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, 2020
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________to______________
001-39199
(Commission File Number)
TRXADE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
46-3673928
(I.R.S. Employer
Identification No.)
3840 Land O’ Lakes Boulevard
Land O’ Lakes, Florida 34639
(Address of Principal Executive Office) (Zip Code)
(800) 261-0281
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.00001 Par Value Per Share
Trading Symbol(s)
MEDS
Name of each exchange on which registered
The NASDAQ Stock Market LLC
(Nasdaq Capital Market)
Securities registered pursuant to Section 12(g) of the Act:
None.
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 Section 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Non-accelerated filer [X]
Emerging growth [X]
Accelerated filer [ ]
Smaller reporting company [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently
completed second fiscal quarter was approximately $21,541,008. For purposes of calculating the aggregate market value of shares held by non-affiliates, we have assumed that all
outstanding shares are held by non-affiliates, except for shares held by each of our executive officers, directors and 5% or greater stockholders. In the case of 5% or greater
stockholders, we have not deemed such stockholders to be affiliates unless there are facts and circumstances which would indicate that such stockholders exercise any control
over our company, or unless they hold 10% or more of our outstanding common stock. These assumptions should not be deemed to constitute an admission that all executive
officers, directors and 5% or greater stockholders are, in fact, affiliates of our company, or that there are no other persons who may be deemed to be affiliates of our company.
Further information concerning shareholdings of our officers, directors and principal stockholders is included or incorporated by reference in Part III, Item 12 of this Annual Report
on Form 10-K.
As of March 26, 2021, there were 8,093,199 shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2021 annual meeting of stockholders (the “2021 Proxy Statement”) are incorporated by reference into Part III of
this Annual Report on Form 10-K where indicated. The 2021 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the
fiscal year to which this report relates.
Glossary
Cautionary Statement Regarding Forward-Looking Information
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
TABLE OF CONTENTS
PART I
PART II
Selected Financial Data
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
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.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplemental Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 15. Exhibits, Financial Statements and Schedules
Item 16.
Signatures
Form 10–K Summary
Table of Contents
PART IV
2
GLOSSARY
Page
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7
20
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46
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46
47
47
48
55
56
77
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84
The following are abbreviations and definitions of certain terms used in this Report, which are commonly used in the pharmaceutical industry:
“ACA” means the Patient Protection and Affordable Care Act, often shortened to the Affordable Care Act, nicknamed Obamacare, which is a U.S. federal statute which
provides numerous rights and protections that make health coverage fairer and easier to understand, along with subsidies (through “premium tax credits” and “cost-sharing
reductions”) to make it more affordable. The law also expands the Medicaid program to cover more people with low incomes.
“ADR” means Authorized Distributor of Record. Under current federal law, an ADR means a distributor with whom a manufacturer has established an ongoing
relationship to distribute such manufacturer’s products.
“ANDA” means an abbreviated new drug application which contains data which is submitted to the FDA for the review and potential approval of a generic drug product.
“CMS” means the Centers for Medicare & Medicaid Services, which is a federal agency within the HHS that administers the Medicare program and works in partnership
with state governments to administer Medicaid.
“CSA” means the Controlled Substances Act, the statute establishing federal U.S. drug policy under which the manufacture, importation, possession, use, and
distribution of certain substances is regulated.
“DEA” means the Drug Enforcement Administration, a United States federal law enforcement agency under the United States Department of Justice, tasked with
combating drug trafficking and distribution within the United States.
“DQSA” means the Drug Quality and Security Act which is a law that amended the FFDCA to grant the FDA more authority to regulate and monitor the manufacturing of
compounded drugs.
“EUA” means an Emergency Use Authorization filed with the FDA. Under section 564 of the FFDCA, the FDA Commissioner may allow unapproved medical products or
unapproved uses of approved medical products to be used in an emergency to diagnose, treat, or prevent serious or life-threatening diseases or when there are no adequate,
approved, and available alternatives.
“FDA” means U.S. The Food and Drug Administration, which is a federal agency of the United States Department of Health and Human Services. The FDA is responsible
for protecting the public health by ensuring the safety, efficacy, and security of human and veterinary drugs, biological products, and medical devices; and by ensuring the safety
of U.S. food supply, cosmetics, and products that emit radiation.
“FDAAA” means the Food and Drug Administration Amendments Act of 2007 which reviewed, expanded, and reaffirmed several existing pieces of legislation regulating
the FDA.
“FFDCA” means the Federal Food, Drug and Cosmetic Act, which is a set of U.S. laws passed by Congress in 1938 giving authority to the FDA to oversee the safety of
food, drugs, medical devices, and cosmetics.
“Generic drugs” are copies of brand-name drugs that have exactly the same dosage, intended use, effects, side effects, route of administration, risks, safety, and strength
as the original drug.
“Health plan” means health insurance coverage provided by an individual or group that provides or pays the cost of medical care. Health plans can be provided by public
(Medicaid) or private (an employer) entities.
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“HHS”, the U.S. Department of Health and Human Services also known as the Health Department, is a cabinet-level department of the U.S. federal government with the
goal of protecting the health of all Americans and providing essential human services.
“HIPAA” means the Health Insurance Portability and Accountability Act of 1996, which has the goal of making it easier for people to keep health insurance, protect the
confidentiality and security of healthcare information and help the healthcare industry control administrative costs.
“Individually identifiable health information” is defined by HIPPA to mean information that is a subset of health information, including demographic information collected
from an individual, and: (1) is created or received by a health care provider, health plan, employer, or health care clearinghouse; and (2) relates to the past, present, or future
physical or mental health or condition of an individual; the provision of health care to an individual; or the past, present, or future payment for the provision of health care to an
individual; and (a) that identifies the individual; or (b) with respect to which there is reasonable basis to believe the information can be used to identify the individual.
“Medicaid” is a federal and state health insurance program in the U.S. that helps with medical costs for some people with limited income and resources. Medicaid also
offers benefits not normally covered by Medicare, including nursing home care and personal care services.
“Medicare” is a national health insurance program in the U.S. It primarily provides health insurance for Americans aged 65 and older, but also for some younger people
with disability status as determined by the Social Security Administration, as well as people with end stage renal disease and amyotrophic lateral sclerosis (ALS or Lou Gehrig’s
disease).
“NDC” means a National Drug Code, a unique 10-digit, 3-segment number. It is a universal product identifier for human drugs in the United States. The code is present on
all non-prescription (OTC) and prescription medication packages and inserts in the U.S. The 3 segments of the NDC identify the labeler, the product, and the commercial package
size.
“PBM” means a Pharmacy Benefits Manager. In the United States, a PBM is a third-party administrator of prescription drug programs for commercial health plans, self-
insured employer plans, Medicare Part D plans (prescription drug plans), the Federal Employees Health Benefits Program, and state government employee plans.
“PDMA” means the Prescription Drug Marketing Act of 1987. The PDMA establishes legal safeguards for prescription drug distribution to ensure safe and effective
pharmaceuticals and is designed to discourage the sale of counterfeit, adulterated, misbranded, subpotent, and expired prescription drugs.
“Pedigree tracking laws” mean laws which help ensure the integrity of the U.S. drug supply chain through the use of drug pedigrees, verifiable written or electronic
documents that track each move in a drug’s journey from manufacturer to patient.
“PPE” means personal protective equipment, which is worn to minimize exposure to hazards that cause serious workplace injuries and illnesses. When used below, PPE
typically refers to protective equipment used by medical personnel, including masks, sanitizers and gloves.
“Rebates” these are provided by manufacturers and are typically based on the ability of a payer to move market share for the manufacturer’s product. Rebates are
confidential.
“SNI” means Serialized Numerical Identifier. Pursuant to FDA requirements, a product’s SNI has to include the item’s NDC and unique Serial Number (SN).
“Wholesaler” typically, the wholesaler is the first purchaser of a drug product – direct from the manufacturer. Wholesalers buy large quantities and then resell either direct
to provider-purchasers (like a large health system, pharmacy or pharmacy chain), or resell to smaller, regional distributors for regional or local distribution to retail pharmacies and
hospitals.
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4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K (this “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some
cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,”
“potential,” “predict,” “project,” “should,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or
results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties
and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-
looking statements in this Report. These factors include those set forth below under “Summary Risk Factors” and those disclosed under “Risk Factors”, below.
You should read the matters described and incorporated by reference in “Risk Factors” and the other cautionary statements made in this Report, and incorporated by
reference herein, as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in
this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law,
we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Summary Risk Factors
We face risks and uncertainties related to our business, many of which are beyond our control. In particular, risks associated with our business include:
● We have been adversely affected by COVID-19 and may continue to be adversely affected by COVID-19;
● We were recently unprofitable, we have recently generated net losses, and we may incur losses in the future;
● We may need additional financing in the future, which may not be available on favorable terms, if at all;
● We may not be able to manage our future growth;
● Many of our competitors are better established and have resources significantly greater than ours;
● We will need to expand our member base or our profit margins to attain profitability;
● We face risks associated with our operations within the pharmaceutical distribution market;
● We are dependent on our current management;
● We rely on third party contracts, which may not be renewed or may be terminated;
● We are currently facing and may in the future face difficulties in sourcing products and inventory due to a variety of causes;
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● We have in the past, and may in the future, not been able to sell our inventory, at or above the price we acquired such inventory for, have in the past, and may in
the future, be forced to write-down inventory;
● We may not receive products or receive refunds for deposited amounts and may experience losses in connection with such deposits;
● We may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could require us to pay significant
damages and limit our ability to operate;
● Our business and operations depend on the proper functioning of information systems, critical facilities and distribution networks and a disruption, cyber-attack,
failure or destruction of such networks, systems, or technologies may disrupt our business or result in liability;
● There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could subject the
Company to significant reputational, financial, legal and operational consequences;
● We face risks associated with our business in the telehealth market, including risks associated with legal challenges, relationships with third parties and affiliated
professionals, our network of qualified providers, competition for services; new technologies, failure to develop widespread brand awareness and regulatory
risks;
● The health passport market may not achieve and sustain high levels of demand, consumer acceptance and market adoption;
● Our certificate of incorporation limits the liability of our officers and directors and provides for indemnification rights;
● We incur significant costs to ensure compliance with U.S. and NASDAQ Capital Market reporting and corporate governance requirements;
● We may not be able to comply with NASDAQ’s continued listing standards;
● Regulatory changes that affect our distribution channels could harm our business;
● Healthcare fraud laws are often vague and uncertain, exposing us to potential liability;
● New and expanded laws or regulations could have a material adverse effect on our business operations, cash flows or future prospects;
● The public health crisis involving the abuse of prescription opioid pain medication could have a material negative effect on our business;
● Consolidation in the U.S. healthcare industry may negatively impact our results of operations;
● We have identified material weaknesses in our internal control over financial reporting and controls and procedures;
● There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price of our comment stock may
continue to be volatile;
● Stockholders may experience dilution to future equity sales, the exercise or conversion of outstanding convertible securities or future transactions;
● Our Chief Executive Officer and President are our two largest stockholders and, as a result, they can exert control over us and have actual or potential interests
that may differ from yours;
● Risks associated with the JOBS Act and our status as an emerging growth company;
● Risks associated with future acquisitions, including unknown liabilities and difficulty integrating such acquisitions;
● Cyber security attacks and website problems; and
● Claims, litigation, government investigations, and other proceedings that may adversely affect our business and results of operations.
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PART I
ITEM 1.
BUSINESS
INTRODUCTION
This information included in this Annual Report on Form 10-K should be read in conjunction with the consolidated financial statements and related notes in “Item 8.
Financial Statements and Supplemental Data” of this Report.
Please see the “Glossary” above for a list of abbreviations and definitions used throughout this Report.
Our logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service marks that are the property of
others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may appear without the ®, ™ and SM symbols. References to our trademarks,
tradenames and service marks are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable
licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the
use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
The market data and certain other statistical information used throughout this Report are based on independent industry publications, reports by market research firms or
other independent sources that we believe to be reliable sources. Industry publications and third-party research, surveys and studies generally indicate that their information has
been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosures
contained in this Report, and we believe these industry publications and third-party research, surveys and studies are reliable. While we are not aware of any misstatements
regarding any third-party information presented in this Report, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and
uncertainties, and are subject to change based on various factors, including those discussed under the section entitled “Risk Factors” beginning on page 19 of this Report. These
and other factors could cause our future performance to differ materially from our assumptions and estimates. Some market and other data included herein, as well as the data of
competitors as they relate to Trxade Group, Inc., is also based on our good faith estimates.
Our fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31, June 30, and September 30th, the first quarter,
second quarter and third quarter, respectively, with the quarter ending December 31st being referenced herein as our fourth quarter. Fiscal 2020 means the year ended December 31,
2020, whereas fiscal 2019 means the year ended December 31, 2019.
Unless the context requires otherwise, references to the “Company,” “we,” “us,” “our,” “Trxade”, “Trxade Group” and “Trxade Group, Inc.” refer specifically to Trxade
Group, Inc. and its consolidated subsidiaries.
In addition, unless the context otherwise requires and for the purposes of this Report only:
● “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
● “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and
● “Securities Act” refers to the Securities Act of 1933, as amended.
Where You Can Find Other Information
We file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the
SEC’s website at www.sec.gov and are available for download, free of charge, soon after such reports are filed with or furnished to the SEC, on the “NASDAQ: MEDS,” “SEC
Filings” page of our website at www.rx.trxade.com. Copies of documents filed by us with the SEC are also available from us without charge, upon oral or written request to our
Secretary, who can be contacted at the address and telephone number set forth on the cover page of this Report. Our website address is www.rx.trxade.com. The information on, or
that may be accessed through, our website is not incorporated by reference into this Report and should not be considered a part of this Report.
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CORPORATE AND ORGANIZATIONAL HISTORY
Background of XCEL
7
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 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.”
Background of Trxade
PharmaCycle LLC, a Nevada limited liability company (“PharmaCycle”), was formed in August 2010 by Prashant Patel, our President, 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 by cash capital contributions from Messrs. Suren Ajjarapu and Patel, our Chief Executive
Officer and President, respectively. Immediately following the Nevada-Florida Merger, Messrs. Ajjarapu and Patel collectively owned 99% of Trxade Nevada. After 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 (prior to the reverse split
discussed below and the Reverse Stock Split (defined below)) 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 (prior to the reverse split discussed below and the Reverse Stock Split).
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 continuing as the surviving corporation. The Merger closed on January 8, 2014. Under the terms of the Merger Agreement, we amended
our certificate of incorporation and changed our name to “Trxade Group, Inc.,” and changed our trading symbol to “TRXD”.
8
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Recapitalization of Common Stock by a Reverse Split and Increase of Authorized Shares of Stock
We also reversed our issued and outstanding stock at the ratio of one for one thousand (1:1,000) shares effective upon the closing of the Merger (the “Merger Reverse
Split”). In connection with the Merger Reverse Split, 104,160,000 outstanding shares of our common stock, including the 80,000,000 shares held by Trxade Nevada, were exchanged
for 104,160 post-Merger Reverse Split shares of common stock. As a result of the Merger, Trxade Nevada stockholders holding 28,800,000 shares of common stock and 670,000
shares of Series A Preferred Stock converted their shares on a 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, 100,000 shares of our common stock (on a post-Reverse Split basis and taking into account the Reverse Stock Split (discussed
below)) 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 amounted
to 13,334 shares (on a post-Reverse Split basis and taking into account the Reverse Stock Split), reverted to treasury stock of the Company. Except as otherwise disclosed, the
share amounts in the paragraph above have not been adjusted for the Merger Reverse Split or the Reverse Stock Split.
February 2020 Reverse Stock Split and NASDAQ Capital Market Listing
On October 9, 2019, our Board of Directors, and on October 15, 2019, stockholders holding a majority of our outstanding voting shares, approved resolutions authorizing a
reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-ten (1-for-10), and provided authority to our Board of Directors
to select the ratio of the reverse stock split in their discretion (the “Stockholder Authority”). On February 12, 2020, the Board of Directors of the Company approved a stock split
ratio of 1-for-6 (“Reverse Stock Split”) in connection with the Stockholder Authority and the Company filed a Certificate of Amendment with the Secretary of Delaware to affect the
Reverse Stock Split. The Reverse Stock Split became effective at 12:01 a.m. Eastern Standard Time on February 13, 2020. The Reverse Stock Split was completed in order to allow us
to meet the initial criteria of The NASDAQ Capital Market.
Our common stock was approved for listing on The NASDAQ Capital Market under the symbol “MEDS”, on February 13, 2020.
Subsidiaries
We own 100% of Trxade Florida. 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 commerce 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. Suren Ajjarapu, our CEO, 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 now serves as our logistics company for
pharmaceutical distribution.
We own 100% of Community Specialty Pharmacy, LLC, an independent retail specialty pharmacy with a focus on specialty medications.
We own 100% of Alliance Pharma Solutions, LLC, a Florida limited liability company, which was founded in January 2018 (“ Alliance”). Alliance previously owned 30% of
SyncHealth MSO, LLC (“SyncHealth”) which was part of a joint venture formed in January 2019 with PanOptic Health, LLC (“PanOptic”) with the goal of enabling independent
retail pharmacies to better compete with large national pharmacies on pricing, distribution and logistics. We did not realize any income from the joint venture and we terminated the
joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned the 30% ownership of SyncHealth back to PanOptic. As of February 1, 2020, we own
no equity in SyncHealth and only the terms of the agreements relating to confidentiality, non-solicitation and each party’s obligation to cease use of the other party’s intellectual
property survive the termination.
We own 100% of Bonum Health, LLC, a Delaware limited liability company which owns our “Bonum Health Hub” assets and operations as discussed in further detail
below.
We previously owned 100% of PharmCentrix, LLC, a Delaware limited liability company which had no revenue in 2020 and was dissolved in December 2020.
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We own 100% of MedCheks, LLC, a Delaware limited liability company which was formed in January 2021 and is a patient-centered, digital, precision healthcare platform
that lets patients consolidate and control their health data via a digital Health Passport. The digital Health Passport allows users to share their health profile, tests and vaccinations
simply and safely. Secured in a blockchain, the Health Passport includes health and vaccination status verification via a QR code (a two-dimensional machine-readable optical
label), which is available for travel, entry into stadiums, concert venues, events, offices, industrial plants, warehouses, and other physical access points. MedCheks Health
Passport stores all of a user’s health records securely in one place.
Acquisition of Community Specialty Pharmacy, LLC
On October 15, 2018, the Company entered into and consummated the purchase of 100% of the equity interests of Community Specialty Pharmacy, LLC, a Florida limited
liability company, (“CSP”), pursuant to the terms and conditions of the Membership Interest Purchase Agreement, entered into by and among the Company as the buyer, and CSP,
and Nikul Panchal, the equity owner of CSP, a non-executive officer of the Company (collectively, the “Seller”). The purchase price for the 100% equity interest in CSP was $300,000
in cash, a promissory note issued by the Company in the amount of $300,000, and warrants to purchase 67,585 shares of common stock of the Company (on a post-Reverse Split
basis and taking into account the Reverse Stock Split) of which 33% of such warrants were revocable by the Company prior to October 15, 2019 (but were not revoked); 33% were
revocable by the Company prior to October 15, 2020 (but were not revoked); and the remaining 33% of such warrants are revocable by the Company prior to October 15, 2021,
which are exercisable for eight (8) years from the issuance date at a strike price of $0.06 per share.
SyncHealth MSO, LLC Joint Venture
On January 17, 2019, the Company and Alliance Pharma Solutions, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (hereafter
“Alliance,” with Alliance and Trxade referred to collectively herein as the “Trxade Parties”), entered into a transaction effective as of January 17, 2019 with PanOptic Health, LLC, a
Delaware limited liability company (“PanOptic”), to create a new entity, SyncHealth MSO, LLC (“SyncHealth”) as part of a joint venture to enable independent retail pharmacies to
better compete with large national pharmacies on pricing, distribution and logistics. As part of the transaction Alliance owned 30% of SyncHealth. We did not realize any income
from the joint venture and we terminated the joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned the 30% ownership of SyncHealth back
to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of the agreements relating to confidentiality, non-solicitation and each party’s obligation
to cease use of the other party’s intellectual property survive the termination.
Bonum Health Asset Acquisition
On October 23, 2019 (the “Closing Date”), Bonum Health, LLC, a Delaware limited liability company, and a then newly formed wholly-owned subsidiary of the Company
(“Bonum Health”) entered into an Asset Purchase Agreement with Bonum Health, LLC, a Florida limited liability company (“ Seller”) and Hardikkumar Patel, the sole member of the
Seller (the “Member”). Pursuant to the Asset Purchase Agreement, the Company (through Bonum Health) acquired from the Seller, certain specified assets and certain specified
contracts associated with the assets of the Seller’s operation as a telehealth service provider (the Tele Meds Platform)(the “Assets”). Included with the acquisition of the Assets,
were contracts (relating to the Assets), intellectual property for the Bonum Health Tele Medicine software & Technology and personal computers. The Company agreed to provide
the Seller consideration equal to 41,667 shares of restricted common stock of the Company at the closing (the “Closing Shares”), and the Seller had the right to earn up to an
additional 108,334 shares of restricted common stock of the Company in the event certain milestones were met within the first anniversary of the Closing date, none of which were
met.
The Asset Purchase Agreement includes a three year non-compete requirement, prohibiting the Seller and the Member from competing against the Assets, customary
representations and indemnification obligations, subject to a $25,000 minimal claim amount and certain limitations on liability disclosed in the Asset Purchase Agreement.
Subsequent to the acquisition, the Company determined that the assets were not usable and wrote off the value of the assets amounting to approximately $369,000.
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Our Principal Products and Services and their Markets.
10
BUSINESS OF TRXADE
Trxade.com is a web-based pharmaceutical marketplace engaged in promoting and enabling commerce among independent pharmacies and large pharmaceutical suppliers
nationally. Our marketplace has hundreds of suppliers providing over 20,000 branded and generic drugs available for purchase by pharmacists. We serve approximately 11,800
registered independent pharmacies, providing access to Trxade’s proprietary pharmaceutical database, data analytics regarding medication pricing, and manufacturer return
policies. We generate revenue from these services 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, 2020, and 2019, were from platform revenue generated on www.rx.trxade.com and product sales through Integra Pharma Solutions, LLC. For additional information,
please visit us at www.trxadegroup.com, www.rx.trxade.com, www.bonumhealth.com, www.comsprx.com, and www.rxintegra.com. Information on our websites is not incorporated
by reference into this Form 10-K.
Status of any publicly announced new products or services.
We have a number of products and services still in development, which are described below.
InventoryRx.com. InventoryRx, launched in the first quarter of 2014, is a web-based pharmaceutical exchange platform where wholesalers can buy and sell pharmaceuticals
or over-the-counter medications with each other in a systematized online sales platform. The site offers these trading partners greater product availability and pricing transparency.
The site may also substantially improve our customers buying efficiency and lower their cost of goods on a continuous basis. This product is built into the Trxade.com platform
and, accordingly, we have not generated any independent revenue from this product.
Pharmabayonline. We formed Pharmabayonline to provide proprietary pharmaceutical data analytics and governmental reimbursement benchmarks analysis to United
States based independent pharmacies and pharmaceutical databases.
RxGuru. Our RxGuru application was launched in the first quarter of 2014 and underscores our commitment to deliver timely information to our customers at the moment
before purchase. Our industry leading price prediction model “RxGuru” integrates product insight into pharmacy acquisition benchmarks (“PAC”) to ascertain trends and pricing
variances which result in significant purchasing opportunities. “RX Guru” helps to predict prices and affords our members an opportunity continuously to benefit from real price
purchasing opportunities that are often concealed from the rest of the industry. This product is built into the Trxade.com platform and, accordingly, this application works in
conjunction with the Trxade platform but, to date, has not generated any independent revenue.
Integra Pharma Solutions, LLC. Integra is intended to serve as our logistics company for pharmaceutical distribution.
Community Specialty Pharmacy, LLC. We acquired Community Specialty Pharmacy, LLC, a Florida limited liability company (“ CSP”), on October 15, 2018. CSP is an
accredited pharmacy located in St. Petersburg, Florida. CSP has a focus on specialty medications. The company operates with an innovative pharmacy model which offers home
delivery services to any patient thereby providing convenience.
Delivmeds.com. Delivmeds.com was launched in late 2018 as a consumer-based app to provide delivery of pharmaceutical products associated with Alliance Pharma
Solutions, LLC. To date, we have not generated any revenue from this product.
Trxademso. Trxademso technology was developed in early 2019 as part of the SyncHealth MSO, LLC joint venture to develop technology that could potentially assist
independent retail pharmacies to compete better with large national pharmacies on prescription generation workflow optimization, pricing, distribution and logistics. We did not
realize any income from the joint venture and we terminated the joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned the 30% ownership
of SyncHealth back to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of the agreements relating to confidentiality, non-solicitation and each
party’s obligation to cease use of the other party’s intellectual property survive the termination.
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Trxade Prime. Trxade Prime allows pharmacy members on the Trxade platform to process, consolidate and ship purchase orders that are placed directly with Trxade
suppliers via the Trxade Prime service. This is at no cost, with the goal of offering a single tool with one low order minimum, one invoice, one package and one delivery from
multiple quality wholesalers and distributors. Revenue has been generated from this service though our Integra subsidiary, which provides the consolidation of the orders.
Bonum Health Hub. The “Bonum Health Hub”, a self-enclosed, free standing virtual examination room, was launched by the Company’s wholly-owned Bonum Health,
LLC subsidiary, in November 2019 and was expected to be operational in April 2020; however, due to the COVID-19 pandemic, at present the Company does not anticipate
installations moving forward until 2021 at the earliest. The hub is a Health Insurance Portability and Accountability Act (HIPPA)-compliant booth planned to be placed in various
independent retail pharmacies in rural and urban areas to provide care for patients that otherwise would not be able to afford primary or collaborative care. Each “Bonum Health
Hub” is expected to feature an online interface that will expand the power of the Bonum Health application into a digital, face-to-face platform that brings patients and physicians
eye-to-eye in a fully secure, private setting. This will allow for more substantial and effective dialogue about sensitive conditions and other collaborative care concerns. The
“Bonum Health Hubs” is planned to include a screen for two-way video communication, the necessary medical equipment for the services available, and a table and chair for in-
person consultations. The Health Hubs will be compatible with the “Bonum Health app”, which provides an overall healthcare experience comparable to a Primary Care practitioner,
and an online portal as a personal electronic medical record and scheduling system. Following the results of the Company’s initial pilot program of the “Bonum Health Hub” and
the effects of the COVID-19 pandemic, the Company is developing new plans to expand such hubs into its network of independent pharmacies. To date, we have not generated
any revenue from this product.
Bonum+ Business to Business (B2B). Bonum+ bundles telehealth, a COVID-19 risk assessment tool and a Personal Protective Equipment (PPE) purchasing tool, through
a secure mobile dashboard for corporate clients. The B2B platform eases pressure on employees who are required to report any relevant health issues daily, centralizing
communication and contact tracing to deliver risk scores. This allows employers to monitor employee COVID-19 risk profiles and streamlines the ordering of new PPE as needed.
An integrated artificial intelligence (AI) tool offers health recommendations and connects employees with board certified physicians, as needed. To date, we have not generated
any revenue from this product.
MedCheks Health Passport. The Health Passport is a patient-centered, digital, precision healthcare platform that lets patients consolidate and control their health data via
a digital Health Passport and allows them to share their health profile, tests and vaccinations simply and safely. Secured in a blockchain, the Health Passport includes health and
vaccination status verification via a QR code, which is available for travel, entry into stadiums, concert venues, events, offices, industrial plants, warehouses, and other physical
access points. The Passport stores all of a user’s health records securely in one place. The platform is under development and we have not generated any revenue from this
product to date.
All of our product offerings are focused on the United States markets. Some products are restricted just to certain states, depending upon the various applicable state
regulations and guidelines pertaining to pharmaceuticals, particularly, and drug businesses, generally. Our services are distributed through our online platform.
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Organizational Structure
The diagram below depicts our current organizational structure:
12
Trxade Group, Inc.
The Pharmaceutical Industry
According to the NCPA 2020 Digest Report, United States pharmaceutical companies comprise a burgeoning estimated $685 billion industry by 2023, consisting of over
65,000 pharmacy facilities. Management believes that few platforms are 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 in branded medications lost their patent protection from 2008 to 2018,
according to an article in Drug Topics from August 2004, called “Big Pharma uses effective strategies to battle generic competitors”, by Martin Sipkoff), have enabled smaller
suppliers’ access to an increasing number of medications at highly discounted prices. The market is slowly changing towards one where medications will become commoditized
and 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 National Drug Code (the “NDC”) standard. The NDC mark is a unique product identifier used in the United
States for drugs intended for human use.
Competitive Business Conditions, Our competitive position in our Industry, and our Methods of Competition.
We expect to face competition from the three large ADR distributors (McKesson, Cardinal Health and AmerisourceBergen), other pharmaceutical distributors, buying
groups, software products, and other start-up companies. Most of our competitors’ operations have substantially greater financial- and manufacturer-backed resources, longer
operating histories, greater name recognition, and more established relationships in the industry.
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Other Start-up Companies Which Provide Competitive Services.
13
We have identified start-ups that provide for supplier-pharmacy trading such as PharmaBid, RxCherrypick, PharmSaver, MatchRx 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. Additional companies target “direct-to-consumer” pharmacy deliveries, including Amazon.com’s PillPack, Capsule and GetRoman.com.
Buying Groups.
Buying Groups provide discounted prices to their members by negotiating better pricing with one primary wholesaler, while charging administrative fees generally ranging
from 3 to 5 percent. Some Buying Groups are structured like co-operatives (such as Independent Pharmacy Cooperative (IPC) and American Pharmacy Cooperative, Inc. (APCI))
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.
Management does not believe Buying Groups 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 to varying degrees at different levels. SureCost, for example, provides inventory management software
enabling pharmacies to comply with primary supplier contracts. This software is fee-based and requires training.
Pharmacies may be reluctant to buy pharmaceuticals on the internet due to the historical negativity and uncertainty with respect to the origin and purity of drugs
purchased off the web. 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 online 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. 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.
Telehealth Providers
We also anticipate facing competition in the telehealth industry (in connection with our planned “Bonum Health Hubs”) from current and future health care companies in
the telehealth market including, Teladoc Health, Inc., MDLive, Inc., American Well Corporation and Grand Rounds, Inc., among other smaller industry participants.
Sources and Availability of Raw Materials; Principal Suppliers.
Trxade is a web-based technology platform. Because we are not a manufacturing company, we do not need any raw materials. Our module on the platform is drug supplier-
to-retailer. We bring buyers and sellers together on this platform. Our suppliers include National Apothecary Solutions, Integral RX, and South Pointe Wholesale, Inc.
Dependence on One or More Major Customers.
As of the date of this filing, we have approximately 11,800 registered independent pharmacies and over 30 pharmaceutical suppliers as customers, with a market potential
of approximately 21,000 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 believe those entities are satisfied with their business relationship with Trxade, if our buying group and two or three of the largest wholesalers decided no
longer to do business with Trxade, the resulting supplier void would materially and adversely affect our competitiveness in the marketplace.
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Intellectual Property.
14
Although we believe that our name and brand are protected by applicable state common law trademark laws, we do not currently have any patents, concessions, licenses,
royalty agreements, or franchises, provided that we do currently maintain a number of registered trademarks and our pharmaceutical pricing benchmarks, PAC. 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 Products and Services.
We are required to hold business licenses and to follow applicable state and federal government regulations detailed herein. In October 2018, we acquired Community
Specialty Pharmacy, LLC, an accredited independent retail pharmacy with a focus on specialty medications, which requires state approval, which have been obtained in 34 states.
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 which went into effect in 2018, requires 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.
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.
California, Florida, Nevada, New Mexico and Indiana define the normal distribution channel to not include the lateral sales of pharmaceuticals between wholesalers. The
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.
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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, Integra Pharma Solutions, LLC, 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.
Potential New Regulations
In addition to the above, regulatory mandates in response to certain unexpected events, such as viral outbreaks, could negatively impact sales. For example, in December
2019 an outbreak of a coronavirus surfaced in China and has resulted, and may continue to result, in governments around the world adopting restrictions on public gatherings,
travel and restrictions on companies’ (including our) ability to conduct normal business operations.
Price gouging may be an issue in the coming months due to the continued effects of the coronavirus and responses thereto; as of the date of this Report, 34 states have
enacted price gouging laws of one kind or another. The laws vary from state to state, but one constant throughout is a prohibition to charge “excessive” or “unconscionable”
prices for consumer goods. Some states define “excessive” or “unconscionable” while others define what makes a prima facia case for price gouging and what constitutes a prima
facia defense, shifting the burden of proof to the accuser. In almost all of the 34 states with price gouging laws on the books, a price is excessive or unconscionable if the price of a
good has increased, in some states by a certain percentage, over the price of the good prior to the onset of the abnormal disruption of the market. Some states have clearly
excepted from the price gouging definition a rise in prices caused by an increase in the merchant’s cost of delivering that good for sale – whether it be increased shipping costs,
gasoline prices or simply the cost of the good itself. Other states have less defined exceptions – Virginia for example only treats the fact of increased input costs as a merchant’s
prima facia defense to an accusation of price gouging. Several states except from the price gouging definition prices that do not exceed a normal margin (i.e., the merchant’s margin
immediately prior to the market disruption) PLUS 10%. In general, while the law may not specifically define what constitutes an “unconscionably excessive price,” the statutes
typically provide that a price may be “unconscionably excessive” if: the amount charged represents a “gross disparity” from the price such goods or services were sold or offered
for sale immediately prior to the onset of the abnormal disruption of the market. Merchants may provide evidence that justifies their higher prices were justified by increased costs
beyond their control. We will need to comply with the excessive price statutes; as of the date of this Report, we believe we were in compliance with all 34 states’ price gouging
laws.
U.S. Federal and State Fraud and Abuse Laws
Federal Stark Law
We are subject to the federal self-referral prohibitions, commonly known as the Stark Law. Where applicable, this law prohibits a physician from referring Medicare
patients to an entity providing “designated health services” if the physician or a member of such physician’s immediate family has a “financial relationship” with the entity, unless
an exception applies. The penalties for violating the Stark Law include the denial of payment for services ordered in violation of the statute, mandatory refunds of any sums paid
for such services, civil penalties, disgorgement and possible exclusion from future participation in the federally funded healthcare programs. A person who engages in a scheme to
circumvent the Stark Law’s prohibitions may be subject to fines for each applicable arrangement or scheme. The Stark Law is a strict liability statute, which means proof of specific
intent to violate the law is not required. In addition, the government and some courts have taken the position that claims presented in violation of the various statutes, including
the Stark Law can be considered a violation of the federal False Claims Act (described below) based on the contention that a provider impliedly certifies compliance with all
applicable laws, regulations and other rules when submitting claims for reimbursement. A determination of liability under the Stark Law could have a material adverse effect on our
business, financial condition and results of operations.
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Federal Anti-Kickback Statute
16
We are also subject to the federal Anti-Kickback Statute. The Anti-Kickback Statute is broadly worded and prohibits the knowing and willful offer, payment, solicitation
or receipt of any form of remuneration in return for, or to induce, (i) the referral of a person covered by Medicare, Medicaid or other governmental programs, (ii) the furnishing or
arranging for the furnishing of items or services reimbursable under Medicare, Medicaid or other governmental programs or (iii) the purchasing, leasing or ordering or arranging or
recommending purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other governmental programs. In addition, a person or entity does
not need to have actual knowledge of this statute or specific intent to violate it to have committed a violation. Moreover, the government may assert that a claim including items or
services resulting from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act, as discussed below. Violations of the
Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental programs as well as civil and criminal penalties and fines. Imposition of any of these
remedies could have a material adverse effect on our business, financial condition and results of operations.
False Claims Act
Both federal and state government agencies have continued civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies
and their executives and managers. Although there are a number of civil and criminal statutes that can be applied to healthcare providers, a significant number of these
investigations involve the federal False Claims Act. These investigations can be initiated not only by the government but also by a private party asserting direct knowledge of
fraud. Penalties for False Claims Act violations include fines, plus up to three times the amount of damages sustained by the federal government. A False Claims Act violation may
provide the basis for exclusion from the federally funded healthcare programs. In addition, some states have adopted similar fraud, whistleblower and false claims provisions.
State Fraud and Abuse Laws
Several states in which we operate have also adopted similar fraud and abuse laws as described above. The scope of these laws and the interpretations of them vary from
state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Some state fraud and abuse laws apply to items or services reimbursed by any
payor, including patients and commercial insurers, not just those reimbursed by a federally funded healthcare program. A determination of liability under such state fraud and
abuse laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Other Healthcare Laws
The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or
HITECH, and their implementing regulations, which we collectively refer to as HIPAA, established several separate criminal penalties for making false or fraudulent claims to
insurance companies and other non-governmental payors of healthcare services. Under HIPAA, these two additional federal crimes are: “Healthcare Fraud” and “False Statements
Relating to Healthcare Matters.” The Healthcare Fraud statute prohibits knowingly and recklessly executing a scheme or artifice to defraud any healthcare benefit program,
including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The False Statements
Relating to Healthcare Matters statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact by any trick, scheme or device or making any materially
false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. These provisions are intended to punish some of
the same conduct in the submission of claims to private payors as the federal False Claims Act covers in connection with governmental health programs.
In addition, the Civil Monetary Penalties Law imposes civil administrative sanctions for, among other violations, inappropriate billing of services to federally funded
healthcare programs and employing or contracting with individuals or entities who are excluded from participation in federally funded healthcare programs. Moreover, a person
who offers or transfers to a Medicare or Medicaid beneficiary any remuneration, including waivers of copayments and deductible amounts (or any part thereof), that the person
knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services may be
liable for civil monetary penalties for each wrongful act. Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid
beneficiaries can also be held liable under the Anti-Kickback Statute and civil False Claims Act, which can impose additional penalties associated with the wrongful act. One of the
statutory exceptions to the prohibition is non-routine, unadvertised waivers of copayments or deductible amounts based on individualized determinations of financial need or
exhaustion of reasonable collection efforts. Although this prohibition applies only to federal healthcare program beneficiaries, the routine waivers of copayments and deductibles
offered to patients covered by commercial payers may implicate applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services,
tortious interference with patient contracts and statutory or common law fraud.
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Jumpstart Our Business Startups Act
17
In April 2012, the Jumpstart Our Business Startups Act (“JOBS Act”) was enacted into law. The JOBS Act provides, among other things:
● Exemptions for “emerging growth companies” from certain financial disclosure and governance requirements for up to five years and provides a new form of financing to small
companies;
● Amendments to certain provisions of the federal securities laws to simplify the sale of securities and increase the threshold number of record holders required to trigger the
reporting requirements of the Exchange Act;
● Relaxation of the general solicitation and general advertising prohibition for Rule 506 offerings;
● Adoption of a new exemption for public offerings of securities in amounts not exceeding $50 million; and
● Exemption from registration by a non-reporting company of offers and sales of securities of up to $1,000,000 that comply with rules to be adopted by the SEC pursuant to
Section 4(6) of the Securities Act and exemption of such sales from state law registration, documentation or offering requirements.
In general, under the JOBS Act a company is an “emerging growth company” if its initial public offering (“IPO”) of common equity securities was affected after December
8, 2011 and the company had less than $1.07 billion of total annual gross revenues during its last completed fiscal year. A company will no longer qualify as an “ emerging growth
company” after the earliest of
(i)
the completion of the fiscal year in which the company has total annual gross revenues of $1.07 billion or more,
(ii)
the completion of the fiscal year of the fifth anniversary of the company’s IPO;
(iii) the company’s issuance of more than $1 billion in nonconvertible debt in the prior three-year period, or
(iv) the company becoming a “larger accelerated filer” as defined under the Exchange Act.
The JOBS Act provides additional new guidelines and exemptions for non-reporting companies and for non-public offerings. Those exemptions that impact the Company
are discussed below.
Financial Disclosure. The financial disclosure in a registration statement filed by an “emerging growth company” pursuant to the Securities Act, will differ from
registration statements filed by other companies as follows:
(i)
audited financial statements required for only two fiscal years (provided that “smaller reporting companies” such as the Company are only required to provide
two years of financial statements);
(ii) selected financial data required for only the fiscal years that were audited (provided that “smaller reporting companies” such as the Company are not required to
provide selected financial data as required by Item 301 of Regulation S-K); and
(iii) executive compensation only needs to be presented in the limited format now required for “smaller reporting companies”.
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However, the requirements for financial disclosure provided by Regulation S-K promulgated by the Rules and Regulations of the SEC already provide certain of these
exemptions for smaller reporting companies. The Company is a smaller reporting company. Currently a smaller reporting company is not required to file as part of its registration
statement selected financial data and only needs to include audited financial statements for its two most current fiscal years with no required tabular disclosure of contractual
obligations.
The JOBS Act also exempts the Company’s independent registered public accounting firm from having to comply with any rules adopted by the Public Company
Accounting Oversight Board (“PCAOB”) after the date of the JOBS Act’s enactment, except as otherwise required by SEC rule.
The JOBS Act further exempts an “emerging growth company” from any requirement adopted by the PCAOB for mandatory rotation of the Company’s accounting firm or
for a supplemental auditor report about the audit.
Internal Control Attestation. The JOBS Act also provides an exemption from the requirement of the Company’s independent registered public accounting firm to file a
report on the Company’s internal control over financial reporting, although management of the Company is still required to file its report on the adequacy of the Company’s
internal control over financial reporting.
Section 102(a) of the JOBS Act exempts “emerging growth companies” from the requirements in §14A(e) of the Exchange Act for companies with a class of securities
registered under the Exchange Act to hold stockholder votes for executive compensation and golden parachutes.
Other Items of the JOBS Act. The JOBS Act also provides that an “emerging growth company” can communicate with potential investors that are qualified institutional
buyers or institutions that are accredited to determine interest in a contemplated offering either prior to or after the date of filing the respective registration statement. The JOBS
Act also permits research reports by a broker or dealer about an “emerging growth company” regardless of whether such report provides sufficient information for an investment
decision. In addition, the JOBS Act precludes the SEC and FINRA from adopting certain restrictive rules or regulations regarding brokers, dealers and potential investors,
communications with management and distribution of research reports on the “emerging growth company’s” initial public offerings (IPOs).
Section 106 of the JOBS Act permits “emerging growth companies” to submit registration statements under the Securities Act on a confidential basis provided that the
registration statement and all amendments thereto are publicly filed at least 21 days before the issuer conducts any road show. This is intended to allow “emerging growth
companies” to explore the IPO option without disclosing to the market the fact that it is seeking to go public or disclosing the information contained in its registration statement
until the company is ready to conduct a roadshow.
Election to Opt Out of Transition Period. Section 102(b)(1) of the JOBS Act exempts “emerging growth companies” from being required to comply with new or revised
financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of
securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standard.
The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth
companies but any such election to opt out is irrevocable. The Company has elected not to opt out of the transition period.
Research and Development.
During the last two fiscal years, Trxade.com, InventoryRx.com, Pharmabayonline, DelivMeds, RxGuru and Bonum Health have been developed as proprietary software.
For the years ended December 31, 2020 and 2019, $662,726 and $647,140, respectively, was spent by the Company in technology activities, which were included in General and
Administrative expenses. None of these expenses were borne directly by customers.
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Cost of Compliance with Environmental Laws.
Our operations are subject to regulations under various federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of
pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs,
including cleanup costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under
environmental laws. We are not aware of any costs or effects of our compliance with environmental laws.
Employees
Currently, we have approximately 43 full-time employees. Our compensation programs are designed to align the compensation of our employees with performance and to
provide the proper incentives to attract, retain and motivate employees to achieve superior results. The structure of our compensation programs balances incentives earnings for
both short-term and long-term performance such as health insurance, paid time off and flexibility schedules. To empower employees to unleash their potential, we provide
onboarding training, development mentorship with C-suite executives, and one on one coaching. The Company believes that its rich culture of inclusion and diversity enables it to
create, develop and fully leverage the strength of its workforce to exceed customer expectation and meet its growth objectives. The Company places a high value on diversity and
inclusion.
We also utilize numerous outside consultants. Our future success will depend partially on our ability to attract, retain and motivate qualified personnel. We are not a party
to any collective bargaining agreements and have not experienced any strikes or work stoppages. We consider our relations with our employees to be satisfactory.
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 an increased demand for
certain generic pharmaceuticals.
ITEM 1A.
RISK FACTORS
You should be aware that there are substantial risks for an investment in our common stock. You should carefully consider these risk factors before you decide to
invest in our common stock.
If any of the following risks were to occur, such as our business, financial condition, results of operations or other prospects, any of these could materially affect our
likelihood of success. If that happens, the market price of our common stock, if any, could decline, and prospective investors would lose all or part of their investment in our
common stock.
Risks Related to Our Business Operations
Our business, financial condition and results of operations are subject to various risks and uncertainties, including those described below. This section discusses factors
that, individually or in the aggregate, 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 description of Risk
Factors is not a complete discussion of all potential risks or uncertainties applicable to our business.
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We have been, and may in the future be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental and social impact of which
is difficult to predict, which may significantly harm our business, prospects, financial condition and operating results.
During 2020 and continuing into 2021, there has been a widespread worldwide impact from the COVID-19 pandemic, and we have been, and may in the future be, adversely
affected as a result. Numerous government regulations and public advisories, as well as shifting social behaviors, have temporarily limited or closed non-essential transportation,
government functions, business activities, and person-to-person interactions, and the duration of such trends is difficult to predict. The outbreak of the COVID-19 coronavirus, the
global response to such coronavirus, including travel restrictions and quarantines that governments are instituting, has adversely affected our operations, may continue to have
an adverse effect on our operations, and/or may have a significant negative impact on our results of operations, the production of pharmaceuticals and our ability to timely obtain
pharmaceuticals for resale. Currently, we are experiencing reductions to, and interruptions in, the delivery of supply chain pharmaceuticals that are having a negative impact on our
wholesalers and certain technology outsourcing in India and the Philippines. Notwithstanding the above disruptions, our results of operations have not, to date, been materially
adversely affected by the pandemic. However, if we continue to experience production difficulties, quality control problems or further shortages in supply of pharmaceuticals in the
future, this could harm our business and results of operations, any of which could have a material adverse effect on our operations and the value of our securities. In addition,
employee sicknesses and remote working environments, and the potential negative effect thereof on productivity and internal controls, related to the coronavirus and the federal,
state and local responses to such virus, could materially impact our consolidated results for the year for 2021 and beyond. The COVID-19 outbreak could also restrict our access to
capital such as credit facilities and lead to material nonrecurring charges, write-downs, impairments and expenses. The Company is actively and continually monitoring the
pandemic’s effect on our businesses and endeavoring to adapt quickly in real time to meet the rapidly-changing demands of our Customers and Suppliers.
To mitigate the spread of COVID-19, we implemented travel restrictions and remote working arrangements for most of our employees in order to minimize physical contact,
and we implemented additional sanitation and personal protection measures. The Company’s employees started working remotely around March 17, 2020, and as a result,
productivity did not drop, if productivity drops it could impact revenues and profitability. The Company’s corporate office is closed through June 30, 2021, at the earliest, unless
the current situation improves. These measures might not fully mitigate COVID-19 risks to our workforce and we could experience unusual levels of absenteeism that might impair
operations and delay delivery of products. The COVID-19 pandemic affects product manufacturing, supply and transport availability and cost. The pandemic reduces demand for
some products due to delays or cancellations of elective medical procedures, consumer self-isolation and business closures, among other reasons. The COVID-19 pandemic also
influences shortages of some products, with product allocation resulting in delivery delays for customers. Additionally, as a result of the recent coronavirus outbreak, various
states have adopted price gouging laws. Our failure to comply with such laws and regulations could subject us to claims, penalties, fines or lawsuits.
We have been impacted and may be further impacted by COVID-19 as follows:
● As a result of COVID-19, various states have adopted price gouging laws. Our failure to comply with such laws and regulations could subject us to claims,
penalties, fines or lawsuits;
● Inventory price fluctuations as a result of supply and demand issues caused by COVID-19 have caused values of inventory to decrease, which has had a direct
impact on gross profit and has resulted in a direct write-off of inventory value;
● Payment Terms with customers may be altered or extended, which would have an impact on current ratios and cash flow; and
● There was a material impairment with respect to goodwill and may affect right-of-use assets as the evaluation of the long-term impact to delivery of service or
physical space assessments changes.
COVID-19 may cause further disruptions to our business, including, but not limited to:
● causing one or more of our customers to file for bankruptcy protection or shut down, including as a result of broader economic disruption;
● reducing health system or health plan subscription agreement fees generated, as well as visit fees, by customers or providers, as a result of funding constraints
related to loss of revenue or employment;
● negatively impacting collections of accounts receivable;
● negatively impacting our ability to facilitate the provision of our telehealth services due to unpredictable demand;
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● negatively impacting our ability to forecast our business’s financial outlook;
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● creating regulatory uncertainty on our telehealth services, if certain restrictions on reimbursement or the practice of medicine across state lines are reintroduced at
some point in the future; and
● harming our business, results of operations and financial condition.
The ongoing impacts of the pandemic may cause a general economic slowdown or recession in one or more markets, disruptions and volatility in global capital markets
and other broad and adverse effects on the economy, business conditions, commercial activity and the healthcare industry. The pandemic might impact our business operations,
financial position and results of operation in unpredictable ways that depend on highly-uncertain future developments, such as determining the effectiveness of current or future
government actions to address the public health or economic impacts of the pandemic. Any of these risks might have a materially adverse impact on our business operations and
our financial position or results of operations.
We were recently unprofitable, we have recently generated net losses, and we may incur losses in the future.
In 2017, we became profitable for the first time; in prior years, we were unprofitable and generated a net accumulated deficit of $8,120,113. Our current business model has
been in constant and improved development since 2010 with results that culminated in net income for the years ended December 31, 2017 and 2018 of $288,983 and $9,038,
respectively.
Revenues generated from our consolidated operations for the years ended December 31, 2020 and 2019 were $17,122,520 and $7,436,264, respectively.
We incurred a net loss of $2,536,051 for the year ended December 31, 2020, compared to a net loss of $284,428 for the year ended December 31, 2019. We may incur other
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 and execution of our business plan, and the regulatory environment affecting the distribution of pharmaceuticals in which we
operate.
If we do not obtain additional financing, our business, prospects, financial condition and results of operations will be adversely affected.
Management anticipates that we will require additional working capital in the future to pursue continued development of products, services, and marketing operations.
We cannot accurately predict the timing and amount of such capital requirements. Additional financing may not be available to us when needed or, if available, it may not be
obtained on commercially reasonable terms. If we are not able to obtain the necessary additional financing on a timely or commercially reasonable basis, we will be forced to delay
or scale down some or all of our development activities (or perhaps even cease the operation of our business).
We have no commitments for any additional financing, and such commitments may not be obtained on favorable terms, if at all. Any additional equity financing will be
dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants with respect to dividends, raising future capital, and other financial and operational
matters. If we are unable to obtain additional financing as needed, we may be required to reduce the scope of our operations or our anticipated expansion, which could have a
material adverse effect on us.
Our business is subject to rigorous regulatory and licensing requirements.
As described in greater detail in “Item 1. Business”, above, our business is highly regulated in the United States, at both the federal and state level, and in foreign
countries. If we fail to comply with regulatory requirements, or if allegations are made that we fail to comply, our results of operations and financial condition could be adversely
affected.
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To lawfully operate our businesses, we are required to obtain and hold permits, product registrations, licenses and other regulatory approvals from, and to comply with
operating and security standards of, numerous governmental bodies. For example, as a wholesale distributor of controlled substances, we must hold valid DEA registrations and
state-level licenses, meet various security and operating standards, and comply with the Controlled Substances Act (CSA). Failure to maintain or renew necessary permits, product
registrations, licenses or approvals, or to comply with required standards, could have an adverse effect on our results of operations and financial condition. We are also required to
comply with various state pricing gouging laws. Products that we source and distribute must also comply with regulatory requirements.
Noncompliance or concerns over noncompliance may result in suspension of our ability to distribute or import products, product bans, recalls or seizures, or criminal or
civil sanctions, which, in turn, could result in product liability claims and lawsuits, including class actions.
Many of our competitors are better established and have resources significantly greater than we have, which may make it difficult to fend off competition.
We expect to compete with the three largest ADR distributors (McKesson, Cardinal Health and AmerisourceBergen), in addition to other pharmaceutical distributors,
buying groups, software products, and various start-up drug 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 us. In addition, a number of these competitors may combine or form strategic
partnerships. As a result, our competitors may establish a more favorable footing in the pharmaceutical industry with respect 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 our industry, as they have contracts with approximately 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 channels 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. Management anticipates 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 or our profit margins to attain profitability.
Currently, we are paid an administrative fee of up to 6 percent of the buying price on the generic pharmaceuticals sold to pharmacies and up to 1 percent 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 are 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 ACA, which regulates some aspects of pharmaceutical spending and pricing. Management believes that we should
benefit substantially from our pricing and product 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 and distributors. On a larger scale, those margins are expected to 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 price trend analysis tools.
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There are inherent risks associated with our operations within the Pharmaceutical Distribution Market.
There are inherent risks involved with doing business within the pharmaceutical distribution market, including:
● Improperly manufactured products may prove dangerous to the end consumer.
● 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.
● Regulatory risks.
● Risk related to the loss of supply, or the loss of a number of suppliers, or in the delay of obtaining the supply of drugs.
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.
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, we 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.
We are dependent upon the efforts of our 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 in other businesses 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 of our officers or directors and, in particular, Mr. Prashant
Patel, our President or Mr. Suren Ajjarapu, our Chief Executive Officer and Chairman of the Company, could have a materially adverse effect upon our business and future
prospects.
The Company purchased, on behalf of and for the benefit of Mr. Suren Ajjarapu, a personal disability insurance policy providing for a $1,500,000 lump sum benefit,
payable to Mr. Ajjarapu, in the event of Mr. Ajjarapu’s disability. The premiums on such policy will be paid by the Company for so long as Mr. Ajjarapu is employed by the
Company.
The Company also obtained a $4,000,000 key-man life insurance policy on the life of Mr. Suren Ajjarapu, and a $1,500,000 lump sum disability insurance policy on Mr.
Ajjarapu, providing for the Company as beneficiary of such policies.
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While our management team has considerable information technology and entrepreneurial experience, none of our management was involved in pharmaceutical
distribution prior to joining the Company and, as such, did not have any technical experience in pharmaceutical distribution prior to joining us. In the event of the loss of Mr.
Ajjarapu’s services, we will seek to hire and retain a qualified professional. In the event of the loss of his services in connection with his death, upon obtaining funding from the
key-man life insurance, management intends to hire qualified and experienced personnel. We may be unable to find a suitable or qualified replacement for Mr. Ajjarapu and as such
our operations and/or prospects may suffer.
We rely on third party contracts.
We depend on others to provide products and services to us. 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 50 wholesalers and the nation’s largest buying group. Although we believe that 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.
Rapid technological change in our industry presents us with significant risks and challenges.
Our industry is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving industry standards. Our success will
depend on our ability to develop or to acquire and market new services. There is no guarantee that we will possess the resources, either financial or personnel, for the research,
design and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further,
there can be no assurance that technological advances by one or more of our competitors or future competitors will not result in our present or future applications and services
becoming uncompetitive or obsolete.
We are currently facing and may in the future face difficulties in sourcing products and inventory due to a variety of causes.
Due to the continued effects of the COVID-19 pandemic, the governmental responses to contain the spread of such virus, we have to date experienced issues with the
availability of certain products, resulting in product allocation and delivery delays, which has not to date, had a material adverse effect on our results of operations. We might also
experience difficulties and delays in sourcing products and inventory due to a variety of causes in the future, such as: difficulties in complying with the legal requirements for
export or import of pharmaceuticals or components; suppliers’ failures to satisfy production demand; manufacturing or supply problems such as inadequate resources; real or
perceived quality issues; and advanced deposits which are at risk of return if product is not delivered. Difficulties in product manufacturing or access to raw materials could result
in supplier production shutdowns, product shortages and other supply disruptions. Any of these risks might have a materially adverse impact on our business operations and our
financial position or results of operations.
We have in the past, and may in the future, not be able to sell our inventory, at or above the price we acquired such inventory for, and have in the past, and may in the
future, be forced to write-down inventory in the future.
Due to the supply and demand nature of our pharmaceutical business and the personal protective equipment (PPE) business, especially in connection with the rapidly
changing regulations, recommendations and guidance surrounding COVID-19, the inventory of products we have acquired, or may acquire in the future, has been/may be, acquired
at a cost higher than the price at which we may be able to resell such products. As a result, in the past we have, and in the future we may not be able to, make a profit on such sales
and have in the past and may in the future, have to write-down a significant portion of our inventory. During the years ended December 31, 2020 and 2019, write-down to market
value was $1,220,269 and $0, respectively.
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We may not receive products or receive refunds for deposited amounts and may experience losses in connection with such deposits.
We might not receive products or the return of funds on deposits that have been provided. We have two deposits outstanding as of the date of this report in an
aggregate amount of approximately $1,081,250. In the event we do not receive products for the deposited amounts or the return of our deposits (through litigation or otherwise),
this will cause us financial harm and result in us taking a significant charge on our financial statements and taking a loss in the amount of such deposit amount. Additionally, in the
future we may provide additional deposits for products which may be material, which deposits may not be refunded timely, if at all, and which products may not be delivered, or
may be defective or unusable. Any significant losses of deposited funds could have a material adverse effect on our financial condition, results of operations and the value of our
securities.
In July 2020, the Company’s wholly-owned subsidiary, Integra, entered into an agreement with Studebaker Defense Group, LLC (“Studebaker”) wherein Integra would pay
Studebaker a down payment of $500,000 and Studebaker would deliver 180,000 boxes of nitrile gloves by August 14, 2020. Integra wired the $500,000 to Studebaker, but to date,
Studebaker has not delivered the gloves or provided a refund of the deposit. In December 2020, we filed a complaint against Studebaker Defense Group, LLC in Florida state court,
Case No. 20-CA-010118 in the Circuit Court for the Thirteenth Judicial Circuit in Hillsborough County for, among other things, breach of contract. Studebaker did not answer the
complaint, nor did counsel for Studebaker file an appearance. Accordingly, in February 2021 the Company filed a default judgment; however, on March 22, 2021, counsel for
Studebaker filed an appearance and the Company anticipates that Studebaker will file a motion to vacate the judgment. A hearing on our motion for a default judgement has been
set for April 27, 2021. The Company anticipates that irrespective of the outcome of such hearing on April 27, 2021, the Company will prevail on the merits; and believes Studebaker
has the ability to satisfy a judgment.
In August 2020, Company’s subsidiary, Integra, entered into an agreement with Sandwave Group Dsn Bhd, wherein Integra would pay Sandwave a down payment of
$581,250 and Sandwave’s supplier, Crecom Burj Group SDN BHD (“Crecom”), would deliver 150,000 boxes of nitrile gloves within 45 days. Integra wired the $581,250 to Sandwave,
which in turn wired the purchase price to Crecom, which Crecom accepted; however, to date, Crecom has not delivered the nitrile gloves. Integra demanded return of its $581,250
and Crecom has acknowledged that Integra is entitled to a refund, but to date Crecom has failed to return Integra’s money. In February 2021, Integra filed a complaint against
Crecom in Malaysia: Case No. WA-22NCC-55-02/2021 in the High Court of Malaysia at Kuala Lumpur in the Federal Territory, Malaysia for the Malaysian equivalent of breach of
contract. Crecom filed an appearance on March 1, 2021; and Crecom had 14 days to file an answer, which they did not do; however, Crecom has filed a request for extension which
we are contesting. There is a hearing scheduled on April 20, 2021 to hear the matter and, in the meantime, we are preparing our Application for Summary Judgement. If a judgment is
entered against Crecom, the process of executing the judgment, and ultimately collecting, can take three to six months. The Company believes that it will prevail in the lawsuit filed;
and believes Crecom has the ability to satisfy a judgment, and the steps to enforce a judgment in Malaysia, if any, may be cumbersome, time consuming or costly.
Risks Relating to Our Information Systems; Technology and Intellectual Property
We may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could require us to pay significant
damages and limit our ability to operate.
Companies on the Internet and technology industries, and other patent and trademark holders seeking to profit from royalties in connection with grants of licenses, own
large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual
property rights. There may be intellectual property rights held by others, including issued or pending patents and trademarks, that cover significant aspects of our technologies,
content, branding or business methods. Any intellectual property claims against us, regardless of merit, could be time-consuming and expensive to settle or litigate and could
divert our management’s attention and other resources. These claims also could subject us to significant liability for damages and could result in our having to stop using
technology, content, branding or business methods found to be in violation of another party’s rights. We might be required or may opt to seek a license for rights to intellectual
property held by others, which may not be available on commercially reasonable terms, or at all. If we cannot license or develop technology, content, branding or business
methods for any allegedly infringing aspect of our business, we may be unable to compete effectively. Even if a license is available, we could be required to pay significant
royalties, which could increase our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which
could require significant effort and expense and be inferior. Any of these results could harm our operating results.
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Our business and operations depend on the proper functioning of information systems, critical facilities and distribution networks.
We rely on our and third-party service providers’ information systems for a wide variety of critical operations, including to obtain, rapidly process, analyze and manage
data to:
●
facilitate the purchase and distribution of inventory items from distribution centers;
●
●
●
●
receive, process and ship orders on a timely basis;
manage accurate billing and collections for thousands of customers;
process payments to suppliers; and
generate financial information.
Our business also depends on the proper functioning of our critical facilities and our distribution networks. Our results of operations could be adversely affected if our or
a service provider’s information systems, critical facilities or distribution networks are disrupted (including disruption of access), are damaged or fail, whether due to physical
disruptions, such as fire, natural disaster, pandemic or power outage, or due to cyber-security incidents, ransomware or other actions of third parties, including labor strikes,
political unrest and terrorist attacks. Manufacturing disruptions also can occur due to regulatory action, production quality deviations, safety issues or raw material shortages or
defects, or because a key product or component is manufactured at a single manufacturing facility with limited alternate facilities.
We rely on network and information systems and other technologies and a disruption, cyber-attack, failure or destruction of such networks, systems, or technologies
may disrupt our business or result in liability.
Network and information systems and other technologies, including those related to our computer, data back-up and processing systems, network management, customer
service operations and programming delivery, are critical to our business activities. Network and information systems-related events, such as computer hackings, cyber-attacks,
computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities, or
any combination of the foregoing, or power outages, natural disasters, terrorist attacks or other similar events, could result in a degradation or disruption of our services or damage
to our properties, equipment and data. These events also could result in large expenditures to repair or replace the damaged properties, networks or information systems or to
protect them from similar events in the future.
The risk of these systems-related events and security breaches occurring has intensified, in part because we maintain certain information necessary to conduct our
businesses in digital form stored on cloud servers. While we develop and maintain systems seeking to prevent systems-related events and security breaches from occurring, the
development and maintenance of these systems is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures
become more sophisticated. Despite these efforts, there can be no assurance that these events and security breaches will not occur in the future. Moreover, we may provide certain
confidential, proprietary and personal information to third parties in connection with our businesses, and while we obtain assurances that these third parties will protect this
information, there is a risk that this information could be compromised.
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If any of our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience
loss or corruption of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations. In
addition, we are currently making, and expect to continue to make, substantial investments in our information technology systems and infrastructure, some of which are significant.
Upgrades involve replacing existing systems with successor systems, making changes to existing systems, or cost-effectively acquiring new systems with new functionality.
Implementing new systems carries significant potential risks, including failure to operate as designed, potential loss or corruption of data or information, cost overruns,
implementation delays, disruption of operations, and the potential inability to meet business and reporting requirements. While we are aware of inherent risks associated with
replacing these systems and believe we are taking reasonable action to mitigate known risks, these technology initiatives may not be deployed as planned or may not be timely
implemented without disruption to our operations.
There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could subject the Company
to significant reputational, financial, legal and operational consequences.
The Company’s business requires it to use, transmit and store confidential information including, among other things, personally identifiable information (“PII”) with
respect to the Company’s customers and employees. The Company devotes significant resources to network and data security, including through the use of encryption and other
security measures intended to protect its systems and data. But these measures cannot provide absolute security, and losses or unauthorized access to or releases of confidential
information occur and could materially adversely affect the Company’s reputation, financial condition and operating results. The Company’s business also requires it to share
confidential information with third parties. Although the Company takes steps to secure confidential information that is provided to third parties, such measures are not always
effective and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect the Company’s reputation, financial condition and
operating results.
For example, the Company may experience a security breach impacting the Company’s information technology systems that compromises the confidentiality, integrity or
availability of confidential information. Such an incident could, among other things, impair the Company’s ability to attract and retain customers for its products and services,
impact the Company’s stock price, materially damage supplier relationships, and expose the Company to litigation or government investigations, which could result in penalties,
fines or judgments against the Company.
The Company has implemented systems and processes intended to secure its information technology systems and prevent unauthorized access to or loss of sensitive
data. As with all companies, these security measures may not be sufficient for all eventualities and may be vulnerable to hacking, employee error, malfeasance, system error, faulty
password management or other irregularities. In addition to the risks relating to general confidential information described above, the Company is also subject to specific
obligations relating to health data and payment card data. Health data is subject to additional privacy, security and breach notification requirements, and the Company can be
subject to audit by governmental authorities regarding the Company’s compliance with these obligations. If the Company fails to adequately comply with these rules and
requirements, or if health data is handled in a manner not permitted by law or under the Company’s agreements with healthcare institutions, the Company could be subject to
litigation or government investigations, may be liable for associated investigatory expenses, and could also incur significant fees or fines.
Under payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for associated investigatory expenses and
could also incur significant fees or fines if the Company fails to follow payment card industry data security standards. The Company could also experience a significant increase in
payment card transaction costs or lose the ability to process payment cards if it fails to follow payment card industry data security standards, which would materially adversely
affect the Company’s reputation, financial condition and operating results.
System errors or failures of our platform or services to conform to specifications could cause unforeseen liabilities or injury, harm our reputation and have a
material adverse impact on our results of operations.
The software and technology services that we operate are complex. As with complex systems offered by others, our software and technology services may contain errors,
especially when first introduced. Failure of a customer’s system to perform in accordance with our documentation could constitute a breach of warranty and could require us to
incur additional expense in order to make the system comply with the documentation. If such failure is not remedied in a timely manner, it could constitute a material breach under a
contract, allowing the client to cancel the contract, obtain refunds of amounts previously paid, or assert claims for significant damages.
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Risks Associated with Bonum Health Telemedicine Services
The telehealth market is immature and volatile.
The telehealth market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand, consumer acceptance and market
adoption. Our success will depend to a substantial extent on the willingness of our clients’ members or patients to use, and to increase the frequency and extent of their utilization
of, our services, as well as on our ability to demonstrate the value of telehealth to employers, health plans, government agencies and other purchasers of healthcare for
beneficiaries. Negative publicity concerning our services or the telehealth market as a whole could limit market acceptance of our services. If our clients, or their members or
patients, do not perceive the benefits of our services, or if our services are not competitive, then our market may not develop at all, or it may develop more slowly than we expect.
Similarly, individual and healthcare industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth could limit market acceptance
of our healthcare services. If any of these events occurs, it could have a material adverse effect on our business, financial condition or results of operations.
With respect to our planned “Bonum Health Hub” telehealth services, the market for such services is new and unproven, and it is uncertain whether it will achieve
consumer acceptance and market adoption. The success of our “Bonum Health Hub” will depend to a substantial extent on the willingness of patients to use new technologies
such as our planned “Bonum Health Hubs”. Negative publicity concerning our “Bonum Health Hubs” or the telehealth market as a whole, could limit market acceptance of the
“Bonum Health Hubs”. Similarly, individual and healthcare industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth could
limit market acceptance of our “Bonum Health Hubs”. If any of these events occurs, it could have a material adverse effect on our business, financial condition or results of
operations.
Our telehealth business could be adversely affected by legal challenges to our business model or by actions restricting our ability to provide services in certain
jurisdictions.
Our ability to conduct telehealth services in a particular U.S. state is dependent upon the applicable laws governing remote healthcare and the practice of medicine and
healthcare delivery in general in such location which are subject to changing political, regulatory and other influences. With respect to telehealth services, which we plan to offer
through our “Bonum Health Hubs”, such services and our ability to offer such services are subject to rules established or interpreted by state medical boards and whether such
boards consider such “Bonum Health Hubs” services to be the practice of medicine. The definition of practicing medicine is subject to change and open to evolving interpretations
by medical boards and state attorneys’ generals, among others. Accordingly, we must monitor our compliance with laws in the jurisdictions in which we operate, on an ongoing
basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law. Additionally, it is possible that the laws
and rules governing the practice of medicine, including remote healthcare, in one or more jurisdictions may change in a manner which negatively effects our ability to operate. If a
successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected
jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations.
In our telehealth business, we will be dependent on our relationships with affiliated professions and our business would be adversely affected if those relationships
were disrupted.
There is a risk that state authorities in some jurisdictions may find that contractual relationships with physicians providing telehealth violate laws prohibiting the
corporate practice of medicine. State corporate practice of medicine doctrines also often impose penalties on physicians themselves for aiding the corporate practice of medicine,
which could discourage physicians from participating in our network of providers. A material changes in our relationship with our healthcare providers, whether resulting from a
dispute among the entities, a change in government regulation, or the loss of these affiliations, could impair our ability to provide services through our planned “Bonum Health
Hub”, and could have a material adverse effect on our business, financial condition and results of operations.
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Our “Bonum Health Hub” telehealth business will depend on our ability to maintain and expand a network of qualified providers.
The success of our “Bonum Health Hubs” is dependent upon our ability to maintain a network of qualified telehealth providers. If we are unable to recruit and retain
board-certified physicians and other healthcare professionals, it would have a material adverse effect on our “Bonum Health Hubs” business and ability to grow such operations.
We may not be willing to pay the costs demanded by such services providers and/or changes in Medicare and/or Medicaid reimbursement levels and other pressures on
healthcare providers and consolidation activity among hospitals, physician groups and healthcare providers may make such providers harder or more expensive to find and
contract with. The result of the above may be that our “Bonum Health Hubs” are unsuccessful, which may result in a material adverse effect to our operations.
Rapid technological change in the telehealth industry presents us with significant risks and challenges.
The telehealth market is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving industry standards. Our
success will depend on our ability to enhance our offerings with next-generation technologies and to develop or to acquire and market new services. There is no guarantee that we
will possess the resources, either financial or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources
successfully and avoid technological or market obsolescence. Further, there can be no assurance that technological advances by one or more of our competitors or future
competitors will not result in our present or future software-based products and services becoming uncompetitive or obsolete.
The telehealth industry is competitive, and if we are not able to compete effectively, our business, financial condition and results of operations will be harmed.
While the telehealth market is in an early stage of development, it is competitive and we expect it to attract increased competition, which could make it difficult for us to
succeed. We currently face competition in the telehealth industry from a range of companies, including specialized software and solution providers that offer similar solutions,
often at substantially lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective. These competitors include Doctor On
Demand, MDLive and Teladoc. In addition, large, well-financed health systems have in some cases developed their own telehealth tools and may provide these solutions to their
customers at discounted prices. The surge in interest in telehealth, and in particular the relaxation of HIPAA privacy and security requirements, has also attracted new competition
from providers who utilize consumer-grade video conferencing platforms such as Zoom and Twilio. Competition from large software companies or other specialized solution
providers, communication tools and other parties could result in continued pricing pressures, which is likely to lead to price declines in certain product segments, which could
negatively impact our future market, sales, profitability and market share (if any). If we are unable to successfully compete in the telehealth market, our business, financial condition
and results of operations could be materially adversely affected.
The emergence of new technologies may render our telehealth solution obsolete or require us to expend significant resources in order to remain competitive.
The U.S. healthcare industry is massive, with a number of large market participants with conflicting agendas, and it is subject to significant government regulation and is
currently undergoing significant change. Changes in the telehealth industry, for example, such as the emergence of new technologies as more competitors enter our market, could
result in our telehealth solution being less desirable or relevant. If healthcare benefits trends shift or entirely new technologies are developed that replace existing solutions, our
existing or future products could be rendered obsolete and our business could be adversely affected. In addition, we may experience difficulties with industry standards, design or
marketing that could delay or prevent our development, introduction or implementation of new applications and enhancements.
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If we fail to develop widespread brand awareness cost-effectively, our business may suffer.
We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread adoption of our products
and attracting new clients. Our brand promotion activities may not generate client awareness or increase revenue, and even if they do, any increase in revenue may not offset the
expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in doing so, we may fail to attract or retain clients
necessary to realize a sufficient return on our brand-building efforts or to achieve the widespread brand awareness that is critical for broad client adoption of our solution.
Risks Associated with Our Planned MedCheks Health Passport Platform
The health passport market may not achieve and sustain high levels of demand, consumer acceptance and market adoption.
The health passport market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand, consumer acceptance and market
adoption. Our success in this new market will depend to a substantial extent on the willingness of our customers to use, and to increase the frequency and extent of their utilization
of, our services, as well as on our ability to demonstrate the value of health passports to employers, health plans, government agencies and other purchasers. Negative publicity
concerning our services or the health passport market as a whole could limit market acceptance of our services. If our s, or their members or patients, do not perceive the benefits of
our services, or if our services are not competitive, then our market may not develop at all, or it may develop more slowly than we expect. Similarly, individual and healthcare
industry concerns or negative publicity regarding patient confidentiality and privacy in the context of health passport could limit market acceptance of our services. Our health
passport may not be adopted by customers due to among other things, their belief that smartphones lack appropriate security or their failure to understand blockchain. If
customers fail to adopt our health passport, or health passports fail to become adopted in the marketplace, it could have a material adverse effect on our business, financial
condition or results of operations. Separately, governments may come out with their own health passports or similar technology which makes our health passport obsolete.
Risks Associated with Our Governing Documents and Delaware Law
Our certificate of incorporation provides for indemnification of officers and directors at our expense and limits their liability, which may result in a major cost to us
and hurt the interests of our stockholders because corporate resources may be expended for the benefit of officers or directors.
Our Certificate of Incorporation provides for indemnification as follows: “To the fullest extent permitted by applicable law, the Corporation is authorized to provide
indemnification of, and advancement of expenses to, such agents of the Corporation (and any other persons to which Delaware law permits the Corporation to provide
indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory
or non-statutory), with respect to actions for breach of duty to the Corporation, its stockholders and others.”
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of
expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling
person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate
jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The
legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce
the market and price for our shares.
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Our certificate of incorporation contains a specific provision that limits the liability of our directors for monetary damages to the Company and the Company’s
stockholders and requires us, under certain circumstances, to indemnify officers, directors and employees.
The limitation of monetary liability against our directors, officers and employees under Delaware law and the existence of indemnification rights to them may result in
substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our certificate of incorporation contains a specific provision that limits the liability of our 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 us incurring substantial expenditures to cover the cost of settlement or damage awards against our directors and officers, which the
Company may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against our directors and officers for breaches of their
fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers, even though such actions, if successful, might
otherwise benefit us and our stockholders.
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 certificate 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.
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. In addition, we can also authorize “blank check” preferred stock, which could be issued by our Board of Directors without stockholder approval and may
contain voting, liquidation, dividend and other rights superior to our common stock.
Compliance, Reporting and Listing Risks
We incur significant costs to ensure compliance with U.S. and NASDAQ Capital Market reporting and corporate governance requirements.
We incur significant costs associated with our public company reporting requirements and with applicable U.S. and NASDAQ Capital Market corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC and The NASDAQ Capital Market. The rules of The NASDAQ
Capital Market include requiring us to maintain independent directors, comply with other corporate governance requirements and pay annual listing and stock issuance fees. All of
such SEC and NASDAQ obligations require a commitment of additional resources including, but not limited, to additional expenses, and may result in the diversion of our senior
management’s time and attention from our day-to-day operations. We expect all of these applicable rules and regulations to significantly increase our legal and financial
compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers.
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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 eXtensible Business Reporting Language (XBRL) and EDGAR (Electronic Data Gathering,
Analysis, and Retrieval) service providers. The engagement of such services can be costly, and we may continue to incur additional losses, which may adversely affect our 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.
We may not be able to comply with NASDAQ’s continued listing standards.
Our common stock was approved for listing on The NASDAQ Capital Market under the symbol “MEDS”, on February 13, 2020. Notwithstanding such listing, there can be
no assurance any broker will be interested in trading our stock. Therefore, it may be difficult to sell your shares of common stock if you desire or need to sell them. Our
underwriters are not obligated to make a market in our securities, and even they do make a market, they can discontinue market making at any time without notice. Neither we nor
the underwriters can provide any assurance that an active and liquid trading market in our securities will develop or, if developed, that such market will continue.
There is also no guarantee that we will be able to maintain our listing on The NASDAQ Capital Market for any period of time by perpetually satisfying NASDAQ’s
continued listing requirements. Our failure to continue to meet these requirements may result in our securities being delisted from NASDAQ.
Among the conditions required for continued listing on The NASDAQ Capital Market, NASDAQ requires us to maintain at least $2.5 million in stockholders’ equity or
$500,000 in net income over the prior two years or two of the prior three years, to have a majority of independent directors, and to maintain a stock price over $1.00 per share. Our
stockholders’ equity may not remain above NASDAQ’s $2.5 million minimum, we may not generate over $500,000 of yearly net income, we may not be able to maintain independent
directors, and we may not be able to maintain a stock price over $1.00 per share. If we fail to timely comply with the applicable requirements, our stock may be delisted. In addition,
even if we demonstrate compliance with the requirements above, we will have to continue to meet other objective and subjective listing requirements to continue to be listed on
The NASDAQ Capital Market. Delisting from The NASDAQ Capital Market could make trading our common stock more difficult for investors, potentially leading to declines in our
share price and liquidity. Without a NASDAQ Capital Market listing, stockholders may have a difficult time getting a quote for the sale or purchase of our stock, the sale or
purchase of our stock would likely be made more difficult and the trading volume and liquidity of our stock could decline. Delisting from The NASDAQ Capital Market could also
result in negative publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing may adversely affect the acceptance of our common
stock as currency or the value accorded by other parties. Further, if we are delisted, we would also incur additional costs under state blue sky laws in connection with any sales of
our securities. These requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in the secondary
market. If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on an over-the-counter quotation system, such as the OTCQB Market, where an
investor may find it more difficult to sell our stock or obtain accurate quotations as to the market value of our common stock. In the event our common stock is delisted from The
NASDAQ Capital Market, we may not be able to list our common stock on another national securities exchange or obtain quotation on an over-the counter quotation system.
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Regulatory Risks
Regulatory changes that affect our distribution channels could harm our business.
At the federal level, track and trace legislation 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 legislation be too burdensome for smaller suppliers. Changes in the United States healthcare industry and regulatory environment
could have a material adverse impact on our results of operations.
Many of our products and services are intended to function within the structure of the healthcare financing and reimbursement system currently being used in the United
States. In recent years, the healthcare industry in the United States has changed significantly in an effort to enhance efficiencies, reduce costs and improve patient outcomes.
These changes have included cuts in Medicare and Medicaid reimbursement levels, changes in the basis for payments, shifting away from fee-for-service and towards value-based
payments and risk-sharing models, increases in the use of managed care, and consolidation in the healthcare industry generally. We expect that the healthcare industry in the
United States shall continue to change and evolve in the near future. Changes in the healthcare industry’s (or our pharmaceutical suppliers’) pricing, selling, inventory, distribution
or supply policies or practices could significantly reduce our revenues and net income. Additionally, if we experience disruptions in our supply of generic drugs, our margins could
be adversely affected.
We distribute generic pharmaceuticals, which can be subject to both price deflation and price inflation. Continued volatility in the availability, pricing trends or
reimbursement of these generic drugs, or significant fluctuations in the nature, frequency and magnitude of generic pharmaceutical launches, could have a material adverse impact
on our results of operations. Additionally, any future changes in branded and generics drug pricing could be significantly different than our projections. Generic drug
manufacturers are increasingly challenging the validity or enforceability of patents on branded pharmaceutical products. During the pendency of these legal challenges, a generics
manufacturer may begin manufacturing and selling a generic version of the branded product prior to the final resolution of its legal challenge over the branded product’s patent. To
the extent we source, contract manufacture, and distribute such generic products, the brand-name company could assert infringement claims against us. While we generally obtain
indemnification against such claims from generic manufacturers as a condition of distributing their products, these rights may not be adequate or sufficient to protect us.
We are also required to comply with various state pricing gouging laws.
The healthcare industry is highly regulated, and further regulation of our distribution businesses and technology products and services could impose increased costs,
negatively impact our profit margins and the profit margins of our customers, delay the introduction or implementation of our new products, or otherwise negatively impact our
business and expose us to litigation and regulatory investigations.
Healthcare fraud laws are often vague and uncertain, exposing us to potential liability.
We are subject to extensive, and frequently changing, local, state and federal laws and regulations relating to healthcare fraud, waste and abuse. Local, state and federal
governments continue to strengthen their position and scrutiny over practices involving fraud, waste and abuse affecting Medicare, Medicaid and other government healthcare
programs. Many of the regulations applicable to us, including those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts. The
regulations may be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that could require us to make changes in our operations. If we fail to
comply with applicable laws and regulations, we could become liable for damages and suffer civil and criminal penalties, including the loss of licenses or our ability to participate in
Medicare, Medicaid and other federal and state healthcare programs.
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Laws reducing reimbursements for pharmaceuticals could ruin our industry.
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Both our profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals,
medical treatments and related services, or changing the methodology by which reimbursement levels are determined. The federal government may adopt measures that could
reduce Medicare or Medicaid spending, or impose additional requirements on healthcare entities. We cannot predict what alternative or additional deficit reduction initiatives or
Medicare payment reductions, if any, will ultimately be enacted into law, or the timing or affect any such initiatives or reductions would have on us. Any of the changes discussed
above may have a material adverse impact on our results of operations.
Operating, security and licensure standards of federal agencies challenge our ability to comply with applicable laws and regulations.
We are subject to the operating and security standards of the Drug Enforcement Administration (the DEA), the U.S. Food and Drug Administration (the FDA), various
state boards of pharmacy, state health departments, the U.S. Department of Health and Human Services (HHS), the Centers for Medicare & Medicaid Services (CMS), and other
comparable agencies. We are also subject to certain state laws relating to price gouging. Although we have enhanced our procedures to ensure compliance, a regulatory agency or
tribunal may conclude that our operations are not compliant with applicable laws and regulations. In addition, we may be unable to maintain or renew existing permits, licenses or
any other regulatory approvals or obtain without significant delay, future permits, licenses or other approvals needed for the operation of our businesses. Any noncompliance by
us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could lead to litigation and have a material adverse impact on our
results of operations.
Pedigree tracking laws and regulations could increase our regulatory burdens.
Congress and state and federal agencies, including state boards of pharmacy and departments of health and the FDA, have made increased efforts in the past year to
regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or mislabeled drugs into the pharmaceutical distribution system
(otherwise known as “pedigree tracking”). In November 2013, Congress passed (and President Barack Obama signed into law) the Drug Quality and Security Act (the “DQSA”).
The DQSA establishes federal standards requiring supply-chain stakeholders to participate in an electronic, interoperable, lot-level prescription drug track-and-trace system. The
law also preempts state drug pedigree requirements and establishes new requirements for drug wholesale distributors and third-party logistics providers, including licensing
requirements in states that had not previously licensed such entities.
In addition, the Food and Drug Administration Amendments Act of 2007 requires the FDA to establish standards and identify and validate effective technologies for the
purpose of securing the pharmaceutical supply chain against counterfeit drugs. These standards may include track-and-trace or authentication technologies, such as radio
frequency identification devices, 2D data matrix barcodes, and other similar technologies. On March 26, 2010, the FDA released the Serialized Numerical Identifier (the “SNI”)
guidance for manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI regulations in our distribution operations. The DQSA and
other pedigree tracking laws and regulations have increased the overall regulatory burden and costs associated with our pharmaceutical distribution business and have had a
material adverse impact on our results of operations.
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We are uncertain how new privacy laws shall be interpreted.
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There are numerous federal and state laws and regulations related to the privacy and security of personal information. In particular, regulations promulgated pursuant to
the Health Insurance Portability and Accountability Act of 1996 (HIPAA) establish privacy and security standards that limit the use and disclosure of individually identifiable
health information (known as “protected health information”) and require the implementation of administrative, physical and technological safeguards to protect the privacy of
protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. We are directly subject to certain provisions of the
regulations as a “Business Associate” through our relationships with customers. We are also directly subject to the HIPAA privacy and security regulations as a “Covered Entity”
with respect to our operations as a healthcare clearinghouse, specialty pharmacy and medical surgical supply business. If we are unable to properly protect the privacy and
security of protected health information entrusted to us, we could be found to have breached our contracts with our customers. Further, if we fail to comply with applicable HIPAA
privacy and security standards, we could face civil and criminal penalties. Although we have implemented and continue to maintain policies and processes to assist us in
complying with these regulations and our contractual obligations, we cannot provide assurances regarding how these regulations will be interpreted, enforced or applied by the
government and regulators to our operations. In addition to the risks associated with enforcement activities and potential contractual liabilities, our ongoing efforts to comply with
evolving laws and regulations at the federal and state level might also require us to make costly system purchases /or modifications from time to time.
There are continued uncertainties associated with efforts to change or repeal healthcare reforms, and we cannot predict their full effect on us at this time.
The ACA significantly expanded health insurance coverage to uninsured Americans and changed the way healthcare is financed by both governmental and private
payers. While certain provisions of the ACA took effect immediately, others have delayed effective dates or require further rulemaking action or regulatory guidance by
governmental agencies to implement or finalize (e.g., nondiscrimination in health programs and activities, or excise taxes on high-cost employer-sponsored health coverage).
Further, there are continued uncertainties associated with efforts to add, change or repeal certain provisions of the ACA or other healthcare reforms, and we cannot predict their
full effect on us at this time. While there is currently a substantial lack of clarity around the likelihood, timing and details of any such policies and reforms, such policies and
reforms may have a material adverse impact on our results of operations.
Medical billing and coding laws may subject us to fines and investigations.
Medical billing, coding and collection activities are governed by numerous federal and state civil and criminal laws. In connection with these laws, we may be subjected to
federal or state government investigations and possible penalties may be imposed upon us, false claims actions may have to be defended, private payers may file claims against us
and we may be excluded from Medicare, Medicaid or other government-funded healthcare programs. Any such proceeding or investigation could have a material adverse impact
on our results of operations.
It may be difficult and costly for us to comply with the extensive government regulations to which our business is subject.
Our operations are subject to extensive regulation by the U.S. federal and state governments. In addition, as we expand our operations, we may also become subject to the
regulations of foreign jurisdictions, as well as additional regulations relating to environmental matters, transportation of pharmaceutical products, shipping restrictions, and import
and export restrictions. We are also required to comply with various state pricing gouging laws.
Further, the enactment of new rules and regulations could adversely affect our business. For example, the ACA has the primary goal of reducing the cost of healthcare
and providing medical coverage to some of the nation’s 25 million uninsured. Depending on future enforcement or additional rules and regulations created around it,
pharmaceutical pricing controls could be established resulting in substantially reduced margins and limited reimbursement for pharmacies and all other healthcare provider bases.
In turn, this may adversely affect our cash flow, profitability, and growth.
Risks Relating to Our Industry in General
The public health crisis involving the abuse of prescription opioid pain medication could have a material negative effect on our business.
Our Pharmaceutical segment distributes prescription opioid pain medications. In recent years, the abuse of prescription opioid pain medication has become a public health
crisis.
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A significant number of counties, municipalities and other plaintiffs, including a number of state attorney generals, have filed lawsuits against pharmaceutical
manufacturers, pharmaceutical wholesale distributors, retail chains and others relating to the manufacturing, marketing or distribution of prescription opioid pain medications. The
defense and resolution of future lawsuits and events relating to these lawsuits could have a material adverse effect on our results of operations, financial condition, cash flows or
liquidity or have adverse reputational or operational effects on our business.
Other legislative, regulatory or industry measures related to the public health crisis involving the abuse of prescription opioid pain medication and the distribution of
these medications could affect our business in ways that we may not be able to predict. For example, several states have now adopted taxes or other fees on the sale of opioids,
and several other states have proposed similar legislative initiatives. These laws and proposals vary in the tax amounts imposed and the means of calculation. Liabilities for taxes or
assessments under any such laws could have an adverse impact on our results of operations unless we are able to mitigate them through operational changes or commercial
arrangements where permitted.
Changes to the U.S. healthcare environment may not be favorable to us.
Over a number of years, the U.S. healthcare industry has undergone significant changes designed to increase access to medical care, improve safety and patient
outcomes, contain costs and increase efficiencies. These changes include adoption of the Patient Protection and Affordable Care Act (ACA), a general decline in Medicare and
Medicaid reimbursement levels, efforts by healthcare insurance companies to limit or reduce payments to pharmacies and providers, the basis for payments beginning to transition
from a fee-for-service model to value-based payments and risk-sharing models, and the industry shifting away from traditional healthcare venues like hospitals and into clinics,
physician offices and patients’ homes.
We expect the U.S. healthcare industry to continue to change significantly in the future. Possible changes include repeal and replacement of major parts of the Patient
Protection and Affordable Care Act, further reduction or limitations on governmental funding at the state or federal level, efforts by healthcare insurance companies to further limit
payments for products and services or changes in legislation or regulations governing prescription pharmaceutical pricing, healthcare services or mandated benefits. These
possible changes, and the uncertainty surrounding these possible changes, may cause healthcare industry participants to reduce the number of products and services they
purchase from us or the price they are willing to pay for our products and services, which could adversely affect us.
Consolidation in the U.S. healthcare industry may negatively impact our results of operations.
In recent years, U.S. healthcare industry participants, including distributors, manufacturers, suppliers, healthcare providers, insurers and pharmacy chains, have
consolidated or formed strategic alliances. Consolidations create larger enterprises with greater negotiating power, and also could result in the possible loss of a customer where
the combined enterprise selects one distributor from two incumbents. If this consolidation trend continues, it could adversely affect our results of operations.
Accounting Risks
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely affect our ability to report our
financial condition, cash flows and results of operations in a timely and accurate manner and/or increase the risk of future misstatements, which could have a material
adverse effect on our business, financial condition, cash flows and results of operations and could cause the market value of our shares of common stock and/or debt
securities to decline.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial
statements. As reported under “Item 9A. Controls and Procedures”, as of December 31, 2020, our CEO and CFO have determined that our disclosure controls and procedures were
not effective. Additionally, our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under
the Exchange Act. As disclosed below under “ Item 9A. Controls and Procedures”, based on reviews conducted by management, we have concluded that a material weakness
exists in the Company’s internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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Maintaining effective disclosure controls and procedures and effective internal control over financial reporting are necessary for us to produce reliable financial
statements and the Company is committed to remediating its material weaknesses in such controls as promptly as possible.
The Company has identified certain remediation actions and is in the process of implementing them, but such efforts are not complete and remain ongoing. If we do not
complete our remediation in a timely manner or if our remedial measures are insufficient to address the material weaknesses, or if additional material weaknesses in our internal
controls are discovered or occur in the future, it may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate
manner and there will continue to be an increased risk of future misstatements. Although we regularly review and evaluate internal controls systems to allow management to report
on the effectiveness of our internal controls over financial reporting, we may discover additional weaknesses in our internal controls over financial reporting or disclosure controls
and procedures. The next time we evaluate our internal controls over financial reporting and disclosure controls and procedures, if we identify one or more new material
weaknesses or have been unable to timely remediate our existing material weaknesses, we would be unable to conclude that our internal controls over financial reporting or
disclosure controls and procedures are effective. If we are unable in the future to conclude that our internal controls over financial reporting or our disclosure controls and
procedures are effective, we may not be able to report our financial condition and results of operations in a timely and accurate manner, which could have a material adverse effect
on our business, financial condition, cash flows and results of operations and could cause the market value of our shares of common stock to decline. In addition, any potential
future restatements could subject us to additional adverse consequences, including sanctions by the SEC, stockholder litigation and other adverse actions. Moreover, we may be
the subject of further negative publicity focusing on such financial statement adjustments and resulting restatement and negative reactions from our stockholders, creditors or
others with whom we do business. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition, cash flows and results of
operations and could cause the market value of our shares of common stock to decline.
We may experience adverse impacts on our reported results of operations as a result of adopting new accounting standards or interpretations.
Our implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect our reported financial
position or operating results or cause unanticipated fluctuations in our reported operating results in future periods.
A significant amount of our revenues has historically been due to only a small number of customers, and if we were to lose any of those customers, our results of
operations would be adversely affected.
During the years ended December 31, 2020 and 2019, sales to two customers represent greater than 10% of revenue at 25% and 15% in 2020 and 10.3% and 10.8% in 2019.
As a result, in the event our customers do not pay us amounts owed, sales to such customers cease or we are unable to find new customers moving forward, it could have a
materially adverse effect on our results of operations.
Risks Related to Our Common Stock
Our common stock has in the past been a “penny stock” under SEC rules, and may be subject to the “penny stock” rules in the future. It may be more difficult to
resell securities classified as “penny stock.”
In the past (including immediately prior to our common stock being listed on The NASDAQ Capital Market in February 2020), our common stock was a “penny stock”
under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below $5.00). While our common stock is not now considered a “penny stock”
because it is listed on The NASDAQ Capital Market, if we are unable to maintain that listing, unless we maintain a per-share price above $5.00, our common stock will become
“penny stock.” These rules impose additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who
qualify as “established customers” or “accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in penny
stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny
stock, disclose the compensation of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock
held in the customer’s account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s written
agreement to the transaction.
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Legal remedies available to an investor in “penny stocks” may include the following:
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● If a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states securities laws, the investor may be able to cancel the
purchase and receive a refund of the investment.
● If a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms that committed the fraud for damages.
These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock
rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely
limit the market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our
common stock.
Many brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest in penny stocks. In addition,
many individual investors will not invest in penny stocks due, among other reasons, to the increased financial risk generally associated with these investments.
For these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time, if ever, our common stock will not
be classified as a “penny stock” in the future.
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 in its price. Some or all of our shares of common stock may
be offered from time to time in the open market pursuant to effective registration statements and/or 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 generally sell common stock into the
market. The sale of a significant portion of such shares when such shares are eligible for public sale may cause the value of our common stock to decline in value.
There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price of our common stock may continue to
be volatile.
The market price of our common stock will likely continue to be highly volatile. Some of the factors that may materially affect the market price of our common stock are
beyond our control, such as conditions or trends in the industry in which we operate or sales of our common stock. 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.
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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. These factors may materially adversely affect the market price of our
common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly
affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of our common stock.
The exercise of outstanding warrants, options and shares issued in connection with a joint venture and acquisition will be dilutive to our existing stockholders.
As of the date of this Report, we had 8,093,199 shares of our common stock issued and outstanding and the following securities, which are exercisable into shares of our
common stock, which are due to be issued or granted, and which are contingently issuable:
● 82,751 shares of our common stock issuable upon the exercise of warrants with exercise prices ranging from $0.06 to $9.00 per share;
● 425,817 shares of our common stock issuable upon the exercise of options with exercise prices ranging from $2.46 per share to $9.60 per share; and
● 20,000 shares of common stock issuable upon the exercise of options with an exercise price of $6.55 per share granted in February 2021.
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. Since we do not anticipate paying cash dividends on our
common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our common stock.
Our common stock price is likely to be highly volatile because of several factors, including a limited public float.
The market price of our common stock has been volatile in the past and the market price of our common stock is likely to be highly volatile in the future. You may not be
able to resell shares of our common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other factors that could cause such volatility may include, among other things:
● actual or anticipated fluctuations in our operating results;
● the absence of securities analysts covering us and distributing research and recommendations about us;
● we may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
● overall stock market fluctuations;
● announcements concerning our business or those of our competitors;
● actual or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
● conditions or trends in our industry;
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● litigation;
● changes in market valuations of other similar companies;
● future sales of common stock;
● departure of key personnel or failure to hire key personnel; and
● general market conditions.
Any of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market in general has at times
experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.
Our Chief Executive Officer and President are our two largest stockholders and, as a result, they can exert control over us and have actual or potential interests that
may differ from yours.
Mr. Suren Ajjarapu, our CEO, and Mr. Prashant Patel, our President, beneficially own, in the aggregate, over 53% 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 differ 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 common stock may continue to be followed by only a limited number of analysts and there may continue to be a limited number of institutions acting as market
makers for our common stock.
For the foreseeable future, our common stock is unlikely to be followed by a significant number of market analysts, and there may be few institutions acting as market
makers for our common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed, and an
orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock are determined in the marketplace
and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact
of the factors referred to elsewhere in these Risk Factors, investor perception of us and general economic and market conditions. No assurances can be given that an orderly or
liquid market will ever develop for the shares of our common stock.
Because of the anticipated low price of the securities being registered, many brokerage firms may not be willing to effect transactions in these securities. Purchasers of our
securities should be aware that any market that develops in our stock will be subject to the penny stock restrictions.
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Risks Relating to The JOBS Act
41
The JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations and to reduce the amount of information provided in
reports filed with the SEC. We cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less
attractive to investors.
We are and we will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or
exceed $1.07 billion (subject to adjustment for inflation), (ii) the last day of the end of our 2024 fiscal year (5 years from our first public offering), (iii) the date on which we have,
during the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a “large accelerated filer” (with at least $700
million in public float) under the Exchange Act. For so long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” as described in further detail in the risk factors below.
We cannot predict if investors will find our common stock less attractive because we will rely on some or all of these exemptions. If some investors find our common stock less
attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. If we avail ourselves of certain exemptions from
various reporting requirements, as is currently our plan, our reduced disclosure may make it more difficult for investors and securities analysts to evaluate us and may result in less
investor confidence.
Our election not to opt out of the JOBS Act extended accounting transition period may not make our financial statements easily comparable to other companies.
Pursuant to the JOBS Act, as an “emerging growth company”, we can elect to opt out of the extended transition period for any new or revised accounting standards that
may be issued by the Public Company Accounting Oversight Board (PCAOB) or the SEC. We have elected not to opt out of such extended transition period which means that
when a standard is issued or revised and it has different application dates for public or private companies, we, as an “emerging growth company”, can adopt the standard for the
private company. This may make a comparison of our financial statements with any other public company which is not either an “emerging growth company” nor an “emerging
growth company” which has opted out of using the extended transition period, more difficult or impossible as possible different or revised standards may be used.
The JOBS Act also allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount
of information provided in reports filed with the SEC.
The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies”. The Company meets the definition of an “emerging growth company” and
so long as it qualifies as an “emerging growth company,” it will, among other things:
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be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation
report on the effectiveness of its internal control over financial reporting;
be exempt from the “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on
golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with
mergers and certain other business combinations) of The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and certain disclosure
requirements of the Dodd-Frank Act relating to compensation of Chief Executive Officers;
be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act and instead provide a
reduced level of disclosure concerning executive compensation; and
be exempt from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial
statements.
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The Company currently intends to take advantage of all of the reduced regulatory and reporting requirements that will be available to it so long as it qualifies as an
“emerging growth company”. The Company has elected not to opt out of the extension of time to comply with new or revised financial accounting standards available under
Section 102(b)(1) of the JOBS Act. Among other things, this means that the Company’s independent registered public accounting firm will not be required to provide an attestation
report on the effectiveness of the Company’s internal control over financial reporting so long as it qualifies as an “emerging growth company”, which may increase the risk that
weaknesses or deficiencies in the internal control over financial reporting go undetected. Likewise, so long as it qualifies as an “emerging growth company”, the Company may
elect not to provide certain information, including certain financial information and certain information regarding compensation of executive officers, which it would otherwise have
been required to provide in filings with the SEC, which may make it more difficult for investors and securities analysts to evaluate the Company. As a result, investor confidence in
the Company and the market price of its common stock may be adversely affected.
Notwithstanding the above, we are also currently a “smaller reporting company”, meaning that we are not an investment company, an asset-backed issuer, or a majority-
owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues of less than $50 million during
the most recently completed fiscal year. In the event that we are still considered a “smaller reporting company”, at such time are we cease being an “emerging growth company”,
the disclosure we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered either an “emerging growth company” or
a “smaller reporting company”. Specifically, similar to “emerging growth companies”, “smaller reporting companies” are able to provide simplified executive compensation
disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an
attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among
other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as an “emerging
growth company” or “smaller reporting company” may make it harder for investors to analyze the Company’s results of operations and financial prospects.
General Risk Factors
Failure to adequately manage our planned aggressive growth strategy may harm our business or increase our risk of failure.
For the foreseeable future, we intend to pursue an aggressive growth strategy for the expansion of our operations through increased product development and marketing.
Our ability to rapidly expand our operations will depend upon many factors, including our 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 our ability to
expand may have a materially adverse effect on our business, results of operations, and financial condition. Accordingly, we may be unable to achieve our targets for sales growth,
and our operations may not be successful or achieve anticipated operating results.
Additionally, our growth may place a significant strain on our managerial, administrative, operational, and financial resources and our infrastructure. Our future success
will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:
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implement additional management information systems;
further develop our operating, administrative, legal, financial, and accounting systems and controls;
hire additional personnel;
develop additional levels of management within our company;
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locate additional office space;
maintain close coordination among our engineering, operations, legal, finance, sales and marketing, and client service and support organizations; and
manage our expanding international operations.
As a result, we may lack the resources to deploy our services on a timely and cost-effective basis. Failure to accomplish any of these requirements could impair our ability
to deliver services in a timely fashion or attract and retain new customers.
If we do not successfully implement any acquisition strategies, our operating results and prospects could be harmed.
We face competition within our industry for acquisitions of businesses, technologies and assets, and, in the future, such competition may become more intense. As such,
even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or at all because
of such competition. Furthermore, if we enter into negotiations that are not ultimately consummated, those negotiations could result in diversion of management time and
significant out-of-pocket costs. Even if we are able to complete such acquisitions, we may additionally expend significant amounts of cash or incur substantial debt to finance
them, which indebtedness could result in restrictions on our business and use of available cash. In addition, we may finance or otherwise complete acquisitions by issuing equity
or convertible debt securities, which could result in dilution of our existing stockholders. If we fail to evaluate and execute acquisitions successfully, we may not be able to realize
their benefits. If we are unable to successfully address any of these risks, our business, financial condition or operating results could be harmed.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
If we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have difficulty integrating the acquired
company’s assets, personnel and operations with our own. We do not anticipate that any acquisitions or mergers we may enter into in the future would result in a change of
control of the Company. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core
business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and
increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
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the difficulty of integrating acquired products, services or operations;
the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
difficulties in maintaining uniform standards, controls, procedures and policies;
the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and
existing customers;
the effect of any government regulations which relate to the business acquired;
potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or
modify the marketing and sales of acquired products or operations, or the defense of any litigation, whether or not successful, resulting from actions
of the acquired company prior to our acquisition; and
potential expenses under the labor, environmental and other laws of various jurisdictions.
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Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection
with an acquisition, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase
our expenses and adversely affect our results of operations.
We may apply working capital and future funding to uses that ultimately do not improve our operating results or increase the value of our securities.
In general, we have complete discretion over the use of our working capital and any new investment capital we may obtain in the future. Because of the number and
variety of factors that could determine our use of funds, our ultimate expenditure of funds (and their uses) may vary substantially from our current intended operating plan for such
funds.
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, 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 the use and expenditure of our capital. Our management has broad discretion to use any or all
of our available capital reserves. Our capital could be applied in ways that do not improve our operating results or otherwise increase the value of a stockholder’s investment.
Our websites may encounter technical problems and service interruptions.
Our websites may in the future experience slower response times or interruptions as a result of increased traffic or other reasons. These delays and interruptions resulting
from failure to maintain Internet service connections to our site could frustrate visitors and reduce our future web site traffic, which could have a material adverse effect on our
business.
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.
Stockholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common
stock.
Wherever possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash
consideration will consist of restricted shares of our common stock or where shares are to be issued to our officers, directors and applicable consultants. Our Board of Directors
has authority, without action or vote of the stockholders, but subject to NASDAQ rules and regulations (which generally require shareholder approval for any transactions which
would result in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our then outstanding shares of stock), to
issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount
to market. These actions will result in dilution of the ownership interests of existing stockholders, which may further dilute common stock book value, and that dilution may be
material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities
committed to supporting existing management.
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Our growth depends in part on the success of our strategic relationships with third parties.
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In order to grow our business, we anticipate that we will need to continue to depend on our relationships with third parties, including our technology providers.
Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our competitors may be effective in providing incentives to
third parties to favor their products or services, or utilization of, our products and services. In addition, acquisitions of our partners by our competitors could result in a decrease in
the number of our current and potential customers. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the
marketplace or to grow our revenue could be impaired and our results of operations may suffer. Even if we are successful, we cannot assure you that these relationships will result
in increased customer use of our products or increased revenue.
Claims, litigation, government investigations, and other proceedings may adversely affect our business and results of operations.
As a company offering a wide range of products and services, we are regularly subject to actual and threatened claims, litigation, reviews, investigations, and other
proceedings, including proceedings relating to goods and services offered by us and by third parties, and other matters. Any of these types of proceedings, including currently
pending proceedings as discussed herein, may have an adverse effect on us because of legal costs, disruption of our operations, diversion of management resources, negative
publicity, and other factors. The outcomes of these matters are inherently unpredictable and subject to significant uncertainties. Determining legal reserves and possible losses
from such matters involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. Until the final resolution of such matters, we may be exposed
to losses in excess of the amount recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could
have a material effect on our business, consolidated financial position, results of operations, or cash flows. In addition, it is possible that a resolution of one or more such
proceedings, including as a result of a settlement, could require us to make substantial future payments, prevent us from offering certain products or services, require us to change
our business practices in a manner materially adverse to our business, requiring development of non-infringing or otherwise altered products or technologies, damaging our
reputation, or otherwise having a material effect on our operations.
For all of the foregoing reasons and others set forth herein, an investment in our securities involves a high degree of risk.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We do not own any real property. We entered into a lease for our office space at 3840 Land O’ Lakes Blvd, Land O’Lakes, Florida 34639 for approximately $106,000 per
year under a three-year lease agreement, beginning January 1, 2018. This lease was extended for a new one-year term beginning on February 1, 2021 under the same terms as the
previous lease. Our office space occupies approximately 6,300 square feet. We entered into a lease for Integra Pharma Solutions, LLC at 6308 Benjamin Road, Tampa, Florida 33634
for approximately $43,000 per year under a five-year lease agreement, effective October 17, 2018, occupying approximately 6,300 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, except as otherwise set forth below.
For a description of our material pending legal proceedings, please see “Note 8 - Other Receivables” and “Note 9 – Contingencies” to the Notes to Consolidated Financial
Statements included herein under “Item 8. Financial Statements and Supplemental Data”.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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46
PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
Our common stock was approved for listing on The NASDAQ Capital Market under the symbol “MEDS”, on February 13, 2020. Prior to that, it traded on the OTCQB
Market under the symbol “TRXD”. At present, there is a limited market for our common stock.
Common Stock and Preferred Stock Outstanding and Holders of Record
As of March 26, 2021, we had 8,093,199 shares of common stock outstanding, held by 49 stockholders of record, not including holders who hold their shares in street
name, and no shares of Preferred Stock issued or outstanding.
Dividend Policy
We have never paid or declared any cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We anticipate that we
will retain all of our future earnings for use in the operation of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the
discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any
future gains on their investments.
Recent Sales of Unregistered Securities
The disclosures below include information on recent sales of unregistered securities during the three months ended December 31, 2020 and from the period from January
1, 2021 to the filing date of this report, and do not include information which has previously been included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K:
In October 2020, warrants to purchase 22,528 shares of common stock were exercised at $0.06 per share by Nikul Panchal, a non-executive officer of the Company. The
Company issued 22,528 shares of common stock upon such exercise, and $1,351 in proceeds were received in connection with such exercise.
To the extent such issuance described above is deemed “sold or offered” (and not issued under a no-sale theory), we claim an exemption from registration pursuant to
Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act, since the foregoing issuance did not involve a public offering, the recipient was (a) an “accredited investor”;
and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act. The securities are subject to transfer
restrictions, and the certificates evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not
be offered or sold absent registration or pursuant to an exemption therefrom.
Issuer Purchases of Equity Securities
None.
ITEM 6.
SELECTED FINANCIAL DATA
A registrant such as the Company, that qualifies as a smaller reporting company, as defined by §229.10(f)(1), is not required to provide the information required by this
Item.
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47
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 (the “ 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:
●
●
●
Results of Operations. An analysis of our financial results comparing the twelve months ended December 31, 2020 and 2019.
Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows and discussion of our financial condition.
Critical Accounting Policies. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported
financial results and forecasts.
Results of Operations
The following discussion of the Company’s historical performance and financial condition should be read together with the consolidated financial statements and related
notes in “Item 8. Financial Statements and Supplemental Data” of this Report. This discussion contains forward-looking statements based on the views and beliefs of our
management, as well as assumptions and estimates made by our management. See “Cautionary Statement Regarding Forward-Looking Information” above. These statements by
their nature are subject to risks and uncertainties and are influenced by various factors. As a consequence, actual results may differ materially from those in the forward-looking
statements. See “Item 1A. Risk Factors” of this report for the discussion of risk factors. For all periods presented, the consolidated statements of income and consolidated balance
sheet data have been adjusted for the reclassification of discontinued operations information, unless otherwise noted. All references to years relate to the calendar year ended
December 31 of the particular year.
Plan of Operations
We had working capital of $8,379,060 as of December 31, 2020. With our current cash on hand, expected revenues, and based on our current average monthly expenses,
we do not anticipate the need for additional funding in order to continue our operations at their current levels, and to pay the costs associated with being a public company, for the
next 12 months. We may require additional funding in the future to expand or complete acquisitions. The sources of this capital are expected to be equity investments and notes
payable. Our plan for the next twelve months is to continue development of the IT used in the Company subsidiaries, which it is anticipated that current cash on hand is able to
fund and continue providing a quality product with excellent customer service while also seeking to expand our operations organically or through acquisitions as funding and
opportunities arise. As our business continues to grow, customer feedback will be integral in making small adjustments to improve the product and overall customer experience. In
the event we require additional funding, we plan to raise that through the sale of debt or equity, which may not be available on favorable terms, if at all, and may, if sold, cause
significant dilution to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues.
Novel Coronavirus (COVID-19)
In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The World Health Organization
declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020. In March and April, many U.S. states and
local jurisdictions began issuing ‘stay-at-home’ orders. For example, the state of Florida, where the Company’s principal business operations are, issued a ‘stay-at-home’ order
effective on April 1, 2020, which remained in place, subject to certain exceptions, through June 2020, when the order was gradually lifted until September 2020, when the order was
completely lifted. The U.S. in general and Florida specifically, has recently seen decreases in total new COVID-19 infections, however, it is unknown whether such decreases will
continue, new strains of the virus will cause numbers to increase and/or whether the state of Florida, or other jurisdictions in which we operate, will issue new or expanded ‘stay-at-
home’ orders, or how those orders, or others, may affect our operations.
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48
To date, we have been deemed an essential healthcare technology provider under applicable governmental orders based on the critical nature of the products we offer
and the community we serve. As such, our business operations were not materially impacted by the prior restrictions put in place by the State of Florida to slow the spread of
COVID-19, which have since expired. Additionally, as shown in our results of operations below, we have to date, not experienced any significant material negative impact to our
operations, revenues or gross profit due to COVID-19. We have however been adversely affected by reductions to, and interruptions in, the delivery of supply chain
pharmaceuticals that have had a negative impact on our wholesalers and certain technology outsourcing in India and the Philippines due to the pandemic, which may become more
frequent or material in the future. We are carefully managing our inventory supply network while we work to overcome these hopefully temporary challenges. As a result of the
above and other unknown issues associated with the pandemic, our sales and operating results may be adversely impacted in the coming months. The full extent of the impact of
COVID-19 on our business and operations currently cannot be estimated and will depend on a number of factors including the scope and duration of the global pandemic.
Since the start of the pandemic, we have taken steps to prioritize the health and safety of our employees. The Company’s employees started working remotely around
March 17, 2020, and our corporate office is currently planned to be closed through June 30, 2021, unless the current situation improves.
Currently we believe that we have sufficient cash on hand and will generate sufficient cash through operations to support our operations for the foreseeable future;
however, we will continue to evaluate our business operations based on new information as it becomes available and will make changes that we consider necessary in light of any
new developments regarding the ongoing pandemic.
Although COVID-19 has had a major impact on businesses around the world, to date, the pandemic has not had a significant negative impact on our business.
However, the future impact of COVID-19 on our business and operations is currently unknown. The pandemic is developing rapidly and the full extent to which COVID-19 will
ultimately impact us depends on future unknowable developments, including the duration and spread of the virus, the efficacy, availability and willingness of individuals to take
vaccines, as well as potential new seasonal outbreaks.
Sources of Revenue
We currently have three main revenue streams:
(1) Trxade, Inc., our wholly-owned subsidiary, provides an online web-based buying and selling platform for licensed pharmaceutical wholesalers (“Suppliers”) to sell
products and services to licensed pharmacies (“Customers”). The Company charges Suppliers a transaction fee, a percentage of the purchase price of the prescription drugs and
other products sold through its website service. The Company holds no inventory and assumes no responsibility for the shipment or delivery of any products or services from our
website. The Company considers itself an agent for this revenue stream and as such, reports revenue as net.
(2) Integra Pharma Solutions, LLC, our wholly-owned subsidiary, is a licensed wholesaler of brand, generic and non-drug products to Customers. The Company takes
orders for products, creates invoices for each order and recognizes revenue at the time the Customer receives the product. Customer returns, to date, have not been material.
(3) Community Specialty Pharmacy, LLC, our wholly-owned subsidiary, is a licensed retail pharmacy. The Company fills prescriptions for drugs written by a doctor and
recognizes revenue at the time the patient confirms delivery of the prescription. Customer returns, to date, have not been material.
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RESULTS OF OPERATIONS
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Results of Operations
49
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. Financial Statements and Supplemental Data” 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.
Fiscal Year Ended
December 31, 2020
December 31, 2019
Change
Percentage
Change
Revenues
Cost of Sales
Gross Profit
Operating Expenses:
Loss on write off of software
Technology
Loss on Impairment of Goodwill
General and Administrative
Warrants and Options Expense
Total Operating Expense
Other Income
Investment Loss
Loss on Extinguishment of Debt
Interest Expense
Loss
Continuing Operations
$
17,122,520
11,415,198
$
5,707,322
-
662,726
725,973
4,962,237
1,863,048
8,213,984
-
-
-
(29,389)
$
(2,536,051)
$
7,436,264
2,565,500
4,870,764
368,520
647,140
-
3,448,052
281,828
4,745,540
72,075
(250,000)
(178,500)
(53,227)
(284,428)
9,686,256
8,849,698
836,558
(368,520)
15,586
725,973
1,514,185
1,581,220
3,468,444
(72,075)
250,000
178,500
23,838
(2,251,623)
130.3%
345.0%
17.2%
(100.0%)
2.4%
0.0%
43.9%
561.1%
73.1%
(100.0%)
100.0%
100.0%
44.8%
(791.6%)
Our revenues during the years ended December 31, 2020 and 2019 were from the Trxade platform, Community Specialty Pharmacy and Integra Pharma Solutions. Revenues
increased by $9,686,256 for the 2020 year, compared to the prior year’s period. In Trxade, Inc., revenue increased by $1,019,006, which is attributable to our sales department
continuing to add customers throughout 2019 and into 2020, through direct marketing and customer training and the availability of items from suppliers. Integra Pharma Solutions
increased revenue to $9,877,067 for the year ended December 31, 2020, compared to $1,020,438 in the same period of 2019. The increase was mainly a result of sourcing items – N95
masks, sanitizers and gloves – i.e., PPE items that were needed in large quantities. The Trxade Platform revenue increased 23% to $5,546,746, compared to $4,527,740, for the years
ended December 31, 2020 and 2019, respectively. The increase in revenue was a result of more product transactions through the platform and an increase of average monthly
unique users.
Cost of Sales and gross profit were $11,415,198 and $5,707,322, for the year ended December 31, 2020 and $2,565,500 and $4,870,764, for the year ended December 31, 2019.
As sales for PPE increased in 2020, the cost of sales increased.
Gross profit as a percentage of sales was 33% for the year ended December 31, 2020, compared to 66% for the year ended December 31, 2019. The reason for the decrease
in gross profit as a percentage of sales was a result of the orders of PPE related product during the year ended December 31, 2020, which include a relatively high cost of sales. In
2019, a larger percentage of our revenue was from the Trxade Platform, which carries no cost of sales. PPE sales increased due to the COVID-19 pandemic.
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We had $368,520 of loss on write off of software for the year ended December 31, 2019 in connection with our Bonum Health asset acquisition, as the software did not
have the needed capabilities.
Direct Technology expenditures increased to $662,726 for 2020, compared to $647,140 for 2019, as the Company continued to develop apps for customers.
We had $725,973 of loss on impairment of goodwill for the year ended December 31, 2020, in connection with Community Specialty Pharmacy, LLC, compared to no loss
on impairment of goodwill in the prior period.
General and administrative expenses (less stock-based compensation expense and technology) increased for the year ended December 31, 2020 to $4,962,237, compared to
$3,448,052 for the comparable period in 2019. The increase was mainly due to increases in employee compensation, legal expenses, filing fees and marketing expenses as a result of
expanding and developing the newer business units.
Total stock-based compensation expense increased by 561.1% for the year ended December 31, 2020, compared to the prior year’s period due to the value of warrants
granted to consultants, 2019 bonus shares issued to executives, shares issued to directors, 2020 bonus accruals and employee option grants, as described in greater detail under
“Item 8. Financial Statements and Supplemental Data”– “Note 4 – Stockholders’ Equity” .
We had no other income for the year ended December 31, 2020, compared to other income of $72,075 for the year ended December 31, 2019, which was from the recovery
of disputed charges and local economic incentives.
We had $250,000 of investment loss for the year ended December 31, 2019 in connection with the SyncHealth, LLC joint venture, which was terminated effective as of
January 31, 2020.
We had $178,500 of loss on extinguishment of debt for the year ended December 31, 2019, in connection with the October 2019 conversion of $175,000 of convertible debt
and notes payable, which was not represented in the year ended December 31, 2020.
We had interest expense of $29,389 for the year ended December 31, 2020, compared to interest expense of $53,227 for the year ended December 31, 2019, which decreased
due to decreases in the amount of outstanding debt the Company had from $300,000 to $225,000 at the years ended December 31, 2019 and 2020, respectively.
Net loss increased by $2,251,623, to a net loss of $2,536,051 for the year ended December 31, 2020, compared to net loss of $284,428 for the year ended December 31, 2019,
mainly due to the increase in general and administrative expenses associated with the value of the 2019 bonus stock award grants issued to management, as described in greater
detail under “Item 8. Financial Statements and Supplemental Data”– “Note 4 – Stockholders’ Equity”, offset partially by the increase in gross profit.
Liquidity and Capital Resources
Cash and Cash Equivalents
Cash and cash equivalents were $5,919,578 at December 31, 2020. 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.
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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
Current assets (excluding cash)
Current liabilities (excluding short term debt)
Short term debt*
Working Capital
* Short term notes payable – related parties.
$
December 31, 2020
December 31, 2019
$
5,919,578
3,301,720
617,238
225,000
8,379,060
2,871,694
931,263
520,816
-
3,282,141
Our principal sources of liquidity during the years ended December 31, 2020 and 2019 have been cash provided by operations, equity capital and borrowings under
various debt arrangements. Our principal uses of cash have been for operating expenses and acquisitions. We anticipate these uses will continue to be our principal uses of cash
in the future.
The increase in cash and cash equivalents from 2019 was primarily due to equity capital raised in connection with the underwritten offering discussed below. The increase
in our current assets was primarily due to higher cash. Cash and other current assets increased by $3,047,885 and $2,370,457, respectively.
The increase in current assets (excluding cash) by $2,370,457 from 2019 was primarily due to increases in inventory purchases of PPE items and inventory deposits.
The increase in current liabilities from 2019 is primarily due to an increase in accrued liabilities from franchise tax and professional fees. Current liabilities increased by
$96,422.
On February 18, 2020, we sold 806,452 shares of common stock in a firm commitment underwritten offering and on February 21, 2020, we sold an additional 115,767 shares
of common stock in the offering in connection with the exercise of an overallotment option. The shares were sold at a public offering price of $6.50 per share. The Company paid
the underwriters a cash fee equal to 8% of the aggregate gross proceeds received by the Company in connection with the offering and reimbursed certain expenses. The Company
received net proceeds of approximately $5.3 million from the offering. The Company used the net proceeds from the offering for working capital and general corporate purposes
with approximately $3.4 million remaining in cash.
We had $225,000 of amounts owed to related parties as of December 31, 2020, which represented amounts owed to Nikul Panchal, a non-executive officer of the Company,
accruing simple interest at the rate of 10% per annum, payable annually, and having a maturity date in October 15, 2021.
Liquidity Outlook cash explanation.
Cash Requirements
Our primary objectives for 2021 are to continue the development of the Trxade Platform, DelivMeds and Bonum Health and increase our client base and operational
revenue. As a result of our cash generated through operations and the cash raised in the 2020 offering discussed above, we believe we have sufficient cash to support our
operations for the foreseeable future. There can be no assurance that our operations will generate significant positive cash flow, or that additional funds will be available to us,
through borrowings or otherwise, on favorable terms if required in the future, or at all.
We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows:
Projected Expenses for 2021
General and administrative (1)
Total
(1)
Includes wages and payroll, legal and accounting, marketing, rent and web development.
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$
$
Amount
8,000,000
8,000,000
Since inception, we have funded our operations primarily through debt and equity capital raises and operational revenue. In 2019, common stock was sold for
approximately $2,455,000. In 2020, common stock was sold for net proceeds of $5,262,068.
We may require additional funding in the future to expand or complete acquisitions. The sources of this capital are expected to be equity investments and notes payable.
Our plan for the next twelve months is to continue using the same marketing and management strategies and continue providing a quality product with excellent customer service
while also seeking to expand our operations organically or through acquisitions, as funding and opportunities arise. As our business continues to grow, customer feedback will be
integral in making small adjustments to improve our products and overall customer experience. In the event we require additional funding, we plan to raise that through the sale of
debt or equity, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional
capital moving forward, it may hurt our ability to grow and to generate future revenues.
We believe that we have adequate cash to implement our plan to operate a business-to-business web-based marketplace focused on the United States pharmaceutical
industry. Our core service is designed to bring the nation’s independent pharmacies and accredited national suppliers of pharmaceuticals together to provide efficient and
transparent buying and selling opportunities.
Cash Flows
The following table summarizes our Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2020 and 2019:
Net Loss
Net Cash Provided by (used in):
Operating Activities
Investing Activities
Financing Activities
Net increase (decrease) in cash
December 31, 2020
December 31, 2019
Change
Percent Change
$
$
(2,536,051)
$
(284,428)
$
(2,251,623)
(2,214,786)
(37,505)
5,300,175
3,047,884
$
141,775
(332,252)
2,192,614
2,002,137
$
(2,356,561)
294,747
3,107,561
1,045,747
$
(792)%
(1,662)%
89%
142%
52%
Cash used by operations for the fiscal year ended December 31, 2020 was $2,214,786. This compared to $141,775 of cash provided by operating activities for the fiscal year
ended 2019. The increase was primarily due to inventory purchases of PPE items and inventory deposits, and the inventory write-down of $1,218,020.
Investing activities used cash of $37,505 and $332,252 for the years ended December 31, 2020 and 2019, respectively. In 2019, the amount included cash used to purchase
fixed assets associated with Bonum Health, LLC hub kiosks, totalling $164,981 ($82,252 in cash and $82,729 in accounts payable), and the investment in connection with the joint
venture with SyncHealth, LLC, totalling $250,000, which was fully written off during the year ended December 31, 2019.
Cash provided by financing activities for 2019 included the repayment of short-term debt of $262,552 and $2,455,000 in common stock proceeds from the sale of stock.
Cash provided by financing activities for 2020, included the sale of common stock in the February 2020 underwritten offering which generated $5,994,424 of proceeds and
$5,300,175 in cash to the Company after expenses, as described in greater detail above, and the exercise of warrants and options which generated cash of $38,107.
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.
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The following table summarizes our contractual obligations as of December 31, 2020:
53
Contractual Obligations
Short and Long-term debt obligations
Operating lease obligations
Total Contractual obligations
Off-Balance Sheet Arrangements
Total
Less than 1 year
1-3 years
$
$
225,000
541,513
766,513
225,000
165,505
390,505
-
161,563
161,563
3-5 years
More than 5 years
-
-
160,793
53,652
160,793
53,652
Payments due by Period
We had no outstanding off-balance sheet arrangements as of December 31, 2020.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 606, “Revenue from Contracts with Customers.”
The Company, through its wholly-owned subsidiary, Trxade, Inc., provides an online website service, a buying and selling marketplace for licensed Pharmaceutical
Wholesalers to sell products and services to licensed Pharmacies. The Company charges Suppliers a transaction fee, a percentage of the purchase price of the Prescription Drugs
and other products sold through its website service. The fulfillment of confirmed orders, including delivery and shipment of Prescription Drugs and other products, is the
responsibility of the Supplier and not of the Company. The Company holds no inventory and assumes no responsibility for the shipment or delivery of any products or services
from our website. The Company considers itself an agent for this revenue stream and as such, reports revenue as net. Step One: Identify the contract with the customer – the
Company’s Terms and Use Agreement is acknowledged between the Wholesaler and the Company which outlines the terms and conditions. The collection is probable based on
the credit evaluation of the Wholesaler. Step Two: Identify the performance obligations in the contract – The Company provides to the Supplier access to the online website,
uploading of catalogs of products and Dashboard access to review status of inventory posted and processed orders. The Agreement requires the supplier to provide a catalog of
pharmaceuticals for posting on the platform, deliver the pharmaceuticals and upon shipment remit the stated platform fee. Step Three: Determine the transaction price – The Fee
Agreement outlines the fee based on the type of product, generic, brand or non-drug. There are no discounts for volume of transactions or early payment of invoices. Step Four:
Allocate the transaction price – The Fee Agreement outlines the fee. There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue
when or as the entity satisfies a performance obligation – Revenue is recognized the day the order has been processed by the Supplier.
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54
Integra Pharma Solutions, LLC, the Company’s wholly-owned subsidiary, is a licensed wholesaler and sells to licensed pharmacies brand, generic and non-drug products.
The Company takes orders for product and creates invoices for each order and recognizes revenue at the time the Customer receives the product. Customer returns are not material.
Step One: Identify the contract with the customer – The Company requires that an application and a credit card for payment is completed by the Customer prior to the first order.
Each transaction is evidenced by an order form sent by the customer and an invoice for the product is sent by the Company. The collection is probable based on the application
and credit card information provided prior to the first order. Step Two: Identify the performance obligations in the contract – Each order is distinct and evidenced by the shipping
order and invoice. Step Three: Determine the transaction price – The consideration is variable if product is returned. The variability is determined based on the return policy of the
product manufacturer. There are no sales or volume discounts. The transaction price is determined at the time of the order evidenced by the invoice. Step Four: Allocate the
transaction price – There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance
obligation - The Revenue is recognized when the Customer receives the product.
Community Specialty Pharmacy, LLC, the Company’s wholly-owned subsidiary, is in the retail pharmacy business. The Company fills prescriptions for drugs written by a
doctor and recognizes revenue at the time the patient confirms delivery of the prescription. Customer returns are not material. Step One: Identify the contract with the customer –
The prescription is written by a doctor for a Customer and delivered to the Company. The prescription identifies the performance obligations in the contract. The Company fills the
prescription and delivers to the Customer the prescription, fulfilling the contract. The collection is probable because there is confirmation that the customer has insurance for the
reimbursement to the Company prior to filling of the prescription. Step Two: Identify the performance obligations in the contract – Each prescription is distinct to the Customer.
Step Three: Determine the transaction price – The consideration is not variable. The transaction price is determined to be the price of prescription at the time of delivery which
considers the expected reimbursements from third party payors (e.g., pharmacy benefit managers, insurance companies and government agencies). Step Four: Allocate the
transaction price – The price of the prescription invoiced represents the expected amount of reimbursement from third party payors. There is no difference between contract price
and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – Revenue is recognized upon the delivery of the
prescription.
Stock-Based Compensation
The Company accounts for stock-based compensation to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to
measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to
recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock option forfeitures are
recognized at the date of employee termination. Effective January 1, 2019, the Company adopted ASU 2018-07 for the accounting of share-based payments granted to non-
employees for goods and services.
RECENTLY ISSUED ACCOUNTING STANDARDS
For more information on recently issued accounting standards, see “Note 2 - Summary of Significant Accounting Policies ”, to the Notes to Consolidated Financial
Statements included herein under “Item 8. Financial Statements and Supplemental Data”.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting
company,” as defined by Rule 229.10(f)(1).
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
55
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Table of Contents
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Table of Contents
To the Stockholders and Board of Directors of
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
57
58
59
60
61
62
Trxade Group, Inc.
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, 2020 and 2019, and
the related consolidated statements of operations, changes in stockholders’ equity, 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, 2020 and 2019, and
the results of their operations and their cash flows for the years 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
www.malonebailey.com
We have served as the Company’s auditor since 2013.
Houston, Texas
March 29, 2021
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57
Trxade Group, Inc.
Consolidated Balance Sheets
December 31, 2020 and 2019
Assets
December 31,
2020
December 31,
2019
Current Assets
Cash
Accounts Receivable, net
Inventory
Prepaid Assets
Other Receivables
Total Current Assets
Property Plant and Equipment, Net
Other Assets
Deposits
Deferred offering costs
Right of use leased assets
Goodwill
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
Accrued Liabilities
Current Portion - Operating Lease Liabilities
Customer Deposits
Notes Payable – Related Party
Total Current Liabilities
Long Term Liabilities
Notes Payable – Related Party
Operating Lease Liabilities, net of current portion
Total Liabilities
Stockholders’ Equity
Series A Preferred Stock, $0.00001 par value; 10,000,000 shares authorized; none issued and outstanding as of
December 31, 2020 and December 31, 2019, respectively
Common Stock, $0.00001 par value; 100,000,000 shares authorized; 8,093,199 and 6,539,415 shares issued and
outstanding as of December 31, 2020 and 2019, respectively
Additional Paid-in Capital
Retained Deficit
Total Stockholders’ Equity
$
$
$
$
5,919,578
805,043
1,257,754
151,248
1,087,675
9,221,298
162,397
21,636
-
387,371
-
2,871,694
792,050
56,761
82,452
-
3,802,957
174,987
21,636
88,231
757,710
725,973
9,792,702
$
5,571,494
$
256,829
219,256
131,153
10,000
225,000
842,238
-
271,306
1,113,544
-
81
19,610,631
(10,931,554)
8,679,158
334,614
98,852
87,350
-
-
520,816
225,000
685,461
1,431,277
-
65
12,535,655
(8,395,503)
4,140,217
Total Liabilities and Stockholders’ Equity
$
9,792,702
$
5,571,494
The accompanying notes are an integral part of the consolidated financial statements.
58
Trxade Group, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2020 and 2019
Table of Contents
Revenues, net
Cost of Sales
Gross Profit
Operating Expenses
Loss on write-off of software asset
Loss on Impairment of Goodwill
General and Administrative
Total Operating Expenses
Operating Income (Loss)
Other Income
Investment Loss
Loss on Extinguishment of Debt
Interest Expense
Net Loss
Net Loss per Common Share – Basic and Diluted
2020
2019
$
$
$
$
17,122,520
11,415,198
5,707,322
-
725,973
7,488,011
8,213,984
(2,506,662)
-
-
-
(29,389)
(2,536,051)
(0.33)
$
$
7,436,264
2,565,500
4,870,764
368,520
-
4,377,020
4,745,540
125,224
72,075
(250,000)
(178,500)
(53,227)
(284,428)
(0.05)
Weighted average Common Shares Outstanding – Basic and Diluted
7,705,620
5,929,092
The accompanying notes are an integral part of the consolidated financial statements.
59
Table of Contents
Trxade Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2020 and 2019
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-in-
Capital
Balance at December 31, 2018
Common Stock issued for cash
Common Stock Issued for Convertible Note
Conversion
Common Stock Issued for Settlement of Notes
Payable
Common Stock Issued for Asset Acquisition
Warrants Exercised for Cash
Warrants Expense
Options Expense
Net Loss
Balance at December 31, 2019
Common Stock Issued from Offering
Fractional Common Stock Issued due to reverse
split
Stock Issuance Costs
Common Stock Issued for Services
Options Exercised for Cash
Warrants Exercised for Cash
Warrants Expense
Options Expense
Net Loss
Balance at December 31, 2020
- $
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,547,638 $
818,333
55 $
8
8,955,688 $
2,454,993
Accumulated
Deficit
(8,111,075) $
-
Total
Stockholders’
Equity
844,668
2,455,001
70,666
2
211,981
-
211,983
58,333
41,667
2,778
-
-
-
6,539,415 $
922,219
40
-
217,965
167
413,393
-
-
-
8,093,199
-
-
-
-
-
-
65 $
10
-
-
2
-
4
-
-
-
81
353,500
277,500
165
105,452
176,376
-
12,535,655 $
5,994,414
-
(820,587)
1,357,757
501
37,602
56,885
448,404
-
19,610,631
-
-
-
-
-
(284,428)
(8,395,503) $
-
-
-
-
-
-
-
-
(2,536,051)
(10,931,554)
353,500
277,500
165
105,452
176,376
(284,428)
4,140,217
5,994,424
-
(820,587)
1,357,759
501
37,606
56,885
448,404
(2,536,051)
8,679,158
Table of Contents
The accompanying notes are an integral part of the consolidated financial statements.
60
Trxade Group, Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 2020 and 2019
Operating Activities:
Net loss
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
2020
2019
$
(2,536,051)
$
(284,428)
Depreciation Expense
Options Expense
Warrant Expense
Common Stock Issued for Services
Bad Debt Expense
Loss on extinguishment of debt
Investment Loss
Loss on write off of software asset
Loss on Impairment of Goodwill
Loss on write-down of Inventory
Amortization of Right-of-Use Asset
Changes in operating assets and liabilities:
Accounts Receivable
Prepaid Assets and Other Current Assets
Other Assets
Inventory
Other Receivables
Lease Liability
Accounts Payable
Accrued Liabilities and Other Liabilities
Customer Deposits
Net Cash provided by (used in) operating activities
Investing Activities:
Purchase of Fixed Assets
Purchase of Equity Method Investment
Net Cash Used in Investing Activities
Financing Activities:
Repayments of Short-Term Convertible Debt – Related Parties
Payment of Stock Issuance Costs
Proceeds from Exercise of Warrants
Proceeds from Exercise of Stock Options
Proceeds from Issuance of Common Stock
Net Cash provided by financing activities
Net increase 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
Recognition of ROU assets and operating lease obligations
Purchase of Fixed Assets recorded in Accounts Payable
Common Stock Issued for Conversion of Note and Accrued Interest
Remeasurement of ROU Assets and Lease Liability for Nonrenewal of Lease
5,500
448,404
56,885
1,357,759
10,539
-
-
-
725,973
1,218,020
97,020
(23,532)
(68,796)
-
(2,419,013)
(1,087,675)
(97,033)
(33,190)
120,404
10,000
(2,214,786)
(37,505)
-
(37,505)
-
(732,356)
37,606
501
5,994,424
5,300,175
3,047,884
2,871,694
5,919,578
29,442
-
-
-
-
273,319
$
$
$
$
$
$
$
5,000
176,376
105,452
-
11,500
178,500
250,000
277,500
-
-
89,731
(369,923)
475
(89,336)
23,205
-
(74,630)
(148,659)
(8,988)
-
141,775
(82,252)
(250,000)
(332,252)
(262,552)
-
166
-
2,455,000
2,192,614
2,002,137
869,557
2,871,694
98,461
-
847,441
82,729
386,983
-
$
$
$
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
61
Trxade Group, Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2020 and 2019
Table of Contents
NOTE 1 – ORGANIZATION
Trxade Group, Inc. (“we”, “our”, “Trxade”, and the “Company”) owns 100% of Trxade, Inc., Integra Pharma Solutions, LLC, Community Specialty Pharmacy, LLC, Alliance Pharma
Solutions, LLC and Bonum Health, LLC. The merger of Trxade, Inc. and Trxade Group, Inc. occurred in May 2013. Community Specialty Pharmacy was acquired in October 2018.
Trxade, Inc. operates a web-based market platform that enables commerce among healthcare buyers and sellers of pharmaceuticals, accessories and services.
Integra Pharma Solutions, LLC is a licensed pharmaceutical wholesaler and sells brand, generic and non-drug products.
Community Specialty Pharmacy, LLC is an accredited independent retail pharmacy with a focus on specialty medications. The company operates with innovative pharmacy model
which offers home delivery services to any patient thereby providing convenience.
Alliance Pharma Solutions, LLC has developed a same day Pharma delivery software – Delivmeds.com and invested in SyncHealth MSO, LLC a managed services organization in
January 2019. (See Note 12 – Equity Method Investment).
Bonum Health, LLC was formed to hold certain telehealth assets acquired in October 2019. The “Bonum Health Hub” was launched in November 2019 and was expected to be
operational in April 2020; however, due to the COVID-19 pandemic, at present the Company does not anticipate installations moving forward until later in 2021 at the earliest. The
hub is a Health Insurance Portability and Accountability Act (HIPPA)-compliant booth planned to be installed at select independent pharmacies, with technology that connects
patients to board-certified medical care through the Bonum Health mobile app and website portal. The Bonum Health mobile application is also available on a subscription basis,
primarily as a stand-alone telehealth software application that can be licensed on a business-to-business (B2B) model to clients as an employment health benefit for the clients’
employees. In August 2020, Bonum Health, LLC launched a business-to-business (B2B) platform called Bonum+, which bundles telehealth, a COVID-19 risk assessment tool and a
personal protective equipment (PPE) purchasing tool, through a secure mobile dashboard for corporate clients.
MedCheks, LLC was formed in January 2021 and is a patient-centered, digital, precision healthcare platform that lets patients consolidate and control their health data via a digital
Health Passport. The digital Health Passport allows users to share their health profile, tests and vaccinations simply and safely. Secured in a blockchain, the Health Passport
includes health and vaccination status verification via a QR code (a two-dimensional machine-readable optical label), which is available for travel, entry into stadiums, concert
venues, events, offices, industrial plants, warehouses, and other physical access points. MedCheks Health Passport stores all of a user’s health records securely in one place.
On October 9, 2019, the Company’s Board of Directors, and on October 15, 2019, stockholders holding a majority of the Company’s outstanding voting shares, approved
resolutions authorizing a reverse stock split of the outstanding shares of the Company’s common stock in the range from one-for-two (1-for-2) to one-for-ten (1-for-10) and
provided authority to the Company’s Board of Directors to select the ratio of the reverse stock split in their discretion (the “Stockholder Authority”). On February 12, 2020, the
Board of Directors of the Company approved a stock split ratio of 1-for-6 (“Reverse Stock Split”) in connection with the Stockholder Authority and the Company filed a Certificate
of Amendment with the Secretary of Delaware to affect the Reverse Stock Split.
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62
Proportional adjustments were made to the conversion and exercise prices of the Company’s outstanding warrants and stock options, and to the number of shares issued and
issuable under the Company’s stock incentive plans in connection with the Reverse Stock Split. The Reverse Stock Split did not affect any stockholder’s ownership percentage of
the Company’s common stock, except to the limited extent that the Reverse Stock Split resulted in any stockholder owning a fractional share. Fractional shares of common stock
were rounded up to the nearest whole share based on each holder’s aggregate ownership of the Company. All issued and outstanding shares of common stock, options and
warrants to purchase common stock and per share amounts contained in the financial statements, have been retroactively adjusted to reflect the Reverse Stock Split for all periods
presented.
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”).
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.
Liquidity – Historically, operations have been funded primarily through the sale of equity or debt securities and operating activities. In 2020, the Company raised approximately
$5.99 million in capital (See Note 4 – Stockholders’ Equity). The Company has the ability to maintain the current level of spending or reduce expenditures to maintain operations if
funding is not available.
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., Integra Pharma Solutions, Inc., Alliance
Pharma Solutions, LLC, Community Specialty Pharmacy, LLC, Bonum Health, LLC and MedCheks, LLC. All significant intercompany accounts and transactions have been
eliminated.
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 FDIC insurance limits for 2020.
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 years ended December 31, 2020 and 2019, $10,539 and $11,500 of bad debt expense, respectively
and $0 of recovery of bad debt, was recognized.
Inventory – Inventories are stated at the lower of cost or net realizable value. Cost is determined on a first in first out basis. These are merchandise inventories at Community
Specialty Pharmacy, LLC and Integra Pharma Solutions, LLC. On a quarterly basis, we evaluate inventory for net realizable value using estimates based on historical experience,
current or projected pricing trends, specific categories of inventory, age and expiration dates of on-hand inventory and manufacturer return policies. If actual conditions are less
favorable than our assumptions, additional inventory write-downs may be required, and no reserve is maintained as obsolete or expired inventories are written off. We believe that
the inventory valuation provides a reasonable approximation of the current value of inventory. There is no reserve for inventory obsolescence and inventory is not pledged during
the periods presented. During the years ended December 31, 2020 and 2019, included in cost of sales were write-downs to reduce inventory to net realizable value of $1,218,020 and
$0, respectively.
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63
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.
Fair Value of Financial Instruments – The Company measures its financial assets and liabilities in accordance with the requirements of Financial Accounting Standards Board
(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.
Goodwill – The Company accounts for goodwill and intangible assets in accordance with ASC 350 “Intangibles Goodwill and Other”. ASC 350 requires that goodwill and other
intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset is more likely than not has
decreased below its carrying value. The Company performed impairment analysis using the quantitative analysis under ASC 350-20 and because of declining revenues and
operating losses an impairment of goodwill was recognized as of December 31, 2020 was $725,973.
Revenue Recognition – 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 adopted ASU 2014-09 using the modified retrospective approach effective January 1, 2018, under which prior periods were
not retrospectively adjusted. The adoption of Topic 606 did not have a material impact on the Company’s consolidated financial statements, including the presentation of revenues
in the Company’s Consolidated Statements of Operations.
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64
Trxade, Inc. provides an online website service, a buying and selling marketplace for licensed Pharmaceutical Wholesalers to sell products and services to licensed Pharmacies.
The Company charges Suppliers a transaction fee, a percentage of the purchase price of the Prescription Drugs and other products sold through its website service. The fulfillment
of confirmed orders, including delivery and shipment of Prescription Drugs and other products, is the responsibility of the Supplier and not of the Company. The Company holds
no inventory and assumes no responsibility for the shipment or delivery of any products or services from the Company’s website. The Company considers itself an agent for this
revenue stream and as such, reports revenue as net. Step One: Identify the contract with the customer – Trxade, Inc.’s Terms and Use Agreement is acknowledged between the
Wholesaler and Trxade, Inc. which outlines the terms and conditions. The collection is probable based on the credit evaluation of the Wholesaler. Step Two: Identify the
performance obligations in the contract – The Company provides to the Supplier access to the online website, uploading of catalogs of products and Dashboard access to review
status of inventory posted and processed orders. The Agreement requires the supplier to provide a catalog of pharmaceuticals for posting on the platform, deliver the
pharmaceuticals and upon shipment remit the stated platform fee. Step Three: Determine the transaction price – The Fee Agreement outlines the fee based on the type of product,
generic, brand or non-drug. There are no discounts for volume of transactions or early payment of invoices. Step Four: Allocate the transaction price – The Fee Agreement
outlines the fee. There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance
obligation – Revenue is recognized the day the order has been processed by the Supplier.
Integra Pharma Solutions, LLC is a licensed wholesaler and sells to licensed pharmacies brand, generic and non-drug products. The Company takes orders for product and creates
invoices for each order and recognizes revenue at the time the Customer receives the product. Customer returns are not material. Step One: Identify the contract with the customer
– The Company requires that an application and a credit card for payment is completed by the Customer prior to the first order. Each transaction is evidenced by an order form sent
by the customer and an invoice for the product is sent by the Company. The collection is probable based on the application and credit card information provided prior to the first
order. Step Two: Identify the performance obligations in the contract – Each order is distinct and evidenced by the shipping order and invoice. Step Three: Determine the
transaction price – The consideration is variable if product is returned. The variability is determined based on the return policy of the product manufacturer. There are no sales or
volume discounts. The transaction price is determined at the time of the order evidenced by the invoice. Step Four: Allocate the transaction price – There is no difference between
contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation - The Revenue is recognized when the
Customer receives the product.
Community Specialty Pharmacy, LLC is in the retail pharmacy business. The Company fills prescriptions for drugs written by a doctor and recognizes revenue at the time the
patient confirms delivery of the prescription. Customer returns are not material. Step One: Identify the contract with the customer – The prescription is written by a doctor for a
Customer and delivered to the Company. The prescription identifies the performance obligations in the contract. The Company fills the prescription and delivers to the Customer
the prescription, fulfilling the contract. The collection is probable because there is confirmation that the customer has insurance for the reimbursement to the Company prior to
filling of the prescription. Step Two: Identify the performance obligations in the contract – Each prescription is distinct to the Customer. Step Three: Determine the transaction price
– The consideration is not variable. The transaction price is determined to be the price of the prescription at the time of delivery which considers the expected reimbursements from
third party payors (e.g., pharmacy benefit managers, insurance companies and government agencies). Step Four: Allocate the transaction price – The price of the prescription
invoiced represents the expected amount of reimbursement from third party payors. There is no difference between contract price and “stand-alone selling price”. Step Five:
Recognize revenue when or as the entity satisfies a performance obligation – Revenue is recognized upon the delivery of the prescription.
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65
Cost of Goods Sold – The Company recognized cost of goods sold from activities in Integra Pharma Solutions, LLC and Community Specialty Pharmacy, LLC.
Stock-Based Compensation – The Company accounts for stock-based compensation to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718
requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value
of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock
option forfeitures are recognized at the date of employee termination. Effective January 1, 2019, the Company adopted ASU 2018-07 for the accounting of share-based payments
granted to non-employees for goods and services.
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 2017 forward are open to examination by the Internal Revenue Service.
Equity Investments – If the investments are less than 50% owned and more than 20% owned, the entities use the equity method of accounting in accordance with ASC 323-10
Investments – Equity Method and Joint Ventures.
The share of income (loss) of such entities is recorded as a single amount as share in equity income (loss) of investments. Dividends, if any, are recorded as a reduction of the
investment.
The Company’s equity investment was fully impaired at December 31, 2019.
The Company had no equity investment for the year ended December 31, 2020.
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
treasury stock method and as if converted methods are used to determine the dilutive shares for the Company’s options and warrants and convertible notes, respectively. In
periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The following table sets forth the computation of basic and diluted income per common share for the years ended December 31, 2020 and 2019:
Numerator:
Net Income (Loss)
Numerator for basic and diluted income available to common shareholders
Denominator:
Denominator for basic and diluted income per common share – Weighted average common shares
outstanding
Basic and Diluted income (loss) per common share
66
Table of Contents
December 31, 2020
December 31, 2019
$
$
$
(2,536,051)
(2,536,051)
7,705,620
(0.33)
$
$
$
(284,428)
(284,428)
5,929,092
(0.05)
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. The amount of cash
not insured by the FDIC as of December 31, 2020 is $5,013,888. During the years ended December 31, 2020 and 2019, sales to two customers represent greater than 10% of revenue
at 25% and 15% in 2020 and 10.3% and 10.8% in 2019, respectively.
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.
Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) using the required modified retrospective approach. The most significant
changes under the new guidance include clarification of the definition of a lease, and the requirements for lessees to recognize a Right of Use (“ROU”) asset and a lease liability for
all qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional disclosures are required to meet the objective
of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. See Note 10 – Leases, below for more detail on the
Company’s accounting with respect to leases.
Effective January 1, 2019, the Company adopted ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting (“ASU 2018-7”), which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with
certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-
Employees. The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted - In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount
expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectibility of the reported amounts. An entity must use judgment in determining the relevant information and estimation
methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those
fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which
the guidance is effective. In November of 2019, the FASB issued ASU 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022
for smaller reporting companies.
The Company does not expect the adoption of this new accounting guidance to have a material impact on its financial position, results of operations, or cash flows.
NOTE 3 – SHORT-TERM DEBT AND RELATED PARTIES DEBT
Convertible Promissory Notes
In February 2019, convertible promissory notes issued in 2015 for $181,500 were amended to have a conversion price of $3.00 per share, and the principal and accrued interest
totalling $211,983, were then converted into 70,666 common shares.
As of December 31, 2020 and 2019, short-term convertible notes payable has a balance of $0 and $0, respectively, net of $0 unamortized debt discount.
Related Party Convertible Promissory Notes
In August 2019, a $40,000 convertible promissory note due to Mr. Shilpa Patel, a relative of Mr. Prashant Patel, the Company’s President and director, was paid in full.
In September and October 2016, convertible promissory notes were issued in the aggregate amount of $211,725 to a related party, Mr. Nitil Patel, the brother of Mr. Prashant Patel,
the Company’s President and director. The term of the notes was one year. Simple interest of 10% was payable at the maturity date of the notes. Prior to maturity, the notes could
be converted into common stock at a conversion price of $3.72 per share. In connection with the notes, the holders of the notes were granted warrants to purchase 8,810 shares of
common stock. These warrants were granted at a strike price of $3.72 per share and had an expiration date of five years from the date of issuance. In July 2019, a note was extended
to October 15, 2019, and the modification was not considered substantial. In October 2019, the note was converted into 33,333 shares of common stock at $3.00 per share. There
was a loss recognized on conversion of $102,000.
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As of December 31, 2020 and 2019, the short-term related party convertible notes had a principal balance of $0 and $0, respectively, net of an unamortized debt discount of $0.
Related Party Promissory Notes
In June 2017, the Company repaid an outstanding promissory note, dated May 8, 2016, as amended, in the principal amount of $250,000 (the “NPR Note”), owed to 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 of the Company and Mr. Patel is President.
The Company borrowed funds to repay the NPR Note in the amounts of $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% per annum, which is payable annually.
The note due to Mr. Patel is $122,552. It comprises $80,000 for the NPR note, $17,280 for an existing promissory note and $25,272 of assumption of credit card obligations related to
business expenses of the Company.
On October 8, 2019, the notes were paid in full. The notes were due on July 1, 2020 and each bear interest at the rate of 6% per annum. The outstanding amounts paid to Mr. Patel
and Sansur Associates, LLC were $122,552 and $100,000, respectively.
In October 2018, in connection with the acquisition of Community Specialty Pharmacy, LLC, a $300,000 promissory note was issued to Nikul Panchal, a non-executive officer of the
Company, accruing simple interest at the rate of 10% per annum, payable annually, and having a maturity date in October 15, 2021. In October 2019, $75,000 of the note was
converted into 25,000 common shares at $3.00 per share. There was a loss recognized on this conversion of $76,500.
At December 31, 2020 and 2019, total related party debt was $225,000 and $225,000, respectively.
NOTE 4 – STOCKHOLDERS’ EQUITY
2019
In February 2019, convertible promissory notes issued in 2015 in the amount of $181,500, were amended to include a conversion price of $3.00 per share, and the principal and
accrued interest totalling $211,983 was then converted into 70,666 common shares.
In February 2019, warrants to purchase 2,778 shares of common stock granted in 2014 with an exercise price of $0.06 per share were exercised for $166 in cash and the Company
issued 2,778 common shares.
In April and May 2019, options to purchase 84,178 shares of common stock were granted with exercise prices of between $2.46 and $2.64 per share, and a term of 10 years from the
grant date. The options vest over a period of four to five years.
On July 10, 2019, the Company entered into a securities Purchase Agreement with an accredited investor with respect to the private placement of 333,333 shares of common stock
at a purchase price of $3.00 per share, for gross proceeds of $1,000,000. This transaction closed on July 30, 2019.
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68
On September 1, 2019, the Company granted Flacane Advisors, Inc., a company controlled by Gary Augusta, a former member of the Board of Directors of the Company, warrants
to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.06 per share. Based on the agreement, warrants to purchase 25,000 shares vest on April 1, 2020
and warrants to purchase 25,000 shares vest on April 1, 2021. The warrants have a term of 5 years. Warrants to purchase 25,000 shares were exercised in May 2020. The remaining
25,000 warrants were automatically revoked when Flacane Advisors, Inc.’s services were terminated.
On September 30, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors with respect to the private placement of 485,000 shares of
common stock at a purchase price of $3.00 per share, for gross proceeds of $1,455,000. Subscribers included Bedford Falls Capital, which is controlled by Gary Augusta, the
Company’s former director (166,667 shares); Nitesh Patel, who is the cousin of Prashant Patel, the Company’s director and President (6,667 shares); and Shilpa Patel, who is the
spouse of Nitesh Patel, the brother of Prashant Patel, the Company’s director and President (3,333 shares).
In October 2019, the Company converted $175,000 of principal owed under various outstanding promissory notes into 58,333 shares common stock of the Company at $3.00 per
share. There was a loss recognized on this conversion of $178,500.
On October 23, 2019 (the “Closing Date”), Bonum Health, LLC, a Delaware limited liability company, and a wholly-owned subsidiary of the Company entered into an Asset
Purchase Agreement with Bonum Health, LLC, a Florida limited liability company (“Seller”) and Hardikkumar Patel, the sole member of the Seller (the “Member”). Pursuant to the
Asset Purchase Agreement, the Company acquired from the Seller, certain specified assets and certain specified contracts associated with the assets of Seller’s operation as a
telehealth service provider (the Tele Meds Platform) (the “Assets”). Included with the acquisition of the Assets, were contracts (relating to the Assets), intellectual property for
the E-Hub Software and Technology and personal computers. The Company agreed to provide the Seller consideration equal to 41,667 shares of restricted common stock of the
Company at the closing with a fair value of $277,500. See Note 13– Asset Acquisition.
2020
On February 13, 2020, we entered into an underwriting agreement (the “Underwriting Agreement”) with Dawson James Securities, Inc. (the “Representative”), as representative of
the several underwriters named therein, relating to the sale of 806,452 shares of common stock in a firm commitment underwritten offering (the “Offering”). The transactions
contemplated by the Underwriting Agreement closed on February 18, 2020 (the “Closing Date”), at which time we sold 806,452 shares of common stock to the underwriters. On
February 21, 2020, the Representative exercised their overallotment option and purchased an additional 115,767 shares of common stock. The shares were sold at a public offering
price of $6.50 per share.
The Company received proceeds of approximately $5.99 million from the Offering. The Company paid the underwriters a cash fee equal to 8% of the aggregate gross proceeds
received by the Company in connection with the Offering and reimbursed certain expenses. The total costs of the Offering were $820,587, including $88,213 paid in the prior year,
which was included in deferred offering cost as of December 31, 2019. The net proceeds of the Offering were approximately $5.17 million.
In February 2020, warrants to purchase 22,529 shares of common stock were exercised at $0.06 per share by Nikul Panchal, a non-executive officer of the Company and note holder.
The Company issued 22,529 shares of common stock upon such exercise, and $1,352 in proceeds were received in connection with such exercise.
In March 2020, options to purchase 167 shares of common stock were exercised at $3.00 per share; the Company issued 167 shares of common stock upon such exercise and
received $501 in proceeds.
In May 2020, warrants to purchase 25,000 shares of common stock were exercised at $0.06 per share by a former consultant; the Company issued 25,000 shares of common stock
upon such exercise and $1,500 in proceeds was received by the Company in connection with such exercise.
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69
On June 25, 2020, warrants to purchase 335,002 shares of common stock were exercised at $0.06 per share; the Company issued 335,002 shares of common stock upon such exercise
and $20,100 in proceeds was received by the Company.
In August 2020, warrants to purchase 1,667 shares of common stock were exercised at $4.80 per share; the Company issued 1,667 shares of common stock upon such exercise and
$8,002 in proceeds was received by the Company.
In August 2020, warrants to purchase 1,667 shares of common stock were exercised at $3.00 per share; the Company issued 1,667 shares of common stock upon such exercise and
$5,001 in proceeds was received by the Company.
In September 2020, warrants to purchase 5,000 shares of common stock were exercised at $0.06 per share; the Company issued 5,000 shares of common stock upon such exercise
and $300 in proceeds was received by the Company. These warrants were granted in September 2020 in connection with the financial consulting agreement dated in September
2019 where the Company agreed to pay the consultant $15,000 over nine months and the above mentioned warrants.
In October 2020, warrants to purchase 22,528 shares of common stock were exercised at $0.06 per share by Nikul Panchal, a non-executive officer of the Company and note holder.
The Company issued 22,528 shares of common stock upon such exercise, and $1,351 in proceeds were received in connection with such exercise.
2019 Chief Executive Officer and President Bonuses
On April 14, 2020, the Board of Directors of the Company (the “Board”) and the Compensation Committee of the Board, approved the award to Suren Ajjarapu, the Company’s
Chief Executive Officer and Prashant Patel, the Company’s President, of bonuses equal to 1% of the Company’s outstanding shares, equivalent to 74,484 shares of common stock,
and 50,000 shares of common stock, respectively. The awards were made under and pursuant to the Company’s 2019 Equity Incentive Plan (the “ Plan”). The Company recognized
stock-based compensation expense of $761,842 equivalent to the fair value of the shares granted.
2020 Equity Compensation Awards
On April 14, 2020, the Compensation Committee approved the grant of (a) 5,000 shares of restricted common stock to the Company’s legal counsel; and (b) 12,500 shares of
restricted common stock to Howard A. Doss, the Company’s Chief Financial Officer, which shares vest at the rate of 1/4th of such shares on July 1 and October 1, 2020 and
January 1 and April 1, 2021. The shares have a fair value of $107,100 and the Company recognized stock-based compensation expense of $80,325 for the year ended December 31,
2020.
Independent Director Compensation Plan
On April 14, 2020, the three independent members of the Board of Directors (Mr. Donald G. Fell, Dr. Pamela Tenaerts, and Mr. Michael L. Peterson), were each awarded 8,987 shares
of restricted stock, which vest at the rate of 1/4th of such shares on July 1 and October 1, 2020 and January 1 and April 1, 2021. The shares have a fair value of $165,001 and the
Company recognized stock-based compensation expense of $123,751 for the year ended December 31, 2020.
Employment Agreement with Suren Ajjarapu, Chief Executive Officer
In connection with our employment agreement with Mr. Suren Ajjarapu, our Chief Executive Officer, which was effective on April 14, 2020, we granted 49,020 restricted shares of
common stock which vest upon the Company reaching certain performance metrics established by the Compensation Committee on the same date and further amended on May 5,
2020. The fair value of the shares at the grant date was determined to be $300,000. The modification of the performance conditions resulted in an incremental value to the shares of
$72,062. The Compensation Committee subsequently determined that the performance conditions were met and the 49,020 bonus shares vested in full on December 31, 2020. The
compensation expense of $391,841 was recognized for the year ended December 31, 2020.
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NOTE 5 - WARRANTS
70
In 2019, warrants to purchase 2,778 shares of common stock were exercised for cash, 50,000 were granted and 2,778 were forfeited. See Note 4 – Stockholders’ Equity.
In 2020, warrants to purchase 413,393 shares of common stock were exercised for cash, 5,000 were granted and 33,336 were forfeited. See Note 4 – Stockholders’ Equity.
The Company uses the Black-Scholes pricing model to estimate the fair value of stock-based awards on the date of the grant. The following table summarizes the assumptions used
to estimate the fair value of the warrants granted during the years ended December 31, 2020 and 2019.
Expected dividend yield
Weighted-average expected volatility
Weighted-average risk-free interest rate
Expected life of warrants
The Company’s outstanding and exercisable warrants as of December 31, 2020 and 2019 are presented below:
2020
2019
0%
217%
2.75%
5 years
0%
217%
2.75%
5 years
Warrants Outstanding as of December 31, 2018
Warrants granted
Warrants forfeited
Warrants exercised
Warrants Outstanding as of December 31, 2019
Warrants granted
Warrants forfeited
Warrants exercised
Warrants Outstanding as of December 31, 2020
Number
Outstanding
Weighted
Average
Exercise
Price
Contractual
Life in
Years
Intrinsic
Value
480,036
50,000
(2,778)
(2,778)
524,480
5,000
(33,336)
(413,393)
82,751
$
$
$
$
$
$
$
$
$
0.46
0.06
0.06
0.06
0.42
0.06
2.30
0.09
1.33
$
$
3.56
5.01
-
-
2.39
5.00
-
-
782,393
-
-
-
3,273,897
-
-
2.73
$
352,951
Warrants Exercisable as of December 31, 2020
60,223
$
1.81
1.59
$
235,129
NOTE 6 - OPTIONS
The Company maintains stock option plans under which certain employees are awarded option grants based on a combination of performance and tenure. The stock option plans
provide for the grant of up to 2,333,333 shares, and the Company’s 2019 Amended and Restated 2019 Equity Incentive Plan provides for automatic increases in the number of
shares available under such plan (currently 2,000,000 shares) on April 1st of each calendar year, beginning in 2021 and ending in 2029 (each a “Date of Determination”), in each
case subject to the approval and determination of the administrator of the plan (the Board of Directors or Compensation Committee) on or prior to the applicable Date of
Determination, equal to the lesser of (A) ten percent (10%) of the total shares of common stock of the Company outstanding on the last day of the immediately preceding fiscal
year and (B) such smaller number of shares as determined by the administrator.
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71
Stock options were granted during 2020 and 2019 to employees totalling 94,154 and 84,178, respectively. These options vest over a period of 4 to 7 years, are granted with an
exercise price of between $2.46-$7.50 per share and have a term of 10 years. The last options expire in November 2029.
Under the Black-Scholes option price model, fair value of the options granted in 2020 and 2019 were $557,308 and $220,975, respectively.
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, 2020 and 2019:
Expected dividend yield
Weighted-average expected volatility
Weighted-average risk-free interest rate
Expected life of options
2020
2019
0%
133-236%
0.25%
5-7 years
0%
209-250%
2.08-2.55%
4-5 years
Total compensation cost related to stock options was $448,404 and $176,376 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was
$264,833 of unrecognized compensation costs related to stock options, which is expected to be recognized over a weighted average period of 5.33 years. The following table
represents stock option activity for the two years ended December 31, 2020:
Options Outstanding as of December 31, 2018
Options Exercisable as of December 31, 2018
Options granted
Options forfeited
Options expired
Options Outstanding as of December 31, 2019
Options Exercisable as of December 31, 2019
Options granted
Options forfeited
Options expired
Options exercised
Options Outstanding as of December 31, 2020
Options Exercisable as of December 31, 2020
NOTE 7 – INCOME TAXES
Number
Outstanding
Weighted
Average
Exercise
Price
Contractual
Life in
Years
Intrinsic
Value
$
$
$
$
288,825
184,543
84,178
(13,703)
(12,302)
346,998
207,485
94,154
(15,168)
-
(167)
425,817
282,167
$
$
7.14
5.76
2.57
5.73
3.34
4.39
5.29
4.42
3.18
-
3.00
4.44
4.52
$
$
$
6.79
5.03
9.35
4.63
8.23
6.77
5.53
3.97
7.12
-
-
5.33
4.56
$
$
-
-
-
-
817,220
314,338
-
-
597,322
384,226
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.
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At December 31, 2020 and 2019 deferred tax assets consist of the following:
72
Federal loss carryforwards
Less: valuation allowance
December 31, 2020
December 31, 2019
$
$
1,309,534
(1,309,534)
-
$
$
1,135,810
(1,135,810)
-
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 $5,506,902 will be available based on the new carryover rules in section 172(a) passed with the Tax Cuts and Jobs
Acts.
NOTE 8 – OTHER RECEIVABLES
In July 2020, the Company’s wholly-owned subsidiary, Integra Pharma Solutions, Inc. (“Integra”), entered into an agreement with Studebaker Defense Group, LLC (“Studebaker”)
wherein Integra would pay Studebaker a down payment of $500,000 and Studebaker would deliver 180,000 boxes of nitrile gloves by August 14, 2020. Integra wired the $500,000 to
Studebaker, but to date, Studebaker has not delivered the gloves or provided a refund of the deposit. In December 2020, we filed a complaint against Studebaker in Florida state
court, Case No. 20-CA-010118 in the Circuit Court for the Thirteenth Judicial Circuit in Hillsborough County, for among other things, breach of contract. Studebaker did not answer
the complaint, nor did counsel for Studebaker file an appearance. Accordingly, in February 2021 the Company filed a default judgment; however, on March 22, 2021, counsel for
Studebaker filed an appearance and the Company anticipates that Studebaker will file a motion to vacate the default judgment. A hearing on our motion for a default judgement has
been set for April 27, 2021. The Company anticipates that irrespective of the outcome of such hearing on April 27, 2021, the Company will prevail on the merits; and believes
Studebaker’s has the ability to satisfy a judgment.
In August 2020, Integra, entered into an agreement with Sandwave Group Dsn Bhd (“Sandwave”), wherein Integra would pay Sandwave a down payment of $581,250 and
Sandwave’s supplier, Crecom Burj Group SDN BHD (“Crecom”), would deliver 150,000 boxes of nitrile gloves within 45 days. Integra wired the $581,250 to Sandwave, which in turn
wired the purchase price to Crecom, which Crecom accepted; however, to date, Crecom has not delivered the nitrile gloves. Integra demanded return of its $581,250 and Crecom
has acknowledged that Integra is entitled to a refund, but to date Crecom has failed to return Integra’s money. In February 2021, Integra filed a complaint against Crecom in
Malaysia: Case No. WA-22NCC-55-02/2021 in the High Court of Malaysia at Kuala Lumpur in the Federal Territory, Malaysia for the Malaysian equivalent of breach of
contract. Crecom filed an appearance on March 1, 2021; and Crecom had 14 days to file an answer, which they did not do; however, Crecom has filed a request for extension which
we are contesting. There is a hearing scheduled on April 20, 2021 to hear the matter and, in the meantime, we are preparing our Application for Summary Judgement. If a judgment is
entered against Crecom, the process of executing the judgment, and ultimately collecting, can take three to six months. The Company believes that it will prevail in the lawsuit filed;
and believes Crecom has the ability to satisfy a judgment, and the steps to enforce a judgment in Malaysia, if any, may be cumbersome, time consuming or costly.
NOTE 9 - CONTINGENCIES
In January 2020, we became aware of a complaint filed by Jitendra Jain, Manish Arora, Scariy Kumaramangalam, Harsh Datta and Balvant Arora (collectively, plaintiffs), against our
wholly-owned subsidiary, Trxade, Inc. and our Chief Executive Officer, Suren Ajjarapu as well as certain unrelated persons, Annapurna Gundlapalli, Gajan Mahendiran and Nexgen
Memantine (collectively, defendants), in the Circuit Court of Madison County, Alabama (Case:47-CV-2019-902216.00). The complaint alleged causes of actions against the
defendants including fraud in the inducement, relating to certain investments alleged to have been made by plaintiffs in Nexgen Memantine, breach of fiduciary duty, conversion
and voidable transactions. The complaint related to certain investments alleged made by the plaintiffs in Nexgen Memantine and certain alleged fraudulent transfers of assets and
funds alleged to have been taken by the defendants which are unrelated to the Company. The complaint sought $425,000 in compensatory damages and $1,275,000 in punitive
damages. The Company and Mr. Ajjarapu denied in their entirety the plaintiffs’ allegations and filed a motion to dismiss the plaintiffs’ claims against the Company and Mr.
Ajjarapu, which motion was granted in May 2020, due to the plaintiffs not being able to establish personal jurisdiction over the defendants, which motion was successful as to all
defendants. The Company and Mr. Ajjarapu further refute any connections for the purpose of the suit to the other named defendants. To the Company’s and Mr. Ajjarapu’s
knowledge, the complaint had no merit whatsoever. The final date for the plaintiffs to appeal the ruling to dismiss the lawsuit passed in August 2020, and there was no appeal. As
such, the ruling is final.
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73
However, in September 2020, the plaintiffs filed a similar complaint (alleging substantially similar facts) in the United States District Court for the Middle District of Florida, Tampa
Division (Case 8:20-cv-02263), against the same defendants but adding Westminster Pharmaceuticals, LLC, our former wholly-owned subsidiary (“Westminster”), and raising
claims for alleged fraud under Section 10(b) and Rule 10b-5 of the Exchange Act; joint and several liability under 15 U.S.C. Code 78t (against Trxade, Inc.); fraudulent transactions
of securities under the Florida Securities Act (against all of the defendants except Trxade); and sale of unregistered securities under the Florida Securities Act (against all of the
defendants except Trxade). The total amount of damages sought is unclear, but is thought to be in excess of $425,000. To the Company’s and Mr. Ajjarapu’s knowledge, the
complaint has no merit whatsoever and each of the Company and Mr. Ajjarapu intend to defend themselves and oppose the relief sought in the complaint. The Company is not
currently accused of any direct misconduct; instead, the Company is alleged to be liable for the acts of certain or all of the other defendants. The Company would likely only incur
liability if some or all of the other defendants were found liable to plaintiffs and the Company is found to be jointly and severally liable for the actions of such other defendant or
defendants. The lawsuit claims approximately $450,000 in damages; however, based on facts currently known, the Company assesses the likelihood of any material loss as remote.
NOTE 10 – LEASES
The Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company to apply the transition provision for Topic 842 at
the Company’s adoption date instead of at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing
at January 1, 2019, but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition guidance which allows the
Company to carry forward the historical accounting treatment for existing leases upon adoption. No impact was recorded to the beginning retained earnings for Topic 842. The
Company has two operating leases for corporate offices. The following table outlines the details:
Initial Lease Term
Renewal Term
Initial Recognition of Right to use assets at January 1, 2019
Incremental Borrowing Rate
Lease 1
Lease 2
December 2017 to December
2021
January 2021 to December 2024
534,140
$
$
November 2018 to November
2023
November 2023 to November
2028
313,301
10%
10%
The Company decided not to renew the corporate office lease (Lease 1) on January 2021; however, the parties subsequently negotiated a one-year lease at the same location. The
Company determined that the decision to not renew Lease 1 changed the corresponding lease term which required remeasurement of the lease liability resulting in the reduction of
the right-of-use asset and the associated lease liability by $97,020. The reassessment of the lease term did not change the existing classification and the lease is still classified as an
operating lease.
The table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the operating lease liabilities
recorded in the Consolidated Balance Sheet as of December 31, 2020.
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Amounts due within twelve months of December 31
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less: effect of discounting
Present value of future minimum lease payments
Less: current obligations under leases
Long-term lease obligations
$
$
165,505
58,902
50,572
52,089
53,652
160,793
541,513
(139,054)
402,459
131,153
271,306
For the year ended December 31, 2020, amortization of assets was $97,020.
For the year ended December 31, 2020, operating lease liabilities paid was $97,033.
NOTE 11 – SEGMENT REPORTING
The Company classifies its business interests into reportable segments which are Trxade, Inc., Community Specialty Pharmacy, LLC, Integra Pharma, LLC and Other (Unallocated).
Operating segments are defined as the components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating
decision makers in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision makers direct the allocation of resources to
operating segments based on the profitability, cash flows, and growth opportunities of each respective segment.
Year Ended
December 31, 2020
Revenue
Gross Profit
Segment Assets
Segment Profit/Loss
Year Ended
December 31, 2019
Revenue
Gross Profit
Segment Assets
Segment Profit/Loss
Trxade, Inc.
5,546,746
5,546,746
2,076,934
3,309,128
Trxade, Inc.
4,527,740
4,527,740
1,843,970
2,440,375
$
$
$
$
$
$
$
$
Community
Specialty
Pharmacy, LLC
1,653,924
107,771
(457,784)
(900,427)
Community
Specialty
Pharmacy, LLC
1,888,086
205,334
188,296
(133,648)
$
$
$
$
$
$
$
$
$
$
$
$
$
75
Integra
Pharma, LLC
9,877,067
8,374
2,698,357
(531,092)
Integra
Pharma, LLC
1,020,438
137,690
371,874
(171,640)
$
$
$
$
$
$
$
Unallocated
Total
44,783
44,431
5,475,195
(4,413,660)
Unallocated
-
-
3,167,354
(2,419,515)
$
$
$
$
$
$
17,122,520
5,707,322
9,792,702
(2,536,051)
Total
7,436,264
4,870,764
5,571,494
(284,428)
Table of Contents
NOTE 12 – EQUITY METHOD INVESTMENT
In January 2019, the Company, through its wholly-owned subsidiary Alliance Pharma Solution, LLC (“ Alliance”), entered into a joint venture transaction to form SyncHealth MSO,
LLC (“SyncHealth”). SyncHealth is owned by PanOptic Health, LLC (“PanOptic”) and Alliance. Alliance contributed $250,000 for the acquisition of a 30% equity interest in
SyncHealth and the option to acquire the remaining ownership from PanOptic stockholders. Prior to March 31, 2019, $210,000 was paid with the remaining $40,000 paid in April
2019. Pursuant to the operating agreement, PanOptic owned 70% of SyncHealth and Alliance owned 30%; however, pursuant to the Letter Agreement, PanOptic would transfer to
Alliance an additional 6% of SyncHealth’s membership units on May 1, 2019, an additional 6% on August 1, 2019 and an additional 7% on November 1, 2019, and at Alliance’s
option, the 51% balance on January 31, 2020, upon transfer of between 378,888 and 2,462,773 shares of Company common stock based on 2019 Gross Revenue Quotas. As of
December 31, 2019, the additional interests had not been transferred and Alliance still owns 30% of SyncHealth. We did not realize any income from the joint venture and we
terminated the joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned the 30% ownership of SyncHealth back to PanOptic. As of February
1, 2020, we own no equity in SyncHealth and only the terms of the agreements relating to confidentiality, non-solicitation and each party’s obligation to cease use of the other
party’s intellectual property survive the termination. The investment loss recognized during the year ended December 31, 2019 was $250,000.
NOTE 13 – ASSET ACQUISITION
On October 23, 2019 (the “Closing Date”), Bonum Health, LLC, a Delaware limited liability company, and a wholly-owned subsidiary of the Company, entered into an Asset
Purchase Agreement with Bonum Health, LLC, a Florida limited liability company (“Seller”) and Hardikkumar Patel, the sole member of the Seller (the “Member”). Pursuant to the
Asset Purchase Agreement, the Company acquired from the Seller, certain specified assets and certain specified contracts associated with the assets of Seller’s operation as a
telehealth service provider (the Tele Meds Platform) (the “Assets”). Included with the acquisition of the Assets, were contracts (relating to the Assets), intellectual property for
the Bonum Health telemedicine Software and Technology and personal computers. The Company agreed to provide the Seller consideration equal to 41,667 shares of restricted
common stock of the Company at the closing (the “Closing Shares”), and that the Seller had the right to earn up to an additional 108,334 shares of restricted common stock of the
Company in the event certain milestones mainly relating to the placement of in-store wellness kiosks were met in the first year following the Closing Date, none of which were met
and none of which milestone shares were met.
The Asset Purchase Agreement includes a three year non-compete requirement, prohibiting the Seller and the Member from competing against the Assets, customary
representations and indemnification obligations, subject to a $25,000 minimal claim amount and certain limitations on liability disclosed in the Asset Purchase Agreement.
The Asset Purchase Agreement also requires the Company to fund up to $600,000 in connection with the remote hub installation, marketing and IT, subject to certain milestones
set forth in the Asset Purchase Agreement (the “Funding Obligation”).
Subsequent to the acquisition, the Company determined that the Assets were not usable and wrote off the value of the Assets amounting to approximately $369,000.
NOTE 14 – SUBSEQUENT EVENTS
In February 2021, options to purchase 20,000 shares of common stock were granted with an exercise price of $6.55 per share, and a term of 10 years from the grant date. The options
vest over a period of four years. The options were granted under the 2019 Equity Incentive Plan.
Table of Contents
76
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 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 our Chief Financial Officer, Mr. Ajjarapu and Mr. Doss,
respectively, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as of the end of the period covered by this Annual Report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded
that as of December 31, 2020, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our reports
filed with the SEC pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
As a result of the formative stage of our development, the Company has not fully implemented the necessary internal controls. The matters involving internal controls and
procedures that the Company’s management considered to be material weaknesses under the standards of the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) were: (1) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of accounting
principles generally accepted in the United States of America (“GAAP”) and SEC disclosure requirements; and (2) ineffective controls over period end financial disclosure and
reporting processes.
Management believes that the material weaknesses set forth above did not have an effect on the Company’s financial results reported herein. We are committed to
improving our financial organization. As part of this commitment, we have recently increased our personnel resources and technical accounting expertise as we develop the internal
and financial resources of the Company. In addition, the Company will prepare and implement sufficient written policies and checklists which will set forth procedures for
accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements.
Management believes that preparing and implementing sufficient written policies and checklists will remedy the following material weaknesses (i) insufficient written
policies and procedures for accounting and financial reporting with respect to the requirements and application of GAAP and SEC disclosure requirements; and (ii) ineffective
controls over period end financial close and reporting processes.
We have improved our financial organization as we have increased our personnel resources and technical accounting expertise. We will continue to monitor and evaluate
the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis.
Table of Contents
Management’s Report on Internal Control Over Financial Reporting
77
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.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. 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 (2013). Based on our assessment,
management believes that the Company’s internal controls over financial reporting were not effective as of December 31, 2020. Specifically, management’s evaluation was based on
the following material weaknesses which existed as of December 31, 2020:
● 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 GAAP and SEC disclosure requirements.
● Ineffective controls over period end financial disclosure and reporting processes.
During the year ended December 31, 2020, we reevaluated our most recent assessment of internal controls and concluded 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 to assist Mr. Doss and Mr. Ajjarapu
in their responsibilities with respect to financial reporting.
Table of Contents
Limitations on the Effectiveness of Controls
78
Management of the Company, including its Chief Executive Officer and its 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.
Changes in Internal Control Over Financial Reporting.
There have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
As a result of COVID-19, our workforce has operated primarily in a work from home environment for the quarter ended December 31, 2020. While pre-existing controls were
not specifically designed to operate in our current work from home operating environment, we do not believe that such work from home actions have had a material adverse effect
on our internal controls over financial reporting. We have continued to re-evaluate and refine our financial reporting process to provide reasonable assurance that we could report
our financial results accurately and timely.
ITEM 9B. OTHER INFORMATION
None.
Table of Contents
79
PART III
Information required by Items 10, 11, 12, 13 and 14 of Part III is omitted from this Annual Report and will be filed in a definitive proxy statement or by an amendment to this
Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be set forth under the headings “Election of Directors”, “Information about our Executive Officers”, “Corporate Governance”,
“Code of Ethics”, “Committees of the Board”, and “Delinquent Section 16(a) Reports” (to the extent applicable and warranted) in the Company’s 2021 Proxy Statement to be filed
with the SEC within 120 days after December 31, 2020 in connection with the solicitation of proxies for the Company’s 2020 annual meeting of stockholders and is incorporated
herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item will be set forth under the headings “Executive Compensation”, “Directors Compensation”, “Outstanding Equity Awards at Fiscal
Year-End”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” (to the extent required), in the Company’s 2021 Proxy Statement
to be filed with the SEC within 120 days after December 31, 2020 and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be set forth under the heading “Voting Rights and Principal Stockholders ” and “Equity Compensation Plan Information” in the
Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after December 31, 2020 and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth under the headings “Certain Relationships and Related Transactions” and “Committees of the Board” - “Director
Independence” in the Company’s 2021 Proxy Statement to be filed with the SEC within 120 days after December 31, 2020 and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be set forth under the heading “Ratification of Appointment of Auditors ” - “Audit Fees” in the Company’s 2021 Proxy
Statement to be filed with the SEC within 120 days after December 31, 2020 and is incorporated herein by reference.
Table of Contents
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) Documents filed as part of this Annual Report:
80
PART IV
The following is an index of the financial statements, schedules and exhibits included in this Form 10-K or incorporated herein by reference.
(1) All Financial Statements
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
57
58
59
60
61
62
Except as provided above, all financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to
require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K.
(3) Exhibits
Exhibit No.
1.1
2.1
Description
Underwriting Agreement dated February 13, 2020, by and between Trxade
Group, Inc. and Dawson James Securities, Inc. as the representative of the
underwriters named therein
Merger and Reorganization Agreement of XCELLINK INTERNATIONAL, INC.,
a Delaware corporation (predecessor to Trxade Group, Inc. a Delaware
corporation) and Trxade Group, Inc., a Nevada corporation
Incorporated by Reference
Form
File No.
Exhibit
Filing Date
Filed
Herewith
8-K
001-39199
1.1
February 13, 2020
10-12G
000-55218
10.1
June 11, 2014
2.2+
3.1
3.2
Asset Purchase Agreement dated October 23, 2019 between Trxade Group, Inc.’s
wholly-owned subsidiary Bonum Health, LLC, a Delaware limited liability
company, Bonum Health, LLC, a Florida limited liability company, and
Hardikkumar Patel
Second Amended and Restated Certificate of Incorporation of Trxade Group,
Inc.
Certificate of Amendment to Second Amended and Restated Certificate of
Incorporation (1-for-6 Reverse Stock Split of Common Stock) filed with the
Delaware Secretary of State on February 12, 2020, and effective February 13,
2020
81
Table of Contents
3.3
4.1
10.1
10.2
10.3
10.4***
10.5
10.6
10.7
10.8
10.9***
10.10
10.11
10.12
10.13
10.14***
10.15***
10.16***
10.17
10.18
10.19%
10.20
10.21
Amended and Restated Bylaws of Trxade Group, Inc.
Description of Registered Securities
$300,000 Promissory Note dated October 15, 2018 with Nikul Panchal
Revocable Warrant dated October 15, 2018 with Nikul Panchal
Warrant Agreement dated December 31, 2016 with Gajan A. Mahendiran and
Amudha Mahendiran
Indemnification Agreement dated February 6, 2019 with Prashant Patel and
Suren Ajjarapu
Shareholder Agreement dated January 1, 2019 between the Company and the
stockholders party thereto
Form of Investment Warrant Agreement
Promissory Note with Sansur Associates LLC in the amount of $100,000 dated
July 17, 2017
Promissory Note with Prashant Patel in the amount of $122,551.88 dated July 1,
2017
Form of Indemnification Agreement dated August 22, 2016 with Michael L.
Peterson
Amendment to Convertible Note Agreement and Note dated June 2, 2016, with
Gajan A. Mahendiran and Amudha Mahendiran
Form of Warrant dated October 2015 with Gajan A. Mahendiran and Amudha
Mahendiran
Form of Warrant Agreement
Form of Registration Rights Agreement
Employment Agreement between Trxade, Inc. and Prashant Patel dated May 24,
2013
2014 Equity Incentive Plan
Form of Indemnification Agreement entered into between Trxade Group, Inc. and
its directors and certain officers
Form of Securities Purchase Agreement (July 30, 2019 Offering)
Form of Securities Purchase Agreement (September 30, 2019 Offering)
Securities Purchase Agreement dated October 23, 2019, by and among Trxade
Group, Inc. and Bonum Health, LLC, a Florida limited liability company
Form of Registration Rights Agreement dated October 23, 2019, by and among
Trxade Group, Inc. and Bonum Health, LLC, a Florida limited liability company
Transition Services Agreement dated October 23, 2019, by and among Trxade
Group, Inc. and Bonum Health, LLC, a Florida limited liability company
Table of Contents
82
10.22***
10.23***
10.24***
10.25***
10.26***
10.27***
10.28***
10.29***
10.30***
10.31***
10.32***
14.1
21.1*
23.1*
31.1*
Amended and Restated Trxade Group, Inc. 2019 Equity Incentive Plan
Form of Stock Option Agreement (April 2020 Grants to Employees) April 14, 2020
Form of Restricted Stock Grant Agreement (Independent Directors 2020 Award,
2020 CFO Award and 2020 Legal Counsel) April 14, 2020
April 14, 2020 Executive Employment Agreement with Suren Ajjarapu
First Amendment to Executive Employment Agreement with Suren Ajjarapu
dated May 5, 2020
Restricted Stock Grant Agreement (Mr. Ajjarapu 2020 Performance Bonus)
(Updated) May 5, 2020
Executive Employment Agreement dated effective June 19, 2020, entered into by
and between Trxade Group, Inc. and Howard A. Doss
Trxade Group, Inc. Independent Director Compensation Policy adopted April 14,
2020
Form of First Amendment to Trxade Group, Inc. 2019 Equity Incentive Plan
Restricted Stock Grant Agreement (April 2020 Grants
to Employees;
Independent Directors 2020 Award, 2020 CFO Award and 2020 Legal Counsel
Award)
Form of Stock Option Agreement Trxade Group, Inc. Amended and Restated
2019 Equity Incentive Plan
Form of Restricted Stock Grant Agreement Trxade Group, Inc. Amended and
Restated 2019 Equity Incentive Plan
Code of Ethics
List of Subsidiaries
Consent of Independent Registered Accounting Firm
Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act*
8-K
S-1
000-55218
333-234221
2.1
3.1
October 28, 2019
October 15, 2019
8-K
001-39199
3.1
February 13, 2020
10-12G/A
10-12G
000-55218
000-55218
000-55218
001-39199
000-55218
000-55218
000-55218
3.1
4.1
2.02
2.03
2.02
July 24, 2014
March 30, 2020
October 16, 2018
October 16, 2018
January 5, 2017
000-55218
10.1
March 22, 2019
000-55218
000-55218
000-55218
000-55218
10.4
10.2
10.1
10.2
January 22, 2019
July 13, 2018
July 5, 2017
July 5, 2017
000-55218
10.1
August 25, 2016
000-55218
000-55218
000-55218
000-55218
000-55218
000-55218
000-55218
10.1
10.3
10.2
10.3
10.6
10.3
10.4
10.1
10.1
June 3, 2016
October 27, 2015
September 26,
2014
September 26,
2014
July 24, 2014
June 11, 2014
June 11, 2014
July 11, 2019
October 2, 2019
000-55218
10.1
October 28, 2019
000-55218
10.2
October 28, 2019
000-55218
10.3
October 28, 2019
001-39199
001-39199
001-39199
001-39199
10.1
10.2
10.3
10.4
June 1, 2020
April 16, 2020
April 16, 2020
April 16, 2020
001-39199
10.2
May 7, 2020
001-39199
10.3
May 7, 2020
10-12G/A
10-K
8-K
8-K
8-K
10-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-12G
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
001-39199
10-Q
001-39199
10.1
10.1
June 26, 2020
July 27, 2020
8-K
S-8
S-8
10-K
001-39199
10.4
August 4, 2020
333-246318
10.6
August 14, 2020
333-246318
000-55218
10.7
14.1
August 14, 2020
March 23, 2015
X
X
X
31.2*
32.1**
32.2**
Certification of Principal Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act*
Certification of Principal Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act**
Certification of Principal Accounting Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act**
XBRL Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
X
X
X
X
X
X
X
X
X
*
**
Filed herewith.
Furnished herewith.
***
Indicates management contract or compensatory plan or arrangement.
+ Certain schedules, exhibits, annexes and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be
furnished supplementally to the Securities and Exchange Commission upon request; provided, however that Trxade Group, Inc. may request confidential treatment pursuant to
Rule 24b-2 of the Exchange Act, for any schedule or exhibit so furnished.
% Certain schedules, annexes and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished
supplementally to the Securities and Exchange Commission upon request; provided, however that Trxade Group, Inc. may request confidential treatment pursuant to Rule 24b-2 of
the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
ITEM 16.
FORM 10–K SUMMARY
None.
Table of Contents
83
SIGNATURES
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.
Date: March 29, 2021
Date: March 29, 2021
TRXADE GROUP, INC.
/s/ Suren Ajjarapu
By: Suren Ajjarapu, Chief Executive Officer (Principal Executive Officer)
/s/ Howard A. Doss
By: Howard A. Doss, Chief Financial Officer (Principal Financial and Accounting
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/ Howard A. Doss
Howard A. Doss
/s/ Prashant Patel
Prashant Patel
/s/ Donald G. Fell
Donald G. Fell
/s/ Michael L. Peterson
Michael L. Peterson
/s/ Dr. Pamela Tenaerts
Dr. Pamela Tenaerts
Title
Chairman of the Board, Chief Executive Officer and Secretary
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director, President and Chief Operating Officer
Director
Director
Director
84
Date
March 29, 2021
March 29, 2021
March 29, 2021
March 29, 2021
March 29, 2021
March 29, 2021
Exhibit 21.1
LIST OF SUBSIDIARIES – ALL 100% OWNED (UNLESS OTHERWISE STATED)
Trxade, Inc., a Florida corporation
Integra Pharma Solutions, Inc. (formerly Pinnacle Tek, Inc., a Florida corporation)
Subsidiaries*
Community Specialty Pharmacy, LLC, a Florida corporation
Alliance Pharma Solutions, LLC, a Florida corporation
Bonum Health, LLC, a Delaware corporation
MedCheks, LLC, a Delaware corporation
* Pursuant to Item 601(b)(21)(ii) of Regulation S-K, the names of other subsidiaries of Trxade Group, Inc. are omitted because, considered in the aggregate, they would not
constitute a significant subsidiary as of the end of the year covered by this report. Inclusion in this list is not, however, a representation that the listed subsidiary is a “significant
subsidiary.”
We consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-248473 and Form S-8 (File No.333-246318) of our report dated March 29, 2021
with respect to the audited consolidated financial statements of Trxade Group, Inc. for the year ended December 31, 2020 which appear in this Annual Report on Form 10-K.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
March 29, 2021
Exhibit 31.1
I, Suren Ajjarapu, certify that:
1.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2020, of Trxade Group, Inc. (the “registrant”);
Certification of Chief Executive Officer
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 29, 2021
/s/ Suren Ajjarapu
Suren Ajjarapu
Chief Executive Officer (Principal Executive Officer)
Exhibit 31.2
I, Howard Doss, certify that:
1.
I have reviewed this annual report on Form 10-K for the year ended December 31, 2020, of Trxade Group, Inc. (the “registrant”);
Certification of Chief Financial Officer
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 29, 2021
/s/ Howard Doss
Howard Doss
Chief Financial Officer (Principal Financial/Accounting Officer)
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
I, Suren Ajjarapu, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Trxade Group, Inc. on Form 10-K for the fiscal year ended December 31, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Trxade Group, Inc. at the dates
and for the periods indicated.
Exhibit 32.1
Dated: March 29, 2021
/s/ Suren Ajjarapu
Suren Ajjarapu
Chief Executive Officer (Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to Trxade Group, Inc. and will be retained by Trxade Group, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
I, Howard Doss, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Trxade Group, Inc. on Form 10-K for the fiscal year ended December 31, 2020 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Trxade Group, Inc. at the dates
and for the periods indicated.
Exhibit 32.2
Dated: March 29, 2021
/s/ Howard Doss
Howard Doss
Chief Financial Officer
(Principal Financial/Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to Trxade Group, Inc. and will be retained by Trxade Group, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.