UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to ___________.
Commission file number: 000-55218
TRXADE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3840 Land O’ Lakes Blvd.
Land O’ Lakes, Florida
(Address of principal executive offices)
46-3673928
Identification Number)
34639
(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
Common Stock
Name of each exchange on which registered
OTCBB
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. [ ]
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
[ ] (Do not check if a smaller reporting company)
Smaller reporting company
[X]
Emerging growth company
[ ]
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 Act). Yes[ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter. Note.—If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by
non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are
set forth in this Form.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017
based upon the closing price reported on such date was approximately $3,295,043. Shares of voting stock held by each officer and
director and by each person who, as of June 30, 2017 may be deemed to have beneficially owned more than 10% of the outstanding
voting stock have been excluded. This determination of affiliate status is not necessarily a conclusive determination of affiliate status
for any other purpose. There were 31,985,827 shares of the registrant’s common stock outstanding on June 30, 2017.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for
identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 1 A. RISK FACTORS
ITEM 1 B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
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F-1
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PART I
Throughout this annual report on Form 10-K, the terms "we,” "us,” "our,” and "our company” refer to Trxade Group, Inc., a Delaware
corporation, and, unless the context indicates otherwise, also includes our subsidiary, Trxade, Inc., a Florida corporation.
Forward-Looking Statements
This annual report contains forward-looking statements, which reflect the views of our management with respect to future events and
financial performance. These forward-looking statements are subject to a number of uncertainties and other factors that could cause
actual results to differ materially from such statements. Forward-looking statements are identified by words such as "anticipates,”
"believes,” "estimates,” "expects,” "plans,” "projects,” "targets” and similar expressions. Readers are cautioned not to place undue
reliance on these forward-looking statements, which are based on the information available to management at this time and which speak
only as of this date. Our actual results may differ materially from results anticipated in these forward-looking statements. We undertake
no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
For a discussion of some of the factors that may cause actual results to differ materially from those suggested by the forward-looking
statements, please read carefully the information under "Risk Factors.”
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. However, your attention is directed to any further disclosures made on related subjects in our subsequent annual
and periodic reports filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K, Proxy Statements on Schedule
14A and Information Statements on Schedule 14C.
We obtained the market data used in this report from internal company reports and industry publications. Industry publications
generally state that the information contained in those publications has been obtained from sources believed to be reliable, but their
accuracy and completeness are not guaranteed and their reliability cannot be assured. Although we believe market data used in this 10-
K is reliable, it has not been independently verified.
Item 1. Business
The following discussion should be read in conjunction with our financial statements and the related notes and other financial
information appearing elsewhere in this Annual Report.
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 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 on a web-based platform.
CORPORATE HISTORY
Background of XCEL
Our company was incorporated in Delaware on July 15, 2005 as "Bluebird Exploration Company” ("Bluebird”). Bluebird was originally
formed to engage in the exploitation of mineral properties. In December 2008, Bluebird changed its name to "Xcellink International, Inc.”
("XCEL”), and subsequently announced that its business plan was being expanded to include the development and marketing of
platform-independent customer-centric payment systems and methodologies. XCEL was unable to raise the funds necessary to
implement its business strategy, never generated any revenue and was a reporting as a "shell” corporation. On January 9, 2014, Trxade
Group, Inc., a privately held Nevada corporation merged with and into XCEL, and XCEL changed its name to "Trxade Group, Inc.”
XCEL’s shares traded on the Over-the-Counter Bulletin Board ("OTCBB”) market until early 2010.
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Background of Trxade
PharmaCycle LLC, a Nevada limited liability company ("PharmaCycle”), was formed in August 2010 by Prashant Patel to serve as a web-
based market platform designed to enable trading among healthcare buyers and sellers of pharmaceuticals, accessories and services. In
January 2013, PharmaCycle converted into a Florida corporation and changed its name to Trxade, Inc. ("Trxade Florida”). In May 2013,
Trxade Florida created a new wholly owned subsidiary, Trxade Group, Inc., a Nevada corporation ("Trxade Nevada”). Trxade Nevada
acquired Trxade Florida pursuant to a reverse triangular merger, resulting in Trxade Florida becoming a wholly owned subsidiary of
Trxade Nevada (the "Nevada-Florida Merger”). The sole purpose of the Nevada-Florida Merger was to provide for a holding company
to own Trxade Florida, the operating company. At all times, up to the Nevada-Florida Merger, Trxade Florida was capitalized exclusively
through cash capital contributions made by Messrs. Suren Ajjarapu and Patel. Immediately following the Nevada-Florida Merger,
Messrs. Ajjarapu and Patel collectively owned 99% of Trxade Nevada. Subsequent to the Nevada-Florida Merger (but prior to the
merger with XCEL), Trxade Nevada raised $670,000 through the sale of its preferred stock in private placements made to third party
investors.
Reverse Merger with Trxade
On September 26, 2008, Mark Fingarson, the former President, sole Director and controlling shareholder of XCEL, sold 80,000,000 shares
of XCEL to XCEL’s then attorney, Ron McIntyre. On November 22, 2013, Trxade Nevada acquired Mr. McIntyre’s controlling interest
of 80,000,000 shares in XCEL pursuant to a Purchase and Sale Agreement dated November 7, 2013. At the time of the sale, XCEL had
104,160,000 shares of common stock issued and outstanding, including the 80,000,000 shares of stock acquired by Trxade Nevada.
On December 16, 2013, Trxade Nevada and XCEL entered into a definitive merger agreement (the "Merger Agreement”) providing for
the merger (the "Merger”) of Trxade Nevada with and into XCEL, with XCEL as the surviving corporation. The Merger closed on
January 8, 2014. Under the terms of the Merger Agreement, we amended our articles of incorporation (filed herewith), changed our name
to "Trxade Group, Inc.,” and changed our trading symbol to XCEL.PK. On February 13, 2014, an additional 600,000 shares of our
common stock (on a post-reverse split basis) were issued pursuant to the conversion of $19,333 aggregate principal amount of our
outstanding promissory notes. Our current officers and directors were the officers and directors of Trxade Nevada.
Recapitalization of Common Stock by a Reverse Split and Increase of Authorized Shares of Stock
Pursuant to our Amended and Restated Certification of Incorporation, we increased the authorized shares of our Common Stock from
200,000,000 shares to 500,000,000 shares, and authorized 100,000,000 shares of Preferred Stock, including 10,000,000 shares of Series
"A” Preferred Stock.
We also effectuated a reverse stock split at the ratio of one thousand-for-one (1,000:1) shares effective upon the closing of the Merger
(the "Reverse Split”). In connection with the split, the 104,160,000 outstanding shares of our Common Stock, including the 80,000,000
shares held by Trxade Nevada, converted into 104,160 shares of Common Stock. As a result of the Merger, Trxade Nevada
Shareholders holding 28,800,000 shares of Common Stock and 670,000 shares of Series A Preferred Stock converted their shares on
one-to-one basis into 28,800,000 shares of our Common Stock and 670,000 shares of our Series A Preferred Stock, for an aggregate total
of 29,470,000 shares. Further, 600,000 shares of our common stock (on a post- Reverse Split basis) were issued following the merger in
connection with the conversion of our promissory notes. The 80,000,000 pre-merger shares held by Trxade Nevada, which post-split
amounted to 80,000 shares, revered to treasury stock of the company.
On June 11, 2015, pursuant to our Second Amended and Restated Certification of Incorporation, we decreased the authorized shares of
our Common Stock from 500,000,000 to 100,000,000 and decreased the authorized shares of our Preferred Stock from 100,000,000 to
10,000,000.
Subsidiaries
We own 100% of Trxade, Inc. This subsidiary is included in our attached consolidated financial statements and is engaged in the same
line of business as Trxade. Trxade Florida is a web-based market platform that enables trade among healthcare buyers and sellers of
pharmaceuticals, accessories and services.
We own 100% of Integra Pharma Solutions, LLC, (formerly Pinnacle Tek, Inc., a Florida corporation) founded by Mr. Ajjarapu in 2011.
("INTEGRA”). Until the end of 2016, INTEGRA served as our technology consultant provider, but we discontinued that line of
business in 2016. INTEGRA is now intended to serve as the our logistics company for pharmaceutical distribution, but has no material
effect on our operations at this time.
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We own 100% of Alliance Pharma Solutions, LLC, a Florida LLC., which was founded in January 2018 ("Alliance”). Alliance currently
has no operations or material effect on our business at this time, but is intended to serve as our consulting firm for pharmaceutical
wholesalers.
We also owned 100% of ShopRX, Ltd., our UK based subsidiary. The Company had hoped to establish a similar business to Trxade,
Inc. in the United Kingdom in the future under this entity. This division was dissolved and has no material impact on the Company’s
operational results.
Sale of Westminster
We also owned 100% of Westminster Pharmaceutical LLC, a Delaware limited liability company (" Westminster”) through December 31,
2016. Westminster was formed in January 2013 as a single member LLC wholly owned by Trxade Florida. This licensed subsidiary is
included in our attached financial statements and provides state-licensed pharmacies and buying groups in the United States with
pharmaceuticals approved by the United States Food and Drug Administration (the " FDA”). In late 2015 and early 2016 Westminster
entered into multiple supply contracts with wholesale manufacturers of generic pharmaceuticals to begin selling Westminster private
label generic pharmaceuticals to our customers.
In December 2016, based on management’s strategic review of its portfolio of businesses, the Company committed to a plan to sell our
private label generic pharmaceuticals. On December 31, 2016, the Company entered into and consummated the sale of 100% of its equity
interests in Westminster Pharmaceuticals, LLC, and in connection with the sale, the Company exited the private label generic
pharmaceuticals business line. The purchase price for Westminster was the cancellation of $1,500,000 of indebtedness with the buyer
under the senior secured note, the issuance of a warrant to purchase 1,500,000 shares of the Company’s Common Stock and the
assumption of various contracts and obligations of Westminster. The Warrants were issued at a strike price of $0.01 per share, and
have an expiration date of five years from date of grant under the term and conditions of a warrant agreement.
The Westminster sale is considered a discontinued operation, and as a result, all consolidated financial statements in this Annual
Report on Form 10-K have been adjusted accordingly to reflect this financial statement presentation. See Note 3 of the Notes to
Consolidated Financial Statements for information concerning the sale of Westminster.
BUSINESS OF TRXADE
Our Principal Products and Services and their Markets.
Trxade.com: Trxade.com is a web-based pharmaceutical marketplace engaged in promoting and enabling trade among independent
pharmacies and large pharmaceutical suppliers nationally. Additional features include the ability of independent pharmacies to trade
among each other in currently 18 states that follow the Model State Pharmacy Act. (The Model State Pharmacy Act and Model Rules of
the National Association of Boards of Pharmacy (Model Act) provide the boards of pharmacy with model language that may be used
when developing state laws or board rules.) Other value-added components include access to Trxade’s proprietary pharmaceutical
shortage database, data analytics regarding medication pricing, and manufacturer return policies. We generate revenue from this
service by charging a transaction fee to the seller of the products for sales conducted via the Trxade platform. The buyers do not bear
the cost of transaction fees for the purchases that they make nor do they pay a fee to join or register with our platform. Substantially all
of our revenues during the years ended December 31, 2017, and 2016 were from platform revenue on Trxade.com.
InventoryRx.com: InventoryRx.com is a web-based pharmaceutical marketplace formed to promote and enable trade among suppliers,
manufacturers and large healthcare facilities nationally. The seller of products and advertisers are charged a transaction fee or posting
fee for products sold or featured on the platform. To date, we have not generated any revenue from this product.
Pharmabayonline: Pharmabayonline was created to provide access to proprietary pharmaceutical data analytics to United States-based
independent pharmacies, pharmaceutical shortage databases, proposed governmental reimbursement benchmarks comparison and
analysis, and a proprietary suggested national retail drug benchmark. To date no revenue has been generated from this service.
RxGuru: RxGuru is a service-based desktop software application designed to provide valid, daily drug pricing and analytics to the
independent pharmacist at time of care to enable their patients to realize cost savings on their medications. This application works in
conjunction with the Trxade platform but to date has not driven any revenue.
Integra Pharma Solutions, LLC: INTEGRA is intended to serve as the our logistics company for pharmaceutical distribution, but has
no operations or revenue at this time.
All our product offerings are focused on the US markets. Some products are restricted to certain states depending on the various state
regulations and guidelines pertaining to pharmaceuticals. Our services are distributed through our online platform.
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Discontinued Operations.
Westminster Pharmaceuticals: Westminster Pharmaceuticals bought US FDA approved prescription medication from licensed
pharmaceutical wholesalers and manufacturers. These products were delivered and stored at a licensed logistics location in Olive
Brach, MS and ready for delivery to our customer base once a product was sold. In late 2015 and early 2016 Westminster entered into
multiple supply contracts with wholesale manufacturers of generic pharmaceuticals to begin selling Westminster private label generic
pharmaceuticals to our customers. Revenue was generated from the sale of private label products owned by Westminster. This
business line was not profitable for the Company, and Westminster was sold in December 2016 and the Company exited the private
label generic pharmaceuticals business line. See Note 3 of the Notes to Consolidated Financial Statements for information concerning
the sale of Westminster.
The Pharmaceutical Industry
According to the 2013-14 Economic Report on Retail, Mail, and Specialty Pharmacies by Adam J. Fein, Ph.D. the US pharmaceutical
industry is a $330 billion industry consisting of over 65,000 pharmacy facilities and over 700 DEA-registered and 1,500 State-licensed
suppliers. There are very few platforms currently in place to bring these participants together to share market knowledge, product
pricing transparency and product availability. According to this, the pharmaceutical market is comprised primarily of three wholesalers
that control an estimated approximately 92% of the market. Our management believes that this concentration has, over the years, led to
a lack of price and cost transparency, thereby resulting in severe limitations on the purchasing choices of industry participants. These
market dynamics have enabled these large wholesalers (McKesson, Cardinal Health and AmerisourceBergen), known as ADR
distributors, to dominate the industry with respect to both generic and brand pharmaceuticals. The increasing concentration of generic
medications (ANDA or Abbreviated New Drug Application), however, with many more expected to go to market in the near future
(approximately $80 billion branded medications will lose their patent protection within the next ten years), have enabled smaller
suppliers access to an increasing number of medications at highly discounted prices. In essence, the market is slowly changing
towards one where medications will become a commoditized and trade influenced by price rather than the business relationships
imposed by the dominant participants of the past.
To fuel this change, insurance companies (Pharmacy Benefits Management PBM and private health payers) and the federal
government have recently initiated lower medication reimbursement payments to healthcare providers. We believe that pharmacies in
due course will face increasing pressure to source medications as inexpensively as possible and improve operational efficiency. Trxade
seeks to be in the forefront of solving these transparency and pricing concerns by providing independent, retail pharmacies with real-
time, pharmacy acquisition cost "PAC” benchmarks to the NDC level The National Drug Code (NDC) is a unique product identifier
used in the United States for drugs intended for human use.
Status of any publicly announced new products or services.
Our RxGuru application was launched in the first quarter of 2014 and complements Trxade.com’s efforts of delivering timely information
at time of purchase. Our industry leading price prediction model "RxGuru” integrates product shortage insight into pharmacy
acquisition benchmarks ("PAC”) to ascertain trends and pricing variances that result in significant purchasing opportunities. "RX
Guru” helps to predicts prices and affords our members an opportunity to continuously benefit from real price purchasing
opportunities that are often concealed from the rest of the industry.
InventoryRx, launched in the first quarter of 2014, is a web based pharmaceutical exchange platform where wholesalers can purchase
and sell pharmaceuticals and other over the counter medications among each other. The site offers these trading partners greater
product availability and pricing transparency and may substantially improve their buying efficiency as well as lower their cost of goods
on a continuous basis.
Westminster Pharmaceuticals, LLC was our wholly-owned private label pharmaceutical distributer. In late 2015 and early 2016
Westminster entered into multiple supply agreements with wholesale manufacturers of generic pharmaceuticals to begin selling
Westminster private label generic pharmaceuticals to our customers. Westminster had a licensed storage and distribution facility in
Olive Branch, MS. Revenue was generated in 2015 and 2016 from the sale of private label products owned by Westminster. This
business line was not profitable for the Company, and in December 2016 Westminster was sold and the Company exited the private
label generic pharmaceuticals business.
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Competitive business conditions, the issuer’s competitive position in the industry, and methods of competition.
We expect to face competition from the three large ADR distributors (McKesson, Cardinal Health & AmerisourceBergen), other
pharmaceutical distributors, buying groups, software products, and other start-up companies. Most of these operations have
substantially greater financial and manufacturer backed resources, longer operating histories, greater name recognition and more
established relationships in the industry.
Other Start-up Companies. We have identified a limited number of start-ups that provide pharmacy-to-pharmacy retail wholesaling for
their overstock pharmaceuticals. In addition, some start-ups provide for a supplier-pharmacy trading such as PharmaBid, RxCherrypick,
PharmSaver and GenericBid, and provide web-based services similar to ours, allowing pharmacies to buy from several suppliers. Trxade
differentiates itself from these exchanges by providing our pharmacies with both brand and generic pharmaceutical products.
Buying Groups. Buying Groups provide discounted prices to their members by negotiating better pricing with one primary wholesaler,
while charging administration fees generally ranging from 3-5%. Some Buying Groups are structured like co-operatives (IPC, API) and
offer their members monthly or quarterly rebates. Although they can function well to bring pricing competition to the industry, they
often offer rebates only after the purchase and we don’t believe they will provide long term savings to customers with this model given
the increased transparency and competition in the industry.
Pharmaceutical Software. Some pharmaceutical software companies compete with us on some levels. SureCost, for example provides
inventory management software that allows pharmacies to comply with primary supplier contracts. This software is fee based, and
requires training.
Moving forward. Some pharmacies may be reluctant to adapt to this format of buying due to the historical negativity associated with
purchasing pharmaceuticals on the internet and the uncertainty with respect to the origin and purity of pharmaceuticals so purchased.
Trxade management believes that as we continue to develop our brand, our customer base, and our vast product offerings, we will gain
the trust of the market and overcome the negativity associated with purchasing via a pharmaceutical marketplace.
One advantage that we believe we have over our competition is our ability to be flexible and fast moving in adjusting our business
model to address the needs of our customer base. Trxade started by offering pharmacies a reverse auction model to enhance savings
on the purchase of their pharmaceuticals. Customer feedback suggested that pharmacies prefer a more buy now format, which we
implemented and then supplemented with a pharmacy-to-pharmacy trading capability for all overstock pharmaceuticals which was
discontinued. This resulted in a "one stop-one-search” platform to buy quality pharmaceuticals for less and a data-rich platform to help
pharmacies overcome the complexities related to supply chain purchasing.
Sources and availability of raw materials and the names of principal suppliers.
Trxade is a web-based technology platform. Because we are not a manufacturing company, we don’t need any raw materials. Our
module on the platform is supplier-to-pharmacy trade. We bring buyers and sellers together on this platform. Our suppliers include
National Apothecary Solutions, River City Pharmacy and South Pointe Wholesale, Inc.
Dependence on one or a few major customers.
As of the date of this Form 10-K, we have over 8,500 pharmacies and over 25 pharmaceutical suppliers as customers, with a market
potential of approximately 24,000 independent pharmacies and 1,500 regional and local suppliers. We have a working relationship with
over 25 wholesalers and the nation’s largest buying group. Although we feel those entities are satisfied with their business relationship
with Trxade, if our buying group and two or three of the wholesalers decided no longer to do business with Trxade, the resulting
supplier void would materially and adversely affect our competitiveness in the marketplace.
Intellectual Property
Although we believe that our name and brand are protected by common law trademark principals, other than Trxade and pending
trademarks on RxGuru and our pharmaceutical pricing benchmarks PAC, we do not currently have any other registered trademarks,
patents, concessions, licenses, royalty agreements, or franchises. Our business operates under a proprietary software system which
includes trade secrets within our database, business practices and pricing model.
Need for government approval of principle products and services.
We are required to hold business licenses and to follow applicable state and federal government regulations detailed herein. Our
wholesale division, which warehouses pharmaceutical products, requires requisite FDA and state approval, which we have obtained.
The wholesale division was discontinued in December 2016.
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Effect of existing or probable government regulations on the business.
Federal Drug Administration Guidelines
On April 12, 1988, President Ronald Reagan signed into law the Prescription Drug Marketing Act of 1987 (PDMA), setting the baseline
for wholesale distribution regulations. The final regulations were published in 1999, establishing the minimum wholesale distribution
requirements for state licensure. With the intent to prevent the introduction and retail sale of substandard, ineffective, or counterfeit
drugs into the distribution system, state licensing systems moved to update their standards to match those provided federally as
guided under FDA’s Guidelines for State Licensing of Wholesale Prescription Drug Distributors (21 CFR 205). PDMA established
minimum federal pedigree requirements to trace the ownership of prescription drugs through the supply chain. The principal goal of the
PDMA was to further secure the nation’s drug supply from counterfeit and substandard prescription drugs. The law establishes two
types of distributors: "Authorized distributor[s] of record” or ADRs; and "Unauthorized distributor[s],” such as wholesalers. The
pedigree requirement was to require each person engaged in the wholesale distribution of a prescription drug in interstate commerce,
who is not the manufacturer or an authorized distributor of record for that drug, to provide a pedigree to the recipient. After meeting
resistance from various stakeholders, the FDA delayed the effective date of the regulations several times, until final implementation in
December 2006.
At the federal level the implementation of the track and trace legislation by 2017 will require the use of pharmaceutical pedigree to track
the movement of pharmaceuticals along the supply chain. The costs of complying with this new legislation may be too burdensome for
many of the smaller suppliers. Further, some state laws utilizing the Federal Model Pharmacy Act may change or add rules that restrict
pharmacy to pharmacy trading in the future. Current model act laws allow for a pharmacy being able to trade 5% of their annual
inventory with other pharmacies while most state laws allow for retail pharmacies to be able to trade a product in national shortage
status.
State Drug Administration Guidelines
There are a number of national and state wide regulations that have an effect on our business. All drug wholesalers must be licensed
under state licensing systems, which must in turn meet the FDA guidelines under State Licensing of Wholesale Prescription Drug
Distributors (21 CFR Part 205). The regulations set forth minimum requirements for prescription drug storage and security as well as for
the treatment of returned, damaged, and outdated prescription drugs. Further, wholesale drug distributors must establish and maintain
inventories and records of all transactions regarding the receipt and distribution of prescription drugs and make these available for
inspection and copying by authorized federal, state, or local law enforcement officials. In most states, wholesale distributor licenses are
issued by the State Boards of Pharmacy and require periodic renewal. Approximately 40 states also require out-of-state wholesalers that
distribute drugs within their borders to be licensed as well.
States have statutes pertaining to the need to possess a wholesaler license for pharmacies to exchange pharmaceuticals with other
pharmacies. There are a number of states that allow pharmacies to exchange pharmaceuticals with other pharmacies if the amount of the
exchange does not exceed 5% of either pharmacy’s annual revenue generated from prescription pharmaceuticals, without the need to
acquire a wholesaler license. Some state pharmacy boards limit that exchange to only emergency exchanges and many of those states
define emergency exchanges to mean exchanges to address temporary shortages. It is important to know the opinion taken by the
board of pharmacy for each state because these boards are initially responsible for interpreting the statute, and not their respective
state attorney general. Approximately 30 states currently have opined that pharmacy to pharmacy exchange does not require a
pharmacy to possess a wholesaler’s license. The interpretation of state statutes have changed, although the statutes have remained
unchanged.
California, Florida, Nevada, New Mexico and Indiana define the normal distribution channel to not include the lateral sales of
pharmaceuticals between wholesalers. The new Supply Chain Act, part of the Quality Drug Act, which was signed into federal law in
December 2013, precludes all states from restricting, investigating or inspecting the distribution channel and transactional history. Until
the federal government provides guidelines for the new federal law, no state regulation or guideline exists.
The warehousing of pharmaceuticals is also restricted and requires additional state licenses. Some licenses require bonds and written
exams and may take some time to approve. Currently, Westminster Pharmaceuticals, our wholesale distributor, asks for formal pedigrees
from the ADR wholesalers and provides pedigrees to those entities they sell to in the marketplace. This requirement limits liability and
provides assurance if a recall is warranted that Trxade and its participants will receive value for the commodity.
Other Regulations:
Changes in state and federal regulations related to pharmacy-to-pharmacy trading may negatively impact that aspect of our business.
Individual state regulation changes can be expected from time to time regarding wholesaler distribution activities and have the potential
of increasing the cost of doing business in those states by influencing licensing requirements, fees and thus elevating our
administrative costs.
9
Research and Development.
During the last two fiscal years, Trxade.com, InventoryRx.com, Pharmabayonline and RxGuru have been developed as proprietary
software. For the years ended December 31, 2017 and 2016, $375,172 and $286,757, respectively, was spent by the company in
development activities. None of these expenses were borne directly by customers.
Cost of compliance with environmental laws.
We are not aware of any costs or effects of our compliance with environmental laws.
Employees
Currently, we have 23 employees. We also utilize numerous outside consultants.
Seasonality
Our business is not directly affected by seasonal fluctuations, but is affected indirectly by the fall and winter flu season, to the extent it
leads to in increased demand for certain generic pharmaceuticals.
Available Information
Our website is located at www.trxade.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and our Proxy
Statements are available through free of charge, after we file them with the SEC, on the SEC’s website at www.sec.gov. You may read
and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may
also request this information directly from the Company. You can get information on the operation of the SEC Public Reference Room
by calling the SEC at 1-800-SEC-0330.
The content of our website is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document
we file with the SEC.
Item 1A. Risk Factors
Risks Related to Our Business
Our business, financial condition and results of operations are subject to various risks and uncertainties, including those described
below and elsewhere in this Report. This section discusses factors that, individually or in the aggregate, we think could cause our
actual results to differ materially from expected and historical results. Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. It is not possible to predict or identify all such factors. Consequently, the following
are not to be a complete discussion of all potential risks or uncertainties applicable to our business.
We may continue to incur losses for an indeterminate period of times
In 2017 we were profitable for the first time; previous years were unprofitable. Our current business model has been in development
since 2010. Revenues generated from the Company’s business consolidated operations for the years ended December 31, 2017 and
2016 were $2,931,280 and $2,481,866, respectively. We incurred net income from continuing operations for the year ended December 31,
2017 of $288,983 and loss from continuing operations for the year ended December 31, 2016 of ($1,173,108). We may incur losses in the
foreseeable future due to the significant costs associated with our business development, including costs associated with maintaining
compliance under SEC reporting standards. We cannot assure you that our operations will annually generate sufficient revenues to
fund our continuing operations or to fully implement our business plan, and thereafter sustain profitability in any future period.
The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the start and growth of a business, the implementation of the Company’s business plan, and the
regulatory environment affecting the distribution of pharmaceuticals in which the Company operates.
10
If we do not obtain additional financing, our business, prospects, financial condition and results of operations will be adversely
affected.
The Company anticipates that it will require additional working capital for the Company to pursue continued development of products
and service and marketing operations. The timing and amount of such capital requirements cannot be accurately predicted. Additional
financing may not be available to the Company when needed or, if available, it may not be obtained on commercially reasonable terms.
If the Company is not able to obtain the necessary additional financing on a timely basis, the Company will be forced to delay or scale
down some or all of its development activities or perhaps even cease the operation of its business.
The Company has no commitments for any additional financing, and there can be no assurance that any such commitments can be
obtained on favorable terms, if at all. Any additional equity financing will be dilutive to the Company’s stockholders, and debt
financing, if available, may involve restrictive covenants with respect to dividends, raising future capital and other financial and
operational matters. If the Company is unable to obtain additional financing as needed, the Company may be required to reduce the
scope of its operations or its anticipated expansion, which could have a material adverse effect on the Company.
Many of our competitors are better established and have resources significantly greater than we have, which may make it difficult
to fend off competition.
The Company expects to compete with the three large ADR distributors (McKesson, Cardinal Health & AmerisourceBergen), other
pharmaceutical distributors, buying groups, software products, and other start-up companies. Many of these operations have
substantially greater financial and manufacturer-backed resources, longer operating histories, greater name recognition and more
established relationships in the industry than our company. In addition, a number of these competitors may combine or form strategic
partnerships. As a result, our competitors may be able to control a more favorable basis in regard to pricing or other factors. Our failure
to compete successfully with any of these companies would have a material adverse effect on our business and the trading price of our
common stock.
The three distributors listed above have a strong control over the industry, as they have contracts with the 24,000 independent, retail
pharmacies that limit the participants’ ability to purchase pharmaceuticals outside of those primary distributors. Additional restrictive
elements exist within the pharmaceutical channel of distribution. For example, a number of the inventory management systems, either
developed by the distributors or third party vendors, have been developed to require compliance to these restrictive purchasing
agreements.
Moreover, we expect that other existing and prospective competitors will adopt technologies or business plans similar to ours, or seek
other means to develop operations competitive with ours, particularly if our development of large-scale production progresses as
scheduled.
We will need to expand our member base and/or our profit margins to attain profitability
Currently, we are paid an administrative fee of up to 6% of the buying price on the generic pharmaceuticals sold to pharmacies and up
to 1% on brand pharmaceuticals that pass through our pharmaceutical exchanges.
Our management is aware that the competitiveness of the group of suppliers that participate in our system and price products on our
exchange is a key factor in determining how many purchasing pharmacies and wholesalers will purchase products through our
platforms. However, price is not the only factor that influences where retail pharmacies will obtain their product. Quality fulfillment
services is also important, and retail pharmacies have historically received quality fulfillment services from the three major ADR
distributors. In order to be more competitive, we must improve our customer service and wholesaler fulfillment efforts, because the
independent, retail pharmacy has for years considered this element of the fulfillment process as important as price. Other factors
influencing the pharmacies purchasing behavior in the future will be changes brought upon by The Affordable Care Act, which
regulates some aspects of pharmaceutical spending and pricing. In this regard we should benefit substantially from our pricing and
product shortage knowledge that is offered by our platform.
Profitability may be further increased as a result of lower cost of goods should the Company build stronger relationships with
manufacturers and other larger buying groups that serve wholesalers/ distributors. On a larger scale those margins will drop depending
upon the breadth of products provided in the market and the sale turn rates required. We are currently undertaking a significant effort
to increase our membership base through attendance at annual conferences and other strategies. Trxade has an expanded e-mail
marketing strategy based on our competitive price advantages and product shortage and price trend analysis tools.
11
There are inherent risks associated with our operations within the Pharmaceutical Distribution Markets
There are inherent risks involved with doing business within the pharmaceutical distribution channel, including:
• Product Use Liability: Improperly manufactured products may prove dangerous to the end consumer.
• Distribution Product Liability: Products may become adulterated by improper warehousing methods or modes of shipment.
• Counterfeit Products or products with fake pedigree papers.
• Unlicensed or unlawful participants in the distribution channel.
• Risk with default and the assumption of credit loss.
• Risk related to the loss of supply, or the loss of a number of suppliers.
Although all of our end-user agreements require our customers to indemnify us and for any and all liabilities resulting from our
participation in the pharmaceutical distribution industry, we cannot assure you that the parties required to provide such
indemnification will have the financial resources to do so. Additionally, although we have evaluated appropriate state statutes and
federal laws pertaining to pharmaceutical distribution in an effort to diminish our risks, the Board of Pharmacy for each state is
responsible for interpreting their state laws, and their interpretations may not comport with our analysis. It is also possible that any
third party logistics arrangements may disrupt service, create a loss of income, or other unforeseen disruptions should the service
provider experience any legal, financial or other difficulties of their own.
Regulatory changes that affect our distribution channel could harm our business
Certain states (CA, FL, NV, NM & IN) have enacted laws that prohibit lateral movement of pharmaceuticals within the distribution
channel. These laws prohibit wholesalers from selling pharmaceuticals directly from or to other wholesalers where they maintain
inventory. Other states may in the future enact similar laws that place restrictions in pharmaceutical trading within the Trxade platforms.
At the federal level, the implementation of the track and trace legislation by 2017 requiring the use of pharmaceutical pedigree may
restrict and disrupt the movement of pharmaceuticals along the supply chain should the cost of complying with this new legislation be
too burdensome for smaller suppliers. In addition, some state laws utilizing the Federal Model Pharmacy Act may change or add rules
that restrict pharmacy to pharmacy trading in the future. Current model act laws permit pharmacies to trade 5% of their annual inventory
with other pharmacies while most state laws allow for retail pharmacies to be able to trade a product in national shortage status.
We may apply working capital and future funding to uses that ultimately do not improve our operating results or increase the value
of your investment.
In general, the Company has complete discretion over the use of its working capital and any new investment capital it may in the future
obtain. Because of the number and variety of factors that could determine the Company’s use of funds, there can be no assurances that
such uses will not vary substantially from the Company’s current operating plan.
We intend to use existing working capital and future funding to support the development of our products and services, product
purchases in our wholesale distribution division, the expansion of our marketing and/or the support of operations to educate our
customers. We will also use capital for market and network expansion, acquisitions and general working capital purposes. However, we
do not have more specific plans for our capital and our management will have broad discretion in how we use available capital reserves.
Our capital could be applied in ways that do not improve our operating results or otherwise increase the value of a shareholder’s
investment.
We do not have a traditional credit facility with a financial institution, which may adversely impact our operations.
We do not have a traditional credit facility with a financial institution, such as a working line of credit. The absence of such a facility
could adversely impact our operations, as it may constrain our ability to have available the working capital for equipment purchases or
other operational requirements. If adequate funds are not otherwise available, we may be required to delay, scale back or eliminate
portions of our business development efforts. Without credit facilities, the Company could be forced to cease operations and investors
in our securities could lose their entire investment.
We are dependent upon our current management, who may have conflicts of interest.
The Company is dependent upon the efforts of its current management. All of our officers and directors have duties and affiliations
with other companies. Even though these companies are not competitors or involved in pharmaceutical distribution, involvement of our
officers and directors may still present a conflict of interest regarding decisions they make for Trxade or with respect to the amount of
time available for Trxade. The loss of any officer or director of the Company and in particular, Mr. Patel or Mr. Ajjarapu, could have a
material adverse effect upon our business and future prospects.
12
The Company does not presently have key-man life insurance upon the life of any of its officers or directors. While our management
team has considerable information technology and entrepreneurial experience, none of our management was been involved in
pharmaceutical distribution prior to joining the Company and, as such, did not have any technical experience in pharmaceutical
distribution prior to joining the Company. Upon adequate funding, management intends to hire qualified and experienced personnel,
including additional officers and directors, and specialists, professionals and consulting firms to advise management as needed;
however, there can be no assurance that management will be successful in raising the necessary funds in respect of recruiting, hiring
and retaining such qualified individuals and firms.
We plan to implement an aggressive growth strategy, which could increase the risk of failure.
For the foreseeable future, the Company intends to pursue an aggressive growth strategy for the expansion of its operations through
increased product development and marketing. The Company’s ability to rapidly expand its operations will depend upon many factors,
including the Company’s ability to work in a regulated environment, market value added products effectively to independent
pharmacies, establish and maintain strategic relationships with suppliers, and obtain adequate capital resources on acceptable terms.
Any restrictions on the Company’s ability to expand may have a material adverse effect on the Company’s business, results of
operations, and financial condition. Accordingly, there are no assurances that the Company will be able to achieve its targets for sales
growth, or that the Company’s operations will be successful or achieve anticipated operating results.
We rely on third-party contracts.
We depend on others to provide products and services to the Company. We do not manufacture pharmaceuticals and we do not sell
pharmaceuticals to the end consumer. We do not control these wholesalers, suppliers and purchasers and although our arrangements
with them will be terminable or of limited length, a change may be difficult to implement. At this time, we have a working relationship
with over twenty-five wholesalers and the nation’s largest buying group. Although we feel those entities are satisfied with their
business relationship with Trxade, if our buying group and two or three of the wholesalers decided no longer to do business with us,
that supplier void would materially and adversely affect our competitiveness in the marketplace.
It may be difficult and costly for us to comply with the extensive government regulations to which our business may be subject.
Our operations are subject to extensive regulation by the U.S. federal and state government. In addition as the company expands
operations it may also become subject to the regulations of foreign jurisdictions. We may also become subject to additional regulations
relating to environmental matters, transportation of pharmaceutical products, shipping restrictions, and import and export restrictions.
Further, the enactment of new rules and regulations could adversely affect our business. For example, The Affordable Care Act has a
primary goal of reducing the cost of healthcare and providing medical coverage to some of the nation’s 25 million uninsured.
Depending on its future enforcement or additional rules and regulations created around it, pharmaceutical pricing control could be
established resulting in substantially reduced margins and reimbursement for pharmacies and all other healthcare provider bases. In
turn this may adversely affect our cash flow, profitability, and growth.
We will continue to incur increased costs as a result of being a reporting company, and given our limited capital resources, such
additional costs may have an adverse impact on our profitability.
We are an SEC reporting company. The rules and regulations under the Exchange Act require reporting companies to provide periodic
reports with interactive data files, which require that we engage legal, accounting and auditing professionals, and XBRL and EDGAR
service providers. The engagement of such services can be costly and the Company may continue to incur additional losses, which
may adversely affect the Company’s ability to continue as a going concern. In addition, the Sarbanes-Oxley Act of 2002, as well as a
variety of related rules implemented by the SEC, have required changes in corporate governance practices and generally increased the
disclosure requirements of public companies. For example, as a result of being a reporting company, we are required to file periodic and
current reports and other information with the SEC and we have adopted policies regarding disclosure controls and procedures and
regularly evaluate those controls and procedures.
The additional costs we continue to incur in connection with becoming a reporting company (expected to be several hundred thousand
dollars per year) will continue to further stretch our limited capital resources. Due to our limited resources, we have to allocate
resources away from other productive uses in order to continue to comply with our obligations as an SEC reporting company. Further,
there is no guarantee that we will have sufficient resources to continue to meet our reporting and filing obligations with the SEC as they
come due.
13
RISKS RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
We are subject to the "penny stock” rules which will adversely affect the liquidity of our common stock.
The Company’s stock is defined as a "penny stock” under Rule 3a51-1 of the Exchange Act. In general, a "penny stock” includes
securities of companies which are not listed on the principal stock exchanges or NASDAQ and have a bid price in the market of less
than $5.00; and companies with net tangible assets of less than $2,000,000 ($5,000,000 if the issuer has been in continuous operation for
less than three years), or which has recorded revenues of less than $6,000,000 in the last three years. "Penny stocks” are subject to rule
15g-9, which imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than
established customers and "accredited investors” (generally, individuals with net worth in excess of $1,000,000 or annual incomes
exceeding $200,000, or $300,000 together with their spouses, or individuals who are officers or directors of the issuer of the securities).
For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction prior to sale. Consequently, this rule may adversely affect the ability of
broker-dealers to sell the Company’s stock, and therefore, may adversely affect the ability of the Company’s stockholders to sell stock
in the public market.
The sale of shares by our directors and officers may adversely affect the market price for our shares.
Sales of significant amounts of shares held by our officers and directors, or the prospect of these sales, could adversely affect the
market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a
premium over our stock price.
A significant number of our shares are eligible for sale and their sale or potential sale may depress the market price of our common
stock.
Sales of a significant number of shares of our common stock in the public market could harm the market price of our common stock.
Most of our common stock is available for resale in the public market, and if sold would increase the supply of our common stock,
thereby causing a decrease its price. Some or all of our shares of common stock may be offered from time to time in the open market
pursuant to compliance with Rule 144, which sales could have a depressive effect on the market for our shares of common stock.
Subject to certain restrictions, a person who has held restricted shares for a period of six months may sell common stock into the
market.
The limitation of monetary liability against the Company’s directors, officers and employees under Delaware law and the existence
of indemnification rights to the Company’s directors, officers and employees may result in substantial expenditures by the
Company and may discourage lawsuits against the Company’s directors, officers and employees.
The Company’s articles of incorporation contain a specific provision that limits the liability of directors for monetary damages to the
Company and the Company’s stockholders. We also have contractual indemnification obligations under our employment and
engagement agreements with our executive officers and directors. The foregoing indemnification obligations could result in the
Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which the
Company may be unable to recoup. These provisions and resultant costs may also discourage the Company from bringing a lawsuit
against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by the
Company’s stockholders against the Company’s directors and officers even though such actions, if successful, might otherwise
benefit the Company and its stockholders.
There is a limited market for our shares; our common stock is thinly quoted, so you may be unable to sell at or near bid prices or at
all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
Our Common Stock is traded on OTCBB under the symbol TRXD. The OTCBB is a quotation service for the Financial Industry
Regulatory Authority (" FINRA”) market makers, and not an issuer listing service or securities market. There is no minimum bid price
requirement. OTCBB companies are not considered to be "listed.” There are, however, certain requirements an issuer must meet in order
for its securities to be eligible for a market maker to enter a quotation on the OTCBB, including that the security be registered with the
SEC and the issuer be current in its required filings. Our Common Stock is very thinly traded, and a robust and active trading market
may never develop. Our common stock will likely continue to be sporadically or "thinly-quoted,” meaning that the number of persons
interested in purchasing our common stock at or near ask prices at any given time may be relatively small or nonexistent. This situation
is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts,
stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if
we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as
ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.
14
As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as
compared to a mature issuer which has a large and steady volume of trading activity that will generally support continuous sales
without an adverse effect on share price. It is possible that a broader or more active public trading market for our common stock will not
develop or be sustained, or that trading levels will not continue.
Our stock may be traded on the OTCQB. The OTCQB is an electronic quotation system operated by OTC Markets Group that displays
quotes from broker-dealers for many over-the-counter securities. These securities tend to be inactively quoted stocks, including penny
stocks and those with a narrow geographic interest. Market makers and other brokers can use OTC Markets to publish their bid and ask
quotation prices. The OTC Markets is not a stock exchange. To be quoted in the OTC Markets, companies do not need to fulfill any
financial requirements. The companies quoted in the OTC Markets tend to be closely held, extremely small, and thinly quoted. Most do
not meet the minimum U.S. listing requirements for trading on a stock exchange such as the New York Stock Exchange.
We have never paid or declared any dividends on our common stock.
We have never paid or declared any dividends on our common stock or preferred stock. Likewise, we do not anticipate paying, in the
near future, dividends or distributions on our common stock. Any future dividends on common stock will be declared at the discretion
of our board of directors and will depend, among other things, on our earnings, our financial requirements for future operations and
growth, and other facts as we may then deem appropriate.
Our directors have the right to authorize the issuance of shares of preferred stock and additional shares of our common stock.
Our directors, within the limitations and restrictions contained in our articles of incorporation and without further action by our
stockholders, have the authority to issue shares of preferred stock from time to time in one or more series and to fix the number of
shares and the relative rights, conversion rights, voting rights, and terms of redemption, liquidation preferences and any other
preferences, special rights and qualifications of any such series. Any issuance of shares of preferred stock could adversely affect the
rights of holders of our common stock. Should we issue additional shares of our common stock at a later time, each investor’s
ownership interest in our stock would be proportionally reduced.
If we fail to remain current in our reporting requirements on the OTCBB, where we are publicly quoted, we could be removed from
the OTCBB, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their
securities in the secondary market.
Companies whose shares are quoted for sale on the OTCBB and the OTCQB must be reporting issuers under Section 12 of the
Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges
on the OTCQB and OTCBB. If we fail to remain current in our reporting requirements, we could be removed from the OTCBB or OTCQB.
As a result, the market liquidity for our securities could be adversely affected by limiting the ability of broker-dealers to sell our
securities and the ability of stockholders to sell their securities in the secondary market.
The market price for our common stock is particularly volatile, given our status as a relatively unknown company with a small and
thinly quoted public float, and lack of profitability, which could lead to wide fluctuations in our share price.
The market for our common stock on the OTCBB will most likely continue to be characterized by significant price volatility when
compared to seasoned issuers, and we expect that our share price will be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price would be attributable to a number of factors. First, as noted above, the shares of our common stock will
likely be sporadically and/or thinly quoted. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares
by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of shares of our common stock are sold on the market without
commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share
price.
Anti-takeover provisions may impede the acquisition of Trxade.
Certain provisions of the Delaware General Corporation Law (DGCL) have anti-takeover effects and may inhibit a non-negotiated
merger or other business combination. These provisions are intended to encourage any person interested in acquiring Trxade to
negotiate with, and to obtain the approval of, our directors, in connection with such a transaction. As a result, certain of these
provisions may discourage a future acquisition of Trxade, including an acquisition in which the stockholders might otherwise receive a
premium for their shares.
15
If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results
accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our business
and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control
environment existed, and our business, brand and reputation with investors may be harmed.
In addition, reporting a material weakness may negatively impact investors’ perception of us. We have allocated, and will continue to
allocate, significant additional resources to remedy any deficiencies in our internal control. There can be no assurances that our
remedial measures will be successful in curing the any material weakness or that other significant deficiencies or material weaknesses
will not arise in the future.
Our Chief Executive Officer and President are also our two largest stockholders, and as a result they can exert control over us and
have actual or potential interests that may diverge from yours.
Suren Ajjarapu, our CEO, and Prashant Patel, our President, beneficially own, in the aggregate, over 80% of our Common Stock. As a
result, these stockholders, acting together, will be able to influence many matters requiring stockholder approval, including the election
of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may have the effect
of delaying, preventing or deterring a change in control, and could deprive our stockholders of an opportunity to receive a premium for
their shares of common stock as part of a sale of our company and may affect the market price of our stock.
Further, Mr. Ajjarapu and Mr. Patel may have interests that diverge from those of other holders of our common stock. As a result, Mr.
Ajjarapu and Mr. Patel may vote the shares they own or control or otherwise cause us to take actions that may conflict with your best
interests as a stockholder, which could adversely affect our results of operations and the trading price of our common stock.
Through this control, Mr. Ajjarapu and Mr. Patel can control our management, affairs and all matters requiring stockholder approval,
including the approval of significant corporate transactions, a sale of our company, decisions about our capital structure and the
composition of our Board of Directors.
Our stock price might be volatile.
The price of our stock may be highly volatile and could be subject to fluctuations in price in response to various factors, some of which
are beyond our control. These factors include:
quarterly variations in our results of operations or those of our competitors;
•
•
announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or
capital commitments;
disruption to our operations or those of other sources critical to our operations;
•
the emergence of new competitors;
•
our ability to develop and market new and enhanced products on a timely basis;
•
seasonal or other variations;
•
•
commencement of, or our involvement in, litigation;
dilutive issuances of our stock or the stock of our subsidiaries, or the incurrence of additional debt;
•
changes in our board or management;
•
adoption of new or different accounting standards;
•
changes in governmental regulations or in the status of our regulatory approvals;
•
changes in earnings estimates or recommendations by securities analysts;
•
•
general economic conditions and slow or negative growth of related markets.
Item 1B. Unresolved Staff Comments
None.
16
Item 2. Properties
Description of Property
We do not own any real property. We lease office space at: 3840 Land O’ Lakes Blvd, Land O’Lakes, Florida 34639 from January 1, 2018
for approximately $100,000 per year under a 3-year lease agreement, occupying approximately 6300 square feet. We believe our current
and future facilities are adequate for our current and near-term needs. Additional space may be required as we expand our activities. We
do not currently foresee any significant difficulties in obtaining any required additional facilities.
Item 3. 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
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Holders
According to the records of our transfer agent, as of December 31, 2017, there were approximately 67 holders of record of our common
stock, not including any persons who hold their stock in "street name.”
Market Information
Our common stock has been quoted on the OTCBB tier of the marketplace maintained by OTC Markets Group, Inc. under the symbol
"TRXD” after filing a Form 10 Registration Statement, since June 2014. Prior to June 2014, our stock has traded on pink sheets and on
the Over-the-Counter Bulletin Board after filing a Form SB-2 Registration Statement in 2007. Our common stock trades on a limited and
sporadic basis and should not be deemed to constitute an established public trading market. There is no assurance that there will be
liquidity in the common stock.
The following table sets forth the high and low bid price for each quarter within the fiscal years ended December 31, 2017 and 2016, as
provided by OTC Markets Group, Inc. The information reflects prices between dealers, and does not include retail markup, markdown,
or commission, and may not represent actual transactions.
Fiscal Year
2016
2017
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
$
$
$
$
Bid Prices
High
1.25
1.02
1.00
.70
.45
.45
.45
.72
Bid Prices
Low
.75
.74
.56
.46
.25
.25
.40
.22
$
$
$
$
$
$
$
$
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks
in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a
penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not
meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risks associated therewith.
17
Dividends
The Company has never paid any cash dividends on its common stock. The Company currently anticipates that it will retain all future
earnings for use in its business. Consequently, it does not anticipate paying any cash dividends in the foreseeable future. The payment
of dividends in the future will depend upon our results of operations, as well as our short-term and long-term cash availability, working
capital, working capital needs and other factors, as determined by our Board of Directors. Currently, except as may be provided by
applicable laws, there are no contractual or other restrictions on our ability to pay dividends if we were to decide to declare and pay
them.
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock with $0.00001 par value per share. Holders of shares of
common stock are entitled to one vote per share on each matter submitted to a vote of shareholders. In the event of liquidation, holders
of common stock are entitled to share pro rata in the distribution of assets remaining after payment of liabilities, if any. Holders of
common stock have no cumulative voting rights, and, accordingly, the holders of a majority of the outstanding shares have the ability
to elect all of the directors of the Company. Holders of common stock have no preemptive or other rights to subscribe for shares.
Holders of common stock are entitled to such dividends as may be declared by the Board out of funds legally available therefore. The
outstanding shares of common stock are validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, $0.00001 par value per share, all of which 10,000,000
undesignated. The Company had no preferred shares outstanding at December 31, 2017 or as of the date of this filing.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information, as of December 31, 2017, with respect to our compensation plans under which common stock
is authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants
and rights
(A)
Weighted-
average
exercise
price of
outstanding
options,
warrants and
rights
(B)
Plan Category
Equity compensation plans approved by stockholders (1)
Equity compensation plans not approved by stockholders (3)
Total
1,157,405
435,000
1,592,405
0.97
1.00
0.97
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
Column A)
(C)
842,595(2)
842,595
(1)
Consists of (i) options to purchase 782,405 shares of common stock issued and outstanding under the Trxade Group, Inc. 2014
Equity Incentive Plan, (ii) options to purchase 375,000 shares of common stock issued and outstanding under the Trxade
Group, Inc. 2013 Equity Incentive Plan.
(2)
Consists of 2,000,000 shares of common stock reserved and available for issuance under the Trxade Group, Inc. 2014 Equity
Incentive Plan. 1,157,405 options have been issued and 842,595 shares are available for issuance at December 31, 2017
(3)
Consists of (i) warrants to purchase 435,000 shares of common stock granted by Trxade Group, Inc., and our predecessor in
interest to consultants in October 2013.
18
Stock Transfer Agent
Our Stock Transfer Agent is Action Stock Transfer, 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, UT 84121.
Recent Sales of Unregistered Securities
During the past year, other than those securities previously reported on Form 10-Q or on a Current Report on Form 8-K, we issued and
sold the following securities without registration under the Securities Act of 1933, as amended (the "Securities Act”):
In February 2017, 25,000 shares of Common Stock were issued when warrants were exercised at $0.01 with strike price for $250.00 In
March 2017, 50,000 shares of Common Stock were issued for services performed for the Company and valued at fair value of $12,500.
The use of proceeds associated with the above listed sales of unregistered securities was for general working capital purposes. The
issuances and grants described above were exempt from registration pursuant to Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving any public offering pursuant to benefit plans and contracts relating to
compensation as provided under Rule 701, or were exempt private placements under Section 4(2), Rule 506 of Regulation D and/or
Regulation S of the Securities Act, since the foregoing issuances and grants did not involve a public offering, the recipients took the
securities for investment and not resale, we took take appropriate measures to restrict transfer, and the recipients were (a) "accredited
investors”; (b) had access to similar documentation and information as would be required in a Registration Statement under the Act; (c)
were non-U.S. persons; and/or (d) were officers or directors of the Company.
Repurchase of Securities
The Company did not purchase any shares of its common stock during the year ended December 31, 2017.
Item 6. Selected Financial Data
Not applicable to a "smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
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 balance sheets and cash flows and discussion of our financial
condition.
•
Results of Operations. An analysis of our financial results comparing the twelve months ended December 31, 2017 and 2016.
•
Critical Accounting Policies . Accounting estimates that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results and forecasts.
19
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included
elsewhere in this report. The following discussion contains forward-looking statements regarding future events and the future results
of the Company that are based on current expectations, estimates, forecasts, and projections about the industry in which the Company
operates and the beliefs and assumptions of the management of the Company. Words such as "expects,” "anticipates,” "targets,”
"goals,” "projects,” "intends,” "plans,” "believes,” "seeks,” "estimates,” variations of such words, and similar expressions are
intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those
expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to,
those discussed elsewhere in this Report, particularly under "Part I, Item 1A. Risk Factors,” and in other reports we file with the SEC.
All references to years relate to the calendar year ended December 31 of the particular year. The Company undertakes no obligation to
revise or update publicly any forward-looking statements for any reason. Factors that could cause or contribute to these differences
include those discussed below and elsewhere in this Report.
The following discussion is based upon our Consolidated Financial Statements included elsewhere in this report, which have been
prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingencies. In the course of operating our business, we routinely make decisions as to the timing of the payment of invoices, the
collection of receivables, the shipment of products, the fulfillment of orders, the purchase of supplies, and the building of inventory,
among other matters. Each of these decisions has some impact on the financial results for any given period. In making these decisions,
we consider various factors including contractual obligations, customer satisfaction, competition, internal and external financial targets
and expectations, and financial planning objectives. On an on-going basis, we evaluate our estimates, including those related to sales
returns, pricing credits, warranty costs, allowance for doubtful accounts, impairment of long-term assets, especially goodwill and
intangible assets, contract manufacturer exposures for carrying and obsolete material charges, assumptions used in the valuation of
stock-based compensation, and litigation. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Company Overview
We have designed and developed, and now own and operate business-to-business web based marketplace focused on the US
pharmaceutical industry. Our core service brings the nation’s independent pharmacies and accredited national suppliers of
pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
We began operations under Trxade Nevada in August of 2010 and spent over two years creating and enhancing our web-based
services. Our services provide enhanced pricing transparency, purchasing capabilities and other value added services on a single
platform to focus on serving the nation’s approximately 24,000 independent pharmacies with an annual purchasing power of $96 billion.
Our national supplier partners are able to fulfill orders on our platform immediately and provide the pharmacy with cost saving payment
terms and next day delivery capabilities in unrestrictive states under the Model State Pharmacy Act and Model Rules of the National
Association of Boards of Pharmacy (Model Act). Important additions to this platform further include the generation of pharmacy to
pharmacy trading capabilities to help independents with their overstocked inventories in a more organized manner. We expanded
rapidly since 2015 and now have over 8,500 registered pharmacy members purchasing on our platform.
In December 2013 we launched a second service to help pharmaceutical distributors better source their pharmaceutical needs within a
highly structured single platform. This solution is designed to help purchasers overcome pharmaceutical supply issues related to drug
shortages, as a means to control costs on drugs with volatile pricing and to help buyers make better purchasing choices based on their
needs.
Additionally, we built and, in February 2014, launched, a new desktop application, named RxGuru, to bring product information on a
just in time basis to our member base. Our pharmacy members should benefit from this application by gaining advanced data analytics
at point of purchase and patient care. RxGuru has been upgraded to continue the benefit to the pharmacies.
In 2015 and 2016, the Company, through Westminster Pharmaceuticals, LLC, our wholly-owned subsidiary and distribution division,
launched a private label pharmaceutical product program, and entered into various supply contracts with pharmaceutical manufactures
to supply Westminster with generic pharmaceutical products on a private label basis to sell to our customers. In connection with this
expansion, Westminster and received significant funding in late 2015 and early 2016. Westminster was not profitable and in December
2016 the Company sold this division and exited the private label distribution business.
20
Company Organization
Trxade Group, Inc. ("Company”) owns 100% of Trxade, Inc., and Integra Pharma Solutions, LLC (formerly Pinnacle Tek, Inc.), and
Alliance Pharma Solutions, LLC. The reverse subsidiary merger of Trxade, Inc. and Trxade Group, Inc. occurred in July 2013. INTEGRA
was merged through a subsidiary with Trxade Group, Inc. in July 2013. Alliance Pharma Solutions, LLC was formed in January 2018. The
Company also owned 100% of Westminster Pharmaceutical LLC , which was formed in January 2013, until this division was sold in
December 2016. Trxade, Inc. is a web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals,
accessories and services.
Inactive or discontinued segments:
Westminster Pharmaceutical LLC, provided US state licensed pharmacies and other buying groups with FDA approved
pharmaceuticals under a private label program. This division was sold in December 2016.
In 2016 the Company formed ShopRX, Ltd. the Company’s UK based subsidiary. The Company had hoped to establish a similar
business to Trxade, Inc. in the United Kingdom in the future under this entity. This division was shut down in December 2016 and later
dissolved and has no material impact on the Company’s operation results.
Integra Pharma Solutions, LLC, (formerly Pinnacle Tek, Inc.) was the Company’s wholly-owned technology consulting division. This
division has not been active and has no material impact on the Company’s operation results. INTEGRA is now intended to serve as the
Company’s logistics company for pharmaceutical manufacturers.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents were $183,914 at December 31, 2017. We expect that our future available capital resources will consist
primarily of cash generated from operations, remaining cash balances, borrowings, and any additional funds raised through sales of
debt and/or equity.
Liquidity
Cash and cash equivalents, current assets, current liabilities, short term debt and working capital at the end of each period were as
follows:
Cash and cash equivalents
Current assets (excluding cash and cash equivalents)
Current liabilities (excluding short term debt)
Short term debt
Working Capital
December 31,
2017
December 31,
2016
$
183,914 $
423,562
263,045
262,312
82,119
14,679
322,445
703,831
770,763
(1,137,470)
Our principal sources of liquidity have been cash provided by operations, equity capital and borrowings under various debt
arrangements. Our principal uses of cash have been for operating expenses. We anticipate these uses will continue to be our principal
uses of cash in the future.
The increase in cash and cash equivalents was primarily due to equity capital and operating income. The increase in our current assets
was primarily due to higher cash and prepaid assets. Cash and prepaid assets increased by $169,235 and $79,657, respectively.
Current liabilities decrease is primarily due to the extension and payment of short term debt.
21
Liquidity Outlook cash explanation.
Cash Requirements
Our primary objectives for 2018 are to continue the development of the Trxade Platform and increase our client base and operational
revenue. Additional funds will be needed to continue to expand our platform and customer base, and cover general and administrative
expense. We expect to pursue raising capital to fund our operations and provide personnel to expand operations and required working
capital. Through these efforts, management believe the Company will be able to obtain the liquidity necessary to fund company
operations for the foreseeable future, however there is no assurance that our operations will generate significant positive cash flow, or
that additional funds will be available to us, through borrowings or otherwise, on favorable terms when required, or at all.
We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows:
Expense
General and administrative (1)
Total
Amount
$
$
2,975,000
2,975,000
(1)
Includes wages and payroll, legal and accounting, marketing, rent and web development.
Since inception, we have funded our operations primarily through debt and equity capital raises and operational revenue. In 2017,
common Stock was issued for $250,000 and new unsecured related party long term debt of approximately $200,000.
We expect to continue to seek additional outside funding in the future although no assurance can be given that we will be able to
obtain financing on reasonable terms or revenues will continue. If we obtain additional financing by issuing equity securities, our
existing stockholders’ ownership will be diluted. Obtaining commercial loans, assuming those loans would be available, will increase
our liabilities and future cash commitments. We may be unable to maintain operations at a level sufficient for investors to obtain a
return on their investments in our common stock.
We will need significantly more cash to implement our plan to operate a business-to-business web based marketplace focused on the
US pharmaceutical industry. Our core service is designed to bring the nation’s independent pharmacies and accredited national
suppliers of pharmaceuticals together to provide efficient and transparent buying and selling opportunities.
Cash Flows
The following table summarizes our Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2017 and 2016:
Fiscal Year Ended
December 31,
2017
December 31,
2016
Loss from discontinued operations
Net Income (Loss) from continuing operations
$
-
288,983
$
(1,587,017)
(1,173,108)
Net cash provided by (used in) continuing operations:
Operating activities
Financing activities
Net cash provided by (used in) discontinued operations:
Operating activities
Investing activities
Financing activities
171,670
(2,435)
-
-
-
Net increase (decrease) in cash and cash equivalents
169,235
(503,529)
621,389
(809,889)
78,000
550,000
(64,029)
Cash provided by operations for the fiscal year ended December 31, 2017 was $171,670. This compared to $503,529 net cash used in
operating activities for the fiscal year 2016.
There were no investing activities in continuing operations.
22
Financing activities in 2017 included $180,000 proceeds from long term debt and $250,000 in common stock issuance.
Results of Operations
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the
notes to these statements included in Item 8 of this report. For all years presented, the consolidated statements of income and
consolidated balance sheet data set forth in this Form 10-K have been adjusted for the reclassification of discontinued operations
information, unless otherwise noted. See Note 3 to the consolidated financial statements in Item 8 for additional information on
discontinued operations.
Fiscal Year Ended December 31, 2017 Compared to Fiscal Year Ended December 31, 2016
Continuing Operations
Fiscal Year Ended
December 31,
2017
December 31,
2016
Revenues
$
2,931,280
$
2,481,866
Operating Expenses:
General and Administrative
Warrants and Options Expense
Total Operating Expense
Other Income
Loss on extinguishment of debt
Interest Expense
Income (Loss) from Continuing Operations
Loss from Discontinued Operations
Gain from sale of Discontinued Operations
2,268,350
267,835
2,536,185
67,500
16,556
157,056
288,983
-
-
3,341,515
147,630
3,489,145
23,250
37,579
151,500
(1,173,108)
(1,784,625)
197,608
Substantially all of our revenues during the years ended December 31, 2017, and 2016 were from platform revenue. Revenues increased
for the Fiscal Year ended December 31, 2017 to $2,931,280 compared to $2,481,866 for the comparable period in 2016. This increase was
attributable to the mix of pharmaceuticals sold on the platform, brands vs. generics, the fee for generics are higher than brands. Our
sales department has continued to add customers in 2017 through direct marketing and customer training.
General and administrative expenses decreased for the fiscal year ended December 31, 2017 to $2,268,350 compared to $3,341,515 for the
comparable period in 2016. There was a decrease in employee cash compensation expense in the 2017 period due to decreased staffing
of our pharmaceutical platform as it reached its operational phase.
Warrant and options expense in the 2017 and 2016 period represents compensation cost related to the issuance of employee stock
options.
Interest expense in 2017 was as a result of approximately $700,000 in debt borrowings. Interest expense in 2016 was as a result of
approximately $2,000,000 in debt borrowings.
Discontinued Operations
Westminster Pharmaceuticals, LLC was sold in December 2016 as a discontinued operation. For further discussion of the discontinued
operations, see Note 3 of the consolidated financial statements contained under Item 8 of Part II of the Form 10-K.
Contractual Obligations and Commitments
In addition to our long-term debt obligations to our various lenders, we have certain other contractual working capital obligations,
including contractual purchase obligations related to various supply contracts.
23
The following table summarizes our contractual obligations as of December 31, 2017:
Contractual Obligations
Payments due by Period
Total
Less than
1 year
1 - 3
years
3 - 5
years
More than
5 years
Short and Long-term debt obligations
$
666,516
262,464
404,052
Operating lease obligations
312,342
92,400
219,942
Total Contractual obligations
$
978,858
354,864
623,994
-
-
-
-
-
-
Off-Balance Sheet Arrangements
We had no outstanding off-balance sheet arrangements as of December 31, 2017.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales
and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we
believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most
difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are
inherently uncertain.
Revenue Recognition
In general, the Company accounts for revenue recognition in accordance with ASC 605, "Revenue Recognition”.
Trxade, Inc. generates net fee income as a percentage of the total transactions between the buyer (independent pharmacies) and the
seller (wholesaler) of pharmaceutical drugs on the Trxade web-based platform. Revenue is recognized when (1) the price is fixed and
determined as the buyer orders the drugs from the wholesaler. (2) The wholesaler has signed a contract with Trxade, Inc. which
recognizes that an arrangement exists. (3) The wholesaler ships the drugs purchased to the buyer, revenue is recognized. (4) The
collectability is reasonably assured by the wholesaler through prior credit checks and payment experience.
Westminster Pharmaceutical LLC generated gross revenues from the sale of pharmaceutical drugs to independent pharmacies or
wholesalers. The revenue recognized when (1) the price is fixed and determinable at the time of the transaction with an invoice. (2) The
invoice is also persuasive evidence that an arrangement exists. (3) The products are delivered to the buyer. (4) The collectability of the
resulting receivable is reasonably assured by credit check prior to the transaction and experience with the customer.
In future reporting periods, the Company will account for revenue recognition in accordance with ASC 606, "Revenue from Contracts
with Customers”.
24
Stock-Based Compensation
The Company accounts for stock-based compensation to non-employees in accordance with the provision of ASC 505, "Equity Based
Payments to Non-Employees” ("ASC 505”), Share Based Payments to Non-Employees, and ASC 505 which requires that such equity
instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to
periodic adjustment as the underlying instruments vest.
The Company accounts for stock-based compensation 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable to a "smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K
25
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TRXADE GROUP, INC.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Operations for years ended December 31, 2017 and 2016
Consolidated Statements of Changes in Shareholders’ Deficit for the Years ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of directors of
Trxade Group, Inc.
Land O’Lakes, Florida
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Trxade Group, Inc., and its subsidiaries (collectively, the
"Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in shareholders’ deficit,
and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the
results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ MaloneBailey, LLP
MaloneBailey, LLP
www.malonebailey.com
We have served as the Company’s auditor since 2013.
Houston, Texas
March 1, 2018
F-2
Trxade Group, Inc.
Consolidated Balance Sheets
December 31, 2017 and 2016
Assets
Current Assets
Cash
Accounts Receivable, net
Prepaid Assets
Other Current Assets
Total Current Assets
Other Assets
Deposit
Total Assets
Liabilities and Shareholders’ Deficit
Current Liabilities
Accounts Payable
Accrued Liabilities
Short Term Notes Payable, net of $152 and $40,306 discount
Short Term Convertible Notes Payable, net of $0 and $0 discount
Short Term Notes Payable – Related Party
Short Term Convertible Notes Payable –
Related Parties, net of $0 and $48,341 discount
Total Current Liabilities
Long Term Liabilities
Convertible Note Payable
Notes Payable, net of $0 and $152 discount
Notes Payable – Related Parties
Total Liabilities
Shareholders’ Deficit
Series A Preferred Stock, $.00001 par value, 10,000,000 authorized;
0 and 0 issued and outstanding, as of
December 31, 2017 and 2016, respectively
Common Stock, $0.00001 par value, 100,000,000 authorized;
31,985,827 and 31,660,827 issued and outstanding as of
December 31, 2017 and 2016 respectively
Additional Paid-in Capital
Accumulated Deficit
Total Shareholder’s Deficit
Total Liabilities and Shareholders’ Deficit
$
$
$
2017
2016
183,914 $
319,467
102,095
2,000
607,476
10,000
617,476 $
106,084 $
156,961
10,587
-
-
14,679
299,113
22,438
894
337,124
-
337,124
236,849
466,982
392,379
165,000
10,000
251,725
525,357
203,384
1,474,594
181,500
-
222,552
929,409
-
10,587
-
1,485,181
-
320
316
7,807,860
(8,120,113)
(311,933)
617,476 $
7,260,723
(8,409,096)
(1,148,057)
337,124
$
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Trxade Group, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2017 and 2016
Revenues
Operating Expenses
General and Administrative
Operating Income (Loss)
Other Income
Loss on Extinguishment of Debt
Interest Expense
Income (Loss) from Continuing Operations
Loss from Discontinued Operations
Gain from sale of Discontinued Operations
Net Income (Loss)
Net Income (Loss) per Common Share – Basic:
Continuing operations
Discontinued operations
Total
Net Income (Loss) per Common Share – Diluted:
Continuing operations
Discontinued operations
Total
Years Ended
2017
2016
$
2,931,280 $
2,481,866
2,536,185
3,489,145
395,095
(1,007,279)
67,500
(16,556)
(157,056)
23,250
(37,579)
(151,500)
288,983
-
-
(1,173,108)
(1,784,625)
197,608
288,983 $
(2,760,125)
0.01 $
- $
0.01 $
0.01 $
- $
0.01 $
(0.04)
(0.05)
(0.09)
(0.04)
(0.05)
(0.09)
$
$
$
$
$
$
$
Weighted Average Common Shares outstanding Basic:
31,955,416
31,544,868
Weighted Average Common Shares outstanding Diluted:
34,086,251
31,544,868
The accompanying notes are an integral part of the consolidated financial statements.
F-4
Trxade Group, Inc.
Consolidated Statements of Changes in Shareholders’ Deficit
Years Ended December 31, 2017 and 2016
Balance at
December 31, 2015
Common Stock Issued for Cash
Warrants Issued for debt Amendment
Warrants Issued for sale of Westminster
Options Expense
Beneficial Conversion features and
Relative fair value of warrants
Net Loss
December 31, 2016
Common Stock Issued for Cash
Common Stock Issued for Services
Warrants Issued for debt Amendment
Warrants Exercised
Options Expense
Net Income
December 31, 2017
Preferred Stock
Common Stock
Shares Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Total
Shareholders’
Equity
(Deficit)
- $
-
-
-
-
-
-
- $
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
31,435,827 $
314 $
5,915,674 $
(5,648,971) $
267,017
225,000
-
-
-
-
-
2
-
-
-
-
-
300,238
37,579
688,143
147,630
171,459
-
-
-
-
-
300,240
37,579
688,143
147,630
-
(2,760,125)
171,459
(2,760,125)
31,660,827 $
316 $
7,260,723 $
(8,409,096) $
(1,148,057)
250,000
50,000
-
25,000
-
-
3
1
-
-
-
-
249,997
12,499
16,556
250
267,835
-
-
-
-
-
-
288,983
250,000
12,500
16,556
250
267,835
288,983
31,985,827 $
320 $
7,807,860 $
(8,120,113) $
(311,933)
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Trxade Group, Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 2017 and 2016
2017
2016
Operating Activities:
Net Income/(Loss)
Loss From discontinued operations
Net Income/(Loss) from continuing operations
Adjustments to reconcile net income (loss) to net cash provided by
(used in) Operating activities:
Recovery of Bad Debt
Options expense
Loss on Debt Extinguishment
Amortization of Debt Discount
Stock Issued for Services
Changes in operating assets and liabilities:
Accounts Receivable
Prepaid Assets and Other Assets
Accounts Payable
Accrued Liabilities and Other Liabilities
Net Cash provided by (used in) operating activities
Financing Activities:
Cash paid as Original Issue Discount
Proceeds from Debt – Related Parties
Repayments of Debt Note Payable
Proceeds from Debt Note Payable
Repayments of Convertible Note
Proceeds from Convertible Note – Related Parties
Proceeds from Issuance of Common Stock
Proceeds from Warrants exercise
Net Cash (used in)/provided by financing activities
Discontinued Operations:
Net cash used in operating activities
Net cash used in investing activities
Net cash used in financing activities
Net cash used in discontinued operations
Net increase or (Decrease) in Cash
Cash at Beginning of the Year
Cash at End of the Year
Supplemental Cash Flow Information
Cash Paid for Interest
Cash Paid for Income Taxes
Non-Cash Transactions
Reclass from accrued interest to short term convertible notes
Arrangement to move related party accounts payable to notes payable
Beneficial conversion features and relative fair value of warrants
$
$
$
$
$
$
$
288,983
-
288,983
-
267,835
16,556
88,647
12,500
(20,354)
(90,763)
(98,213)
(293,521)
171,670
-
-
(432,685)
-
-
180,000
250,000
250
(2,435)
-
-
-
-
169,235
14,679
183,914
71,210
-
16,500
32,552
-
$
(2,760,125)
(1,587,017)
(1,173,108)
(150)
147,630
37,579
111,288
-
55,779
67,366
16,498
233,589
(503,529)
(45,000)
10,000
(54,735)
209,159
(50,000)
251,725
300,000
240
621,389
(809,889)
(78,000)
550,000
(181,889)
(64,029)
78,708
14,679
23,556
-
15,000
-
171,459
$
$
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 1 – ORGANIZATION
Trxade Group, Inc. ("we”, "our”, "Trxade”, the "Company”) owns 100% of Trxade, Inc., Integra Pharma Solutions, LLC and ShopRX,
Ltd. The merger of Trxade, Inc. and Trxade Group, Inc. occurred in May 2013. ShopRx, Ltd. was formed in 2016.
Trxade, Inc. operates a web based market platform that enables trade among healthcare buyers and sellers of pharmaceuticals,
accessories and services.
In December 2016 the Company sold Westminster Pharmaceutical LLC. Westminster provided US state licensed pharmacies and other
buying groups with FDA approved pharmaceuticals. The Westminster Pharmaceuticals LLC division, which was sold in December
2016, is included in the consolidated financial statements and is presented as discontinued operations as more fully described in Note 3
- DISCONTINUED OPERATIONS.
In December 2016 the Company ceased operation of ShopRX, Ltd. the Company’s UK based subsidiary. The Company had hoped to
establish a similar business to Trxade, Inc. in the United Kingdom in the future under this entity. The startup costs were expensed.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America ("GAAP”), and include all the notes required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary for fair presentation of the financial statements have
been included.
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial
statements. Such financial statements and accompanying notes are the representations of the Company’s management, who are
responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the
United States of America ("GAAP”) in all material respects, and have been consistently applied in preparing the accompanying
financial statements.
Basis of Presentation – The Company has incurred losses for the past several years while pursuing the development of private label
pharmaceutical products through Westminster Pharmaceuticals, LLC. The net losses incurred were $2.7 million in 2016. Westminster
Pharmaceuticals, LLC was sold in December 2016. See NOTE 3 – Discontinued operations.
Historically, operations have been funded primarily through the sale of equity or debt securities and operating activities. In 2017, the
Company restructured outstanding debt from short term to long term (See Note 5), raised capital (See Note 6) and had positive
operating cash flow from operations. The Company has the ability to maintain the current level of spending or reduce expenditures to
maintain operations if funding is not available.
The Company’s financial statements for the prior year December 31, 2016 disclosed substantial doubt about the company’s ability to
continue as a going concern. Based on management’s plans, capital raised, restructure of debt obligations and operating results during
the subsequent year ended December 31, 2017, that substantial doubt has been resolved.
Use of Estimates – In preparing these financial statements, management is required to make estimates and assumptions that effect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements
and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassification – Certain prior year amounts have been reclassified to conform to the current year presentation.
Principle of Consolidation – The Company’s consolidated financial statements include the accounts of Trxade Group, Inc., Trxade, Inc.,
and Integra Pharma Solutions, Inc. (Pinnacle Tek, Inc). All significant intercompany accounts and transactions have been eliminated.
The Westminster Pharmaceuticals LLC division, which was sold in December 2016, is included in the consolidated financial statements
and is presented as discontinued operations as more fully described in Note 3 - DISCONTINUED OPERATIONS.
Cash and Cash Equivalents – Cash in bank accounts are at risk to the extent that they exceed U.S. Federal Deposit Insurance
Corporation insured amounts. All investments purchased with a maturity of three months or less are cash equivalents. Cash and cash
equivalents are available on demand and are generally within of FDIC insurance limits for 2017.
F-7
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Receivable – The Company’s receivables are from customers and are collected within 90 days. The Company determines the
allowance based on known troubled accounts, historical experience, and other currently available evidence. During the year ended
December 31, 2017 and 2016, $0 of bad debt expense and $150 of recovery of bad debt was recognized, respectively.
Beneficial Conversion Features – The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is
not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is
treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date
the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized
discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by
comparing the effective conversion price, after considering the relative value of detachable instruments included in the financing
transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
Derivative financial instruments – The Company evaluates its financial instruments to determine if such instruments are derivatives or
contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes option
pricing model, assuming maximum value, in accordance with ASC 815-15 " Derivative and Hedging” to value the derivative instruments
at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could
be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments – The Company measures its financial assets and liabilities in accordance with the requirements of
FASB ASC 820, "Fair Value Measurements and Disclosures”. ASC 820 clarifies the definition of fair value, prescribes methods for
measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those
in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing
basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly
observable as of the reported date and includes those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward
prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term
of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the
marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate
swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used
with internally developed methodologies that result in management’s best estimate of fair value.
The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
The carrying amounts of cash, accounts receivable, accounts payable, accrued liabilities and short-term debt approximate fair value
because of the short-term nature of these instruments. The carrying amount of long-term debt approximates fair value because the debt
is based on current rates at which the Company could borrow funds with similar maturities.
Revenue Recognition – In general the Company accounts for revenue recognition in accordance with ASC 605, "Revenue
Recognition”.
F-8
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Trxade, Inc. generates net fee income as a percentage of the total transactions between the buyer (independent pharmacies) and the
seller (wholesaler) of pharmaceutical drugs on the Trxade web-based platform. Revenue is recognized when (1) the price is fixed and
determined as the buyer orders the drugs from the wholesaler. (2) The wholesaler has signed a contract with Trxade, Inc. which
recognizes that an arrangement exists. (3) The wholesaler ships the drugs purchased to the buyer. (4) The collectability is reasonably
assured by the wholesaler through prior credit checks and payment experience.
Westminster Pharmaceutical LLC generated gross revenues from the sale of pharmaceutical drugs to independent pharmacies or
wholesalers. The revenue is recognized when (1) the price is fixed and determinable at the time of the transaction with an invoice. (2)
The invoice is also persuasive evidence that an arrangement exists. (3) The products are delivered to the buyer. (4) The collectability of
the resulting receivable is reasonably assured by credit check prior to the transaction and experience with the customer. The
Westminster revenue is presented as discontinued operations and is fully described in Note 3 - DISCONTINUED OPERATIONS.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (Topic 606)
"Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Accounting Standards
Codification Topic 605, "Revenue Recognition”, and requires entities to recognize revenue when they transfer control of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for
those goods or services. The Company will adopt ASU 2014-09 using the modified retrospective approach effective January 1, 2018,
under which prior periods will not be retrospectively adjusted. We expect the adoption of Topic 606 will not have a material impact to
our consolidated financial statements, including the presentation of revenues in our Consolidated Statements of Operations.
Stock-Based Compensation – The Company accounts for stock-based compensation to non-employees in accordance with the
provision of ASC 505, "Equity Based Payments to Non-Employees” ("ASC 505”), which requires that such equity instruments are
recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment
as the underlying instruments vest.
The Company accounts for stock-based compensation to employees in accordance with ASC 718, "Compensation-Stock
Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity
instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over
the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock option forfeitures
are recognized at the date of employee termination.
Income Taxes – The Company accounts for income taxes utilizing ASC 740, "Income Taxes” (SFAS No. 109). ASC 740 requires the
measurement of deferred tax assets for deductible temporary differences and operating loss carry forwards, and of deferred tax liabilities
for taxable temporary differences. Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax
law. The effects of future changes in tax rates are not included in the measurement. The Company recognizes the amount of taxes
payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of
events and transactions that have been recognized in the Company’s financial statements or tax returns. The Company currently has
substantial net operating loss carry forwards. The Company has recorded a 100% valuation allowance against net deferred tax assets
due to uncertainty of their ultimate realization. Valuation allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized. Tax years from 2014 forward are open to examination by the Internal Revenue Service.
F-9
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income (loss) Per Share – Basic net income (loss) per common share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed similar
to basic net loss per common share except that the denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The
dilutive effect of the Company’s options and warrants is computed using the treasury stock method while the dilutive effect of our
convertible notes is computed using the if-converted method.
The following table sets forth the computation of basic and diluted Loss per Share:
Numerator:
Net Income (Loss)
Net Loss from discontinued operations
Net Income (Loss) from continuing operations
Numerator for basic and diluted EPS – income (loss)
Available to common shareholders
Numerator for basic and diluted EPS – income (loss)
From discontinued operations
Denominator:
Denominator for basic EPS – Weighted average shares
Dilutive Effect of Warrants
Denominator for diluted EPS – adjusted weighted-average shares and assumed
conversions
Basic and Diluted income (loss) per common share
Basic and Diluted income (loss) per common share from discontinued Operations
Basic and Diluted income (loss) per common share from continuing Operations
December 31, 2017
December 31, 2016
$
$
$
$
288,983
-
288,983
288,983
-
31,955,416
2,130,835
34,086,251
0.01
-
0.01
$
$
$
$
(2,760,125)
(1,587,017)
(1,173,108)
(2,760,125)
(1,587,017)
31,544,868
-
31,544,868
(0.09)
(0.05)
(0.04)
Concentration Of Credit Risks And Major Customers - Financial instruments that potentially subject the company to credit risk consist
principally of cash and cash equivalents and receivables. The Company places its cash and cash equivalents with financial institutions.
Deposits are insured to Federal Deposit Insurance Corp limits. At December 31, 2017 and 2016, there were no uninsured cash or cash
equivalents. During the years ended December 31, 2017 and 2016, sales to two customers represent individually greater than 10% of
revenue.
Recent Accounting Pronouncements – The Company has implemented all new relevant accounting pronouncements that are in effect
through the date of these financial statements. The pronouncements did not have any material impact on the financial statements
unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have
been issued that might have a material impact on its consolidated financial position or results of operations.
NOTE 3 – DISCONTINUED OPERATIONS
On December 31, 2016, the Company entered into and consummated the sale of 100% of its equity interests in its wholly-owned
subsidiary, Westminster Pharmaceuticals, LLC, a Delaware limited liability company ("Westminster”). The purchase price was the
transfer of $1,197,354 assets, the transfer of $(3,908,296) of liabilities, 1,500,000 warrants issued with a fair market value of $688,143
which was calculated based on the Black-Scholes model, cancellation of $1,557,810 intercompany balance due to Trxade Group, Inc. and
remaining debt discount of $267,381 being written off. The transaction resulted in a gain of $197,608. The schedule below summarizes
the sale arrangement:
Assumed Assets
Assumed Liabilities
Cancellation of intercompany payables
Write-off unamortized debt discount
Issuance of 1,500,000 warrants
Gain on sale of Westminster
F-10
$
$
$
$
$
$
1,197,354
(3,908,296)
1,557,810
267,381
688,143
(197,608)
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 3 – DISCONTINUED OPERATIONS (continued)
Results of Discontinued Operations for the:
Revenue
Cost of Goods Sold
Operating Expenses
Loss from discontinued operations
Year Ended
December 31,
2016
2,966,411
2,673,338
2,077,698
(1,784,625)
$
$
$
$
Assets and Liabilities of Discontinued Operations as of
Cash
Accounts Receivable
Inventory, net of $30,413 obsolescence reserve
Prepaid Assets and other advances
Fixed Assets, net of accumulated amortization
Other Assets
Total Assets
Intercompany payable
Accounts payable
Accrued Liabilities
Convertible Note
Total Liabilities
December 31,
2016
65,386
30,499
641,525
75,221
65,000
319,723
1,197,354
1,557,810
620,881
229,605
1,500,000
3,908,296
$
$
$
$
In July 2016, the purchase of ERP software was completed. The cost of the acquisition was $78,000 and the total balance was
outstanding at December 31, 2016. The depreciation for the current year is $13,000.
Convertible Promissory Note Assumed
The convertible promissory notes assumed were originally issued to the buyer of Westminster Pharmaceuticals, LLC.
Secured convertible promissory notes were issued in the aggregate amount of $950,000 in November and December 2015. The original
term of the notes was three years. In June 2016, the note was extended to a four-year maturity for consideration of a senior secured
position on the assets of the Company. Interest rate is a "Royalty Payment” which consists of a percentage of net Profit of certain
transactions, payable within 45 days of the end of each quarter. Prior to maturity the notes may be converted for common stock at a
conversion price of $2.50. The holders of the notes were granted a warrant to purchase 316,667 shares of common stock at a strike price
of $0.01 and an expiration date of five years from date of issuance.
In June, October and December 2016, an additional $250,000, $200,000 and $100,000, respectively, was issued under the secured
convertible promissory notes. The holders of the notes were granted additional warrants (under the same terms above) to purchase
83,334, 66,667 and 33,334, respectively, shares of common stock at a strike price of $0.01.
The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815 40 and
determined embedded conversion feature does not meet the definition of a liability. Then the Company evaluated the conversion
feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial Conversion
Feature inherent to the convertible note payable and a total debt discount of $0 was recorded. The Company also uses the Black-
Scholes pricing model to estimate the fair value of the warrants issued along with convertible notes on the date of grant.
F-11
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 3 – DISCONTINUED OPERATIONS (continued)
The Company accounted for relative fair value of the warrants issued and a total debt discount of $251,883 was recorded in 2015. An
additional discount of $106,069 was recorded in 2016.
During 2016, a debt discount of $80,298 was amortized. As part of the purchase and sale agreement the $1,500,000 note was cancelled
and the remaining debt discount of $267,381 was expensed immediately at December 31, 2016.
NOTE 4 – SHORT-TERM DEBT AND RELATED PARTIES DEBT
Convertible Promissory Note
Convertible promissory notes were issued in the aggregate amount of $200,000 in April and May 2015. The term of the notes was one
year. Simple interest of 10% was payable at the maturity date of the note. Prior to maturity the notes may be converted for common
stock at a conversion price of $1.50. The holders of the notes were granted warrants at one share of common stock for every $4.00 of
the note principal amount, which totaled a warrant to purchase 50,000 shares of common stock. These warrants were issued at a strike
price of $1.50 and an expiration date of five years from date of issuance. The Company used the Black-Scholes pricing model to estimate
the fair value of the warrants issued along with convertible notes on the date of grant. The Company accounted for the relative fair
value of the warrants issued and a total debt discount $53,546 was recorded.
In April and May 2016, $50,000 of the $200,000 in convertible promissory notes (plus $5,000 in interest) was repaid. A one-year
extension was executed on the remaining notes and the interest owed, totaling $15,000 became part of the adjusted principal of notes
and the balance of $165,000 is due May 2017. In connection with the one-year extension of the maturity date of the outstanding notes,
the holders of the notes were granted warrants at one common stock for $4.00 of the note amount, and warrants to purchase 41,250
shares of common stock were issued at a strike price of $1.50 and an expiration date of five years from date of issuance. The amendment
of the note was considered a debt extinguishment and a loss on extinguishment of debt was booked in the amount of $37,579.
In April 2017, $165,000 in convertible promissory notes (plus $5,500 in interest) was amended. A two-year extension was executed on
the remaining notes and the interest owed, totaling $16,500 became part of the adjusted principal of the notes and the balance of
$181,500 is due May 2019. The conversion price was adjusted to $0.85 per share. In connection with the two-year extension of the
maturity date of the outstanding notes, the holders of the notes were granted warrants to purchase 18,150 shares of common stock that
was issued at a strike price of $0.65 and an expiration date of five years from date of issuance. The amendment of the note was
considered a debt extinguishment and a loss on extinguishment of debt was booked in the amount of $11,512.
The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815-40 and
determined that the embedded conversion feature does not meet the definition of a derivative liability. Then the Company evaluated the
conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial
Conversion Feature inherent to the convertible note payable the conversion was not beneficial and a total debt discount from the
issued warrants of $53,546 was recorded in 2015 and $0 as of the date of the debt modification.
During 2016, a debt discount of $35,697 was amortized. As of December 31, 2016, the short term convertible notes had a principal
balance of $165,000 with an unamortized debt discount of $0.
During 2017, debt discount of $0 was amortized. As of December 31, 2017, short-term convertible note has a balance of $0, net of $0
unamortized debt discount. See NOTE 5 – LONG TERM DEBT
Promissory Note
In May 2016, a promissory note that was issued in May 2015 was renewed in the face amount of $250,000 and the term was extended an
additional year. The note has an original issuance discount of $45,000 and this amount was paid in cash at the renewal. During 2016, a
debt discount of $45,000 was amortized. As of December 31, 2016, the promissory note has a balance of $250,000 with an unamortized
debt discount of $15,000.
During 2017 the debt discount of $15,000 was fully amortized and the balance of $250,000 was paid.
F-12
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 4 – SHORT-TERM DEBT AND RELATED PARTIES DEBT (continued)
In October 2016, a promissory note was issued in the face amount of $12,159. The term of the note was 30 days. It was paid in
November of 2016.
In October 2016, a promissory note was issued in the face amount of $47,000. The term of the note was one year. Payments are made
daily and $3,917 of principal was paid in 2016. At December 31, 2016 the balance was $43,083.
In 2017 $43,083 of principal was paid and at December 31, 2017 the balance was $0.
In September 2016, a promissory note was issued for $189,000. The term of the note is 494 days. The debt discount was $39,000 thus the
initial net proceeds were $150,000. At December 31, 2016, $139,602 was classified as short term with a discount of $25,306 and $10,739
was classified as long term with a discount of $152. Payments are made each weekday in the amount of $537. In 2017, $139,602 was paid
off by cash and debt discount of $25,306 was amortized.
As of December 31, 2017, short term promissory notes have a balance of $10,739, net of $152 unamortized debt discount.
Related Party Convertible Promissory Note
In August 2016, $40,000 in promissory notes were issued to Mr. Shilpa Patel, a relative of Mr. Prashant Patel. The term of the note was
one year. Simple interest of 10% is payable at the maturity date of the note. Prior to maturity the note may be converted for common
stock at a conversion price of $1.50.
In August 2017, $40,000 in convertible promissory notes was amended. A one-year extension was executed to August 2018. In
connection with the one-year extension of the maturity date of the outstanding notes, the holder of the notes was granted warrants to
purchase 10,000 shares of common stock that was issued at a strike price of $0.80 and an expiration date of five years from date of
issuance. The amendment of the note was considered a debt extinguishment and a loss on extinguishment of debt was booked in the
amount of $5,044.
The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815-40 and
determined that the embedded conversion feature does not meet the definition of a derivative liability. Then the Company evaluated the
conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial
Conversion Feature inherent to the convertible note payable and $0 was recorded as of the grant date.
In September and October 2016, convertible promissory notes were issued in the aggregate amount of $211,725 to a related party, Mr.
Nitel Patel, the brother of Mr. Prashant Patel. The term of the notes was one year. Simple interest of 10% is payable at the maturity date
of the notes. Prior to maturity the notes may be converted for common stock at a conversion price of $0.62. In connection with the
notes, the holders of the notes were granted warrants to purchase 52,861 shares of common stock. These warrants were issued at a
strike price of $.62 and an expiration date of five years from date of issuance.
In April 2017, a $61,725 related party note was renewed for a one-year extension at the same interest rate of 10%, due April 2018.
In September 2017, a $150,000 related party note was renewed for a six-month extension at the same interest rate of 10%, due in
February 2018.
The Company evaluated the embedded conversion feature within the above convertible notes under ASC 815-15 and ASC 815-40 and
determined that the embedded conversion feature does not meet the definition of a derivative liability. Then the Company evaluated the
conversion feature for a beneficial conversion feature at inception. The Company accounted for the intrinsic value of a Beneficial
Conversion Feature inherent to the convertible note payable and the beneficial feature was not beneficial and a total debt discount of
$65,390 due to the warrants was recorded as of the grant date.
During 2016, a debt discount of $17,049 was amortized. As of December 31, 2016, the short term related party convertible notes had a
principal balance of $251,725 with an unamortized debt discount of $48,341.
During 2017, the remaining debt discount of $48,341 was fully amortized. As of December 31, 2017, the short term related party
convertible notes had a principal balance of $251,725, net of an unamortized debt discount of $0.
F-13
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 4 – SHORT-TERM DEBT AND RELATED PARTIES DEBT (continued)
Related Party Promissory Note
In November 2016, Mr. Prashant Patel loaned the Company $10,000. The term of the loan is 90 days and is at zero percent interest. The
balance at December 31, 2016 was $10,000.
In February 2017, $7,280 of accounts payable to Mr. Patel was added to the loan. The term of the loan was extended for 90 days and is
at zero interest rate. An additional $25,272 of accounts payable was added to the loan in the second quarter and the balance of $42,552
was converted to long-term debt in July 2017 and will mature in July 2020. See NOTE 5 – LONG TERM DEBT.
NOTE 5 – LONG TERM DEBT
There are $181,500 in convertible promissory notes due in May 2019 as described in NOTE 4 – SHORT TERM DEBT.
Related Party Promissory Notes
In June 2017, the Company satisfied an outstanding promissory note, dated May 8, 2016, as amended, in the principal amount of
$250,000 (the "NPR Note”), made by between the Company and NPR INVESTMENT GROUP, LLC (the "Lender”). The NPR Note
included a personal guarantee from Suren Ajjarapu and Prashant Patel, who both serve on the Board of Directors of the Company and
are controlling stockholders of the Company. Further, Mr. Ajjarapu is the CEO and President of the Company and Mr. Patel is Vice
Chairman and Executive Director of Strategy.
In connection with the foregoing satisfaction of the NPR Note above, the Company received funds in June 2017 and entered into a
promissory note agreement on July 1, 2017, whereby the Company borrowed $100,000 and $80,000 from Sansur Associates, LLC, a
limited liability company controlled by Mr. Ajjarapu, and Mr. Patel, respectively (the "Promissory Notes”). The term of each of these
Notes is three years and they each bear interest at 6%, which is payable annually.
The note due to Mr. Patel is $122,552. It comprises $80,000 for the NPR note, $17,280 for existing promissory note and $25,272
assumption of credit card obligation related to business expenses of the Company.
At December 31, 2017, total related party long term debt was $222,552.
Future maturities of both short-term and long-term debt in the next five years are as follows:
Due in 2018
Due in 2019
Due in 2020
Due in 2021
Due in 2022
Total Debt
$
$
$
$
$
$
262,464
181,500
222,552
-
-
666,516
NOTE 6 – SHAREHOLDERS’ EQUITY
2016
Under a Private Offer Memorandum, 200,000 shares of common stock were issued for $300,000 cash, which included 100,000 shares in
June 2016 and 100,000 shares in August. The common stock was sold at $1.50 per share. In connection with this common stock offering
warrants to purchase 50,000 shares of common stock were issued at a strike price of $0.01 and an expiration date of five years. Warrants
were exercised for 25,000 shares of common stock at $.01 for $240.
2017
In January 2017, under a Private Offer Memorandum, 250,000 shares of common stock were issued for $250,000 cash. The common stock
was sold at $1.00 per share. In connection with this common stock offering warrants to purchase 87,500 shares of common stock were
issued with a strike price of $0.01 and an expiration date of five years.
F-14
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (continued)
In February 2017, 25,000 shares were issued when warrants were exercised at $.01 grant price for $250.
In March 2017, 50,000 shares were issued for services performed for the Company and valued at fair value of $12,500.
NOTE 7 - WARRANTS
In 2016, 41,250 warrants were issued as consideration of the debt amendment. See Note 4.
In 2016, 236,196 warrants were issued along with convertible debt. See Notes 4 and 5.
In 2016, 25,000 warrants were exercised at the price of $240 and 50,000 warrants were issued along with stock subscription. See Note 6.
In December 2016, 1,500,000 warrants were issued in connection with the sale of Westminster. The fair value of the warrants were
calculated based on the Black-Scholes model. See Note 3.
In 2017, 87,500 warrants were issued related to common shares sold for cash. See Note 6. Likewise, 28,150 were issued for renewal of
convertible debt (see Note 4) and 25,000 warrants were exercised. No warrants were forfeited in 2017 and 2016.
The following table summarizes the assumptions used to estimate the fair value of warrants granted during the years ended December
31, 2017 and 2016:
Expected dividend yield
Weighted-average expected volatility
Weighted-average risk-free interest rate
Expected life of warrants
2017
0%
200%
1.81% - 1.84%
5 years
2016
0%
200%
1.35% - 1.36%
5 years
The Company’s outstanding and exercisable warrants as of December 31, 2017 and 2016 are presented below:
Warrants Outstanding as of December 31, 2015
Warrants granted
Warrants Forfeited
Warrants Exercised
Warrants Outstanding and Exercisable as of December 31, 2016
Warrants granted
Warrants Forfeited
Warrants Exercised
Warrants Outstanding and Exercisable as of December 31, 2017
F-15
Number
Outstanding
Weighted
Average
Exercise Price
Contractual
Life in
Years
845,000
1,827,446
-
(25,000)
2,647,446
115,650
-
(25,000)
2,738,096
$
$
$
$
$
$
$
$
$
0.61
0.06
-
0.01
0.24
0.18
-
0.01
0.24
3.77
5.00
-
-
4.24
5.00
-
-
3.28
Intrinsic
Value
435,900
-
-
-
930,751
-
-
-
937,567
$
$
$
$
$
$
$
$
$
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 8 - OPTIONS
The Company maintains a stock option plan under which certain employees and management are awarded option grants based on a
combination of performance and tenure. All options may be exercised for a period up to four ½ years following the grant date, after
which they expire. Options are vested up to 5 years from the grant date. The Board has authorized the use of 2,000,000 shares for option
grants.
Stock options were granted during 2017 and 2016 to employees totaling, 263,846 and 189,000 respectively. These options vest over a
period of 5 years, are granted with an exercise price of between $0.41 - $1.02 per share and have a term of 10 years. The last options
expire October 2027.
Under the Black-Scholes option price model, fair value of the option granted in 2017 and 2016 were $169,100 and $184,697, respectively.
During the year ended December 31, 2016, 300,750 options were forfeited due to employee resignation. The options were not vested
and the option expense reversed was $139,954. During the year ended December 31, 2016, another 43,750 options expired.
In April 2017, 253,846 options were granted with an exercise price of $0.65 and a term of 10 years from the grant date. The options vest
over a period of one and four years. During the year ended December 31, 2017, 35,000 were forfeited and 75,500 expired.
In April 2017, four option grants, totaling 650,000 options, were amended to extend the exercise term to 10 years from the date of grant.
Incremental option expense recognized as a result of the amendment amounted to $69,611.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant. The
following table summarizes the assumptions used to estimate the fair value of stock options granted during the years ended December
31, 2017 and 2016:
Expected dividend yield
Weighted-average expected volatility
Weighted-average risk-free interest rate
Expected life of options
2017
0%
200%
1.92%
4.74 – 7.50 years
2016
0%
200%
1.24% - 1.56%
5 years
Total compensation cost related to stock options was $267,835 and $147,630 for the years ended December 31, 2017 and 2016,
respectively. As of December 31, 2017, there was $95,181 of unrecognized compensation costs related to stock options, which is
expected to be recognized over a weighted average period of 6.78 years. The following table represents stock option activity for the two
years ended December 31, 2017:
Outstanding at December 31, 2015
Exercisable at December 31, 2015
Forfeited
Granted
Expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Forfeited
Granted
Expired
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Number of Options
1,200,000
332,000
(300,750)
189,000
(43,750)
1,044,500
584,000
(35,000)
263,846
(75,500)
1,197,846
781,300
F-16
Weighted
Average
Exercise
Price
1.07
1.04
1.03
-
1.16
0.92
1.05
1.02
0.64
1.13
0.97
1.02
Contractual
Life in Years
5.19
3.34
7.87
-
8.08
3.38
3.02
8.25
9.05
4.54
6.96
6.30
Intrinsic
Value
28,000
-
-
-
-
-
-
-
-
-
-
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 9 – INCOME TAXES
On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the "Tax Act”) was enacted. Among the significant
changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate ("Federal Tax Rate”) from 35%
to 21% effective January 1, 2018.
The statutory tax rate is the percentage imposed by law; the effective tax rate is the percentage of income actually paid by a company
after taking into account tax deductions, exemptions, credits and operating loss carry forwards.
At December 31, 2017 and 2016 deferred tax assets consist of the following:
Federal loss carry forwards
Less: valuation allowance
December 31,
2017
December 31,
2016
$
$
963,833
(963,833)
-
$
$
1,840,249
(1,840,249)
-
The Company has established a valuation allowance equal to the full amount of the deferred tax asset primarily due to uncertainty in
the utilization of the net operating loss carry forwards.
The estimated net operating loss carry forwards of approximately $4,589,682 will be available based on the new carryover rules in
section 172(a) passed with the Tax Cuts and Jobs Acts.
NOTE 10 – RELATED PARTIES
In January 2017 Mr. Ajjarapu and Mr. Patel suspended their executive salaries of $165,000 and $125,000, respectively, for a period of
five and six months. All of our executives are at-will employees or consultants. Each of Messrs. Ajjarapu and Patel are parties to an at-
will executive employment agreement.
The Company owed management wages to Mr. Prashant Patel and Mr. Suren Ajjarapu at December 31, 2017 of $62,500 and $0,
respectively and at December 31, 2016 of $132,012 and $76,971, respectively.
See related party debt activities in Notes 4 and 5.
NOTE 11 – Commitments and Contingencies
The Company leases its premises in Land O’ Lakes, Florida under an operating lease that expires in 2021. Future minimum rental
payments under these non-cancelable operating leases as of December 31, 2017 are:
2018
2019
2020
2021
Total
$
$
$
$
$
92,400
103,824
106,939
9,179
312,342
On November 19, 2015, Family Medicine Pharmacy, LLC filed a class-action claim against Trxade Group, Inc. and its wholly owned
subsidiary Westminster Pharmaceutical, LLC, Inc. (Family Medicine Pharmacy, LLC v. Trxade Group, Inc. and Westminster, Inc., Case
No.: 1:15-CV-00590-KD-B, United States District Court, Southern District of Alabama, Mobile Division). Family Medicine has served
Trxade for allegedly utilizing a "junk fax” advertising program. On June 6, 2016, we entered into a binding memorandum of
understanding with the plaintiff related to this litigation to resolve all claims in exchange for Trxade funding a settlement fund in the
amount of $200,000. An accrual of $200,000 is recorded on book as of December 31, 2016. The final judgment, approval and payment
was entered into on March 17, 2017 for $200,000.
F-17
Trxade Group, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
NOTE 12 - SUBSEQUENT EVENTS
In January 2018 Mr. Ajjarapu and Mr. Patel executive salaries were amended from $165,000 and $125,000, to $200,000 and $150,000
respectively. All of our executives are at-will employees or consultants. Each of Messrs. Ajjarapu and Patel are parties to an at-will
executive employment agreement.
In February 2018, $100,000 of the $150,000 related party note was extended to July 2018 at the same interest rate of 10% and $50,000 of
note principal and interest were paid.
F-18
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable
Item 9A. Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act of 1934, as amended (the "Exchange Act”) is recorded, processed, summarized and reported, within
the time period specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, as
appropriate, in order to allow timely decisions in connection with required disclosure.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
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 Annual Report. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2017, our disclosure controls and
procedures were not effective.
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 as disclosed below.
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.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP, but because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. The Company’s internal control over financial reporting includes those policies and procedures that are designed
to:
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
26
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control — Integrated Framework. Based on our assessment, management believes that the Company’s internal controls over
financial reporting were not effective as of December 31, 2017. Specifically, management’s evaluation was based on the following
material weaknesses which existed of December 31, 2017:
·
Financial Reporting Systems: The Company did not maintain a fully integrated financial consolidation and reporting system
throughout the period and as a result, extensive manual analysis, reconciliation and adjustments were required in order to
produce financial statements for external reporting purposes.
·
Segregation of Duties: The Company does not currently have a sufficient complement of technical accounting and external
reporting personal commensurate to support standalone external financial reporting under public company or SEC
requirements. Specifically, the Company did not effectively segregate certain accounting duties due to the small size of its
accounting staff, and maintain a sufficient number of adequately trained personnel necessary to anticipate and identify risks
critical to financial reporting and the closing process. In addition, there were inadequate reviews and approvals by the
Company’s personnel of certain reconciliations and other processes in day-to-day operations due to the lack of a full
complement of accounting staff.
·
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.
·
Ineffective controls over period end financial disclosure and reporting processes.
During the year December 31, 2017, we reevaluated our most recent assessment of internal controls and concluded that that our internal
controls were still not effective. The Company has recently engaged additional accounting support to provide more resources and
expand the technical accounting knowledge.
Changes in Internal Control Over Financial Reporting
As an early stage company, we continue to develop our internal control systems. We continue to seek additional financial reporting
and accounting experience and expertise. Except as otherwise discussed above, there were no changes in our internal controls over
financial reporting during the year ended December 31, 2017 that have materially affected or are reasonably likely to materially affect,
our internal controls over financial reporting, including any corrective actions with regard to significant deficiencies and material
weaknesses.
Attestation Report of the Registered Public Accounting Firm
This report does not include an attestation report of our registered public accounting firm regarding our internal controls over financial
reporting. Under SEC rules, such attestation is not required for smaller reporting companies such as ourselves.
Inherent Limitations on the Effectiveness of Controls
Management of the Company, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s
disclosure controls and procedures or its internal control over financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Furthermore, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual
acts of some persons or by the collusion of two or more persons. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject
to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
Item 9B. Other Information
None.
27
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Set forth below is certain information regarding our directors and executive officers as of March 2, 2018:
Name
Suren Ajjarapu
Chairman, Chief Executive Officer and Secretary
Position
Age Director/Officer Since
Prashant Patel
Director, President and Chief Operating Officer
Donald G. Fell
Director
Howard A. Doss
Chief Financial Officer
Michael L. Peterson
Director
Business Experience
46
43
69
64
63
January 2014
January 2014
January 2014
January 2014
August 2016
The following is a brief description of the education and business experience of our current directors and executive officers.
Suren Ajjarapu, Chairman of the Board, Chief Executive Officer and Secretary.
Mr Ajjarapu has served as our Chairman of the Board, Chief Executive Officer and Secretary since our acquisition of Trxade Nevada on
January 8, 2014, and as the Chairman of the Board, Chief Executive Officer and Secretary of Trxade Nevada since its inception. Mr.
Ajjarapu was a Founder, CEO and Chairman of Sansur Renewable Energy, Inc., a company involved in developing wind power sites in
the Midwest, United States, from 2009 to 2012. Mr. Ajjarapu was a Founder, President and Director of Aemetis, Inc., a biofuels company
(AMTX.OB) and a Founder, Chairman and Chief Executive Officer of International Biofuels, a subsidiary of Aemetis, Inc., from 2006 to
2009. Mr. Ajjarapu was Co-Founder, COO, and Director Global Information Technology, Inc., an IT outsourcing and systems design
company, headquartered in Tampa, Florida with major operations in India from 1995 to 2006. Mr. Ajjarapu acts as a non-Executive
Director for AIM-listed company Nandan Clean Tec Plc. (Ticker: NAND), a backward integrated Biofuels company. Mr. Ajjarapu holds
an MS in Environmental engineering from South Dakota State University, Brookings, South Dakota, and an MBA from the University
of South Florida, specializing in International Finance and Management. Mr. Ajjarapu is also a graduate of the Venture Capital and
Private Equity program at Harvard University. Our Board of Directors believes that Mr. Ajjarapu’s history with our company, from both
an operational standpoint and that of a member of management, are vital to the Board’s collective knowledge of our day-to-day
operations.
Prashant Patel, Director, President and Chief Operating Officer
Mr. Patel has served as our full-time President and COO, and as a director since our acquisition of Trxade Nevada on January 8, 2014,
and as the COO and President and as a director of Trxade Nevada since its inception.. Mr. Patel is a registered pharmacist and
pharmaceutical consultant with over ten years of experience in retail pharmacy and pharmaceutical logistics and the founder of several
pharmacies in the Tampa Bay area, in Florida. Mr. Patel has been a President and Member of the Board of Trxade since August 2010.
Since October 2008, Mr. Patel has been Managing Member of the APAA LLC, a pharmacy. Since April 2007, Mr. Patel has been a Vice
President of Holiday Pharmacy, Inc., a pharmacy. Mr Patel graduated from Nottingham University School of Pharmacy and practiced in
the UK before obtaining his masters in Transport, Trade and Finance from Cass Business School, City University, UK. Our Board of
Directors believes that Mr. Patel’s history with our company, from both an operational standpoint and that of a member of management,
are vital to the Board’s collective knowledge of our day-to-day operations.
Howard A. Doss, Chief Financial Officer
Mr. Doss has served as our CFO since January 2014. Mr. Doss has served in a variety of capacities with accounting and investment
firms. He joined the staff of Seidman & Seidman (BDO Seidman, Dallas) in 1977, and in 1980 he joined the investment firm Van Kampen
Investments, opening the firm’s southeast office in Tampa in 1982. He remained with the firm until 1996 when he joined Franklin
Templeton to develop corporate retirement plan distribution. After working for the Principal Financial Group office in Tampa, Mr. Doss
was City Executive for U.S. Trust in Sarasota, responsible for high net worth individuals. He retired from that position in 2009. He
served as CFO and Director for Sansur Renewable Energy an alternative energy development company, from 2010 to 2012. Mr. Doss
has also served as President of STARadio Corp. since 2005. Mr. Doss is a member of the America Institute of CPA’s. He is a graduate
of Illinois Wesleyan University. Our Board of Director’s believes that Mr. Doss’ experience is significant to the Board’s understanding
today’s complex and ever changing accounting rules and regulations.
28
Donald G. Fell, Director
Mr. Fell has served as a Director of our company since January 2014, as well as a director of Trxade Nevada since December 2013. Since
1992, Mr. Fell has been a Director/Professor Foundation for Teaching Economics. From 1995 to 2012, Mr. Fell was Senior
Fellow/Professor at the Executive MBA faculty at the University of South Florida. He was also a Visiting Professor at the University of
Rochelle, FR in 2010. Mr. Fell holds degrees in Economics from Indiana State University, with additional graduate work in Economics at
Northern Illinois University and Illinois State University. Mr. Fell since 2012 has been employed as Institute Director and Professor for
the Davis, CA based Foundation for Teaching Economics, conducting Institutes related to 1) economic policy; and 2) environmental
economics. Institute audiences consist of university/college professors, high school teachers and government leaders. These
Institutes have been held throughout the U.S. Our Board of Director’s believes that Mr. Fell’s extensive experience in the field of
economics and business will provide us with valuable insight as we seek to execute our business strategy.
Michael L. Peterson, Director
Mr. Michael L. Peterson is President & Chief Executive Officer at PEDEVCO Corp. He is on the Board of Directors at Trxade Group, Inc.
Mr. Peterson was previously employed as Chairman, President & Chief Executive Officer by Nevo Energy, Inc., Chairman, President &
Chief Executive Officer by Solargen Energy, Inc., Chief Financial Officer, Director & Executive VP by Blast Energy Services, Inc.,
Managing Partner by Pascal Management LLC, Managing Partner by American Institutional Partners LLC, and Vice President by
Goldman Sachs & Co. He also served on the board at AE Biofuels, Inc., American Ethanol, Inc., Aemetis, Inc., and Navitas Corp. Our
Board of Director’s believes that Mr. Peterson’s extensive experience in finance and business will provide us with valuable insight as
we seek to execute our business strategy. He received his undergraduate degree from Brigham Young University and an MBA from
BYU Marriott School.
Family Relationships
There are no family relationships among any of our executive officers or directors.
Committees of the Board of Directors
Our board of directors has the authority to appoint committees to perform certain management and administration functions. Our board
of directors has two committees: the audit committee and the compensation committee.
Audit Committee
The primary purpose of the audit committee will be to assist the board of directors’ oversight of:
·
the integrity of our financial statements; our systems of control over financial reporting and disclosure controls and
procedures;
·
our compliance with legal and regulatory requirements;
·
our independent auditors’ qualifications and independence;
·
the performance of our independent auditors and our internal audit function; and
·
all related-person transactions for potential conflict of interest situations on an ongoing basis; and
·
the preparation of the report required to be prepared by the committee pursuant to SEC rules.
Mr. Fell and Mr. Peterson serve on the audit committee, where Mr. Peterson acted as chairman of the audit committee. Mr. Fell and Mr.
Peterson each qualify as an ‘‘audit committee financial expert’’ as such term has been defined by the SEC in Item 407(d)(5) of
Regulation S-K. Our board of directors has affirmatively determined that Mr. Fell and Mr. Peterson meet the definition of ‘‘independent
directors’’ for the purposes of serving on the audit committee under applicable SEC rules, and we intend to comply with these
independence requirements within the time periods specified.
29
Compensation Committee
The primary purpose of our compensation committee is to: recommend to our board of directors for consideration, the compensation
and benefits of our executive officers and key employees; monitor and review our compensation and benefit plans; administer our stock
and other incentive compensation plans and programs and prepare recommendations and periodic reports to the board of directors
concerning such matters; prepare the compensation committee report required by SEC rules to be included in our annual report; prepare
recommendations and periodic reports to the board of directors as appropriate; and handle such other matters that are specifically
delegated to the compensation committee by our board of directors from time to time.
Mr. Fell and Mr. Peterson serve on the compensation committee, and Mr. Fell serves as the chairman.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve on the compensation committee or board of directors of any other company of which any of the
members of our compensation committee or any of our directors is an executive officer.
Code of Business Conduct and Ethics
Our Board of Directors had adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees.
The Code of Business Conduct and Ethics will be available for review in print, without charge, to any stockholder who requests a copy
by writing to us at Trxade Group, Inc., 3840 Land O’ Lakes Blvd, Land O’ Lakes, Florida, 34639, Attention: Investor Relations. Each of
our directors, employees and officers are required to comply with the Code of Business Conduct and Ethics
.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and persons who own more
than 10% of the Company’s common stock to file reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC”). The Company recently undertook a review of the Section 16(a) reports filed on behalf of each individual who
served as a director or executive officer of the Company during the fiscal year ended December 31, 2017 to determine whether all of their
reportable transactions in the Company’s common stock were timely reported and to ensure reporting of all of their beneficial holdings.
The review revealed that while all of the required transactions had been reported in the Company’s Form 10-K and Form 10-Qs, the
reports listed below were not timely filed. In all cases, the transactions were non-market transactions such as option grants by the
Company, or in one case, a private sale.
The following reports were filed under Section 16(a) since the beginning of the fiscal year ended December 31, 2017:
Suren Ajjarapu, CEO, filed one Form 4 reporting the sale of stock.
Michael Peterson, Director, filed a Form 5 reporting a prior award of stock options.
Donald Fell, Director, filed a Form 5 reporting a prior award of stock options.
Howard Doss, CFO, filed a Form 5 reporting a prior award of stock options.
30
Item 11. Executive Compensation
The following table sets forth the compensation for the fiscal years ended December 31, 2017 and 2016 for services rendered to us
(including our subsidiary, Trxade, Inc.) by our Chief Executive Officer and our two most highly compensated executive officers other
than our Chief Executive Officer:
Summary Compensation Table
Name and Principal Position Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
Suren Ajjarapu
Chairman of the Board,
Chief Executive Officer, and
Director
Prashant Patel
Chief Operating Officer,
President and Director
2016 $148,750 (1) $50,000
2017
$96,250 (1)
-
2016 $125,000 (2) $50,000
2017
$62,500 (2)
-
Howard A. Doss
Chief Financial Officer
2016
2017
$60,000 (3)
$60,000 (3)
-
-
-
-
-
-
-
-
-
-
-
-
$15,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$198,750
$96,250
$175,000
$62,500
$75,000
$60,000
(1) The amount shown reflects compensation under an at will employment agreement with the Company.
(2) The amount shown reflects compensation under an at will employment agreement with the Company.
(3) The amount shown reflects compensation under a consulting agreement with the Company.
Employment and Consulting Agreements
All of our named executives are at-will employees or consultants. The Company has entered in an at-will employment agreement with
Mr. Ajjarapu, with annual salary of $165,000 and a possible $50,000 performance bonus. The Company has entered in an at-will
employment agreement with Mr. Patel, with annual salary of $125,000 and a possible $50,000 performance bonus. In January 2017, each
of Messrs. Ajjarapu and Patel suspended their executive salaries through June 30, 2017, a period of six months. Mr. Ajjarapu entered
into an amendment in June 2017 to resume payment of the annual salary. Mr. Patel resumed July 1, 2017. In January 2018 Mr. Ajjarapu
and Mr. Patel salaries were amended to $200,000 and $150,000 respectively. The Company has an hourly rate consulting arrangement
with Mr. Doss. The Company has also entered into indemnification agreements with its officers and directors. The annual bonus
payable to each of Mr. Ajjarapu and Mr. Patel is based upon executive’s performance and the Company’s attainment of objectives
established by the Board of Directors or Compensation Committee of the Board. With respect to any subjective milestones, the
determination of whether executive has attained the mutually agreed upon milestones for the bonus shall be reasonably determined by
the Board or the Compensation Committee.
Compensation of the Board of Directors
The following table provides information regarding all compensation awarded to, earned by or paid to each person who served as a
director of Trxade Group, Inc. for some portion or all of 2017 and 2016. Other than as set forth in the table and described more fully
below, Trxade Group, Inc. did not pay any fees, made any equity or non-equity awards, or paid any other compensation, to its non-
employee directors. All compensation paid to its employee directors is set forth in the tables summarizing executive officer
compensation above.
31
Name
2016
Donald Fell
Fernando Sanchez
Michael Peterson
2017
Donald Fell
Michael Peterson
Fees Earned or
paid in Cash
Stock
Awards Option Awards
All Other
Compensation
Total
$
$
$
$
$
5,000
5,000
1,250
15,000
15,000
-
-
-
-
-
$
$
$
$
25,000
25,000
-
50,000
113,883
-
-
-
-
-
$
$
$
$
$
30,000
30,000
1,250
65,000
128,883
In April 2016, the Company granted Mr. Sanchez options to purchase 25,000 shares of Common Stock, vesting over four years and
exercisable at $1.02 per share. All have been forfeited.
In April 2016, the Company granted Mr. Fell options to purchase 25,000 shares of Common Stock, vesting over four years and
exercisable at $1.02 per share.
In April 2017, the Company granted Mr. Fell options to purchase 76,923 shares of Common Stock, vesting over one year and exercisable
at $.65 per share.
In April 2017, the Company granted Mr. Peterson options to purchase 76,923 shares of Common Stock, vesting over one years and
exercisable at $.65 per share.
In April 2017, the Company granted Mr. Peterson options to purchase 100,000 shares of Common Stock, vesting over four years and
exercisable at $.65 per share.
Non-employee directors are paid $5,000 per quarter for board responsibilities. The Company has also entered into an indemnification
agreement with Messrs. Fell, Sanchez and Peterson.
Outstanding Option Equity Awards at 2017 Fiscal Year End
The following table sets forth information as of December 31, 2017 concerning unexercised options, unvested stock and equity
incentive plan awards for each of the executive officers named in the Summary Compensation Table.
OUTSTANDING EQUITY AWARDS AT YEAR ENDED DECEMBER 31, 2017
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
225,000
4,500
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
75,000(1)
10,500(2)
Name
Grant
Date
Howard A. Doss,
1/20/2014
Chief Financial Officer 4/1/2016
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
-
-
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
-
-
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
-
-
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
-
-
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
-
-
32
Option
Exercise
Price
($)
1.00
1.02
Option
Expiration
Date
1/1/2024
4/1/2026
(1) Vesting is 25% of the total number of shares on the one year anniversary of the vesting commencement date of 1/20/2014 and 25%
shall vest on each one year anniversary.
(2) Vesting is 6.25% of the total number of shares each quarter of the vesting commencement date of 7/1/2016.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information with respect to the beneficial ownership of our securities as of March 2, 2017 by (i)
each of our named executive officers and directors; (ii) each person known to us who owns beneficially more than 5% of any class of
our outstanding equity securities; and (iii) all of our executive officers and directors as a group. The number of shares and the
percentage of shares beneficially owned by each such person or group, as set forth below, include shares of common stock that such
person or group had the right to acquire on or within sixty days after March 18, 2016 pursuant to the exercise of vested and exercisable
options or warrants. References to options or warrants in the footnotes to the table below include only options or warrants to purchase
shares that were exercisable on or within sixty days after March 2, 2017.
Name and Address of Beneficial Owner (1)
Directors and Named Executive Officers:
Suren Ajjarapu, Chairman, CEO (4)
Prashant Patel, Director, COO, and President (5)
Donald G Fell, Director (6)
Howard Doss, CFO (7)
Michael L Peterson, Director (9)
Gajan Mahendiran (8)
All executive officers and directors as a Group (five persons)
Greater than 5% Stockholders
* Less than one 1%
Number of Shares
Beneficially Owned (2)
Percentage
Beneficially Owned (3)
13,743,750
12,250,000
107,500
304,500
37,500
2,843,335
26,443,250
43.0%
38.3%
*
*
*
8.9%
81.3%
(1) Unless otherwise indicated in the footnotes to the following table, the address of each person named in the table is: c/o Trxade
Group, Inc., 3840 Land O’ Lakes Blvd, Land O’ Lakes, Florida, 34639.
(2) Based on 31,985,827 shares of Common Stock outstanding on March 2, 2018. Does not include shares issuable upon exercise of
(i) 1,157,405 stock options currently outstanding, (ii) warrants to purchase 2,738,096 shares of Common Stock, (iii) 842,595 shares
which are reserved for the Company’s 2014 Equity Incentive Plan, none of which shares are issuable within 60 days of the date
set forth above.
(3) Except as otherwise indicated, we believe that the beneficial owner of the common stock listed above, based on information
furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property
laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting
or investment power with respect to securities.
(4) Includes (i) 7,143,750 shares owned directly by Mr. Ajjarapu, (ii) 4,050,000 shares owned by Sandhya Ajjarapu, Mr. Ajjarapu’s
wife, for whom Mr. Ajjarapu claims beneficial ownership, (iii) 1,275,000 shares owned by the Surendra Ajjarapu Revocable Trust
of 2007, for whom Mr. Ajjarapu claims beneficial ownership as Trustee, and (iv) 1,275,000 shares owned by the Sandhya Ajjarapu
Revocable Trust of 2007, for whom Mr. Ajjarapu claims beneficial ownership as Trustee.
(5) Includes (i) 7,350,000 shares owned directly by Mr. Patel, (ii) 2,500,000 shares owned by Rina Patel, Mr. Patel’s wife for whom
Mr. Patel claims beneficial ownership, and (iii) 2,400,000 shares owned by the Patel Trust, for whom Mr. Patel claims beneficial
ownership as Trustee.
(6) Includes 107,500 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of the
applicable date above.
(7) Includes 304,500 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of the
applicable date above.
(8) Includes 833,334 shares of Common Stock of the Company and warrants to purchase 2,010,001 shares of Common Stock at an
exercise price of $0.01 per share that are exercisable within 60 days of the applicable date above, and which are held jointly with
Mr. Mahendiran’s wife, Amudha Mahendiran, as tenants by entirety.
33
(9) Includes 37,500 shares of common stock issuable upon the exercise of stock options that are exercisable within 60 days of the
applicable date above.
There are no current arrangements among any of the foregoing persons which would result in a change in control.
Equity Compensation Plan Information
The following table provides information as of December 31, 2017 with respect to securities that may be issued under our equity
compensation plans.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and rights
(a)
3,935,942
-
3,935,942
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
$0.47
-
$1.10
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
802,154
-
802,154
The equity compensation plans approved by the Company’s security holders are the 2014 Equity Incentive Plan ("2014 Stock Plan”) of
Trxade Group, Inc., Delaware corporation, and the 2013 Equity Incentive Plan of Trxade Group, Inc., a Nevada corporation and
predecessor in interest to Trxade Group, Inc., a Delaware corporation. The above listed equity compensation plans were adopted as of
December 31, 2017, with the approval of security holders.
Summary of Material Features of the 2014 Equity Incentive Plan
The following discussion summarizes the material terms of the 2014 Stock Plan. A description of the 2014 Stock Plan, which is intended
merely as a summary of its principal features and is qualified in its entirety by reference to the full text of the 2014 Stock Plan, as filed
and incorporated by reference to Exhibit 10.3 to the Registration Statement on Form 10 of Trxade Group, Inc., File No. 000-55218, filed on
June 6, 2014, is below.
Administration. The 2014 Stock Plan is administered by the Company’s Board of Directors and the Compensation Committee of the
Board.
Term. The 2014 Stock Plan shall continue in effect for a period of 10 years. In general, the term of each option granted shall be no more
than ten 10 years from the date of grant, though in certain instances such term may be shorter.
Eligibility. Employees and service providers of the Company and its subsidiaries and non-employee directors of the Company are
eligible to receive awards under the 2014 Stock Plan. Awards under the 2014 Stock Plan may include grants of options, stock
appreciation rights, restricted stock, restricted stock units, performance units and performance shares, and awards intended to qualify
as performance-based compensation under Section 162(m) of the Internal Revenue Code. Eligibility for any particular award is
determined by the Administrator (as defined in the 2014 Stock Plan) and, in the case of certain awards such as incentive stock options,
eligibility for receipt of such awards may be limited by the Internal Revenue Code.
Plan Limit. The Company has reserved 2,000,000 Common Shares for issuance under the 2014 Stock Plan. The 2014 Stock Plan had
802,154 remaining shares reserved for issuance as of March 2, 2018.
The above limit is subject to adjustment for certain changes in the Company’s capitalization such as stock dividends, stock splits,
combinations or similar events. If an award expires, terminates, is forfeited or is settled in cash rather than in Common Shares, the
Common Shares not issued under that award will again become available for grant under the 2014 Stock Plan. If Common Shares are
surrendered to the Company or withheld to pay any exercise price or tax withholding requirements, only the number of Common Shares
issued net of the shares withheld or surrendered will be counted against the number of Common Shares available under the 2014 Stock
Plan. The exercise price for a stock option or stock appreciation right may not be less than 100% of the fair market value of the shares
on the date of grant or may not be less than 110% of the fair market value of the shares on the date of grant for employees representing
more than 10% of the voting power of all of the classes of stock of the Company. The Board may amend, alter, suspend or terminate the
plan. The Company must obtain stockholder approval of any amendment of the 2014 Stock Plan to the extent necessary and desirable
to comply with applicable law.
34
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
All of our executives are at-will employees or consultants. Each of Messrs. Ajjarapu and Patel are parties to an at-will executive
employment agreement. In January 2017, each of Messrs. Ajjarapu and Patel suspended their executive salaries of for a period of six
months. The Company has also entered into indemnification agreements with its officers and directors. In January 2018 Mr. Ajjarapu
and Mr. Patel executive salaries were amended from $165,000 and $125,000, to $200,000 and $150,000 respectively.
The Company’s founders Mr. Ajjarapu (through Sansur Associates, a company that he controls) and Mr. Patel have periodically
loaned funds on a short-term interest free basis to cover the Company’s operating expenses. In November 2016, Mr. Patel loaned the
Company $10,000. In June 2017, the Company borrowed $100,000 and $80,000 from Sansur Associates, LLC, a limited liability company
controlled by Mr. Ajjarapu, and Mr. Patel, respectively. The term of each of these Notes is three years and they each bear interest at
6%, which is payable annually. The note due to Mr. Patel is $122,552. It comprises $80,000, $17,280 for existing promissory note and
$25,272 assumption of credit card obligation related to business expenses of the company. As of March 2, 2018, $222,552 was
outstanding on these loans.
The Company owed $61,725 under related party note that was renewed in April 2017 for a one-year extension at the same interest rate of
10%, due April 2018. Further, the Company owed $150,000 under a related party note that was renewed for a six-month extension at the
same interest rate of 10% in September 2017, which is now due February 2018. Both of these notes were entered with Nitel Patel, the
brother of Prashant Patel, the Director and President of the Company. In February 2018, $50,000 of the $150,000 of principal was paid.
The remaining $100,000 was extended to July 2018 as the same interest rate of 10%.
In August 2017, $40,000 in convertible promissory notes was amended. A one-year extension was executed to August 2018. In
connection with the one-year extension of the maturity date of the outstanding notes, the holder of the notes was granted warrants to
purchase 10,000 shares of common stock that was issued at a strike price of $0.80 and an expiration date of five years from date of
issuance. The amendment of the note was considered a debt extinguishment and a loss on extinguishment of debt was booked in the
amount of $5,044.
During the year ended December 31, 2017, there have been no other related party transactions, or currently proposed transactions, in
which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our
total assets at year-end for the last completed fiscal years and in which any related person had or will have a direct or indirect material
interest.
Director Independence
Our common stock is traded on the OTCQB under the symbol "TRXD”. The OTCQB electronic trading platform does not maintain any
standards regarding the "independence” of the directors on our company’s Board of Directors, and we are not otherwise subject to the
requirements of any national securities exchange or an inter-dealer quotation system with respect to the need to have a majority of our
directors be independent.
In the absence of such requirements, we have elected to use the definition for "director independence” under the NASDAQ stock
market’s listing standards, which defines an "independent director” as "a person other than an officer or employee of the Company or
the Company’s subsidiaries or any other individual having a relationship, which in the opinion of our Board of Directors, would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” The definition further provides
that, among others, employment of a director by us (or any parent or subsidiary of ours) at any time during the past three years is
considered a bar to independence regardless of the determination of our Board of Directors. Two of our four directors, Mr. Fell and Mr.
Peterson, are deemed "independent” under the NASDAQ Stock Market’s listing standards.
Item 14. Principal Accountant Fees and Services
Aggregate fees billed to us by MaloneBailey, LLP with respect to our 2017 and 2016 fiscal years were as follows:
Audit Fees
All Other Fees
Total
2017
29,000 $
15,000
44,000 $
2016
29,000
15,000
44,000
$
$
35
Aggregate fees billed to us by Thomas Craig & Co. with respect to our 2017 and 2016 years were as follows:
Tax Fees
All Other Fees
Total
2017
2016
7,000 $
-
7,000 $
8,500
-
8,500
$
$
In the above table, in accordance with the SEC’s definitions and rules, "audit fees” are fees that Trxade Group, Inc. paid for
professional services for the audit of our consolidated financial statements included in our Form 10-K and for services that are normally
provided by the registered public accounting firm in connection with statutory and regulatory filings or engagements; "audit-related
fees” are fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial
statements; and "tax fees” are fees for tax compliance, tax advice and tax planning.
All of the audit-related services and other services described in the above table were pre-approved by our Audit Committee. The Audit
Committee has adopted a pre-approval policy that provides for the pre-approval of all services performed for us by MaloneBailey, LLP.
The policy authorizes the Audit Committee to delegate to one or more of its members pre-approval authority with respect to permitted
services. Pursuant to this policy, the Audit Committee delegated such authority to the Chairman of the Audit Committee. All pre-
approval decisions must be reported to the Audit Committee at its next meeting.
Item 15. Exhibits and Financial Statement Schedules
PART IV
Exhibit
Number
2.1
2.2
3.1
3.2
10.1
10.2
10.3
10.4
10.5
14.1
21.1
31.1
31.2
32.1
32.2
101
Description
Purchase and Sale Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Trxade Group,
Inc., File No. 000-55218, filed on January 5, 2017).
Warrant Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Trxade Group, Inc., File
No. 000-55218, filed on January 5, 2017).
Second Amended and Restated Certificate of Incorporation of Trxade Group, Inc. (incorporated by reference as Appendix A
to the Schedule 14C Information Statement of Trxade Group, Inc., File No. 000-55218, filed on May 18, 2015).
Amended and Restated Bylaws of Trxade Group, Inc., (incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form 10 of Trxade Group, Inc., File No. 000-55218, filed on July 23, 2014).
2014 Equity Incentive Plan of Trxade Group, Inc. (incorporated by reference to Exhibit 10.3 to the Registration Statement on
Form 10 of Trxade Group, Inc., File No. 000-55218, filed on June 6, 2014).*
Promissory Note with Sansur Associates, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
of Trxade Group, Inc., File No. 000-55218, filed on July 5, 2017.
Promissory Note with Prashant Patel (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Trxade
Group, Inc., File No. 000-55218, filed on July 5, 2017.
Form of Note with Westminster Pharmaceuticals, LLC (wholly-owned subsidiary of Trxade Group, Inc.) (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K of Trxade Group, Inc., File No. 000-55218, filed on October 27,
2015.
Form of Indemnification Agreement entered into between Trxade Group, Inc. and its directors and certain officers
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Trxade Group, Inc., File No. 000-55218, filed
on August 25, 2016).*
Code of Ethics of Trxade Group, Inc. (incorporated by reference as Exhibit 14.1 to the Annual Report on Form 10-K of
Trxade Group, Inc., File No. 000-55218, filed on March 23, 2015.
List of subsidiaries of Trxade Group, Inc.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following financial information from the Annual Report on Form 10-K of Trxade Group, Inc. for the year ended
December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Balance Sheets as of
December 31, 2017, and 2016; (2) Consolidated Statements of Operations for the years ended December 31, 2017 and 2016;
(3) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017 and 2016; (4) Consolidated
Statements of Cash Flows for years ended December 31, 2017 and 2016; and (5) Notes to Condensed Financial
Statements.**
36
____________
*
Denotes a management contract or compensatory plan or arrangement in which one or more directors or executive officers participate.
** Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 (a) is "furnished” and is not deemed to be "filed” or part of a
registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, (b) is deemed not to be
"filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and (c) is not otherwise subject to liability under
those sections.
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: March 2, 2018
Trxade Group, Inc.
By:
/s/ Suren Ajjarapu
Suren Ajjarapu,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Suren Ajjarapu
Suren Ajjarapu
/s/ Prashant Patel
Prashant Patel
/s/ Howard A. Doss
Howard Doss
/s/ Michael L. Peterson
Michael L. Peterson
/s/ Donald G Fell
Donald G Fell
Title
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date
March 2, 2018
Chief Operating Officer, President and Director
March 2, 2018
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Director
Director
37
March 2, 2018
March 2, 2018
March 2, 2018
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Trxade, Inc., a Florida corporation.
Integra Pharma Solutions, LLC (formerly Pinnacle Tek, Inc., a Florida corporation)
ShopRX, Ltd. A UK corporation. – DISSOLVED
Alliance Pharma Solutions, LLC, a Florida Corporation
EXHIBIT 31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
I, Suren Ajjarapu, certify that:
1.
I have reviewed this report on Form 10-K of Trxade Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 2, 2018
/s/ Suren Ajjarapu
Name:Suren Ajjarapu
Title: Chief Executive Officer
EXHIBIT 31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
I, Howard A. Doss, certify that:
1.
I have reviewed this report on Form 10-K of Trxade Group, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 2, 2018
/s/ Howard A. Doss
Name: Howard A. Doss
Title: Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Trxade Group, Inc.
(the "Company”) hereby certifies that, to the best of his knowledge:
(i) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2017 (the "Report”) fully complies
with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operation of the Company.
Dated: March 2, 2018
/s/ Suren Ajjarapu
Suren Ajjarapu
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Trxade Group, Inc.
(the "Company”) hereby certifies that, to the best of his knowledge:
(i) the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2017 (the "Report”) fully complies
with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operation of the Company.
Dated: March 2, 2018
/s/ Howard A. Doss
Howard A. Doss
Chief Financial Officer