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EX-32.2 - TRXADE GROUP, INC.ex32-2.htm
EX-32.1 - TRXADE GROUP, INC.ex32-1.htm
EX-31.2 - TRXADE GROUP, INC.ex31-2.htm
EX-31.1 - TRXADE GROUP, INC.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2020

 

OR

 

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

 

For the Transition Period from _______ to _______

 

Commission File Number: 001-39199

 

TRXADE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   46-3673928

(State or other jurisdiction of

incorporation or organization)

  (Identification Number)
     
3840 Land O’ Lakes Blvd.    
Land O’ Lakes, Florida   34639
(Address of principal executive offices)   (Zip code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered

Common Stock, $0.00001 Par Value Per Share

  MEDS   The NASDAQ Stock Market LLC

 

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

 

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

 

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

 

Large accelerated filer [  ] Accelerated filer [  ]
       
Non-accelerated filer [X] Smaller reporting company [X]
       
Emerging growth company [X]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

There were 8,093,199 shares of the registrant’s common stock outstanding on October 23, 2020, and no shares of preferred stock outstanding.

 

 

 

 
 

 

TRXADE GROUP, INC.

FORM 10-Q

For the Quarter Ended September 30, 2020

 

TABLE OF CONTENTS

 

    Page
PART I: FINANCIAL INFORMATION    
     
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)   1
     
Consolidated Balance Sheets   1
Consolidated Statements of Operations   2
Consolidated Statements of Changes in Shareholders’ Equity   3
Consolidated Statements of Cash Flows   4
Notes to Unaudited Consolidated Financial Statements   5
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   12
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   20
     
ITEM 4. CONTROLS AND PROCEDURES   21
     
PART II. OTHER INFORMATION    
     
ITEM 1. LEGAL PROCEEDINGS   22
     
ITEM 1A. RISK FACTORS   22
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   24
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES   24
     
ITEM 4. MINE SAFETY DISCLOSURES   24
     
ITEM 5. OTHER INFORMATION   24
     
ITEM 6. EXHIBITS   24
     
SIGNATURES   25

 

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Trxade Group, Inc.

Consolidated Balance Sheets

September 30, 2020 and December 31, 2019

(unaudited)

 

   September 30, 2020   December 31, 2019 
Assets          
Current Assets          
Cash  $6,647,763   $2,871,694 
Accounts Receivable, net   1,034,482    792,050 
Inventory   1,647,088    56,761 
Prepaid Assets   232,671    82,452 
Deposits for Inventory purchases   1,081,250    - 
Total Current Assets   10,643,254    3,802,957 
           
Property Plant and Equipment, Net   150,147    174,987 
           
Other Assets          
Deposits   21,636    21,636 
Deferred Offering Costs   -    88,231 
Right-of-use leased assets   313,000    757,710 
Goodwill   725,973    725,973 
           
Total Assets  $11,854,010   $5,571,494 
           
Liabilities and Shareholders’ Equity          
           
Current Liabilities          
Accounts Payable  $191,597   $334,614 
Accrued Liabilities   286,145    98,852 
Current Portion Lease Liabilities   57,155    87,350 
Total Current Liabilities   534,897    520,816 
           
Long Term Liabilities          
Notes Payable – Related Parties   225,000    225,000 
Other Long-term Liabilities – Leases   267,024    685,461 
Total Liabilities   1,026,921    1,431,277 
           
Shareholders’ Equity          
Series A Preferred Stock, $0.00001 par value; 10,000,000 shares authorized; none issued and outstanding as of September 30, 2020 and December 31, 2019, respectfully   -    - 
Common Stock, $0.00001 par value; 100,000,000 shares authorized; 8,070,671 and 6,539,415 shares issued and outstanding, as of September 30, 2020 and December 31, 2019, respectively   81    65 
Additional Paid-in Capital   19,446,404    12,535,655 
Retained Deficit   (8,619,396)   (8,395,503)
Total Shareholders’ Equity   10,827,089    4,140,217 
           
Total Liabilities and Shareholders’ Equity  $11,854,010   $5,571,494 

 

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

 

1

 

Trxade Group, Inc.

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2020 and 2019

(unaudited)

 

   Three months ended   Nine months ended 
   2020   2019   2020   2019 
                 
Revenues  $6,332,269   $2,311,426   $15,128,226   $5,740,361 
                     
Cost of Sales   4,402,967    1,000,917    9,554,016    2,119,894 
Gross Profit   1,929,302    1,310,509    5,574,210    3,620,467 
                     
Operating Expenses                    
General and Administrative   1,783,481    1,132,656    5,775,439    3,138,150 
                     
Operating Income (Loss)   145,821    177,853    (201,229)   482,317 
                     
Other Income   -    25,275    -    25,275 
Investment Loss   -    (162,178)   -    (250,000)
Interest Expense   (7,430)   (13,385)   (22,664)   (46,817)
Net Income (Loss)  $138,391   $27,565   $(223,893)  $210,775 
                     
Net Income (Loss) per Common Share – Basic:  $0.02   $0.00   $(0.03)  $0.04 
                     
Net Income (Loss) per Common Share – Diluted:  $0.02   $0.00   $(0.03)  $0.03 
                     
Weighted average Common Shares Outstanding – Basic   8,063,043    5,748,329    7,572,954    5,728,421 
                     
Weighted average Common Shares Outstanding - Diluted   8,215,418    6,047,748    7,725,329    6,027,840 

 

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

 

2

 

Trxade Group, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the Three and Nine Months Ended September 30, 2020 and 2019

(unaudited)

 

   Preferred Stock   Common Stock   Additional
Paid-in-
   Accumulated   Total
Shareholders’
 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
Balance at December 31, 2019        -   $       -    6,539,415   $65   $12,535,655   $(8,395,503)  $4,140,217 
Common Stock issued from offering   -    -    922,219    10    5,994,414    -    5,994,424 
Fractional shares issued due to reverse split   -    -    40    -    -    -    - 
Stock Issuance Costs   -    -    -    -    (820,586)   -    (820,586)
Options Exercised for Cash   -    -    167    -    501    -    501 
Warrants Exercised for Cash   -    -    22,529    -    1,352    -    1,352 
Warrants Expense   -    -    -    -    79,089    -    79,089 
Options Expense   -    -    -    -    61,997    -    61,997 
Net Income   -    -    -    -    -    180,303    180,303 
Balance at March 31, 2020   -   $-    7,484,370   $75   $17,852,422   $(8,215,200)  $9,637,297 
                                    
Common Stock Issued for Services   -    -    217,965    2    829,865    -    829,867 
Warrants Exercised for Cash   -    -    360,002    4    21,596    -    21,600 
Warrants Expense   -    -    -    -    21,294    -    21,294 
Options Expense   -    -    -    -    183,906    -    183,906 
Net Loss   -    -    -    -    -    (542,587)   (542,587)
Balance at June 30, 2020   -   $-    8,062,337   $81   $18,909,083   $(8,757,787)  $10,151,377 
                                    
Common Stock Issued for Services   -    -    -    -    348,246    -    348,246 
Warrants Exercised for Cash   -    -    8,334    -    13,303    -    13,303 
Warrants Expense   -    -    -    -    48,775    -    48,775 
Options Expense   -    -    -    -    126,997    -    126,997 
Net Income   -    -    -    -    -    138,391    138,392 
Balance at September 30, 2020   -    -    8,070,671          81    19,446,404    (8,619,396)   10,827,089 

 

   Preferred Stock   Common Stock   Additional
Paid-in-
   Accumulated   Total
Shareholders’
 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
Balance at December 31, 2018       -   $       -    5,547,638   $55   $8,955,688   $(8,111,075)  $844,668 
Common Stock issued for convertible debt and accrued interest   -    -    70,666    1    211,982    -    211,983 
Warrants Exercised for Cash   -    -    2,778    -    166    -    166 
Options Expense   -    -    -    -    35,979    -    35,979 
Net Income   -    -    -    -    -    125,229    125,229 
Balance at March 31, 2019   -   $-    5,621,082   $56   $9,203,815   $(7,985,846)  $1,218,025 
                                    
Option Expense   -    -    -    -    64,011    -    64,011 
Net (Loss) Income   -    -    -    -    -    57,981    57,981 
Balance at June 30, 2019   -    -    5,621,082    56    9,267,826    (7,927,865)   1,340,017 
                                    
Common Stock Issued for Cash   -    -    818,333    9    2,454,991    -    2,455,000 
Warrants Expense   -    -    -    -    26,363    -    26,363 
Options Expense   -    -    -    -    41,604    -    41,604 
Net Income   -    -    -    -    -    27,565    27,565 
Balance at September 30, 2019   -         -    6,439,415              65    11,790,784    (7,900,300)   3,890,549 

 

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

 

3

 

Trxade Group, Inc.

Consolidated Statements of Cash Flows

For the Nine months ended September 30, 2020 and 2019

(unaudited)

 

   2020   2019 
         
Operating Activities:          
Net Income (Loss)  $(223,893)  $210,775 
           
Adjustments to reconcile net (loss) income to net cash used in operating activities:          
Depreciation Expense   3,750    3,750 
Options Expense   372,900    141,594 
Warrant Expense   149,158    26,363 
Common Stock Issued for Services   1,178,113    - 
Bad Debt Expense   35,539    6,084 
Investment Loss   -    250,000 

Inventory Write Down

   

137,155

    

-

 

Amortization of Right-of-Use Asset

   60,600    66,598 
Changes in operating assets and liabilities:          
Accounts Receivable   (277,971)   (282,746)
Prepaid Assets and Other Current Assets   (150,219)   (100,100)
Inventory   (1,727,482)   16,650 
Deposits for Inventory Purchases   (1,081,250)   - 
Lease Liability   (64,522)   (55,102)
Accounts Payable   (98,422)   (2,557)
Accrued Liabilities and Other Liabilities   187,293    43,256 
Net Cash (used in) provided by operating activities   (1,499,251)   324,565 
           
Investing Activities:          
Purchase of Fixed Assets   (23,505)   - 
Purchase of Equity Method Investment   -    (250,000)
Net Cash (used in) investing activities   (23,505)   (250,000)
           
Financing Activities:          
Repayments of Short-Term Convertible Debt - Related Parties   -    (40,000)
Payment of Stock Issuance Costs   (732,355)   - 
Proceeds from Exercise of Warrants   36,255    166 
Proceeds from Exercise of Stock Options   501    - 
Proceeds from Issuance of Common Stock   5,994,424    2,455,000 
Net Cash provided by financing activities   5,298,825    2,415,166 
           
Net increase in Cash   3,776,069    2,489,731 
Cash at Beginning of the Period   2,871,694    869,557 
Cash at End of the Period  $6,647,763   $3,359,288 
           
Supplemental Cash Flow Information          
Cash Paid for Interest  $5,789   $40,705 
Cash Paid for Income Taxes  $-   $- 
           
Non-Cash Transactions          
Common Stock Issued for Conversion of Note and Accrued Interest  $-   $211,983 
ROU Assets and Operating Lease Obligations recognized  $-   $847,441 
Remeasurement of ROU Assets and Lease Liability for Nonrenewal of Lease  $384,110   $- 

 

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

 

4

 

Trxade Group, Inc.

Notes to Unaudited Consolidated Financial Statements

For the Nine months ended September 30, 2020 and 2019

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

 

Trxade Group, Inc. (“we”, “our”, “Trxade”, and the “Company”) owns 100% of Trxade, Inc., Integra Pharma Solutions, LLC, Community Specialty Pharmacy, LLC, Alliance Pharma Solutions, LLC and Bonum Health, LLC. The merger of Trxade, Inc. and Trxade Group, Inc. occurred in May 2013. Community Specialty Pharmacy was acquired in October 2018.

 

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

 

Integra Pharma Solutions, LLC, is a licensed pharmaceutical wholesaler and sells brand, generic and non-drug products.

 

Community Specialty Pharmacy, LLC, is an accredited independent retail pharmacy with a focus on specialty medications and a community-based model offering home delivery services to patients.

 

Alliance Pharma Solutions, LLC, has developed a same-day pharmaceutical delivery software – Delivmeds.com, and invested in SyncHealth MSO, LLC, a managed services organization during January 2019, which investment was divested in February 2020.

 

Bonum Health, LLC was formed to hold certain telehealth assets acquired in October 2019. The “Bonum Health Hub” was launched in November 2019 and was expected to be operational in April 2020; however, due to the COVID-19 pandemic, at present the Company does not anticipate installations moving forward until 2021 at the earliest. The hub is a Health Insurance Portability and Accountability Act (HIPPA)-compliant booth planned to be installed at select independent pharmacies, with technology that connects patients to board-certified medical care through the Bonum Health mobile app and website portal. The Bonum Health mobile application is also available on a subscription basis, primarily as a stand-alone telehealth software application that can be licensed on a business-to-business (B2B) model to clients as an employment health benefit for the clients’ employees. In August 2020, Bonum Health, LLC launched a business-to-business (B2B) platform called Bonum+, which bundles telehealth, a COVID-19 risk assessment tool and a personal protective equipment (PPE) purchasing tool, through a secure mobile dashboard for corporate clients.

 

On October 9, 2019, the Company’s Board of Directors, and on October 15, 2019, stockholders holding a majority of the Company’s outstanding voting shares, approved resolutions authorizing a reverse stock split of the outstanding shares of the Company’s common stock in the range from one-for-two (1-for-2) to one-for-ten (1-for-10), and provided authority to the Company’s Board of Directors to select the ratio of the reverse stock split in their discretion (the “Stockholder Authority”). On February 12, 2020, the Board of Directors of the Company approved a stock split ratio of 1-for-6 (“Reverse Stock Split”) in connection with the Stockholder Authority and the Company filed a Certificate of Amendment with the Secretary of Delaware to affect the Reverse Stock Split.

 

Proportional adjustments were made to the conversion and exercise prices of the Company’s outstanding warrants and stock options, and to the number of shares issued and issuable under the Company’s stock incentive plans in connection with the Reverse Stock Split. The Reverse Stock Split did not affect any stockholder’s ownership percentage of the Company’s common stock, except to the limited extent that the Reverse Stock Split resulted in any stockholder owning a fractional share. Fractional shares of common stock were rounded up to the nearest whole share based on each holder’s aggregate ownership of the Company. All issued and outstanding shares of common stock, options and warrants to purchase common stock and per share amounts contained in these financial statements, have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.

 

Basis of Presentation - The accompanying unaudited interim consolidated financial statements of Trxade Group, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 30, 2020.

 

5

 

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended December 31, 2019 as reported in the Company’s Annual Report on Form 10-K have been omitted.

 

Income (loss) Per Common Share – Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed similar to basic net income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The dilutive effect of the Company’s options and warrants is computed using the treasury stock method.

 

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

 

   For three months ended
September 30,
   For nine months ended
September 30,
 
   2020   2019   2020   2019 
Numerator:                
Net Income (Loss)  $138,391   $27,565   $(223,893)  $210,775 
                     
Numerator for basic and diluted EPS - income (loss) available to common Shareholders   138,391   $27,565    (223,893)  $210,775 
                     
Denominator:                    
Denominator for basic EPS – Weighted average shares   8,063,043    5,748,329    7,572,954    5,728,421 
Dilutive Effect of Warrants and Options   152,375    299,419    152,375    299,419 
Denominator for diluted EPS – adjusted Weighted average shares   8,215,418    6,047,748    7,725,329    6,027,840 
Basic Income (Loss) per common share  $0.02   $0.00   $(0.03)  $0.04 
Diluted Income (Loss) per common share  $0.02   $0.00   $(0.03)  $0.03 

 

NOTE 2– LONG TERM DEBT – RELATED PARTIES

 

In October 2018, in connection with the acquisition of Community Specialty Pharmacy, LLC, a $300,000 promissory note was issued to Nikul Panchal, the seller and currently a non-executive officer of the Company, accruing simple interest at the rate of 10% per annum, payable annually, and having a maturity date of October 15, 2021. In October 2019, $75,000 of the note was converted into 25,000 common shares at $3.00 per share. There was a loss recognized on this conversion of $76,500. The outstanding balance at September 30, 2020 is $225,000.

 

NOTE 3 – SHAREHOLDERS’ EQUITY

 

In February 2019, convertible promissory notes issued in 2015 in the amount of $181,500, were amended to include a conversion price of $3.00 per share, and the principal and accrued interest totaling $211,983 was then converted into 70,666 common shares.

 

In February 2019, warrants to purchase 2,778 shares of common stock granted in 2014 with an exercise price of $0.06 per share were exercised for $166 in cash and the Company issued 2,778 common shares in connection with such exercise.

 

On February 13, 2020, we entered into an underwriting agreement (the “Underwriting Agreement”) with Dawson James Securities, Inc. (the “Representative”), as representative of the several underwriters named therein, relating to the sale of 806,452 shares of common stock in a firm commitment underwritten offering (the “Offering”). The transactions contemplated by the Underwriting Agreement closed on February 18, 2020 (the “Closing Date”), at which time we sold 806,452 shares of common stock to the underwriters. On February 21, 2020, the Representative exercised their overallotment option and purchased an additional 115,767 shares of common stock. The shares were sold at a public offering price of $6.50 per share.

 

6

 

The Company received proceeds of approximately $5.99 million from the Offering. The Company paid the underwriters a cash fee equal to 8% of the aggregate gross proceeds received by the Company in connection with the Offering and reimbursed certain expenses. The total costs of the Offering were $820,586, including $88,213 paid in the prior year, which was included in deferred offering cost as of December 31, 2019. The net proceeds of the Offering were approximately $5.17 million.

 

In September 2019, the Company entered into a financial consulting agreement. As compensation, the Company agreed to pay the consultant $15,000 over nine months and to grant the consultant warrants to purchase 5,000 shares of common stock with an exercise price of $0.06 per share. The warrants were granted on September 1, 2020 and were exercised immediately after grant for an aggregate consideration of $300. In connection with the exercise the Company issued the holder 5,000 shares of common stock.

 

In February 2020, warrants to purchase 22,529 shares of common stock were exercised at $0.06 per share by Nikul Panchal, a non-executive officer of the Company and note holder (see “Note 2 – Long Term Debt – Related Parties”). The Company issued 22,529 shares of common stock upon such exercise, and $1,352 in proceeds were received in connection with such exercise.

 

In March 2020, options to purchase 167 shares of common stock were exercised at $3.00 per share; the Company issued 167 shares of common stock upon such exercise, and received $501 in proceeds.

 

In May 2020, warrants to purchase 25,000 shares of common stock were exercised at $0.06 per share by a former consultant; the Company issued 25,000 shares of common stock upon such exercise and $1,500 in proceeds was received by the Company in connection with such exercise.

 

On June 25, 2020, warrants to purchase 335,002 shares of common stock were exercised at $0.06 per share; the Company issued 335,002 shares of common stock upon such exercise and $20,100 in proceeds was received by the Company.

 

In August 2020, warrants to purchase 1,667 shares of common stock were exercised at $4.80 per share; the Company issued 1,667 shares of common stock upon such exercise and $8,002 in proceeds was received by the Company.

 

In August 2020, warrants to purchase 1,667 shares of common stock were exercised at $3.00 per share; the Company issued 1,667 shares of common stock upon such exercise and $5,001 in proceeds was received by the Company.

 

2019 Chief Executive Officer and President Bonuses

 

On April 14, 2020, the Board of Directors of the Company (the “Board”) and the Compensation Committee of the Board, approved the award to Suren Ajjarapu, the Company’s Chief Executive Officer and Prashant Patel, the Company’s President, of bonuses equal to 1% of the Company’s outstanding shares, equivalent to 74,484 shares of common stock, and 50,000 shares of common stock, respectively. The awards were made under and pursuant to the Company’s 2019 Equity Incentive Plan (the “Plan”). The Company recognized stock-based compensation expense of $761,842 equivalent to the fair value of the shares granted.

 

2020 Equity Compensation Awards

 

On April 14, 2020, the Compensation Committee approved the grant of (a) 5,000 shares of restricted common stock to the Company’s legal counsel; and (b) 12,500 shares of restricted common stock to Howard A. Doss, the Company’s Chief Financial Officer, which shares vest at the rate of 1/4th of such shares on July 1 and October 1, 2020 and January 1 and April 1, 2021. The shares have a fair value of $107,100 and the Company recognized stock-based compensation expense of $53,550 for the nine months ended September 30, 2020.

 

7

 

Independent Director Compensation Plan

 

On April 14, 2020, the three independent members of the Board of Directors (Mr. Donald G. Fell, Dr. Pamela Tenaerts, and Mr. Michael L. Peterson), were each awarded 8,987 shares of restricted stock, which vest at the rate of 1/4th of such shares on July 1 and October 1, 2020 and January 1 and April 1, 2021. The shares have a fair value of $165,000 and the Company recognized stock-based compensation expense of $82,500 for the nine months ended September 30, 2020.

 

Employment Agreement with Suren Ajjarapu, Chief Executive Officer

 

In connection with our employment agreement with Mr. Suren Ajjarapu, our Chief Executive Officer, which was effective on April 14, 2020, we granted 49,020 restricted shares of common stock which vest upon the Company reaching certain performance metrics established by the Compensation Committee on the same date and further amended on May 5, 2020. The fair value of the shares at the grant date was determined to be $300,000. The modification of the performance conditions resulted in an incremental value to the shares of $72,062. The Company determined that it was probable that certain performance conditions will be met and recognized compensation expense of $280,222 for the nine months ended September 30, 2020.

 

NOTE 4 - WARRANTS

 

For the nine-month period ended September 30, 2020, 5,000 warrants were granted and 8,336 expired. Warrants to purchase 390,865 shares of common stock were exercised for proceeds of $36,255. See “Note 3 – Shareholders’ Equity”.

 

The Company uses the Black-Scholes pricing model to estimate the fair value of stock-based awards on the date of the grant. The following table summarizes the assumptions used to estimate the fair value of the warrants granted during the quarter ended September 30, 2020.

 

   2020 
Expected dividend yield   0%
Weighted-average expected volatility   217%
Weighted-average risk-free interest rate   2.75%
Expected life of options   5 years 

 

The total fair value of warrants issued was $27,481. The compensation cost related to the warrants granted was $149,158 and $26,363 for the nine months ended September 30, 2020 and 2019, respectively.

 

The Company’s outstanding and exercisable warrants as of September 30, 2020 are presented below:

 

   Number Outstanding   Weighted Average Exercise Price   Contractual Life in Years   Intrinsic Value 
Warrants Outstanding as of December 31, 2019   524,480   $0.42    2.39   $3,273,897 
Warrants granted   5,000   $0.06    5.00    - 
Warrants expired or forfeited   (8,336)   9.00    -    - 
Warrants exercised   (390,865)  $0.09    -    - 
                     
Warrants Outstanding as of September 30, 2020   130,279   $0.87    3.69   $719,989 
Warrants Exercisable as of September 30, 2020   60,223   $1.81    1.84   $286,342 

 

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NOTE 5 – OPTIONS

 

The Company maintains stock option plans under which certain employees are awarded option grants based on a combination of performance and tenure. The stock option plans provide for the grant of up to 2,333,333 shares, and the Company’s 2019 Amended and Restated 2019 Equity Incentive Plan provides for automatic increases in the number of shares available under such plan (currently 2,000,000 shares) on April 1st of each calendar year, beginning in 2021 and ending in 2029 (each a “Date of Determination”), in each case subject to the approval and determination of the administrator of the plan (the Board of Directors or Compensation Committee) on or prior to the applicable Date of Determination, equal to the lesser of (A) ten percent (10%) of the total shares of common stock of the Company outstanding on the last day of the immediately preceding fiscal year and (B) such smaller number of shares as determined by the administrator.

 

For the nine-month period ended September 30, 2020, options to purchase 94,154 shares were granted, 15,168 were forfeited, none expired and options to purchase 167 shares of common stock were exercised, for 167 shares of common stock and proceeds of $501. The options granted during the period vest over a period ranging from less than a year to four years and have exercise prices ranging from $0.06 to $7.50 and terms ranging from 1.4 years to ten years.

 

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of the grant. The following table summarizes the assumptions used to estimate the fair value of the stock options granted during the quarter ended September 30, 2020.

 

   2020 
Expected dividend yield   0%
Weighted-average expected volatility   133-236%
Weighted-average risk-free interest rate   0.25%
Expected life of options   5-7 years 

 

Total compensation cost related to stock options granted was $372,900 and $141,594 for the nine months ended September 30, 2020 and 2019, respectively.

 

The following table represents stock option activity for the nine-month period ended September 30, 2020:

 

  

Number Outstanding

  

Weighted Average Exercise Price

  

Contractual Life in Years

  

Intrinsic Value

 
Options Outstanding as of December 31, 2019   346,998   $4.39    6.77   $817,220 
Options Exercisable as of December 31, 2019   207,485   $5.29    5.53   $312,338 
Options granted   94,154   $4.42    4.22    - 
Options forfeited   (15,168)  $3.18    7.37    - 
Options expired   -   $-    -    - 
Options exercised   (167)  $3.00    -    - 
                     
Options Outstanding as of September 30, 2020   425,817   $4.44    5.58   $847,965 
Options Exercisable as of September 30, 2020   275,344   $4.54    4.73   $531,326 

 

NOTE 6 – CONTINGENCIES

 

In January 2020, we became aware of a complaint filed by Jitendra Jain, Manish Arora, Scariy Kumaramangalam, Harsh Datta and Balvant Arora (collectively, plaintiffs), against our wholly-owned subsidiary, Trxade, Inc. and our Chief Executive Officer, Suren Ajjarapu as well as certain unrelated persons, Annapurna Gundlapalli, Gajan Mahendiran and Nexgen Memantine (collectively, defendants), in the Circuit Court of Madison County, Alabama (Case:47-CV-2019-902216.00). The complaint alleged causes of actions against the defendants including fraud in the inducement, relating to certain investments alleged to have been made by plaintiffs in Nexgen Memantine, breach of fiduciary duty, conversion and voidable transactions. The complaint related to certain investments alleged made by the plaintiffs in Nexgen Memantine and certain alleged fraudulent transfers of assets and funds alleged to have been taken by the defendants which are unrelated to the Company. The complaint sought $425,000 in compensatory damages and $1,275,000 in punitive damages. The Company and Mr. Ajjarapu denied in their entirety the plaintiffs’ allegations and filed a motion to dismiss the plaintiffs’ claims against the Company and Mr. Ajjarapu, which motion was granted in May 2020, due to the plaintiffs’ not being able to establish personal jurisdiction over the defendants, which motion was successful as to all defendants. The Company and Mr. Ajjarapu further refute any connections for the purpose of the suit to the other named defendants. To the Company’s and Mr. Ajjarapu’s knowledge, the complaint had no merit whatsoever. The final date for the plaintiffs to appeal the ruling to dismiss the lawsuit passed in August 2020, and there was no appeal. As such, the ruling is final.

 

However, in September 2020, the plaintiffs filed a similar complaint (alleging substantially similar facts) in the United States District Court for the Middle District of Florida, Tampa Division (Case 8:20-cv-02263), against the same defendants but adding Westminster Pharmaceuticals, LLC, our former wholly-owned subsidiary (“Westminster”), and raising claims for alleged fraud under Section 10(b) and Rule 10b-5 of the Exchange Act; joint and several liability under 15 U.S.C. Code 78t (against Trxade, Inc.); fraudulent transactions of securities under the Florida Securities Act (against all of the defendants except Trxade); and sale of unregistered securities under the Florida Securities Act (against all of the defendants except Trxade). The total amount of damages sought is unclear, but is thought to be in excess of $425,000. To the Company’s and Mr. Ajjarapu’s knowledge, the complaint has no merit whatsoever and each of the Company and Mr. Ajjarapu intend to defend themselves and oppose the relief sought in the complaint. The Company is not currently accused of any direct misconduct; instead, the Company is alleged to be liable for the acts of certain or all of the other defendants.  The Company would likely only incur liability if some or all of the other defendants were found liable to plaintiffs and the Company is found to be jointly and severally liable for the actions of such other defendant or defendants. The lawsuit claims approximately $450,000 in damages; however, based on facts currently known, the Company assesses the likelihood of any material loss as remote.

 

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NOTE 7 – LEASES

 

The Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the Company to carry forward the historical accounting treatment for existing leases upon adoption. No impact was recorded to the beginning retained earnings for Topic 842. The Company has two operating leases for corporate offices. The following table outlines the details:

 

   Lease 1   Lease 2 
Initial Lease Term   December 2017 to January 2021    November 2018 to November 2023 
Renewal Term   January 2021 to December 2024    November 2023 to November 2028 
Initial Recognition of right-of-use assets at January 1, 2019  $534,140   $313,301 
Incremental Borrowing Rate   10%   10%

 

The Company has decided not to renew the corporate office lease (Lease 1) on January 2021 and is actively looking for a new corporate office to lease. The Company determined that the decision to not renew Lease 1 changed the corresponding lease term which required remeasurement of the lease liability resulting in the reduction of the right-of-use asset and the associated lease liability by $384,110. The reassessment of the lease term did not change the existing classification and the lease is still classified as an operating lease.

 

The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the operating lease liabilities recorded in the Consolidated Balance Sheet as of September 30, 2020.

 

Amounts due within twelve months of September 30    
2020  $85,727 
2021   48,714 
2022   50,196 
2023   51,704 
2024   53,255 
Thereafter   174,407 
Total minimum lease payments   464,003 
Less: effect of discounting   (139,824)
Present value of future minimum lease payments   324,179 
Less: current obligations under leases   57,155 
Long-term lease obligations  $267,024 

 

For the nine months ended September 30, 2020 and 2019, amortization of assets was $60,600 and $66,598, respectively.

 

For the nine months ended September 30, 2020 and 2019, amortization of liabilities was $64,522 and $55,102, respectively.

 

NOTE 8 – SEGMENT REPORTING

 

The Company classifies its business interests into reportable segments which are Trxade, Inc., Community Specialty Pharmacy, LLC, Integra Pharma, LLC and Other. Operating segments are defined as the components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability, cash flows, and growth opportunities of each respective segment.

 

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Nine Months Ended

September 30, 2020

  Trxade, Inc.   Community Specialty Pharmacy, LLC   Integra Pharma, LLC   Other   Total 
Revenue  $4,268,619   $1,287,197   $9,548,512   $23,898   $15,128,226 
Gross Profit  $4,268,619   $119,946   $1,162,030   $23,615   $5,574,210 
Segment Assets  $1,828,345   $257,495   $3,118,945   $6,649,226   $11,854,010 
Segment Profit (Loss)  $2,655,734   $(88,756)  $762,149   $(3,553,020)  $(223,893)

 

Nine Months Ended

September 30, 2019

  Trxade, Inc.   Community Specialty Pharmacy, LLC   Integra Pharma, LLC   Other   Total 
Revenue  $3,335,050   $1,412,449   $992,862   $-   $5,740,361 
Gross Profit  $3,335,050   $172,071   $113,346   $-   $3,620,467 
Segment Assets  $1,561,760   $315,681   $411,161   $3,565,921   $5,854,523 
Segment Profit (Loss)  $1,748,896   $(75,955)  $(122,144)  $(1,340,022)  $210,775 

 

NOTE 9 – EQUITY METHOD INVESTMENT

 

In January 2019, the Company, through its wholly-owned subsidiary Alliance Pharma Solution, LLC (“Alliance”), entered into a joint venture transaction to form SyncHealth MSO, LLC (“SyncHealth”). SyncHealth was, prior to the divestment discussed below, owned by PanOptic Health, LLC (“PanOptic”) and Alliance. Alliance contributed $250,000 for the acquisition of a 30% equity interest in SyncHealth and the option to acquire the remaining ownership from PanOptic shareholders. Prior to March 31, 2019, $210,000 was paid with the remaining $40,000 paid in April 2019. Pursuant to the operating agreement, PanOptic owned 70% of SyncHealth and Alliance owned 30%; however, pursuant to the Letter Agreement, PanOptic would transfer to Alliance an additional 6% of SyncHealth’s membership units on May 1, 2019, an additional 6% on August 1, 2019 and an additional 7% on November 1, 2019, and at Alliance’s option, the 51% balance on January 31, 2020, upon transfer of between 378,888 and 2,462,773 shares of Company common stock based on gross revenue quotas for 2019. As of December 31, 2019, the additional interests had not been transferred and Alliance still owned 30% of SyncHealth. We did not realize any income from the joint venture and we terminated the joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned the 30% ownership of SyncHealth back to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of the agreements relating to confidentiality, nonsolicitation and each party’s obligation to cease use of the other party’s intellectual property survive the termination. The investment loss recognized during the nine-month period ended September 30, 2019 was $250,000 and for the year ended December 31, 2019 was $250,000.

 

NOTE 10 – SUBSEQUENT EVENTS

 

Equity

 

In October 2020, warrants to purchase 22,528 shares of common stock were exercised at $0.06 per share; the Company issued 22,528 shares of common stock upon such exercise and $1,352 in proceeds were received by the Company.

 

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

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (“Report”), including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, regarding future events and the future results of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the management of the Company. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. In particular, as discussed in greater detail below, our financial condition and results could be materially adversely affected by the impacts and disruptions caused by the novel coronavirus (COVID-19) global pandemic. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Report, including under “Risk Factors”, and in other reports the Company files with the Securities and Exchange Commission (“SEC”), including the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 30, 2020 (under the heading “Risk Factors” and in other parts of that report). The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason, except as otherwise required by law.

 

The following discussion is based upon our unaudited Consolidated Financial Statements included elsewhere in this report, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the collection of receivables, the shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory, among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions, we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets and expectations, and financial planning objectives. On an on-going basis, we evaluate our estimates, including those related to sales returns, pricing credits, warranty costs, allowance for doubtful accounts, impairment of long-term assets, especially goodwill and intangible assets, contract manufacturer exposures for carrying and obsolete material charges, assumptions used in the valuation of stock-based compensation, and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, and in other reports we file with the SEC, including under “Item 1A. Risk Factors” below, and in our most recent Annual Report on Form 10-K. All references to years relate to the calendar year ended December 31 of the particular year.

 

General Information

 

This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II. Other Information - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 30, 2020 (the “Annual Report”).

 

Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited consolidated financial statements included above under “Part I - Financial Information” - “Item 1. Financial Statements”.

 

Please see the section entitled “Glossary” in our Annual Report for a list of abbreviations and definitions used throughout this Report.

 

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Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

The market data and certain other statistical information used throughout this Report are based on independent industry publications, reports by market research firms or other independent sources that we believe to be reliable sources. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosures contained in this Report, and we believe these industry publications and third-party research, surveys and studies are reliable. While we are not aware of any misstatements regarding any third-party information presented in this Report, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under, and incorporated by reference in, the section entitled “Item 1A. Risk Factorsof this Report. These and other factors could cause our future performance to differ materially from our assumptions and estimates. Some market and other data included herein, as well as the data of competitors as they relate to Trxade Group, Inc., is also based on our good faith estimates.

 

Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Trxade”, “Trxade Group” and “Trxade Group, Inc.” refer specifically to Trxade Group, Inc. and its consolidated subsidiaries.

 

In addition, unless the context otherwise requires and for the purposes of this report only:

 

  Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
     
  SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
     
  Securities Act” refers to the Securities Act of 1933, as amended.

 

Effective on February 12, 2020, the Company effected a stock split of its outstanding common stock in a ratio of 1-for-6 (“Reverse Stock Split”). Proportional retroactive adjustments were made to the conversion and exercise prices of the Company’s outstanding warrants and stock options, and to the number of shares issued and issuable under the Company’s stock incentive plans in connection with the Reverse Stock Split in the disclosures below.

 

Where You Can Find Other Information

 

We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “NASDAQ: MEDS,” “SEC Filings” page of our corporate website at www.rx.trxade.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report. Our corporate website address is www.rx.trxade.com. The information on, or that may be accessed through, our corporate website is not incorporated by reference into this Report and should not be considered a part of this Report.

 

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Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

  Overview. Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A.
     
  Liquidity and Capital Resources. An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition.
     
  Results of Operations. An analysis of our financial results comparing the three and nine months ended September 30, 2020 and 2019.
     
  Critical Accounting Policies. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 

Company Overview

 

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

 

We began operations as Trxade Group, Inc., a Nevada corporation (“Trxade Nevada”) in August of 2010 and spent over two years creating and enhancing our web-based services. Our services provide pricing transparency, purchasing capabilities and other value-added services on a single platform focused on serving the nation’s approximately 22,000 independent pharmacies with annual purchasing power of $78 billion (according to the National Community of Pharmacists Association’s 2018 Digest). Our national wholesale supply partners are able to fulfill orders on our platform in real-time and provide pharmacies with cost-saving payment terms and next-day delivery capabilities in unrestrictive states under the Model State Pharmacy Act and Model Rules of the National Association of Boards of Pharmacy (Model Act). We have expanded significantly since 2015 and now have around 11,800 registered pharmacy members purchasing products on our sales platform.

 

Company Organization

 

Trxade Group, Inc. owns 100 percent of Trxade, Inc., and Integra Pharma Solutions, LLC (formerly Pinnacle Tek, Inc.), Alliance Pharma Solutions, LLC, Community Specialty Pharmacy, LLC, and Bonum Health, LLC. The reverse triangular merger of Trxade, Inc. and Trxade Group, Inc. occurred in July 2013. Integra was acquired in July 2013. We acquired 100 percent of Community Specialty Pharmacy, LLC, in October 2018. Alliance Pharma Solutions, LLC was formed in January 2018 and our joint venture with SyncHealth MSO, LLC, which was terminated in February 2020, was formed in January 2019. We acquired our Bonum Health operations in October 2019. Trxade, Inc. is a web-based market platform that enables commerce among healthcare buyers and sellers of pharmaceuticals, accessories and services.

 

Novel Coronavirus (COVID-19)

 

In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April, many U.S. states and local jurisdictions began issuing ‘stay-at-home’ orders. For example, the state of Florida, where the Company’s principal business operations are, issued a ‘stay-at-home’ order effective on April 1, 2020, which remained in place, subject to certain exceptions, through June 2020, when the order was gradually lifted until September 2020, when the order was completely lifted. Many U.S. states have seen recent rapid increases in the spread of COVID-19, and although the number of COVID-19 cases in Florida has been declining since approximately July 2020, it is likely that the number will increase now that the prior restrictions on activities have been lifted. Many experts also expect the number of COVID-19 infections to rise during the fall and winter. As such, it is currently unclear whether the state of Florida, or other jurisdictions in which we operate, will issue new or expanded ‘stay-at-home’ orders, or how those orders, or others, may affect our operations.

 

14

 

To date, we have been deemed an essential healthcare technology provider under applicable governmental orders based on the critical nature of the products we offer and the community we serve. As such, our business operations were not materially impacted by the prior restrictions put in place by the State of Florida to slow the spread of COVID-19, which have since expired. Additionally, as shown in our results of operations below, we have to date, not experienced any significant material negative impact to our operations, revenues or gross profit due to COVID-19. We have however been adversely affected by reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that have had a negative impact on our wholesalers and certain technology outsourcing in India and the Philippines due to the pandemic, which may become more frequent or material in the future. We are carefully managing our inventory supply network while we work to overcome these hopefully temporary challenges. As a result of the above and other unknown issues associated with the pandemic, our sales and operating results may be adversely impacted in the coming months. The full extent of the impact of COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic.

 

Since the start of the pandemic, we have taken steps to prioritize the health and safety of our employees. The Company’s employees started working remotely around March 17, 2020, and our corporate office is currently planned to be closed through December 31, 2020, at the earliest, unless the current situation improves. The Company has determined to not renew its lease for its current corporate office and is in the process of searching for a smaller space for its corporate offices.

 

Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations to support our operations for the foreseeable future; however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any new developments regarding the ongoing pandemic.

 

Although COVID-19 has had a major impact on businesses around the world, to date, the pandemic has not had a significant negative impact on our business. However, the future impact of COVID-19 on our business and operations is currently unknown. The pandemic is developing rapidly and the full extent to which COVID-19 will ultimately impact us depends on future unknowable developments, including the duration and spread of the virus, as well as potential new seasonal outbreaks.

 

Liquidity and Capital Resources

 

Cash

 

Cash was $6,647,763 at September 30, 2020. We expect that our future available capital resources will consist primarily of cash generated from operations, remaining cash balances, borrowings, and additional funds raised through sales of debt and/or equity securities.

 

Liquidity

 

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

 

   September 30, 2020   December 31, 2019 
         
Cash  $6,647,763   $2,871,694 
Current assets (excluding cash)   3,995,491    931,263 
Current liabilities   534,897    520,816 
Working Capital   10,108,357    3,282,141 

 

Our principal sources of liquidity have been cash provided by operations, sales of equity, and borrowings under various debt arrangements. Our principal uses of cash have been for operating expenses and acquisitions. We anticipate these uses will continue to be our principal uses of cash in the future.

 

The increase in cash as of September 30, 2020, compared to December 31, 2019, was primarily due to $5,994,424 of cash raised through the sale of common stock in our February 2020 underwritten offering, as described in greater detail above in “Part I. Financial StatementsItem 1. Financial Statements” – “Note 3 – Shareholders’ Equity”.

 

15

 

Liquidity Outlook cash explanation.

 

Cash Requirements

 

Our primary objectives for the remainder of 2020 are to continue the development of the Trxade Platform and increase our client base and operational revenue. As a result of our cash generated through operations and the cash raised in the underwritten offering, we believe we have sufficient cash to support our operations for the foreseeable future. There can be no assurance that our operations will generate significant positive cash flow, or that additional funds will be available to us, through borrowings or otherwise, on favorable terms if required in the future, or at all.

 

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

 

Projected Expenses for October 2020 to September 2021  Amount 
General and administrative (1)  $6,000,000 
Total  $6,000,000 

 

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

 

We currently anticipate paying the estimated expenses described above through cash on hand and revenues generated from our operations.

 

Since inception, we have funded our operations primarily through debt and equity capital raises and operational revenue. To date in 2020, we have raised $5,994,424 through the sale of common stock in our February 2020 underwritten offering. We also raised $36,756 through the exercise of outstanding options and warrants during the nine month period ended September 30, 2020.

 

We may require additional funding in the future to expand or complete acquisitions. The sources of this capital are expected to be equity investments and notes payable. Our plan for the next twelve months is to continue using the same marketing and management strategies and continue providing a quality product with excellent customer service while also seeking to expand our operations organically or through acquisitions, as funding and opportunities arise. As our business continues to grow, customer feedback will be integral in making small adjustments to improve our products and overall customer experience. If in the future we require additional funding, we plan to raise such funds through the sale of debt or equity, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues.

 

We believe that we have adequate cash to implement our plan to operate a business-to-business web-based marketplace focused on the United States pharmaceutical industry. Our core service is designed to bring the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.

 

As of the date of this filing, there has been a global viral outbreak that world governments have responded to with travel and other restrictions, including ‘stay-at-home’ orders, among other steps. The extent and duration of business disruptions and related financial impacts from the COVID-19 coronavirus cannot be reasonably estimated at this time; however, our exposure includes reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that have had a negative impact on our wholesalers and certain technology outsourcing in India and the Philippines. In addition, employee sicknesses and remote working environments related to the coronavirus and the federal, state and local responses to such virus, could materially impact our consolidated results for the fourth quarter and full year 2020 and into fiscal 2021. See also “Novel Coronavirus (COVID-19)”, above.

 

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Cash Flows

 

The following table summarizes our Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019:

 

   Nine months Ended         
   September 30, 2020   September 30, 2019   Change   Percent Change 
Net (Loss) Income  $(223,893)  $210,775   $(434,668)   (206)%
Net Cash Provided by (used in):                    
Operating Activities   (1,499,251)   324,565    (1,823,816)   (562)%
Investing Activities   (23,505)   (250,000)   226,495    91%
Financing Activities   5,298,825    2,415,166    2,883,659    119%
Net increase (decrease) in cash  $3,776,069   $2,489,731   $1,286,338   $52%

 

Cash used in operations for the nine months ended September 30, 2020 was $1,499,251, compared to cash provided by operations of $324,565, for the nine months ended September 30, 2019. This decrease in cash provided by operations was mainly due to (a) inventory deposits required of $1,081,250, which are required for future delivery of PPE products (as markets normalize these deposits may not be necessary), and which deposits were not required in the prior period; (b) an increase in inventory of $1,727,482, which is composed of PPE products which were purchased to have in inventory for the current pandemic, and (c) an increase in accounts receivable of $277,971, offset by (d) $1,178,113 of stock grants made to officers and consultants as consideration for services rendered during the current period, compared to no stock issued for services during the prior period. Information on the compensation awards is described in greater detail above under “Part I. Financial Statements Item 1. Financial Statements” – “Note 3 – Shareholders’ Equity”.

 

Cash used in investing activities for the nine months ended September 30, 2020 of $23,505, was related to a purchase of fixed assets. Cash used in investing activities for the nine months ended September 30, 2019, was associated with the Company’s $250,000 investment in SyncHealth MSO, LLC, which has since been divested.

 

Cash provided by financing activities for the nine months ended September 30, 2020, included the sale of common stock in the February 2020 underwritten offering which generated $5,994,424 of proceeds and approximately $5.26 million in cash to the Company after expenses, as described in greater detail above in “Part I. Financial StatementsItem 1. Financial Statements” – “Note 3 – Shareholders’ Equity”, and the exercise of warrants and options which generated cash of $36,756. Financing activities in 2019 included $166 of proceeds from a warrant exercise and $2.46 million of cash from the sale of common stock in private transactions.

 

Results of Operations

 

The following selected consolidated financial data should be read in conjunction with the unaudited consolidated financial statements and the notes to these statements included above.

 

Three Month Period Ended September 30, 2020 Compared to Three Month Period Ended September 30, 2019

 

   Three Months Ended         
   September 30, 2020   September 30, 2019   Change   Percent Change 
                 
Revenues  $6,332,269   $2,311,426   $4,020,843    174%
Cost of Sales   4,402,967    1,000,917    3,402,050    340%
                     
Gross Profit   1,929,302    1,310,509    618,793    47%
Operating Expenses:                    
General and Administrative (less stock-based compensation expense)   1,259,463    1,068,645    190,818    18%
Stock-Based Compensation Expense   524,018    64,011    460,007    719%
Total General and Administrative/Operating Expense   1,783,481    1,132,656    650,825    58%
                     
Other Income   -    25,275    25,275    (100)%
Investment Loss   -    (162,178)   162,178    100%
Interest Expense   (7,430)   (13,385)   5,955    45%
                     
Net Income  $138,391   $27,565   $110,826    402%

 

Our revenues for the three months ended September 30, 2020 were from the Trxade platform, Community Specialty Pharmacy and Integra Pharma Solutions. Revenues increased by $4,020,843, compared to the prior period. Integra Pharma Solutions revenue increased to $4,544,988, for the three months ended September 30, 2020, compared to $638,953, in the prior year’s period. The increase was mainly a result of sourcing items – N95 masks, sanitizers and gloves - PPE items that were needed in large quantities. Cost of sales and gross profit for the three-month period ended September 30, 2020 were $4,402,967 and $1,929,302, respectively, and for the three-month period ended September 30, 2019 were $1,000,917 and $1,310,509, respectively. As sales for PPE increased in 2020, the cost of sales increased. Revenue from the Trxade Platform increased 17%, from $1,152,417 for the three months ended September 30, 2019, to $1,354,081 for the three months ended September 30, 2020.

 

Gross profit as a percentage of sales was 31% for the three months ended September 30, 2020, compared to 57% for the three months ended September 30, 2019. The reason for the decrease in gross profit as a percentage of sales was the cost of the orders of PPE related products in the current period. In 2019, a larger percentage of revenue was generated by the Trxade Platform, which carries no cost of sales.

 

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General and administrative expenses (less stock-based compensation expense) increased for the three months ended September 30, 2020 to $1,259,463, compared to $1,068,645 for the comparable period in 2019. The increase was mainly due to IT development, legal expenses, filing fees and marketing expenses, which increased incrementally with the growth in revenue.

 

Total stock-based compensation expense increased by 719% for the three months ended September 30, 2020, compared to the prior year’s period, due to warrants granted to consultants, 2019 bonus shares issued to executives, shares issued to directors, 2020 bonus accruals and employee option grants, as described in greater detail above under “Part I. Financial StatementsItem 1. Financial Statements” – “Note 3 – Shareholders’ Equity”.

 

We had no other income for the three months ended September 30, 2020, compared to other income of $25,275 for the three months ended September 30, 2019.

 

We had $162,178 of investment loss for the quarter ended September 30, 2019 in connection with the SyncHealth, LLC joint venture which was terminated effective as of January 31, 2020.

 

We had interest expense of $7,430 for the three months ended September 30, 2020, compared to interest expense of $13,385 for the three months ended September 30, 2019, which decreased due to decreases in the amount of outstanding debt we had as of the current period.

 

Net income increased $110,827, to net income of $138,391 for the three months ended September 30, 2020, compared to net income of $27,565 for the three months ended September 30, 2019, mainly due to increased sales from Integra Pharmaceutical Solutions and Trxade Platform.

 

Nine Month Period Ended September 30, 2020 Compared to Nine Month Period Ended September 30, 2019

 

   Nine Months Ended         
   September 30, 2020   September 30, 2019   Change   Percent Change 
                 
Revenues  $15,128,226   $5,740,361   $9,387,865    164%
Cost of Sales   9,554,016    2,119,894    7,434,122    351%
                     
Gross Profit   5,574,210    3,620,467    1,953,743    54%
Operating Expenses:                    
General and Administrative (less stock-based compensation Expense)   4,075,269    2,970,193    1,105,076    37%
Stock-Based compensation Expense   1,700,170    167,957    1,532,213    912%
Total General and Administrative/Operating Expense   5,775,439    3,138,150    2,637,289    84%
                     
Other Income   -    25,275    (25,275)   (100)%
Investment Loss   -    (250,000)   250,000    100%
Interest Expense   (22,664)   (46,817)   24,153    52%
                     
Net (Loss) Income  $(223,893)  $210,775   $(434,668)   (206)%

 

Our revenues for the nine months ended September 30, 2020 were from the Trxade platform, Community Specialty Pharmacy and Integra Pharma Solutions. Revenues increased by $9,387,865 compared to the prior period. In Trxade, Inc., revenue increased by $933,569 which is attributable to our sales department continuing to add customers throughout 2019 and into 2020 through direct marketing and customer training and the availability of items from suppliers. Integra Pharma Solutions increased revenue to $9,548,512 for the nine months ended September 30, 2020, compared to $992,862 in the same period of 2019. The increase was mainly a result of sourcing items – N95 masks, sanitizers and gloves - PPE items that were needed in large quantities. Cost of goods sold and gross profit were $9,554,016 and $5,574,210, for the nine months ended September 30, 2020, respectively, and $2,119,894 and $3,620,467, for the nine months ended September 30, 2019, respectively. As sales for PPE increased in 2020, the cost of sales increased. Trxade Platform revenue increased 28% from $3,335,050, for the nine months ended September 30, 2019 to $4,268,619 for the nine months ended September 30, 2020.

 

Gross profit as a percentage of sales was 37% for the nine months ended September 30, 2020, compared to 63% for the nine months ended September 30, 2020. The reason for the decrease in gross profit as a percentage of sales was a result of the orders of PPE related product during the nine months ended September 30, 2020. In 2019, a larger percentage of our revenue was from the Trxade Platform, which carries no cost of sales.

 

General and administrative expenses (less stock-based compensation expense) increased for the nine months ended September 30, 2020 to $4,075,269, compared to $2,970,193 for the comparable period in 2019. The increase was mainly due to IT development, legal expenses, filing fees and marketing expenses.

 

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Total stock-based compensation expense increased by 1,101% for the nine months ended September 30, 2020, compared to the prior year’s period due to warrants granted to consultants, 2019 bonus shares issued to executives, shares issued to directors, 2020 bonus accruals and employee option grants, as described in greater detail above under “Part I. Financial StatementsItem 1. Financial Statements” – “Note 3 – Shareholders’ Equity”.

 

We had no other income for the nine months ended September 30, 2020, compared to other income of $25,275 for the nine months ended September 30, 2019.

 

We had $250,000 of investment loss for the quarter ended September 30, 2019 in connection with the SyncHealth, LLC joint venture, which has been terminated effective as of January 31, 2020.

 

We had interest expense of $22,664 for the nine months ended September 30, 2020, compared to interest expense of $46,817 for the nine months ended September 30, 2019, which decreased due to decreases in the amount of outstanding debt we had as of the current period.

 

Net income declined $434,668, to a net loss of $223,893 for the nine months ended September 30, 2020, compared to net income of $210,775 for the nine months ended September 30, 2019, mainly due to the increase in general and administrative expenses associated with the value of the 2019 bonus stock award grants issued to management, as described in greater detail above under “Part I. Financial StatementsItem 1. Financial Statements” – “Note 3 – Shareholders’ Equity”, offset partially by the increase in gross profit.

 

Off-Balance Sheet Arrangements

 

We had no outstanding off-balance sheet arrangements as of September 30, 2020.

 

Critical Accounting Policies

 

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

 

Revenue Recognition

 

In general, the Company accounts for revenue recognition in accordance with ASC 606, “Revenue from Contracts with Customers.

 

Trxade, Inc. provides an online web-based buying and selling platform for licensed pharmaceutical wholesalers (“Suppliers”) to sell products and services to licensed pharmacies (“Customers”). The Company charges Suppliers a transaction fee, a percentage of the purchase price of the prescription drugs and other products sold through its website service. Fulfillment of confirmed orders, including delivery and shipment of prescription drugs and other products, is the responsibility of the Supplier, not the Company. The Company holds no inventory and assumes no responsibility for the shipment or delivery of any products or services from our website. The Company considers itself an agent for this revenue stream and as such, reports revenue as net. Step One: Identify the contract with the Customers – Trxade, Inc.’s Terms and Use “Agreement,” which outlines the terms and conditions between the Company and the Supplier, is acknowledged and agreed to by the Supplier. Collection is probable based on a credit evaluation of the Supplier. Step Two: Identify the performance obligations in the Agreement – the Company provides the Supplier access to the online website, ability to upload catalogs of products and Dashboard access to review status of inventory as well as posted and processed orders. The Agreement requires the Supplier to post a catalog of pharmaceuticals on the platform, deliver the pharmaceuticals and, upon shipment, remit the stated platform fee. Step Three: Determine the transaction price – the Agreement outlines the fee, which is based on the type of product: generic, brand or non-drug. There are no discounts for volume transactions or early payment of invoices. Step Four: Allocate the transaction price – the Agreement details the fee: There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – revenue is recognized upon Supplier’s fulfillment of the applicable order.

 

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Integra Pharma Solutions, LLC is a licensed wholesaler of brand, generic and non-drug products to Customers. The Company takes orders for products, creates invoices for each order and recognizes revenue at the time the Customer receives the product. Customer returns are not material. Step One: Identify the contract with the Customer – the Company requires that an application and a credit card for payment be completed by the Customer prior to the first order. Each transaction is evidenced by an order form sent by the Customer and an invoice for the product is sent by the Company. The collection is probable based on the application and credit card information provided prior to the first order. Step Two: Identify the performance obligations in the contract – Each order is distinct and evidenced by the shipping order and invoice. Step Three: Determine the transaction price – The consideration is variable if product is returned. The variability is determined based on the return policy of the product manufacturer. There are no sales or volume discounts. The transaction price is determined at the time of the order evidenced by the invoice. Step Four: Allocate the transaction price – There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation - The Revenue is recognized when the Customer receives the product.

 

Community Specialty Pharmacy, LLC is a licensed retail pharmacy. The Company fills prescriptions for drugs written by a doctor and recognizes revenue at the time the patient confirms delivery of the prescription. Customer returns are not material. Step One: Identify the contract with the Customer – The prescription is written by a doctor for a patient and presented by the patient to the Customer and is in turn delivered to the Company. The prescription identifies the performance obligations in the contract. The Company fills the prescription and delivers to the Customer the drugs, fulfilling the contract. The collection is probable because there is confirmation that the patient has insurance for reimbursement to the Company prior to filling of the prescription. Step Two: Identify the performance obligations in the contract – Each prescription is distinct to the Customer. Step Three: Determine the transaction price – The consideration is not variable. The transaction price is determined to be the price of prescription at the time of delivery which considers the expected reimbursements from third party payors (e.g., pharmacy benefit managers, insurance companies and government agencies). Step Four: Allocate the transaction price – The price of the prescription invoiced represents the expected amount of reimbursement from third party payors. There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – Revenue is recognized after the delivery of the prescription.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock option forfeitures are recognized at the date of employee termination. Effective January 1, 2019, the Company adopted ASU 2018-07 for the accounting of share-based payments granted to non-employees for goods and services.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

For more information on recently issued accounting standards, see “Note 1 – Organization and Basis of Presentation”, to the Notes to Consolidated Financial Statements included herein under “Part I - Item 1. Financial Statements”.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (our principal executive officer and principal accounting/financial officer), Mr. Ajjarapu and Mr. Doss, respectively, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of September 30, 2020, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

 

As a result of the formative stage of our development, the Company has not fully implemented the necessary internal controls. The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses under the standards of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) were: (1) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of accounting principles generally accepted in the United States of America (“GAAP”) and SEC disclosure requirements; and (2) ineffective controls over period end financial disclosure and reporting processes.

 

Management believes that the material weaknesses set forth above did not have an effect on the Company’s financial results reported herein. We are committed to improving our financial organization. As part of this commitment, we have recently increased our personnel resources and technical accounting expertise as we develop the internal and financial resources of the Company. In addition, the Company will prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.

 

Management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses (i) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements; and (ii) ineffective controls over period end financial close and reporting processes.

 

We have improved our financial organization as we have increased our personnel resources and technical accounting expertise. We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis.

 

Changes in Internal Control over Financial Reporting

 

There has not been any change in our internal control over financial reporting that occurred during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

Such current litigation or other legal proceedings are described in, and incorporated by reference in, this “Item 1. Legal Proceedings” of this Form 10-Q from, “Part I - Item 1. Financial Statements” in the Notes to Consolidated Financial Statements in “Note 6 – Contingencies”. The Company believes that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial condition or results of operations. However, assessment of the current litigation or other legal claims could change in light of the discovery of facts not presently known to the Company or by judges, juries or other finders of fact, which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.

 

Additionally, the outcome of litigation is inherently uncertain. If one or more legal matters were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Commission on March 30, 2020 (the “Form 10-K”), under the heading “Risk Factors”, except as set forth below, and investors should review the risks provided in the Form 10-K and below, prior to making an investment in the Company. The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Form 10-K for the year ended December 31, 2019, under “Risk Factors”, and below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.

 

We have been, and may in the future be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental and social impact of which is difficult to predict, which may significantly harm our business, prospects, financial condition and operating results.

 

During and following the second and third quarters of 2020, there has been a widespread worldwide impact from the COVID-19 pandemic, and we have been, and may in the future be, adversely affected as a result. Numerous government regulations and public advisories, as well as shifting social behaviors, have temporarily limited or closed non-essential transportation, government functions, business activities, and person-to-person interactions, and the duration of such trends is difficult to predict. The outbreak of the COVID-19 coronavirus, the global response to such coronavirus, including travel restrictions and quarantines that governments are instituting, has adversely effected our operations, may continue to have an adverse effect on our operations, and/or may have a significant negative impact on our results of operations, the production of pharmaceuticals and our ability to timely obtain pharmaceuticals for resale. Currently, we are experiencing reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that we anticipate will have a negative impact on our wholesalers and certain technology outsourcing in India and the Philippines. Notwithstanding the above disruptions, our results of operations have not, to date, been materially adversely affected by the pandemic. However, if we continue to experience production difficulties, quality control problems or further shortages in supply of pharmaceuticals in the future, this could harm our business and results of operations, any of which could have a material adverse effect on our operations and the value of our securities. In addition, employee sicknesses and remote working environments, and the potential negative effect thereof on productivity and internal controls, related to the coronavirus and the federal, state and local responses to such virus, could materially impact our consolidated results for the fourth quarter and full year for 2020 and beyond. The COVID-19 outbreak could also restrict our access to capital such as credit facilities and lead to material nonrecurring charges, write-downs, impairments and expenses. The Company is actively and continually monitoring the pandemic’s effect on our businesses and endeavoring to adapt quickly in real time to meet the rapidly-changing demands of our Customers and Suppliers.

 

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To mitigate the spread of COVID-19, we implemented travel restrictions and remote working arrangements for most of our employees in order to minimize physical contact, and we implemented additional sanitation and personal protection measures. The Company’s employees started working remotely around March 17, 2020, and as a result, productivity may drop, which could impact revenues and profitability. The Company’s corporate office is closed through December 31, 2020, at the earliest, unless the current situation improves. The Company has not renewed its corporate office lease and is searching for smaller facilities for the future. These measures might not fully mitigate COVID-19 risks to our workforce and we could experience unusual levels of absenteeism that might impair operations and delay delivery of products. The COVID-19 pandemic affects product manufacturing, supply and transport availability and cost. The pandemic reduces demand for some products due to delays or cancellations of elective medical procedures, consumer self-isolation and business closures, among other reasons. The COVID-19 pandemic also influences shortages of some products, with product allocation resulting in delivery delays for customers.

 

The ongoing impacts of the pandemic may cause a general economic slowdown or recession in one or more markets, disruptions and volatility in global capital markets and other broad and adverse effects on the economy, business conditions, commercial activity and the healthcare industry. The pandemic might impact our business operations, financial position and results of operation in unpredictable ways that depend on highly-uncertain future developments, such as determining the effectiveness of current or future government actions to address the public health or economic impacts of the pandemic. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.

 

We may be further impacted by COVID-19 as follows:

 

  As a result of COVID-19, various states have adopted price gouging laws. Our failure to comply with such laws and regulations could subject us to claims, penalties, fines or lawsuits;
     
  Inventory price fluctuations as a result of supply and demand issues caused by COVID-19 may cause values of inventory to decrease, which would have a direct impact on gross profit and could result in a direct write-off of inventory value;
     
  Payment Terms with customers may be altered or extended, which would have an impact on current ratios and cash flow; and
     
 

There may be material impairments with respect to goodwill and right-of-use assets as the evaluation of the long-term impact to delivery of service or physical space assessments changes.

 

We may have difficulties in sourcing products and inventory due to a variety of causes.

 

We might experience difficulties and delays in sourcing products and inventory due to a variety of causes, such as: difficulties in complying with the legal requirements for export or import of pharmaceuticals or components; suppliers’ failures to satisfy production demand; manufacturing or supply problems such as inadequate resources; real or perceived quality issues; and advanced deposits which are at risk of return if product is not delivered. Difficulties in product manufacturing or access to raw materials could result in supplier production shutdowns, product shortages and other supply disruptions. All of these issues may be exacerbated by the COVID-19 pandemic, which to date, has resulted in issues with the availability of certain products, resulting in product allocation and delivery delays. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations.

 

We may not be able to sell our inventory, at or above the price we acquired such inventory for, and/or may be forced to write-down inventory in the future.

 

Because of the supply and demand nature of our pharmaceutical business and the personal protective equipment (PPE) business, especially in connection with the rapidly changing regulations, recommendations and guidance surrounding COVID-19, the inventory of products we have acquired, or may acquire in the future, may have been/will be, acquired at a cost higher than the price at which we may be able to resell such products. As a result, we may not make a profit on such sales and may have to write-down a significant portion of our inventory in the future.

 

We may not receive products or receive refunds for deposited amounts.

 

We might not receive products or the return of funds on deposits that have been provided. We have two deposits outstanding as of the date of this report in an aggregate amount of approximately $1,000,000. In the event we do not receive products for the deposited amounts or the return of our deposits, this will cause us financial harm and result in us taking a significant charge on our financial statements. In the future we may provide additional deposits for products which may be material, which deposits may not be refunded timely, if at all, and which products may not be delivered, or may be defective or unusable. Any significant losses of deposited funds could have a material adverse effect on our financial condition, results of operations and the value of our securities.

 

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

 

There have been no sales of unregistered securities during the quarter ended September 30, 2020 and from the period from October 1, 2020 to the filing date of this report, which have not previously been disclosed in a prior Quarterly Report on Form 10-Q or a Current Report on Form 8-K, except as set forth below:

 

In August 2020, warrants to purchase 1,667 shares of common stock were exercised at $4.80 per share; the Company issued 1,667 shares of common stock upon such exercise and $8,002 in proceeds was received by the Company.

 

In August 2020, warrants to purchase 1,667 shares of common stock were exercised at $3.00 per share; the Company issued 1,667 shares of common stock upon such exercise and $5,001 in proceeds was received by the Company.

 

In September 2020, warrants to purchase 5,000 shares of common stock were granted and immediately exercised at $0.06 per share; the Company issued 5,000 shares of common stock upon such exercise and $300 in proceeds was received by the Company.

 

In October 2020, warrants to purchase 22,528 shares of common stock were exercised at $0.06 per share; the Company issued 22,528 shares of common stock upon such exercise and $1,352 in proceeds were received by the Company.

 

We claim an exemption from registration pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act for such issuances, since the foregoing issuances did not involve a public offering, the recipients were (a) an “accredited investor”; and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act. The securities are subject to transfer restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The securities were not registered under the Securities Act and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

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SIGNATURES

 

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

 

  Trxade Group, Inc.
     
  By: /s/ Suren Ajjarapu
    Suren Ajjarapu
   

Chief Executive Officer

(Principal Executive Officer)

     
    Date: October 26, 2020
     
  By: /s/ Howard Doss
    Howard Doss
   

Chief Financial Officer

(Principal Accounting/Financial Officer)

     
    Date: October 26, 2020

 

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EXHIBIT INDEX

 

        Incorporated by Reference    
Exhibit No.   Description   Form   File No.   Exhibit   Filing Date   Filed Herewith
1.1   Underwriting Agreement dated February 13, 2020, by and between Trxade Group, Inc. and Dawson James Securities, Inc. as the representative of the underwriters named therein   8-K   001-39199   1.1   February 13, 2020    
3.1   Second Amended and Restated Certificate of Incorporation of Trxade Group, Inc.   S-1   333-234221   3.1   October 15, 2019    
3.2   Certificate of Amendment to Second Amended and Restated Certificate of Incorporation (1-for-6 Reverse Stock Split of Common Stock) filed with the Delaware Secretary of State on February 12, 2020, and effective February 13, 2020   8-K   001-39199   3.1   February 13, 2020    
3.3   Amended and Restated Bylaws of Trxade Group, Inc.   10-12G/A   000-55218   3.1   July 24, 2014    
10.1***   Trxade Group, Inc. Amended and Restated 2019 Equity Incentive Plan   8-K   001-39199   10.1   June 1, 2020    
10.2***   Form of Stock Option Agreement (April 2020 Grants to Employees) April 14, 2020   8-K   001-39199   10.2   April 16, 2020    
10.3***   Form of Restricted Stock Grant Agreement (Independent Directors 2020 Award, 2020 CFO Award and 2020 Legal Counsel) April 14, 2020   8-K   001-39199   10.3   April 16, 2020    
10.4***   April 14, 2020 Executive Employment Agreement with Suren Ajjarapu   8-K   001-39199   10.4   April 16, 2020    
10.5***   First Amendment to Executive Employment Agreement with Suren Ajjarapu dated May 5, 2020   8-K   001-39199   10.2   May 7, 2020    
10.6***   Restricted Stock Grant Agreement (Mr. Ajjarapu 2020 Performance Bonus)(Updated) May 5, 2020   8-K   001-39199   10.3   May 7, 2020    
10.7***   Executive Employment Agreement dated effective June 19, 2020, entered into by and between Trxade Group, Inc. and Howard A. Doss   8-K   001-39199   10.1   June 26, 2020    
10.8***   Trxade Group, Inc. Independent Director Compensation Policy adopted April 14, 2020    10-Q   001-39199   10.1   July 27, 2020    
10.9***   Form of First Amendment to Trxade Group, Inc. 2019 Equity Incentive Plan Restricted Stock Grant Agreement (April 2020 Grants to Employees; Independent Directors 2020 Award, 2020 CFO Award and 2020 Legal Counsel Award)   8-K   001-39199   10.4   August 4, 2020    
31.1*   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*                   X
31.2*   Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act*                   X
32.1**   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act**                   X
32.2**   Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act**                   X
101.INS   XBRL Instance Document                   X
101.SCH   XBRL Taxonomy Extension Schema Document                   X
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document                   X
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document                   X
101.LAB   XBRL Taxonomy Extension Label Linkbase Document                   X
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document                   X

 

* Filed herewith.
   
** Furnished herewith.

 

*** Indicates management contract or compensatory plan or arrangement.

 

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