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EX-32 - EX 32.2 SEC 906 CERTIFICATION-CFO - PARALLAX HEALTH SCIENCES, INC.ex322section906certification.htm
EX-32 - EX 32.1 SEC 906 CERTIFICATION-CEO - PARALLAX HEALTH SCIENCES, INC.ex321section906certification.htm
EX-31 - EX 31.2 SEC 302 CERTIFICATION-CFO - PARALLAX HEALTH SCIENCES, INC.ex312section302certification.htm
EX-31 - EX 31.1 SEC 302 CERTIFICATION-CEO - PARALLAX HEALTH SCIENCES, INC.ex311section302certification.htm
EX-23 - EX 23.4 AUDITOR CONSENT - PARALLAX HEALTH SCIENCES, INC.ex234auditorconsent.htm
EX-23 - EX 23.3 AUDITOR CONSENT - PARALLAX HEALTH SCIENCES, INC.ex233auditorconsent.htm
EX-10 - EX 10.37 EMPLOYMENT AGREEMENT-ARENA - PARALLAX HEALTH SCIENCES, INC.ex1037employmentagreement1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


(Mark One)


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


For the fiscal year ended December 31, 2015


¨  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 
 EXCHANGE ACT OF 1934


Commission file number 000-52534

[f20151231prlx10krev9final001.jpg]

PARALLAX HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)


Nevada

46-4733512

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

  

1327 Ocean Avenue, Suite B, Santa Monica, CA

90401

(Address of principal executive offices)

(Zip Code)

  

  

Registrant's telephone number, including area code:

(310) 899-4442


Copy of all Communications to:

Lawrence I. Washor

Washor & Associates

21800 Oxnard Street, Suite 790

Woodland Hills, CA 91367

(310) 479-2660


 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.

Yes ¨ No þ

 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No þ

 

 

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 last 90 days.

Yes ¨ No þ

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 registration statement was required to submit and post such files).

Yes ¨ No þ

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes ¨ No þ

 

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 definition 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

¨

 

Smaller reporting company

þ

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

 

 

 

 

The aggregate market value of Common Stock held by non-affiliates of the Registrant as of June 30, 2015 was $1,367,647, based on a closing price of $0.062 for the Common Stock on June 30, 2015, the last business day of the Registrant’s most recently completed second fiscal quarter. For purposes of this computation, all executive officers and directors have been deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers and directors are, in fact, affiliates of the Registrant.

 

Indicate the number of shares outstanding of each of the registrant’s

classes of common stock as of the latest practicable date.


111,532,620 Common Shares issued and outstanding as of June 15, 2017








  TABLE OF CONTENTS   

  

ITEM 1.

BUSINESS

3

  

  

  

ITEM 1A.

RISK FACTORS

24

  

  

  

ITEM 2.

PROPERTIES

24

  

  

  

ITEM 3.

LEGAL PROCEEDINGS

24

  

  

  

ITEM 4.

MINE SAFETY STANDARDS

24

  

  

  

ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

25

  

  

  

ITEM 6.

SELECTED FINANCIAL DATA

27

  

  

  

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

27

  

  

  

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

32

  

  

  

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

32

  

  

  

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

33

  

  

  

ITEM 9A.

CONTROLS AND PROCEDURES

33

  

  

  

ITEM 9B.

OTHER INFORMATION

34

  

  

  

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

34

  

  

  

ITEM 11.

EXECUTIVE COMPENSATION

40

  

  

  

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

41

  

  

  

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

42

  

  

  

ITEM 14.

PRINCIPAL ACCOUNTANTS FEES AND SERVICES

43

  

  

  

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

44



2


PART I


ITEM 1.

BUSINESS


As used in this annual report, the terms "we", "us", "our" and "Parallax" mean Parallax Health Sciences, Inc. (the "Company"), and its wholly-owned subsidiaries, Parallax Diagnostics, Inc. (formerly Endeavor Sciences, Inc.) and RoxSan Pharmacy, Inc., unless otherwise indicated.


This annual report contains forward-looking statements. These statements relate to future events or the Company’s future financial performance, and include statements made by the Company regarding product development and obtaining FDA clearances. In some cases, forward-looking statements can be identified by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors” that may cause the Company’s or its industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.


Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.


The Company’s financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.


In this annual report, unless otherwise specified, all dollar amounts are expressed in United States Dollars and all references to “common shares” refer to the common shares in the Company’s capital stock.


CORPORATE OVERVIEW


The Company’s principal executive office is located at 1327 Ocean Avenue, Suite M, Santa Monica, California, 90401, with operations at 465 N. Roxbury Drive, Beverly Hills, CA 90210. The Company’s telephone numbers are (310) 899-4442 (Santa Monica) and (310) 273-1644 (Beverly Hills).


The Company’s websites are at www.parallaxhealthsciences.com, www.parallaxdiagnostics.com, www.roxsan.com and www.roxsanfertility.com


The Company is a fully reporting company with its stock traded on the OTC Markets under the symbol “PRLX”.


Corporate History


Formation and Development


The Company was incorporated in the State of Nevada on July 6, 2005.  On November 1, 2012, the Company, formerly Endeavor Power Corporation, and its wholly owned subsidiary Endeavor Holdings, Inc., a Nevada corporation, entered into an Agreement and Plan of Merger with Parallax Diagnostics, Inc., a Nevada corporation ("Parallax Diagnostics" or "PDI"), whereby Parallax Diagnostics became a wholly owned subsidiary.  On January 9, 2014, the Company changed its name to Parallax Health Sciences, Inc. (“Parallax”).  (OTC.PRLX).

 

Parallax Diagnostics was founded in 2010, and holds the right, title, and interest in perpetuity to certain Target System Immunoassay point-of-care diagnostic testing system and related FDA-cleared tests in the area of infectious disease.  Its primary focus was to commercialize the proprietary testing system and test in a worldwide domain.


Parallax Diagnostics is currently pre-revenue, and continues to pursue viable opportunities for the commercialization of its product.  The Company has sought to identify strategies that would make its proposition more valuable and competitive.  To this end, the Company has pursued the creation of patents around its foundational technology, and began developing a novel immune status test targeting the HIV/AIDS and TB markets. Since the inception of Parallax Diagnostics, and the Company has been issued patents on elements of its technology for its testing system.


In 2013, Parallax identified an opportunity to acquire RoxSan Pharmacy, Inc. ("RoxSan"), a California corporation, and began the due diligence process.  The Company's initial interest centered on utilizing the acquisition as a means of accelerating the commercialization of the Parallax Target System and diagnostic platform, as RoxSan had access to a nationwide network of doctors and sales representatives.  During the due diligence process, the Company became aware of the numerous opportunities that RoxSan and its markets represented.


On March 21, 2013, the Company entered into a Letter of Intent with Shahla Melamed, RoxSan's sole Shareholder, to acquire RoxSan. Between 2013 and 2015, four (4) amendments were also executed.  



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3



As part of the acquisition, the Company was required to obtain licensure from the State of California, and on July 31, 2015, the Company received notice that its pharmacy and sterile compounding licenses were issued by the California State Board of Pharmacy.


On August 13, 2015 (the "Closing Date"), pursuant to a resolution of the board of directors (the "Board"), the Company entered into an Agreement to Purchase and Sell One Hundred Percent of the Issued and Outstanding Shares of RoxSan Pharmacy, Inc. ("RoxSan" or the "Pharmacy"), and its Assets and Inventory (the “Purchase Agreement”).  Pursuant to the Purchase Agreement between the Company, RoxSan and its sole shareholder, Shahla Melamed (the “Seller” or "Melamed"), in exchange for 100% of RoxSan's common stock, and its assets and inventory, the Company, among other things, issued the Seller a Secured Promissory Note (the "Note") dated August 13, 2015 in the amount of $20.5 million (the "Acquisition").  The Note bears interest at a rate of 6% per annum, and matures in three (3) years, or August 13, 2018 ("Maturity").  Principal and interest payments on the Note will be made to the Seller on a quarterly basis beginning with the three-month period ending November 30, 2015, in an amount equal to: 1) 75% during the first two (2) years; and 2) 60% during year three (3); of certain of the Pharmacy's earnings defined within the Purchase Agreement as EBITDA.  All remaining principal and/or accrued interest, if any, still owing after three (3) years shall be paid in full to the Seller at Maturity. The Company is seeking a reduction in the Purchase Price and related promissory note (See Legal Proceedings).


As a result of the Acquisition, effective August 13, 2015, RoxSan became a wholly owned subsidiary of the Company. No change in control of the Company occurred as a result of the Acquisition.


In connection with the Acquisition, the Company entered into an Employment Agreement (the "Employment Agreement") with the Seller.  Under the Employment Agreement, Melamed agreed to provide exclusive consulting services to the Company in the areas of public relations and marketing for a term of four (4) years. On March 4, 2016, the Company terminated the Employment Agreement in accordance with paragraph 3.2 Termination for Cause (see "Dispute with Former Owner" below). The termination was the result of, among other things, Melamed's breaches in the Agreement, which were substantiated by an investigation conducted by an employment law firm retained by RoxSan.  Under the terms of the Agreement, no financial obligation resulted in the termination.


On October 15, 2015, Mr. Edward W. Withrow III resigned as chairman and member of the Board.  This resignation did not involve any disagreement with the Company.  Prior to the submission of his resignation, Mr. Withrow asked Mr. David M. Engert, an existing board member, to succeed him as Executive Chairman.  Mr. Engert accepted the position, under the condition that he receive a Consulting Agreement wherein he would receive compensation at a rate of $180,000 per annum in exchange for a part-time commitment.  Pursuant to the Consulting Agreement, Mr. Engert's duties were as follows:


1.

Oversee the governance and function of the Board

2.

Advise on capitalization matters and financing:

a.

Perform or review due diligence on capital source

b.

Introduce the Company to potential strategic partners

c.

Interface with NASDAQ or AMEX executives as part of the Company’s up-listing goals

d.

Develop capitalization materials and interface with the financial community

3.

Advise on Merger & Acquisition (M&A) opportunities:

a.

Assist in the development of acquisition strategies

b.

Interface with outside M&A professionals,

c.

Interface with executives, boards and/or control investors of companies that represent potential targets for acquisition.


In addition, as part of Mr. Engert's Consulting Agreement, the Company was obligated to pay for Mr. Engert's travel to the Company's headquarters in California, as Mr. Engert resides in Arizona.


Over time, management became aware that Mr. Engert, aside from the duties he was retained to perform, began to involve himself with the management, oversight and strategic planning of the business of RoxSan.  This resulted in, among other things, a substantial amount of managerial overlapping and duplication.  As a result, during the first quarter of 2016, the Company's President notified Mr. Engert that, as his services were not physically required at RoxSan, and in an effort to be financially prudent, he would no longer need to travel to the Company's offices.


Management reiterated several times to Mr. Engert the Company's need for the services that he was hired to perform, outside of his role as Executive Chairman.  Mr. Engert stated that he was not inclined to perform the functions around securing capital, investment banking introductions and other services, for various reasons.


During the 4th quarter 2016, members of the Company's management team, members of the Board and Mr. Engert were involved in a disagreement over certain content included in a Consent Resolution presented to the Board for approval (the "Resolution").  Though the content was ultimately removed from the Resolution, Mr. Engert was at odds with the Board over the Resolution's content, as well as the participation and role of the Company’s Majority Shareholders with regards to the Board and its deliberations.  


On December 29, 2016, in accordance with the Company's by-laws, a meeting of shareholders representing over fifty percent (50%) of the Company's issued and outstanding shares, was held, wherein a vote was taken to elect and re-elect the Company's Board members. During this meeting, Mr. Engert was not re-elected.  



4



As a result of the disagreement with Mr. Engert, he has filed a lawsuit in Arizona claiming, among other issues, monies owed to him under his Consulting Agreement for being terminated without cause.  The Company is in disagreement with the position and claims made by Mr. Engert, and as such have notified Mr. Engert that the Company intends to vigorously defend its position. Management believes a good faith attempt at resolving this matter outside of the courthouse is in the best interest of the Company and its shareholders.


During the shareholders meeting held on December 29, 2016, Mr. John L. Ogden and Ms. Calli R. Bucci were elected to serve as members of the Company's board of directors.  On April 6, 2017, the Board elected Mr. Joseph M. Redmond as Chairman, to serve until the Company’s next meeting, in accordance with the Company's bylaws, or a resignation is duly tendered.


Effective July 7, 2017, the Board of the Company has caused the departure of Mr. Redmond from his position as President and Chief Executive Officer of the Company. Pursuant to the Employment Agreement dated August 1, 2015, Mr. Redmond resigned from the Board of the Company and its wholly-owned subsidiary, RoxSan Pharmacy, Inc.


Effective July 7, 2017, pursuant to a unanimous Board resolution, Mr. Paul R. Arena was appointed as the Company’s President and Chief Executive Officer, and the Board caused Mr. Arena's election to the Company's Board and the Board of its wholly-owned subsidiary, RoxSan Pharmacy, Inc.


In connection with Mr. Arena’s appointment, the Company entered into an Executive Employment Agreement (the "Agreement") with Mr. Arena dated July 7, 2017, wherein Mr. Arena’s will serve as President and Chief Executive Officer for a period of three (3) years.  As compensation for his services, Mr. Arena will receive a base compensation of Three Hundred Fifty Thousand Dollars ($350,000) per annum in year one, of which 30% shall be deferred until certain funding goals are met; Four Hundred Twenty Five Thousand dollars ($425,000) in year two; and Five Hundred Fifty Thousand ($550,000) in year three.


Pursuant to the Agreement, Mr. Arena shall also be entitled to twice (2x) the base salary in any given year the Company's EBITDA reaches or exceeds the following: a) $1,000,000 generated by any individual division of the Company the first twelve month period following the date of the Agreement; b) $3,000,000 on a consolidated basis the second twelve month period; and c) $5,000,000 on a consolidated basis the third twelve month period. In the event the Company has not reached certain earnings/profits goals, Mr. Arena's base salary shall remain at the rate of Three Hundred Fifty Thousand Dollars ($350,000) per annum, or previous year, as the case may be, until the earnings/profits goals have been reached.


In connection with the Agreement, the Company has agreed to cause the issuance of ten million (10,000,000) shares of restricted common stock to Mr. Arena, of which 25% vests immediately upon execution of the Agreement; 25% vests one year from the date of the Agreement; 25% vests after two years from the date of the Agreement; and 25% vests when certain funding goals have been met.


Also, in connection with the Agreement, Mr. Arena shall be granted five million (5,000,000) stock options at an exercise price of twenty five cents ($0.25) per share.  The options are for a period of five years, and vest as follows: a) 25% immediately upon execution of the Agreement; b) 25% when the Company's stock trades above forty cents ($0.40) per share for a period of thirty (30) days; c) 25% when the Company's stock trades above seventy-five cents ($0.75) per share for a period of sixty (60) days; and d) 25% when the Company's stock trades at over one dollar ($1.00) per share for a period of ninety (90) days.


Dispute with Former Owner of Pharmacy


Shortly after the Closing, the Company's management and Melamed clashed over control of the RoxSan Pharmacy business operations and bank accounts.  Faced with Melamed continuing to materially interfere with the Pharmacy’s operations to the detriment of its business, the Company retained the services of an employment law firm to investigate Melamed's actions, and provide a report to the Company’s Board (the "Report").  The Company also placed Melamed on a paid leave of absence because of her actions. The Board, after reviewing the findings in the Report, found substantive cause for Melamed's termination, and immediately sent Melamed written notification of the Company's intent to dismiss her for cause.  Under the Employment Agreement, Melamed was provided with a thirty (30) day cure period.  However, the Company received no response of intent to cure from Melamed or her counsel, and no evidence of a cure was provided to the Company.   As a result, the Board authorized Melamed's termination for cause on March 3, 2016, and on March 6, 2016, Melamed was formally terminated in writing.   


In the course of management’s operation of the RoxSan Pharmacy, and adherence to Financial Accounting Standards Board revenue recognition policies, management became concerned with the absence of the claim processing for over $16 million of pre-Close Workers Compensation prescription revenues, which Melamed represented to the Company prior to Closing as being the vast majority of the high margin compound revenue. In addition to the $16 million in pre-Close claims, the Pharmacy generated over $8 million after the change in ownership, until the CFO alerted management of a serious and dramatic change in the receivables collection timetable, the underpinning cash flow processes, and the potential illegitimacy of the Workers Compensation revenues. Further, the CFO was uncomfortable with recognizing the revenue as it was presented by Melamed's financial records, and, in the absence of any reasonable assurance of collectability of the Workers Compensation revenues, the Company established an allowance for doubtful receivables for the $8 million in post-Close claims for which collectability was highly unlikely.



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5



The Company retained the services of a forensic Workers Compensation fraud specialist to determine the legitimacy of the pre-Close Workers Compensation revenues and related insurance claims.   As a result of this forensic review, it was determined that these claims were essentially valueless.  As a result of these findings and undisclosed changes to the cash flow and quality of earnings that represented a majority of the revenue of the Pharmacy, the Company’s Board deemed it necessary to demand a reduction in the terms of the Sale and Purchase Agreement to more accurately reflect the true valuation of the Company.  This was met with resistance on the part of the Seller.


Shortly thereafter, in October 2015, Melamed, initiated two (2) legal actions against the Company in the Superior Court of the State of California, County of Los Angeles, West District, Shahla Melamed v. Parallax Health Sciences, Inc., action numbers SC 124873 and SC 125705 (the “Matter”).  In the Matter, action No. SC124873, Melamed sought rescission of the August 13, 2015 Purchase Agreement. Rescission was sought on the basis that, allegedly, in order to acquire the Pharmacy, the Company and its principals had allegedly defrauded Melamed, there had allegedly been a complete failure of consideration, and a unilateral mistake was allegedly made on the part of Melamed.


On March 17, 2017, the Court ruled in favor of the Company, and issued that Melamed is not entitled to rescission of the Purchase Agreement.  The ruling of the Court stated that no fraud on the part of the Company or its principals had been demonstrated.  The Court further ruled that there had been no failure of consideration, and that Melamed’s entry into the Agreement was not a result of a unilateral mistake on the part of Melamed.  The Minutes of the Ruling were entered by the County Clerk on March 17, 2017.


The Company has likewise initiated legal action against Melamed and filed an action in the Superior Court of the State of California, County of Los Angeles, West District, Parallax Health Sciences, et al. v. Shahla Melamed, et al., case number SC 124898.  The Complaint in that action alleges that Melamed has breached several obligations under the Purchase Agreement, and the Company is seeking to reduce the Secured Note due to undisclosed material changes in the business.


Subsequently filed pleadings by the Company and RoxSan in case number SC 124873 allege, among other things, that Melamed misrepresented the true earnings and source of income for the pharmacy business and had engaged in a fraudulent and illegal scheme to ship medications to states where her pharmacy was not licensed prior to the sale of the Pharmacy.


In the Matter, action No. SC125702, Melamed alleges that the Company is in default under the terms of the Purchase Agreement and Secured Note and the Company’s termination of Melamed’s employment agreement.  The Company firmly believes that it had adequate grounds to justify the termination of the employment, that it acted within its rights, and shall prevail in these proceedings.  


All three (3) legal matters are currently pending.


Description of Business  


The Company’s principal focus is on personalized patient care through the Company’s Pharmacy, RoxSan, and eventually through the diagnostic testing platform capable of diagnosing and monitoring several health issues.  Through the Company’s wholly owned subsidiary Parallax Diagnostics Inc., the Company holds the right, title, and interest in perpetuity to certain point-of-care diagnostic tests.


The Company has the following two business segments: Retail Pharmacy Services (RPS) and Corporate.


Retail Pharmacy Services (RPS)

The RPS provides a full range of pharmacy services including retail, compounding and fertility medications.  


The RPS generates net revenues primarily by dispensing prescription drugs, both through local channels by direct delivery as well as mail order. The RPS also sells a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, seasonal merchandise and convenience foods, through the Company’s pharmacy.


The Pharmacy is fully licensed and qualified to conduct business in over 40 US States.  


Corporate

The Corporate Segment provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, and corporate information technology and finance departments.  In addition, the Corporate Segment supports the costs and operating expenses related to the continued development and exploitation of the Company's proprietary medical diagnostic and monitoring platform and processes, which remains the Company's primary focus.  


Management


Parallax is led by experienced veterans from the healthcare, technology, finance and management fields.  The Company's disciplined and organized approach is balanced by its optimism for the future, and the opportunities present in the current healthcare market. The Parallax team is grounded in a belief that success in business is built on a combination of research, planning and execution.



6



The Parallax Business Model


In 60 years, healthcare has transitioned from a direct relationship between doctor and patient, to one that has patients separated from their doctors by the introduction of a huge number of stakeholders, ranging from health insurers, employers, pharmacy benefit managers, imaging, diagnostic testing, lawyers, specialists and a plethora of others.  The patient and healthcare provider both want the same thing: information, quality of service, transparency, value for their hard-earned dollars, and more time in their day.


Parallax believes that its products and services can provide solutions that mitigate rising costs, reduce waste in spending through transparency, reduce the amount of unnecessary services, and increase the health and wellness of patients before they are sick.  


Parallax has developed, acquired and licensed multiple proprietary and exclusive platforms, that provide services and products, across the healthcare continuum.  These platforms are designed to allow for multiple points of reciprocal consideration, through innovative business models, that provide patients with increased quality of services and products, at reduced cost of time and money.  They also provide healthcare providers with increased access to their patients, the ability to deliver better and more efficient service and increase their income from the services they supply.    


Though Parallax’s multiple operations are focused in separate vertical markets, Parallax has designed its business model to allow for cross-pollination and reciprocal transfer of value at multiple points in their respective economic food chains.


The Company's business operations currently generate revenue from its compounding, retail and fertility business, and through multiple economic models ranging from cash payment to insurance reimbursement to rebates from pharmaceutical companies.


Products and Services


The Company's products and services range from compound pharmaceutical drugs and infertility medications to retail drugs.


To date, the primary compound products have been transdermal pain medications, which are made up of several different formulas.  The pharmacy also sells non-compounded single ingredient transdermal pain medications.


Business Structure


Parallax operates two divisions, ranging from Parallax Diagnostics, the Company's pre-revenue, point-of-care diagnostics company, to a 61-year-old compound pharmacy, generating millions of dollars in annual revenue and operational in over 40 states in the US., that target markets in:


Pharmaceuticals

RoxSan Pharmacy, Inc.

Medical Diagnostics

Parallax Diagnostics, Inc.

 

Each of Parallax's divisions targets a separate vertical market that is synergistic and complement each other and the Company's value proposition. Designed operational cross-over affords Parallax the ability to use built in economies of scale across multiple operating platforms.  


The Cross-Over and Cross-Pollination Model


As an example of the Company's cross-over and cross-pollination model, the nationwide sales infrastructure supporting RoxSan, can be utilized by Parallax’s Point-of-care Diagnostic system.


·

RoxSan Pharmacy, the compound and retail pharmacy, sells its drugs to doctors in over 40 US states, approximately 3,500 doctors in its client data base, both active and non-active; and

·

Parallax Diagnostics, the point-of-care testing and diagnostics division, will be able to sell their testing platforms and tests to the RoxSan doctors for use with their patients.


At Parallax, management continually strives to identify solutions to the challenges facing the current healthcare system.  Parallax is committed to delivering the highest quality products and services to patients, payers, healthcare insurers and stakeholders that are accessible and reasonable, built upon sound business models and economics that are designed to provide for sustainable growth and increased value to the Company's shareholders.


The Company's business strategy is to expand through organic growth, selective synergistic acquisition, and develop, license and or acquire, quality products and or services that complement the Parallax Mission.



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7



The Company believes that the current healthcare system is built on unsustainable models and significant challenges for all the stakeholders in the healthcare system. The Company strives to identify products, services and technologies that deliver solutions that fill a void in the current market for high quality high efficacy products and services delivered at reasonable and rational prices.


The Company's business model is built on identifying opportunities represented by one market vertical that provides for a separate vertical to utilize one or more of its core operations.


ROXSAN PHARMACY, INC.

COMPOUND and RETAIL PHARMACY SERVICES


Overview


RoxSan Pharmacy, Inc. ("RoxSan”), was incorporated on February 16, 1996, in the state of California, and is located in Beverly Hills, California. Prior to its incorporation in 1996, RoxSan was a privately-owned company providing pharmacy services since the early 1960s.


RoxSan is the oldest continuingly operated pharmacy in Beverly Hills and is a well-known commodity to the residents, and:   


·

provides Retail Pharmacy, Compound Pharmacy, Infertility, Wellness, Anti-Aging and Sexual Health products and services.

·

has continually operated at same location for 61 years.

·

is located in prime downtown Beverly Hills, CA location.

·

has a staff of 22 employees, including 4 pharmacist, 3 certified compounding technicians and 2 certified fertility technicians.


Retail Pharmacy Services (RPS)

The RPS provides a full range of pharmacy services including retail, compounding and fertility medications.  


The RPS generates net revenues primarily by dispensing prescription drugs, through local channels by direct delivery as well as mail order. The RPS also sells a wide assortment of general merchandise, including over-the-counter drugs, beauty and cosmetic products, seasonal merchandise and convenience foods.


The pharmacy is fully licensed and qualified to conduct business in over 40 US States.  


Corporate

The Corporate Segment provides management and administrative services to support the pharmacy. The Corporate Segment consists of certain aspects of the pharmacy’s executive management, corporate relations, legal, compliance, human resources, and corporate information technology and finance departments.


Operational Structure and New Business Units


Management developed a system of operations that focused on differentiating unique business markets for RoxSan services and developed additional areas of focus.  Currently, RoxSan operates four distinct business units comprised of:


·

RoxSan Compound Pharmacy (“Compounding”)

·

RoxSan Anti-Aging (“RoxSan Anti-Aging”)  

·

RoxSan Fertility Group (“RoxSan Fertility”)

·

RoxSan Retail Pharmacy (“RoxSan Retail”)


Shortly after RoxSan's acquisition in August 2015, management determined that there were several areas that required immediate attention.


Pharmacy Compliance


Management created the position of Director of Compliance at RoxSan and put a senior pharmacist as the Director.  Management developed a strategic plan covering its Regulatory Compliance goals.  The first goal was to create foundational standard operating procedures in the filling, processing, and shipping of prescriptions.


Under this program an audit report ("Audit Report") was discovered that was previously discarded by the prior ownership as having “no relevance” as to the results of the findings in that audit. This audit was part of a due diligence requirement imposed by the Company upon the prior owner before the acquisition, which was to have a third-party organization verify that the pharmacy was operating within compliance of state regulatory demands. The Audit Report dated prior to the acquisition, which was discovered in abandoned files, indicated that several areas of operation of the pharmacy were in violation of the most fundamental compliance rules, and strict warnings as to the consequences of what would happen to the pharmacy’s licenses if these areas were not immediately corrected. The Seller did not provide this “material” information while in due diligence prior to the acquisition. All areas recommended in the Audit Report to be corrected, were in fact implemented by the current ownership.



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State Pharmacy Licenses


The former owner had developed a well-documented contentious relationship with the California Board of Pharmacy as well as a number of other states in which the previous owner was accused of regulatory violations.  There were states that had suspended RoxSan’s Licenses under the prior ownership to operate in their state.  The new management began an aggressive program in each state, to appeal to the State Pharmacy Boards to reinstate the licenses. It became apparent that many individual members on several state Boards of Pharmacy, including the California Board of Pharmacy, the Nevada Board of Pharmacy and the Arizona Board of Pharmacy, had an extremely negative perception of the former owner. With the new management entering into the picture, the negative perception became extremely positive toward RoxSan’s new ownership, and its new Compliance Program.  Thus far, RoxSan has obtained pharmacy licenses in over 40 US states, and is seeking to obtain licensing in the remaining states.  


As a result of the efforts of new management, all of these issues were corrected and the pharmacy is currently operating in an entirely new status of having great relations with each of the previously strained relationships with individual state Boards of Pharmacy.


Pharmacy Benefit Management Business


The former owner had created a negative and challenging relationship with Payers and Pharmacy Benefit Management (PBM’s) as well as the cancellation of some pharmacy network contracts with PBM contracts that control the approvals for reimbursements for several health insurers.  The new management established a plan of action and SOP’s to follow as well as address the criteria for contract re-approvals with the PBM’s.  


RoxSan Pharmacy has become qualified and fully accredited member of FocusScript’s Compounding Pharmacy Network enabling RoxSan to participate in the Pharmacy Benefit Management Program for one of the largest health insurers in the United States.  As of this update approximately 5% of the Compound Pharmacy’s in the US have been able to achieve this accreditation.


A market development has occurred that has produced a payer reaction to the exorbitantly high pricing trends for compound pain medications. That development has affected the viability of the compound pain medication management industry due to rejections and many of the ingredients becoming “non-covered”. RoxSan has developed a program to restructure the pharmacy’s approach to creating a more “ethically” based pricing structure with extraordinarily high efficacy formularies, and is working with several of the industry’s leading PBM’s in pursuit of partnership arrangements.    


National Accreditation


In addition, under the new management, RoxSan Pharmacy passed the inspection from the Verified Pharmacy Program (VPP) as part of the National Association of the Board of Pharmacy. This was a significant accomplishment, considering that the prior ownership had failed in passing the VPP inspection in the past. Passing the VPP inspection is an exhaustive process requiring high levels of regulatory systems and compliance.  This extraordinary accomplishment was achieved in less than one year under the newly restructured operating compliance program under the new ownership, which included strict adherence to documentation retention and categorization.


Human Resources


In addition to the issues outlined above, it was determined that there were also personnel issues that RoxSan’s pharmacists, technicians and general operations employees had with the prior ownership. These issues involved compensation, benefits and management style of leadership, which lacked the opportunity for the employees to be empowered to effectively perform their duties. Management also addressed these issues with clarification of job responsibilities, compensation/benefit adjustments including stock option incentives and an overall more inclusive and open communication style of management.


Market Opportunities


Compounding Industry


What is a Compound Pharmacy?


Pharmacy compounding is the art and science of preparing personalized medications for patients. Compounded medications are made based on a practitioner’s prescription in which individual ingredients are mixed together in the exact strength and dosage form required by the patient. This method allows the compounding pharmacist to work with the patient and the prescriber to customize a medication to meet the patient’s specific needs.


At one time, nearly all prescriptions were compounded. With the advent of mass drug manufacturing in the 1950s and 1960s, compounding rapidly declined. The pharmacist’s role as a preparer of medications quickly changed to that of a dispenser of manufactured dosage forms, and most pharmacists no longer were trained to compound medications. However, the “one-size-fits-all” nature of many mass-produced medications meant that some patients’ needs were not being met.



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Fortunately, compounding has experienced a resurgence as modern technology and innovative techniques and research have allowed more pharmacists to customize medications to meet specific patient needs.


The primary activities of this industry are:

The major products and services in this industry are: 

 

 

·

Preparing alternate dosage forms of medication

·

Currently unavailable pharmaceutical manufacturing 

·

Preparing alternate strengths of medication

·

Pharmaceutical application alteration 

·

Preparing flavored medication

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Pharmaceutical dosage alteration 

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Preparing medication for patients with allergies or other sensitivities.

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Pharmaceutical ingredient alteration 


There are no major players in the industry.  No single pharmacy holds more than 5% of the market share, offering an opportunity for consolidation, which management has continued to explore as a potential strategy to compliment and secure growth.


Despite the Compounding Pharmacies industry experiencing negative media attention due to contaminated compounded prescriptions, it has still proved to be indispensable. For example, compounded medications can address patients’ noncompliance with their medication due to offering tastes, routes of administration and dosages that were not otherwise commercially available. Moreover, the burgeoning elderly population has stimulated demand for prescriptions, including compounded medications that were customized to address a patient’s needs. However, from October to September 2012, the Food and Drug Administration (FDA) inspected about 150 compounding pharmacies, with 90.0% of facilities inspected having problems. As a result, some industry operators have exited the industry altogether or have contended with costs related to complying with FDA standards. 


Nevertheless, the industry has benefited from pharmaceutical manufacturers having drug shortages, enabling the industry to access raw materials and supply medication orders to patients and hospitals. As group purchasing organizations (GPOs), which secure supplies for healthcare providers, control about 72.0% of purchases made by hospitals, according to the Healthcare Supply Chain Association, drug shortages have occurred. Due to GPOs using their market share as leverage to secure low-cost contracts with pharmaceutical manufacturers, some drug makers did not have the incentive to manufacture and stock essential drugs. As a result, industry revenue is expected to grow at an annualized rate of 2.4% to $5.6 billion during the five years to 2015, including 7.3% growth in 2015. This growth has been driven by the number of active drug shortages increasing from 328 in 2010 to 361 in 2013, according to the latest data available from the United States Government Accountability Office. Profit is anticipated to rise from 25.7% of industry revenue in 2010 to 26.5% in 2015, due to the prescription shortage and lack of substitutes for industry products enabling the industry to garner higher prices. 


During the five years to 2020, industry revenue is forecast to grow at an annualized rate of 2.6% to $6.4 billion. As the number of physician visits is expected to rise, more individuals will likely be prescribed medications, which may stimulate demand for compounded pharmaceuticals. Overall, the size of this growth will be contingent on how many patients require medications with alternative dosages and strengths. 


Key External Drivers 


·

Number of pets (cats and dogs) 

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Number of physician visits 

·

Regulation 

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Per capita disposable income 

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Number of adults aged 65 and older 


Number of Pets (Cats and Dogs) 


In addition to developing drug compounds for humans, compounding pharmacies also create specialized drugs compounded for animals. As the number of pets increases, demand for compounding pharmacies rises, as many pet owners will purchase compounded medications to increase animal compliance with flavoring and alternative routes of administration. The number of pets is expected to increase in 2015. 


Number of Physician Visits 


Consumers who visit doctors more frequently tend to receive more prescriptions and, in turn, purchase more medications. Therefore, patients may require compounded prescriptions to access drug strengths and forms that are not commercially available. The number of physician visits is expected to increase in 2015. 


Regulation 


The Food and Drug Administration (FDA) is encouraging large-scale operators to register with the FDA and is increasing federal regulations. As healthcare providers are increasingly purchasing compounded medications from FDA-registered and regulated facilities, many operators will choose to comply with regulations to bolster revenue volumes. Regulation is expected to increase in 2015, which represents a potential threat to the industry. 



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Per Capita Disposable Income 


Per capita disposable income determines consumers’ ability to purchase this industry’s products. While prescription products can be essential for health and therefore less susceptible to changes in consumer discretionary spending, some of the industry’s offerings, such as medicine flavorings, are subject to changes in disposable income. An increase in disposable income will boost demand for compounding pharmacies. Per capita disposable income is expected to increase in 2015. 


Number of Adults Aged 65 And Older 


As the population ages, demand for various pharmaceutical products increases. Adults aged 65 and older are more likely to have chronic illnesses than younger demographics, which stimulates demand for prescriptions. Additionally, elderly individuals may require compounded prescriptions to have personalized dosage forms, flavors or medications that comply with their allergies. The number of adults aged 65 and over is expected to increase in 2015, representing a potential opportunity for the industry. 

 

Current Industry Performance


Recently, significant changes have been made in the Compound Pharmacy industry that have made a detrimental impact on the industry, and have changed the RoxSan product mix permanently from its original growth patterns during 2012 through 2014. The huge growth in the industry during these years, especially in transdermal pain creams, has been reduced in size by as much as 90%.  The decline is not driven by a lack of demand, as compounding has become an alternative to traditional medications in a major way.  The swift decline has been the result of an oversaturation within the industry, and the reaction to the sudden growth by insurance companies and Pharmacy Benefit Management (“PBM”) companies.  


At the height of the compound industry growth, topical pain medications had grown astronomically, and in the 3rd Quarter of 2014, the industry reached a tipping point whereby Express Scripts announced that certain ingredients contained in popular compound medications would no longer be covered by their policies.  In 2015, most large payers and their PBM’s have stopped reimbursing the compounded topical pain creams.  


The Company's pharmacist and senior management agree that the pricing of these compounded drugs was too high and have made attempts to obtain “fix price agreements” with the PBM’s and insurers.  The Company believes, however, that there is still a great opportunity to develop the topical cream pain business, as it is one of the strongest alternatives to opioid usage, which appears to be the default alternative when a patient is faced with not having the pain creams available to them.


In 2015 there were over 5,500 compounding pharmacies in the US that were estimated to generate over $5.5 billion of revenue and $1.5 billion in profits. Compounding has historically been very profitable, with high gross margins on product sales.


Compound Industry Trends


The Compound Industry information that follows was taken from the IBIS World Industry Report OD5706 Compounding Pharmacies in the US, dated January 2015 by Sarah Turk at https://truenaturepharma.com/wp-content/uploads/2016/01/Compounding-Pharmacies-Industry-Report.pdf.  The Company encourages all interested parties to read it closely.


During the past five years, the Compounding Pharmacies industry has exhibited growth, thanks to an increase in the number of dispensed prescriptions. As the burgeoning elderly population has dealt with a number of chronic illnesses that require medication, demand for compounded pharmaceuticals has risen. For example, patients have used compounded prescriptions to access medications in alternative dosages, routes of administration, ingredients (due to patient allergies) and flavorings than drugs that were commercially available. Moreover, the shortage or termination of prescriptions from drug manufacturers’ product portfolio has stimulated demand for compounded prescriptions. 


In the five years to 2015, industry revenue is anticipated to increase at an annualized rate of 2.4% to $5.6 billion, including 7.3% growth in 2015, due to a rise in the number of prescription shortages. For example, according to data from the United States Government Accountability Office, the number of active drug shortages has increased from 328 in 2010 to 361 in 2013 (latest data available), which has benefited some compounding pharmacies because they were able to supply drugs to hospitals and patients that may have otherwise come from another source. Profit is expected to increase from 25.7% of industry revenue in 2010 to 26.5% in 2015, due to the prescription shortage enabling operators to mark up industry product prices. 


Pharmaceutical Awareness: Rising Healthcare Awareness and Spending on Pharmaceuticals Benefits Industry


During the past five years, many Americans have purchased pharmaceuticals to treat their health ailments. According to the Pharmaceutical Research and Manufacturers of America (PhRMA), about 3.6 billion prescriptions are dispensed in the United States each year. The US Pharmacopeia Convention estimates that 30.0 million to 40.0 million of those prescriptions are compounded medications. Over the past five years, numerous trends have increased patient utilization rates of compounded medications. For example, rising healthcare awareness and growth in the number of overall physician visits have bolstered demand for prescriptions and provided a boon to the industry. Moreover, as more patients addressed their allergies to certain drugs and their medication preferences, such as medication that have a different dosage strength, route of administration or flavoring than drugs that were commercially available, demand for compounded medications has increased. 



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A relative lack of regulation has had mixed effects on the industry. For instance, pharmaceutical manufacturers contend with high costs from generating brand awareness and complying with FDA regulations, which incites manufacturers to limit their product portfolio. While many compounding pharmacies opted for regulation to achieve credibility for their compounding process, such as accreditation with the Pharmacy Compounding Accreditation Board to ensure quality and sterility in their compounding facilities, only 163 pharmacies in the United States were accredited in 2013 (latest data available). As a result, costs for complying with regulation are relatively low when compared with pharmaceutical manufacturers. This has enabled compounding pharmacies to address drug shortages with few financial barriers. 


As the number of prescription drug shortages grew, compounding pharmacies were able to help alleviate these shortages by having access to raw materials and downstream markets, such as patients and hospitals. For example, according to the Congressional Research Service’s (CRS) Compounded Drugs report, 62.0% of hospitals outsourced compounded drugs due to drug shortages, to ensure drug stability (69.0%) and to extend drug shelf life (62.0%).


However, drug shortages have been particularly prominent among sterile injectable generic drugs, which are difficult to compound safely. Compounding pharmacies have recalled some products, due to not meeting the FDA’s standards. This trend has further exacerbated the drug shortage. For example, according to data from the CRS, 48.1% of hospitals reported that a shortage of compounded sterile products would have a significant impact on patient care, whereas 16.6% and 11.5% of hospitals reported that it would result in either an inconvenience or a major disruption to patient care, respectively. 


Booming Opportunity: As the Growing Elderly Population Requires More Prescriptions, Demand for the Industry Increased


The burgeoning elderly population has provided a boom for the compounding industry. The number of adults aged 65 and older is expected to grow at an annualized rate of 3.4% during the five years to 2015. More elderly patients have visited their physician, which has stimulated demand for prescriptions. Because the burgeoning elderly population has required more prescriptions to address their numerous chronic illnesses, demand for compounded pharmaceuticals has grown. For example, as the number of stroke patients rose, so did the prevalence of dysphagia, or a patient’s inability to swallow. As a result of this trend, demand for compounded medications with alternative routes of administration increased.

 

Additionally, the industry also provides compounded medications for pets. The number of pet owners is expected to grow at an annualized rate of 2.3% during the five years to 2015. Because of this growth, more pet owners will be required to obtain compounded drugs to increase their pet’s compliance with medications. For example, pet owners may demand compounded drugs to cater to their pets’ individualized needs, such as allergies and complications with the drug’s route of administration. 


Industry Outlook


During the next five years, the Compounding Pharmacies industry is expected to benefit from more pharmacies addressing negative media attention from contaminated drugs by registering with the FDA. Moreover, as the elderly population will continue to require a high volume of prescriptions, demand for compounded drugs will increase because some patients will require medications with alterative dosages and strengths that are not commercially available. 


Furthermore, as prescription drug shortages continue to occur, which may be partly attributable to the termination of drugs by pharmaceutical manufacturers, patients will need compounded medications to address their health ailments and supply their prescriptions. During the five years to 2020, industry revenue is forecast to grow at an annualized rate of 2.6% to $6.4 billion, which can be attributed to need-based demand for industry products and the lack of a viable substitute. Profit is expected to slightly rise from 26.5% of industry revenue in 2015 to 27.1% in 2020, due to high sales volumes offsetting costs related to complying with regulations. 


Rising Incomes and Aging Americans


Consumers’ per capita disposable income is linked to demand for compounded pharmaceuticals. For example, many pharmacy benefit managers (PBMs), which are responsible for processing and paying prescription drug claims, have increasingly limited their coverage of compounded drugs. In 2014, Express Scripts, a major PBM, announced that it would no longer cover about 1,000 active ingredients used by compounding pharmacies. As many PBMs attempt to cut costs in response to the rising cost of prescription drugs, they may lower their coverage of compounded drugs. In particular, in 2012, the National Council on Prescription Drug Programs permitted compounding pharmacies to bill for all ingredients used in the compounded drug, rather than for the most expensive ingredient. 


Moreover, although compounded drugs make up a small share of total pharmaceuticals, the cost of compounded drugs made with bulk drug substances, such as baclofen (a muscle relaxer) and gabapentin (an anticonvulsant), is rising. In response, PBMs may exclude coverage of industry products. Overall, consumers’ per capita disposable income will be a key driver for compounded drugs because many customers will have to pay for industry products out of pocket. In addition, the burgeoning elderly population will provide opportunities for the industry. For example, pharmaceutical manufacturers may produce a drug that does not have the appropriate dosage for elderly individuals, which stimulates demand for compounded medications. Age-related changes, such as medication absorption, distribution, metabolism and excretion, may cause a patient to require compounded prescriptions, bolstering industry revenue. 



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Drug Shortages


Additionally, drug shortages will bolster demand for compounding pharmacies. In 2014 (latest data available), the United States Government Accountability Office (GAO) reported that there was a shortage of about 361 active drugs, which is expected to continue an upward trend over the five-year period. Many drugs included in the shortage were generic sterile injectable drugs. Typically, drug shortages have involved cancer drugs, anesthetics for patients undergoing surgery and electrolytes for patients with intravenous fluids. Consequently, compounding pharmacists that can efficiently manufacture drugs in a sterile environment during a shortage will likely develop favorable supply-side contracts with healthcare providers. Many compounding pharmacies have access to raw materials and can increase their production quickly during a shortage. However, the regulatory landscape will likely become more stringent. More compounding pharmacies have opted to register with the FDA through the Drug Quality and Security Act, giving compounding pharmacies the oversight necessary to develop confidence among healthcare providers and patients. In January 2014 (latest data available), 11 compounding pharmacies have elected to adhere to current good manufacturing standards and FDA inspections, which will likely increase over the five-year period. In particular, sterile compounding facilities, which manufacture drugs that are at high risk for contamination, are expected to increasingly adhere to FDA regulations. With FDA inspections, compounding pharmacies are considered outsourcing facilities, which enables industry operators to provide industry services in bulk to hospitals and physicians when individual prescriptions are not required. 


Industry Life Cycle: The industry is growing


Industry value added (IVA), which measures an industry’s contribution to the overall economy, is expected to grow at an annualized rate of 3.2% during the 10 years to 2020. Comparatively, GDP is anticipated to increase at an average annual rate of 2.5% during the ten-year period. While contaminated compounded medications have gained negative media attention, drug shortages have still bolstered demand for compounded prescriptions. As consumers continue to require compounded prescriptions to address allergies, provide alternative routes of drug administration as well as dosages or strengths that were not commercially available, the industry will experience stable need-based demand. 


While industry operators will increasingly contend with regulation, registering with the FDA will allow compounding pharmacies to be considered outsourcing facilities, which will enable industry operators to supply hospitals with compounded medications in bulk. As the elderly population requires more medications to address their chronic illnesses, demand for compounded prescriptions will also grow, as operators individually tailor prescriptions to meet a patient’s dosage or route of administration needs. As consumers become more aware of their health, more individuals will be willing to incur out-of-pocket costs for compounded prescriptions, which benefits the industry. 


Demand Determinants 


The main drivers affecting demand for compounding pharmacies are consumer incomes and the population’s health. Only 1.0% to 2.0% of consumers suffer from allergies or other conditions that require specialized drugs from compounding pharmacies. In general, these consumers can take the unaltered pharmaceutical, but they use compounding pharmacies to manufacture pharmaceuticals that are easier to take, by altering the flavor or application method. This kind of demand is somewhat sensitive to changes in per capita disposable income; as consumer per capita disposable income declines, more consumers will purchase the standardized manufactured pharmaceutical if it is more affordable. Additionally, health insurance companies do not always reimburse consumers who use compounding pharmacies, which constrains demand for compounded prescriptions when consumers cannot incur high out-of-pocket healthcare costs. 


However, most customers of compounding pharmacies require their services regardless of the cost. Demand from these customers moves with the general health of the population. The United States population is aging, with more individuals suffering from numerous chronic illnesses, which stimulates demand for compounded medications. 


While many individuals require individually tailored compounded medications, age demographics that are typically noncompliant with medications (individuals aged 18 and younger) and elderly individuals with a plethora of chronic illnesses are the main consumers of compounding pharmacies. For example, younger individuals, under the age of 19, are more likely to require medications with alternative applications, due to not being able to take their medication in pill form or due to preferences for particular flavors. Comparatively, elderly individuals comprise a larger market share due to their numerous health ailments, which increases demand for prescriptions. 


Individuals aged 18 and younger 


Consumers aged 18 and younger also represent a disproportionately large part of industry revenue, accounting for about 15.0% of total revenue in 2015. Aside from the elderly, young children are most likely to have allergies to pharmaceutical compounds, as well as require a special dosage and application method to increase their compliance with medications. During the next five years, demand for compounded medications from this market segment will increase, as more stringent FDA regulations incite more parents to purchase compounded medications for their children. 


Individuals aged 19 to 64 


The adult population, aged 19 to 64, makes up 55.0% of industry revenue in 2015. During the past five years, this market segment exhibited stable need-based demand, as many individuals required compounded medications with a specific dye due to allergies or gluten-free ingredients for dietary requirements. Furthermore, this demographic demanded compounded drugs due to their low-cost prices, relative to brand-name pharmaceuticals, and accessibility during drug shortages. 



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Individuals aged 65 and older 


According to the US Department of Health and Human Services, consumers aged 65 and over are estimated to account for about 30.0% of pharmaceutical expenditures, indicating that the senior population is one of the primary markets for compounding pharmacies. This age group has a relatively high drug-prescribing pattern, which is due to the number of chronic diseases and disorders and the limited number of non-drug alternatives. The aging baby boomer population has been a key factor of sustained growth in the Compounding Pharmacies industry. As the average age of the US population continues to increase, the volume of drugs prescribed by doctors continues to rise. 


Competitive Landscape


Market share concentration: Concentration is very low


The Compounding Pharmacies industry exhibits a low market share concentration, with no firm accounting for 5.0% of total revenue in 2015. Unlike pharmaceutical companies that mass produce medications, compounding pharmacists individually tailor prescriptions to meet specific patient needs, which limits the industry’s ability to benefit from cost synergies from economies of scale.

 

Profit 


In 2015, the Compounding Pharmacies industry is expected to generate a robust profit margin (measured as earnings before interest and taxes), accounting for 26.5% of total industry revenue. While profit margins are high for the pharmaceutical sector as a whole, industry operators typically have higher margins, which can be attributed to the industry offering a specialized service with no direct substitutes. However, profit margins vary according to industry operators’ product portfolio and clientele.

 

For example, compounding pharmacies that utilize a variety of ingredients and dosage forms for more patient clinical conditions, or have upgraded facilities for compounding medications, typically have higher profit margins. Furthermore, industry operators that develop contracts with physicians, hospitals and medical clinics will have higher profit margins, compared with compounding pharmacies that work directly with patients on an individual basis. In particular, pharmacies that provide prescriptions during a long-term shortage of critical medications will have high profit margins until the pharmaceutical supply is revived. 


Basis of Competition


Firms in the Compounding Pharmacies industry face moderate competition. Competition within the industry stems only from other regionally located firms, due to the industry providing services that lack substitutes. While operators compete on the basis of price, the industry will increasingly generate clientele on the basis of reputation. For example, while the industry is becoming more exposed to regulation, the industry is still experiencing negative media attention from patient deaths and illnesses related to contaminated compounded medications. As a result, industry operators that can generate positive word-of-mouth for compounded medications that are manufactured in sterile environments will likely have a large customer following. Industry operators that develop safe compounded medications that are known for their efficacy will generate high sales volumes. Furthermore, more operators will move toward opting to register with Pharmacy Compounding Accreditation Board and the US Food and Drug Administration’s current good manufacturing practices to meet standards for quality in the compounding process. 


Compounding pharmacies that are prone to regulation will have an advantage over nonregulated industry operators, which will benefit regulated compounding pharmacies in securing favorable contracts with local physicians, hospitals and medical clinics. Additionally, compounding pharmacies will compete to respond to address shortages of manufactured medications for critical conditions or illnesses, which will benefit operators that have the large compounding facilities and access to raw drug ingredients necessary to manufacture drugs during a shortage. Operators also compete to develop networks with physicians and the healthcare sector, which will benefit operators when patients are referred to compounding pharmacies for specialized medications that are compatible with their allergies, medication strength or other customized prescription needs. Moreover, industry operators also compete to develop networks with downstream industries, such as veterinarians, to be referred when a pet owner requires a compounded prescription for their pet. 


Barrier to entry


New entrants to the Compounding Pharmacies industry face moderate barriers to entry. The largest barrier to entry for potential industry entrants includes hiring a specialized work force, which is typically comprised of lab technicians and a pharmacist. Employees must be trained in how to handle and manufacture pharmaceutical products, and firms face competition in hiring employees from traditional pharmaceutical manufacturers and pharmacies. Additionally, compounding pharmacies that specialize in sterile compounding, such as the preparation of injectable drugs and medication that goes into patients’ body cavities or sterile areas, incur higher costs for purchasing equipment and maintaining a sterile environment to lower the risk for contamination. 


Furthermore, sterile compounding operators also potentially incur costs related to liability issues, which could pose as a potential barrier for potential industry entrants. Many compounding pharmacies have networks with major healthcare systems, which poses as a barrier to entry for small, boutique compounding pharmacies that appeal to local clientele and want to work with healthcare providers. While Accreditation with the Pharmacy Compounding Accreditation Board, which allows operators to achieve legitimacy via regulated operations, can allow potential industry entrants to secure contracts with hospitals, fewer than 5.0% of compounding pharmacies nationwide achieve accreditation, which could limit a compounding pharmacy from entering the industry. 



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In addition, compounding pharmacies must invest in facilities, including a sterile laboratory, suitable for manufacturing pharmaceuticals. Finally, compounding pharmacies typically operate solely in small geographic regions and compete against other industry operators within that region. For a new entrant to be successful, it must find a region in which the existing compounding pharmacies are not meeting the demand from a small customer pool. While being monitored by the FDA is not required for industry operators, many will choose to comply with regulations to build legitimacy and attract healthcare providers. According to MediFare consultants, it costs the average compounding pharmacy facility $35,000 to comply with FDA regulations, which is a significant fixed cost for industry entrants. 


Fertility Industry


The market for IVF drugs in California is the largest in the country and is driven my multiple factors as noted above.  In addition to the IVF Market information below, sourced from Harris and Williams and Co. a middle market investment advisory and M & A transaction firm, management at RoxSan and its staff, all the way down to the driver delivering the IVF drugs to its customer, are proud to be part of a business that brings children to people who truly want them and have, until their successful treatment for infertility, been unable to conceive on their own.  The IVF group at RoxSan is a major factor in the Company's self-esteem, and it is a symbol of pride for everyone that works at RoxSan and Parallax.  


Market outlook of the global fertility services market


Market research analysts predict the global fertility services market to grow steadily at a CAGR of nearly 9% between 2016 and 2020. The increase in fertility complications is one of the major drivers for the growth of the market. With age, human body starts undergoing various medical and hormonal changes. Likewise, infertility among women is also an age-related issue. Medically, women above the age of 35 are vulnerable to fertility complications. About 20% of women in the age range of 35-44 undergo fertility services to increase their chances of pregnancy, thus boosting the growth of the fertility services market.


Along with the increase in fertility issues among women, there has also been an increase in the number of fertility clinics worldwide, which is a trending factor contributing to the growth of the market. The rapid rise in the number of fertility clinics is increasing the accessibility of fertility services across the globe, thus facilitating couples to choose clinics based on their convenience.


Segmentation by underlying cause and analysis of the fertility services market


Female infertility is a very common problem in about 10% of women in the age range of 15-44 years. As per the NICE guidelines, female infertility is the inability of a woman of reproductive age to conceive after one year of unprotected vaginal intercourse. Ovulation disorders, submucosal fibroids, pelvic inflammatory disease, and endometriosis are few of the factors that can cause infertility in women.

.  

·

15% of the world's population experiences some sort of difficulties conceiving naturally in their life.

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In the western society, people are prolonging having our first child more and more, which has a clear negative correlation with chances of conceiving naturally.

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Furthermore, other western lifestyle diseases such as obesity also have a clear negative correlation with natural conception chances.


PARALLAX DIAGNOSTICS, INC.

TARGET SYSTEM and DIAGNOSTIC TESTING PLATFORM


Overview


Parallax Diagnostics, Inc. (“PDI” or "Parallax Diagnostics") is a company focused on the development of point-of-care diagnostics, with an emphasis on its Target System testing platform and novel applications, that detect and/or monitor infectious diseases, cardiac markers and drug of abuse assays.  PDI holds exclusive licenses, in perpetuity, to a line of proprietary, patented and/or patent-pending, previously FDA cleared, point-of-care diagnostic tests to be utilized with its single platform diagnostic testing Target System.  PDI, with its products and products in development, offers the potential to transform the diagnostic landscape by transitioning critical tests from the centralized lab directly to the hands of the physician or clinicians.   


The PDI product line includes an FDA cleared 510K desktop analyzer for both qualitative and quantitative assays and twenty-four FDA 510K-cleared tests for commercial sale in the U.S. PDI also has HIV 1 & 2 tests ready for clinical trial, and a novel CD4-CD8 rapid immune status test targeting the HIV/AIDS/TB treatment and monitoring market.


PDI is currently at a pre-revenue stage, and has spent the last few years prosecuting its patents, as well as initiating development of two (2) CD4-CD8 immune status tests, and the SPARKS Mobile diagnostic reader. PDI also has a technology that was previously cleared by the FDA technology that is being used as a platform for a test that will detect CD4 and CD8 cells which in turn determine a patient’s immune status.

  

The PDI business model is focused on the commercialization of its proprietary diagnostic device in the areas of infectious diseases, cardiac markers, drugs of abuse tests and various other medical conditions.


Patents on its target system diagnostic test platform and test cartridges were issued in the United States, China, Macao, and Hong Kong and its India patent is pending.



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The 2015 World market for Point-of-care Testing (“POCT”) totaled $22.9 billion.


History of the PDI Target System Technology


The Target System represents the core technology of PDI's point-of-care business.


1982

The Target System was developed and produced by the late Dr. James Parker.  In January 1982, James Parker founded V-Tech, Inc. a biomedical and Plastics Company, combining established immunodiagnostic technologies with innovative medical plastic products ("V-Tech"). Mr. Parker’s goal was to develop innovative diagnostic tests and testing systems. During his career, Mr. Parker successfully patented over thirty (30) biomedical related products.


1985

Late in 1985, Mr. Parker expanded V-Tech’s capabilities by acquiring Organon Diagnostics' 22,500 sq. ft. facility and technical scientific staff. Under Mr. Parker’s direction, the acquisition had an immediate impact on V-Tech’s pursuit of its major commitment to translate emerging research concepts into useful diagnostic and health care products.


1986

V-Tech introduced its first product on membrane, the Target HCG Test, in the third quarter of 1986. The commercial success of that first product utilizing membrane technology not only spawned a host of additional new tests introduced between 1988 and 1993 but brought V-Tech to the attention of companies such as Miles Laboratories, DuPont, for whom V-Tech successfully developed tests on membrane for agricultural diagnostics, Difco Laboratories, which joint-ventured the application of several analytes.


1986-2001

Between 1986 and 2001, the Target System was manufactured and marketed by V-Tech to medical distributors, hospitals and various government agencies (D.O.D., and G.S.A.). V-Tech owned and operated two manufacturing and distribution facilities, 38,000 and 48,000 square feet in Pomona and the City of Industry, California, respectively. All development and manufacturing, together with FDA compliance laboratory processes, were conducted at these two FDA certified facilities.


2001-2004

The Target System inventor and V-Tech founder, Dr. James Parker, died in October 2001, of an aneurism, just as PDI was beginning to initiate significant sales.  Collegues and family members believe that the anuerism was a direct result of a suspicious circumstances surrounding a fall down an escalator in Paris, France, shortly before Dr. Parker was to give a speech at a international conference of diagnostic professionals. V-Tech was in disarray and lay dormant for a number of years under stewards with non-compatible backgrounds. Victor Parker, Esq., son of James Parker approached Ted Withrow, a financier, biomedical executive, entrepreneur and inventor, to help him continue with his father's vision of providing high quality low cost diagnostics in or outside of a hospital. Subsequently, Mr. Withrow approached Dr. Jorn Gorlach, a successful scientist, entrepreneur, biomedical executive and inventor, to join him in founding a new company charged with the commercialization of the Target System and the fulfillment of Dr. Parker’s vision. By expanding and applied innovative development to the existing platform, Messer’s Withrow and Gorlach were able to lead the new company, Montecito BioSciences, Ltd. ("MBS") into the development of mobile diagnostic and healthcare platform.  


MBS applied for and was granted patents covering its mobile technology and Target System test cartridge, and is currently in the pre-prototype stage of development.. SPARKS Mobile, the handheld, mobile technology, will be a next generation version of the VT-1000 reader, and was put into development along with new product segments and market strategies for the reorganization of the Target System technologies and testing platform into MBS.  MBS entered into an exclusive license of 24 FDA 510K cleared tests and the FDA 510K cleared immunoassay reader and an Assignment Agreement for the patented and patent-pending applications covering innovations to the Target System and to the business plan.



16


The following list represents historical distributor that sold. The Target Antigen Detection System Diagnostic Platform, including the TARGET VT-1000 Desktop Analyzer and a number of the Company’s FDA approved tests in a commercial setting:


Customer

Location

1.

Columbia Diagnostics

Springfield, VA

2.

Cardinal Healthcare

McGaw Park, IL

3.

Community Family Planning

New York, NY

4.

East Tech, Inc.

Indianhead, MD

5.

Laboratory Supply Corp.

Louisville, KY

6.

Medical Technology Corporation

Somerset, NJ

7.

Accumed

Brooklyn, NY

8.

Owens & Minor

Greensburg, PA

9.

General Medical Corp

Richmond, VA

10.

Physicians Sales & Services

Jacksonville, FL

11.

Troy Biological, Inc.

Troy, MI

12.

Alimenterics, Inc.

Morris Plains, NJ

13.

E.I. DuPont Agriculture Department

Newark, DE

14.

Difco Laboratories

Detroit, MI

15.

United States Defense Department

Washington D.C.

16.

Veterans Administration

Washington D.C.

17.

Tryco, Inc.

Mclean, VA

18.

Allied Signal

Jacksonville, FL

19.

VWR International

Bridgeport, NJ

20.

Arab Circle Healthcare

Saudi Arabia

21.

Bioclone Australia

Sydney, Australia*

22.

Care Diagnostics

Vienna, Austria

23.

Izasa, S.A.

Barcelona, Spain

24.

LMC LTD.

Ankara, Turkey

25.

Transasia Bio-Medicals

Bombay India



2005

Withrow developed a business relationship with Victor Parker, the son of James Parker,  the inventor of the Target System and the founder and operator of the business that developed and commercialized it.

On October 10, 2005 Withrow joined forces with Jorn Gorlach and formed Montecito Bio Sciences, Ltd. ("MBS") as a Nevada corporation

The MBS Business plan was to develop the Target System assets, re-launch the Target System into the market and generate revenue through the commercialization of the Intellectual Property.

Event Milestones:

Re-evaluated HIV 1 and 2 Test that was ready for clinical trial seeking a 510 clearance.

Developed a relationship with head of South African Medical Association who directed MBS away from a rapid HIV 1 and 2 test and focused on the need for a low-cost rapid immune status test to be given as part of the HIV-AIDS Antiretroviral treatment.

US and International patent applications were filed to protect the business and its stakeholders.


2008- 2010

Roth Kline, Inc. was incorporated on December 30, 2008.  The sole Shareholder of Roth Kline, Inc. was Montecito Bio Sciences, Ltd.

Roth Kline was formed to facilitate the development and commercialization of the Target System.

Roth, Kline changed its name to Parallax Diagnostics, Inc.

The development of the Target system, Hand held Analyzer & CD4-8 Test became Parallaxs primary focus.


Product Strategy


In recent years, there has been a continuing shift from the use of laboratory-based analyzers to point-of-care (“POC”) tests that can be performed in a matter of minutes. Unlike the centralized clinical laboratory segment of the diagnostic market, which is mature and highly competitive, the POC market is still in its relatively early stages. According to the recent worldwide research reports, however, such as the 2010 Worldwide IVD Market, by the research firm Kalorama Information, the growth rate of the POC market continues to rise. Although certain simple, single analyte diagnostic tests have been developed, such tests have remained incapable of precise and highly sensitive quantitative measurements. As a result, medical tests that require precise quantization of the target analyte have remained the domain of immunoassay analyzers in the centralized laboratory.



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Point-of-care diagnostic kits typically consist of test strips that the health care provider applies a patient’s sample to and then reads the strip either visually or with an instrument in order to determine a result.  They are simple to use, fast, disposable and reliable within an acceptable range. More sensitive analytes or tests requiring quantitative analysis and definitive antibody screening needed in most situations, must be sent out to a diagnostic lab, and hours or days later results arrive. These tests are comparatively complex, expensive, and time consuming; only centralized diagnostic facilities can manage sample handling and the cost of instruments and reagents.  A point-of-care instrument that has the advantage of a test strip device in terms of ease of use and rapid results along with ELISA-like capabilities for major diseases would circumscribe diagnosis routinely within the course of a patient visit. This could disrupt the current model.  The Company is planning to develop just such a device that it intends to sell to doctors and health care providers.


The commercial success of the current generation of small, simple to use diagnostic devices which provide rapid results in POC applications has been limited by their inability to provide precise, highly sensitive, quantitative measurement. 


Despite these limitations, the rapid increase in discovery of individual markers of disease processes, coupled with the advancements in rapid detection technologies, has made these tools available to medical professionals on a wide scale and POC diagnostics are quickly becoming a high growth industry.


The Company believes that there is market potential for advanced POC diagnostic products that provide quick and accurate diagnosis during a patient visit, shortening the decision time to medical intervention and minimizing the need for additional patient follow-up, thereby reducing overall health care delivery costs.


The Company’s Target System (the systems includes the VT-1000 Desktop Analyzer, the Target Antigen Detection Cartridge and associated reagents) technology addresses these limitations by applying sophisticated immunochemical and optical methods to detect and quantify analytes present in various human specimens, including blood, urine, and feces. Data indicates that sensitivity will be comparable to expensive and complicated laboratory-based analyzers. 


The Company also believes that there is growth opportunity for the exploitation of its Target System platform in developing nations and regions such as Africa, India, South America, Eastern Europe, Russia and Asia as well as developed markets of North America and Western Europe. One of the first initiatives to be developed for this market will combine the Company’s SPARKS Mobile (a portable hand-held diagnostic analyzer based on the VT-1000 Desktop Analyzer technology, but smaller and more portable), currently in development, with a test for the monitoring of AIDS/TB patients through the use of a proprietary rapid point-of-care immunoassay CD4-CD8 test called PROMISE CD4, also in development.


The Diagnostics Products


The Company’s assets will include a previously FDA-cleared VT-1000 Desktop Analyzer and more than a dozen FDA 510(k) cleared diagnostic tests.  


The Company’s previously FDA-cleared VT-1000 Desktop Analyzer and immunoassay system incorporates a flow-through rapid antigen test platform configuration that has the ability to produce high-performance quantitative blood test results with the ease of rapid qualitative diagnostic strips.  The Company has patent applications related to its current and future products, as well as methods for future test development. The Target VT-1000 Desktop Analyzer is ideally suited for rapid development and commercialization of all new tests that may be introduced.


VT-1000 Desktop Analyzer: Quantitative and Qualitative Immunoassay

 

The Company’s VT-1000 Desktop Analyzer was FDA 510(k) cleared and is capable of rapidly detecting qualitative and quantitative data for the Company’s FDA-cleared Target Platform tests.  The VT-1000 Desktop Analyzer is used for all Target Platform Tests, allowing for clinical personnel to be trained once and also gives consistent results for either qualitative or quantitative testing.

 

Target Antigen Detection System (“TADS”)


The Target Antigen Detection System consists of a unique disposable cartridge with reagents capable of testing multiple test markers, combined with the VT-1000 Desktop Analyzer. The TADS requires a small amount of sample and provides results in minutes.  The simplicity of the fully loaded disposable test cartridge and subsequent ease-of-use of the instrument helps to alleviate the technical burden on medical staff and makes patient diagnosis more efficient.


The Company’s Target Antigen Detection System is a departure from the standard devices typical to the rapid testing markets. The device is part of the manufacturer’s qualitative and quantitative “Target System Diagnostics Platform,” which offers an array of improved modifications and features to the traditional qualitative and semi-quantitative flow-through immunoassay test. With its platform uniformity, vacuum pump, absorption layer for sample overflow, and complete compatibility with single and multi-light source reflectometer technology, the TADS cartridge is a unique collection of tests for qualitative and quantitative detection diseases and of conditions.


The Company plans to develop the SPARKS Mobile, a hand-held analyzer unit, similar in size to a mobile phone/PDA, which will be based on the VT-1000 Desktop Analyzer (see Products in Development).



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TADS Vacuum Control Flow Device


The TADS cartridge utilizes a vacuum technology to deposit specimen samples uniformly on test membranes.  The Vacuum Control Flow Device provides a vacuum pump action, which reduces test time and ensures maximum contact with the membrane antibodies.  This collection device allows for numerous tests to be incorporated. The vacuum specimen filtration and excess specimen absorption is built right in.


Target System Patent Status:  The Target System and certain of its related components were previously issued patents by the United States Patent and Trademark Office (“USPTO”).  The following previously-issued patents have expired:  


USPTO Patent #

Description

Date Filed in US

Date Expired

US4,748,042

Target Ringing & Spotting Machine (method and Apparatus for Imprinting membrane with pattern of antibody)

May 31, 1988

May 31, 2008

US4,797,260

Target Cassette (Antibody testing system)

January 10, 1989

January 1, 2009

US5,137,691

Target Cassette with Removable Air Gap (Antibody testing system with removable air gap)

August 11, 1992

August 11, 2012


The Company’s Current Technology


The Company currently holds the rights to certain technology related to the VT-1000 Desktop Analyzer and the Target System.


The Company retained the services of the Intellectual Property Network to provide Intellectual Property protection recommendations for all of the Company's Intellectual Property, open patent applications and products, both domestically and internationally.  IPN informs the Company and its shareholders of the accurate and current state of the commercial patent pending coverage, and where possible to identify the existence of novel and patentable inventions present in the current innovation initiative.  IPN concluded that the Company has a strong patent portfolio protecting its business, and recommended that the Company aggressively proceed with additional patent applications to protect the Company’s inventions and innovations.   


There can be no assurance that the Company will be granted patents for any of the patent applications it has filed with the USPTO.


For more information on the Company’s patent applications, please see the section entitled “Intellectual Property” contained within this Annual Report.


The Company’s previously FDA-Cleared Tests in the area of Infectious Diseases

 

Rubella

 

Rubella, German measles, is a highly contagious disease, which is generally transmitted by direct contact with infected persons. Rubella is generally a mild disease. However, when a pregnant woman becomes infected with rubella, the virus may infect the placenta, multiply and induce serious damage to the fetus.  Rubella and congenital rubella syndrome became nationally notifiable diseases in 1966. The largest annual total of cases of rubella in the United States was in 1969, when 57,686 cases were reported (58 cases per 100,000 populations). Following vaccine licensure in 1969, rubella incidence fell rapidly. By 1983, fewer than 1,000 cases per year were reported (<0.5 cases per 100,000 population).  A moderate resurgence of rubella occurred in 1990-1991, primarily due to outbreaks in California (1990) and among the Amish in Pennsylvania (1991). In 2002 a record low annual total of 18 cases were reported.


Rotavirus


Human rotavirus is recognized as a major cause of gastroenteritis in infants, young children, and the elderly. During the winter months a portion of gastroenteritis in children is due to rotavirus infection. The disease manifests with the symptoms of vomiting, diarrhea, and fever. Rapid and accurate diagnosis is important to avoid inappropriate antibiotic therapy, provide proper treatment early, and to prevent spread of nosocomial infection.

 

Globally, rotavirus accounts for an estimated 125 million cases of diarrhea each year and represents 30% - 40% of hospitalizations for diarrhea in children less than five years. In developing countries, between 600,000 and 800,000 children die from rotavirus each year (or approximately 2,000 children each day.) This accounts for about one quarter of the deaths from diarrhea and about 5% of all deaths among children less than five years of age.

 

CMV- Herpes

 

Cytomegalovirus (CMV) is a human viral pathogen belonging to the Herpes family. Infection in humans is widespread and usually results in asymptomatic disease. However, severe symptomatic infections are a very significant risk in infants and Immuno-compromised individuals. An important primary source of such infection is via blood transfusion and allograft transfer. The serological status of donor and recipient is, therefore, important in patient management.



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The United States is not unique in its high rates of CMV seroprevalence. Virtually every country in the world presents similar numbers. Since recurrences are often mild and few patients are aware that they are infected, the infection is likely to continue to rise at double-digit rates without an intervention.


Group A Streptococci: Strep A, Strep Throat, Necrotizing Fasciitis, impetigo

 

Strep throat is an infection of the pharynx (the part of the throat between the tonsils and the larynx) caused by streptococcus bacteria. The infection is spread by person-to-person contact with nasal secretions or saliva, often among family or household members. Even though the sore throat usually gets better on its own, people who have strep throat should take antibiotics to prevent some of the more serious complications of this infection, particularly acute rheumatic fever.  

 

Approximately 15% of children who have a sore throat and fever are infected by Group A streptococci.  CDC estimates that approximately 9,100 cases of invasive GAS disease (rate: 3.2/100,000) and 1,350 deaths occurred nationally during 2002. Disease incidence was highest among children aged <1 year (6.9/100,000) and adults aged >65 years.

 

Infectious Mononucleosis: EB, Epstein-Barr Viral Syndrome, Mono

 

Infectious mononucleosis (IM) is a viral infection causing high temperature, sore throat, and swollen lymph glands, especially in the neck. The Epstein-Barr virus typically causes it. Infectious mononucleosis may begin slowly with fatigue, malaise, headache, and sore throat. The sore throat becomes progressively worse, often with enlarged tonsils covered with a whitish-yellow fibrinous exudate. The lymph nodes in the neck are frequently enlarged and painful. Symptoms of mononucleosis gradually subside over a period of weeks to a month. The disease is generally self-limited.


Tests Planned for Development for the Target System Diagnostic Platform


The Company is in the planning process of developing and obtaining FDA clearance for the following products.  There can be no assurance that the Company will be successful in developing such tests or in obtaining the required FDA clearance.


HIV 1 & 2 TADS Rapid Test

 

Today, 42 million people are estimated to be living with HIV/AIDS. Of these, 38.6 million are adults. 19.2 million are women, and 3.2 million are children under 15. During 2002, AIDS caused the deaths of an estimated 3.1 million people, including 1.2 million women and 610,000 children under 15. With the recent advent of Rapid HIV testing, HIV detection and prevention programs around the world have become increasingly effective by reducing their time and costs of detecting the virus, thus allowing for a far greater number of individuals to be screened. The FDA has approved several rapid Immunoassay tests for the detection of HIV, but none of these tests are designed for HIV 1 and 2.  The current “rate” of these “rapid” tests is from 15 minutes to hours and only a few can produce results less than 15 minutes.


Additional Products Planned for Development


The Company also believes that there is growth opportunity for the exploitation of the Target System platform in developing nations and regions such as Africa, India, South America, Eastern Europe, Russia and Asia as well as developed markets of North America and Western Europe.


One of the first initiatives for the development of this specific market will be to combine the SPARKS Mobile, the Company’s hand-held analyzer (the portable version of its VT-1000 Desktop Analyzer), with a test for the monitoring of HIV/AIDS patients and Tuberculosis patients, through the use of the Company’s proprietary rapid POC immunoassay PROMISE CD4 quantitative test, also planned for development.


The Target System Hand-Held Analyzer: SPARKS Mobile

 

The Company’s next generation Target System Analyzer, the SPARKS Mobile, a hand-held analyzer, will include a small, rapid testing format, in conjunction with a hand-held data acquisition and test reading device. The SPARKS Mobile will be a re-engineered version of the Company’s previously FDA-approved VT-1000 Desktop Analyzer.


Whether searching for markers in the blood stream, or diagnosing a pathogen in urine, the Company’s SPARKS Mobile will be a portable tool for rapid diagnostics. The SPARKS Mobile will also provide an improvement in POC diagnostics and applications in countries with limited health care infrastructures and geographic limitations, both of which are of paramount importance in the combat against infectious diseases and in the fight against proliferation of endemic and pandemic diseases.  


This innovative SPARKS Mobile will allow for a fast (minutes instead of hours or days) performance of tests at the point-of-care, and will only require a test cartridge and a small number of ready-to-use solutions in preformatted quantities.  Moreover, the SPARKS Mobile will include the ability to store patient information, test data, and QC data, and transmit data through wireless connections.



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The SPARKS Mobile design goals will plan to:

 

a)

achieve a portable monitoring system, which is compatible with proven and reliable ELISA-based target system technology.


b)

expand readout capabilities to provide a mobile testing and monitoring platform.


c)

increase the economy of scale and scope of the diagnostics and monitoring platform by the development of additional utility of the device without redundant infrastructure investments (additional data acquisition of patients, additional tests for other, predominant diseases).


The basic design of the Company’s SPARKS Mobile is based on the same 510(k) cleared technology employed in its VT-1000 Desktop Analyzer and is compatible with existing Test Cartridges. However, a number of innovative features will be integrated into the design to meet customer and patient needs:

 

1.

High Infrared Light Spectrum: Multiple light source system providing variable light wave analysis into the infra-red spectrum. This diversity in light source and detection will allow for the simultaneous identification and diagnosis of a broader spectrum of different targets within the same sample and assay. It will also allow for very specific test development, without having to develop a new analyzer to read the results. 

 

2.

Easy Field Upgrades: Field software upgrades made through memory chip (SIMM) or Flash memory stick.


3.

No Change of Equipment: The same Analyzer will be used for all Target System Tests (example: Cardiac Panel., infectious disease), and will be able to be used on all future tests, allowing for training personnel only once, and displaying consistent test results on an easy to read LCD screen.

 

4.

Printer Hook-up Capability: When hooked to a printer, the SPARKS Mobile will be able to provide printed results for any Target System Test, both Qualitative (when written results must be stored with original test for HIPPA and other compliance issues), or Quantitative (measured amount analysis must be printed and maintained in the patient chart folder).

 

5.

Low Entry Cost for New Test Development and Analysis: Due to the technologies’ broad capability, a new analyzer will not have to be developed for different samples types (blood, serum, plasma, urine, soil or human skin).

 

6.

Safety, Security and Accuracy by design: For all tests, the SPARKS Mobile bar code activation system will identify the test to be analyzed.


7.

Desk to Docking Station: The SPARKS Mobile will be able to be configured with or without a desk-to-docking station. The docking station will provide a stationary platform when in use in an office or non-mobile application. It will also provide the user to set up multiple tests samples while the analyzer is processing tests.


8.

Smart Phone Capability:  The SPARKS Mobile will have many Smart Phone Capabilities including, but not limited to, Bluetooth, WiFi, MMS messaging, SMS, Memory Cards, internal memory expandable to 8GB, data transfer, and more.


PROMISE CD4: CD4-CD8 Rapid Monitoring Test


The Company initiated the development of the CD4-CD8 monitoring rapid test using an immunoassay test the Company has named PROMISE CD4, which the Company believes has the potential to enhance the testing, monitoring and treatment of AIDS patients in developing economies such as South Africa, Sub-Saharan countries, India and other nations struggling to deal with the treatment of AIDS. 


AIDS Diagnostics and Immune Status


The Company’s aim is to use markers for a disease progression instead of using the cell count method that is associated with and based on those markers. The PROMISE CD4 will include quantification of CD4-CD8 protein in either total blood or CD3+ pre-selected cell populations. This quantification can directly be used to assess an individual’s immune status.


AIDS Immune Status: Value Proposition


The treatment of AIDS patients represents a challenge in the developed world and much more so in developing countries. The current methodology to determine the status of an HIV-positive individual involves elaborate technologies to determine the immune status of an individual as well as the presence of the HIV virus in the individual’s blood (called the “viral load”).

 



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Determination of the immune status is usually performed through so-called cell counts of T-cells, in particular the determination of CD4+ cell count or the relationship of CD4 and CD3 positive cells. This diagnostic procedure requires high-tech machinery (e.g. cell counters), and well-educated laboratory personnel in a stationary laboratory setting. In addition, the cell counting method presently employed and defined by the Western medical community as the “Gold Standard” has shortcomings, which limit its reproducibility and reliability. These factors might cause changes in diagnostic procedures even within those communities in the future. The determination of the amount of virus populating the blood of a person infected with HIV is currently performed through quantitative PCR, again a method requiring stationary settings, as well as highly educated personnel and sophisticated machinery. These setting are usually not available in developing economies. While, in the Western economic environment, the medical care of HIV positive individuals and AIDS patients involves a combination of the above mentioned medical diagnostics in combination with additional, patient dependent procedures, the situation in developing countries looks to the contrary.  In South Africa, the country with one of the highest infection rates with HIV in the world, treatment is only available to a small number of infected people. Even under those medication-limited circumstances, treatment is usually administered without any diagnostic procedures concerning the immune status or the viral load of an individual in question, leading to unnecessary treatment of otherwise non-immuno-compromised individuals and the lack of treatment for others with AIDS at later progression. Countries like China have only recently begun to diagnose for HIV positive individuals, and have not moved into the AIDS diagnostic either. The same can be said for many other countries in Africa and Asia.

 

Requirements for “appropriate” AIDS diagnostics have been defined by many national and international, organizations, amongst them the World Health Organization (“WHO”), under strong influence of scientists mainly from the US and the EU. These requirements have led to the above described situation in developing counties: No appropriate diagnosis of AIDS patients caused by requirements that cannot be achieved under the given circumstances and a strong increase of HIV infection in most of these countries over the last years.


Furthermore, the lack of financial resources are limiting to the expansion of suitable points of diagnostics. Cell counts require elaborate machinery (like FACS or alike) and there are no low-cost or highly portable testing systems available to date. There is an overwhelming demand and urgent need to reduce the costs for cell counting or other methods to determine the immune status, and to increase their usefulness in non-laboratory settings.

 

In addition, the geographic and social structures of many countries require a more POC oriented approach, as opposed to the dominating centralized care found in highly populated countries in North America and Europe. Therefore, it would by highly desirable to reduce the measurements used as a guide for disease progression or treatment to more simple technologies, like an ELISA performed on a handheld device or similar.

 

For the Company and its efforts to design a handheld diagnostics device for optimal market use, this means:


·

development of a testing system which is compatible with proven and reliable ELISA based target system technology.

·

expansion of the capabilities of handheld device to provide a mobile testing platform.

·

increase the economy of the diagnostics platform by the development of additional utility of the device without redundant infrastructure investments (additional data acquisition of patients, additional tests for other, predominant diseases).

·

acceptance of the Company’s testing system as well as the platform within the medical community of African, Asian, and other countries with mounting problems in the field of HIV and other infectious diseases.


Tests for Other Diseases

 

The Company’s testing system is not limited to HIV or AIDS diagnostics. The test format has been applied in the past to viral and bacterial infections (e.g., Rubella, Rotavirus, Strep. A), and can be adopted toward other epidemics. Diseases like malaria, cholera, hepatitis, yellow fever, or West Nile virus and other viral diseases present increasing health threats to large populations in the world, with major existing problems at the stage of proper diagnosis.  The Company believes that it can adapt its VT-1000 Desktop Analyzer and SPARKS Mobile to the rapid, simple, point-of-care diagnosis of almost all of these diseases without the requirement of additional equipment. Further, the Company believes that the combination of a mobile, hand-held testing device with a large number of different tests provided by a family of cartridges will improve the ability of current health care and disease diagnostics in a fast majority of today’s underserved regions. In addition, the Target System Platform also allows for the monitoring of environmental components influencing the health of populations, including the presence of toxins in soil and drinking water as well as contamination of food supply.


Ease of Use

 

The Company’s platform provides tremendous flexibility in sample requirements, clinician training and result interpretation. The Company’s “train once” system means the clinician can now perform a number of single use tests on a wide variety of conditions with the interpretation of results consistent through the platform paradigm. The “while you watch” speed of the test development, results in a significant cost saving in time and training.

 

Application and Economy of Scale

 

The Company’s unique vacuum pump action reduces test time and ensures maximum contact with the membrane antibodies. This collection device is versatile in the number of different tests that can be incorporated. The economy of scale is provided to health care provider or any other customer group by being able to utilize a single test system for multiple tests with varies little variance in training needed. A clinician can move from one test to the next in a matter of minutes. 



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Furthermore, the capability of acquiring and transmitting patient related data in addition to the tests performed at the point-of-care will enable the Company’s SPARKS Mobile Analyzer to become the central diagnostic device in a decentralized, patient oriented, and cost-conscious environment to provide or maintain a high level of health care in the face of threatening epidemics.


Safety and Accuracy by Design

 

For all tests, the Company’s bar code activation system will identify the test to be analyzed, allowing only those medical personnel that possess that test will be aware that it is available. Without the Company’s specific Target System Test Cartridge, read by the bar code reader, the analyzer will not calibrate to that test. This precludes mistakes by the user or erroneous results by the device.

 

Each Test Cartridge bar code must be read to initialize the analyzer, and load the appropriate algorithm from the software table. This provides a level of security for patient related tests and eliminates errors based on operator’s mistakes.

 

The Company will provide a combination of innovative, fast, and inexpensive diagnostic testing products with a highly mobile data collection and transfer test reader. In this regard, the Company’s Target System is suitable for rapid, point-of-care testing in almost every environment, which includes emergency situations, remote locations within the US as well as other parts of the world, immediate response teams, personal testing in a home setting, and many more.

 

Advantageously, many different tests can be performed using the same reader, e.g., either the Company’s VT-1000 Desktop Analyzer or its SPARKS Mobile, currently in development, at any location.


Mobility

 

The Company’s mobile testing, data acquisition, and data transmission system being developed is intended to meet the needs for diagnostics in particular in areas where either no structured health care systems exist or where, due to geographic nature and population density and distribution, a more decentralized approach is necessary. The highly mobile test reader can be used in basically all environments, and will be suited to use power sources independent of an electric network (rechargeable batteries, solar panel, running on motor vehicle voltage and power supply). Furthermore, the tests can be performed within short time periods, and do not require the performing medical personnel, the physician, or the patient to return for test results or potential initiation of treatment.

 

New Product Screening Criteria

 

The Target System Platform is broken down into three categories and their associated sub-groups. The categories are:


1.

Qualitative

2.

Quantitative

3.

Specialized


The following list represents a general representation of targeted test to be developed in the area of infectious or highly contagious diseases:

 

·

Trichomoniasis

·

Chlamydia

·

Gonorrhea

·

Genital herpes (herpes simplex virus of JSV)

·

Genital warts (human papilloma virus or HPV)

·

Hepatitis B

·

H. pylori

·

Human immunodeficiency virus (HIV)

·

Lyme Disease

·

Rocky Mountain Spotted Fever

·

West Nile


Raw substances as well as fully developed and commercially available disease markers and antibodies for the diseases listed above as well as many others can be purchased by the Company from a variety of sources and incorporated into the Target System Platform.

 

This in no way represents the complete segment of Qualitative or Semi-Quantitative tests available for rapid development on the Target System Platform.

 



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New Product Identification

 

·

Track all CDC, FDA, WHO, relevant reports of medical diagnostic requirements. Provide analysis of whether the test should be Specialized, Quantitative or Qualitative.


·

Determine human capital requirements: project management, outsourcing needed political needs (if any) and social needs (affiliations with association or non-profit groups).


·

Determine the market size and utilization of device needed to address identified diagnostic needs.


·

Determine from source venders what antibodies and antigens are available to use in the Company’s device with minimal regulatory and manufacturing hurdles.


·

Perform cost analysis of device manufacture, to include: regulatory application time estimates, clinical requirements, third party and vendor involvement for regulatory support.


·

Identify and prepare pre-market distributor (government or commercial) analysis for market penetration timetable and/or government contract fulfillment.


·

Identify new partnership resources if necessary for specialty devices.


·

On all Quantitative Devices, the Company will determine the Biohazard level at which it is to perform its algorithm development. For highly contagious diseases, the Company will outsource its complete process to a certified lab.


·

In the development of standard quantitative test the Company will determine through the protocol process: how many tests must be performed for an I.R.B. for both the algorithm development (quantitative controls for each test process) and the accuracy of the variable light analysis.


·

All new quantitative tests will be videotaped during algorithm development (light source verification and reflectivity of known sample), and equivalency testing (where the Company compares its device to another like kind device).


·

All software developed for the Company’s tests, that are not modifications of existing source code, will be previewed via written outline to the FDA.


Market Opportunities


In recent years, there has been a continuing shift from the use of laboratory-based analyzers to more technologically advanced point-of-care tests that can be performed in a matter of minutes. Unlike the centralized clinical laboratory segment, which is mature and highly competitive, the point-of-care market is still a relatively early stage market. Although certain simple single analyte diagnostic tests have been developed, such tests have remained incapable of precise and highly sensitive quantitative measurements. As a result, medical tests that require precise quantization of the target analyte have remained the domain of immunoassay analyzers.

 

POC Diagnostic Market


Diagnostic tests performed outside the central laboratory or decentralized testing is generally known as point-of-care (POC). Over the years, the increasing introduction of transportable, portable, and handheld instruments has resulted in the migration of POC testing from the hospital environment to a range of medical environments including the workplace, home, disaster care and most recently, convenience clinics.


Moreover, POC test devices have contributed significantly to the growth of the overall diagnostics market over the past 10 years. As more diagnostic manufacturers pursue CLIA waiver status for their POC devices and CE Mark for POC or self-use. At the same time more decentralized test venues invest in non-waived rapid tests and instruments POC testing appears to be headed for an even bigger role in diagnosis and monitoring patient care.


The Global In-vitro Diagnostics market is expected to grow to $69.1 billion by 2017, up from $49.2 billion in 2012. The growth represents a 7% compounded annual growth rate in five years. Self-testing is the biggest trend fueling the growth. The self-testing market is poised to grow at a CAGR of 9.3% from 2013 to 2018, to reach $27.5 billion by 2018.


The growth is being driven by  devices aimed at making acute care more efficient. There is a concerted effort to reduce time spent in expensive intensive care units and in the hospital in general. More tests and technologies have been adapted to serve the needs of physician offices and home testing.


The two factors that are significant to the rapid growth of POC testing are technology advancements and health care economics. The development of new and improved technologies has resulted in the ability to make evidence-based medical decisions that improve patient outcomes and reduce patient acuity, criticality, morbidity and mortality.  Quicker diagnosis of infectious agents can also permit the earlier prescription of appropriate medications, thereby potentially shortening the duration of illness.

 



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Additionally, the economic climate is driving significant changes in the manner in which patients will be tested and how results are delivered. Recent revisions to government regulations, together with growing patient and insurer pressures on hospitals and physicians have increased incentives to reduce overall patient healthcare costs while providing a higher level of care to a greater number of patients. One cost-cutting measure is to reduce the high cost of diagnostic testing carried out in central laboratory sites.


The Target System provides the platform for the development of a series of quantitative tests for important diagnostic applications that can provide results at a patient's bedside, in a doctor's office, in the emergency room, in a clinic, in an ambulance, on the battlefield, on site agri-business locations, rural and economically disadvantaged areas.

 

The Target System expects to meet the POC diagnostic market criteria as follows:


·

Rapid turnaround time

·

Direct application of a non-critical volume or placement of sample directly into instrument

·

Disposable device or minimal maintenance required

·

Minimal technical expertise required

·

Positive identification and specimen tracking strategy that eliminates specimen identification errors

·

Simple strategy for calibration and QC

·

Transferability of data to the LIS or HIS

·

Agreement of result with accepted "Gold Standard" tests

·

Affordable cost


Immunoassays: Defined


Immunoassays are chemical tests used to detect or quantify a specific substance, the analyte, in a blood or body fluid sample, using an immunological reaction.  Immunoassays are highly sensitive and specific. Their high specificity results from the use of antibodies and purified antigens as reagents. An antibody is a protein (immunoglobulin) produced by B-lymphocytes (immune cells) in response to stimulation by an antigen. Immunoassays measure the formation of antibody-antigen complexes and detect them via an indicator reaction. High sensitivity is achieved by using an indicator system (e.g., enzyme label) that results in amplification of the measured product. Immunoassays may be qualitative (positive or negative) or quantitative (amount measured). An example of a qualitative assay is an immunoassay test for pregnancy. Pregnancy tests detect the presence of human chorionic gonadotropin (hCG) in urine or serum. Highly purified antibodies can detect pregnancy within two days of fertilization. Measuring the signal produced by the indicator reaction performs quantitative immunoassays. This same test for pregnancy can be made into a quantitative assay of hCG by measuring the concentration of product formed.


The purpose of an immunoassay is to measure (or, in a qualitative assay, to detect) an analyte. Immunoassay is the method of choice for measuring analytes normally present at very low concentrations that cannot be determined accurately by other less expensive tests. Common uses include measurement of drugs, hormones, specific proteins, tumor markers, and markers of cardiac injury. Qualitative immunoassays are often used to detect antigens on infectious agents and antibodies that the body produces to fight them. For example, immunoassays are used to detect antigens on Hemophilus, Cryptococcus, and Streptococcus organisms in the cerebrospinal fluid (CSF) of meningitis patients. They are also used to detect antigens associated with organisms that are difficult to culture, such as hepatitis B virus and Chlamydia trichomatis. Immunoassays for antibodies produced in viral hepatitis, HIV, and Lyme disease are commonly used to identify patients with these diseases.


Quantitative Immunoassay Analysis

 

Immunoassays are powerful techniques for understanding the role of specific components in complex systems. They work on the basis of the recognition of a specific component (target X) by an antibody or equivalent (affibody, RNA aptamer, recombinant antibody, etc.), which results in the production of a detectable signal. In most cases immunoassays are qualitative, providing information in terms of signal intensity. What is really wanted, however, is quantitative assay providing information in absolute chemical terms, namely the concentration of target X.

Quantitative Immunoassays would allow:


·

Detection of the absolute concentration of components

·

Reduce inter-assay variation in data

·

Permit successful statistical analysis of smaller sample sets

·

Permits direct comparison of data generated at independent sites or occasions.


Quantitative Immunoassays are simple to construct. They require the simultaneous analysis of experimental (or test) samples and calibration standards. The signal intensity generated by calibration standards of known concentration permits conversion of the signals generated by the test samples into absolute units of concentration.


Calibration curve


A calibration curve (or standard curve) establishes the relationship between the amount of material present and the signal intensity measured. In the case of immunoassays, this would represent the relationship between the epitope concentration and the signal intensity obtained. This relationship is often non-linear, and in many applications displays a dynamic range (or response range) of approximately two orders of magnitude in the concentration of target X.



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To perform a Quantitative Immunoassay, a set of "calibration standards" containing the epitope in various concentrations, are deployed in the immunoassay alongside experimental "test samples". Densitometry is performed on all data from the assay, and curve fitting used to define the relationship between epitope concentration and signal intensity. This mathematical relationship is then used to convert the signals generated by experimental samples into concentration of target X, which in the Company’s experience is highly accurate.


Molecular Identity of Calibration Standards


For Western Blot applications, a calibration standard is a molecule which contains the epitope feature of an immunoassay covalently bonded to a protein of known molecular weight. Two configurations of this structure are possible (Figure 1), where the epitope structure is either linked to the amino acid backbone (Fig 1a) in the form of a fusion protein or linked to a side chain of a specific amino acid (Fig 1b).

[f20151231prlx10krev9final002.jpg]

Figure


Figure 1: Schematic representation of calibration standard molecules.


A set of calibration standards to common epitope tags (His6, c-myc, HA, FLAG, AU1, AU5, glu-glu,) was analyzed by SDS-PAGE/Western blotting (detected via the His6 tag). A single band of 55kDa was detected, and the intensity of signal decreased with decreasing calibration standard loading as expected (Figure 2).


[f20151231prlx10krev9final003.jpg]

Figure


Figure 2: Immunodetection of a serial dilution of His6-calibration standard.


Densitometry of the data was performed and the data plotted to define the relationship between epitope amount and signal intensity (Figure 3). Mathematical fitting of the data was performed, with the best fit achieved by "one site-specific binding" analysis (GraphPad Prism) as shown in Figure 3. An excellent fit of the data was achieved using 6 calibration standard concentrations each analyzed in quadruplicate. Similar excellent fits could also be achieved by analysis of fewer standards, with indistinguishable results obtained from 3 calibration standard samples analyzed in triplicate.

[f20151231prlx10krev9final004.jpg]

Figure


Figure 3: Mathematical description of a calibration curve.


To determine the epitope concentration of an experimental sample, the mathematical description of the calibration curve is rearranged to calculate epitope concentration from raw signal intensity.  Figure 4 displays the quantitative measurement of three "test" samples. Test samples of 2pmol and 0.5 pmol were analyzed and the results obtained were 2.153± 0.127 pmol (mean ± standard error, n=4), 0.552± 0.045 pmol (mean ± standard error, n=4), confirming the accuracy of the measure (Figure 4). Samples should only be analyzed which fall within the calibration range, as errors are higher for observations beyond the confines of the calibration curve e.g. 0.125 pmol in this example.

[f20151231prlx10krev9final005.jpg]

Figure


Figure 4: Accuracy of Quantitative Immunoassays.



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In summary, Quantitative Immunoassays are easy to construct and offer several valuable benefits to the researcher. They permit calculation of the absolute concentration of the component of study with high accuracy (error <10%) and high reproducibility. This enhances the quality of research results and also the productivity of research programs by facilitating the direct comparison of data obtained on separate occasions.


The Immunoassay Market

 

Overview


Immunoassays have been used since the mid-1960’s by hospitals, laboratories and research facilities. With the widespread usage of blood and other biological specimen tests for disease and medical condition diagnoses, there is a growing need for new and better technologies to achieve fast and accurate test results.  Though the traditional laboratory testing of blood samples has been an acceptable form of screening for certain conditions for quite some time, it has only been in the last twenty years that rapid POC qualitative (yes/no) and semi quantitative (based on predetermined cutoff levels) testing has become an acknowledged source of accurate information. 


Rapid Immunoassay Test


With continuing breakthroughs in detectable markers in the body that can identify the presence of a growing number of diseases and conditions, coupled with the advancements in rapid detection technologies, the tools available to medical professionals is quickly becoming a booming industry.  


Rapid immunoassays generally come in two configurations: Lateral Flow and Flow-Through.  Examples of the rapid immunoassay test are the home pregnancy test and the on-site drug screening test. While both of these examples are based on urine specimens, many of the new rapid screening devices have been developed to use blood as the specimen. The different types of rapid immunoassay test include:


·

Lateral Flow Test

·

Solid Phase Test

·

Agglutination Assay

·

Flow Through Immunoassay


Lateral Flow Tests


A popular testing method used by both professional and over-the-counter tests, the lateral flow test is quick and efficient. Depending on the specific test kit, a sample of urine, whole blood, blood plasma, and in some cases feces, may be mixed with diluting substances, reactive agents or other solutions that are provided for the conduct of the test. Most of the tests are classified as solid phase enzyme immunoassays.


Most home pregnancy tests utilize lateral-flow technology, whereby urine is absorbed through the exposed sample application pad and is allowed (by natural wicking) to migrate to the analytical membrane and react with an embedded agent designed to change color if hormones associated with pregnancy are present in the urine. This is a direct specimen application and does not require dilution or other agents to be added for results to appear.  The typical finished product in general use encases all but the application pad in plastic with view openings for the test line or dot and the control line.  

 

Lateral flow devices have been used for home pregnancy tests, drugs of abuse testing in clinical laboratories and, more recently, for home use. Manufactured in continuous membrane strips cut to the desired length and batch tested for accuracy, the manufacture of test kits is highly automated and inexpensive, making lateral flow tests well suited for mass market applications.


Lateral flow devices, however, can suffer in performance when the sample being tested is not handled within strict conditions. Test samples may be affected by environmental conditions (barometric pressure, temperature and humidity), thereby requiring special care in sample preparation, exact dilution controls and controlled time for the test to develop properly. Test development time, for example, can vary from a few minutes (3 to 5) for urine-based tests and up to 20 minutes for whole blood or plasma.

  

Solid Phase Tests

 

Solid phase assays include the so-called "dipstick" or "dipstick comb" tests. As its title suggests, the detection materials are in a solid state affixed to a solid, non-porous base. The dipstick is then incubated with the patient’s specimen.  


The solid phase tests use urine, saliva, serum, plasma, or whole blood as its specimen and the same patient can be tested for multiple parameters with a single assay.  Results are usually provided in an hour or less.  The sensitivity and accuracy is generally lower than the flow through and lateral flow tests.


Agglutination Test

 

The basic principle of an agglutination test is the formation of clumps (agglutination) of small particles coated with antigens when exposed to antibodies specific for the antigen. The test particles and the patient antibodies combine to form a visible precipitate.  This usually is observed under a microscope.



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Some of the advantages of the agglutination test are that its individual test cost is low, the results are semi-quantitative, and it takes a relatively short time to obtain results.  However, results can vary as the test reaction depends upon careful control of the test re-agents and environmental conditions.  The sensitivity/accuracy is lower than the flow through or lateral flow tests.

 

Flow-Through Immunoassay

 

The flow through test procedure requires a number of steps, and includes a vacuum device that deposits fluid containing the test sample through a porous membrane and into an absorbent pad. A second layer, or sub-membrane, inhibits the immediate back-flow of fluids, which can obscure results.


Positive, uniform deposition of test samples on a membrane containing selected diagnostic reagents provides for a flexible, inexpensive and reproducible platform technology to test for a large number of diseases.

 

The flow-through platform technology can be used to detect both antibodies and antigens. To perform the test, a sample is applied to the membrane followed by a wash step, the addition of the signal reagent, and a second wash to clear the membrane. The solutions can be added as rapidly as the previous liquids are absorbed into the cassette.

 

The time it takes for a test to display results is subject to the viscosity of the sample, which can be affected by environmental conditions, such as humidity and barometric pressure, further interfering with the time the test takes is the amount of sample used.


Limitations


Each of the screening devices described above have limitations in their utility and range of application. Many screening devices have been adopted from their use in clinical laboratories and, when applied to POC application, required special handling of the specimen samples (blood, urine, and feces) and decreased sensitivity and/or specificity.


Competition

 

There are approximately 40 to 50 companies in the point-of care (“POC”) diagnostic industry in the U.S. and approximately another 100 outside the U.S. The POC space can be broken down into various sub-sets such as molecular biologist developing reagents, and markers to diagnostic equipment and test development companies, as well as companies who do neither and focus on marketing tests, equipment and assays.  Most notably in the POC space are the large pharmaceutical companies such as Bayer, Roche, Abbot Labs and others.  The Company’s specific competitive landscape is tied to its patent pending process involving its SPARKS Mobile Analyzer and Target System Platform In-Vitro Tests.  There are a number of companies developing mobile devices to perform a host of health industry-related services and the Company believes that more companies will enter the mobile diagnostic space in the next few years.   The industry has yet to develop a standardized point-of-care immunoassay platform for any device to be integrated into.  The goal of the Company’s SPARKS Mobile Analyzer is to deliver a device that adds immediate value to health providers, patients and health insurance companies.  The Company’s primary goal is to create a mobile platform that could integrate and utilize the flow-through process of the Company’s Target System Platform and offer the healthcare provider a system that is fully interoperable and ubiquitous with a potentially large number of in vitro tests.  There are other test platforms in the space but the Company has filed a patent on the process of its SPARKS Mobile Analyzer and its TADS Cartridge.  There can be no assurance that the Company’s POC device will prove to be competitive with the other POC devices under development.


Until the Company secures a minimum of two million dollars ($2,000,000) of additional capital to operate for the next eighteen months the Company will remain highly vulnerable from the Company’s competition.  The Company anticipates the need for a minimum of an additional four million ($4,000,000) dollars of investment capital will be required for it to achieve its goal of developing a commercially viable rapid point-of-care CD4-8 immune status test and its proposed mobile SPARKS Mobile version of its FDA Approved VT 1000 Desktop Analyzer.  There can be no assurance that such amount will prove adequate to develop the Company’ products. Furthermore, the Company’s competition has significantly greater resources that it can deploy and anytime to head off competition.


In Vitro Diagnostic Sales Leaders


·

Roche Diagnostics, Switzerland www.roche.com

·

Abbott Diagnostics, Abbott Park, IL 60064 www.abbott.com

·

Siemens Medical Solutions Diagnostics, Deerfield, IL www.diagnostics.siemens.com

·

Johnson & Johnson, Ortho Clinical Diagnostics (OCD) division, Raritan, NJ www.jnj.com

·

Beckman Coulter Inc., Fullerton, CA www.beckmancoulter.com

·

Becton, Dickinson & Co., Franklin Lakes, NJ www.bd.com

·

bioMerieux SA, Marcy l’Etoile, France www.biomerieux.com

·

Bio-Rad Laboraties Inc., Hercules, CA www.bio-rad.com

·

Quidel Inc., San Diego, CA www.quidel.com

·

Alere, Inc. Orlando, FL www.alere.com



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Barriers to Use

 

The main barriers and constraints to the use of rapid diagnostic tests can be put into three main categories:  

 

·

Acceptability Rapid tests need to be acceptable to policymakers, clinicians, and patients. Tests need to have sufficient sensitivity and specificity and need to have an adequate predictive value. Ease-of-use is critical for point-of-care use by clinicians. Culturally appropriate specimens and credible results are important if rapid tests are to be accepted by patients.


·

Affordability:  Many rapid diagnostic tests are more expensive than the tests or syndromic algorithms they are intended to replace. Decreasing per-test costs, carefully designing diagnostic algorithms, and educating end users about the cost-savings of more efficient use of therapeutic drugs are important means of maximizing rapid test affordability.


·

Availability:  Rapid diagnostic tests are not always available in developing countries. Most tests have limited shelf lives, and many countries have weak public and private sector procurement and distribution systems. The consistency and quality of imported tests can also be issues. To address these constraints, local government regulations, quality assurance, shelf life testing, and distribution systems all need to be assessed and improved. The Company will initially control all of the manufacturing of its Target System test cartridges and Desk Top Analyzer and SPARKS Mobile Analyzer in conjunction with Montecito.


·

Reimbursement:  The ability to gain scale in reimbursement across a wide number of test is still a challenge for point of care diagnostic companies such as our Company. 

 

Intellectual Property


The Company’s products include a previously FDA-cleared VT-1000 Desktop Analyzer and more than a dozen previously FDA 510(k)-cleared tests.  The Company acquired the exclusive rights in perpetuity to a number of pending USPTO Patent Applications on the Company’s products in the area of Infectious Diseases, as well as methods for future test development, through a License Agreement with Montecito BioSciences, Ltd.  


Parallax intends to seek Intellectual Property protection for all supporting products such as novel biomarker candidates, antibodies, proteins, and diagnostic tests surrounding the Company’s core indication areas, in order to create a barrier to entry for its competitors.


The Company retained the services of the Intellectual Property Network to provide Intellectual Property protection recommendations for all of the Company's Intellectual Property, open patent applications and products, both domestically and internationally.  IPN informs the Company and its shareholders of the accurate and current state of the commercial patent pending coverage, and where possible to identify the existence of novel and patentable inventions present in the current innovation initiative.  IPN concluded that the Company has a strong patent portfolio protecting its business, and recommended that the Company aggressively proceed with additional patent applications to protect the Company’s inventions and innovations.   


Key Patentable Concepts


·

Sample Analysis

·

Plurality of Isolated Antibodies to a Plurality of Cognate Antigens

·

Identifying Drugs, Targeting Moieties or Diagnostics

·

Determining the Immune Status of a Subject

·

Flow Through Testing System with Pressure Indicator

·

Novel biomarker candidates

·

Antibodies

·

Proteins

·

Diagnostic testing


Parallax / Montecito BioSciences, Ltd. Patents and Applications


Portfolio Overview


Issued Portfolio / Applications Pending or Abandoned


1a. ABANDONED[1]: US11/924,033 “Portable Apparatus for Improved Sample Analysis”


The present invention is an improved apparatus for sample analysis. The apparatus employs an assay component containing a membrane having one or a plurality of analyte-specific binding agents attached thereto, a means for absorbing liquid, and a piston means for drawing analytes through said membrane into said means for absorbing liquid. The apparatus is configured to be portable and provide a detector for detecting binding of an analyte to an analyte-specific binding agent, a plurality of data acquisition components, and a computer for integrating, analyzing and storing the detected analyte specific binding and acquired data.



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This Patent Application(s) cover the Company’s SPARKS Mobile hand held analyzer in conjunction with the Target System Test Cartridge. The family of cases under US11/924,033 filed October 25, 2007; and US60/863,241, filed October 27, 2006, disclose and claim the handheld TargetAnalyzer device, which is capable of housing and analyzing two assay cassettes. The claimed device optionally features wired or wireless data transfer and multiple data acquisition components including a keypad, a touch-pad, a barcode wand and / or a finger print reader.  On August 23, 2013 the Company was notified that its Chinese Patent Application No. 200780039901.X “Portable Apparatus for Improved Sample Analysis” had been granted by the States Intellectual Property Office of the Peoples Republic of China. Patents were also issued in Hong Kong and Macao.  The Company filed in India under a New Indian Patent Application based on the PCT Application No. PCT/US2007/082499 The case is currently pending.


Following is the family of cases under US11924,033 and US60/863,241:


1a. US11/924,033 filed October 25, 2007; US60/863,241, filed October 27,2006.

1b. Issued Patent: US Patent No. 8,920,725 - US13/248,307 filed September 29, 2011

1c. Issued Patent: US Patent No. 9,170,258 - US14/553,011 filed November 25, 2014

1d. Foreign Patent Granted: China CNZ200780039901.X / CN 1015558302A filed October 25,2007

1e. Foreign Patent Granted: Hong Kong No. HK1137813 / HK10103654.9 filed October 25, 2007

1f. Foreign Patent Granted: Macau MO J/001298 filed October 25, 2007

1g. Pending Foreign Application No: IN785/MUMNP/ 2009 filed October 25, 2007. This case is currently pending.


 [1]  Patent Application US11/924,033 was being prosecuted worldwide.  The now abandoned EPO Application No. 07854420.2 was filed in the following designee countries; Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Monaco, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Liechtenstein, Turkey and the United Kingdom.  


2a. ABANDONED US2006051348 - 11/221,252 “Method of Producing a Plurality of Isolated Antibodies to a Plurality of Cognate Antigens”


The present invention relates to a method for producing high affinity antibodies that are antigen-specific. The method involves binding a plurality of antibody-producing B-cells from a mammal to a plurality of cognate antigens; sorting the bound antibody-producing B-cell and cognate antigen; amplifying nucleic acid sequences encoding each antibody, or fragment thereof, from the B-cells; and expressing the each antibody in a protein expression system. Antibodies produced in this manner are useful in diagnostic and therapeutic applications. This family of cases covers a technique for obtaining a population of antibodies produced by B-cells, without any a priori information about the population of antibodies, and use of the same in an array for profiling antigen expression.


2a. US11/221,252, filed September 7, 2005; US60/608,526, filed September 9, 2004

2b. Pending: US13/253,366 filed October 5, 2011. This case is currently pending.


3a. ABANDONED US2006052948 - 11/221,038 “Method of Identifying Drugs, Targeting Moieties or Diagnostics”


The present invention relates to a method for identifying a binding agent or epitope for use in drug design, drug targeting or diagnostics. The method employs contacting and sorting binding agents and cognate epitopes from collections thereof, characterizing the binding agent and cognate epitope, detecting the level or location of the epitope in a sample using the binding agent, and correlating the level or location of the epitope in the sample with the presence or stage of a disease or condition to identify novel drugs, targeting moieties, or diagnostic agents. This family of cases covers a technique for obtaining a population of antibodies that specifically binds to a corresponding population of antigens, without any a priori information about either population. The antigens identified by the method are subsequently characterized and correlated with the presence or stage of a disease or condition there by serving as a target for drug design, drug targeting or diagnostics.


3a. US11/221,038, filed September 7, 2005; US60/608,342, filed September 9, 2004.

3b. Pending: US Application Serial No. US12/769,036, filed April 28, 2010. This case is currently pending.


4a. Strategic Abandonment: US11/856,925 “Method for Determining the Immune Status of a Subject”


The present invention is a method for using levels of soluble Clusters of Differentiation (CD) proteins, or cell surface-localized CD proteins extracted from T lymphocytes for determining the immune status of a subject. The present invention also a kit containing a CD protein extraction means and at least one antibody which specifically binds a CD protein for use in carrying out the method of the invention. This family of cases covers a technique and kit for assessing immune status, e.g., in HIV patients, based upon the amount of soluble or surface-localized CD3,CD4, and  or CD8 protein present in a patient sample. This method and kit is an alternative to conventional cell sorting technologies.


4a. US11/856,925 filed September 18,2007; US60/845,395, filed September 18, 2006.

4b. Pending: US Application Serial No. 14/492,641 filed September 22, 2014. This case is currently pending.




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5a. Closed: PCT/US14/35073 / US61/814,916 Title: "Flow Through Testing System with Pressure Indicator"


This family of cases covers an improved assay cassette with pressure-sensitive microcapsules for ensuring that a sufficient reduction in pressure is achieved there by maximizing contact between the sample and analytic compound. A device for performing immunoassays on analytes. The device includes an immunosorbent membrane, an absorbent material, a piston component located below said absorbent material to draw analytes in a sample through the immunosorbent membrane into the absorbent material, and discrete groups of pressure-sensitive microcapsules located on the immunosorbent membrane.


5a. PCT/US14/35073, filed April 23, 2014; US61/814,916 filed April 23, 2013.

5b. Pending: US Application Serial No: 14/786,272 filed October 22, 2015. This case is currently pending.          


Open Applications available for continuation filings:


2b. US13/253,366 - Title: “Method of Producing a Plurality of Isolated Antibodies to a Plurality of Cognate Antigens”

3b. US12/769,036 Title: “Method of Identifying Drugs, Targeting Moieties or Diagnostics”

4b. US14/492,641 Title: “Method for Determining the Immune Status of a Subject”

5b. 14/786,272 Title: "Flow Through Testing System with Pressure Indicator"


For further information on the exclusive license of these Patent Applications, and the complete text of the License Agreement and subsequent Modification, please refer to Exhibits 10.20 and 10.22, respectively, to the Company’s Current Report filed November 15, 2012 on Form 8-K.


There can be no assurance that the Company will be granted patents for any of the patent applications it has filed with the USPTO.


Additional Potentially Patentable Concepts


US20140280136 Platform for optimizing data driven outcomes


A computer based method for tracking outcome specific data specifically for optimizing, managing, and tracking data driven outcomes. Process utilizes a multi-dimensional platform to facilitate data-driven outcomes processes through assessment, goal development, data tracking, graphing, and re-evaluation. The process allows for optimization of best practices, successful actions, and success based plan execution, which is identified through automatic data-mining and analysis as well as user specified parameters, algorithms, and analytics.  The process can be utilized by a client, patient, student, service provider, program, product, service, device, organization, business, department, or so forth.  The tool can be utilized across various industries for client behavior management, educational instruction, school improvement activities, program evaluation, organizational key performance indicators, financial management, weight management, tracking insurance claims, or so forth. Also published as WO2014144749A1 Platform for optimizing data driven outcomes. Also published as GB2526749 Platform for optimizing data driven outcomes  


14/979,889 Remote User Monitoring System


Application covering a System, Device and Computer Program tied to a product for continuous monitoring of the status of a user.  Multiple user biometrics can be monitored at the users preferred point of monitoring.  The status of a user is determined in response to sensing one or more biometrics indicators.  The biometric readings generate a series of questions related to the status of the user and are communicated to an administrator or a medical professional. Voice recognition is also utilized speakers, microphones, and sensors within the system may be utilized to determine relevant patient information and doctors or administrators communicate with the user, and receive meaningful feedback.  The status of a patient is determined based on the answers to the one or more questions and the proper instructions can be determined at the administration level.   The monitoring systems also includes any number of spectrums for determining distinct information about the location and condition of the user (e.g., hyper-spectral imaging, thermal, infrared, X-ray, etc.) and as an additional means to monitor the overall activity levels of a patient. The monitoring systems also includes various cameras, which can be positioned in the location and also include an electronic nose for detecting odors or flavors in addition to any number of chemosensors or gas chromatography devices for detecting odors  Integrated sensors are configured to detect particular odors.  For example, rotting food, mold, bodily fluids or waste, or other smells indicative of a potential problem may be sensed and reported.


14/979,742 Remote Medication Delivery Systems


A central facility is set up to remotely serve a single patient or multiple users to ensure that their medication and health monitoring needs are met. The status of a user is determined in response to sensing one or more biometrics indicators.  The biometric readings generate a series of questions related to the status of the user and are communicated to an administrator or a medical professional. A remote diagnosis can be performed and the patient’s medication and other medical items are distributed via pneumatic tube network that is utilized to pneumatically drive containers to a location of the user for delivering medication.  In another embodiment, one or more drones (flying or land based) may be utilized to deliver the medications. The medications and regimens may vary by patient and include one or more different types, dosages, categories, or delivery types. Based on a patient’s medication regimens and medication protocol information is cross referenced with a medication reconciliation platform that indicates to the system a user is scheduled to receive medication.  A route between a dispensary storing the medication and the location of the user is determined and the medication is delivered to a medication lockbox at various distribution intervals including predetermined schedule or based on a patient need or prescription requirements.



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Expired Patents:


The Target System and certain of its related components were previously issued patents by the USPTO.  The following previously-issued patents have expired:  


USPTO Patent #

Description

Date Filed in US

Date Expired

US4,748,042

Target Ringing & Spotting Machine (method and Apparatus for Imprinting membrane with pattern of antibody)

May 31, 1988

May 31, 2008

US4,797,260

Target Cassette (Antibody testing system)

January 10, 1989

January 1, 2009

US5,137,691

Target Cassette with Removable Air Gap (Antibody testing system with removable air gap)

August 11, 1992

August 11, 2012


The Company’s Previously FDA-Cleared Tests


The Company acquired the exclusive rights in perpetuity to the following FDA-approved 510(k) tests (the “Tests”) through an Assignment Agreement with Montecito BioSciences, Ltd.:

No.

Test/Device Name

510(k) Number

 

No.

Test/Device Name

510(k) Number

1

Rotacube (Rotavirus)

K884017

 

14

First Sign (Pregnancy, Hcg)

K973208

2

Rubella-Cube TM

K892051

 

15

Target Hcg

K914303

3

Cmv-Cube TM

K884842

 

16

Target Quantitative Hog One Step

K903937

4

Target Quantitative Hcg

K890131

 

17

V-Trend Target Rf Test

K904105

5

Target Strep A (Streptococcus Spp.)

K880460

 

18

Blue Dot Test for Pregnancy

K884017

6

V-Trend Target Im Test (infect mononucleosis)

K890041

 

19

Target Cocaine Metabolites-R Test

K910122

7

Target Reader

K885254

 

20

Target Cocaine Metabolites-V Test

K910123

8

Target Cardiac Ck-Mb

K890295

 

21

Target Cannabinoids-R Test

K910893

9

Target Cardiac Troponin 1

K972094

 

22

Target Cannabinoids-V Test

K910892

10

Target C-Reactive Protein Test

K892231

 

23

Target Amphetamines/Methamphetamines-R Test

K910739

11

Target C-Reactive Protein Test

K890423

 

24

Target Amphetamines/Methamphetamines-V Test

K910740

12

Target Myoglobin

K963680

 

25

Target Opiate-R Test

K890978

13

Target Aso Test

K910073

 

26

Target Opiate-V Test

K890979

 

For further information on the exclusive rights to these Tests, and the complete text of the Assignment Agreement and subsequent Modification, please refer to Exhibits 10.19 and 10.21, respectively, to the Company’s Current Report filed November 15, 2012 on Form 8-K.


It is expected that after successful re-introduction of the Target System and the introduction of its novel PROMISE CD4 immune status test, additional tests will be developed and protected by the Company. Generally, the Company and Montecito BioSciences, Ltd., will own improvements to the basic technology platform in exclusivity.


Trademarks


The Company will also utilize trademark applications to protect its Intellectual Property that may not be suitable for patent protection. Unlike patent applications, which in many cases must be filed in advance of a particular date, there is no specific date by which a trademark application must be filed. Instead, the time constraint is in a different direction. In the United States, an ordinary so-called "use" trademark application can only be filed after the goods or services have been in interstate commerce.

 

Government Regulations

 

The long legal journey toward medical device regulation began with the Pure Food and Drugs Act of 1906.  Medical devices were not included, as no one envisioned how technology would grow increasingly complex, and would ultimately require regulation.



32



The Medical Device Amendments of 1976 gave FDA authority to ensure the safety and effectiveness of a range of life-saving medical devices, while also protecting the public from fraudulent devices.  The Amendments:

 

·

defined a medical device,

·

established three device classes (I, II, and III),

·

identified pathways to market,

·

established Advisory Panels, and

·

set clinical investigation requirements.


Subsequent legislation strengthened the FDA’s regulatory authority.  The following table identifies the legislation and significance for the Major Medical Device:  

 

Legislation

Significance

Safe Medical Devices Act of 1990

·

established Quality System requirements

·

supported post market surveillance

·

allowed FDA discretion for PMAs brought to panel

FDA Modernization Act of 1997

·

supported for early collaboration, expanded Class I and Class II exemptions

·

set the "least burdensome provision"*

·

supported dispute resolution

·

established evaluation of automatic Class III designation (giving the sponsor the opportunity to request lower classification due to a minimal risk device, known as "de novo" review)

·

mandated free and open participation by all interested persons

Medical Device User Fee and

Modernization Act (MDUFMA) of 2002

·

established a fee schedule for most types of device submissions to achieve shorter review times

·

requires FDA to include pediatric experts on the panel for a product intended for pediatric use

FDA Modernization Act of 2007

·

reauthorized and expanded MDUFMA


The least burdensome provision allows industry and FDA to consider the least burdensome appropriate means of evaluating a device’s effectiveness when there is a reasonable likelihood of its approval. The intent is to help expedite the availability of new device technologies without compromising scientific integrity in the decision-making process or FDA's ability to protect the public health. This provision does not lower the standard for premarket clearance.

 

Medical Devices: Defined

 

The definition has several components. A medical device:

 

·

diagnoses, cures, lessens, treats, or prevents disease

·

affects the function or structure of the body

·

does not achieve primary intended purposes through chemical action

 

FDA's Center for Devices and Radiological Health regulates companies that design, manufacture, repackage, relabeling, and/or import medical devices into the United States. The agency does not regulate the practice of medicine – how and which physicians can use a device. The only exception is FDA's regulation of mammography facilities under the Mammography Quality Standards Act.


Combination Products

 

Combination products are therapeutic and diagnostic products that combine drugs, devices, and/or biological products. The term acknowledges the role technological advancements have made in merging medical product types. Examples of combination products include a drug-eluting stent, a nicotine patch, and surgical mesh with antibiotic coating, prefilled syringes, and a steroid-eluting pacing lead.

 

Combination products raise regulatory challenges because they involve components that were normally regulated under different types of authorities and often by different FDA Centers. Differences in regulatory pathways for each component can affect the regulatory processes for all aspects of product development and management, including preclinical testing, clinical investigation, marketing applications, manufacturing and quality control, adverse event reporting, promotion and advertising, and post-approval modifications.




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Three classes of regulatory control

 

The three device classes are based on the degree of regulatory control necessary to ensure their safety and effectiveness:

 

Class I:

devices present a low risk of harm to the user and are subject to general controls that are sufficient to protect the user. Most are exempt from the regulatory process.

 

Examples: non-powered breast pumps, elastic bandages, tongue depressors, examination gloves, most hearing aids, arm slings, microbial analyzers, keratoscopes

 

Class II:

devices are more complicated and require special controls for labeling, guidance, tracking, design, performance standards, and post market monitoring. Most require Premarket Notification 510(k).

 

Examples: powered wheelchairs, CT scanners, and contact lens care products, endolymphatic shunts

 

Class III:

devices usually sustain or support life, are implanted, or present potential unreasonable risk of illness or injury. They have the toughest regulatory controls. Most of these devices require Premarket Approval because general and special controls alone cannot reasonably assure their safety and effectiveness.

 

Examples: pacemakers, implanted weight loss devices, non-invasive glucose testing devices, medical imaging analyzers, cochlear implants, breast implants

 

FDA Review of Medical Devices

 

Investigational Device Exemptions (IDE

 

An IDE allows an investigational device to be used in a clinical study to collect the safety and effectiveness data required for a Premarket Approval (PMA) application or a Premarket Notification (510(k)) submission to FDA. Both FDA and an Institutional Review Board (IRB) must approve clinical studies with devices of significant risk before the study can begin. Studies with devices posing non-significant risk must be approved by an IRB before the study can begin.

 

FDA observes a 30-day review period for IDE applications. The agency focuses its review on the data provided to demonstrate the safety and anticipated benefits of the device for use in humans, as well as the scientific validity of the proposed clinical trial protocol. 


Following clinical studies, a device’s journey to market can take one of four major pathways:


1.

Investigational Device Exemptions (IDE)

2.

Premarket Notification (510(k))

3.

Premarket Approval Application (PMA)

4.

Humanitarian Device Exemption (HDE)


Premarket Notification (510(k))

 

510(k) is required when demonstrating substantial equivalence to a legally marketed device, when making significant modifications to a marketed device, and when a person required to register with FDA introduces a device for the first time. If a device requires the submission of a 510(k), it cannot be commercially distributed until the FDA authorizes it.

   

Substantial Equivalence

 

A device is substantially equivalent (SE) if it has the same intended use and same technological characteristics as a legally marketed device, known as the predicate. A legally marketed device:


1.

was legally marketed prior to May 28, 1976 ("pre-amendments device"), for which a PMA is not required

 

or

2.

was reclassified from Class III to Class II or Class I,

 

or

3.

was found SE through the 510(k) process


Applicants must compare their device to one or more similar legally marketed devices and make and support their SE claims. If the device is SE to a predicate, it is placed in the same class. If it is not SE, it becomes non-SE and is placed into Class III.


Examples of 510(k)s include x-ray machines, dialysis machines, fetal monitors, lithotripsy machines, and muscle stimulators.

 

Premarket Approval (PMA)

 

PMA refers to the scientific and regulatory review necessary to evaluate the safety and effectiveness of Class III devices or devices that were found not substantially equivalent to a Class I or II predicate through the 510(k) process.



34



PMA is the most involved process. To reasonably assure that a device is safe and effective, PMA requires valid scientific evidence that the probable benefits to health from the intended use of a device outweigh the probable risks, and that the device will significantly help a large portion of the target population. Sources of valid scientific evidence may include well controlled investigations, partially controlled studies, historical controls, well documented case histories by qualified experts, and robust human experience.

 

Independence is an important concept for PMAs, meaning that each PMA should establish the safety and effectiveness of the device under review, and that data about one device cannot be used to support another.  Examples of PMAs include digital mammography, minimally invasive and non-invasive glucose testing devices, implanted defibrillators, and implantable middle ear devices.


Summary Comparison of 510(k) and PMA


510(k) Submissions

PMA Submissions

·

primarily for Class II devices

·

a Class I or II pre-amendment or legally marketed device (predicate) exists

·

third party review option is available for devices not requiring clinical data

·

documented proof of Substantial Equivalence to a predicate is required

·

primarily for Class III devices

·

a Class I or II pre-amendment or legally marketed device (predicate) does not exist

·

device is life supporting and/or has potential risk to patient

·

documented safety and effectiveness data for the device is required

 

Humanitarian Device Exemption (HDE)

 

An HDE is a device that is intended to benefit patients by treating or diagnosing a disease or condition that affects fewer than 4,000 individuals in the United States per year. HDEs are exempt from requirements to demonstrate effectiveness. Still, they must pose no unreasonable risks, or, at least, the probable benefits should outweigh the risks. And the device must be used at a facility with an Institutional Review Board.

 

HDEs provide a powerful incentive for device manufacturers to develop devices that help diagnose or treat patients with rare conditions. Otherwise, a company’s research and development costs would likely exceed the market returns for serving such small patient populations.

 

Examples of HDEs include a fetal bladder stent, iris replacement, radioactive microspheres for cancer treatment, and semi-constructed finger joints.

 

Post-Approval Studies

 

The FDA can impose requirements at the time of approval of a PMA or HDE, or by regulation afterwards. One requirement may be the need for post-approval studies. The CDRH Post-Approval Studies Program helps ensure that well designed post-approval studies are conducted effectively and efficiently and in the least burdensome manner. Post-approval studies should not be used to evaluate unresolved premarket issues that are important to the initial establishment of device safety and effectiveness.


With post-approval studies, FDA can evaluate device performance and potential problems when the device is used more widely than in clinical trials and over a longer period of time. This allows FDA to build in accountability and gather essential post market information, including:

 


·

longer-term performance of the device (for example, effects of re-treatments and product changes)

·

community performance (clinicians and patients)

·

effectiveness of training programs

·

sub-group performance

·

outcomes of concern – real and potential


Manufacturing


The Company does not intend to manufacture in house for at least three years, with the exception of prototype and small batch production of tests for clinical trials and in-house testing.  The Company is required to use manufacturers who operate under Good Manufacturing Practices (“GMP”).


A GMP is a production and testing practice that helps to ensure a quality product. Many countries have legislated that pharmaceutical and medical device companies must follow GMP procedures, and have created their own GMP guidelines that correspond with their legislation. Basic concepts of all of these guidelines remain more or less similar to the ultimate goals of safeguarding the health of the patient as well as producing good quality medicine, medical devices or active pharmaceutical products. In the U.S. a drug may be deemed adulterated if it has passed all of the specifications tests but is found to be manufactured in a condition which violates current good manufacturing practice guidelines. Therefore, complying with GMP is a mandatory aspect in pharmaceutical manufacturing.



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Although there are a number of them, all guidelines follow a few basic principles:


a.

Manufacturing processes are clearly defined and controlled. All critical processes are validated to ensure consistency and compliance with specifications.

b.

Manufacturing processes are controlled, and any changes to the process are evaluated. Changes that have an impact on the quality of the drug are validated as necessary.

c.

Instructions and procedures are written in clear and unambiguous language. (Good Documentation Practices)

d.

Operators are trained to carry out and document procedures.

e.

Records are made, manually or by instruments, during manufacture that demonstrate that all the steps required by the defined procedures and instructions were in fact taken and that the quantity and quality of the drug was as expected. Deviations are investigated and documented.

f.

Records of manufacture (including distribution) that enable the complete history of a batch to be traced are retained in a comprehensible and accessible form.

g.

The distribution of the drugs minimizes any risk to their quality.

h.

A system is available for recalling any batch of drug from sale or supply.

i.

Complaints about marketed drugs are examined, the causes of quality defects are investigated, and appropriate measures are taken with respect to the defective drugs and to prevent recurrence.

j.

GMP guidelines are not prescriptive instructions on how to manufacture products. They are a series of general principles that must be observed during manufacturing. When a company is setting up its quality program and manufacturing process, there may be many ways it can fulfill GMP requirements. It is the company's responsibility to determine the most effective and efficient quality process.


Food & Drug Administration (“FDA”) and International Regulatory recognition of GMP [1]


GMPs are enforced in the United States by the US FDA, under Section 501(B) of the 1938 Food, Drug, and Cosmetic Act (21 USCS § 351). The regulations use the phrase "current good manufacturing practices" (“cGMP") to describe these guidelines. Courts may theoretically hold that a drug product is adulterated even if there is no specific regulatory requirement that was violated as long as the process was not performed according to industry standards. As of June 2010, a different set of cGMP requirements apply to all manufacturers of dietary supplements.


The World Health Organization (“WHO”) version of GMP is used by pharmaceutical regulators and the pharmaceutical industry in over one hundred countries worldwide, primarily in the developing world. The European Union's GMP enforces similar requirements to the WHO GMP, as does the Food and Drug Administration's version in the US. Similar GMPs are used in other countries, with Australia, Canada, Japan, Singapore, Philippines and others having highly developed/sophisticated GMP requirements. In the United Kingdom, the Medicines Act (1968) covers most aspects of GMP in what is commonly referred to as "The Orange Guide", which is named so because of the color of its cover; it is officially known as Rules and Guidance for Pharmaceutical Manufacturers and Distributors.


Since the 1999 publication of GMPs for Active Pharmaceutical Ingredients, by the International Conference on Harmonization (ICH), GMPs now apply in those countries and trade groupings that are signatories to ICH (the EU, Japan and the U.S.), and applies in other countries (e.g., Australia, Canada, Singapore) which adopt ICH guidelines for the manufacture and testing of active raw materials.


[1] Source: “Guideline Versions”, Good Manufacturing Practices, Wikipedia, 2012.


Distribution


 The Company has not yet commenced commercial operations, and thus it has yet to develop methods of distribution for its products beyond the business plan stage.


In order to commercially sell the Company’s VT-1000 Desktop Analyzer, the Company must have it manufactured under GMP.  The Company can and will provide demonstrations of its VT-1000 Desktop Analyzer capabilities to potential customers.


The Company will need to secure additional capitalization before it can acquire additional antibody markers, produce additional Target System cartridges or produce its VT-1000 Desktop Analyzer under GMP.


Principal Suppliers


Corder Engineering, LLC: Located in Chesterton, Indiana, Corder Engineering provided the Company with engineering services related to the Company’s medical testing equipment, and manufactured the Company’s evaluation units, including software, hardware and instrumentation.


Meyers Stevens Group, Inc.:  Located in Montebello, California, Meyers Stevens Group manufactured and supplied small batches of research product of the Company’s diagnostic assays related to the Company’s medical testing equipment.


The Company relies upon these suppliers to provide all of its test cartridges and materials used in association with the development of its products. If these suppliers were to cease providing test cartridges and materials to the Company, the Company’s ability to develop its products may be adversely affected.



36



Facilities


The Company’s principal executive office is located at 1327 Ocean Avenue, Suite M, Santa Monica, California, 90401, with operations at 465 N. Roxbury Drive, Beverly Hills, CA 90210. The Company’s telephone numbers are (310) 899-4442 (Santa Monica) and (310) 273-1644 (Beverly Hills).


Employees


As of December 31, 2015, the Company had 34 employees, exclusive of its directors and executive officers.


The Company currently has 22 employees, exclusive of its directors and executive officers.


Research and Development

 

The Company has incurred no expenditures relating to the research and development of its proprietary medical diagnostic equipment during 2015 and 2014, including costs for consultants, costs to develop and manufacture prototype units, and assays, costs to conduct clinical trials, and costs incurred to develop new products.    


Reports to Security Holders


The Company is not required to deliver an annual report to its stockholders, but will voluntarily send an annual report, together with the Company’s annual audited financial statements upon request. The Company is required to file annual, quarterly and current reports, proxy statements, and other information with the Securities and Exchange Commission. The Company’s Securities and Exchange Commission filings are available to the public over the Internet at the SEC's website at www.sec.gov.


The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Internet address of the site is www.sec.gov.


ITEM 1A.

RISK FACTORS


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



ITEM 1B.

UNRESOLVED STAFF COMMENTS


None.


ITEM 2.

PROPERTIES


The Company’s principal executive offices are located at 1327 Ocean Avenue, Suite B, Santa Monica, CA 90401, with its pharmacy operations located at 465 N. Roxbury Drive, Beverly Hills, CA 90210.  The Company currently sub-leases the Santa Monica space for approximately $5,600 a month, and leases the Roxbury Drive space for $30,544 per month.  Currently, this space is sufficient to meet the Company’s needs.  However, once the Company expands its business to a significant degree, it will require additional space. The Company does not currently own any real estate.



ITEM 3.

LEGAL PROCEEDINGS


Prior to the Company's acquisition of RoxSan, Shahla Melamed, the former owner of RoxSan ("Melamed") had become subject to two (2) disciplinary actions by the California Board of Pharmacy.  In February 2015 the California Board of Pharmacy filed its First Amended Accusation against Melamed in Case No. AC201100427600.  In April 2015 the First Amended Accusation was withdrawn and the Pharmacy Board filed new Accusation against Melamed in Case No. AC201400545500.  The April 2015 Accusation alleges "causes for discipline" against Melamed "stemming from nine consumer complaints".  The Accusation includes allegations that Melamed "Falsified the DEA Biennial Controlled Substance Inventory" report.  The Accusation also alleges that Melamed, RoxSan Pharmacy, and its then Pharmacist in Charge "Illegally Shipped Drugs Into Other States Without a License," and dispensed a drug which the United States Food and Drug Administration "has not approved...for any purpose in this country and has banned the drug's importation and interstate transfer except for research purposes."  The Accusation sought, among other things, the "Revoking or suspending of Pharmacist License Number RPH 42096, issued to Shahla Keyvanfar Melamed". On July 29, 2015, Melamed executed a Stipulated Surrender of License and Order agreeing and stipulating to the surrender of her Pharmacist License.  The California Board of Pharmacy issued a "Decision and Order" on October 7, 2015, adopting the Stipulated Surrender of License and Order.  The California Board of Pharmacy issued a Notice of Decision and Denial of Reconsideration on November 6, 2015, following Melamed's filing of a Petition for Reconsideration on October 26, 2015.  Pursuant to the Notice, the Petition for Reconsideration was "deemed denied by operation of law" and the "Decision and Order with the effective date of November 6, 2015, is the Board of Pharmacy's final decision in this matter."



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On July 21, 2015, the Company, as Plaintiff, filed a Complaint against the California Board of Pharmacy (the “Defendant”) in the United States District Court (the “Complaint”).  The Complaint alleges that the Company is entitled to an immediate injunction granting certain Pharmacy and Compounding Permits (the “Permits”) and monetary relief due to, among other things, the unlawful actions of the Defendant in connection with the Company’s application for the Permits in the State of California, and in connection with the pending acquisition of a California-based Pharmacy. On July 31, 2015, the Company received notice that pharmacy and sterile compounding licenses were issued to the Company by the California State Board of Pharmacy, and the Company's Complaint was withdrawn.


In October 2015, shortly following the Company's acquisition of RoxSan, Melamed, initiated two (2) legal actions against the Company in the Superior Court of the State of California, County of Los Angeles, West District, Shahla Melamed v. Parallax Health Sciences, Inc., action numbers SC 124873 and SC 125705 (the “Matter”).  In the Matter, action No. SC124873, Melamed sought rescission of the August 13, 2015 Purchase Agreement. Rescission was sought on the basis that, allegedly, in order to acquire the Pharmacy, the Company and its principals had allegedly defrauded Melamed, there had allegedly been a complete failure of consideration, and a unilateral mistake was allegedly made on the part of Melamed.


On March 17, 2017, the Court ruled in favor of the Company, and issued that Melamed is not entitled to rescission of the Purchase Agreement.  The ruling of the Court stated that no fraud on the part of the Company or its principals had been demonstrated.  The Court further ruled that there had been no failure of consideration, and that Melamed’s entry into the Agreement was not a result of a unilateral mistake on the part of Melamed.  The Minutes of the Ruling were entered by the County Clerk on March 17, 2017.


The Company has likewise initiated legal action against Melamed and filed an action in the Superior Court of the State of California, County of Los Angeles, West District, Parallax Health Sciences, et al. v. Shahla Melamed, et al., case number SC 124898.  The Complaint in that action alleges that Melamed has breached several obligations under the Purchase Agreement, and the Company is seeking to reduce the Secured Note due to undisclosed material changes in the business.


Subsequently filed pleadings by the Company and RoxSan in case number SC 124873 allege, among other things, that Melamed misrepresented the true earnings and source of income for the pharmacy business and had engaged in a fraudulent and illegal scheme to ship medications to states where her pharmacy was not licensed prior to the sale of the Pharmacy.


In the Matter, action No. SC125702, Melamed alleges that the Company is in default under the terms of the Purchase Agreement and Secured Note and the Company’s termination of Melamed’s employment agreement.  The Company firmly believes that it had adequate grounds to justify the termination of the employment, that it acted within its rights, and shall prevail in these proceedings.  


All three (3) legal matters are currently pending.


As earlier noted the Company is currently attempting to settle a contractual and governance disagreement with Mr. David M. Engert out of court, but had received a legal Complaint in May 2017.


On September 14, 2015, the US Securities and Exchange Commission and the Justice Department filed a complaint and an indictment in the Massachusetts District of the United States District Court (the "Cases") against, among others, Edward W. Withrow III, the co-founder of the Company, co-inventor of the Company's foundational patents, and one of the Company's beneficial shareholders.  The Cases allege that the individuals named within the SEC complaint engaged in activities involving the Company's securities to obtain financial benefit, and made false statements during SEC examination.  The criminal case is currently pending and set for trial on December 2, 2017.  Mr. Withrow has consistently denied all allegations of wrongdoing against him and he intends to continue to defend the case vigorously.


The Company knows of no other material, existing or pending legal proceedings against it, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no other proceedings in which its director, officer or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to its interest.


ITEM 4.

MINE SAFETY STANDARDS


Not applicable.



38


PART II


ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


The Company’s Common Stock is quoted on the OTC Quotation Board “OTCQB – U.S. Registered” under the trading symbol PRLX.QB. The following table sets forth the high and low bid prices for its Common Stock per quarter as reported by the OTCQB for the last two years. These prices represent quotations between dealers without adjustment for retail mark-up, markdown or commission and may not represent actual transactions.


The high and low prices of the Company’s common shares for the periods indicated below are as follows:


Quarter Ended

High

Low

December 31, 2015

$0.02

$0.02

September 30, 2015

$0.06

$0.04

June 30, 2015

$0.06

$0.06

March 31, 2015

$0.05

$0.05

December 31, 2014

$0.06

$0.06

September 30, 2014

$0.12

$0.12

June 30, 2014

$0.16

$0.16

March 31, 2014

$0.13

$0.11


The Company’s common stock is subject to rules adopted by the Commission regulating broker dealer practices in connection with transactions in “penny stocks.” Those disclosure rules applicable to “penny stocks” require a broker dealer, prior to a transaction in a “penny stock” not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Securities and Exchange Commission. That disclosure document advises an investor that investment in “penny stocks” can be very risky and that the investor’s salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in “penny stocks,” to independently investigate the security, as well as the salesperson with whom the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other information and must make a special written determination that the “penny stock” is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.


Record Holders


The Company’s common shares are issued in registered form. Action Stock Transfer Corp., 2469 E. Fort Union Blvd., Suite 214, Salt Lake City, UT 84121 (Telephone 801-274-1088, Facsimile 801-274-1099) is the registrar and transfer agent for the Company’s common shares.


As of December 31, 2015, pursuant to Action Stock Transfer Corp., the shareholders' list of the Company’s common shares showed 55 registered shareholders and 132,026,053 shares outstanding. The total outstanding shares does not include the 31,459,279 shares subsequently canceled and returned to treasury.


As of December 31, 2015, an aggregate of 823,691 shares of the Company’s preferred stock were issued and outstanding and are held by 4 shareholders. All preferred shares are convertible into the Company’s common stock at a conversion ratio of 20 shares of common stock and 20 warrants for each preferred share held (see Warrants).   


Dividends


The Company has not declared any dividends on its common stock since the Company’s inception. There is no restriction in the Company’s Articles of Incorporation and Bylaws that will limit its ability to pay dividends on its common stock. However, the Company does not anticipate declaring and paying dividends to its shareholders in the near future. 


Dividends are payable semi-annually on the Company’s preferred stock at a rate of 7% per annum.  Dividends may be paid in kind, at the option of the Company, to the extent that if the Company is not legally permitted to distribute cash dividends, it shall pay dividends in the form of preferred shares equal to the amount of the dividend. No dividends have been declared on the Company’s preferred stock.



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39


Equity Compensation Plan Information


On October 1, 2010, the Board of the Company adopted the 2010 Employee Stock Option Plan (the “2010 Plan”).  Under the 2010 Plan, 2,800,000 restricted shares of common stock have been reserved for issuance upon exercise of options granted from time to time under the stock option plan. The 2010 plan is intended to assist the Company in securing and retaining key employees, directors and consultants by allowing them to participate in the Company’s ownership and growth through the grant of incentive and non-qualified options. Under the 2010 Plan, the Company may grant incentive stock options only to key employees and employee directors, or the Company may grant non-qualified options to employees, officers, directors and consultants. Subject to the provisions of the 2010 Plan, the Board will determine who shall receive options, the number of shares of common stock that may be purchased under the options.  As of December 31, 2015, the Company has granted options to purchase a total of 1,900,000 shares. In connection with the options granted, a total of $281,250 was recorded as deferred compensation, and was amortized over a 12-18 month vesting period. 


On March 26, 2011, the Company adopted and approved the 2011 Equity Incentive Plan ("the 2011 Plan"), wherein 20,000,000 restricted shares of common stock were reserved for issuance. The 2011 Plan was intended to assist the Company in securing and retaining key employees, directors and consultants by allowing them to participate in the Company's ownership and growth through the grant of incentive and non-qualified options. The 2011 Plan is currently administered by the Company's Board. Subject to the provisions of the plan, the board will determine who shall receive options, the number of shares of common stock that may be purchased under the options. Under the 2011 Plan, no options have been granted.  


On August 13, 2015, the Company adopted and approved the 2015 Incentive Compensation Plan ("the 2015 Plan"), wherein ten million (10,000,000) restricted shares of common stock were reserved for issuance. The 2015 Plan was intended to assist the Company in securing and retaining key employees, directors and consultants by allowing them to participate in the Company's ownership and growth through the grant of incentive and non-qualified options. The 2015 Plan is currently administered by the Company's Board. Subject to the provisions of the plan, the board will determine who shall receive options, the number of shares of common stock that may be purchased under the options. As of December 31, 2015, the Company has granted options to purchase a total of 7,600,000 shares. In connection with the options granted, a total of $379,910 was recorded as deferred compensation, and is being amortized over a 36-month vesting period. 


As of December 31, 2015, the Company has granted options to purchase a total of 9,200,000 shares. In connection with the options granted, a total of $661,160 was recorded as deferred compensation, of which $281,250 was expensed in prior years, $58,024 was expensed in 2015, and $321,886 will be expensed over the next 33 months.


Warrants


In connection with the 823,691 shares of preferred stock issued and outstanding, there are warrants to purchase 15,989,276 shares of common stock. Of these warrants, 14,535,706 are issued at an exercise price of $0.27518 per share, and 1,210,910 are issued at an exercise price of $0.41278 per share.  The number of shares of common stock underlying the warrants and the exercise price are subject to adjustment upon certain events.


As of December 31, 2015, the Company had 15,989,276 warrants issued and outstanding.


Purchase of Equity Securities by the Issuer and Affiliated Purchasers


The Company did not purchase any shares of its common stock or other securities during the year ended December 31, 2015.


Recent Sales of Unregistered Securities


The following represents all unregistered securities issued by the registrant during the current period, including sales of reacquired securities, as well as new issues, securities issued in exchange for property, services, or other securities, and new securities resulting from the modification of outstanding securities:


On January 25, 2015, pursuant to a Stock Purchase Agreement, the Company issued 3,798,035 shares of the Company's restricted common stock at $0.01 per share, for cash in the amount of $37,980.  As a result, $34,182 was recorded to paid in capital.


On December 31, 2015, the Company cancelled an unpaid stock subscription for 11,459,279 shares of the Company's restricted common stock.  As a result, paid in capital was reduced by $10,313.


Exemption From Registration. The shares of Common Stock referenced herein were issued in reliance upon an exemption from registration afforded either under Section 4(2) of the Securities Act for transactions by an issuer not involving a public offering, or Regulation D promulgated thereunder, or Regulation S for offers and sales of securities outside the U.S.



40



ITEM 6.

SELECTED FINANCIAL DATA


As a “smaller reporting company”, the Company is not required to provide the information required by this Item.


ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Forward-Looking Statements


This annual report contains forward-looking statements. These statements relate to future events or the Company’s future financial performance. In some cases, forward-looking statements can be identified by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause the Company’s or the Company’s industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results..

 

The Company’s consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.


Corporate History


The Company was incorporated in the State of Nevada on July 6, 2005.  On November 1, 2012, the Company, formerly Endeavor Power Corporation, and its wholly owned subsidiary Endeavor Holdings, Inc., a Nevada corporation, entered into an Agreement and Plan of Merger with Parallax Diagnostics, Inc., a Nevada corporation ("Parallax Diagnostics"), whereby Parallax Diagnostics became a wholly owned subsidiary.  On January 9, 2014, the Company changed its name to Parallax Health Sciences, Inc. (“Parallax”).  (OTC.PRLX).

 

Parallax Diagnostics was founded in 2010, and holds the right, title, and interest in perpetuity to certain Target System Immunoassay point-of-care diagnostic testing system and related FDA-cleared tests in the area of infectious disease.  Its primary focus was to commercialize the proprietary testing system and test in a worldwide domain.


Parallax Diagnostics is currently pre-revenue, and continues to pursue viable opportunities for the commercialization of its product.  The Company has sought to identify strategies that would make its proposition more valuable and competitive.  To this end, the Company has pursued the creation of patents around its foundational technology, and developed a novel immune status test targeting the HIV/AIDS and TB markets. Since the inception of Parallax Diagnostics, the novel CD4-CD8 immune status test has been developed, and the Company has been issued patents on elements of its core technology and testing system.


In 2013, Parallax identified an opportunity to acquire RoxSan Pharmacy, Inc. ("RoxSan"), a California corporation, and began the due diligence process.  The Company's initial interest centered on utilizing the acquisition as a means of accelerating the commercialization of the Parallax Target System and diagnostic platform, as RoxSan had access to a nationwide network of doctors and sales representatives.  During the due diligence process, the Company became aware of the numerous opportunities that RoxSan and its markets represented.


On March 21, 2013, the Company entered into a Letter of Intent with Shahla Melamed, RoxSan's sole Shareholder, to acquire RoxSan.  Between 2013 and 2015, four (4) amendments were also executed.  


As part of the acquisition, the Company was required to obtain licensure from the State of California, and on July 31, 2015, the Company received notice that its pharmacy and sterile compounding licenses were issued by the California State Board of Pharmacy.


On August 13, 2015 (the "Closing Date"), pursuant to a resolution of the board of directors (the "Board"), the Company entered into an Agreement to Purchase and Sell One Hundred Percent of the Issued and Outstanding Shares of RoxSan Pharmacy, Inc. ("RoxSan" or the "Pharmacy"), and its Assets and Inventory (the “Purchase Agreement”).  Pursuant to the Purchase Agreement between the Company, RoxSan and its sole shareholder, Shahla Melamed (the “Seller” or "Melamed"), in exchange for 100% of RoxSan's common stock, and its assets and inventory, the Company, among other things, issued the Seller a Secured Promissory Note (the "Note") dated August 13, 2015 in the amount of $20.5 million (the "Acquisition").  The Note bears interest at a rate of 6% per annum, and matures in three (3) years, or August 13, 2018 ("Maturity").  Principal and interest payments on the Note will be made to the Seller on a quarterly basis beginning with the three-month period ending November 30, 2015, in an amount equal to 1) 75% during the first two (2) years; and 2) 60% during year three (3); of certain of the Pharmacy's earnings defined within the Purchase Agreement as EBITDA.  All remaining principal and/or accrued interest, if any, still owing after three (3) years shall be paid in full to the Seller at Maturity. The Company is seeking a reduction in the Purchase Price and related promissory note (See Legal Proceedings).



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As a result of the Acquisition, effective August 13, 2015, RoxSan became a wholly owned subsidiary of the Company. No change in control of the Company occurred as a result of the Acquisition.


In connection with the Acquisition, the Company entered into an Employment Agreement (the "Employment Agreement") with the Seller.  Under the Employment Agreement, Melamed agreed to provide exclusive consulting services to the Company in the areas of public relations and marketing for a term of four (4) years. On March 4, 2016, the Company terminated the Employment Agreement in accordance with paragraph 3.2 Termination for Cause (see "Dispute with Former Owner" below). The termination was the result of, among other things, Melamed's breaches in the Agreement, which were substantiated by an investigation conducted by an employment law firm retained by RoxSan.  Under the terms of the Agreement, no financial obligation resulted in the termination.


Dispute with Former Owner


Shortly after the Closing, the Company's management and Melamed clashed over control of the RoxSan Pharmacy business operations and bank accounts.  Faced with Melamed continuing to materially interfere with the Pharmacy’s operations to the detriment of its business, the Company retained the services of an employment law firm to investigate Melamed's actions, and provide a report to the Company’s Board (the "Report").  The Company also placed Melamed on a paid leave of absence because of her actions. The Board, after reviewing the findings in the Report, found substantive cause for Melamed's termination, and immediately sent Melamed written notification of the Company's intent to dismiss her for cause.  Under the Employment Agreement, Melamed was provided with a thirty (30) day cure period.  However, the Company received no response of intent to cure from Melamed or her counsel, and no evidence of a cure was provided to the Company.   As a result, the Board authorized Melamed's termination for cause on March 3, 2016, and on March 6, 2016, Melamed was formally terminated in writing.   


In the course of management’s operation of the RoxSan Pharmacy, and adherence to Financial Accounting Standards Board revenue recognition policies, management became concerned with the absence of the claim processing for over $16 million of pre-Close Workers Compensation prescription revenues, which Melamed represented to the Company prior to Closing as being the vast majority of the high margin compound revenue. In addition to the $16 million in pre-Close claims, the Pharmacy generated over $8 million after the change in ownership, until the CFO alerted management of a serious and dramatic change in the receivables collection timetable, the underpinning cash flow processes, and the potential illegitimacy of the Workers Compensation revenues. Further, the CFO was uncomfortable with recognizing the revenue as it was presented by Melamed's financial records, and, in the absence of any reasonable assurance of collectability of the Workers Compensation revenues, the Company established an allowance for doubtful receivables for the $8 million in post-Close claims for which collectability was highly unlikely.


The Company retained the services of a forensic Workers Compensation fraud specialist to determine the legitimacy of the pre-Close Workers Compensation revenues and related insurance claims.   As a result of this forensic review, it was determined that these claims were essentially valueless.  As a result of these findings and undisclosed changes to the cash flow and quality of earnings that represented a majority of the revenue of the Pharmacy, the Company’s Board deemed it necessary to demand a reduction in the terms of the Sale and Purchase Agreement to more accurately reflect the true valuation of the Company.  This was met with resistance on the part of the Seller.


Shortly thereafter, in October 2015, Melamed, initiated two (2) legal actions against the Company in the Superior Court of the State of California, County of Los Angeles, West District, Shahla Melamed v. Parallax Health Sciences, Inc., action numbers SC 124873 and SC 125705 (the “Matter”).  In the Matter, action No. SC124873, Melamed sought rescission of the August 13, 2015 Purchase Agreement. Rescission was sought on the basis that, allegedly, in order to acquire the Pharmacy, the Company and its principals had allegedly defrauded Melamed, there had allegedly been a complete failure of consideration, and a unilateral mistake was allegedly made on the part of Melamed.


On March 17, 2017, the Court ruled in favor of the Company, and issued that Melamed is not entitled to rescission of the Purchase Agreement.  The ruling of the Court stated that no fraud on the part of the Company or its principals had been demonstrated.  The Court further ruled that there had been no failure of consideration, and that Melamed’s entry into the Agreement was not a result of a unilateral mistake on the part of Melamed.  The Minutes of the Ruling were entered by the County Clerk on March 17, 2017.


The Company has likewise initiated legal action against Melamed and filed an action in the Superior Court of the State of California, County of Los Angeles, West District, Parallax Health Sciences, et al. v. Shahla Melamed, et al., case number SC 124898.  The Complaint in that action alleges that Melamed has breached several obligations under the Purchase Agreement, and the Company is seeking to reduce the Secured Note due to undisclosed material changes in the business.


Subsequently filed pleadings by the Company and RoxSan in case number SC 124873 allege, among other things, that Melamed misrepresented the true earnings and source of income for the pharmacy business and had engaged in a fraudulent and illegal scheme to ship medications to states where her pharmacy was not licensed prior to the sale of the Pharmacy.


In the Matter, action No. SC125702, Melamed alleges that the Company is in default under the terms of the Purchase Agreement and Secured Note and the Company’s termination of Melamed’s employment agreement.  The Company firmly believes that it had adequate grounds to justify the termination of the employment, that it acted within its rights, and shall prevail in these proceedings.  



42


All three (3) legal matters are currently pending.


Purchase Price Dispute


Included in the Acquisition Agreement, and as part of the negotiated purchase price, were representations and warranties made by the former owner involving certain primary revenue streams and related contracts.  Shortly after the closing, however, management discovered that these representations were substantially inaccurate and/or completely false.  These inaccuracies, and the improper disclosures and/or omissions made by the former owner during negotiations, would have significantly affected the purchase price and related note payable.   As a result, among other things, management has initiated legal action against the former owner to seek a reduction in the purchase price.  


In addition, management engaged a third-party to perform a valuation of the Pharmacy, utilizing revised inputs that more accurately reflected the Pharmacy's revenue streams as of the date of Acquisition.  The valuation performed resulted in a fair market value of $4.7 to $5.2 million. After careful consideration, and based upon these significant differences, management has determined that the purchase price and related promissory note of $20.5 million does not fairly represent the fair market value at the date of purchase.  The Company has, therefore, applied a discount to the note of $15.3 million, to reduce the purchase price and related note to its estimated fair market value of $5.2 million, utilizing the higher value on the range of as a conservative measure.  


The valuation performed does not include the effects of any liabilities the former owner omitted or damages caused to the Company as a result of the former owner and her immediate family members connected to the Pharmacy.


Control of Funds Dispute


For a period of time immediately after the closing of the Acquisition, the former owner would not relinquish control of the Pharmacy's bank accounts, and collected the Pharmacy's incoming cash revenues, refusing to transfer the funds to the new ownership. Furthermore, when the Company attempted to change the corporate records and signatories on the existing bank accounts, the former owner disputed the changes, resulting in approximately $180,000 in corporate funds being frozen and held for adjudication. During this period, the Company was forced to request that the former owner pay the Pharmacy's operating expenses.  At no time after the Company opened new accounts did the former owner cooperate with the transference or willingly relinquish control of the Pharmacy's operating cash flow or incoming cash revenues. As a result, an extensive reconciliation was performed to determine what amounts were collected and paid by the former owner, and what amounts were due to the Company.  The reconciliation resulted in over $412,000 owed to the Company from the former owner.  The reconciliation and underlying documentation went under judicial review, and on July 24, 2017, the Company was notified that the results of the review were in favor of the Company in the amount of $412,948.  A judgment is pending for the order of $412,948 owed to the Company from the former owner.


US Postal Service Interference


The former owner continued to interfere in the transference of control of the Pharmacy by submitting change of address forms to the US Postal Service, wherein the former owner diverted the Pharmacy mail to her home address.  Once this was discovered and rectified with the post office, the former owner filed another change of address to divert mail to a post office box.  During these periods of time, the former owner received check payments and negotiated the checks by opening up a bank account utilizing a DBA, "Roxsan Pharmacy."  The Company was able to identify some of the checks the former owner negotiated by directly contacting the payer and receiving copies of the cancelled checks, with the former owner's signature endorsement and account number on the check.


Description of Business  


The Company’s principal focus is on personalized patient care through the use of the Company’s pharmacy, RoxSan, and eventually through the Parallax Diagnostics' medical diagnostic testing platform capable of diagnosing and monitoring several health issues.  The Company has the following two business segments: Retail Pharmacy Services (RPS) and Corporate.


Retail Pharmacy Services (RPS)

The RPS provides a full range of pharmacy services including retail, compounding and fertility medications.  


The RPS generates net revenues primarily by dispensing prescription drugs, both through local channels by direct delivery as well as mail order. The RPS also sells a wide assortment of general merchandise, including over-the-counter drugs, beauty and cosmetics products, seasonal merchandise and convenience foods, through the Company’s pharmacy.


The pharmacy is fully licensed and qualified to conduct business in over 40 US States.  


Corporate

The Corporate Segment provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, and corporate information technology and finance departments.  In addition, the Corporate Segment supports the costs and operating expenses related to the continued development and exploitation of the Company's proprietary medical diagnostic and monitoring platform and processes, which remains the Company's primary focus.  



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43


Management


Parallax is led by experienced veterans from the healthcare, technology, finance and management fields.  The Company's disciplined and organized approach is balanced by its optimism for the future, and the opportunities present in the current healthcare market. The Parallax team is grounded in a belief that success in business is built on a combination of research, planning and execution.


The Parallax Business Model


In 60 years, healthcare has transitioned from a direct relationship between doctor and patient, to one that has patients separated from their doctors by the introduction of a huge number of stakeholders, ranging from health insurers, employers, pharmacy benefit managers, imaging, diagnostic testing, lawyers, specialist and a plethora of others.  The patient and healthcare provider both want the same thing: information, quality of service, transparency, value for their hard-earned dollars, and more time in their day.


Parallax believes that its products and services can provide solutions that mitigate rising costs, reduce waste in spending through transparency, reduce the amount of unnecessary services, and increase the health and wellness of patients before they are sick.  


Parallax has developed, acquired and licensed multiple platforms, proprietary and exclusive, that provide services and products, across the healthcare continuum.  These platforms are designed to allow for multiple points of reciprocal consideration, through innovative business models, that provide patients with increased quality of services and products, at reduced cost of time and money.  They also provide healthcare providers with increased access to their patients, the ability to deliver better and more efficient service and increase their income from the services they supply.    


Though Parallax’s multiple operations are focused in separate vertical markets, Parallax has designed its business model to allow for cross-pollination and reciprocal transfer of value at multiple points in their respective economic food chains.


The Company's business operations generate revenue, currently, from its compounding, retail and fertility business, and through multiple economic models ranging from cash payment to insurance reimbursement to rebates from pharmaceutical companies.


Operational Structure and New Business Units


Management developed a system of operations that focused on differentiating unique business markets for RoxSan services and developed additional areas of focus:  Currently, RoxSan operates four distinct business units comprised of:


·

RoxSan Compound Pharmacy (“Compounding”)

·

RoxSan Anti-Aging (“RoxSan Anti-Aging”)  

·

RoxSan Fertility Group (“RoxSan Fertility”)

·

RoxSan Retail Pharmacy (“RoxSan Retail”)


Shortly after RoxSan's acquisition in August 2015, management determined that there were several areas that required immediate attention.

Pharmacy Compliance


Management created the position of Director of Compliance at RoxSan and put a senior pharmacist as the Director.  Management developed a strategic plan covering its Regulatory Compliance goals.  The first goal was to create foundational standard operating procedures in the filling, processing, and shipping of prescriptions.


Under this program an audit report (Audit report) was discovered that was previously discarded by the prior ownership as having “no relevance” as to the results of the findings in that audit. This audit was part of a due diligence requirement imposed by the Company upon the prior owner before the acquisition, which was to have a third-party organization verify that the pharmacy was operating within compliance of state regulatory demands. The Audit Report dated prior to the acquisition, which was discovered in abandoned files, indicated that several areas of operation of the pharmacy were in violation of the most fundamental compliance rules, and strict warnings as to the consequences of what would happen to the pharmacy’s licenses if these areas were not immediately corrected. No corrections to the most serious violations had been performed by the prior owner, and the Seller did not provide this “material” information while in due diligence prior to the acquisition. All areas recommended in the Report to be corrected, were in fact implemented by the current ownership.


State Pharmacy Licenses


The former owner had developed a well-documented contentious relationship with the California Board of Pharmacy as well as a number of other states in which the previous owner was accused of regulatory violations.  There were states that had suspended RoxSan’s Licenses under the prior ownership to operate in their state.   The new management began an aggressive program in each state, to appeal to the State Pharmacy Boards to reinstate the licenses. It became apparent that many individual members on several state Boards of Pharmacy, including the California Board of Pharmacy, the Nevada Board of Pharmacy and the Arizona Board of Pharmacy, had an extremely negative perception of Ms. Melamed. With the new management entering into the picture, the negative perception became extremely positive toward RoxSan’s new ownership, and its new Compliance Program.  Thus far, RoxSan has obtained pharmacy licenses in over 40 US states, and is seeking to obtain licensing in the remaining states.  



44


As a result of the efforts of new management, all of these issues were corrected and the pharmacy is currently operating in an entirely new status of having great relations with each of the previously strained relationships with individual state Boards of Pharmacy.


Pharmacy Benefit Management Business


The former owner had created a negative and challenging relationship with Payers and Pharmacy Benefit Management (PBM’s) as well as the cancellation of some pharmacy network contracts with PBM contracts that control the approvals for reimbursements for several health insurers.  The new management established a plan of action and SOP’s to follow as well as address the criteria for contract re-approvals with the PBM’s.  


RoxSan Pharmacy has become qualified and fully accredited member of FocusScript’s Compounding Pharmacy Network enabling RoxSan to participate in the Pharmacy Benefit Management Program for one of the largest health insurers in the United States.  As of this update approximately 5% of the Compound Pharmacy’s in the US have been able to achieve this accreditation.


A market development has occurred that has produced a payer reaction to the exorbitantly high pricing trends for compound pain medications. That development has affected the viability of the compound pain medication management industry due to rejections and many of the ingredients becoming “non-covered”. RoxSan has developed a program to restructure the Pharmacy’s approach to creating a more “ethically” based pricing structure with extraordinarily high efficacy formularies, and is working with several of the industry’s leading PBM’s in pursuit of partnership arrangements.    


National Accreditation


In addition, under the new management, RoxSan Pharmacy passed the inspection from the Verified Pharmacy Program (VPP) as part of the National Association of the Board of Pharmacy. This was a significant accomplishment, considering that the prior ownership had failed in passing the VPP inspection in the past. Passing the VPP inspection is an exhaustive process requiring high levels of regulatory systems and compliance.  This extraordinary accomplishment was achieved in less than one year under the newly restructured operating compliance program under the new ownership, which included strict adherence to documentation retention and categorization.


Human Resources


In addition to the issues outlined above, it was determined that there were also personnel issues that RoxSan’s pharmacists, technicians and general operations employees had with the prior ownership. These issues involved compensation, benefits and management style of leadership, which lacked the opportunity for the employees to be empowered to effectively perform their duties. Management also addressed these issues with clarification of job responsibilities, compensation/benefit adjustments including stock option incentives and an overall more inclusive and open communication style of management.


NOTE: The following sections of this annual report and any further reference made to “the Company”, "we", "us", "our" and "Parallax " shall mean Parallax Health Sciences, Inc., and its wholly-owned subsidiaries, Parallax Diagnostics, Inc. (formerly, Endeavor Sciences, Inc.) and RoxSan Pharmacy, Inc., unless otherwise indicated.


Results of Operations


The following summary of the Company’s results of operations should be read in conjunction with the Company’s audited consolidated financial statements for the years ended December 31, 2015 and 2014, which are included herein. The financial information provided includes the accounts of the Company and its wholly owned subsidiaries, Parallax Diagnostics, Inc. (formerly Endeavor Sciences, Inc.) and RoxSan Pharmacy, Inc., on a consolidated basis.  All significant inter-company accounts and transactions have been eliminated.  


 

For the year ended

 

 

December 31, 2015

 

December 31, 2014

 

Revenue

$

11,579,720

  

$

––

  

Cost of sales

$

9,874,244

  

$

––

  

Gross profit (loss)

$

1.705,476

  

$

––

 

Sales, marketing, and pharmacy expenses

$

 1,061,069

 

$

––

 

General and administrative expenses

$

 1,906,488

  

$

866,646

  

Operating (loss)

$

(1,262,081

)

$

(866,646

)

Loss on disposal of assets

$

(10,155

)

$

––

 

Discount amortization

$

(2,233,741

)

$

(194,753

)

Interest expense

$

(213,921

)

$

(51,798

)

Net loss

$

(3,419,898

)

$

(1,113,197

)


Revenue


Revenue in the amount of $11,579,720 consists primarily of pharmaceutical sales related to the Company's pharmacy operations for the period August 13, 2015 through December 31, 2015. The Company has not yet launched its major business activity, which is medical diagnostics and testing.



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45


Cost of sales


Costs of sales in the amount of $9,874,244 consists primarily of pharmaceutical drug purchases, direct labor, and indirect pharmacy costs related to the Company's pharmacy operations for the period August 13, 2015 through December 31, 2015.  The Company has not yet launched its major business activity, which is medical diagnostics and testing.


General and Administrative Expenses

 

For the year ended

 

 

 

 

  

December 31, 2015

 

December 31, 2014

 

Variances

 

Legal, accounting, and management services

$

865,954

  

$

236,744

  

$

629,210

 

Stock compensation/stock option amortization

 

58,024

 

 

384,808

 

 

(326,784

)

Salaries, taxes and benefits

 

477,181

 

 

236,550

 

 

240,631

 

Depreciation and amortization

 

77,905

 

 

7,988

 

 

69,917

 

Rent expense-office

 

52,414

 

 

––

 

 

52,414

 

Travel, meals and entertainment

 

79,721

 

 

––

 

 

79,721

 

Publicity and promotion

 

105,923

 

 

––

 

 

105,923

 

Office supplies and miscellaneous expenses

  

189,365

  

  

556

 

  

188,809

 

Total general and administrative expenses

$

1,906,487

 

$

866,646

 

$

1,039,841

 


General and administrative expenses in the amount of $1,906,487 for the year ended December 31, 2015, were comprised of $865,954 in legal, accounting and management fees, $58,024 in stock compensation/stock option amortization, $477,181 in salaries and related taxes and benefits, $77,905 in depreciation and amortization, $52,414 in rent expense, $79,721 in travel, meals and entertainment, $105,923 in publicity and promotion, and $189,365 of office overhead and other general and administrative expenses.


General and administrative expenses in the amount of $866,646 for the year ended December 31, 2014, were comprised of $236,744 of legal and accounting fees, $384,808 in stock compensation, $236,550 in salaries and related taxes and benefits, $7,988 in depreciation and amortization, and $556 in office overhead and other general and administrative expenses.


General and administrative expenses for the year ended December 31, 2015 were $1,906,487 as compared to $866,646 for the year ended December 31, 2014, which resulted in an increase in general and administrative expenses for the current year of $1,039,841.


Significant changes in general and administrative expenses of $1,039,841 during the year 2015 compared to 2014 were attributable to the following items


·

an increase in legal, accounting and consulting services of $629,210, primarily due to an increase in legal costs of $258,942 resulting from legal counsel retained for pending litigation matters; and an increase in accounting fees of $133,079 due to a change in audit firms and additional audit work required related to acquisitions;  an increase in management fees of $210,189 resulting from additional consultants retained for corporate management and business operations, and an increase of $27,000 for additional miscellaneous staffing;


·

a decrease in stock compensation/stock option amortization of $326,784, primarily due to stock compensation of $384,808 expensed in 2014, compared to none in the current year; and the issuance of stock options in the current year, resulting in amortization of $58,024, compared to none in the prior year; and


·

an increase in management salaries and fees, and related taxes and benefits of $240,631, primarily due to an increase in officer compensation of $61,803; an increase in related payroll taxes of $20,607; and staff compensation of $68,346 and employee benefits of $89,875 in the current year, compared to none in the prior year; and


·

an increase in depreciation and amortization of $69,917, primarily due to the acquisition of additional fixed assets, resulting in additional depreciation of $7,417; and the acquisition of intangible assets, resulting in amortization expense of $62,500; and


·

an increase in rent expense for office space of $52,414, travel, meals and entertainment of $79,721, and publicity and promotion of $105,923 in the current year, compared to none in the prior year; and


·

an increase in office supplies and miscellaneous expenses of $189,365, due to an increase in automobile expense of $11,395, bad debt expense of $35,579, computer and internet costs of $13,453, dues and subscriptions of $12,207, insurance expense of $21,640, parking of $16,335, pension plan administrative costs of $16,188, and communication costs of $16,968, compared to none in the prior year; and an increase in other general office expenses of $45,041.


General and administrative expenses for both 2015 and 2014 were incurred for the purpose of advancing the Company closer to its financing and operating goals in the bio-medical sector, as well as the business operations of the Pharmacy between August 13, 2015 through December 31, 2015.



46


Net Loss


During the year ended December 31, 2015, the Company incurred a net loss of $3,719,818 compared with a net loss of $1,113,197 for the year ended December 31, 2014. The increase in net loss of $2,606,701 is attributable to an increase in gross profits of $1,705,476, an increase in sales, marketing and pharmacy expense of $1,061,069; an increase in general and administrative expenses of $1,039,842; a loss on the disposal of equipment of $10,155, an increase in amortization of discounts on notes payable of $2,038,988, and an increase in other interest expense of $162,123.


Liquidity and Capital Resources


Working Capital

At December 31,

 

Increase

 

 

2015

 

2014

 

(Decrease)

 

Current assets

$

3,749,311

 

$

513

 

$

3,748,798

 

Current liabilities

 

2,921,812

 

  

1,501,458

 

 

1,420,354

 

Working capital (deficit)

$

827,499

 

$

(1,500,945

)

$

2,328,444

 

 

 

 

 

 

 

 

 

 

 


As at December 31, 2015, the Company had cash in the amount of $912,399 compared to $513 as of December 31, 2014.


The Company had working capital of $827,499 as of December 31, 2015, compared to a working capital deficit of $1,500,945 at December 31, 2014. The increase in working capital of $2,328,444 is primarily attributable to an increase in cash of $911,886, accounts receivable of $1,449,554, rebates receivable of 424,066, inventory of $831,156, employee advances of $21,800, and prepaid expenses of $110,336; and an increase in accounts payable and accrued expenses of $2,485,334 and related party payable of $30,047; and reclassification of $1,095,027 from short term notes payable to long term notes payable.


Cash Flows

For the year ended

 

Increase

 

 

December 31, 2015

 

December 31, 2014

 

(Decrease)

 

Net cash used in operating activities

$

(648,836

)

$

(56

)

$

(648,780

)

Net cash used in investing activities

 

(7,659

)

  

––

 

 

(7,659

)

Net cash provided by financing activities

  

1,568,381

 

  

––

 

 

1,568,381

 

Increase (decrease) in cash

$

911,886

 

$

(56

)

$

911,942

 


Cash Flows from Operating Activities


During the year ended December 31, 2015, the Company used $648,836 of cash flow for operating activities, compared with $56 for the year ended December 31, 2014. The increase in cash used for operating activities of $648,780 is primarily attributable to an increase in the net loss from operations of $2,606,701; an increase in depreciation and amortization of $69,917; a loss on the disposal of assets of $10,155, a decrease in stock compensation/stock option amortization of $326,784; an increase in discount amortization of $2,038,988; an increase in bad debt allowance of $8,412,853; a decrease in related party accruals converted to notes payable of $102,404; an increase in accounts receivable of $10,310,865; a decrease in inventories of $82,680; an increase in prepaid expenses of $104,638; an increase in other assets of $750; an increase in accounts payable and accrued expenses of $2,382,152; and a decrease in related party payables of $193,383.


Cash Flows from Investing Activities


During the years ended December 31, 2015, the Company used $7,659 of cash flow for investing activities, compared to none for the year ended December 31, 2014.  The increase in cash used for investing activities is the result of the Company's purchase of professional equipment in the amount of $7,659.

  

Cash Flows from Financing Activities


During the year ended December 31, 2015, the Company was provided with $1,568,381 of cash flow from financing activities compared with none during the year ended December 31, 2014. The increase in cash flows provided from financing activities of $1,568,381 is attributable to proceeds from notes payable of $2,000,00, repayment of notes payable of $169,599, repayment of related party notes payable of $300,000, and proceeds from the issuance of common stock of $37,980.


As at December 31, 2015 and 2014, respectively, related parties are due a total of $1,240,864 and $958,615, consisting of $120,800 and $75,800 in accrued compensation; $12,810 and $27,763 in cash advances to the Company for operating expenses; and $1,107,254 and $855,052 in related party convertible notes payable, net of unamortized discounts.

  



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47


The Company has issued convertible promissory notes to its principals in the aggregate sum of $1,107,254, representing cash loans and unpaid compensation.  The notes bear interest at a rate of between 5% and 7% per annum, mature between and December 31, 2015 and July 31, 2017, and contains a repayment provision to convert the debt into common stock of the Company at a strike price of $0.10. The conversion price of $0.10 resulted in a beneficial conversion feature.  As a result, the difference between the conversion rate and the market rate in the aggregate of $474,394 was classified as discounts on the notes. During the year ended December 31, 2015 and 2014, respectively, the Company expensed $278,741 and $194,753 in discount amortization.  As of December 31, 2015 and 2014, respectively, $0 and $278,741 in unamortized discounts remained.  During the years ended December 31, 2015 and 2014, respectively, interest in the amount of $70,646 and $34,418 was expensed.  As of December 31, 2015 and 2014, respectively, a total of $107,897 and $37,251 in interest has been accrued, and is included as an accrued expense on the accompanying consolidated balance sheet.


The Company’s principal sources of funds have been from the Company’s sales of its preferred and common stock, loans from related parties and third-party lenders, and net revenues generated from the sale of prescription pharmaceuticals.


Future Financings

 

The Company has suffered recurring losses from operations. The continuation of the Company’s operations is dependent upon the Company’s attaining and maintaining profitable operations and raising additional capital as needed. The Company anticipates that it will have to raise additional funds through private placements of the Company’s equity securities and/or debt financing to complete its business plan.


The Company will require additional financing in order to proceed with its plan of operations, including approximately $2,000,000 over the next 12 months to pay for its ongoing expenses. These cash requirements include working capital, general and administrative expenses, the development of the Company’s product line, and the pursuit of acquisitions. These cash requirements are in excess of the Company’s current cash and working capital resources. Accordingly, the Company will require additional financing in order to continue operations and to repay its liabilities. There is no assurance that the financing will be completed as planned or at all. If the Company is unable to secure adequate capital to continue the Company’s planned operations, the Company’s shareholders may lose some or all of their investment and the Company’s business may fail.


The Company anticipates continuing to rely on equity sales of its common stock in order to continue to fund its business operations. Issuances of additional shares will result in dilution to the Company’s existing stockholders. There is no assurance that the Company will achieve any additional sales of its equity securities or arrange for debt or other financing to fund its planned business activities.

 

Personnel

 

As of December 31, 2015, the Company had 34 employees, excluding its directors and executive officers. Currently, the Company - has 22 employees, excluding its directors and executive officers.


Contractual Obligations


As a “smaller reporting company”, the Company is not required to provide the information required by this Item.


Going Concern


The Company has incurred losses since inception resulting in an accumulated deficit of $6,714,776, and further losses are anticipated in the development of its business. The Company’s ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, which may not be available at commercially reasonable terms. There can be no assurance that the Company will be able to generate profitable operations and/or continue to raise funds, in which case the Company may be unable to meet its obligations and the Company may cease operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.


The consolidated audited financial statements included with this annual report have been prepared on the going concern basis which assumes that adequate sources of financing will be obtained as required and that the Company’s assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the consolidated audited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Off-Balance Sheet Arrangements


The Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.




48


Critical Accounting Policies


The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated audited financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. The Company believes that understanding the basis and nature of the estimates and assumptions involved with the following aspects of the Company’s financial statements is critical to an understanding of its consolidated financial statements.


Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.


Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.


Fair Value Hierarchy

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:


Level 1:  

Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.


Level 2:  

Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.


Level 3:  

Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.


Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. As at December 31, 2015 and 2014, the Company had no cash equivalents.


Fair Value of Financial Instruments

As of December 31, 2015 and 2014, respectively, the carrying values of Company’s Level 1 financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value. The fair value of Level 3 instruments is calculated as the net present value of expected cash flows based on externally provided or obtained inputs. Certain Level 3 instruments may also be based on sales prices of similar assets. The Company’s fair value calculations take into consideration the credit risk of both the Company and its counterparties as of the date of valuation.


There were no outstanding derivative financial instruments as of December 31, 2015 and 2014.


Convertible Debt

In accordance with Accounting Standards Codification (“ASC”) 470-20-25, the Company recognizes the advantageous value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert debt into common stock at a price per share that is less than the trading price to the public on the date of the debt. The beneficial value is calculated as the intrinsic value (the market price of the stock at the commitment date in excess of the conversion rate) of the beneficial conversion feature of the debt, and is recorded as a discount to the related debt and an addition to additional paid in capital. The discount is amortized over the remaining outstanding period of related debt using the interest method.


Net Income (Loss) Per Common Share

The Company computes earnings per share in accordance with ASC 260-10, Earnings Per Share. Net earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible preferred shares and the exercise of the Company’s stock options and warrants.


Comprehensive Loss

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at December 31, 2015 and 2014, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.


Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the stock award (generally 3 to 5 years) using the straight-line method.



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49



Recently Adopted Accounting Standards 

The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the US Securities and Exchange Commission (“SEC”), and the Emerging Issues Task Force (“EITF”), to determine the impact of new pronouncements on US GAAP and the impact on the Company. The Company has recently adopted the following new accounting standards:


Adopted:


In April 2014, the FASB issued ASU No. 2014-08 Presentation of Financial Statements (Top 205): Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity.  The objective of ASU No. 2014-08 is to clarify the criteria for determining which disposals can be presented as discontinued operations and also modifies related disclosure requirements. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods.  Early adoption is permitted for new disposals beginning in the first quarter of 2014, provided financial statements have not been issued before the release of this standard.


In June 2014, the FASB issued ASU No, 2014-10, Elimination of Certain Financial Reporting Requirements for Development Stage Entities.  The objective of ASU 2014-10 is to reduce the cost and complexity associated with the incremental reporting requirements for development stage entities.  This Update removes all incremental financial reporting requirements, and eliminates an exception provided to development stage entities in Topic 810.  The amendments in this standard are effective retrospectively for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted.


In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606).  The objective of ASU No. 2014-08 is to clarify the principles for recognizing revenue and to develop a common revenue standard for US GAAP and IFRS.  The FASB created a new Topic 606, and IASB is issuing IFRS 15, to meet the joint objectives regarding revenue recognition.  The guidance in this Update affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.  The guidance in this Update supersedes the revenue recognition requirements in Topic 605, and most industry-specific guidance, as well as certain requirements contained within Topic 350 and Topic 360.  The standard is required to be adopted by public business entities in annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is not permitted.


In August 2014, the FASB issued ASU No 2014-15 Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The objective of ASU 2014-15 is to provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  


In November 2014, the FASB issued ASU No. 2014-17 Business Combinations (Topic 805): Pushdown Accounting. The objective of ASU 2014-17 is to provide guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle.


Not Yet Adopted:


In January 2015, the FASB issued ASU 2015-01 Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities. The Company is evaluating the effect, if any, adoption of ASU No. 2015-01 will have on its consolidated financial statements.


In April 2015, the FASB issued ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30: Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 is part of the Simplification Initiative, and its objective of to simplify the presentation of debt issuance costs.  This Update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update.  The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is evaluating the effect, if any, adoption of ASU No. 2015-03 will have on its consolidated financial statements.



50



In July 2015, the FASB issued ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory.  ASU 2015-11 is part of the Simplification Initiative, and its objective is to simplify the measurement of inventory.  This Update applies to inventory that is measured using FIFO or average cost, and requires an entity measure inventory at the lower of cost and net realizable value.  The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.  The Company is evaluating the effect, if any, adoption of ASU No. 2015-11 will have on its consolidated financial statements.


In September 2015, the FASB issued ASU 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments.  ASU 2015-16 is part of the Simplification Initiative, and eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. The Company is evaluating the effect, if any, adoption of ASU No. 2015-16 will have on its consolidated financial statements.


Recently Issued Accounting Standards Updates: 

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.


ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


As a “smaller reporting company”, the Company is not required to provide the information required by this Item.


ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The Company’s consolidated audited financial statements are stated in United States dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.


The following consolidated audited financial statements are filed as part of this annual report:


Report of Independent Registered Public Accounting Firm (s)

F-1

  

 

Consolidated Balance Sheets as at December 31, 2015 and 2014

F-3

  

 

Consolidated Statements of Operations for the years ended December 31, 2015 and 2014

F-4

  

 

Consolidated Statements of Changes in Stockholders' Deficit for the period from January 1, 2014 to December 31, 2015

F-5

  

 

Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014

F-6

  

 

Notes to the Consolidated Financial Statements for the years ended December 31, 2015 and 2014

F-7




Table of Contents

51



[f20151231prlx10krev9final006.jpg]

PCAOB Registered Auditors – www.sealebeers.com



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Parallax Health Sciences, Inc.


We have audited the accompanying consolidated balance sheets of Parallax Health Sciences, Inc. as of December 31, 2013 and 2014, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2014. Parallax Health Sciences, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Parallax Health Sciences, Inc. as of December 31, 2013 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has no revenues, has negative working capital at December 31, 2014, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern.  Management’s plans concerning these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Seale and Beers, CPAs


Seale and Beers, CPAs

Las Vegas, Nevada

March 27, 2015



8250 W. Charleston Blvd., Suite 100 - Las Vegas, NV 89117 Phone: (888)727-8251 Fax: (888)782-2351



Table of Contents

F-1


[f20151231prlx10krev9final008.gif]DAVE BANERJEE, CPA

An Accountancy Corporation – Member AICPA and PCAOB

21860 Burbank Blvd., Suite 150, Woodland Hills, CA 91367l (818) 657-0288l FAX (818) 657-0299l (818) 312-3283






REPORT OF INDEPENDENT REGISTRED PUBLIC ACCOUNTING FIRM



We have audited the accompanying consolidated balance sheets of Parallax Health Sciences, Inc., (Company) and subsidiaries as of December 31, 2015, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.


The financial statements of Parallax Health Sciences, Inc., as of December 31, 2014, were audited by other auditors whose report dated March 27, 2015, expressed an unqualified opinion on those statements.


We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly we express no such opinion.


An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Parallax Health Sciences, Inc., and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses and recurring negative cash flow from operating activities and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Dave Banerjee CPA, an Accountancy Corporation

Dave Banerjee CPA

An Accountancy Corporation.

Woodland Hills, California

June 14, 2017



Table of Contents

F-2



PARALLAX HEALTH SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

 

 

December 31, 2015

 

December 31, 2014

 

ASSETS

 

 

 

 

 

 

Current assets

 

  

 

 

  

 

Cash and cash equivalents

$

 912,399

 

$

 513

 

Accounts receivable, net

 

 1,449,554

 

 

––   

 

Rebates receivable

 

 424,066

 

 

––   

 

Inventories

 

 831,156

 

 

––   

 

Employee advances

 

 21,800

 

 

––   

 

Prepaid expenses

 

 110,336

 

 

––   

 

Total current assets

 

 3,749,311

 

 

 513

 

  

 

  

 

 

  

 

Loans receivable-long-term

 

 176,884

 

 

––   

 

Property and equipment, net

 

 116,531

 

 

 9,527

 

Intangible assets, net

 

 203,756

 

 

 17,920

 

Goodwill

 

 3,887,818

 

 

––   

 

Deposits

 

 22,750

 

 

––   

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

 8,157,050

 

$

 27,960

 

  

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

Current liabilities

 

  

 

 

  

 

Accounts payable and accrued expenses

$

 2,788,202

 

$

 302,868

 

Related party payables

 

 133,610

 

 

 103,563

 

Notes and loans payable

 

––   

 

 

 95,975

 

Convertible notes payable

 

––   

 

 

 144,000

 

Convertible notes payable-related party, net of unamortized discount

 

––   

 

 

 855,052

 

Total current liabilities

 

 2,921,812

 

 

 1,501,458

 

  

 

  

 

 

  

 

Long term liabilities

 

 

 

 

 

 

Notes and loans payable, unsecured

 

 95,975

 

 

––   

 

Convertible notes payable

 

 144,000

 

 

––   

 

Convertible notes payable, related party

 

 1,107,254

 

 

––   

 

Note payable, secured, net of unamortized discount

 

 8,985,401

 

 

––   

 

Total long term liabilities

 

 10,332,630

 

 

––   

 

Total liabilities

 

 13,254,442

 

 

 1,501,458

 

 

 

 

 

 

 

 

Stockholders' deficit

 

  

 

 

  

 

Preferred stock, $.001 par, 10,000,000 shares authorized, 823,691 issued and outstanding

as of December 31, 2015 and 2014

 

 824

 

 

 824

 

Common stock: 250,000,000 shares authorized, $.001 par, 120,566,774 and 128,228,018 issued

and outstanding as of December 31, 2015 and 2014, respectively

 

 120,567

 

 

 128,228

 

Additional paid in capital-preferred

 

465,843

 

 

465,843

 

Additional paid in capital-common

 

1,030,342

 

 

927,823

 

Subscriptions receivable

 

(192

)

 

(1,338

)

Accumulated deficit

 

(6,714,776

)

 

(2,994,878

)

Total stockholders' deficit

 

(5,097,392

)

 

(1,473,498

)

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$

8,157,050

 

$

 27,960

 



The accompanying notes are an integral part of these financial statements



Table of Contents

F-3



PARALLAX HEALTH SCIENCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

For the year ended

 

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

Revenue

$

11,579,720

 

$

––

 

Cost of sales

 

 9,874,244

 

 

––

 

Gross profit

 

 1,705,476

 

 

––

 

 

 

 

 

 

 

 

Sales, marketing, and pharmacy expenses

 

 1,061,069

 

 

 

 

General and administrative expenses

 

 1,906,488

 

 

866,646

 

 

 

 

 

 

 

 

Operating loss

 

 (1,262,081

)

 

(866,646

)

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

Loss on disposal of assets

 

(10,155

)

 

––

 

Discount amortization

 

(2,233,741

)

 

(194,753

)

Interest expense

 

 (213,921

)

 

 (51,798

)

Total other income (expenses)

 

(2,457,817

)

 

 (246,551

)

 

 

 

 

 

 

 

Net loss

$

(3,419,898

)

$

(1,113,197

)

 

 

 

 

 

 

 

Net (loss) per common share - basic and diluted

$

(0.028

)

$

(0.009

)

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

131,734,518

 

 

127,492,922

 



The accompanying notes are an integral part of these financial statements



Table of Contents

F-4



PARALLAX HEALTH SCIENCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

By Segment

 

 

For the year ended

 

 

December 31, 2015

 

December 31, 2014

 

  

Pharmacy

 

Corporate

 

Consolidated

 

Pharmacy

 

Corporate

 

Consolidated

 

  

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Revenue

$

 11,579,720

 

$

 ––   

 

$

 11,579,720

 

$

 ––   

 

$

 ––   

 

$

 ––   

 

Cost of sales

 

 9,874,244

 

 

 ––   

 

 

 9,874,244

 

 

 ––   

 

 

 ––   

 

 

 ––   

 

Gross profit

 

 1,705,476

 

 

 ––   

 

 

 1,705,476

 

 

 ––   

 

 

 ––   

 

 

 ––   

 

 

 

  

 

  

  

 

  

  

 

 

  

 

  

  

 

  

  

 

Sales, marketing, and pharmacy expenses

 

 1,061,069

 

 

 ––   

 

 

 1,061,069

 

 

 ––   

 

 

 ––   

 

 

 ––   

 

General and administrative expenses

 

 1,356,068

 

 

 550,420

 

 

 1,906,488

 

 

 ––   

 

 

 866,646

 

 

 866,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 (711,661

)

 

 (550,420

)

 

 (1,262,081

)

 

 ––   

 

 

 (866,646

)

 

 (866,646

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on disposal of assets

 

 (10,155

)

 

 ––   

 

 

 (10,155

)

 

––   

 

 

––   

 

 

––   

 

Discount amortization

 

––   

 

 

(2,233,741

)

 

(2,233,741

)

 

 

 

 

(194,753

)

 

(194,753

)

Interest expense

 

 (24,194

)

 

 (189,727

)

 

 (213,921

)

 

 ––   

 

 

 (51,798

)

 

 (51,798

)

Total other income (expenses)

 

 (34,349

)

 

 (2,423,468

)

 

 (2,457,817

)

 

 ––   

 

 

 (246,551

)

 

 (246,551

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

 (746,010

)

$

 (2,973,888

)

$

 (3,719,898

)

$

 ––   

 

$

 (1,113,197

)

$

 (1,113,197

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) per common share –– basic and diluted

$

 (0.006

)

$

 (0.023

)

$

 (0.028

)

$

 ––   

 

$

 (0.009

)

$

 (0.009

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding –– basic and diluted

 

 131,734,518

 

 

 131,734,518

 

 

 131,734,518

 

 

 127,492,922

 

 

 127,492,922

 

 

 127,492,922

 




The accompanying notes are an integral part of these financial statements



Table of Contents

F-5





PARALLAX HEALTH SCIENCES, INC.

STATEMENT OF STOCKHOLDERS DEFICIT

FROM JANUARY 1, 2014 TO DECEMBER 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PREFERRED STOCK

 

COMMON STOCK

 

ADDITIONAL PAID IN CAPITAL

 

DEFERRED

 

SUBSCRIPTIONS

 

ACCUMULATED

 

 

 

 

SHARES

 

AMOUNT

 

SHARES

 

DEFICIT

 

PREFERRED

 

COMMON

 

COMPENSATION

 

RECEIVABLE

 

DEFICIT

 

TOTAL

 

Balance, January 1, 2014

823,691

 

$

824

 

162,765,837

 

$

162,766

 

$

465,843

 

$

(68,658

)

$

––   

 

$

(1,146

)

$

(1,893,546

)

$

(1,333,917

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior period expense adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,865

 

 

11,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature on related party convertible debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

473,494

 

 

 

 

 

 

 

 

 

 

 

473,494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of common stock

 

 

 

 

 

(36,462,819

)

 

(36,463

)

 

 

 

 

36,463

 

 

 

 

 

 

 

 

 

 

 

––

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of related party debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103,449

 

 

 

 

 

 

 

 

 

 

 

103,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to officers

 

 

 

 

 

1,600,000

 

 

1,600

 

 

 

 

 

318,400

 

 

 

 

 

(160

)

 

 

 

 

319,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to consultants

 

 

 

 

 

325,000

 

 

325

 

 

 

 

 

64,675

 

 

 

 

 

(33

)

 

 

 

 

64,698

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,113,197

)

 

(1,113,197

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

823,691

 

 

824

 

128,228,018

 

 

128,228

 

 

465,843

 

 

927,823

 

 

––   

 

 

(1,338

)

 

(2,994,878

)

 

(1,473,498

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for cash

 

 

 

 

 

3,798,035

 

 

3,798

 

 

 

 

 

34,182

 

 

 

 

 

 

 

 

 

 

 

37,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellation of common stock

 

 

 

 

 

(11,459,279

)

 

(11,459

)

 

 

 

 

10,313

 

 

 

 

 

1,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant of stock options to officers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

168,350

 

 

(168,350

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant of stock options to directors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

116,100

 

 

(116,100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant of stock options to employees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95,460

 

 

(95,460

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58,024

 

 

 

 

 

 

 

 

58,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,719,898

)

 

(3,719,898

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

823,691

 

$

824

 

120,566,774

 

$

120,567

 

$

465,843

 

$

1,352,228

 

$

(321,886

)

$

(192

)

$

(6,714,776

)

$

(5,097,392

)


The accompanying notes are an integral part of these financial statements



Table of Contents

F-6




PARALLAX HEALTH SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

For the year ended

 

  

December 31, 2015

 

December 31, 2014

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

$

 (3,719,898

)

$

 (1,113,197

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 77,905

 

 

 7,988

 

Loss on disposal of assets

 

 10,155

 

 

––   

 

Stock compensation/stock option amortization

 

 58,024

 

 

 384,808

 

Discount amortization

 

 2,233,741

 

 

 194,753

 

Allowance for bad debt

 

 8,412,853

 

 

––   

 

Accruals converted to convertible notes payable

 

 273,462

 

 

 375,866

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Increase in trade and other receivables

 

 (10,310,865

)

 

––   

 

Decrease in inventories

 

 82,680

 

 

––   

 

Increase in prepaid expenses

 

 (104,638

)

 

––   

 

Increase in other assets

 

 (750

)

 

––   

 

Increase in accounts payable and accrued expenses

 

 2,485,332

 

 

 103,180

 

Increase (decrease) in related party payables

 

 (146,837

)

 

 46,546

 

Net cash used in operating activities

 

 (648,836

)

 

 (56

)

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of professional equipment

 

 (7,659

)

 

––      

 

Net cash used in investing activities

 

 (7,659

)

 

––   

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from notes payable

 

 2,000,000

 

 

––   

 

Repayment of notes payable

 

 (169,599

)

 

––   

 

Repayment of related party note payable

 

 (300,000

)

 

––   

 

Proceeds from issuance of common shares

 

 37,980

 

 

––   

 

Net cash provided by financing activities

 

 1,568,381

 

 

––   

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

 911,886

 

 

 (56

)

Cash - beginning of period

 

 513

 

 

 569

 

 

 

 

 

 

 

 

Cash - end of period

$

 912,399

 

$

 513

 

 

 

 

 

 

 

 

NON-CASH ACTIVITIES

 

 

 

 

 

 

Note payable issued for purchase of subsidiary common stock

$

 20,500,000

 

$

––   

 

Discount on long-term note payable

$

 (13,345,000

)

$

––   

 

Conversion of related party payable to convertible notes payable

$

 273,462

 

$

 1,087,693

 

Assignment of note payable to related party note payable

$

––   

 

$

 (144,000

)

Change from related party to non-related party convertible note payable

$

––   

 

$

 144,000

 

Change from related party debt to non-related party debt

$

––   

 

$

 49,400

 

Discount on related party debt

$

 (278,740

)

$

 (473,494

)

Cancellation of related party debt

$

––   

 

$

 103,449

 

Subscriptions receivable

$

 (192

)

$

 (1,338

)

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

 

Interest paid

$

 24,194

 

$

––   

 

Income taxes paid

$

––   

 

$

––   

 


The accompanying notes are an integral part of these financial statements





Table of Contents

F-7


PARALLAX HEALTH SCIENCES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2015 AND 2014



NOTE 1. OVERVIEW AND NATURE OF BUSINESS


Parallax Health Sciences, Inc. (the “Company”) was incorporated in the State of Nevada on July 6, 2005.  The Company’s principal focus is on personalized patient care, through the Company’s wholly owned subsidiary, RoxSan Pharmacy, Inc. ("RoxSan"), and through the Company’s wholly owned subsidiary, Parallax Diagnostics Inc., which holds the right, title, and interest in perpetuity to certain point of care diagnostic tests.  The Company's diagnostic testing platform is capable of diagnosing and monitoring several health issues.


On August 13, 2015, the Company entered into an agreement with RoxSan Pharmacy, Inc., a California corporation, and its sole shareholder, Shahla Melamed, to purchase 100% of the issued and outstanding shares of RoxSan's common stock and its assets and inventory. As a result, effective August 13, 2015, RoxSan became the Company's wholly owned subsidiary (Note 11).  Concurrently, Mrs. Melamed resigned from all positions within RoxSan, and Mr. J. Michael Redmond was appointed RoxSan's President and Chief Executive Officer, and Ms. Calli Bucci its Chief Financial Officer.  Mr. Redmond and Ms. Bucci were also appointed as Chairman and member, respectively, of RoxSan’s board of directors.


The Company has the following two business segments: Retail Pharmacy Services (RPS) and Corporate.


Retail Pharmacy Services (RPS)

The RPS provides a full range of pharmacy services including retail, compounding and fertility medications.  


The RPS generates net revenues primarily by dispensing prescription drugs, both through local channels by direct delivery as well as mail order. The RPS also sells a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, seasonal merchandise and convenience foods, through the Company’s pharmacy.


The pharmacy is fully licensed and qualified to conduct business in 39 US States.  


Corporate

The Corporate Segment provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, and corporate information technology and finance departments.  In addition, the Corporate Segment supports the costs and operating expenses related to the continued development and exploitation of the Company's proprietary medical diagnostic and monitoring platform and processes, which remains the Company's primary focus.  


The accompanying audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”).  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that effect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


Going Concern

The Company has incurred losses since inception resulting in an accumulated deficit of $6,714,776, and working capital of $827,499, and further losses are anticipated. The Company’s ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, which may not be available at commercially reasonable terms  There can be no assurance that the Company will be able to generate profitable operations and/or continue to raise funds, in which case the Company may be unable to meet its obligations and the Company may cease operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.


The consolidated financial statements reflect all adjustments consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue as a going concern.


NOTE: The following notes and any further reference made to “the Company”, "we", "us", "our" and "Parallax" shall mean Parallax Health Sciences, Inc., and its wholly-owned subsidiaries, Parallax Diagnostics, Inc. (formerly Endeavor Sciences, Inc.) and RoxSan Pharmacy, Inc., unless otherwise indicated.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation

This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements.  These accounting policies conform to accounting principles, generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.


The Company’s fiscal year-end is December 31.



Table of Contents

F-8



Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.


Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.


Fair Value Hierarchy

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:


Level 1:  Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.


Level 2:  Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.


Level 3:  Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.


Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. As at December 31, 2015 and 2014, the Company had no cash equivalents.


Fair Value of Financial Instruments

As of December 31, 2015 and 2014, respectively, the carrying values of Company’s Level 1 financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value. The fair value of Level 3 instruments is calculated as the net present value of expected cash flows based on externally provided or obtained inputs. Certain Level 3 instruments may also be based on sales prices of similar assets. The Company’s fair value calculations take into consideration the credit risk of both the Company and its counterparties as of the date of valuation. See Note 6 and 11 for additional information about long-term debt.

 

There were no outstanding derivative financial instruments as of December 31, 2015 and 2014.


Accounts Receivable

Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), as well as customers, vendors and manufacturers.  Charges to bad debt are based on both historical write-offs and specifically identified receivables.


The activity in the allowance for doubtful accounts receivable for the years ended December 31, 2015 and 2014, is as follows:


 

December 31, 2015

 

December 31, 2014

 

Beginning balance

$

––

 

$

––

 

Additions charged to bad debt expense for insurance claims

 

34,000

 

 

––

 

Allowance for doubtful collection of workers compensation claims

 

8,378,853

 

 

 

 

Write-offs charged to allowance

 

––

 

 

––

 

Ending balance

$

8,412,853

 

$

––

 


Management has determined that the collection of certain revenues relating to workers compensation insurance claims, in the retail value of $8,378,853, cannot be reasonably assured.  As a result, an allowance for doubtful collections of workers compensation claims in the amount of $8,378,853 has been established until such time as collection can be reasonably assured.


Inventory

Inventory is stated at the lower of cost or market. Prescription drug inventories are accounted for using the weighted average cost method. Front store inventories are accounted for on a first-in, first-out basis using the retail inventory method. Physical inventory counts are taken on a regular basis and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand to ensure that the amounts reflected in the accompanying financial statements are properly stated.



Table of Contents

F-9



Property and Equipment

Property and equipment is comprised of office and computer equipment and software, furniture and fixtures, leasehold improvements, and vehicles, recorded at cost and depreciated using the double declining balance method over the estimated useful lives of 5 to 7 years. Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Application development stage costs for significant internally developed software projects are capitalized and depreciated. See Note 3 for additional information about property and equipment.


Intangible Assets

Product processes, patents and customer lists are amortized on a straight-line basis over their estimated useful lives between 10 and 20 years. See Note 4 for additional information about intangible assets.


Goodwill and other Indefinitely-lived assets

Goodwill and other indefinitely-lived assets are not amortized, but are subject to impairment reviews annually, or more frequently if necessary.


Impairment of Long-Lived Assets

In accordance with ASC 350-30, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable.  When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount.  Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.  The Company currently believes there is no impairment of its long-lived assets.  There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue.  Either of these could result in future impairment of long-lived assets.


Due to the Company’s recurring losses, its long-lived assets were evaluated for impairment and it was determined that future cash flows were sufficient for recoverability of the asset.


Convertible Debt

In accordance with Accounting Standards Codification (“ASC”) 470-20-25, the Company recognizes the advantageous value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert debt into common stock at a price per share that is less than the trading price to the public on the date of the debt. The beneficial value is calculated as the intrinsic value (the market price of the stock at the commitment date in excess of the conversion rate) of the beneficial conversion feature of the debt, and is recorded as a discount to the related debt and an addition to additional paid in capital. The discount is amortized over the remaining outstanding period of related debt using the interest method.


Net Income (Loss) Per Common Share

The Company computes earnings per share in accordance with ASC 260-10, Earnings Per Share. Net earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible preferred shares and the exercise of the Company’s stock options and warrants.


Comprehensive Loss

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at December 31, 2015 and 2014, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.


Revenue Recognition

Revenue is recognized when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.


The Retail Pharmacy recognizes revenue at the time the customer takes possession of the merchandise. Customer returns are not material. Sales taxes are not included in revenue.


Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.


The Company has net operating loss carryforwards available to reduce future taxable income. Future tax benefits for these net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that the Company will not realize a future tax benefit, a valuation allowance is established.


Stock-Based Compensation



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F-10



Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the stock award (generally 3 to 5 years) using the straight-line method.


Recently Adopted Accounting Standards 

The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the US Securities and Exchange Commission (“SEC”), and the Emerging Issues Task Force (“EITF”), to determine the impact of new pronouncements on US GAAP and the impact on the Company. The Company has recently adopted the following new accounting standards:


Adopted:


In April 2014, the FASB issued ASU No. 2014-08 Presentation of Financial Statements (Top 205): Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity.  The objective of ASU No. 2014-08 is to clarify the criteria for determining which disposals can be presented as discontinued operations and also modifies related disclosure requirements. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods.  Early adoption is permitted for new disposals beginning in the first quarter of 2014, provided financial statements have not been issued before the release of this standard.


In June 2014, the FASB issued ASU No, 2014-10, Elimination of Certain Financial Reporting Requirements for Development Stage Entities.  The objective of ASU 2014-10 is to reduce the cost and complexity associated with the incremental reporting requirements for development stage entities.  This Update removes all incremental financial reporting requirements, and eliminates an exception provided to development stage entities in Topic 810.  The amendments in this standard are effective retrospectively for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted.


In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606).  The objective of ASU No. 2014-08 is to clarify the principles for recognizing revenue and to develop a common revenue standard for US GAAP and IFRS.  The FASB created a new Topic 606, and IASB is issuing IFRS 15, to meet the joint objectives regarding revenue recognition.  The guidance in this Update affects any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.  The guidance in this Update supersedes the revenue recognition requirements in Topic 605, and most industry-specific guidance, as well as certain requirements contained within Topic 350 and Topic 360.  The standard is required to be adopted by public business entities in annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is not permitted.


In August 2014, the FASB issued ASU No 2014-15 Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The objective of ASU 2014-15 is to provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.  


In November 2014, the FASB issued ASU No. 2014-17 Business Combinations (Topic 805): Pushdown Accounting. The objective of ASU 2014-17 is to provide guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle.


Not Yet Adopted:


In January 2015, the FASB issued ASU 2015-01 Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities. The Company is evaluating the effect, if any, adoption of ASU No. 2015-01 will have on its consolidated financial statements.



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In April 2015, the FASB issued ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30: Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 is part of the Simplification Initiative, and its objective of to simplify the presentation of debt issuance costs.  This Update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update.  The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is evaluating the effect, if any, adoption of ASU No. 2015-03 will have on its consolidated financial statements.


In July 2015, the FASB issued ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory.  ASU 2015-11 is part of the Simplification Initiative, and its objective is to simplify the measurement of inventory.  This Update applies to inventory that is measured using FIFO or average cost, and requires an entity measure inventory at the lower of cost and net realizable value.  The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period.  The Company is evaluating the effect, if any, adoption of ASU No. 2015-11 will have on its consolidated financial statements.


In September 2015, the FASB issued ASU 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments.  ASU 2015-16 is part of the Simplification Initiative, and eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. The Company is evaluating the effect, if any, adoption of ASU No. 2015-16 will have on its consolidated financial statements.


Recently Issued Accounting Standards Updates: 

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.


NOTE 3. ACCOUNTS RECEIVABLE, NET


Accounts receivable, net, consists of the following:

 

December 31, 2015

 

December 31, 2014

 

Insurance claims receivable

$

999,612

 

$

––

 

Workers compensation claims receivable

 

8,549,073

 

 

––

 

Customer receivables

 

313,722

 

 

––

 

Total accounts receivable

 

9,862,407

 

 

––

 

 

 

 

 

 

 

 

Allowance for doubtful accounts:

 

 

 

 

 

 

Allowance-insurance claims

$

(34,000

)

$

––

 

Allowance-workers compensation claims

 

(8,378,853

)

 

––

 

Total allowances for doubtful accounts receivable

 

(8,412,853

)

 

––

 

 

 

 

 

 

 

 

Accounts receivable, net

$

1,449,554

 

$

––

 


As of December 31, 2015, the Company was owed $999,612 in insurance claims, $8,549,073 in workers compensation claims, and $313,722 in customer house account charges, for which payment has not yet received.


Customer receivable consists of $33,894 in copayments and $279,828 in charges for prescriptions and other retail purchases made by certain preferred customers, for which the Company provides monthly invoices to and receives regular payments on.  As of December 31, 2015, $313,722 was owed from customers receivable.


Management has determined that the collection of certain revenues relating to workers compensation claims, in the retail value of $8,378,853, cannot be reasonably assured.  As a result, an allowance for the doubtful collection of workers compensation claims in the amount of $8,378,853 until such time as collection can be reasonably assured. The collectability of workers compensation claims in the amount of $170,220 can be reasonably assured.  As a result, the Company has included this amount as revenues earned on the accompanying income statement.

 

An allowance for doubtful collection of insurance claims has been established in the amount of $34,000.


As of December 31, 2015, accounts receivable, net of allowances for doubtful accounts, was $1,449,554.




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F-12


NOTE 4. PROPERTY AND EQUIPMENT


The following are the components of property and equipment:

 

December 31, 2015

 

December 31, 2014

 

Appliances

$

3,360

 

$

––

 

Computer and office equipment

 

32,718

 

 

8,385

 

Furniture and fixtures

 

23,453

 

 

––

 

Leasehold improvements

 

78,881

 

 

––

 

Software

 

873

 

 

––

 

Medical devices and instruments

 

45,194

 

 

45,194

 

Sub-total

 

184,479

 

 

53,579

 

Less: accumulated depreciation

 

(57,793

)

 

(44,052

)

Property and equipment, net, before disposals

 

126,686

 

 

9,527

 

Less: disposals, net of depreciation

 

(10,155

)

 

––

 

Property and equipment, net of disposals

$

116,531

 

$

9,527

 


As of December 31, 2015, the Company disposed of equipment valued at $0, and recognized a loss in the amount of $10,155.  


Depreciation expense for the years ended December 31, 2015 and 2014, was $13,741 and $6,324, respectively.


NOTE 5. INTANGIBLE ASSETS


The following are the components of finite-lived intangible assets:

 

December 31, 2015

 

December 31, 2014

 

Products and processes

$

12,500

 

$

12,500

 

Trademarks and patents

 

12,500

 

 

12,500

 

Customer list

 

250,000

 

 

––

 

Sub-total

 

275,000

 

 

25,000

 

Accumulated amortization

 

(71,244

)

 

(7,080

)

Intangible assets, net

$

203,756

 

$

17,920

 


Amortization expense for the years ended December 31, 2015 and 2014, was $64,164 and $1,664, respectively.


NOTE 6. LOANS RECEIVABLE


Loans receivable consists of $176,884 in monies owed to the Company from the former owner of RoxSan Pharmacy through December 31, 2015.  Included in this amount are monies collected by the former owner for revenues earned subsequent to the closing date of August 13, 2015 (the “Closing Date”), less monies collected by the Company for revenues earned prior the Closing Date; and monies advanced by the Company on behalf of the former owner for expenses incurred prior to the Closing Date, less monies advanced by the former owner on behalf of the Company for expenses incurred subsequent to the Closing Date.  


The amount owed to the Company is being disputed by the former owner, and is part of the legal proceedings disclosed in Note 16. The Company is confident that it shall prevail in this matter.


NOTE 7. NOTES AND LOANS PAYABLE


Notes and loans payable consists of the following:

 

December 31, 2015

 

December 31, 2014

 

Notes and loans payable, unsecured

 

 

 

 

 

 

Loans payable

$

11,900

 

$

11,900

 

Notes payable

 

84,075

 

 

84,075

 

Total notes and loans payable, unsecured

 

95,975

 

 

95,975

 

 

 

 

 

 

 

 

Convertible notes payable

 

144,000

 

 

144,000

 

 

 

 

 

 

 

 

Notes payable, secured, net of unamortized discount

 

 

 

 

 

 

Note payable-merchant

 

1,830,401

 

 

––

 

 

 

 

 

 

 

 

Note payable

 

20,000,000

 

 

––

 

Less: unamortized discount

 

(13,345,000

)

 

––

 

Note payable, net of unamortized discount

 

7,155,000

 

 

 

 

Total notes payable, secured, net of unamortized discount

 

8,985,401

 

 

––

 

 

 

 

 

 

 

 

Total notes and loans payable

$

9,225,376

 

$

239,975

 


As of December 31, 2015 and 2014, non-related party loans and promissory notes in the aggregate sum of $95,975 are owed by the Company.  The loans, made in previous years, were for short-term overhead requirements, and are unsecured and non-interest bearing.  The notes bear interest a rate of 8% to 10% per annum, are unsecured, and are payable upon demand.  As of December 31, 2015, no demand has been made.  During the year ended December 31, 2015 and 2014, respectively, interest in the amount of $7,300 and $7,300 was expensed. As of December 31, 2015 and 2014, respectively, a total of $36,812 and $29,512 in interest has been accrued, and is included as an accrued expense on the accompanying consolidated balance sheet.


Non-related party convertible notes payable consist of the following:

Note Holder

 

Principal

 

APR

 

Accrued Interest

 

Conversion

Price

 

Term/Due

 

 

 

 

 

 

 

 

 

 

 

 

 

The Kasper Group, Ltd.

 

$

144,000

 

7%

 

$

40,320

 

$0.25

 

01/01/2015


As of December 31, 2015 and 2014, a non-related party convertible promissory note in the amount of $144,000 is owed by the Company. The unsecured note bears interest at a rate of 7% per annum, was due by January 1, 2015, and contains a repayment provision to convert the debt into shares of the Company's common stock at a rate of $0.25 per share.  As of December 31, 2015, no demand for payment or conversion has been made. During the year ended December 31, 2015 and 2014, respectively, interest in the amount of $10,080 and $10,080 was expensed.  As of December 31, 2015 and 2014, respectively, a total of $40,320 and $30,240 in interest has been accrued, and is included as an accrued expense on the accompanying consolidated balance sheet.


On August 13, 2015, the Company issued a secured promissory note in the amount of $20.5 million in connection with the acquisition of RoxSan Pharmacy, Inc. (Note 11).  The note bears interest at a rate of 6% per annum, and matures in three (3) years, or August 13, 2018 ("Maturity").  Principal payments are to be calculated on a quarterly basis beginning with the three-month period ending November 30, 2015, in an amount equal to 1) 75% during the first two (2) years; and 2) 60% during year three (3); of certain earnings defined within the Note as EBITDA.  All remaining principal, if any, and accrued interest still owing after three (3) years is to be paid in full at Maturity. Management has determined that the note issued does not fairly represent the fair market value for the related acquisition at the date of purchase.  As a result, the difference between the face value and the estimated fair market value of the note has been classified as a discount on the note. During the year ended December 31, 2015, the Company expensed $1,955,000 in discount amortization.  As of December 31, 2015, $13,345,000 in unamortized discount remains, to be amortized over the next 32 months, to the note's maturity.  During the year ended December 31, 2015, interest in the amount of $101,702 has been expensed, and as of December 31, 2015, it is included as an accrued expense on the accompanying consolidated balance sheets.


On October 9, 2015, the Company, through its wholly owned subsidiary, RoxSan, entered into a Business Loan and Security Agreement (the "Loan") with American Express, FSB, in the principal sum of $2,000,000.  The Loan includes interest in the form of a flat fee of $240,000, or 12% per annum, to be amortized over twenty-four (24) months, to the Loan's maturity.  Payments of principal and interest are made through collection of merchant funds received by the Company for customer purchases paid with the American Express credit card.  During the year ended December 31, 2015, payments totaling $193,792, representing $169,599 in principal and $24,193 in interest have been made. As of December 31, 2015, principal of $1,830,401 and unamortized loan fee of $215,806 remains.


During the year ended December 31, 2015 and 2014, respectively, interest on notes and loans payable in the amount of $143,275 and $17,380 has been expensed.  As at December 31, 2015 and 2014, respectively, a total of $203,027 and $59,752 in interest has been accrued and is included as part of accrued expenses on the accompanying consolidated balance sheets.


NOTE 8. RELATED PARTY TRANSACTIONS


Related party transactions consist of the following:

 

December 31, 2015

 

December 31, 2014

 

Related party payables

 

 

 

 

 

 

Accrued compensation

$

120,800

 

$

75,800

 

Cash advances

 

12,810

 

 

27,763

 

Total related party payables

 

133,610

 

 

103,563

 

 

 

 

 

 

 

 

Convertible notes payable

 

1,107,254

 

 

1,133,793

 

Less: unamortized discount

 

––

 

 

(278,741

)

Total convertible note payable, net of discount

 

1,107,254

 

 

855,052

 

 

 

 

 

 

 

 

Total related party transactions

$

1,240,864

 

$

958,615

 


As at December 31, 2015 and 2014, respectively, related parties are due a total of $1,240,864 and $958,615, consisting of $120,800 and $75,800 in accrued compensation; $12,810 and $27,763 in cash advances to the Company for operating expenses; and $1,107,254 and $855,052 in related party convertible notes payable, net of unamortized discounts.  



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F-14



Related party convertible notes payable consist of the following:

Note Holder

 

Principal

 

APR

 

Accrued Interest

 

Conversion

Price

 

Term/Due

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph M. Redmond, President

 

$

776,154

 

5%

 

$

47,134

 

$0.10

 

07/31/2017

Huntington Chase, Beneficial Owner

 

 

331,100

 

7%

 

 

60,673

 

$0.10

 

12/31/2015

Total

 

$

1,107,254

 

 

 

$

107,897

 

 

 

 


The Company has issued convertible promissory notes to its principals in the aggregate sum of $1,107,254, representing cash loans and unpaid compensation.  The notes bear interest at a rate of between 5% and 7% per annum, mature between and December 31, 2015 and July 31, 2017, and contains a repayment provision to convert the debt into common stock of the Company at a strike price of $0.10. The conversion price of $0.10 resulted in a beneficial conversion feature.  As a result, the difference between the conversion rate and the market rate in the aggregate of $474,394 was classified as discounts on the notes. During the year ended December 31, 2015 and 2014, respectively, the Company expensed $278,741 and $194,753 in discount amortization.  As of December 31, 2015 and 2014, respectively, $0 and $278,741 in unamortized discounts remained.  During the years ended December 31, 2015 and 2014, respectively, interest in the amount of $70,646 and $34,418 was expensed.  As of December 31, 2015 and 2014, respectively, a total of $107,897 and $37,251 in interest has been accrued, and is included as an accrued expense on the accompanying consolidated balance sheet.


On August 13, 2015, the Company, through its wholly owned subsidiary, RoxSan, entered into an Employment Agreement with its newly appointed President and Chief Executive Officer. The agreement replaces any other written agreement with the Company, is for a term of three (3) years, and includes annual compensation of $295,000 in year 1; $325,000 in year 2; and $350,000 in year 3, as well as a bonus plan contingent upon the Company's sales performance and customary employee benefits.  In addition, the agreement provides for options granted to purchase for 2,000,000 shares of the Company's common stock at a strike price of $0.05 per share.  The options are for a period of five (5) years, and vest quarterly over a three (3) year period.

 

On August 13, 2015, the Company, through its wholly owned subsidiary, RoxSan, entered into an Employment Agreement with its newly appointed Chief Financial Officer.  The agreement replaces any other written agreement with the Company, is for a term of three (3) years, and includes annual compensation of $165,000 in year 1; $190,000 in year 2; and $215,000 in year 3, as well as a bonus plan contingent upon the Company's sales performance, and customary employee benefits.  In addition, the agreement provides for options granted to purchase 1,500,000 shares of the Company's common stock at a strike price of $0.05 per share. The options are for a period of five (5) years, and vest quarterly over a three (3) year period.


On October 1, 2015, the Company, through its wholly owned subsidiary, RoxSan, entered into a Consulting Agreement with a former member of the board of directors.  The agreement replaces any other written agreement with the Company, is for a term of three (3) years, and includes monthly compensation of $15,000 and customary expense allowances.  In addition, the agreement provides for options granted to purchase 500,000 shares of the Company's common stock at a strike price of $0.05 per share. The options are for a period of five (5) years, and vest quarterly over three (3) year period.


On October 2, 2015, the Company through its wholly owned subsidiary, RoxSan, entered into a Consulting Agreement with Huntington Chase Financial Group, LLC, whose principal is a related party. The agreement replaces any other written agreement with the Company, is for a term of three (3) years, and includes monthly compensation of $20,000 and customary expense allowances.


During the years ended December 31, 2015 and 2014, respectively, interest on related party notes payable in the amount of $70,646 and $34,418 was expensed.  As at December 31, 2015 and 2014, respectively, a total of $107,897 and $37,251 in interest has been accrued, and is included as part of accrued expenses on the accompanying consolidated balance sheets.


NOTE 9: CONVERTIBLE PREFERRED STOCK


The total number of authorized shares of preferred stock that may be issued by the Company is 10,000,000 with a par value of $0.001 per share.


All preferred shares are convertible into the Company’s common stock at a rate of 20 shares of common stock for each preferred share held, and were issued with 100% warrant coverage (Note 10).  The number of shares of common stock underlying the warrants and the exercise price are subject to adjustment upon certain events.


As of December 31, 2015 and 2014, the Company had 823,691 shares of preferred stock issued and outstanding.


NOTE10. COMMON STOCK


The total number of authorized shares of common stock that may be issued by the Company is 250,000,000 with a par value of $0.001 per share.  



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F-15



On January 25, 2015, pursuant to a Stock Purchase Agreement, the Company issued 3,798,035 shares of the Company's restricted common stock at $0.01 per share, for cash in the amount of $37,980.  As a result, $34,182 was recorded to paid in capital.


On December 31, 2015, the Company cancelled an unpaid stock subscription for 11,459,279 shares of the Company's restricted common stock.  As a result, paid in capital was reduced by $10,313.


As of December 31, 2015 and 2014, respectively, the Company had 120,566,774 and 128,228,018 common shares issued and outstanding.


NOTE 11. WARRANTS AND OPTIONS


As of December 31, 2015 and 2014, respectively, the Company had 15,989,276 and 16,473,401 warrants and 9,200,000 and 5,400,000 options issued and outstanding.


On December 6, 2015, 726,785 warrants underlying 36,339 shares of preferred stock, expired.

 

Warrants Outstanding

 

 

 

Number of

 

Remaining

 

Exercise Price

 

Weighted

 

 

 

Common

 

Contractual Life

 

times Number

 

Average

 

Exercise Price

 

Shares

 

(in years)

 

of Shares

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

$0.27518

 

14,535,706

 

1.45

 

$

4,000,000

 

$0.27518

 

$0.41278

 

726,785

 

1.74

 

 

300,000

 

$0.41278

 

$0.41278

 

484,125

 

0.31

 

 

199,837

 

$0.41278

 

 

 

15,989,276

 

 

 

$

4,499,837

 

$0.41278

 


Warrant Activity

 

 

 

 

 

Number of

 

Weighted Average

 

 

Shares

 

Exercise Price

 

Outstanding at December 31, 2014

16,473,401

 

$0.41278

 

Issued

––

 

––

 

Exercised

––

 

––

 

Expired / Cancelled

(726,785

)

$0.41278

 

Outstanding at December 31, 2015

15,989.276

 

$0.41278

 


On August 13, 2015, in connection with certain executive employment agreements, the Company granted its officers options to purchase 3,500,000 common shares at $0.05 for a period of five (5) years.  The options vest quarterly over a three (3) year period, and were valued at $168,350, using the Black-Scholes method.  The assumptions used in valuing the options were: expected term 5.75 years, expected volatility 1.97, risk free interest rate 1.58%, and dividend yield 0%.  As of December 31, 2015, the Company expensed $21,044 in stock compensation, and recorded $147,306 in deferred compensation, to be expensed over the next 31 months.


Between October 1, 2015 and October 5, 2015, the Company granted certain members of the board of directors options to purchase 2,250,000 common shares at $0.05 for a period of five (5) years.  The options, of which 25% vested upon the grant date, and the balance vest quarterly over a two (2) year period, were valued at $116,100, using the Black-Scholes method.  The assumptions used in valuing the options were: expected term 5.75 years, average expected volatility 1.53, average risk-free interest rate 1.35%, and dividend yield 0%.  As of December 31, 2015, the Company expensed $29,025 in stock compensation, and recorded $87,075 in deferred compensation, to be expensed over the next 24 months.


On October 1, 2015, the Company granted certain employees options to purchase 1,850,000 common shares at $0.05 for a period of five (5) years.  The options vest quarterly over a three (3) year period, and were valued at $95,460, using the Black-Scholes method.  The assumptions used in valuing the options were: expected term 5.75 years, average expected volatility 1.52, average risk-free interest rate 1.37%, and dividend yield 0%. As of December 31, 2015, the Company expensed $7,955 in stock compensation, and recorded $87,505 in deferred compensation, to be expensed over the next 33 months.


Options Outstanding

 

 

 

 

Remaining

 

Exercise Price

 

Weighted

 

 

 

Number of

 

Contractual Life

 

times Number

 

Average

 

Exercise Price

 

Shares

 

(in years)

 

of Shares

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

$0.10

 

1,375,000

 

5.00

 

$

137,500

 

$0.10

 

$0.25

 

225,000

 

0.25

 

 

56,250

 

$0.25

 

$0.05

 

3,500,000

 

3.87

 

 

175,000

 

$0.05

 

$0.05

 

4,100,000

 

4.00

 

 

205,000

 

$0.05

 

 

 

9,200,000

 

 

 

$

573,750

 

$0.16

 




Table of Contents

F-16



Options Activity

 

 

 

 

 

Number of

 

Weighted Average

 

 

Shares

 

Exercise Price

 

Outstanding at December 31, 2014

1,900,000

 

$0.20

 

Issued

7,600,000

 

$0.05

 

Exercised

––

 

––

 

Expired / Cancelled

(300,000

)

––

 

Outstanding at December 31, 2015

9,200,000

 

$0.16

 


During the year ended December 31, 2015 and 2014, respectively, a total of $379,910 and $0 in deferred compensation was recorded, and $58,024 and $0 in stock option compensation was expensed.  There remains $321,886 and $0 in deferred compensation as of December 31, 2015 and 2014, respectively, to be expensed over the next 33 months.


NOTE 12: BUSINESS ACQUISITIONS


On August 13, 2015, the Company purchased 100% of the issued and outstanding shares of RoxSan Pharmacy, Inc. common stock and its assets and inventory in exchange for a secured promissory note in the principal sum of $20.5 million (the "Acquisition Agreement").  As part of the Acquisition Agreement, all existing cash and trade receivables, and all existing debt as of August 12, 2015, remained the property/obligation of the seller.  


The negotiated purchase price was based upon, among other things, the guarantee of certain revenues being collectible and contracts being in place after closing.  It was discovered after closing that, among other things, the revenues were not collectible and the contracts were not in place.  The improper disclosures by the seller during negotiations significantly affected the purchase price and related note payable, and management has determined that the purchase price and related promissory note do not fairly represent the fair market value at the date of purchase.  As a result, the company has discounted the promissory note to its estimated fair market value of $5.2 million. (Note 6).


The following represent the fair values of the assets acquired by the Company on August 13, 2015:


Inventory

$

913,835

 

Prepaid insurance

 

3,108

 

Property and equipment

 

105,368

 

Identifiable intangibles

 

250,000

 

Goodwill

 

3,887,818

 

Security deposits

 

22,000

 

Fair market value of assets acquired

$

5,200,000

 


The fair market value established at August 13, 2015 does not include the effects of any liabilities the seller omitted or caused the Company to incur as a result of the seller and its associates.


The goodwill represents future economic benefits expected to arise from the Company’s expanded presence in the specialty pharmaceuticals market, the assembled workforce acquired, and the expected synergies from combining operations with RoxSan. The goodwill is nondeductible for income tax purposes.


RoxSan’s results of operations are included in the Company’s statements of operations beginning on August 13, 2015 (Note 15).  During the year ended December 31, 2015, acquisition costs of $110,000 were expensed and incurred within general and administrative expenses.


NOTE 13. COMMITMENTS AND CONTINGENCIES


The Company leases office space and commercial facilities in Beverly Hills, California.  The lease agreement for the office space renews annually at a base rent of $92,880.  The commercial facilities are leased under agreements with original terms of twelve (12) years, with one (1) renewal option of twelve (12) years, and contain base monthly rent for premises plus a proportionate share of common area maintenance cost (CAM). The company also sub-leases office space for its administrative offices in Santa Monica, California, for $5,600 per month, on a month-to-month basis.


The future minimum rental payments required under the lease agreements are summarized as follows:


Year

 

Base

 

CAM

 

Total

2016

 

$

382,856

 

$

58,417

 

$

441,274

2017

 

 

391,556

 

 

58,417

 

 

449,973

2018

 

 

400,037

 

 

58,417

 

 

458,455

2019

 

 

330,525

 

 

42,298

 

 

372,822

 

 

$

1,504,974

 

$

217,550

 

$

1,722,524


Rent expense for the years ended December 31, 2015 and 2014, was $155,713 and $0, respectively, including $22,456 and $0 of common area maintenance cost.



Table of Contents

F-17



NOTE 14. INCOME TAXES


The components of the cumulative net deferred tax asset at December 31, 2015 and 2014, the statutory tax rate, the effective tax rate and the amount of the valuation allowance are indicated below:


 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

Income (loss) before taxes

$

(3,719,898

)

$

(1,113,197

)

Statutory rate

 

34%

 

 

34%

 

 

 

 

 

 

 

 

Computed expected tax payable (recovery)

$

(1,264,800

)

$

(378,500

)

Non-deductible expenses

 

4,500