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EX-32.2 - EXHIBIT 32.2 SECTION 906 CERTIFICATION - TRXADE GROUP, INC.f10q033117_ex32z2.htm
EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATION - TRXADE GROUP, INC.f10q033117_ex32z1.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CERTIFICATION - TRXADE GROUP, INC.f10q033117_ex31z2.htm
EX-31.1 - EXHIBIT 31.1 SECTION 302 CERTIFICATION - TRXADE GROUP, INC.f10q033117_ex31z1.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 March 31, 2017


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, Suite 202

 

 

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  X . No      .


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


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


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 May 15, 2017

Common Stock, $0.00001 par value per share

31,985,827 shares




1



TRXADE GROUP, INC.

FORM 10-Q

For the Quarter Ended March 31, 2017


INDEX

 

 

 

 

 

 

 

 

 

 

 

 

 

Page

PART 1.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements

3

 

 

 

 

 

 

a)

 

Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)

3

 

 

 

 

 

 

b)

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (unaudited)

4

 

 

 

 

 

 

c)

 

Consolidated Statements of Cash Flows for Three Months Ended March 31, 2017 and 2016 (unaudited)

5

 

 

 

 

 

 

d)

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

Item 2.

 

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

12

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

16

 

 

 

Item 4.

 

Controls and Procedures

16

 

 

 

 

 

PART 2.

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

17

 

 

 

 

 

 

Item 1A.

 

Risk Factors

17

 

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

17

 

 

 

 

 

 

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

March 31, 2017 and December 31, 2016

(unaudited)


 

 

 

 

March 31, 2017

 

December 31, 2016

 

Assets

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash

 

$

169,996

$

14,679

 

Accounts Receivable, net

 

 

273,481

 

299,113

 

Prepaid Assets

 

 

68,486

 

22,438

 

Other Assets

 

 

-

 

894

 

Total Current Assets

 

 

511,963

 

337,124

 

 

 

 

 

 

 

Total Assets

 

$

511,963

$

337,124

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Deficit

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts Payable

 

$

166,048

$

236,849

 

Accrued Liabilities

 

 

282,275

 

466,982

 

Short Term Notes Payable net of $19,201 and $40,306 discount

 

 

377,573

 

392,379

 

Short term Convertible Payable

 

 

165,000

 

165,000

 

Short term Notes Payable – Related Party

 

 

17,280

 

10,000

 

Short term Convertible Payable – Related Party net of $21,994 and $48,341 discount

 

 

229,731

 

203,384

 

Total Current Liabilities

 

 

1,237,907

 

1,474,594

 

 

 

 

 

 

 

Long Term Liabilities

 

 

 

 

 

 

Convertible Note net of $0 and $152 discount

 

-

 

10,587

 

 

 

 

 

 

 

Total Liabilities

 

 

1,237,907

 

1,485,181

 

 

 

 

 

 

 

Shareholders’ Deficit

 

 

 

 

 

 

Series A Preferred Stock, $0.00001 par value; 10,000,000

 

 

 

 

shares authorized; 0 and 0

 

 

 

 

 

as of March 31, 2017 and December 31, 2016, respectively

 

-

 

-

 

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

 

 

 

 

 

shares authorized; 31,985,827 and 31,660,827

 

 

 

 

 

shares issued and outstanding, as of March 31, 2017

 

 

 

 

 

and December 31, 2016, respectively

 

 

319

 

316

 

Additional Paid-in Capital

 

 

7,603,107

 

7,260,723

 

Retained Deficit

 

 

(8,329,370)

 

(8,409,096)

 

Total Shareholders’ Deficit

 

 

(725,944)

 

(1,148,057)

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Deficit

 

$

511,963

$

337,124

 

 

 

 

 

 

 

 

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




3





Trxade Group, Inc.

Consolidated Statements of Operations

Three Months ended March 31, 2017 and 2016

(unaudited)


 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Revenues

 

 

$

745,943

$

644,515

 

 

 

 

 

 

 

Cost of Sales

 

 

-

 

15,592

Gross Profit

 

 

745,943

 

628,923

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

General and Administrative

 

604,493

 

759,203

 

 

 

 

 

 

 

Operating Income (Loss)

 

141,450

 

(130,280)

 

 

 

 

 

 

 

Interest Expense

 

 

61,724

 

40,925

 

 

 

 

 

 

 

Income (Loss) from Continuing Operations

 

79,726

 

(171,205)

 

 

 

 

 

 

 

Loss from Discontinued Operations

 

-

 

(201,175)

 

 

 

 

 

 

 

Net Income (Loss)

 

$

79,726

$

(372,380)

 

 

 

 

 

 

 

Net Income (Loss) per Common Share – Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

0.00

$

0.00

 

Discontinued operations

$

0.00

$

(0.01)

 

 

 

 

 

 

 

Total

 

 

$

0.00

$

(0.01)

 

 

 

 

 

 

 

Net Income (Loss) per Common Share – Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

0.00

$

0.00

 

Discontinued operations

$

0.00

$

(0.01)

 

 

 

 

 

 

 

Total

 

 

$

0.00

$

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding Basic

 

31,862,494

 

31,435,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding Diluted

34,258,188

 

31,435,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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




4





Trxade Group, Inc.

Consolidated Statements of Cash Flows

Three Months ended March 31, 2017 and 2016

(unaudited)


 

 

 

 

2017

 

2016

Operating Activities:

 

 

 

 

 

Net Income (Loss)

$

79,726

$

(372,380)

 

Loss From discontinued operations

 

-

 

201,175

 

Adjustments to reconcile net loss to net cash used in

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

Bad Debt Expense

 

-

 

711

 

 

Stock Issued for Services

 

12,500

 

-

 

 

Options expense

 

79,637

 

27,525

 

 

Amortization of Debt Discount

 

47,604

 

38,024

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts Receivable

 

25,632

 

91,828

 

 

Prepaid Assets and Other Current Assets

 

(45,154)

 

(60,990)

 

 

Accounts Payable

 

(63,521)

 

(113,564)

 

 

Accrued Liabilities and Other Liabilities

 

(184,707)

 

105,633

 

Net Cash used in operating activities

 

(48,283)

 

(82,038)

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of Short-term Notes Payable

 

(46,650)

 

-

 

Proceeds from exercise of Warrants

 

250

 

-

 

Proceeds from Issuance of Common Stock

 

250,000

 

-

 

Net Cash provided by financing activities

 

203,600

 

-

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

Net cash provided by operating activities

 

-

 

14,472

 

Net cash provided by discontinued operations

 

-

 

14,472

 

 

 

 

 

 

 

Net increase (decrease) in Cash

 

155,317

 

(67,566)

Cash at Beginning of the Year

 

14,679

 

78,708

Cash at March 31, 2017 and 2016

$

169,996

$

11,142

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

Cash Paid for Interest

$

13,886

$

3,618

Cash Paid for Income Taxes

$

-

$

-

 

 

 

 

 

 

 

Non-Cash Transactions

 

 

 

 

Arrangement to move related party Accounts Payable to Notes Payable

$

7,280

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 three months ended March 31, 2017 and 2016


NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION


Trxade Group, Inc. (‘we’, ‘our’, the “Company”) owns 100% of Trxade, Inc.


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


In December 2016, the Company sold Westminster Pharmaceutical LLC. Westminster provided US state licensed pharmacies and other buying groups with FDA approved pharmaceuticals. The Westminster Pharmaceuticals LLC division, which was sold in December 2016, is included in the consolidated financial statements as discontinued operations and is fully described in Note 3 – DISCONTINUED OPERATIONS.”


Basis of Presentation - 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.


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, 2016 as reported in the Company’s Annual Report on Form 10K have been omitted.


Income (loss) Per Common Share – Basic net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted net income (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 dilutive. The dilutive effect of the Company’s options and warrants is computed using the treasury stock method while the dilutive effect of our convertible notes is computed using the if-converted method. At March 31, 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.



6





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


 

 

For three months ended

 

 

March 31, 2017

 

March 31, 2016

Numerator:

 

 

 

 

Net Income (Loss)

$

89,726

$

(372,380)

 

 

 

 

 

Net Loss from discontinued operations

 

-

 

(201,175)

 

 

 

 

 

Net Income (Loss) from continuing operations

 

89,726

 

(171,205)

 

 

 

 

 

Numerator for basic and diluted EPS – income (loss)

 

 

 

 

Available to common shareholders

 

89,726

 

(372,380)

 

 

 

 

 

Numerator for basic and diluted EPS – income (loss)

 

 

 

 

From discontinued operations

 

-

 

(201,175)

 

 

 

 

 

Numerator for basic and diluted EPS – income (loss)

 

 

 

 

From continuing operations

 

89,726

 

(171,205)

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic EPS – weighted average shares

 

31,862,494

 

31,435,827

Dilutive effect of warrants

 

2,395,694

 

-

Denominator for diluted EPS –weighted average shares

 

34,258,188

 

31,435,827

 

 

 

 

 

Basic and Diluted loss per common share

 

0.00

 

(0.01)

 

 

 

 

 

Basic and Diluted loss per common share

 

 

 

 

From discontinued operations

 

0.00

 

(0.01)

 

 

 

 

 

Basic and diluted loss per common share

 

 

 

 

From continuing operations

 

0.00

 

0.00


Recent Accounting Pronouncements – The Company has implemented all new relevant accounting pronouncements that are in effect through the date of these financial statements. The pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its consolidated financial position or results of operations.


NOTE 2 – GOING CONCERN


These consolidated 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. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



7





NOTE 3 – DISCONTINUED OPERATIONS


On December 31, 2016, the Company entered into a contract and consummated the sale of 100% of its equity interests in its wholly-owned subsidiary, Westminster Pharmaceuticals, LLC, a Delaware limited liability company (“Westminster”). The purchase price was the transfer of $1,197,354 of assets, the transfer of $(3,908,296) of liabilities, 1,500,000 warrants issued with a fair market value of $688,143 which was calculated based on Black-Scholes model, cancellation of $1,557,810 intercompany balance due to Trxade Group, Inc. and remaining debt discount of $267,381 being written off. The transaction resulted in a gain of $197,608. The schedule below summarizes the sale arrangement:


Assets transferred

$

1,197,354

Liabilities transferred

$

(3,908,296)

Cancellation of intercompany payables

$

1,557,810

Write-off unamortized debt discount

$

267,381

Issuance of 1,500,000 warrants

$

688,143

 

 

 

Gain on sale of Westminster

$

(197,608)


Results of Discontinued Operations for the:


 

 

Three months ended March 31, 2016

Revenue

$

1,202,636

Cost of Goods Sold

$

1,000,490

Operating Expenses

$

381,613

Interest Expense

$

21,708

Loss from discontinued operations

$

(201,175)


Assets and Liabilities of Discontinued Operations as of:


 

 

December 31, 2016

 

 

 

Cash

$

65,386

Accounts Receivable

 

30,499

Inventory, net of $30,413 obsolescence reserve

 

641,525

Prepaid Assets and other advances

 

75,221

Fixed Assets, net of accumulated amortization

 

65,000

Other Assets

 

319,723

Total Assets

$

1,197,354

 

 

 

Intercompany payable

$

1,557,810

Accounts payable

 

620,881

Accrued Liabilities

 

229,605

Convertible Note

 

1,500,000

Total Liabilities

$

3,908,296




8





NOTE 4 –DEBT AND RELATED PARTIES DEBT


Convertible Promissory Note


As of March 31, 2017 and December 31, 2016, the short-term convertible notes had a principal balance of $165,000 with an unamortized debt discount of $0. The principal matures in April 2017 and has an annual interest rate of 10%. In April 2016 for a 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.


Promissory Note


In May 2016, a 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 2016, a debt discount of $30,000 was amortized. As of December 31, 2016, the promissory note has a balance of $235,000 with an unamortized debt discount of $15,000. During the three months ended March 31, 2017, debt discount of $11,250 was amortized and the balance was $246,250, net of $3,750 unamortized debt discount.


In October 2016, a promissory note was issued in the face amount of $47,000. The term of the note was one year. Payments are made monthly and $3,917 of principal was paid in 2016. During the three months ended March 31, 2017 $11,750 of principal was paid and the balance was $31,333.


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 December 31, 2016, $139,602 was classified as short term with a discount of $25,306 and $10,739 was classified as long term with a discount of $152. Payments are made each weekday in the amount of $537. At March 31, 2017, $34,900 was paid off by cash and debt discount of $10,007 was amortized. At March 31, 2017 the balance was $115,441, classified as short term with a discount of $15,451.


As of March 31, 2017, short term promissory note has a balance of $377,573, net of $19,201 unamortized debt discount.


Related Party Convertible Promissory Note


In August 2016, $40,000 in promissory notes were issued to Mr. Shilpa Patel, a relative of Mr. Prashant Patel. 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.


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 $0 was recorded as of the grant date.


In September and October 2016, convertible promissory notes were issued in the aggregate amount of $211,725 to a related party, Mr. Nitel Patel, the brother of Mr. Prashant Patel. The term of the notes was one year. Simple interest of 10% is payable at the maturity date of the notes. Prior to maturity the notes may be converted for common stock at a conversion price of $.62. In connection with the notes, the holder of the notes was granted warrants to purchase 52,861 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 $65,390 was recorded as of the grant date.


At December 31, 2016, the short term related party convertible notes had a principal balance of $203,384, net of an unamortized debt discount of 48,341.


During 2017, a debt discount of $26,347 was amortized. As of March 31, 2017, the short term related party convertible notes had a principal balance of $229,731, net of an unamortized debt discount of $21,994.



9





Related Party Promissory Note


In November 2016, Mr. Prashant Patel loaned the Company $10,000. The term of the loan is 90 days and is at zero percent interest.


In February 2017, $7,280 of accounts payable to Mr. Patel was added to the loan. The term of the loan was extended for 90 days and is at zero interest rate. The balance at March 31, 2017 was $17,280.


NOTE 5 – SHAREHOLDERS’ EQUITY


In January 2017, under a Private Offer Memorandum, 250,000 shares of common stock were issued for $250,000 cash. The common stock was sold at $1.00 per share. In connection with this common stock offering warrants to purchase 87,500 shares of common stock were issued with a strike price of $0.01 and an expiration date of five years.


In addition, 50,000 shares were issued for services performed for the Company and valued at fair value of $12,500.


NOTE 6 - WARRANTS


For the three-month period ended March 31, 2017, 87,500 warrants were issued related to the subscription of common shares – See NOTE 5, 25,000 warrants were exercised and none were forfeited.


The Company’s outstanding and exercisable warrants as of March 31, 2017 are presented below:


 

 

Number

Outstanding

 

 

Weighted Average Exercise Price

 

Contractual

Life in Years

 

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants Outstanding as of December 31, 2016

 

2,647,446

 

$

0.24

 

4.24

$

930,751

 

 

 

 

 

 

 

 

 

 

Warrants Granted

 

87,500

 

 

0.01

 

5

 

 

Warrants Forfeited

 

-

 

 

-

 

 

 

 

Warrants Exercised

 

25,000

 

 

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants Outstanding as of March 31, 2017

 

2,709,946

 

$

0.23

 

4.02

$

1,583,690


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 10 years following the grant date, after which they expire. Options are vested in 4 or 5 years from the grant date.


For the three-month period ended March 31, 2017, two option grants’ exercise period was extended to 10 years from the grant date. The option expense for the period associated with the extension was $60,041. No options were issued, and 105,500 options were forfeited or expired due to employee resignation. For the options not vested, the option expense reversed was $10,679.


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



10





Total compensation cost related to stock options was $79,637 for the three months ended March 31, 2017. As of March 31, 2017, there was $116,154 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 for the three- month period ended March 31, 2017:


 

 

Number of Options

 

Average Exercise Price

 

Contractual Life in Years

 

Intrinsic

Value

 

 

 

 

 

Outstanding at December 31, 2016

 

1,044,500

$

0.92

 

3.38

$

-

Exercisable at December 31, 2016

 

584,000

$

1.05

 

3.02

$

-

 

 

 

 

 

 

 

 

 

Forfeited

 

31,000

$

1.02

 

9.01

 

 

Granted

 

-

 

-

 

-

 

 

Expired

 

74,500

$

1.13

 

5.24

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2017

 

939,000

$

1.06

 

5.67

$

-

Exercisable at March 31, 2017

 

594,500

$

1.04

 

5.14

$

-


NOTE 8 – RELATED PARTIES


Trxade Group, Inc. owed management wages to Mr. Prashant Patel and Mr. Suren Ajjarapu at March 31, 2017 of $102,012 and $31,971, respectively and at December 31, 2016 of $132,012 and $76,971, respectively.


In January 2017 Mr. Ajjarapu and Mr. Patel suspended their executive salaries of $165,000 and $125,000, respectively, for a period of six months. All of our executives are at-will employees or consultants. Each of Messrs. Ajjarapu and Patel are parties to an at-will executive employment agreement.


See related party debt activities in NOTE 4.


NOTE 9 – 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. The final judgment and approval was entered and funded on March 17, 2017 for $200,000. An accrual of $200,000 is recorded on book as of December 31, 2016.


NOTE 10 – SUBSEQUENT EVENTS


In April 2017, $165,000 in convertible promissory notes (plus $5,500 in interest) was repaid. A two-year extension was executed on the remaining notes and the interest owed, totaling $16,500 became part of the adjusted principal of the notes and the balance of $181,500 is due May 2019. The conversion price was adjusted to $0.85 per share. In connection with the two-year extension of the maturity date of the outstanding notes, the holders of the notes were granted warrants to purchase 18,150 shares of common stock that was issued at a strike price of $.65 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 $11,512.


In April 2017, a $61,725 related party note was renewed for a one year extension at the same interest rate of 10%, due April 2018.


In April 2017, 253,846 options were granted with an exercise price of $.65 and exercise expiration of 10 years from the grant date. The options vest over a period of one and four years.


In April 2017, two option grants, totaling 250,000 options, were amended to extend the exercise term from 5 years to 10 years from the date of grant.



11





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 Registration Statement on Form 10 and the Company’s most recent 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 Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, and in other reports we file with the SEC, specifically our most recent Annual Report on Form 10-K. All references to years relate to the calendar year ended December 31 of the particular year.


Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

 

·

Overview. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A.


·

Liquidity and Capital Resources. An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition.


·

Results of Operations. An analysis of our financial results comparing the three months ended March 31, 2017 and 2016.


·

Critical Accounting Policies. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 

Company Overview

 

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

 



12





We began operations under Trxade Nevada in August of 2010 and spent over two years creating and enhancing our web-based services. Our services provide enhanced pricing transparency, purchasing capabilities and other value added services on a single platform to focus on serving the nation’s approximately 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 have expanded rapidly and now have over 6,600 registered pharmacy members purchasing on our platform.

 

In 2015 and 2016, the Company, through Westminster Pharmaceuticals, LLC, our wholly-owned subsidiary and distribution division, launched a private label pharmaceutical product program, and entered various supply contracts with pharmaceutical manufactures to supply Westminster with generic pharmaceutical products on a private label basis to sell to our customers. In connection with this expansion, Westminster received significant funding in late 2015 and early 2016. Even though the distribution business performed well, the private label business caused Westminster to not be profitable and in December 2016 the Company sold this division. The Company is currently looking for opportunities to re-enter the distribution business.

 

Company Organization

 

Trxade Group, Inc. (“Company”) owns 100% of Trxade, Inc. Trxade, Inc. is a web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals, accessories and services.

 

Inactive or discontinued segments:


Westminster Pharmaceutical LLC, provided US state licensed pharmacies and other buying groups with FDA approved pharmaceuticals under a private label program. This division was sold in December 2016.


In 2016, the Company formed ShopRX, Ltd. the Company’s UK based subsidiary. The Company had hoped to establish a similar business to Trxade, Inc. in the United Kingdom in the future under this entity. This division was shut down in December 2016 and has no material impact on the Company’s operation results.


INTEGRA PHARMA SOLUTIONS, LLC, (formerly Pinnacle Tek, Inc.) was the Company’s wholly-owned technology consulting division. This division is no longer active and has no material impact on the Company’s operation results.


Liquidity and Capital Resources


Cash and Cash Equivalents


Cash and cash equivalents were $169,996 at March 31, 2017. We expect that our future available capital resources will consist primarily of cash generated from operations, remaining cash balances, borrowings, and any additional funds raised through sales of debt and/or equity.


Liquidity


Cash and cash equivalents, current assets, current liabilities, short term debt and working capital at the end of each quarterly period were as follows:


 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

Cash and cash equivalents

$

169,996

$

14,679

Current assets (excluding cash and cash equivalents)

 

341,967

 

322,445

Current liabilities (excluding short term debt)

 

448,323

 

703,831

Short term debt

 

789,584

 

770,763

Working Capital

 

(725,944)

 

(1,137,470)


As of March 31, 2017, we had cash and cash equivalents of approximately $169,996 and other current assets of $341,967.


The increase in our current assets was primarily due to a $250,000 issuance of Common Stock for cash.



13





The current liabilities decrease is primarily due to payment of class action settlement of $200,000. Additional funds will be needed to continue to expand our platform and customer base, and cover general and administrative expense. Our principal sources of liquidity have been cash provided by operations, equity capital and borrowings under various debt arrangements. Our principal uses of cash have been for operating expenses and payment of short term debt. We anticipate these uses will continue to be our principal uses of cash in the future.


For discussion of our various debt arrangements see Note 4 – Debt and Related Parties Debt, Notes to Consolidated Financial Statements.


Liquidity Outlook


Cash Requirements


Our primary objectives for 2017 are to continue the development of the Trxade Platform and increase our client base and operational revenue. Additional funds will be needed to continue to expand our platform and customer base, and cover general and administrative expense. We expect to pursue raising capital to fund our operations and provide personnel to expand operations and required working capital. Through these efforts, management believe the Company will be able to obtain the liquidity necessary to fund company operations for the foreseeable future, however there is no assurance that our operations will generate significant positive cash flow, or that additional funds will be available to us, through borrowings or otherwise, on favorable terms when required, or at all. 


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

follows:


Expense

 

Amount

 

 

 

 

General and administrative (1)

 

$

2,425,000

Total

 

$

2,425,000


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


Since inception, we have funded our operations primarily through debt and equity capital raises and operational revenue. We expect to continue to seek additional outside funding 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 is designed to bring the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.


Cash Flows


The following table summarizes our Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016:


 

 

Three Months Ended

 

 

March 31,

 

March 31,

 

 

2017

 

2016

 

 

($)

 

($)

Net cash provided by (used in):

 

 

 

 

Operating activities

 

(48,283)

 

(82,038)

Investing activities

 

-

 

-

Financing activities

 

203,600

 

-

Net increase (decrease) in cash

 

155,317

 

(67,566)


Cash used in operating activities for the three months ended March 31, 2017 was $48,283. This is a decrease of $33,755 from same period in 2016 and was due to increased customers and revenue. Financing activities include $250,250 raised in common stock and exercise of warrants.



14





Results of Operations


Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016


Continuing Operations


 

Three months ended

March 31, 2017

 

Three months ended

March 31, 2016

 

 

 

 

 

 

 

 

Revenues

$

745,943

 

$

644,515

Cost of Sales

 

-

 

 

15,592

Gross Profit

 

745,943

 

 

628,923

Operating Expenses:

 

 

 

 

 

General and Administrative

 

524,856

 

 

731,678

Warrants and Options Expense

 

79,637

 

 

27,525

Total Operating Expenses

 

604,493

 

 

759,203

Income (Loss) from operations

 

141,450

 

 

(130,280)

Amortization of Debt Discount

 

47,604

 

 

38,024

Interest Expense

 

14,120

 

 

2,901

Net Income (loss)

$

79,726

 

$

(171,205)


Revenues increased for the three months ended March 31, 2017 to $745,943 compared to $644,515 for the comparable period in 2016. This increase was attributable to an increase of fee income from our web-based platform and transition fees from the sale of Westminster. Our sales department has continued to add customers in 2017 through direct marketing and customer training.


General and administrative expenses decreased for the three months ended March 31, 2017 to $524,856 compared to $731,678 for the comparable period in 2016. A large component of general and administrative expenses in 2017 was affected by a decrease in employee cash compensation expense in 2017.


Warrant and options expense in the 2017 and 2016 periods represent compensation cost related to the issuance of employee stock options.


Off-Balance Sheet Arrangements


We had no outstanding off-balance sheet arrangements as of March 31, 2017.


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 items 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; (4) The collectability is reasonably assured by the wholesaler through prior credit checks and payment experience.



15





Stock-Based Compensation


The Company accounts for stock-based compensation to non-employees in accordance with the provision of ASC 505-50, “Equity Based Payments to Non-Employees” (“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 to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable.


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 three months ended March 31, 2017 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


In addition to the legal matters below, in the ordinary course of business, we may become a party to lawsuits involving various matters. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We believe the ultimate resolution of any such current proceeding will not have a material adverse effect on our continued financial position, results of operations or cash flows


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. The final judgment and approval was entered and funded on March 17, 2017 for $200,000. An accrual of $200,000 is recorded on book as of December 31, 2016.




16





ITEM 1A. RISK FACTORS


No change in risk factors since the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017.


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


Shares of common stock were issued in January 2017 totaling 250,000 shares. These were sold at $1.00 per share.  In connection with this common stock offering, warrants to purchase 87,500 shares of common stock were issued at a strike price of $0.01 and an expiration date of five years.


Further, in April 2015, convertible promissory notes were issued in the aggregate amount of $150,000. These notes were due in April 2017. The maturity date of these notes was extended two years, to April 2018, the conversion rate of the notes was reduced from $1.50 to $085 per share of Common Stock, and the holders of the notes were granted warrants to purchase an aggregate total of 18,150 of restricted Common Stock at a price per security equal to $0.65 per share, with an expiration date of five (5) years.


The issuances of the 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





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.

 

 

 

 

Date: May 15, 2017

By:

 

/s/ SUREN AJJARAPU

 

 

 

Suren Ajjarapu

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

Date: May 15, 2017

By:

 

/s/ HOWARD DOSS

 

 

 

Howard Doss

 

 

 

Chief Financial Officer