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EX-32.B - EXHIBIT 32-B SECTION 906 CERTIFICATION - TRXADE GROUP, INC.f10q093016_ex32zb.htm
EX-32.A - EXHIBIT 32-A SECTION 906 CERTIFICATION - TRXADE GROUP, INC.f10q093016_ex32za.htm
EX-31.B - EXHIBIT 31-B SECTION 302 CERTIFICATION - TRXADE GROUP, INC.f10q093016_ex31zb.htm
EX-31.A - EXHIBIT 31-A SECTION 302 CERTIFICATION - TRXADE GROUP, INC.f10q093016_ex31za.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, 2016


OR


      .

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to    


Commission File Number: 000-55218


TRXADE GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware

 

46-3673928

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)


1115 Gunn Hwy 

Odessa, Florida 33556 

(Address of Principal Executive Offices) (Zip Code)


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


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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      . 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 14, 2016

 

 

Common Stock, $0.00001 par value per share

31,660,827 shares





TRXADE GROUP, INC.

FORM 10-Q

For the Quarter Ended September 30, 2016


INDEX


 

 

 

Page 

PART I.

 FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

a)

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 (unaudited)

3

 

 

 

 

 

b)

Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2016 and 2015 (unaudited)

4

 

 

 

 

 

c)

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)

5

 

 

 

 

 

d)

Notes to (unaudited) Financial Statements

6

 

 

 

Item 2. 

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

11

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

16

 

 

 

Item 4. 

Controls and Procedures

16

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

16

 

 

 

Item 1A.

Risk Factors

16

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

16

 

 

 

Item 3.

Defaults Upon Senior Securities

17

 

 

 

Item 4.

Mine Safety Disclosures

17

 

 

 

Item 5.

Other Information

17

 

 

 

Item 6.

Exhibits

17

 

 

 

SIGNATURES

18

 

 

 





2



PART 1: FINANCIAL INFORMATION


Item 1: Financial Statements


Trxade Group, Inc.

Consolidated Balance Sheets

September 30, 2016 and December 31, 2015

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash

$

94,551

 

$

860,132

 

Accounts Receivable, net

 

388,796

 

 

498,100

 

Inventory, net

 

640,086

 

 

284,718

 

Prepaid Assets

 

144,865

 

 

201,361

 

Other Assets

 

81,150

 

 

183,359

 

Total Current Assets

 

1,349,448

 

 

2,027,670

 

 

 

 

 

 

 

Property and Equipment (net)

 

71,500

 

 

-

 

 

 

 

 

 

 

Total Assets

$

1,420,948

 

$

2,027,670

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts Payable

$

576,794

 

$

356,159

 

Accrued Liabilities

 

645,712

 

 

296,803

 

Promissory Note, net of $57,502 and $15,000 discount

 

332,100

 

 

235,000

 

Convertible Note, net of $69,574 and $35,697 discount

 

285,426

 

 

164,303

 

Total Current Liabilities

 

1,840,032

 

 

1,052,265

 

 

 

 

 

 

 

Long Term Liabilities

 

 

 

 

 

 

Convertible Note net of $236,329 and $241,612 discount

 

963,671

 

 

708,388

 

Long Term Notes Payable, net of $2,575 and $0 discount

 

43,065

 

 

-

 

 

 

 

 

 

 

Total Liabilities

 

2,846,768

 

 

1,760,653

 

 

 

 

 

 

 

Shareholders’ Equity (Deficit)

 

 

 

 

 

 

Series A Preferred Stock, $.00001 par value, 10,000,000 authorized; 0 and 0 issued and outstanding,  as of September 30, 2016 and December 31, 2015

 

-

 

 

-

 

Common Stock, $0.00001 par value; 100,000,000 shares authorized; 31,660,827 and 31,435,827 shares issued and outstanding, as of September 30, 2016 and December 31, 2015, respectively

 

316

 

 

314

 

Additional Paid-in Capital

 

6,539,910

 

 

5,915,674

 

Accumulated Deficit

 

(7,966,046)

 

 

(5,648,971)

 

Total Shareholders’ Equity (Deficit)

 

(1,425,820)

 

 

267,017

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity (Deficit)

$

1,420,948

 

$

2,027,670

 

 

 

 

 

 

 

 

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, 2016 and 2015

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

803,278

 

$

1,637,875

 

$

4,339,419

 

$

3,501,203

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Sales

 

230,672

 

 

700,637

 

 

2,286,643

 

 

1,313,104

Gross Profit

 

572,606

 

 

937,238

 

 

2,052,776

 

 

2,188,099

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

1,364,506

 

 

1,013,801

 

 

4,167,817

 

 

2,733,761

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

(791,900)

 

 

(76,563)

 

 

(2,115,041)

 

 

(545,662)

 

 

 

 

 

 

 

 

 

 

 

 

Loss on Debt Extinguishment

 

-

 

 

-

 

 

37,579

 

 

-

Interest Expense

 

50,980

 

 

47,199

 

 

164,455

 

 

76,076

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

$

(842,880)

 

$

(123,762)

 

$

(2,317,075)

 

$

(621,738)

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per Common Share

$

(0.03)

 

$

(0.00)

 

$

(0.07)

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted loss per Common Share

$

(0.03)

 

$

(0.00)

 

$

(0.07)

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average number of Common Shares outstanding

 

31,611,914

 

 

31,269,160

 

 

31,505,535

 

 

31,269,160

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average number of Common Shares outstanding

 

31,611,914

 

 

31,269,160

 

 

31,505,535

 

 

31,269,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2016 and 2015

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

Operating Activities:

 

 

 

 

 

 

Net Loss

$

(2,317,075)

 

$

(621,738)

 

Adjustments to reconcile net loss to net cash used in

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

Depreciation

 

6,500

 

 

3,802

 

 

Bad debt expense

 

1,783

 

 

40,934

 

 

Inventory Allowance

 

(22,306)

 

 

-

 

 

Loss on Debt Extinguishment

 

37,579

 

 

-

 

 

Options expense

 

158,927

 

 

226,437

 

 

Amortization of debt discount

 

137,811

 

 

63,373

 

Changes in Operating assets and Liabilities:

 

 

 

 

 

 

 

Accounts Receivable

 

107,521

 

 

(135,507)

 

 

Prepaid Assets

 

56,496

 

 

(144,392)

 

 

Inventory

 

(333,062)

 

 

(311,607)

 

 

Other Assets

 

102,209

 

 

35,374

 

 

Accounts Payable

 

142,635

 

 

41,025

 

 

Accrued Liabilities

 

363,909

 

 

98,107

 

 

Other Liabilities

 

-

 

 

(59,220)

 

 

Deferred Income

 

-

 

 

(22,568)

 

Net Cash used in operating activities

 

(1,557,073)

 

 

(785,980)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

Cash paid as Original Debt Discount

 

(45,000)

 

 

-

 

Proceeds from Convertible Debt

 

440,000

 

 

200,000

 

Repayments of Convertible Debt

 

(50,000)

 

 

-

 

Proceeds from Promissory Note

 

150,000

 

 

205,000

 

Repayments of Promissory Note

 

(3,758)

 

 

-

 

Proceeds from Issuance of Common Stock

 

300,000

 

 

-

 

Proceeds from Exercise of Warrants

 

250

 

 

-

 

Net Cash provided by financing activities

 

791,492

 

 

405,000

 

 

 

 

 

 

 

 

Net Decrease in Cash

 

(765,581)

 

 

(380,980)

Cash at Beginning of the Year

 

860,132

 

 

705,602

Cash at September 30, 2016 and 2015

$

94,551

 

$

324,622

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

Cash Paid for Interest

$

22,227

 

$

28,967

Cash Paid for Income Taxes

$

-

 

$

-

 

 

 

 

 

 

 

 

Non –Cash Transactions

 

 

 

 

 

Reclass from accrued interest to short term convertible notes

$

15,000

 

$

-

Beneficial conversion features and relative fair value of warrants

$

127,482

 

$

107,093

Purchase of software on credit

$

78,000

 

$

-

 

 

 

 

 

 

 

 

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, 2016 and 2015


NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION


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


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


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


ShopRX, Ltd. is the Company’s newly launched UK based subsidiary.  The Company hopes to establish a similar business to Trxade, Inc. in the United Kingdom in the future under this entity.


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


In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2015 as reported in the Company’s Registration Statement on Form 10K have been omitted.


Income (loss) Per Share – Basic net loss per common share is computed by dividing net loss available to commons stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed similar to basic net loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilute. At September 30 2016 diluted net loss per share is equivalent to basic net loss per share as the inclusion of any shares committed to be issued would be anti-dilutive.


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


 

 

Three-month

 

 

Nine-month

 

 

September 30, 2016

 

 

September 30, 2016

Numerator:

 

 

 

 

 

Net Loss

$

(842,880)

 

$

(2,317,075)

 

 

 

 

 

 

Numerator for basic EPS – income (loss)

 

 

 

 

 

Available to common shareholders

 

(842,880)

 

 

(2,317,075)

 

 

 

 

 

 

Numerator for diluted EPS – income (loss)

 

 

 

 

 

Income available to common shareholders

 

(842,880)

 

 

(2,317,075)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic EPS –

 

 

 

 

 

Weighted average shares

 

31,611,914

 

 

31,505,535

 

 

 

 

 

 

Denominator for diluted EPS -

 

 

 

 

 

Weighted-average shares and assumed Conversions

 

31,611,914

 

 

31,505,535

 

 

 

 

 

 

Basic loss per common share

$

(0.03)

 

$

(0.07)

 

 

 

 

 

 

Diluted loss per common share

$

(0.03)

 

$

(0.07)




6




NOTE 2 – GOING CONCERN


These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The ability of the Company to continue as a going concern is dependent on raising additional capital and generating future profitable operations. There can be no assurance that the Company will be able to raise the necessary funds when needed to finance its ongoing costs.


The Company’s future capital requirements will depend on many factors, including cash flow from operations, costs to complete platform improvements, if warranted, and competition and market conditions. The Company’s recurring operating losses and working capital needs will require that it obtain additional capital to operate its business. Given the Company’s limited operating history, lack of revenues, and its operating losses, there can be no assurance that it will be able to achieve and maintain profitability. Accordingly, these factors raise substantial doubt about the Company’s ability to continue as a going concern.


NOTE 3 – Property and Equipment


In July 2016, the purchase of ERP software was completed. The cost of the acquisition was $78,000 and the total balance was outstanding at September 30, 2016. The depreciation for the current year is $6,500.


NOTE 4 – SHORT-TERM DEBT


Convertible Promissory Note


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


In April and May 2016, $50,000 of the $200,000 in convertible promissory notes (plus $5,000 in interest) was repaid. A one-year extension was executed on the remaining notes and the interest owed, totaling $15,000 became part of the adjusted principal of notes and the balance of $165,000 is due May 2017.  In connection with the one-year extension of the maturity date of the outstanding notes, the holders of the notes were granted warrants at one common stock for $4.00 of the note amount, and warrants to purchase 41,250 shares of common stock were issued at a strike price of $1.50 and an expiration date of five years from date of issuance. The amendment of the note was considered a debt extinguishment and a loss on extinguishment of debt was booked in the amount of $37,579 for the nine months ended September 30, 2016.


In August 2016, $40,000 in promissory notes were issued. The term of the note was one year. Simple interest of 10% is payable at the maturity date of the note. Prior to maturity the note may be converted for common stock at a conversion price of $1.50.


In September 2016, convertible promissory notes were issued in the aggregate amount of $150,000. The term of the notes was 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 $.62. The holders of the notes were granted warrants at one share of common stock for every $4.00 of the note principal amount, which totaled a warrant to purchase 37,500 shares of common stock.  These warrants were issued at a strike price of $.62 and 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 that the embedded conversion feature does not meet the definition of a derivative liability. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $53,546 was recorded in 2015 and $0 as of the date of the debt modification.  


The Company also uses the Black-Scholes pricing model to estimate the fair value of the warrants issued along with convertible notes on the date of grant. The Company accounted for the relative fair value of the warrants issued and a total debt discount $53,546 and $71,699 was recorded in 2015 and 2016 respectively.


During the nine months ended September 30, 2016, a debt discount of $ $37,822 was amortized.


As of September 30, 2016, the short term convertible notes had a principal balance of $355,000 with an unamortized debt discount of $69,574.



7




Promissory Note


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


In May 2016, the promissory note was renewed in the face amount of $250,000 and the term was extended an additional year.  The note has an original issuance discount of $45,000 and this amount was paid in cash at the renewal.


During the nine months ended September 30, 2016, a debt discount of $37,500 was amortized.


As of September 30, 2016, the short term promissory note has a principal balance of $389,602 with an unamortized debt discount of $57,502.  


NOTE 5 – LONG TERM DEBT


Convertible Promissory Note


Secured convertible promissory notes were issued in the aggregate amount of $950,000 in November and December 2015. The original term of the notes was three years. In June 2016, the note was extended to a four-year maturity for consideration of a senior secured position on the assets of the Company. Interest rate is a “Royalty Payment” which consists of a percentage of net Profit of certain transactions, payable within 45 days of the end of each quarter. Prior to maturity the notes may be converted for common stock at a conversion price of $2.50. The holders of the notes were granted a warrant to purchase 316,667 shares of common stock at a strike price of $0.01 and an expiration date of five years from date of issuance


In June 2016, an additional $250,000 was issued under the secured convertible promissory notes. The holders of the notes were granted additional warrants (under the same terms above) to purchase 83,333 shares of common stock at a strike price of $0.01.


The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815 40 and determined embedded conversion feature does not meet the definition of a liability. Then the Company evaluated the conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion Feature inherent to the convertible note payable and a total debt discount of $0 was recorded in 2015.


The Company also uses the Black-Scholes pricing model to estimate the fair value of the warrants issued along with convertible notes on the date of grant. The Company accounted for relative fair value of the warrants issued and a total debt discount of $251,883 was recorded in 2015. An additional discount of $55,783 was recorded in 2016.


During the nine months ended September 30, 2016, a debt discount of $61,066 was amortized. As of September 30, 2016, long term convertible note has a principal balance of $1,200,000, net of an unamortized debt discount of $236,329.


Promissory Note


In September 2016, a promissory note was issued for $189,000. The term of the note is 494 days. The debt discount was $39,000 thus the initial net proceeds were $150,000. At September 30, 2016, $139,602 was classified as short term with a discount of $35,002 and $45,640 was classified as long term with a discount of $2,575. Payments are made each weekday in the amount of $537.  During the nine months ended September 30, 2016, $3,758 was paid off by cash, a debt discount of $1,423 was amortized.



8




NOTE 6 - WARRANTS


For the nine-month period ended September 30, 2016, 212,083 warrants were issued, and 25,000 warrants were exercised at the price of $250. The Company’s outstanding and exercisable warrants as of September 30, 2016 are presented below:


 

Number

 

Weighted Average

 

Contractual

 

Intrinsic

 

Outstanding

 

Exercise Price

 

Life in Years

 

Value

 

 

 

 

 

 

 

 

 

 

Warrants Outstanding as of December 31, 2015

845,000

 

$

0.61

 

3.77

 

$

435,900

 

 

 

 

 

 

 

 

 

 

Warrants Granted

212,083

 

 

0. 41

 

5.00

 

 

-

Warrants Forfeited

-

 

 

-

 

-

 

 

-

Warrants Exercised

25,000

 

 

0.01

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

Warrants Outstanding as of September 30, 2016

1,032,083

 

$

0.58

 

3.33

 

$

257,583


NOTE 7 - OPTIONS


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


For the nine-month period ended September 30, 2016, 176,500 options were issued, and 170,750 options were forfeited or expired due to employee resignation.  The options were not vested and the option expense reversed was $75,514.


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


Total compensation cost related to stock options was $158,927 for the nine-months ended September 30, 2016. As of September 30, 2016, there was $282,874 of unrecognized compensation costs related to stock options, which is expected to be recognized over a weighted average period of 4.0 to 5.0 years. The following table represents stock option activity as of and for the period ended September 30, 2016:


 

Number of

 

Average

 

Contractual

 

Intrinsic

 

Options

 

Exercise Price

 

Life in Years

 

Value

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2015

1,200,000

 

$

1.07

 

5.19

 

 

-

Exercisable at December 31, 2015

332,000

 

$

1.04

 

3.34

 

$

28,000

 

 

 

 

 

 

 

 

 

 

Forfeited

148,250

 

$

1.03

 

8.84

 

 

-

Granted

176,500

 

$

1.02

 

9.53

 

 

-

Expired

22,500

 

$

1.53

 

7.57

 

 

-

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2016

1,205,750

 

$

1.06

 

4.61

 

 

-

Exercisable at September 30, 2016

555,750

 

$

1.04

 

2.97

 

 

-


NOTE 8 – EQUITY


Under a Private Offer Memorandum, 200,000 shares of common stock were issued for $300,000 cash, which included 100,000 shares in June 2016 and 100,000 shares in August. The common stock was sold at $1.50 per share. In connection with this common stock offering warrants to purchase 50,000 shares of common stock were issued at a strike price of $0.01 and an expiration date of five years.



9




NOTE 9– SEGMENT REPORTING


The Company classifies its business interests into two reportable segments, which are Trxade and Westminster.  Trxade is our web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals, accessories and services, and Westminster provides pharmacies and other buying groups with wholesale and private label pharmaceuticals. Westminster discontinued its wholesale business in July 2016 in order to focus on private label distribution.   


 

Three months ended

September 30,

 

Nine months ended

September 30,

 

2016

 

2015

 

2016

 

2015

Revenues

 

 

 

 

 

 

 

 

 

 

 

Trxade

$

610,832

 

$

761,235

 

$

1,810,043

 

$

1,977,971

Westminster

$

192,461

 

$

832,699

 

$

2,495,576

 

$

1,341,269

 

 

 

 

 

 

 

 

 

 

 

 

Segment Profit/Loss

 

 

 

 

 

 

 

 

 

 

 

Trxade

$

(391,344)

 

$

226,684

 

$

(742,836)

 

$

311,529

Westminster

$

(451,336)

 

$

(319,113)

 

$

(1,569,265)

 

$

(882,385)

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Trxade

$

342,969

 

$

470,225

 

 

 

 

 

 

Westminster

$

897,295

 

$

769,384

 

 

 

 

 

 


Corporate Overhead was allocated based on revenue, and amounted to $(266,815) and $(268,562) for the three months September 30, 2016 and 2015, respectively. The amount was $(1,197,266) and $(763,194) for the nine months ended September 30, 2016 and 2015, respectively.


NOTE 10– CONTINGENCY


On November 19, 2015, Family Medicine Pharmacy, LLC filed a class-action claim against Trxade Group, Inc. and its wholly owned subsidiary Westminster Pharmaceutical, LLC, Inc. (Family Medicine Pharmacy, LLC v. Trxade Group, Inc. and Westminster, Inc., Case No.: 1:15-CV-00590-KD-B, United States District Court, Southern District of Alabama, Mobile Division). Family Medicine has served Trxade for allegedly utilizing a “junk fax” advertising program.  On June 6, 2016, we entered a binding memorandum of understanding with the plaintiff related to this litigation to resolve all claims in exchange for Trxade funding a settlement fund in the amount of $200,000. A hearing regarding the final approval is scheduled on February 21, 2017. An accrual of $200,000 is recorded as of September 30, 2016.


NOTE 11– SUBSEQUENT EVENTS


Secured convertible promissory notes were issued in the aggregate amount of $200,000 in October of 2016. The original term of the notes was three years. Interest rate is a “Royalty Payment” which consists of a percentage of net Profit of certain transactions, payable within 45 days of the end of each quarter. Prior to maturity the notes may be converted for common stock at a conversion price of $2.50. The holders of the notes were granted a warrant to purchase 66,667 shares of common stock at a strike price of $0.01 and an expiration date of five years from date of issuance.


In October of 2016 the Company entered into a loan with third parties for an amount of $47,000. The loan is due September of 2017 and carries a variable interest rate.





10




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


Forward-Looking Statements


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


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


Company Overview


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


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


In April 2013 Westminster Pharmaceuticals, LLC was formed to take advantage of certain supply disruptions for specialty and other niche pharmaceuticals. These pharmaceuticals were sold to independent pharmacies. In July 2016 the Company transitioned from this revenue model to focus on private label distribution.


In September 2016 the creation of ShopRx, Ltd, a UK corporation was completed. ShopRx will implement the market platform developed by Trxade, Inc. which enables trade among healthcare buyers and sellers of pharmaceuticals and accessories. The market platform will operate in UK and other EU zones.



11




Company Organization


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


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


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


ShopRX, Ltd. is a web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals, accessories and services and operates in the United Kingdom. The formation of the entity as a 100% wholly owned subsidiary of Trxade Group, Inc. was completed in September of 2016.


Liquidity and Capital Resources


Liquidity Outlook


Cash Requirements


Our primary objectives for the remainder of 2016 and 2017 are to continue the development of the Trxade Platform, and continue private label Pharmaceuticals through Westminster Pharmaceuticals, LLC. 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)

 

$

4,000,000

General and administrative (2)

 

$

5,000,000

Total

 

$

9,000,000


(1)

Includes the cost of drugs for Westminster Pharmaceuticals.

(2)

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


As of September 30, 2016, we had cash and cash equivalents of approximately $94,551 and other current assets of $1,254,897.  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.  The ability of the Company to continue as a going concern is dependent on raising additional capital and generating future profitable operations. There can be no assurance that the Company will be able to raise the necessary funds when needed to finance its ongoing costs.  The Company’s future capital requirements will depend on many factors, including cash flow from operations, costs to complete platform improvements, if warranted, and competition and market conditions. The Company’s recurring operating losses and working capital needs will require that it obtain additional capital to operate its business. Given the Company’s limited operating history, lack of revenues, and its operating losses, there can be no assurance that it will be able to achieve and maintain profitability. Accordingly, these factors raise substantial doubt about the Company’s ability to continue as a going concern.  


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. 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.



12




Cash Flows


The following table summarizes our Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 and 2015:


 

Nine Months Ended

 

September 30,

 

September 30,

 

2016

 

2015

 

$

 

$

Net cash provided by (used in):

 

 

 

Operating activities

(1,557,073)

 

(785,980)

Financing activities

791,492

 

405,000

Net increase (decrease) in cash and cash equivalents

(765,581)

 

(380,980)


Cash used in operating activities for the nine months ended September 30, 2016 was $1,557,073. This is an increase of $771,093 from same period in 2015 and was due to increased staffing as the Company discontinued its wholesale business and transitioned into private label distribution. Furthermore, the Company had significant costs associated with IT development of the Company’s web platform and its new ERP system, professional fees and inventory purchases, and the launch of its new UK based subsidiary, ShopRx Ltd.


Cash provided by financing activities for the nine months ended September 30, 2016 was $791,492. This is an increase of $386,492 for the same period in 2015 and was more equity financing.


Historical Liquidity and Capital Resources


Working Capital


Our negative working capital as of September 30, 2016 and working capital December 31, 2015 is summarized as follows:


 

 

At

September 30,

2016

 

 

At

December 31,

2015

Current assets

$

1,349,448

 

$

2,027,670

Current Liabilities

 

1,840,032

 

 

1,052,265

Working Capital

$

(490,584)

 

$

975,405


Current Assets


The decrease in our current assets was primarily due to cash decrease of $765,581.  This decease of cash resulted from increased costs related to staffing increases as the Company discontinued its wholesale business and transitioned into private label distribution. Furthermore, the Company had significant costs associated with IT development of the Company’s web platform and its new ERP system, professional fees and inventory purchases, and the launch of its new UK based subsidiary, ShopRX, Ltd.


Current Liabilities


Current liabilities increase is primarily due to an increase in accounts payable by $220,635 and accrued liabilities of $348,909.



13




Results of Operations


Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015


 

Nine months ending

 

Nine months ending

 

September 30, 2016

 

September 30, 2015

 

($)

 

($)

Revenues

4,339,419

 

3,501,203

Cost of Sales

2,286,643

 

1,313,104

Gross Profit

2,052,776

 

2,188,099

Operating expenses:

 

 

 

General and Administrative

4,008,890

 

2,507,324

Warrants and Options Expense

158,927

 

226,437

Total Operating Expenses

4,167,817

 

2,733,731

Loss from operations

(2,115,041)

 

(545,662)

Loss on Extinguishment of Debt

(37,579)

 

-

Interest Expense

(164,455)

 

(76,076)

Net loss

(2,317,075)

 

(621,738)


Revenues increased for the nine months ended September 30, 2016 to $4,339,419 compared to $3,501,203 for the comparable period in 2015.  This increase was attributable to fee income from our web-based platform and pharmaceutical sales. Our sales department has continued to add customers in 2016 through direct marketing and customer training.


Cost of sales increased for the nine months ended September 30, 2016 to $2,286,643 compared to $1,313,104 for the comparable period in 2015.  This increase was primarily attributable to an increase in revenue from the pharmaceutical sales which has higher cost of sales than our other revenue sources.


General and administrative expenses increased for the nine months ended September 30, 2016 to $4,008,890 compared to $2,507,324 for the comparable period in 2015.  A large component of general and administrative expenses was in 2016 was affected by an increase in employee cash compensation expenses in the 2016 period due to increased staffing as the Company discontinued its wholesale business and transitioned into private label distribution, as well as additional significant costs associated with IT development of the Company’s web platform and its new ERP system.  


Warrant and options expense in the 2016 and 2015 periods represents compensation cost related to the issuance of employee stock options.


Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015


 

Three Months Ending

 

Three Months Ending

 

September 30, 2016

 

September 30, 2015

 

$

 

$

 

 

 

 

Revenues

803,278

 

1,637,875

Cost of Sales

230,672

 

700,637

Gross Profit

572,606

 

937,238

Operating Expenses

 

 

 

General and Administrative

1,321,723

 

957,140

Warrants and Options Expense

42,783

 

56,661

Total Operating Expense

1,364,506

 

1,013,801

Loss from Operations

(791,900)

 

(76,563)

Loss on Debt Conversion

-

 

-

Interest Expense

(50,980)

 

(47,199)

Net Loss

(842,880)

 

(123,762)


Revenues decreased for the three months ended September 30, 2016 from $1,637,875 to $803,278.  This decrease was attributable to transitioning from wholesale revenue to a focus and increased expense in developing the Company’s private label distribution in pharmaceutical sales.



14




Cost of sales decreased for the three months ended September 30, 2016 to $230,672 compared to $700,637.  This decrease was primarily attributable discounting the Company’s wholesale product division, which led to a decrease in revenue from the wholesale pharmaceutical sales and which has higher cost of sales than our other revenue sources. General and administrative expenses increased for the three months ended September 30, 2016 to $1,321,723 compared to $957,140 for the comparable period in 2015.  Implementation of ERP software resulted in additional consulting expense of about $100,000 for the quarter. A large component of general and administrative expenses was an increase in employee cash compensation expense in the 2016 period due to increased staffing in private label distribution, the development of ShopRX platform and the ongoing operation of the ERP software.


Warrant and options expense in the 2016 and 2015 periods represents compensation cost related to the issuance of employee stock options.


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 four steps are met: (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; and (4) The collectability is reasonably assured by the wholesaler through prior credit checks and payment experience.    

 

Westminster Pharmaceutical LLC generates gross revenues from the sale of pharmaceutical drugs to independent pharmacies or wholesalers. Revenue is recognized when four steps are met: (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; and (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.



15




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, 2016 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


On November 19, 2015, Family Medicine Pharmacy, LLC filed a class-action claim against Trxade Group, Inc. and its wholly owned subsidiary Westminster Pharmaceutical, LLC, Inc. (Family Medicine Pharmacy, LLC v. Trxade Group, Inc. and Westminster, Inc., Case No.: 1:15-CV-00590-KD-B, United States District Court, Southern District of Alabama, Mobile Division). Family Medicine has served Trxade for allegedly utilizing a “junk fax” advertising program.  On June 6, 2016, we entered into a binding memorandum of understanding will the plaintiff related to this litigation to resolve all claims in exchange for Trxade funding a settlement fund in the amount of $200,000. A hearing regarding the final approval is scheduled on February 21, 2017. This settlement was approved by the courts in September.


ITEM 1A. RISK FACTORS


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


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


In October 2016 an additional secured convertible promissory note totaling $200,000 was issued in connection with similarly issued notes, first issued in October 2015.  The term of the notes is three years. The interest rate is a “Royalty Payment,” which consists of a percentage of net Profit of certain transactions, payable within 45 days of the end of each quarter. Prior to maturity the note may be converted for common stock at a conversion price of $2.50. The holder of the note was granted a warrant to purchase 66,667 shares of common stock at a strike price of $0.01 and an expiration date of five years from date of issuance.



16




Shares of common stock were issued July and August 2016 totaling 200,000 shares.  These were sold at $1.50 per share. In connection with this common stock offering warrants to purchase 50,000 shares of common stock were issued at a strike price of $0.01 and an expiration date of five years.


Further, in September 2016, convertible promissory notes were issued in the aggregate amount of $150,000. The term of the notes was 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 $0.62. The holders of the notes were granted warrants at one share of common stock for every $4.00 of the note principal amount, which totaled a warrant to purchase 37,500 shares of common stock.  These warrants were issued at a strike price of $0.62 and an expiration date of five years from date of issuance.


Lastly, revocable warrants to purchase 20,000 shares of common stock were issued in October 2016 in connection with the purchase of a software license.  These revocable warrants were issued at a strike price of $0.01 and a vest over five (5) years, an expiration date of five years from date of issuance.


The issuances of the secured convertible promissory notes, common stock and warrants described above were exempt from registration pursuant to Section 4(2), Rule 506 of Regulation D and/or Regulation S of the Securities Act since the foregoing issuances and grants did not involve a public offering, the recipients took the securities for investment and not resale, we took take appropriate measures to restrict transfer, and the recipients were (a) “accredited investors”; (b) had access to similar documentation and information as would be required in a Registration Statement under the Act; (c) were non-U.S. persons; and/or (d) were officers or directors of the Company.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4. MINE SAFETY DISCLOSURES


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





17






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 14, 2016

 

 

 

 

 

By:

 

/s/ HOWARD DOSS

 

 

 

 

 

 

 

Howard Doss

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

Date: November 14, 2016













20