Tek, Inc. is a technology consultant provider that supports the programming needs of parent company and also provides other information technology consulting services.


Income (loss) Per Share – Basic net loss per common share is computed by dividing net loss available to commons stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed similar to basic net loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilute. At September 30, 2015 diluted net loss per share is equivalent to basic net loss per share as the inclusion of any shares committed to be issued would be anti-dilutive.


The following table sets forth the computation of basic and diluted Loss per Share:


 

 

Three-month

 

Nine-month

 

 

September 30, 2015

 

September 30, 2015

Numerator:

 

 

 

 

Net Loss

$

(123,762)

$

(621,738)

 

 

 

 

 

Numerator for basic EPS – income (loss)

 

 

 

 

Available to common shareholders

 

(123,762)

 

(621,738)

 

 

 

 

 

Numerator for diluted EPS – income (loss)

 

 

 

 

Income available to common shareholders

 

(123,762)

 

(621,738)

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic EPS –

 

 

 

 

Weighted average shares

 

31,269,160

 

31,269,160

 

 

 

 

 

Denominator for diluted EPS -

 

 

 

 

Weighted-average shares and assumed Conversions

 

31,269,160

 

31,269,160

 

 

 

 

 

Basic loss per common share

$

(0.00)

$

(0.02)

 

 

 

 

 

Diluted loss per common share

$

(0.00)

$

(0.02)


The accompanying unaudited interim financial statements of Trxade Group, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K.


In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2014 as reported in the Annual Report on Form 10K have been omitted.



6




NOTE 2 – SHORT-TERM DEBT


Convertible Promissory Note


Convertible promissory notes were issued in the aggregate amount of $200,000 in April and May 2015. The term of the notes are one year. Simple interest of 10% is payable at the maturity date of the note. Prior to maturity the notes may be converted for common stock at a conversion price of $1.50. The holders of the notes were granted warrants at one common stock for $4.00 of the note amount, 50,000 warrants were issued at a strike price of $1.50 with an expiration date of five years from date of issuance.


The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815 40 and determined embedded conversion feature does not meet the definition of a liability. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $53,546 was recorded.


The Company also uses the Black-Scholes pricing model to estimate the fair value of the warrants issued along with convertible notes on the date of grant. See assumptions employed in the calculation in Note 3. The Company accounted for relative fair value of the warrants issued and a total debt discount of $53,547 was recorded.


During the nine months ended September 30, 2015, debt discount of $44,623 was amortized. As of September 30, 2015, convertible note has a balance of $137,530, net of $62,470 unamortized debt discount.


Promissory Note


In May 2015, a promissory note was issued in the face amount of $250,000. The term of the note is one year. The note has an original issuance discount of $45,000, thus the cash proceeds from the promissory note is $205,000.


During the nine months ended September 30, 2015, debt discount of $18,750 was amortized. As of September 30, 2015, promissory note has a balance of $223,750, net of $26,250 unamortized debt discount.


NOTE 3 - WARRANTS


For the nine month period ended September 30, 2015, 50,000 warrants were issued along with convertible debt. See Note 2.


The Company uses the Black-Scholes warrant pricing model to estimate the fair value of warrants on the date of grant.


Under the Black-Scholes warrant price model, fair value of the warrants granted is estimated at $73,124 at the respective issuance date.


The following table summarizes the assumptions used to estimate the fair value of warrants granted during the nine months ended September 30, 2015:


 

2015

Expected dividend yield

0%

Weighted-average expected volatility

200%

Weighted-average risk-free interest rate

0.48%

Expected life of warrants

5 years


The Company’s outstanding and exercisable warrants as of September 30, 2015 are presented below:


 

Number

 

Weighted Average

Contractual

 

Intrinsic

 

Outstanding

 

Exercise Price

Life in Years

 

Value

 

 

 

 

 

 

 

Warrants Outstanding and exercisable as of December 31, 2014

635,000

$

$0.69

4.15

$

515,500

 

 

 

 

 

 

 

Warrants Granted

50,000

$

$1.50

5.00

$

2,500

Warrants Forfeited

-

$

-

-

$

-

 

 

 

 

 

 

 

Warrants Outstanding and exercisable as of September 30, 2015

685,000

$

$0.75

3.49

$

198,000




7




NOTE 4 - OPTIONS


The Company maintains a stock option plan under which certain employees are awarded option grants based on a combination of performance and tenure. The stock option plan provides for the grant of up to 2,000,000 shares. All options may be exercised for a period up to 10 years following the grant date, after which they expire and are vested in 4 or 5 years from the grant date.


During the nine months ended September 30, 2015, 480,000 options were granted to employees. These options vest over five years and are granted with an exercise price of $1.60 and the expiration date is ten years from the grant date. The last ones expire January 2025.


During the nine months ended September 30, 2015, 420,000 options were forfeited due to employee resignation. The options were not vested and the option expense reversed was $90,894. During the nine months ended September 30, 2015, another 20,000 options expired.


The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant.


Under the Black-Scholes option price model, fair value of the option granted is estimated at $759,838 at the respective issuance date.

The following table summarizes the assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2015:


 

2015

Expected dividend yield

0%

Weighted-average expected volatility

200%

Weighted-average risk-free interest rate

0.48%

Expected life of options

5-8 years


Total compensation cost related to stock options was $226,437 for the nine months ended September 30, 2015. As of September 30, 2015, there was $341,554 of unrecognized compensation costs related to stock options, which is expected to be recognized over a weighted average period of 4.11 years. The following table represents stock option activity as of and for the period ended September 30, 2015:


 

 

 

Weighted

 

 

 

 

Number of

 

Average

Contractual Life

 

Intrinsic

 

Options

 

Exercise Price

in Years

 

Value

 

 

 

 

 

 

 

Outstanding at December 31, 2014

900,000

$

1.00

3.41

 

-

Exercisable at December 31, 2014

112,500

$

1.00

3.16

$

56,250

 

 

 

 

 

 

 

Forfeited

(420,000)

$

1.37

6.94

 

-

Granted

480,000

$

1.60

9.30

 

-

Expired

(20,000)

$

1.00

2.33

 

-

 

 

 

 

 

 

 

 Outstanding at September 30, 2015

940,000

$

1.14

4.15

$

-

 Exercisable at September 30, 2015

292,500

$

1.06

3.14

$

-


NOTE 5 – SUBSEQUENT EVENTS


A convertible promissory note purchase agreement was executed in the amount of $1,500,000 in October 2015, with the principal delivered in three tranches. Funding of $450,000 was completed for the first tranche of the loan in October 2015. The second and third tranches of $550,000 and $500,000 are scheduled for December 31, 2015 and February 1, 2016, respectfully. The term of the notes are three years. Interest payments are based on a profit percentage of specific operations of the company’s wholesale distribution division, payable each quarter. Prior to maturity the notes may be converted for shares of our common stock at a conversion price of $2.50 per share. In further consideration of the convertible promissory note, the holder of the note was granted security purchase warrants at one common stock for $3.00 of the note amount, and in October 2015 warrants to purchase 150,000 shares of common stock (plus an additional 10,000 warrants) were issued at a strike price of $0.01, with an expiration date of five years from date of issuance.




8




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Forward-Looking Statements


This Quarterly Report on Form 10-Q (“Report”), including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, and in other reports the Company files with the Securities and Exchange Commission (“SEC”), including the Company’s Annual Report on Form 10-K. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.


The following discussion is based upon our unaudited Consolidated Financial Statements included elsewhere in this report, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. On an on-going basis, we evaluate our estimates, including those related to sales returns, pricing credits, warranty costs, allowance for doubtful accounts, impairment of long-term assets, especially goodwill and intangible assets, contract manufacturer exposures for carrying and obsolete material charges, assumptions used in the valuation of stock-based compensation, and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.


Company Overview


We have designed, developed, and now own and operate business-to-business web based marketplace focused on the US pharmaceutical industry. Our core service brings the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.


We began operations under our predecessor corporation in August of 2010 and spent over two years creating and enhancing our web-based services. Our services provide enhanced pricing transparency, purchasing capabilities and other value added services on a single platform to focus on serving the nation’s approximately 24,000 independent pharmacies with an annual purchasing power of $96 billion. Our national supplier partners are able to fulfill orders on our platform immediately and provide the pharmacy with cost saving payment terms and next day delivery capabilities in unrestrictive states under the Model State Pharmacy Act and Model Rules of the National Association of Boards of Pharmacy (Model Act). Important additions to this platform further include the generation of pharmacy to pharmacy trading capabilities to help independents with their overstocked inventories in a more organized manner. We expanded rapidly in 2013 and broke the 1,000 member pharmacy mark that year.


In December 2013 we launched a second service to help the pharmaceutical distributor better source their pharmaceutical needs within a highly structured single platform. This solution is designed to help purchasers overcome pharmaceutical supply issues related to drug shortages, as a means to control costs on drugs with volatile pricing and to help buyers make better purchasing choices based on their needs. Planned enhancements will expand this offering to manufactures and hospitals alike.


Additionally, we built and, in February 2014, launched, a new desktop application, named RxGuru, to bring product information on a just in time basis to our member base. Our pharmacy members should benefit immensely from this application by gaining advanced data analytics at point of purchase and patient care.


Other related developments include the creation of a Delaware registered supply arm, Westminster Pharmaceuticals, LLC, in April 2013 to take advantage of certain supply disruptions for specialty and other niche pharmaceuticals and operates via a third party logistics warehouse. We began private label distribution under this supply arm in 2015.



9




Our Information Technology consultancy division located in Tampa, Florida, focuses on staffing and healthcare data analytics research in areas of product pricing, drug shortages and governmental pharmaceutical reimbursement benchmark monitoring.


Company Organization


Trxade Group, Inc. (“Company”) owns 100% of Trxade, Inc., Westminster Pharmaceutical LLC and Pinnacle Tek, Inc. The merger of Trxade, Inc. and Trxade Group, Inc. occurred in July 2013. Pinnacle Tek was merged with Trxade Group, Inc. in July 2013. Westminster Pharmaceutical LLC was formed in January 2013.


Trxade, Inc. is a web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals, accessories and services.


Westminster Pharmaceutical LLC, provides US state licensed pharmacies and other buying groups with FDA approved pharmaceuticals.


Pinnacle Tek, Inc. is a technology consultant provider that supports the programming needs of parent company, analyzes current benchmark pricing of pharmaceuticals and provides other information technology consulting services to third parties.


Liquidity and Capital Resources


Liquidity Outlook


Cash Requirements


Our primary objectives for the remainder of 2015 are to continue the development of the Trxade Platform, and increase our client base. In addition, we expect to pursue raising capital to fund our operations and provide personnel to expand operations and required working capital.


We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows:


Expense

 

Amount

Cost of Sales(1)

 

$

1,200,000

General and administrative(2)

 

$

3,500,000

Total

 

$

4,700,000


(1)

Includes the cost of drugs for Westminster Pharmaceuticals and consulting expenses for Pinnacle Tek.

(2)

Includes wages and payroll, legal and accounting, marketing, rent and web development.


As of September 30, 2015, we had cash and cash equivalents of approximately $324,622 and other current assets of $1,027,912. Additional funds will be needed to continue to expand our platform and customer base, and cover general and administrative expense.


Since inception, we have funded our operations primarily through equity capital raises, convertible debt, loans and operational revenue. We expect to continue to do so in the future although no assurance can be given that we will be able to obtain financing on reasonable terms or revenues will continue. If we obtain additional financing by issuing equity securities, our existing stockholders’ ownership will be diluted. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. We may be unable to maintain operations at a level sufficient for investors to obtain a return on their investments in our common stock. Further, we may continue to be unprofitable.


We will need significantly more cash to implement our plan to operate a business-to-business web based marketplace focused on the US pharmaceutical industry. Our core service brings the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.



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Cash Flows


The following table summarizes our Consolidated Statement of Cash Flows for the nine months ended September 30, 2015 and 2014:


 

Nine Months Ended

 

September 30,

 

September 30,

 

2015

 

2014

 

$

 

$

Net cash provided by (used in):

 

 

 

Operating activities

(785,980)

 

(699,330)

Financing activities

405,000

 

885,861

Net increase (decrease) in cash and cash equivalents

(380,980)

 

186,531


Cash used in operating activities for the nine months ended September 30, 2015 was $785,980. This is an increase of $86,650 from same period in 2014 and was due to increased staffing as the Company transitioned to its operational phase, continuing IT development of the Company’s web platform, professional fees and inventory purchases.


Cash provided by financing activities for the nine months ended September 30, 2015 was $405,000. This is a decrease of $480,861 for the same period in 2014 and was due less equity financing.


Historical Liquidity and Capital Resources


Working Capital


Our working capital as of September 30, 2015 and December 31, 2014 is summarized as follows:


 

At September 30, 2015

 

At December 31, 2014

 

$

 

$

Current assets

1,352,534

 

1,218,316

Current Liabilities

972,301

 

553,667

Working Capital

380,233

 

664,639


Current Assets


The increase in our current assets was primarily due to a $311,607 and $144,392 increase in inventory and prepaid assets, respectfully. Cash decreased $380,980.


Current Liabilities


Current liabilities increase is primarily due to an increase in accounts payable by $41,025 and notes payable of $361,280.


Results of Operations


Nine Months Ended September 30, 2015 Compared To Nine Months Ended September 30, 2014

 

 

Nine months ending

 

Nine months ending

 

September 30, 2015

 

September 30, 2014

 

($)

 

($)

Revenues

3,501,203

 

904,603

Cost of Sales

1,313,104

 

275,129

Gross Profit

2,188,099

 

629,474

Operating expenses:

 

 

 

General and Administrative

2,507,324

 

1,341,015

Warrants and Options Expense

226,437

 

282,832

Total Operating Expenses

2,733,731

 

1,623,847

Loss from operations

(545,662)

 

(994,373)

Loss on debt conversion

-

 

(576,417)

Interest Expense

(76,076)

 

(4,109)

Net loss

(621,738)

 

(1,574,899)



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Revenues increased for the nine months ended September 30, 2015 to $3,501,203 compared to $904,603 for the comparable period in 2014. This increase was attributable to fee income from our web-based platform and pharmaceutical sales. Our sales department has continued to add customers in 2015 through direct marketing and customer training.


Cost of sales increased for the nine months ended September 30, 2015 to $1,313,104 compared to $275,129 for the comparable period in 2014. This increase was primarily attributable to an increase in revenue from the pharmaceutical sales which has higher cost of sales than our other revenue sources.


General and administrative expenses increased for the nine months ended September 30, 2015 to $2,507,324 compared to $1,341,015 for the comparable period in 2014. A large component of general and administrative expenses in 2015 was affected by an increase in employee cash compensation expense in the 2015 period due to increased staffing as we reached our operational phase and our payroll expense was $1,309,266.


Warrant and options expense in the 2015 and 2014 periods represents compensation cost related to the issuance of employee stock options.


In February 2014, the Xcellink loan of $19,333 was converted to 600,000 shares of common stock along with $4,250 of proceeds. The shares were valued at the market price on the respective date of the transaction and the fair value of the shares was determined to be $600,000 and $576,417 was recorded as loss on conversion of debt during the nine months ended September 30, 2014.


Three Months Ended September 30, 2015 Compared To Three Months Ended September 30, 2014

 

 

Three Months Ending

 

Three Months Ending

 

September 30, 2015

 

September 30, 2014

 

$

 

$

 

 

 

 

Revenues

1,637,875

 

372,690

Cost of Sales

700,637

 

77,153

Gross Profit

937,238

 

295,537

Operating Expenses

 

 

 

General and Administrative

957,140

 

553,574

Warrants and Options Expense

56,661

 

91,789

Total Operating Expense

1,013,801

 

645,363

Loss from Operations

(76,563)

 

(349,826)

Loss on Debt Conversion

-

 

-

Interest Expense

(47,199)

 

(2,057)

Net Loss

(123,762)

 

(351,883)


Revenues increased for the three months ended September 30, 2015 to $1,637,875 compared to $372,690 for the comparable period in 2014. This increase was attributable to fee income from our web-based platform and pharmaceutical sales. Our sales department has continued to add customers in 2015 through direct marketing and customer training.


Cost of sales increased for the three months ended September 30, 2015 to $700,637 compared to $77,153 for the comparable period in 2014. This increase was primarily attributable to an increase in revenue from the pharmaceutical sales which has higher cost of sales than our other revenue sources. General and administrative expenses increased for the three months ended September 30, 2015 to $957,140 compared to $553,574 for the comparable period in 2014. A large component of general and administrative expenses in 2015 was affected by an increase in employee cash compensation expense in the 2015 period due to increased staffing.


Warrant and options expense in the 2015 and 2014 periods represents compensation cost related to the issuance of employee stock options.



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Critical Accounting Policies


Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.


Revenue Recognition


In general the Company accounts for revenue recognition in accordance with ASC 605, “Revenue Recognition”.


Trxade, Inc. generates net fee income as a percentage of the total transactions between the buyer (independent pharmacies) and the seller (wholesaler) of pharmaceutical drugs on the Trxade web-based platform. Revenue is recognized when (1) the price is fixed and determined as the buyer orders the drugs from the wholesaler. (2) The wholesaler has signed a contract with Trxade, Inc. which recognizes that an arrangement exists. (3) The wholesaler delivers the drugs purchased to the buyer, products are delivered. (4) The collectability is reasonably assured by the wholesaler through prior credit checks and payment experience.

 

Pinnacle Tek, Inc. generates gross revenues from IT Consulting and Job Placement. Revenue is recognized (1) with the execution of a contract for the price and scope of services. (2) The contract also provides persuasive evidence of an existing arrangement. (3) The IT Consulting services are performed and invoiced monthly and the job placement is invoiced at the hiring of the applicant, delivery of services. (4) The collectability of the resulting receivable is determined by credit checks prior to the performance of services and payment experience with the client.


Westminster Pharmaceutical LLC generates gross revenues from the sale of pharmaceutical drugs to independent pharmacies or wholesalers. The revenue recognized when (1) the price is fixed and determinable at the time of the transaction with an invoice. (2) The invoice is also persuasive evidence that an arrangement exists. (3) The products are delivered to the buyer. (4) The collectability of the resulting receivable is reasonably assured by credit check prior to the transaction and experience with the customer.


Stock-Based Compensation


The Company accounts for stock-based compensation in accordance with the provision of ASC 505, “Equity Based Payments to Non-Employees” (“ASC 505”), Share Based Payments to Non-Employees, and ASC 505 which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying instruments vest.


The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Information not required for smaller reporting companies.


ITEM 4. CONTROLS AND PROCEDURES


Disclosure Controls and Procedures


As of the end of the period covered by this quarterly report on Form 10-Q, our principal executive officer and our principal accounting officer (the “Certifying Officers”), evaluated the effectiveness of our disclosure controls and procedures. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure. Based on these evaluations, the Certifying Officers have concluded, that, as of the end of the period covered by this quarterly report on Form 10-Q:


(a)

our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and


(b)

our disclosure controls and procedures were not effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Exchange Act was accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.


Changes in Internal Control over Financial Reporting


There has not been any change in our internal control over financial reporting that occurred during the nine months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


None.


ITEM 1A. RISK FACTORS


In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K, which could materially affect our business, financial position and results of operations. Risk factors which could cause actual results to differ materially from those suggested by forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the SEC, and those included in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K.



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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


The Company’s wholly owned subsidiary, Westminster Pharmaceuticals, LLC, entered into a convertible promissory note purchase agreement (“Note Purchase Agreement”) with a previous investor and current shareholder of the Company (“Investor”), in the aggregate amount of $1,500,000 on October 22, 2015.  The principal amount under the Note Purchase Agreement shall be delivered in three separate note tranches under a convertible promissory note agreement (“Note”).  The first tranche of the funding of $450,000 was completed on October 22, 2015 under the first Note.  The second and third tranches of $550,000 and $500,000 are scheduled for December 31, 2015 and February 1, 2016, respectively. The term of each Note is three years. Interest payments on the Note are based on a percentage of net profit from sales of specific pharmaceutical products sold by the Company’s wholly-owned wholesale distribution division, Westminster Pharmaceuticals, LLC, and the profit sharing ranges from 7.5% to 25% of such net sales (“Interest”), depending on the amount of the Notes.  Interest is due and payable each quarter. Prior to maturity the principal and Interest under the Notes may be converted for shares of our common stock at a conversion price of $2.50 per share. In further consideration of the Notes, Investor was granted warrants to purchase one share of our common stock for every $3.00 of principal under the Note (“Warrants”), for a maximum of 500,000 share of common stock, and on October 22, 2015 warrants to purchase 150,000 shares of common stock (plus an additional 10,000 Warrants) were granted in connection with the first Note of $450,000. These Warrants were issued at a strike price of $0.01 per share, and have an expiration date of five years from date of grant.


The offer and sale of the Notes and Warrants in the private placement was made in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.  The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the Note Purchase Agreement, the form of Note, and the form of Warrant Agreement, which are filed as Exhibits 10.1, 10.2 and 10.3, respectively to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2015, which is incorporated herein by reference.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4. MINE SAFETY DISCLOSURES


None.


ITEM 5. OTHER INFORMATION


Not Applicable


ITEM 6. EXHIBITS


Exhibit No.

Description

31.A

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.B

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.A

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.B

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

XBRL





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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

TRXADE GROUP, INC.

 

 

 

 

 

By:

 

/s/ SUREN AJJARAPU

 

 

 

 

 

 

 

Suren Ajjarapu

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

Date: November 2, 2015

 

 

 

 

 

By:

 

/s/ HOWARD DOSS

 

 

 

 

 

 

 

Howard Doss

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

Date: November 2, 2015