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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market Information
Our
common stock has been traded on the OTC Electronic Bulletin Board since August 2012 under the symbol “SCRC”. Prior
to August 2012, our common stock was traded on an exchange or any other established market.
The
following table reflects the high and low quarterly bid prices for the fiscal years ended December 31, 2012 and December 31, 2013. This
information was provided to us by the Financial Industry Regulatory Authority and the Internet. These quotations reflect inter-dealer
prices, without retail mark-up or mark-down or commissions. These quotations may not necessarily reflect actual transactions.
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Period
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High Bid
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Low Bid
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1st Qtr 2013
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$0.405
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$0.17
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2nd Qtr 2013
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$0.47
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$0.111
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3rd Qtr 2013
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$1.05
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$0.123
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4th Qtr 2013
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$0.42
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$0.0811
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Period
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High Bid
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Low Bid
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1st Qtr 2012
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–
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–
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2nd Qtr 2012
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–
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–
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3rd Qtr 2012
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$0.51
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$0.22
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4th Qtr 2012
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$0.483
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$0.25
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Our Transfer Agent
We
have appointed Olde Monmouth Stock Transfer Company, with offices at 200 Memorial Parkway, Atlantic Highlands, New Jersey 07716,
phone number 732-872-2727, as transfer agent for our shares of common stock. The transfer agent is responsible for all record-keeping
and administrative functions in connection with our shares of common stock.
Dividend Policy
The
Series A Preferred Stock is paid a dividend at annual rate of 8% of the purchase price, which dividend is paid at the end of each
fiscal quarter. Such dividends are cumulative.
The
Series A Preferred Stock, which we issued on April 1, 2011 is reported as mezzanine equity because the Series A Preferred
Stock has liquidation preferences which are outside the control of the Company. The $1,043,000 invested in such Series A
Preferred Stock was not recorded in the Shareholders' Deficit section of our balance sheet, but rather is shown as a
liability. Consequently, for the year ended December 31, 2013, we had a stockholders’ deficit of $3,470,827 (rather
than stockholders’ deficit of $2,427,827 if we had booked such investment in the Shareholders’ Deficit section of
the balance sheet). Additionally, for the fiscal year ended December 31, 2013, we had a net loss of approximately $11.2
million. Because we had a loss for 2013 and we have a retained deficit on our balance sheet, our directors cannot declare
dividends under Section 174 of the Delaware General Corporation Law without incurring personal liability. Unless we have a
profit in 2014, our board of directors will not be able to declare a dividend nor will we be able to pay the dividend owed to
the Series A Preferred Stockholder which dividends will accrue on our balance sheet.
We
have never declared or paid any cash dividends on our shares of common stock, and despite the retained deficit on our balance sheet,
we do not anticipate paying any dividend on our common stock in the foreseeable future.
Except
for any dividends owed to the holder of our Series A Preferred Stock (as described above), we anticipate that we will retain all
of our future earnings to finance our operations and expansion. The payment of cash dividends in the future will be
at the discretion of our Board of Directors (subject to the approval of the holder of the Series A Preferred Stock) and will depend
upon our earnings levels, capital requirements, any restrictive loan covenants and other factors the Board considers relevant. The
Series A Preferred Stock is paid a dividend at annual rate of 8% of the purchase price, which dividend is paid at the end of each
fiscal quarter. Each quarterly payment of such dividend is approximately $20,860.
In
addition to the Board approval, we cannot declare or pay any dividends on our common stock (other than in shares of our own common
stock) unless we first pay to the Series A Preferred Stockholder a dividend equal to (i) all quarterly dividends on the Series
A Preferred Stock that have accrued but that we have not paid to the Series A Preferred Stockholder plus (ii) the amount of the
common stock dividend that the Series A Preferred Stockholder would get if he converted all of his shares of Series A Preferred
Stock into our common stock. 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.
Holders of Common Stock
As
of April 8
, 2014
, the shareholders' list of our shares of common stock showed 162 registered
shareholders and 125,610,436
shares of our common stock issued and outstanding. We
also have 2,990,252 shares of Series A Preferred Stock issued and outstanding, which are convertible into 5,980,504 shares of common
stock.
Securities authorized for issuance under
equity compensation plans
We
currently do not have any equity compensation plans.
Recent Sales of Unregistered Securities
From
May 2010 through April 2011, we issued promissory notes in the aggregate principal amount of $794,000 to four (4) investors. Of
this amount, we issued promissory notes aggregating $50,000 to Robert Schneiderman, our Chief Executive Officer, and notes aggregating
$30,000 to Harry James Production DBA R S and Associates a company owned by Mr. Schneiderman. In March 2012, our CEO
and president agreed to amend the maturity date and interest rate on his $50,000 promissory notes and the $30,000 promissory notes
held by Harry James Production DBA R S and Associates. The maturity date on these notes has been extend from September
30, 2012 until January 30, 2014. The interest rate on the notes has been decreased from 2% monthly to 1% monthly effective
on October 1, 2012. The remaining promissory notes in the aggregate amount of $714,000 were issued to Jim and Joanne
Speers ($514,000) and Leon Hurst ($200,000). These notes provide for monthly interest only payments of 1% of principal payable,
at the lenders’ option, in cash or in shares of our common stock (based on a valuation of $0.50 per share). Upon maturity,
outstanding principal is payable and may be converted to common stock of the Company at $0. 25 per share at the option of the lenders.
The notes have a one (1) year term and mature at various dates from May 2011 through January 2014. The convertible notes were issued
to such investors in reliance on the exemption under Section 4(2) of the Securities Act. The convertible notes qualified for exemption
under Section 4(2) of the Securities Act since the issuances by us did not involve a public offering. The offering was not a “public
offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering,
manner of the offering and number of shares offered. The recipients of the convertible notes were accredited investors and acknowledged
the restricted nature of the notes they acquired. Based on an analysis of the above factors, we have met the requirements to qualify
for exemption under Section 4(2) of the Securities Act for this transaction.
On
March 12, 2012, each of Mr. Hurst and Jim and Joanne Speers converted $125,000 in principal of their notes into 1,000,000 shares
of our common stock.
In
November 2010 and February 2011, we issued an aggregate of 50,000 shares of our common stock to Four Seasons Financial Group as
fees for assistance provided to us in capital raising efforts, which assistance has been completed (and is no longer being provided).
These shares had a market value of $12,500 at the time of issuance, and they were issued in reliance on the exemption under Section
4(2) of the Securities Act. These shares of our common stock qualified for exemption under Section 4(2) of the Securities Act since
the issuance shares by us did not involve a public offering. The offering was not a “public offering” as defined in
Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and
number of shares offered. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under
Section 4(2) of the Securities Act for this transaction.
In February
2011, we issued 100,000 shares to Jim and Joanne Speers in connection with the purchase by such investors of $200,000 in convertible
notes from us (as described above). The shares of common stock were issued to such investors in reliance on the exemption under
Section 4(2) of the Securities Act. The shares of our common stock qualified for exemption under Section 4(2) of the Securities
Act since the issuances by us did not involve a public offering. The offering was not a “public offering” as defined
in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering
and number of shares offered. The recipients of the shares were accredited investors and acknowledged the restricted nature of
the shares they acquired. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under
Section 4(2) of the Securities Act for this transaction.
On April 1, 2011 we closed on the sale of 2,990,252 shares of
our Series A Preferred Stock to a single accredited investor for a purchase price of $1,043,000. The sale of shares was exempt
under Section 4(2) of the Securities Act as an offer and sale not involving a public offering. As of the date of this prospectus,
each share of Series A Preferred Stock is convertible into two shares of our common stock. The conversion ratio of the Series A
Preferred Stock is subject to adjustment (as described below) The Series A Preferred Stock is paid a dividend at annual rate of
8% of the purchase price, which dividend is paid at the end of each fiscal quarter. Such dividends are cumulative. Of the seven
members of our board of directors, the holder of the Series A Preferred Stock, as a single class, gets to elect one (1) director
to the board and will vote with the common stockholders to elect four (4) directors (the common stockholders will elect, as a single
class, two (2) directors). The Series A Preferred Stockholder will have approval right over certain corporate actions, namely our
liquidation or dissolution, any merger, share exchange or asset sale that results in a change of control, the payment of any dividends
or the redemption of stock (except for stock dividends, change of control transaction and termination of employment or service).
The Series A Preferred Stock is convertible into 5,980,505 shares of our common stock (based on a conversion price of $0.1744,
which was adjusted as a result of the forward stock split effected on April 15, 2011. The conversion price of the Series A Preferred
Stock will be adjusted for any issuances of stock by us at a price per share less than $0.1744 (subject to certain exemptions such
as securities issued under an employee stock option plan or securities issued in business transactions approved by our board).
The Series A Preferred Stock has priority to assets over the common stockholders in the event of liquidation, dissolution or any
merger, share exchange or consolidation in which we are not the surviving entity or there is a change in control of us). These
rights of the Series A Preferred Stockholder continue until all of the shares of Series A Preferred Stock are converted into our
common stock. These shares of our Series A Preferred Stock qualified for exemption under Section 4(2) of the Securities
Act since the issuance shares by us did not involve a public offering. The offering was not a “public offering” as
defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering
and number of shares offered. Based on an analysis of the above factors, we have met the requirements to qualify for exemption
under Section 4(2) of the Securities Act for this transaction.
In
April 2011, we sold 5,200,000 shares of our common stock to four purchasers for an aggregate purchase price of $176,000. Each
of the purchasers was a corporation formed outside of the United States with a business address located outside of the United States.
This transaction was exempt from the registration provisions of the Securities Act pursuant to Regulation S as an offshore transaction
with non-U.S. persons (as such term is defined in Rule 902 of Regulation S). As of March 14, 2012, we have received the remaining
balance of the $176,000.
In
May 2011, we sold 28,000 shares of its common stock to 56 purchasers for an aggregate purchase price of $5,600. Each of the purchasers
was a non-U.S. citizen with a residence address located outside of the United States. This transaction was exempt from the registration
provisions of the Securities Act pursuant to Regulation S as an offshore transaction with non-U.S. persons (as such term is defined
in Rule 902 of Regulation S).
On
June 4, 2011, the Company issued 100,000 shares of restricted common stock to Sarav Patel, an officer, director and major shareholder
of Marlex, pursuant to a consulting agreement. The shares were valued at $10,000, which was the value of the services to be performed.
Under the consulting agreement, Mr. Patel will assist the Company in developing our supply chain management business by introducing
and promoting the Company with private sector out-patient surgery centers, hospitals and other health care facilities. These
shares of our common stock qualified for exemption under Section 4(2) of the Securities Act since the issuance shares by us did
not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial
number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered. Based on an
analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for
this transaction.
On
June 6, 2011, the Company issued 50,000 shares of restricted common stock to Lincoln Associates, Inc. pursuant to a consulting
agreement. The shares were valued at $5,000, which valuation was determined by our board of directors. Under the consulting agreement,
Lincoln Associates will assist the Company in developing our supply chain management business by introducing and promoting the
Company with military out-patient surgery centers, military hospital and other health care facilities. These shares
of our common stock qualified for exemption under Section 4(2) of the Securities Act since the issuance shares by us did not involve
a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number
of persons involved in the deal, size of the offering, manner of the offering and number of shares offered. Based on an analysis
of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.
During the six
months ended June 30, 2011, we issued (i) 180,000 shares of our common stock to non-employees for services rendered during the
six month period ended June 30, 2011 or to be rendered. These services were valued at $22,500 and (ii) 520,000 shares of our common
stock in connection with services provided by members of the board of directors, for which we charged $52,000 to our operations
for such period. These shares of our common stock qualified for exemption under Section 4(2) of the Securities Act since
the issuance shares by us did not involve a public offering. The offering was not a “public offering” as defined in
Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and
number of shares offered. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under
Section 4(2) of the Securities Act for this transaction.
On
July 21, 2011, the Company issued 104,000 shares of restricted common stock to Curing Capital, Inc. pursuant to a letter agreement.
Under the agreement, Curing Capital Inc. will assist the Company to raise up to $17,000,000 and to provide the Company with financial
advisory services. These shares of our common stock qualified for exemption under Section 4(2) of the Securities Act
since the issuance shares by us did not involve a public offering. The offering was not a “public offering” as defined
in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and
number of shares offered. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under
Section 4(2) of the Securities Act for this transaction.
On
December 30, 2011, we issued (i) an aggregate of 84,000 shares of common stock to our five outside directors for their attendance
at board and committee meetings during 2011, which shares were valued at $8,400, (ii) 200,004 shares of common stock to a corporation
controlled by our Chief Executive Officer as payment of salary for the fourth quarter in lieu of cash, which shares were valued
at $35,000 and (iii) 200,000 shares of common stock to Northern Value Partners, LLC for financial consulting services, which shares
were valued at $20,000 and (iv) 25,000 shares to our outside counsel for his work on our registration statement that was declared
effective in November 2011, which shares were valued at $2,500. The shares of the Company’s common stock
issued to our outside directors, the affiliate of our Chief Executive Officer, our legal counsel and Northern Value Partners qualified
for exemption under Section 4(2) of the Securities Act since the issuance of shares by the Company did not involve a public offering.
The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved
in the offering, the size of the offering, the manner of the offering and the number of shares offered.
In
March 2012, we sold 300,000 shares of our common stock for an aggregate purchase price of $30,000. These share were
sold to an existing shareholder who qualifies as an accredited investor under Rule 501 of Regulation D. The sale of
the 300,000 shares qualified for exemption under Section 4(2) of the Securities Act since the issuance of shares by the Company
did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial
number of persons involved in the offering, the size of the offering, the manner of the offering and the number of shares offered.
During
the year ended December 31, 2012, the Company issued 1,345,000 restricted shares of its common stock to non-employees for services
rendered during the year or to be rendered. These services were valued at $231,100 and the Company charged its operations $122,906
in fiscal year 2012. The unamortized amount of prepaid services at December 31, 2012 is $108,194.
These
shares of our common stock qualified for exemption under Section 4(2) of the Securities Act since the issuance shares by us did
not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial
number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered. Based on an
analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for
this transaction.
During
the year ended December 31, 2012, the Company issued 124,000 restricted shares of its common stock in connection with services
provided by members of the board of directors during the fiscal year 2012. The Company charged its operations $34,480 in fiscal
year 2012.
The shares of the Company’s common stock issued to our outside directors qualified
for exemption under Section 4(2) of the Securities Act since the issuance of shares by the Company did not involve a public offering.
The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved
in the offering, the size of the offering, the manner of the offering and the number of shares offered.
The
Company issued 114,288 restricted shares of its common stock to a corporation controlled by the Company’s President and CEO
for payment of his salary in lieu of cash compensation payments for services rendered during the twelve months period ended December
31, 2012. These services were valued at $20,000 and the Company charged this amount to operations in fiscal year 2012.
The
shares of the Company’s common stock issued to the affiliate of our Chief Executive Officer qualified for exemption under
Section 4(2) of the Securities Act since the issuance of shares by the Company did not involve a public offering. The offering
was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the offering,
the size of the offering, the manner of the offering and the number of shares offered.
In
October 2012, we issued 150,000 restricted shares of common stock to Olympic Capital Group (“OCG”) for OCG’s
services under a consulting agreement. These services were valued at $56,850 and the Company charged such amount to its operations
in fiscal 2012. The shares of the Company’s common stock issued to OCG qualified for exemption under Section 4(2) of the
Securities Act since the issuance of shares by the Company did not involve a public offering. The offering was not a “public
offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the offering, the size of the
offering, the manner of the offering and the number of shares offered.
From
January 1, 2013 to April 5, 2013 the Company issued 2,443,989 shares of the Company’s common stock, the shares were issued
for the following transactions: a) sold 739,641 shares in a private placement for $110,000, b) issued 673,528 shares for the payments
of monthly royalty expenses valued at $159,362 and c) issued 1,030,820 shares for services performed and to be performed,
valued at $207,624.
On
January 21, 2013, the Company received $22,500 in cash for a 10% convertible note payable with a principal amount of $25,000, which
note included a 10% discount. The accrued interest and principal are due on the maturity date of January 21, 2014. The Company
may repay this note at any time on or before 90 days from the issuance date and at such time the Company shall not owe or pay any
interest on the note. After 90 days from issuance there is a pre-payment fee of 150% of the principal amount outstanding and interest
due. The conversion price is the lesser of (a) $0.25 or (b) the amount equal to 60% of the lowest trading price of the Company’s
common stock at the close of trading during the 20 trading day period prior to the date of the notice of conversion. Collateral
for this loan also includes 3,000,000 shares of the Company’s common stock.
On
January 31, 2013, the Company entered into a securities purchase agreement with JMJ Financial (“JMJ”) pursuant to which
JMJ purchased a 12% convertible note. The Company received $67,500 in cash for a 12% convertible note payable with a principal
amount of $82,500, which note included a 10% discount and we paid a $7,500 finder’s fee. The accrued interest and principal
are due on the maturity date of January 31, 2014. The Company may repay this note at any time on or before 90 days from the issuance
date and at such time the Company shall not owe or pay any interest on the note. The conversion price is the lesser of (a) $0.21
or (b) the amount equal to 60% of the lowest trading price of the Company’s common stock at the close of trading during the
25 trading day period prior to the date of the notice of conversion. Collateral for this loan also includes 9,000,000 shares of
the Company’s common stock.
On
February 18, 2013, the Company received a net amount $67,500 in cash for an 8% convertible note payable with a principal amount
of $92,500. The note included a 10% discount, we paid a $7,500 finder’s fee and we agreed to pay $10,000 to cover the investor’s
legal fees. The accrued interest and principal are due on the maturity date of December 18, 2014. The conversion price is equal
to 65% of the average of the three lowest trading prices of the Company’s common stock at the close of trading during the
20 trading day period prior to the date of the notice of conversion.
On
March 20, 2013, the Company received $35,200 in cash for a 12% annual interest convertible note payable with a principal amount
of $40,000. The note did not include a discount, however, we paid $2,000 to cover the investor’s legal fees and $2,800 was
paid directly to a third party on the Company’s behalf. Interest is payable monthly in the amount of $400. The unpaid interest
and principal are due on the maturity date of March 20, 2014. The principal portion of this convertible note can be converted into
the Company’s common stock at any time at the rate of $0.20 per share at the option of the lender.
On
March 20, 2013, the Company received $17,600 in cash for a 6% convertible note payable with a principal amount of $20,000. The
note did not include a discount, but $2,400 was paid directly to a third party on our behalf. The accrued interest and principal
are due on the maturity date of March 20, 2014. There is a prepayment charge of 150% of the principal amount outstanding and interest
due. The conversion price is equal to 70% of the lowest trading price of the Company’s common stock at the close of trading
during the 5 trading day period prior to the date of the notice of conversion.
In October, November and December 2013, we issued an aggregate
of 1,003,571 shares of common stock to Tonaquint, Inc. for the conversion of an aggregate of $207,735 in principal amount of a
convertible note held by Tonaquint.
In October and December 2013, we issued an aggregate of 1,366,964
shares of common stock to JMJ Financial for the conversion of an aggregate of $299,457 in principal amount of a convertible note
held by JMJ Financial.
In October, November and December 2013, we issued an aggregate
of 600,838 restricted shares of common stock to
a note holder as payment of
royalties due under the note. The royalty payment was in the amount of $102,159.
In October, November and December 2013, we issued an aggregate
of 62,250 restricted shares of common stock to
a note holder as payment of
royalties due under the note. The royalty payment was in the amount of $8,798.
In October, November and December 2013, we issued an aggregate
of 1,003,442 restricted shares of common stock to Vista Capital Investments, LLC for the conversion of an aggregate of $163,960
in principal amount of a convertible note held by Vista Capital Investments.
In October, November and December 2013, we issued an aggregate
of 827,926 restricted shares of common stock to GEL Properties, LLC for the conversion of an aggregate of $140,717 in principal
amount of a convertible note held by GEL Properties.
On October 7,
2013 and November 21, 2013, we issued an aggregate of 24,444 restricted shares of common stock to Nick Torrens under a consulting
agreement with regard to public relations services. The shares were valued at $3,289.
On October 15,
2013, we issued an aggregate of 1,000,000 restricted shares of common stock to Black Cat Consulting, Inc. under a consulting agreement
with regard to investor relations services. The shares were valued at $140,000.
On October 16,
2013, we issued an aggregate of 32,000 restricted shares of common stock to our directors for their attendance at board
and/or committee meetings. We took a charge of $5,440 for the issuance of these shares.
On October 29, 2013 and November 14, 2013, we issued an aggregate
of 597,756 restricted shares of common stock to IBC Funds LLC for the conversion of an aggregate of $165,288 in principal amount
of a convertible note held by IBC Funds.
On December 4, 2013, we issued 841,426 shares of restricted
common stock to Seaside 88, LP pursuant to a Stock Purchase Agreement entered into on November 4, 2013. The purchase price of the
shares was $88,374.
On December 16, 2013,
we issued 313,479 restricted shares of common stock to Redwood Management LLC for the conversion of $40,752 in principal amount
of a convertible note held by Redwood Management.
On December 16, 2013, we issued 250,000 restricted shares of
common stock to Sean Fitzgibbons under a consulting agreement with regard to investor relations services. These shares were valued
at $32,500.
On December 18, 2013, we issued 738,071 restricted shares of
common stock to Caesar Capital Group LLC for the conversion of $88,569 in principal amount of a convertible note held by Caesar
Capital Group.
On December 23, 2013, we issued an aggregate of 20,000 restricted
shares of common stock to our directors for their attendance at board and/or committee meetings. We took a charge of $2,800 for
the issuance of these shares.
On December 27, 2013,
we issued 498,647 restricted shares of common stock to Group 10 Holdings, LLC for the conversion of $69,811 in principal amount
of a convertible note held by Group 10 Holdings.
The shares of
our common stock issued to consultants, upon the conversion of principal of notes, issued in payment of royalties and/or issued
to members of our board of directors qualified for exemption under Section 4(2) of the Securities Act since such issuances of shares
by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to
the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered.
Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities
Act for this transaction.
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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Caution Regarding Forward-Looking Information
This document contains forward-looking
statements which may involve known and unknown risks, uncertainties and other factors that may cause ScripsAmerica, Inc. actual
results and performance in future periods to be materially different from any future results or performance suggested by these
statements. These factors include, but are not necessarily limited to those risks set forth in Item 1A of this form 10-K. Words
such as projects, believe, plan, anticipate and expect and similar expressions are intended to qualify as forward-looking statements.
ScripsAmerica Inc. cautions investors not to place undue reliance on forward-looking statements, which speak only to management’s
expectations on this date. We undertake no obligation to update any forward-looking statements even if actual results may differ
from projections.
The following discussion should be read
in conjunction with the financial information included elsewhere in this Annual Report on Form 10-K.
Overview
ScripsAmerica, Inc. was incorporated in
the State of Delaware on May 12, 2008. Since our inception, ScripsAmerica’s business model has evolved significantly. Through
March 2013, and to a lesser extent into early 2014, the Company primarily provided pharmaceutical distribution services
to
a wide range of end users across the health care industry through major pharmaceutical distributors in North America, such as
McKesson Corporation and
Cardinal Health
. The end
users include retail, hospitals, long-term care facilities and government and home care agencies. The majority of the Company’s
revenue from this model came from orders facilitated by McKesson,
the largest pharmaceutical distributor in North America,
and a few other clients.
However, we had
no exclusive contract with McKesson and the Company’s other pharmaceutical distributors to utilize our services and our
margins became compressed. As a result, in 2013
the business of providing these
pharmaceutical distribution services became curtailed and we are now primarily focused
on
generating revenue through (1) the marketing, sale and distribution of our RapiMed® products, (2) our support
arrangements and financing agreements with companies servicing the independent pharmacy distribution business and (3) our
entry into the specialty pharmacy market.
Specifically, we have developed a branded
OTC product called “RapiMed” (www.rapimeds.com), which is a children’s pain reliever and fever reducer
currently launched in China though our joint venture entity Global Pharma Hub, and which we hope to launch in retail outlets
in North
America sometime in 2014.
We
have also entered into agreements with third parties pursuant to which we receive fees based on a formula tied to the gross
profit on sales of pharmaceutical products to independent pharmacies by such third parties. Lastly, on February 20, 2014
we entered into an agreement with a New Jersey specialty pharmacy that specializes in topical pain creams, pursuant to which
we manage their business operations in exchange for a percentage of the pharmacy’s total revenue.
Evolving Business Model
Since our inception, ScripsAmerica’s
business model has evolved significantly. Initially, the company primarily provided pharmaceutical distribution services
to
a wide range of end users across the health care industry through the pharmaceutical distributors in North America. End users include
retail, hospitals, long-term care facilities and government and home care agencies. The majority of our revenue from this model
came from orders facilitated by McKesson,
the largest pharmaceutical distributor in North America, and a few other clients.
However, because we had no exclusive contract
with McKesson to utilize our services and the margins began to shrink,
we have moved away
from providing these pharmaceutical distribution services as our main source of income and are now primarily focused on generating
revenue through our RapiMed® products and our independent pharmacy distribution model.
On September 6, 2013, the Company and Marlex
Pharmaceuticals, Inc., its former Contract Packager, pursuant to which the Company and its former Contract Packager resolved various
disagreements that had arisen between the parties on various projects covered by written agreements between the Company and its
former Contract Packager, namely (i) the Contract Packager’s agreement with the
U.S. government
,
(ii) the parties agreement with respect
to the production and packaging of the Company’s RapiMed
®
products and (iii) shares of the Company’s stock issued to the principals of the Contract Packager for consulting services
,
entered into a settlement agreement. The settlement agreement provided mutual releases, continued the
U.S.
government
arrangement under modified terms, as well as a partial reimbursement over fifteen months for previous amounts
due the Company.
This new agreement stipulates that the
Company will provide financing through a related party, Development 72 LLC, for the continuance of its pharmaceutical distribution
contract with the
U.S. government
and for the Contract Packager to make 15 monthly payments to
the Company, totaling $408,154.95, with respect to prior shipments under
U.S. government
contract
(which had had stopped in May 2013 due to a dispute but have resumed in September 2013) which were previously reserved for or written
off in 2013. The Company’s percentage of the profits under the
U.S. government
contract
had been revised in terms of the rate and the number of bottles of product sold to the
U.S. government
for which the Company would receive payments.
To protect our position with respect to
the RapiMed
®
products we also terminated the Rapid Melt tablet agreement
with the Contract Packager. All development costs through the date of this cancellation agreement have previously been expensed
and paid. The Company subsequently entered into a manufacturing and supply contract directly with the manufacturer of this technology,
however, this agreement was subsequently terminated in 2013.
RapiMed Children’s Pain Reliever and Fever Reducer
Our target market for RapiMed
®
is 2-11 year olds and we anticipate that the formula for our orally disintegrating tablets will be more effective than existing
products due to its ability to melt faster, taste better and provide more accurate dosing.
Unlike other products available, ScripsAmerica’s
is much smaller and dissolves in the child’s mouth in 25 seconds, therefore entering their system faster. RapiMed
®
contains Acetaminophen (main ingredient in Tylenol), however the bitter taste of this active ingredient is masked by a patented
technology. The cherry and wild grape flavors that our product will come in are most appealing to children. Additionally, the dosage
of RapiMed
®
is controlled, not like the syringe based competing products and we
offer the 80 mg for 2-6 year olds, and 160 mg for the 6-11 year olds.
The RapiMed
®
packaging is convenient, portable, child resistant and easy to use as well as eye-catching. The product will be labeled in both
English and Spanish to serve the expanding Hispanic markets in America. The contents are aspirin free, ibuprofen free, sugar free
and gluten free as well. Since the numerous Tylenol recalls in the recent past, there is a clear need for a better controlled,
more efficient product to fill the void. We believe our RapiMed is that product.
ScripsAmerica presented RapiMed to retail
buyers in February of 2013 at the ECRM Cough and Cold show in Florida and we received very positive feedback. We have engaged DPG
to roll out the product to retailers nationwide once we secure adequate funding. Depending on the retailer, the product will be
promoted through in-store temporary price reductions, coupons, store circulars, buy-two-and save packs, as a clip-strip program,
radio and print advertising.
In January 2014, we entered into an exclusive
world-wide licensing agreement with Global Pharma Hub for the marketing and distribution of our children’s pain reliever
and fever reducer OTC product called RapiMed® in all countries except the United States. The license will allow Global Pharma
Hub to market and distribute the children’s acetaminophen orally dissolving tablets under our registered trademark, RapiMed®
as well as our registered trade mark “
MELTS IN YOUR CHILD'S MOUTH”
.
In order to keep the license agreement, Global Pharma Hub must meet minimum sales quotas terms which are as follows:
|
|
1.
|
$500,000 in purchase orders during first 12 months of License Agreement;
|
|
|
2.
|
$1,400,000 in purchase orders during second 12 months; and
|
|
|
3.
|
$2,400,000 in purchase orders during the third 12 months.
|
Global Pharma Hub signed an exclusive sub-licensing
agreement for RapiMed in the territory of Hong Kong on January 28, 2014, with NYJJ Hong Kong Ltd.
to generate initial and ongoing orders for the product following its registration approval by the Hong Kong government.
The minimum sales quotas terms of the exclusive Hong Kong sub-licensing agreement are as follows:
|
|
1.
|
$550,000 in purchase orders during first 12 months;
|
|
|
2.
|
$1,500,000 in purchase orders during the second 12 months; and
|
|
|
3.
|
$2,500,000 in purchase orders during the third12 months.
|
On February 22, 2014, Global Pharma Hub
signed an exclusive sub-licensing agreement with Jetsaw Pharmaceutical, Inc. the marketing and distribution of RapiMed® pediatric
acetaminophen in the territory of Canada for an initial term of three years. The minimum sales quotas terms of the exclusive Hong
Kong sub-licensing agreement are as follows:
|
|
1.
|
$120,000 in purchase orders during first 12 months;
|
|
|
2.
|
$220,000 in purchase orders during the second 12 months; and
|
|
|
3.
|
$320,000 in purchase orders during the third12 months.
|
Independent
Pharmacy Distribution
In addition to
its RapiMed® products, we are also implementing our plan to generate significant revenue by entering the Independent Pharmacy
distribution market.
This market will
allow us to provide a much-needed solution to a problem experienced by small retail chains and individual pharmacies which is their
inability to fill prescriptions for their clients when the prescription calls for controlled substances. The reason for this problem
is that in order to secure these controlled substances the manufacturers of these products impose minimum order quantities that
are far beyond the size of orders typically made by small, independent pharmacies.
As of November
1, 2013, ScripsAmerica entered into an agreement with WholesaleRx, Inc., which that represents over 700 such independent pharmacy
operations and is a DEA and State-licensed to store and distribute controlled substances (which are drugs that have the potential
for abuse or dependence and are regulated under the
federal Controlled
Substances Act)
.
WholesaleRx
orders
the goods from the manufacturers and has them shipped to its warehouse facility. WholesaleRx then
ships the
goods to the pharmacies in the bottles as received by the manufacturer. Upon receiving
orders from the pharmacies, goods will be sent to them COD which will eliminate any accounts receivable issues.
Prior to
November 1, 2013, the Company and WholesaleRx had an oral agreement to pursuant to which the Company secured third party financing
to fund WholesaleRx’s purchase orders and the Company in consideration of which the Company would receive 12.5% of the WholesaleRx’s
“gross profit” for the prior month (which gross profit would consist of (i) sales to all customers minus (ii) cost
of goods sold, freight in (to WholesaleRx), credits and allowances). Under the November 1 Agreement, ScripsAmerica agreed to provide
purchase order financing to WholesaleRx and purchased a 20% equity stake in WholesaleRx. In consideration for providing financing
for WholesaleRx’s purchaser orders, and to cover the Company’s costs in administering the purchase order financing,
WholesaleRx has agreed to pay the Company on or before the 15
th
calendar day of each month 20% of the gross profit (as
described above) for the prior calendar month. If WholesaleRx is late in paying such 20% fee, then the amount owed will accrue
interest at the rate of 18% per annum until paid.
In December, 2013, the Company revised
an October 2013 purchase agreement to acquire 90% of the Membership Units in
P.I.M.D.
International, LLC (“
PIMD”), a start-up limited liability company based in, and proposing to do business in,
Florida. Although founded approximately 4 years ago, PIMD has had no sales, but has the necessary licenses for operation of a drug
wholesale operation. The purchase of the Membership Units in PIMD was subject to certain conditions precedent, of which the most
important was that the Company obtain the necessary licenses from Florida (and the DEA) for the ownership of a drug distribution
company like PIMD. However, it was determined that securing the licenses was going to require a substantially longer period of
time than the parties had anticipated. Consequently, in order to preserve the business opportunity, it was necessary to change
the structure of the relationship. Accordingly, the original purchase agreement was cancelled and voided. The funds already advanced
by ScripsAmerica to PIMD were converted to a loan and the relationship between PIMD and ScripsAmerica became a Sourcing and Marketing
Agreement
Under this Sourcing
and Marketing Agreement, which the Company entered into with PIMD in December 2013, the Company will assist PIMD by helping PIMD
to (1) secure advantageous sources of drugs and (2) secure marketing and sales assistance in selling the drugs. For these services,
the Company will receive a “Sourcing and Marketing Fee” which is 45% of the “Calculated Basis” to be calculated
under a formula in the Sourcing and Marketing Agreement. PIMD has no material sales in fiscal 2013 and no sales as of the three
months ended March 31, 2014, but should be operational by the end of June 2014. Under our agreement with PIMD, we have no authority
or control with respect to PIMD’s business - the purchase of the drugs and the sale of the drugs. Additionally, we do not
have any authority to bind PIMD for any transaction relating to the purchase, sale or transfer of pharmaceutical products.
On February 20,
2014, Implex Corporation and Main Avenue Pharmacy, Inc., the specialty pharmacy being acquired by Implex, entered into a
Business Management Agreement with ScripsAmerica, effective as of February 7, 2014. Under this agreement, Implex has engaged
the Company to manage the day to day business operations of Main Avenue Pharmacy, subject to the directives of Implex. The
Company’s day to day management responsibilities includes financial management but excludes any matters related to
licensing and those responsibilities which require Federal or state licensure (“Licensing Matters”). Prior to the
final closing, the Licensing Matters will be handled by Main Avenue Pharmacy’s owner and after the final closing Implex
will be responsible for managing Licensing Matters. The Company will also provide funding (as a loan or advance), to the
extent not covered by the funds of the pharmacy, to pay all costs and expenses incurred in the operation of Main Avenue
Pharmacy.
Implex will be entitled to make monthly
draws on the first day of each month, as owner of Main Avenue Pharmacy, as follows: (i) commencing on April 1, 2014 and continuing
to, and including, March 1, 2015, $47,003 plus $30 for each prescription processed by Main Avenue Pharmacy during the preceding
month (except that the first such payment shall include prescriptions processed since the initial closing on February 7, 2014);
(ii) commencing on April 1, 2015 and continuing to, and including, March 1, 2016, $8,827 plus $30 for each prescription processed
by Main Avenue Pharmacy during the preceding month; (iii) commencing on April 1, 2016 and continuing thereafter plus $30 for each
prescription processed by Main Avenue Pharmacy during the preceding month and (iv) commencing on the 10,001 prescription processed
by Main Avenue Pharmacy the rate will be reduced to $10 for each prescription processed by Main Avenue Pharmacy during the preceding
month.
For the management services provided by
the ScripsAmerica under this Business Management Agreement, Implex will pay us a combined monthly Management and Financing Fee.
This combined fee will be equal to 97% of the Calculation Basis (receipts from paid invoices less Implex’s monthly draw and
various expenses of Main Avenue Pharmacy). Since ScripsAmerica will have significant controlling interest via related party relationships
and will be the primary beneficiary, the Company will consolidate financial activities of Main Avenue Pharmacy.
Description of Revenues
ScripsAmerica offers fulfillment of prescription
and over the counter (“OTC”) orders. To fulfill purchase orders from customers, ScripsAmerica processes orders to the
end user’s desired specifications. Capabilities range from unit of use packaging for in-patient nursing homes and hospitals
to bulk packaging for government and international organizations.
Product
Revenue associated with our curtailed pharmaceutical distribution services is recognized when product is shipped from a contract
packager to our customers’ warehouses and is adjusted for anticipated charge backs from our customers which include inventory
credits, discounts or volume incentives. These charge back costs are received monthly from our customers’ and the sales revenue
and accounts receivables are reduced accordingly based on historical experience, customer contract programs, product pricing trends
and the mix of products shipped.
Purchase
orders from our customers generate our shipments, provide persuasive evidence that an arrangement exists and that the pricing is
determinable. The credit worthiness of our customers assures that collectability is reasonably assured.
We also
recognize revenue from our contract packager on a net basis according to ASC 605-45,
Revenue Recognition: Principal Agent Considerations.
Since we are not deemed to be the
principal in these sales transactions we do not report the transaction on a gross
basis in our statement of operations. These sales transactions relate to a contract that our Contract Packager has obtained with
a government agency. The revenue is reported in a separate line in the statement of operations as Product revenues net from Contract
Packager, the gross sales are reduced by the cost of sales fees from our Contract Packager.
In addition,
commission fees are recognized when earned on shipments of generic pharmaceutical and OTC products by WholesaleRx, which is a DEA
and State-licensed to store and distribute controlled substances, pursuant to an agreement entered into as of November 1, 2013.
Under this written agreement with WholesaleRx, the Company will earn a 20% commission fees on the gross margin of products shipped
to independent pharmacies by WholesaleRx. From August 2013 to October 31, 2013, the Company had been receiving a 12.5% commission
fee on the gross margin of such shipments under an oral agreement with WholesaleRx.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( ) = unfavorable
Change
|
|
|
|
|
2013
|
|
|
|
|
|
2012
|
|
|
|
|
|
$ change
|
|
|
Product revenue-net of contract adjustments
|
|
|
153,000
|
|
|
|
28
|
%
|
|
|
3,763,000
|
|
|
|
96
|
%
|
|
|
(3,610,000
|
)
|
|
Revenue net, from contract packager
|
|
|
333,000
|
|
|
|
60
|
%
|
|
|
152,000
|
|
|
|
4
|
%
|
|
|
181,000
|
|
|
Commission fees - related party
|
|
|
70,000
|
|
|
|
13
|
%
|
|
|
–
|
|
|
|
0
|
%
|
|
|
70,000
|
|
|
Net Sales
|
|
|
556,000
|
|
|
|
100
|
%
|
|
|
3,915,000
|
|
|
|
100
|
%
|
|
|
(3,359,000
|
)
|
|
Cost of Goods Sold
|
|
|
496,000
|
|
|
|
89
|
%
|
|
|
3,384,000
|
|
|
|
86
|
%
|
|
|
(2,888,000
|
)
|
|
Gross Profit
|
|
|
60,000
|
|
|
|
11
|
%
|
|
|
531,000
|
|
|
|
14
|
%
|
|
|
(471,000
|
)
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
2,432,000
|
|
|
|
437
|
%
|
|
|
1,861,000
|
|
|
|
48
|
%
|
|
|
(571,000
|
)
|
|
Share-base Comp issued for payment of services in General and Administrative
|
|
|
3,792,000
|
|
|
|
682
|
%
|
|
|
178,000
|
|
|
|
5
|
%
|
|
|
(3,614,000
|
)
|
|
Reserve expense for receivable - contract packager
|
|
|
1,129,000
|
|
|
|
203
|
%
|
|
|
–
|
|
|
|
0
|
%
|
|
|
(1,129,000
|
)
|
|
Research and Development
|
|
|
–
|
|
|
|
0
|
%
|
|
|
38,000
|
|
|
|
1
|
%
|
|
|
38,000
|
|
|
Total Operating expenses
|
|
|
7,353,000
|
|
|
|
1322
|
%
|
|
|
2,077,000
|
|
|
|
53
|
%
|
|
|
(5,276,000
|
)
|
|
Operating Loss
|
|
|
(7,293,000
|
)
|
|
|
1312
|
%
|
|
|
(1,546,000
|
)
|
|
|
-39
|
%
|
|
|
(5,747,000
|
)
|
|
Other Income (expenses) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(333,000
|
)
|
|
|
-60
|
%
|
|
|
(225,000
|
)
|
|
|
-6
|
%
|
|
|
(108,000
|
)
|
|
Loss from derivative issued with debt greater carrying value
|
|
|
(1,180,000
|
)
|
|
|
-212
|
%
|
|
|
–
|
|
|
|
0
|
%
|
|
|
(1,180,000
|
)
|
|
Loss on revaluation of derivatives
|
|
|
(1,289,000
|
)
|
|
|
-232
|
%
|
|
|
(7,000
|
)
|
|
|
0
|
%
|
|
|
(1,282,000
|
)
|
|
Financing costs
|
|
|
(972,000
|
)
|
|
|
-175
|
%
|
|
|
–
|
|
|
|
0
|
%
|
|
|
(972,000
|
)
|
|
Amortization of debt discount
|
|
|
(785,000
|
)
|
|
|
-141
|
%
|
|
|
(41,000
|
)
|
|
|
-1
|
%
|
|
|
(744,000
|
)
|
|
Gain on extinguishment
|
|
|
637,000
|
|
|
|
115
|
%
|
|
|
–
|
|
|
|
0
|
%
|
|
|
637,000
|
|
|
Income from equity investments
|
|
|
2,000
|
|
|
|
0
|
%
|
|
|
–
|
|
|
|
0
|
%
|
|
|
2,000
|
|
|
Total Other Income / (expenses)
|
|
|
(3,920,000
|
)
|
|
|
-705
|
%
|
|
|
(273,000
|
)
|
|
|
-7
|
%
|
|
|
(3,647,000
|
)
|
|
Income (Loss) before taxes
|
|
|
(11,213,000
|
)
|
|
|
-2017
|
%
|
|
|
(1,819,000
|
)
|
|
|
-46
|
%
|
|
|
(9,394,000
|
)
|
|
Tax Expense
|
|
|
–
|
|
|
|
0
|
%
|
|
|
43,000
|
|
|
|
1
|
%
|
|
|
(43,000
|
)
|
|
Net loss
|
|
|
(11,213,000
|
)
|
|
|
-2017
|
%
|
|
|
(1,862,000
|
)
|
|
|
-48
|
%
|
|
|
(9,351,000
|
)
|
Revenues, net:
The following table
sets forth selected statement of operations data as a percentage of total revenue for fiscal years ending December 31, 2013 and
2012.
|
Products sold
|
|
2013
|
|
|
% to total
|
|
|
2012
|
|
|
% to total
|
|
|
Change
|
|
|
Prescription drug products
|
|
|
185,000
|
|
|
|
3
|
%
|
|
|
2,949,000
|
|
|
|
53
|
%
|
|
|
(2,764,000
|
)
|
|
OTC & non prescription products
|
|
|
117,000
|
|
|
|
2
|
%
|
|
|
1,461,000
|
|
|
|
26
|
%
|
|
|
(1,344,000
|
)
|
|
Revenue, from contract packager
|
|
|
6,434,000
|
|
|
|
88
|
%
|
|
|
1,173,000
|
|
|
|
21
|
%
|
|
|
5,261,000
|
|
|
Revenue, from pharmaceutical partner
|
|
|
599,000
|
|
|
|
8
|
%
|
|
|
–
|
|
|
|
0
|
%
|
|
|
599,000
|
|
|
Gross Revenue
|
|
|
7,335,000
|
|
|
|
100
|
%
|
|
|
5,583,000
|
|
|
|
100
|
%
|
|
|
1,752,000
|
|
|
Discounts / Charge backs
|
|
|
(150,000
|
)
|
|
|
-2
|
%
|
|
|
(647,000
|
)
|
|
|
-12
|
%
|
|
|
497,000
|
|
|
Adjustment to sales for contract packager and pharmaceutical partner
|
|
|
(6,629,000
|
)
|
|
|
-90
|
%
|
|
|
(1,021,000
|
)
|
|
|
|
|
|
|
(5,608,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
556,000
|
|
|
|
|
|
|
|
3,915,000
|
|
|
|
|
|
|
|
(3,359,000
|
)
|
In 2012, the majority of the Company’s
revenue was generated from the sales of generic pharmaceutical prescription orders under our pharmaceutical distribution services
business. In fiscal year 2013 the Company generated net sales revenue of approximately $556,000 as compared to net sales revenue
of approximately $3,915,000 for 2012, a decrease of approximately $3,359,000, or 86%. The decline in sales was mainly a result
the Company’s decision to exit sales to McKesson due to increase charge back costs and the discontinued sales to Cutis Pharmaceuticals
and MedVet which we had significant sales a year ago. Revenue from the
U.S. government
contract
through our former Contract Packager did not replace the lost sales volume partly because the
U.S. government
sales are recorded net of costs. The Company sales for fiscal year 2013 would have been approximately $2.2 million higher if
the sales for
U.S. government
were recorded at gross and were not recognized on the net basis
for sales associated with the
U.S. government
contract with our former Contract Packager. In
August 2013 we began earning revenue from our arrangements with independent pharmacies pursuant to an oral agreement with WholesaleRx,
a pharmaceutical distributor, under which we earn a commission of 12.5% on the gross margin of generic pharmaceutical and OTC product
sales shipped to independent pharmacies by WholesaleRx. On November 1, 2013, we entered into a Master Agreement with WholesaleRx
which increased the commission to 20%. WholesaleRx sales were approximately $599,000 for five months of shipments in fiscal year
2013, for which we earned a commission of approximately $70,000.
For the twelve months period ended December
31, 2013
U.S. government
sales accounted for 60% of our net revenue and McKesson accounted for
27% of our net revenue (versus 4% and 74%, respectively, of net revenue for the same period in 2012). Cutis Pharmaceuticals and
MedVet accounted for another 22% of our net revenue in 2012. Commissions of approximately $70,000 in 2013 accounted for the other
12% of our revenue.
Gross Profit:
Gross profit for fiscal
year 2013 was approximately $60,000, which was 11% of our net sales as compared to a gross profit equal to 14% net sales in 2012.
The decline of approximately $471,000, or 88%, in gross profit from fiscal year 2012 was mainly due to the sales decline of approximately
$3.4 million due to the Company’s decision not to continue its relationship with McKesson. Sales for prescription drug products
and OTC products declined 93% from the prior year. The sales on our
U.S. government
contract
which has only a 7% margin also contributed to the decline in our gross margin. Also impacting our gross margin percentage was
the royalty expenses included in cost of goods for 2013 in the amount to approximately $286,000 as compared to approximately $53,000
in 2012.
Operating Expenses
Our 2013 operating expenses consist of Selling, General and
Administrative expenses excluding share-based compensation issued for services in the amount of approximately $2.4 million, share-based
compensation issued for services in the amount of approximately $3.8 million and provision for receivable for our contract packager
receivable in the amount of approximately $1.1 million.
Our principal Selling, General and Administrative costs include
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( ) = unfavorable
|
|
|
Principal operating cost consist of :
|
|
2013
|
|
|
|
|
|
2012
|
|
|
|
|
|
$ Change
|
|
|
Human resources
|
|
|
355,000
|
|
|
|
6
|
%
|
|
|
364,000
|
|
|
|
18
|
%
|
|
|
9,000
|
|
|
Sales Marketing
|
|
|
421,000
|
|
|
|
7
|
%
|
|
|
443,000
|
|
|
|
22
|
%
|
|
|
22,000
|
|
|
Professional fees: Legal & accounting
|
|
|
351,000
|
|
|
|
6
|
%
|
|
|
171,000
|
|
|
|
8
|
%
|
|
|
(180,000
|
)
|
|
Consulting
|
|
|
890,000
|
|
|
|
14
|
%
|
|
|
187,000
|
|
|
|
9
|
%
|
|
|
(703,000
|
)
|
|
Investor relations and Marketing
|
|
|
3,112,000
|
|
|
|
49
|
%
|
|
|
59,000
|
|
|
|
3
|
%
|
|
|
(3,053,000
|
)
|
|
General expense
|
|
|
1,095,000
|
|
|
|
17
|
%
|
|
|
815,000
|
|
|
|
40
|
%
|
|
|
(280,000
|
)
|
|
Total Selling, General & Administrative
|
|
|
6,224,000
|
|
|
|
100
|
%
|
|
|
2,039,000
|
|
|
|
100
|
%
|
|
|
(4,185,000
|
)
|
|
Share-based compensation included in S,G & A above
|
|
|
3,792,000
|
|
|
|
|
|
|
|
178,000
|
|
|
|
|
|
|
|
(3,614,000
|
)
|
|
Adjusted total Selling, General & Administrative
|
|
|
2,432,000
|
|
|
|
|
|
|
|
1,861,000
|
|
|
|
|
|
|
|
(571,000
|
)
|
Selling,
General and Administrative.
For the year ended December 31, 2013, selling, general and administrative expenses
(“S,G&A”) increased approximately $4.2 million to approximately $6.2 million as compared to approximately
$2.0 million for fiscal year 2012, which includes approximately $4.0 million of non-cash expenses resulting from the issuance
of our Company’s common stock for payment of services. The changes in S,G&A expenses was mainly a result of (a) an
increase in selling costs (see chart above for dollar change versus 2012) mainly due to the distribution of samples
associated with our selling efforts to promote the RapiMed® rapidly disintegrating tablet, which also included costs
associated for trade shows and advertising, (b) an increase in professional fees, consisting mainly of legal costs,
accounting fees and general consulting fees, (c) an increase in consulting costs consisting of costs associated
with financing and debt raising costs, as well as expertise advise for potential projects, (d) an increase in investor
relations and public relations costs which include costs associated with market awareness of the Company’s stock, press
releases, assistance in capital raising and fees for obtaining funding, (e) a small decline in human resource expenses which
included salary and benefits and board of directors costs and (f) an increase in general expense which includes D&O
insurances, telephone, computer expenses, and general overhead and other office type expenses.
Share-based compensation issued for
services:
Due our cash flow issues in 2013 and 2012 we issued common stock for payment of service to various vendor. The following
table list what area of Selling, General and Administrative we issue our common stock for:
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|
|
|
|
|
|
|
|
|
( ) = unfavorable
|
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
Consulting
|
|
|
892,000
|
|
|
|
143,000
|
|
|
|
(749,000
|
)
|
|
Investor relations and Marketing
|
|
|
2,900,000
|
|
|
|
35,000
|
|
|
|
(2,865,000
|
)
|
|
Total Selling, General & Administrative
|
|
|
3,792,000
|
|
|
|
178,000
|
|
|
|
(3,614,000
|
)
|
Provision for
receivable from our contract packager:
In the second quarter of 2013, the Company fully reserved and expensed $1,210,999
for the remaining balance of loans and receivables from its former Contract Packager because they were deemed uncollectable.
Under the settlement agreement the Company and its former Contract Packager entered into on September 6, 2013 we have
received $81,631 in cash payments as of December 31, 2013. Because collectibility is uncertain, we release the reserve
as cash is received. The settlement agreement stipulates repayment of a total of $408,154 over the next 15 months.
Research and Development.
The Company’s
expenditures for research and development cost declined approximately $38,000, for the year ended December 31, 2013, compared to
the same period in 2012. The decline in our research and development costs can mainly be attributed to the completion of our on-going
research related to new product development at the end of 2011.
Total Other Expenses.
Other expenses
for the year ended December 31, 2013 increased by approximately $3.6 million to approximately $3.9 million from approximately $273,000
in 2012.
The dollar changes for fiscal year 2013
versus 2012 for other expenses consist of the following:
|
|
|
|
|
|
|
|
|
( ) = unfavorable
Change
|
|
|
Other expenses :
|
|
|
2013
|
|
|
|
2012
|
|
|
|
$ change
|
|
|
Interest expense
|
|
|
(333,000
|
)
|
|
|
(225,000
|
)
|
|
|
(108,000
|
)
|
|
Loss from derivative issued with debt greater carrying value
|
|
|
(1,180,000
|
)
|
|
|
–
|
|
|
|
(1,180,000
|
)
|
|
Loss on revaluation of derivatives
|
|
|
(1,289,000
|
)
|
|
|
(7,000
|
)
|
|
|
(1,282,000
|
)
|
|
Financing costs
|
|
|
(972,000
|
)
|
|
|
–
|
|
|
|
(972,000
|
)
|
|
Amortization of debt discount
|
|
|
(785,000
|
)
|
|
|
(41,000
|
)
|
|
|
(744,000
|
)
|
|
Gain on extinguishment
|
|
|
637,000
|
|
|
|
–
|
|
|
|
637,000
|
|
|
Income from equity investments
|
|
|
2,000
|
|
|
|
–
|
|
|
|
2,000
|
|
|
Total Other expenses
|
|
|
(3,920,000
|
)
|
|
|
(273,000
|
)
|
|
|
(3,647,000
|
)
|
Other expenses consist of interest expense,
amortization of debt discount, change in fair value of derivative liabilities and gain on extinguishment of debt. A significant
portion, approximately $1.3 million, of the total increase in other expenses was due to the value change in our derivative liabilities
from our convertible notes payable. The increase in the revaluation of derivative liabilities at December 31, 2013 relates partially
to the Company having sufficient trading activity to utilize the actual volatility of the Company’s stock as an assumption
when computing the fair value of derivative liabilities commencing in January 2013. The Company had previously estimated the volatility
assumption by averaging the volatility of the equity security of three similar entities which resulted in a lower volatility. The
increase in value of the volatility assumption has led to a higher valuation of derivative liabilities associated with the convertible
notes payable.
Interest expense
in 2013 consist of the following: a) interest on our convertible debts, this amount was approximately $239,000, of this
amount we made cash payments of $140,000 in 2013 the balance was an accrued expenses associated with our convertible notes
payable, b) interest cost associated with a term loan of $500,001 was approximately $37,000, and approximately $15,000 for
fiscal year 2013 and 2012, respectively, c) interest costs associated with the Company’s line of credit with a bank was
approximately $4,000 for 2013 as compared to approximately $750 for the same period in 2012, d) Interest cost associated with
our purchase order financing was approximately $73,000 for 2013 and approximately $36,000 for 2012, included in the 2013 total
is $48,000 from related party. Our total interest expense for 2013 was approximately $333,000 as compared to approximately
$225,000 in 2012.
We incurred a loss from derivatives values
issued with our variable convertible notes payable because the derivative value was greater than the carrying value of the notes
payable this amount of approximately $1,180,000 in 2013.
The loss on derivative liability was approximately
$1,289,000 for 2013 compared to $7,000 for the same period in 2012. The change is a result of our stock volatility discussed above.
With an extinguishment of debt from paying
off convertible notes early we incurred gains of approximately $637,000.
We also incurred financing fees because
we issued common stock greater than the value associate with debt in the amount of approximately $972,000 in 2013.
Income taxes (benefit).
Total income
taxes expense for fiscal December 31, 2013 was none as compared to a tax expense of $43,000 for 2012. For 2013 and 2012 the Company
incurred losses that increased the current deferred tax benefit but since the likelihood of not being able to recover the deferred
tax benefit a valuation allowance of 100% of the tax benefit was applied. In 2012 we recorded a valuation allowance to our deferred
tax asset of $597,591 offsetting potential tax benefit. Prior to 2012 we did not have a reserve allowance.
Net Loss
Applicable to Common Shares.
The Company recorded a net loss of approximately $11,213,000 in fiscal year 2013, compared
to a net loss of approximately $1,862,000 for 2012, an increase in our net loss of approximately $9,351,000 as compared to
prior year. This increase in net loss is mainly due to our significant reduction in our sales resulting in a decline of
approximately $3.4 million causing a profit margin decline of approximately $2.9 million in 2013 versus 2012. Also
contributing to the loss was an increase in our SG&A expense of approximately $4.2 million, as described above. We also
incurred an expense of $1.1 million for write-off of our receivable with our former Contract Packager for possibility on
non-collections. Other income/expenses increased approximately $3.6 million in 2013 as compared to 2012 as described above.
Research and development cost declined approximately $381,000 from the 2012 spending. The Company accrued a preferred stock
dividend of $83,440 in both 2013 and 2012, resulting in a loss of income available to common shareholders of $11,296,000 and
$1,945,000 for 2013 and 2012, respectively. Basic and diluted loss per common share were $0.17 and $0.04 for the fiscal years
2013, and 2012, respectively.
Liquidity and Capital Resources
Summary
Since our inception in 2008, we have generated
significant losses from operations and we anticipate that we will continue to generate significant losses from operations for the
foreseeable future.
We have funded our operations primarily through the
private placement of equity and debt securities. For the two year period ended December 31, 2013, we received $2,056,000 in net
proceeds from the issuance of debt securities, $561,000 in net proceeds from the issuance of shares of our common stock, $1,317,000
in proceeds from purchase order financing from a related party and $500,000 from a 4 year term loan also from a related party.
At
December 31, 2013, the Company had approximately $47,000 in cash and incurred a loss from operations of approximately $11.2 million,
of which approximately $6.9 million of the loss was due to non-cash charges. The Company’s cash expenditures are projected
to be approximately $135,000 a month on a continuing operating basis. Included in these cash expenditures are approximately
$13,000 a month in interest costs. After taking into consideration our 2014 interim results to date and current projections
for the remainder of 2014, management believes that the Company’s cash flow from operations, coupled with recent financings
are not sufficient to support the working capital requirements, debt service, applicable debt maturity requirements, and operating
expenses through December 31, 2014.
During 2013, and in the first quarter of
2014, the Company only generated net revenue of approximately $200,000 from the establishment of the new distribution model (independent
pharmacies), the compounding pharmacy business, and the rapid disintegrating technology products. This raises substantial doubt
regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern
is highly dependent upon (i) management’s ability to equal or exceed its planned operating cash flows, (ii) maintain continued
availability on its line of credit and (iii) the ability to obtain alternative financing to fund capital requirements and/or debt
obligations coming due and operating expenses. The accompanying financial statements do not include any adjustments that may result
from the outcome of this uncertainty.
Although the Company has successfully obtained various funding
and financing in the past, future financing and funding options may be challenging in the current environment.
We completed
the development of
a pediatric pain relief rapid orally disintegrating 80 mg and 160 mg tablets
for OTC products. In the second quarter of 2014, we expect to sign a supply agreement (the terms of which have already been finalized)
with a generic manufacturer for the production of these rapid orally disintegrating products for marketing, sale and distribution
outside of the United States.
In January 2014, the Company formed a joint venture entity, Global Pharma Hub, Inc., for the
licensing, marketing and distribution of our pediatric RapiMed® acetaminophen outside of the United States. Our initial market
is in China.
On March 10, 2014, we received a
$200,000 purchase
order for our
children’s pain relief rapid orally disintegrating
80mg tablets
from Global Pharma Hub for the China market.
However, we estimate that we will need approximately $1.5 million of incremental
funding to launch RapiMed® products in the United States. The funding for launching the rapid orally disintegrating products
in the U.S. is expected to come from the sale of equity securities, or debt financing. However, such financing has not yet
been secured.
At December 31, 2013, the Company had total
current assets of approximately $1.5 million and total current liabilities of approximately $3.2 million resulting in negative
working capital of approximately $1.7 million. The Company's current assets consisted of approximately $47,000 in cash, approximately
$1,113,000 in receivables and approximately $330,000 in prepaid expenses. Current liabilities at December 31, 2013 consist of current
portion of long term debt from related party of approximately $123,000, convertible notes payable of approximately $290,000, purchase
order financing of approximately $1,037,000, accounts payable of approximately $232,000, line of credit payable of approximately
$99,000, stock to be issued of approximately $274,000 and a derivative liability of approximately $1,133,000.
During the twelve month period ended December
31, 2013 we supplemented our liquidity needs primarily from financing activities. Our revenue did not cover our operational costs
and our debt requirements. The Company raised approximately $2,549,000 in cash through the following: approximately $1,580,000
from proceeds of convertible notes, the sale of common stock which raised approximately $531,000, and borrowing of approximately
$438,000 under our PO financing agreement with a related party. Approximately $551,000 of these funds were used for payments on
convertible notes payable, payments on our purchase order financing, payments on note payable to a related party, and payments
to the factor.
The following table summarizes our cash flows from operating
investing and financing activities for the fiscal years ending December 31, 2013 and 2012:
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Total cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(1,804,000
|
)
|
|
|
(2,471,000
|
)
|
|
|
667,000
|
|
|
Investing activities
|
|
|
(150,000
|
)
|
|
|
6,000
|
|
|
|
(156,000
|
)
|
|
Financing activities
|
|
|
1,988,000
|
|
|
|
2,011,000
|
|
|
|
(23,000
|
)
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
34,000
|
|
|
|
(454,000
|
)
|
|
|
488,000
|
|
After taking into consideration our interim
results and current projections, management believes that the Company’s cash flow from operations, coupled with recent financings
will not be sufficient to support the working capital requirements, debt service and applicable debt maturity requirements for
the twelve month period ending December 31, 2014. This raises substantial doubt regarding the Company’s ability to
continue as a going concern. The Company’s ability to continue as a going concern is highly dependent upon (i) management’s
ability to achieve its planned operating cash flows, (ii) maintain continued availability on its line of credit and (iii) the ability
to obtain alternative financing to fund capital requirements and/or debt obligations coming due. The accompanying financial statements
do not include any adjustments that may result from the outcome of this uncertainty.
Although the Company
has successfully obtained various funding and financing in the past, future financing and funding options may be challenging in
the current environment
and cannot be expected just based on past results.
Since our inception, ScripsAmerica’s
business model has evolved significantly. Initially, the Company primarily provided pharmaceutical distribution services
to
a wide range of end users across the health care industry through the pharmaceutical distributors in North America. End users included
retail, hospitals, long-term care facilities and government and home care agencies. The majority of our revenue from this model
came from orders facilitated by McKesson,
the largest pharmaceutical distributor in North America, and a few other clients.
However, because we had no exclusive contract with McKesson to utilize our services and the margins began to shrink,
we
have moved away from providing these pharmaceutical distribution services as our main source of income and are now primarily focused
on generating revenue through our RapiMed® products and our independent pharmacy distribution model.
ScripsAmerica has already commenced the
sales and marketing of its RapiMed® pediatric acetaminophen product in China and, subject to securing financing, we hope to
roll out this product in the United States during 2014. Our target market for this RapiMed® product is 2-11 year olds and we
anticipate that the formula for our orally disintegrating tablets will be more effective than existing products due to its ability
to melt faster, taste better and provide more accurate dosing.
ScripsAmerica presented RapiMed® to retail buyers in February of 2013 at the ECRM Cough and Cold show in Florida and we received
very positive feedback. We have engaged DPG Inc. to roll out the product to retailers nationwide once we secure adequate funding.
Depending on the retailer, the product will be promoted through in-store temporary price reductions, coupons, store circulars,
buy-two-and save packs, as a clip-strip program, radio and print advertising.
We completed the development of these rapid
disintegrating table products in the first quarter of 2012, with production and sales pending manufacturing and process qualification
and marketing execution. However, we estimate that we will need approximately $1.5 million of incremental funding for expenses
required to launch these RapiMed® products in the United States. The funding for launching the rapid melt products is to come
from the sale of equity securities, preferred and/or common stock securities and debt financing.
In addition to RapiMed®, we are also implementing our plan to generate significant revenue by entering the Independent Pharmacy distribution
market. This market will allow us to provide a much-needed solution to a problem experienced by small retail chains and individual
pharmacies which is their inability to fill prescriptions for their clients when the Rx calls for controlled substances. The reason
for this problem is that in order to secure these controlled substances the manufacturers of these products impose minimum order
quantities that are far beyond the need of smaller operations.
ScripsAmerica
entered into an oral agreement in August 2013 with a pharmaceutical distributor that represents over 700 such independent operations.
and is a DEA and State-licensed to store and distribute controlled substances (which are drugs that have the potential for abuse
or dependence and are regulated under the
federal Controlled Substances
Act)
.
WholesaleRx
orders
the goods from the manufacturers and has them shipped to its warehouse facility. WholesaleRx then
ships the
goods to the pharmacies in the bottles as received by the manufacturer. Upon receiving
orders from the pharmacies, goods will be sent to them COD which will eliminate any accounts receivable issues.
Prior to
November 1, 2013, the Company and WholesaleRx had an oral agreement to pursuant to which the Company secured third party financing
to fund WholesaleRx’s purchase orders and the Company in consideration of which the Company would receive 12.5% of the WholesaleRx’s
“gross profit” for the prior month (which gross profit would consist of (i) sales to all customers minus (ii) cost
of goods sold, freight in (to WholesaleRx), credits and allowances). Under the November 1 Agreement, ScripsAmerica agreed to provide
purchase order financing to WholesaleRx and purchased a 20% equity stake in WholesaleRx. In consideration for providing financing
for WholesaleRx’s purchaser orders, and to cover the Company’s costs in administering the purchase order financing,
WholesaleRx has agreed to pay the Company on or before the 15
th
calendar day of each month 20% of the gross profit (as
described above) for the prior calendar month. If WholesaleRx is late in paying such 20% fee, then the amount owed will accrue
interest at the rate of 18% per annum until paid.
On February 20,
2014, Implex Corporation and Main Avenue Pharmacy, Inc., the specialty pharmacy being acquired by Implex, entered into a
Business Management Agreement with ScripsAmerica, effective as of February 7, 2014. Under this agreement, Implex has engaged
the Company to manage the day to day business operations of Main Avenue Pharmacy, subject to the directives of Implex. The
Company’s day to day management responsibilities includes financial management but excludes any matters related to
licensing and those responsibilities which require Federal or state licensure (“Licensing Matters”). Prior to the
final closing, the Licensing Matters will be handled by Main Avenue Pharmacy’s owner and after the final closing Implex
will be responsible for managing Licensing Matters. The Company will also provide funding (as a loan or advance), to the
extent not covered by the funds of the pharmacy, to pay all costs and expenses incurred in the operation of Main Avenue
Pharmacy.
For the management services provided by
the ScripsAmerica under this Business Management Agreement, Implex will pay us a combined monthly Management and Financing Fee.
This combined fee will be equal to 97% of the Calculation Basis (receipts from paid invoices less Implex’s monthly draw and
various expenses of Main Avenue Pharmacy). ). Since ScripsAmerica will have significant controlling interest via related party
relationships and will be the primary beneficiary the company will consolidate financial activities of Main Avenue Pharmacy.
Operating Activities
Net cash used by operating activities was
approximately $1.8 million for fiscal year 2013, as compared to cash used by operating activities of approximately $2.5 million
for fiscal year 2012, which was a decrease in cash used by operations of approximately $692,000. The use of cash in 2013 and 2012
resulted primarily from our net loss adjusted for non-cash charges and changes in components of working capital. Our use of issuing
common stock for services had a significant impact the Company reducing use of cash from operating activities in 2013 compared
to 2012.
Investing Activities
In 2013 the Company made two investments:
|
|
1.
|
We loaned $272,000 to Implex Corporation for Implex’s acquisition of the
Membership Units in
P.I.M.D. International, LLC
(“
PIMD”), a start-up limited liability company based in, and proposing to do business in, Florida.
Although founded approximately 4 years ago, PIMD has had no sales, but has the necessary licenses for operation of a drug
wholesale operation. The purchase of the Membership Units in PIMD was subject to certain conditions precedent, of which the
most important was that the Company obtain the necessary licenses from Florida (and the DEA) for the ownership of a drug
distribution company like PIMD. Since this is considered a variable interest entity we have consolidated this receivable for
our loan and PIMD’s loan payable is eliminated in our consolidated balance sheet.
|
|
|
2.
|
In
November and December 2013, we invested $150,000 for a 14%
interest in WholesaleRx, Inc., which that represents over 700 independent pharmacy operations and is a DEA and State-licensed
to store and distribute controlled substances (which are drugs that have the potential for abuse or dependence and are
regulated under the
federal Controlled Substances
Act)
.
WholesaleRx
orders
the goods from the manufacturers and has them shipped to its warehouse facility. WholesaleRx then
ships the
goods to the pharmacies in the bottles as received by the manufacturer. Upon
receiving orders from the pharmacies, goods will be sent to them COD which will eliminate any accounts receivable issues.
Prior
to November 1, 2013, the Company and WholesaleRx had an oral agreement to pursuant to which the Company secured third party
financing to fund WholesaleRx’s purchase orders and the Company in consideration of which the Company would receive
12.5% of the WholesaleRx’s “gross profit” for the prior month (which gross profit would consist of (i)
sales to all customers minus (ii) cost of goods sold, freight in (to WholesaleRx), credits and allowances). ScripsAmerica
agreed to provide purchase order financing to WholesaleRx. In consideration for providing financing for
WholesaleRx’s purchaser orders, and to cover the Company’s costs in administering the purchase order
financing.
|
Recent Investing Events
On January 29, 2014, Implex Corporation,
which is owned by our legal counsel, Richard C. Fox, entered into a stock purchase agreement with Dmitriy Naydenko to acquire the
specialty pharmacy Main Avenue Pharmacy, Inc., located in New Jersey, for $550,000. The purchase price will be paid in installments
and the shares will be held by an escrow agent until the final payment is made. Under the purchase agreement, the final agreement
is to be made on July 11, 2014 (unless extended by the parties). For the management services provided by the ScripsAmerica under
this Business Management Agreement, Implex will pay us a combined monthly Management and Financing Fee. This combined fee will
be equal to 97% of the Calculation Basis (receipts from paid invoices less Implex’s monthly draw and various expenses of
Main Avenue Pharmacy). Since ScripsAmeica will have controlling interest in Implex, we plan to consolidate activities of Main Ave
into our financial statements in first quarter 2014.
Financing Activities
Net cash provided
by financing activities was approximately $1,988,000 for fiscal year 2013 compared to approximately $2,011,000 in 2012.
Financing activities for fiscal year 2013 consisted of the following: the Company (a) sold shares of common stock for gross
proceeds of $531,000, (b) sold convertible notes payables for gross proceeds of $1,580,000, (c) borrowed $438,000 on a
Purchase Order agreement with related party, (d) paid down the balance on convertible notes in the amount of $288,000, (e)
paid down $112,000 on a four year term loan, (f) made a payment from factor in the amount of $142,000, (g) net proceeds
of $59,000 under an existing line of credit, and (h) a distribution of equity in our PIMD subsidiary of approximately
$120,000.
Recent Financial Events
From January 1, 2014 until April 10, 2014,
we received $1,009,067 in cash in a private subscription sale in which we issued 19,207,420 shares of common stock.
In January and
February 2014 we received cash proceeds of $206,621 from Seaside 88, L.P. for the issuance of an aggregate of 2,270,740
restricted shares of common stock.
Commitments
The holders of a $250,000 convertible note
which was converted into 2,000,000 shares of our common stock on March 12, 2012 are entitled to a 4% royalty from the sales of
our orally disintegrating rapidly dissolving 80mg and 160mg pain relief tablets. The royalty payments associated with this agreement
have no minimum guarantee amounts and royalty payments will end only if the product line of Acetaminophen rapidly dissolving 80mg
and 160mg tablets is sold to a third party. Shipments for this product are expected to occur in first half of the year 2014.
The holder of a $320,000
note payable are entitled to a to 1.8% royalty payment on the first $10 million of sales of a generic prescription drug under
distribution contracts with Federal government agencies and
0.09%
on the next $15 million of
such sales. Payments for royalties will be paid quarterly and as of December 31, 2012, the Company had accrued $42,000 in royalties.
In the first quarter 2013 the Company issued 455,556 shares of its common stock as payment for the royalty expense and in the
second quarter of 2013, the Company issued 58,278 shares of its common stock as payment for the royalty expense. In additions
a holder of a $50,000 note payable (see note 10), a related party, is entitled to a 0.9% on the first $25 million of sales of
a generic prescription drug under distribution contracts with Federal government agencies. The Company had accrued $10,500 in
royalties as of December 31, 2012, and in first quarter 2013 the Company issued 130,555 shares of its common stock for payment
of royalty expense. In the second quarter the Company issued 29,139 shares of its common stock for payment of royalty expense
and the Company has recorded a royalty expense of $30,600 and $213,945 for the three months and nine months period ended September
30, 2013, respectively.
On November 4, 2013, the Company entered into a securities purchase
agreement with Seaside 88, L.P. ("Seaside") pursuant to which the Company agreed to sell, and Seaside agreed to purchase,
up to seven million (7,000,000) restricted shares of the Company’s common stock in one or more closings. The number of shares
to be purchased at each closing will be equal to ten percent (10%) of the aggregate trading volume of shares of the Company’s
common stock during normal trading hours for the 20 consecutive trading days prior to each closing. The purchase price for the
shares to be purchased by Seaside at each closing will be equal to sixty percent (60%) of the average of “daily average stock
price” for the five (5) trading days preceding the date of the closing. The “daily average stock price” for a
trading day is equal to the quotient of (a) the sum of the highest and lowest sale price for the trading day divided by (b) two.
The Company had an initial closing under the securities purchase
agreement on November 4, 2013, at which the Company sold to Seaside 1,152,514 restricted shares of its common stock for gross proceeds
of $200,537, of which $7,500 was used to pay the legal fees for Seaside and $19,303 was paid for a finder’s fee. The Company
also had closings on (i) December 4, 2013, at which the Company sold to Seaside 841,426 restricted shares of common stock for gross
proceeds of $90,926 of which $2,500 was used to pay the legal fees for Seaside. (ii) January 6, 2014, at which the Company sold
to Seaside 928,670 restricted shares of common stock for gross proceeds of $69,093 of which $2,500 was used to pay the legal fees
for Seaside and (iii) February 4, 2014, at which the Company sold to Seaside 1,342,070 restricted shares of common stock for gross
proceeds of $142,527 and (iv) on February 24, 2014 the Company issued 1,615,550 restricted shares of common stock for financing
fees which were accrued and expense in 2013.
In May 2013, the Company signed a “Development, Manufacturing
and Supply Agreement” with a pharmaceutical manufacturer to develop and manufacture our 80mg and 160mg Acetaminophen RapiMed®
rapid orally disintegrating tablets. The initial term of the agreement is two years with an option to a one five year contract
extension. In addition to development and scale up costs, the Company will pay up to $150,000 to license the technology during
the first two years. In order to maintain exclusivity rights for the technology the Company must purchase a minimum of 10,000,000
tablets each of the 80mg and 160mg tablets in the first year and 16,500,000 tablets for both 80mg 160mg in the second year. After
the second year annual volume requirements need to be achieved for the Company to maintain exclusivity of the license. In 2014,
the Company terminated this agreement with the pharmaceutical manufacturer due to the manufacturer’s deteriorating financial
condition.
Previously, the Company had entered into
a Product Development, Manufacturing and Supply Agreement with Marlex Pharmaceuticals, Inc. (the “Contract Manufacturer”
or “Marlex”) in March 2010. The Contract Manufacturer was to develop rapid melt tablets in accordance with the specifications
of the agreement with the Company responsible for all associated costs with the proprietary rights owned by the Company. The Company
and the Contract Manufacturer agreed upon a projected product cost to be paid to the Contract Manufacturer as well as 7% of gross
profits for the term of the agreement. The Company can terminate this agreement and did so in the third quarter 2013 (see note
8). All development costs through the date of notice have previously been expensed and paid.
On October 15, 2013 the Board of Directors approved revise compensation
for the CEO, Robert Schneiderman and the CFO, Jeffrey Andrews, contingent on the Company raising $4 million via equity, debt or
a combination of both. Contingent on raising the $4 million compensation would be as follows: CEO annual salary $200,000, CFO annual
salary $192,000, both would receive 50,000 options quarterly at 120% of market price on the date granted with a one year vesting
period.
On October 15, 2013 the Board of Directors approved additional
compensation to Board members in the form of issuance of stock options. Board members shall be granted 100,000 stock options for
each year served commencing in 2012. The chairman of the Board shall be granted 135,000 for each year served. Effective date is
October 7, 2013, options vest immediately and option price will be 110% of the market price on the grant date. Additionally for
each board meeting 10,000 options will be granted and for each committee meeting 5,000 options will be granted.
In July of 2013, the Company entered into
a memorandum of understanding (“MOU”) with a Forbes Investments Ltd (“Forbes”) to provide future services.
Upon the signing of this MOU agreement the Company issued 350,000 shares of our Company’s common stock to two parties of
this agreement. The value of the common stock at issuance was $154,000 and this amount was recorded to prepaid and was expensed
to selling, general and administrative through balance of 2013. The MOU agreement has a 12 month exclusivity clause, a two-way
break-up fee of $50,000 in cash or securities at 50% of market rate upon 30 day running average of termination. Upon successfully
completing the goal of this agreement the two parties are entitled to each receive 200,000 shares of ScripsAmerica’s common
stock and also shall be entitled to receive 25,000 shares of our common stock per $250,000 financing arranged from any source up
to $5 million during the first 12 months of this agreement. In January 2014 licensing agreements were entered into (see note 21
in financial statements Global Pharma Hub) and the 400,000 shares of ScripsAmerica’s common stock was issued at a value of
$52,000.
In November our subsidiary PIMD (see note
8) entered into a 25 month operating lease for a distribution facility in Doral Florida. The lease begins January 1, 2014 and expires
January 31, 2016, monthly rent is $4,585 for the first thirteen months with the first month free and $4,724 for the last twelve
months. The total minimum lease payments are $111,714, and for 2014 they are $50,441, for 2015 they are $56,548, and for 2016 they
are $4,724.
In January 2013, the Company entered into
consulting agreement with Implex Corporation, a consulting firm owned by the Company’s legal counsel. The initial agreement
terms are for six months and the agreement shall automatically be renewed for a successive month period(s) until one party gives
written notice to terminate the agreement thirty days prior to the next termination date. Fees are $25,000 per month and such fees
shall be paid in shares of the Company’s common stock rather than cash so as to permit the Company to conserve cash. During
2013 the Company issued to Implex Corporation 824,956 shares of common stock at a fair value of $253,996.
During the fiscal year 2013 the Company
purchased product from two suppliers, and in 2012 the Company purchased 100% of its product packaging from its Contract Packager.
A disruption in the availability of product packaging from the Company’s suppliers could cause a possible loss of sales,
which could affect operating results adversely.
During the year ended
December 31, 2013, the Company derived approximately $413,000, or 73%, of its revenue from two customers, of this total one customer
accounted for 61% and the other accounted for 12%. During the year ended December 31, 2012, the Company derived approximately
$3,524,000 or 90% of its revenue from two customers, of this total one customer accounted for 74% and the other accounted for
16%.
Equity
investments
WholesaleRx
As
of December 31, 2013, the Company has a 14% non-controlling ownership interest in WholesaleRx, Inc., which represents over 700
such independent pharmacy operations and is a DEA and State-licensed to store and distribute controlled substances (which are drugs
that have the potential for abuse or dependence and are regulated under the
federal Controlled Substances Act)
.
WholesaleRx
orders the goods from the manufacturers and has them shipped to its warehouse facility. WholesaleRx
then
ships the
goods to the pharmacies
in the bottles as received by the manufacturer. Upon receiving orders from the pharmacies, goods will be sent to them COD which
will eliminate any accounts receivable issues.
Prior to November 1, 2013, the Company and WholesaleRx had an oral agreement
to pursuant to which the Company secured third party financing to fund WholesaleRx’s purchase orders and the Company in consideration
of which the Company would receive 12.5% of the WholesaleRx’s “gross profit” for the prior month (which gross
profit would consist of (i) sales to all customers minus (ii) cost of goods sold, freight in (to WholesaleRx), credits and allowances).
Under the November 1 Agreement, ScripsAmerica agreed to provide purchase order financing to WholesaleRx and purchased a 20% equity
stake in WholesaleRx. In consideration for providing financing for WholesaleRx’s purchaser orders, and to cover the Company’s
costs in administering the purchase order financing, WholesaleRx has agreed to pay the Company on or before the 15
th
calendar day of each month 20% of the gross profit (as described above) for the prior calendar month. If WholesaleRx is late in
paying such 20% fee, then the amount owed will accrue interest at the rate of 18% per annum until paid
Per the November 1, 2013 agreement with
WholesaleRx the Company agreed to make an equity investment of $400,000 for 12,000 shares, which represents 20% ownership interest
in WholesaleRx. The subscription amount to be paid in three installments ($150,000 upon execution of the agreement, $125,000 paid
in January 2014 and $125,000 on February 15, 2014, which has not been made as of April 10, 2014).
Variable
Interest Entities (VIE)
P.I.M.D International, LLC
The Company is the primary beneficiary
of
P.I.M.D. International, LLC (“
PIMD”), a start-up limited
liability company based in, and proposing to do business in, Florida. Our determination PIMD investment is a variable interest
entity (VIE) was based on the facts ScripsAmerica receives a majority of its expected profits and losses. We also will provide
be the primary financing for inventory purchases through related parties. Our loan receivable of $272,000 and PIMD’s loan
payable was eliminated in the accompanying consolidated financial statements. The assets and liabilities and revenues and expenses
of PIMD have been included in the accompanying consolidated financial statements. The 10% outside ownership is shown as non-controlling
interest. At November 1, 2013, PIMD’s beginning capital was $41,000 and they had accumulated deficit of $49,607. During December
2013 the un-controlling interest made a distributed $104,930 making the total equity attributed to non-controlling interest to
be a deficit of $10,622.
Details of the loan agreement are as follows:
In December, 2013, the Company revised an September 2013 purchase agreement to acquire 90% of the Membership Units in
P.I.M.D.
International, LLC (“
PIMD”), a start-up limited liability company based in, and proposing to do business in,
Florida. Although founded approximately 4 years ago, PIMD has had no sales, but has the necessary licenses for operation of a drug
wholesale operation. The purchase of the Membership Units in PIMD was subject to certain conditions precedent, of which the most
important was that the Company obtain the necessary licenses from Florida (and the DEA) for the ownership of a drug distribution
company like PIMD. However, it was determined that securing the licenses was going to require a substantially longer period of
time than the parties had anticipated. Consequently, in order to preserve the business opportunity, it was necessary to change
the structure of the relationship. Accordingly, the original purchase agreement was cancelled and voided. The funds already advanced
by ScripsAmerica to PIMD were converted to a loan and the relationship between PIMD and ScripsAmerica became a Sourcing and Marketing
Agreement. Implex Corporation, owned by the Company’s legal counsel, who is a Florida resident, has stepped in to assist
with any licensing issues. The Company believes that if licensing is required it will be that of Implex, based in Florida and with
a Florida owner.
Under this Sourcing and Marketing Agreement,
which the Company entered into with PIMD in December 2013, the Company will assist PIMD by helping PIMD to (1) secure advantageous
sources of drugs and (2) secure marketing and sales assistance in selling the drugs. For these services, the Company will receive
a “Sourcing and Marketing Fee” which is 45% of the “Calculated Basis” to be calculated under a formula
in the Sourcing and Marketing Agreement.
The funds already advanced by ScripsAmerica
to PIMD were converted to a loan to Implex, a related party, borrowed $272,000 from ScripsAmerica at an interest rate of 2% and
it has re-loaned the funds to PIMD at an interest rate of 5%. Implex will keep the 3% differential. The Company’s loan to
Implex and Implex’s loan to PIMD are both for a 5-year period. Implex will be entering into a “Business Development
and Retention Agreement” with PIMD to assist PIMD with the development of its business.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies and estimates
Principles
of Consolidation
- The
consolidated financial statements include the accounts of the
Company and all of its subsidiary in which a controlling interest is maintained. All significant inter-company accounts and transactions
have been eliminated in consolidation. Investments in entities in which the Company does not have a controlling financial interest,
but over which we have significant influence are accounted for using the equity method. Investments in which we do not have the
ability to exercise significant influence are accounted for using the cost method. For those consolidated subsidiaries where Company
ownership is less than 100%, the outside stockholders’ interests are shown as non-controlling interest. Our equity investment
is classified in Investments on the balance sheet.
Use of Estimates
- The preparation
of financial statements in conformity with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue
Recognition
–
Product revenue associated with
our pharmaceutical distribution services is recognized when product is shipped from a contract packager to our customers’
warehouses, and is adjusted for anticipated charge backs from our customers which include inventory credits, discounts or volume
incentives. These charge back costs are received monthly from our customers’ and the sales revenue and accounts receivables
are reduced accordingly based on historical experience, customer contract programs, product pricing trends and the mix of products
shipped.
Purchase
orders from our customers generate our shipments, provide persuasive evidence that an arrangement exists and that the pricing is
determinable. The credit worthiness of our customers assures that collectability is reasonably assured.
We also
recognize revenue from our contract packager on a net basis according to ASC 605-45,
Revenue Recognition: Principal Agent Considerations.
Since we are not deemed to be the
principal in these sales transactions we do not report the transaction on a gross
basis in our statement of operations. These sales transactions relate to a contract that a Contract Packager has obtained with
a government agency. The revenue is reported in a separate line in the statement of operations as “Product revenues net from
Contract Packager”, and the gross sales are reduced by the cost of sales fees from our Contract Packager.
Commission
fees are recognized when earned on shipments of generic pharmaceutical and OTC products by our pharmaceutical partner, which is
a DEA and State-licensed to store and distribute controlled substances. Per our agreement with our pharmaceutical partner, the
Company will earn a 20% commission on the gross profit (sales less cost of goods sold, freight in and credits and allowances) of
products shipped to independent pharmacies on or after November 1, 2013 and 12.5% commission on gross profit of products shipped
to independent pharmacies prior to November 1, 2013.
Research and Development
-
Expenditures for research and development (“R & D”) associated with contract research and development provided
by third parties are expensed, as incurred. The Company had charges of $0 and $37,524 for research and development expenses for
the years ended December 31, 2013 and 2012, respectively.
Accounts Receivable Trade, net
-
Accounts
receivable are stated at estimated net realizable value net of the sales allowance due to charge backs. The Chargeback reserve
at December 31, 2013 was zero because we did not have any receivable associated with McKesson and we no longer sell product to
McKesson. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for
bad debts based on its assessment of the current status of individual accounts and historical collection information. Balances
that are deemed uncollectible after management has used reasonable collection efforts are written off through a charge to the allowance
and a credit to accounts receivable. As of December 31, 2013 and 2012 no allowance for doubtful accounts
was
deemed necessary.
The Company
entered into an accounts receivable factoring facility agreement in June 2012. As of December 31, 2012, gross receivables
were
$395,974 of which $141,725 was sold to a factor, and has been included in the liabilities section in the balance sheet. Gross accounts
receivable was reduced $105,443 to provide for an allowance for charge backs, for a net accounts receivable balance of $290,531.
R
eceivable – Contract Packager
- The Company has receivables from Marlex Pharmaceuticals, Inc. (Contract Packager), in the amount of $1,088,598 and $1,579,051
at December 31, 2013 and 2012, respectively. As of December 31, 2013, this receivable consists of PO financing, revenue earned
for
U.S. government
sales and monthly payments due under the settlement agreement entered into
on September 6, 2013 (see Note 10). The 2012 receivable consists of the following: a) receivables relating to sales with a government
agency in the amount of $772,809, b) the Company’s payment of $600,000 to a vendor for the product to be manufactured on
behalf of our Contract Packager, and c) the Company’s advance of $206,241 to our Contract Packager for the purchase of product
inventory. In the second quarter of 2013, the Company fully reserved and expensed $1,210,999 which was the remaining balance. Per
the September 6, 2013 settlement agreement, the company is entitle to recover $408,150 consequently the unrecoverable amount have
been eliminated and since collectable is still not certain the remaining receivable is fully reserved as of December 31, 2013.
Receivable – related party
–
WholesaleRx in which we have a 14% investment where we recognized Commission fees when earned on shipments
of generic pharmaceutical and OTC products by our pharmaceutical partner, which is a DEA and State-licensed to store and distribute
controlled substances. The receivable consists of PO financing, and revenue earned for commission sales agreement entered into
in November 1, 2013. No reserve for un-collectability due to short history and no prior bad debts.
Income Taxes
-
The Company provides for income taxes using the asset and liability based approach for reporting for
income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial
statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established to reduce deferred tax assets to the amounts expected to be realized. The Company had a full valuation
allowance of $2,015,200 and $597,591 against deferred tax assets at December 31, 2013 and 2012, respectively.
The Company also complies with the provisions
of
Accounting for Uncertainty in Income Taxes
. The accounting regulation prescribes a recognition threshold and measurement
process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. The Company
classifies any assessment for interest and/or penalties as other expenses in the financial statements, if applicable. There were
no uncertain tax positions at December 31, 2013 and 2012.
Derivative Financial Instruments
-
Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and
one or more underlying values (e.g. interest rate, security price or other variable) that require no initial net investment and
permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further,
derivative financial instruments are, initially, and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market
or foreign-currency risks. However, the Company has entered into various types of financing arrangements to fund its business capital
requirements, including convertible debt and other financial instruments. These contracts require evaluation to determine whether
derivative features embedded in host contracts require bifurcation and fair value measurement or, in the case of freestanding derivatives
(principally warrants) whether certain conditions for equity classification have been achieved. In instances where derivative financial
instruments require liability classification, the Company is required to initially and subsequently measure such instruments at
fair value. Accordingly, the Company adjusts the fair value of these derivative components at each reporting period through a charge
to income until such time as the instruments acquire classification in stockholders’ deficit.
Derivative financial instruments are initially
recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. The Company estimates fair
values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent
with the objective measuring fair values. In selecting the appropriate technique, management considers, among other factors, the
nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments,
such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option valuation technique because it embodies
all of the requisite assumptions (including trading volatility, dividend yield, estimated terms and risk free rates) necessary
to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant
and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal
and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market
price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently
carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.
Fair Value Measurements
-
The
Company follows the provision of ASC No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”). ASC
820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement
date) and provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value
into three levels:
Level 1:
Unadjusted quoted
prices in active markets for identical assets or liabilities.
Level 2:
Input other than
quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs
reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data
obtained from sources independent of the Company.
Level 3:
Unobservable inputs
reflect the assumptions that the Company develops based on available information about what market participants would use in valuing
the asset or liability.
An asset or liability’s level within
the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability
of observable inputs can vary and is affected by a variety of factors.
The Company uses judgment in determining the fair value of assets
and liabilities, and level 3 assets and liabilities involve greater judgment than level 1 and level 2 assets and liabilities.
The carrying values of accounts receivable, inventory,
accounts payable and accrued expenses, royalty payable, obligation due factor, and notes payable approximate their fair values
due to their short-term maturities. The carrying value of the Company’s long-term debt approximates fair value due to the
borrowing rates currently available to the Company for loans with similar terms. See note 13 for fair value of derivative liabilities.
Stock-Based Compensation
–
Compensation expense is recognized for the fair value of all share-based payments issued to employees. As of December 31, 2013,
the Company has issued 2,015,000 employee stock options that would require calculating the fair value using a pricing model such
as the Black-Scholes pricing model, see note 15 for fair value. As of December 31, 2012, the Company had not issued any employee
stock options that would require calculating the fair value using a pricing model such as the Black-Scholes pricing model.
For non-employees,
stock grants issued for services are valued at either the invoiced or contracted value of services provided, or the fair value
of stock at the date the agreement is reached, whichever is more readily determinable. For stock options and warrants granted to
non-employees the fair value at the grant date is used to value the expense. In calculating the estimated fair value of its stock
options and warrants, the Company used a Black-Scholes pricing model which requires the consideration of the following seven variables
for purposes of estimating fair value:
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the stock option or warrant exercise price,
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the expected term of the option or warrant,
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the grant date fair value of our common stock, which is issuable upon exercise of
the option or warrant,
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the expected volatility of our common stock,
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expected dividends on our common stock (we do not anticipate paying dividends in the
foreseeable future),
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the risk free interest rate for the expected option or warrant term, and
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the expected forfeiture rate.
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Earnings
Per Share
- Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding
during the period.
Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock warrants, options, convertible notes payable and Series A convertible preferred shares. Common
stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to
do so would be anti-dilutive. For details on number of common stock equivalents see Note 18 below.
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
SCRIPSAMERICA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Contents
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Page
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Report of Independent Registered Public Accounting firm
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F-1
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Consolidated Financial Statements - December 31, 2013 and 2012
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Consolidated Balance Sheets
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F-2
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Consolidated Statements of Operations
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F-3
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Consolidated Statements of Changes in Stockholders’ Deficit
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F-4
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Consolidated Statements of Cash Flows
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F-5
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Consolidated Notes to Financial Statements
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F-6 - F-28
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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of ScripsAmerica, Inc.
We have audited the accompanying consolidated balance sheet
of ScripsAmerica, Inc. (the “Company”) as of December 31, 2013, and the related consolidated statement of operations,
stockholders’ deficit, and cash flows for the year then ended. We have also audited the accompanying balance sheet of the
Company as of December 31, 2012, and the related statement of operations, stockholders’ deficit and cash flows for the year
then ended. ScripsAmerica, Inc.’s management is responsible for these financial statements. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 2013 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of ScripsAmerica, Inc. as of December 31, 2013, and the
results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the 2012 financial statements referred to above present fairly, in all material
respects, the financial position of ScripsAmerica, Inc. as of December 31, 2012, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements,
the Company has incurred an operating loss and net loss of $7.3 million and $11.2 million, respectively during the year ended December
31, 2013, a working capital deficit of $1.7 million and has negative cash flows from operations of $1.8 million. These factors
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to
these matters are discussed in Note 2. The consolidated financial statements do not include any adjustments that might result from
the outcome of these uncertainties. If the Company is unable to successfully refinance and raise additional capital to fund ongoing
operations there would be a material adverse effect to the consolidated financial statements.
/s/ FRIEDMAN LLP
East Hanover, New Jersey
April 15, 2014
SCRIPSAMERICA, INC.
Consolidated Balance Sheets
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
47,293
|
|
|
$
|
13,513
|
|
|
Accounts receivable trade, net of allowance for charge backs of $105,443
|
|
|
–
|
|
|
|
290,531
|
|
|
Receivable - contract packager, net of allowance of $408,150 and $0, respectively
|
|
|
1,088,598
|
|
|
|
1,579,051
|
|
|
Receivable - related party
|
|
|
24,223
|
|
|
|
–
|
|
|
Prepaid expenses and other current assets
|
|
|
329,673
|
|
|
|
198,820
|
|
|
Total Current Assets
|
|
|
1,489,787
|
|
|
|
2,081,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
–
|
|
|
|
69,650
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
276,956
|
|
|
|
–
|
|
|
Other Assets
|
|
|
14,720
|
|
|
|
200,000
|
|
|
|
|
|
291,676
|
|
|
|
200,000
|
|
|
TOTAL ASSETS
|
|
$
|
1,781,463
|
|
|
$
|
2,351,565
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
99,222
|
|
|
$
|
40,059
|
|
|
Accounts payable and accrued expenses
|
|
|
226,570
|
|
|
|
101,520
|
|
|
Purchase order financing - related party
|
|
|
1,037,494
|
|
|
|
578,280
|
|
|
Obligation due to factor
|
|
|
–
|
|
|
|
141,725
|
|
|
Royalty payable
|
|
|
5,302
|
|
|
|
42,000
|
|
|
Royalty payable - related party
|
|
|
–
|
|
|
|
10,500
|
|
|
Stock to be issued
|
|
|
273,947
|
|
|
|
–
|
|
|
Current portion of long-term debt - related party
|
|
|
122,529
|
|
|
|
112,021
|
|
|
Convertible notes payable - net of discount $259,396 and $50,918 respectively
|
|
|
289,839
|
|
|
|
64,832
|
|
|
Derivative liability
|
|
|
1,133,393
|
|
|
|
94,477
|
|
|
Total Current Liabilities
|
|
|
3,188,296
|
|
|
|
1,185,414
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends payable
|
|
|
187,740
|
|
|
|
104,300
|
|
|
Convertible notes payable - related parties
|
|
|
120,738
|
|
|
|
130,000
|
|
|
Convertible notes payable - net of discounts $168,273 and 0 respectively
|
|
|
628,795
|
|
|
|
719,400
|
|
|
Long-term debt, less current portion - related party
|
|
|
230,287
|
|
|
|
352,816
|
|
|
Total Non-Current Liabilities
|
|
|
1,167,560
|
|
|
|
1,306,516
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,355,856
|
|
|
|
2,491,930
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
Series A Convertible preferred stock -
$.001 par value; 10,000,000 shares authorized, 2,990,252 issued and outstanding
|
|
|
1,043,000
|
|
|
|
1,043,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
Common stock - $0.001 par value; 150,000,000 shares
authorized; 91,792,839 and 56,404,972 shares issued and outstanding as of December 31, 2013 and 2012, respectively
|
|
|
91,794
|
|
|
|
56,405
|
|
|
Additional paid-in capital
|
|
|
10,046,457
|
|
|
|
1,090,772
|
|
|
Accumulated deficit
|
|
|
(13,609,078
|
)
|
|
|
(2,330,542
|
)
|
|
Total Stockholders' Deficit of ScripsAmerica, Inc.
|
|
|
(3,470,827
|
)
|
|
|
(1,183,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit Attributed to Noncontrolling interest
|
|
|
(146,566
|
)
|
|
|
–
|
|
|
Total Stockholders' Deficit
|
|
|
(3,617,393
|
)
|
|
|
(1,183,365
|
)
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
1,781,463
|
|
|
$
|
2,351,565
|
|
See accompanying notes to consolidated
financial statements.
SCRIPSAMERICA, INC.
Consolidated Statements of Operations
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
Product revenues - net of contract adjustments
|
|
$
|
152,650
|
|
|
$
|
3,762,677
|
|
|
Revenues net, from contract packager
|
|
|
333,638
|
|
|
|
152,517
|
|
|
Commission fees - related party
|
|
|
69,902
|
|
|
|
–
|
|
|
Total net revenues
|
|
|
556,190
|
|
|
|
3,915,194
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
210,540
|
|
|
|
3,331,846
|
|
|
Royalty expense
|
|
|
285,547
|
|
|
|
52,500
|
|
|
|
|
|
496,087
|
|
|
|
3,384,346
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
60,103
|
|
|
|
530,848
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
2,432,540
|
|
|
|
1,861,374
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses share-based compensation issued for services
|
|
|
3,791,909
|
|
|
|
177,773
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for contract packager receivable
|
|
|
1,129,368
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
–
|
|
|
|
37,524
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
7,353,817
|
|
|
|
2,076,671
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(7,293,714
|
)
|
|
|
(1,545,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses), net
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(332,947
|
)
|
|
|
(225,247
|
)
|
|
Loss from derivatives issued with debt greater than carrying value
|
|
|
(1,179,737
|
)
|
|
|
–
|
|
|
Financing costs
|
|
|
(971,840
|
)
|
|
|
–
|
|
|
Loss on revaluation of derivatives
|
|
|
(1,288,623
|
)
|
|
|
(6,750
|
)
|
|
Amortization of debt discount
|
|
|
(785,170
|
)
|
|
|
(40,833
|
)
|
|
Gain on extinguishment of debt
|
|
|
636,670
|
|
|
|
–
|
|
|
Income from equity investments
|
|
|
1,956
|
|
|
|
–
|
|
|
|
|
|
(3,919,691
|
)
|
|
|
(272,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income taxes
|
|
|
(11,213,405
|
)
|
|
|
(1,818,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Tax Expense
|
|
|
–
|
|
|
|
43,179
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(11,213,405
|
)
|
|
|
(1,861,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributed to noncontrolling interest
|
|
|
(18,309
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to ScripsAmerica, Inc.
|
|
|
(11,195,096
|
)
|
|
|
(1,861,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend
|
|
|
(83,440
|
)
|
|
|
(83,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Shareholders
|
|
$
|
(11,278,536
|
)
|
|
$
|
(1,945,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Common Share
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.17
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
68,119,715
|
|
|
|
55,140,192
|
|
See accompanying notes to consolidated
financial statements.
SCRIPSAMERICA, INC.
Consolidated Statements of Changes in
Stockholders' Deficit
For the Years
Ended December 31, 2013 and 2012
|
|
|
Common Stock
|
|
|
Subscription
|
|
|
Additional
Paid-In
|
|
|
Retained Earnings
|
|
|
Stockholders' Deficit
|
|
|
Deficit
|
|
|
Total
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Receivable
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
ScripsAmerica
|
|
|
Noncontrolling
|
|
|
Deficit
|
|
|
Balance
- January 1, 2012
|
|
|
52,521,684
|
|
|
$
|
52,522
|
|
|
$
|
(170,800
|
)
|
|
$
|
494,487
|
|
|
$
|
(385,270
|
)
|
|
$
|
(9,061
|
)
|
|
$
|
–
|
|
|
$
|
(9,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment received
for stock subscription
|
|
|
–
|
|
|
|
–
|
|
|
|
170,800
|
|
|
|
–
|
|
|
|
–
|
|
|
|
170,800
|
|
|
|
–
|
|
|
|
170,800
|
|
|
Common stock
issued for cash
|
|
|
300,000
|
|
|
|
300
|
|
|
|
–
|
|
|
|
29,700
|
|
|
|
–
|
|
|
|
30,000
|
|
|
|
–
|
|
|
|
59,700
|
|
|
Common stock
issued for services - BOD
|
|
|
124,000
|
|
|
|
124
|
|
|
|
–
|
|
|
|
34,356
|
|
|
|
–
|
|
|
|
34,480
|
|
|
|
–
|
|
|
|
68,836
|
|
|
Common stock
issued for services - employees
|
|
|
114,288
|
|
|
|
114
|
|
|
|
–
|
|
|
|
19,886
|
|
|
|
–
|
|
|
|
20,000
|
|
|
|
–
|
|
|
|
39,886
|
|
|
Common stock
issued for conversion of convertible Notes payable
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
–
|
|
|
|
248,000
|
|
|
|
–
|
|
|
|
250,000
|
|
|
|
–
|
|
|
|
498,000
|
|
|
Common stock
issued for services - non employees
|
|
|
1,345,000
|
|
|
|
1,345
|
|
|
|
–
|
|
|
|
229,755
|
|
|
|
–
|
|
|
|
231,100
|
|
|
|
–
|
|
|
|
460,855
|
|
|
Dividends for
convertible preferred stock
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(83,440
|
)
|
|
|
(83,440
|
)
|
|
|
–
|
|
|
|
(166,880
|
)
|
|
Warrants issued
for services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
34,588
|
|
|
|
–
|
|
|
|
34,588
|
|
|
|
–
|
|
|
|
69,176
|
|
|
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,861,832
|
)
|
|
|
(1,861,832
|
)
|
|
|
–
|
|
|
|
(3,723,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2012
|
|
|
56,404,972
|
|
|
$
|
56,405
|
|
|
$
|
–
|
|
|
$
|
1,090,772
|
|
|
$
|
(2,330,542
|
)
|
|
$
|
(1,183,365
|
)
|
|
$
|
–
|
|
|
$
|
(1,183,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for cash
|
|
|
4,854,952
|
|
|
|
4,855
|
|
|
|
–
|
|
|
|
526,253
|
|
|
|
–
|
|
|
|
531,108
|
|
|
|
–
|
|
|
|
531,108
|
|
|
Common stock
issued for services - Directors
|
|
|
136,000
|
|
|
|
136
|
|
|
|
–
|
|
|
|
35,064
|
|
|
|
–
|
|
|
|
35,200
|
|
|
|
–
|
|
|
|
35,200
|
|
|
Common stock
issued for conversion of Convertible Notes payable
|
|
|
11,456,639
|
|
|
|
11,457
|
|
|
|
–
|
|
|
|
2,765,834
|
|
|
|
–
|
|
|
|
2,777,291
|
|
|
|
–
|
|
|
|
2,777,291
|
|
|
Common stock
issued for services - non employees
|
|
|
9,177,027
|
|
|
|
9,177
|
|
|
|
–
|
|
|
|
3,377,935
|
|
|
|
–
|
|
|
|
3,387,112
|
|
|
|
–
|
|
|
|
3,387,112
|
|
|
Common stock
issued for debt and payables
|
|
|
8,690,000
|
|
|
|
8,690
|
|
|
|
–
|
|
|
|
1,294,810
|
|
|
|
–
|
|
|
|
1,303,500
|
|
|
|
–
|
|
|
|
1,303,500
|
|
|
Common stock
issued for royalty payment
|
|
|
1,339,616
|
|
|
|
1,340
|
|
|
|
–
|
|
|
|
345,463
|
|
|
|
–
|
|
|
|
346,803
|
|
|
|
–
|
|
|
|
346,803
|
|
|
Common stock
retired for services previously provided
|
|
|
(600,000
|
)
|
|
|
(600
|
)
|
|
|
–
|
|
|
|
(75,900
|
)
|
|
|
–
|
|
|
|
(76,500
|
)
|
|
|
–
|
|
|
|
(76,500
|
)
|
|
Common stock
issued for warrants in a cashless conversion
|
|
|
333,633
|
|
|
|
334
|
|
|
|
–
|
|
|
|
(334
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Dividends for
convertible preferred stock
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(83,440
|
)
|
|
|
(83,440
|
)
|
|
|
–
|
|
|
|
(83,440
|
)
|
|
Common stock
options issued for services - Directors
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
246,731
|
|
|
|
–
|
|
|
|
246,731
|
|
|
|
–
|
|
|
|
246,731
|
|
|
Common stock
options issued for services
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
439,829
|
|
|
|
–
|
|
|
|
439,829
|
|
|
|
–
|
|
|
|
439,829
|
|
|
Noncontrolling
interest beginning balance
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(8,607
|
)
|
|
|
(8,607
|
)
|
|
Distribution
taken from noncontrolling interest
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(119,650
|
)
|
|
|
(119,650
|
)
|
|
Net
Loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(11,195,096
|
)
|
|
|
(11,195,096
|
)
|
|
|
(18,309
|
)
|
|
|
(11,213,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2013
|
|
|
91,792,839
|
|
|
$
|
91,794
|
|
|
$
|
–
|
|
|
$
|
10,046,457
|
|
|
$
|
(13,609,078
|
)
|
|
$
|
(3,470,827
|
)
|
|
$
|
(146,566
|
)
|
|
$
|
(3,617,393
|
)
|
See accompanying
notes to consolidated financial statements.
SCRIPSAMERICA, INC.
Consolidated Statements of Cash Flows
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(11,213,405
|
)
|
|
$
|
(1,861,832
|
)
|
|
Adjustments to reconcile net loss to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
|
Income from equity method investee
|
|
|
(1,956
|
)
|
|
|
–
|
|
|
Amortization of discount on convertible notes payable
|
|
|
785,170
|
|
|
|
38,892
|
|
|
Loss from derivatives issued with debt
|
|
|
1,179,737
|
|
|
|
–
|
|
|
Amortization of loan fees
|
|
|
263,973
|
|
|
|
–
|
|
|
Common stock issued for services
|
|
|
3,191,812
|
|
|
|
174,530
|
|
|
Common stock issued for payment of royalty fees
|
|
|
346,803
|
|
|
|
–
|
|
|
Common stock issued for finance fees
|
|
|
761,818
|
|
|
|
–
|
|
|
Options issued for services
|
|
|
439,829
|
|
|
|
–
|
|
|
Options issued for services - Directors
|
|
|
246,731
|
|
|
|
3,243
|
|
|
Change in derivative liability
|
|
|
1,288,623
|
|
|
|
6,750
|
|
|
Change in deferred Income tax provision
|
|
|
–
|
|
|
|
41,200
|
|
|
Reserve on receivable - Contract packager
|
|
|
1,385,000
|
|
|
|
743,503
|
|
|
Recovery of bad debt
|
|
|
(81,632
|
)
|
|
|
–
|
|
|
Gain on extinguishment of debt
|
|
|
(636,670
|
)
|
|
|
–
|
|
|
Allowance for chargebacks
|
|
|
(11,399
|
)
|
|
|
53,805
|
|
|
Loss for property and equipment disposal
|
|
|
69,650
|
|
|
|
–
|
|
|
Change in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
Accounts receivable - trade
|
|
|
253,485
|
|
|
|
(139,696
|
)
|
|
Accounts receivable – related party
|
|
|
24,222
|
|
|
|
–
|
|
|
Receivable - Contract packager
|
|
|
(667,336
|
)
|
|
|
(1,640,155
|
)
|
|
Prepaid expenses and other current assets
|
|
|
143,134
|
|
|
|
(10,125
|
)
|
|
Accounts payable and accrued expenses
|
|
|
428,157
|
|
|
|
118,400
|
|
|
Cash used in operating activities
|
|
|
(1,804,254
|
)
|
|
|
(2,471,485
|
)
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchase of Investment
|
|
|
(150,000
|
)
|
|
|
–
|
|
|
Proceeds from note receivable
|
|
|
–
|
|
|
|
6,055
|
|
|
Cash provided by investing activities
|
|
|
(150,000
|
)
|
|
|
6,055
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds under bank line of credit, net
|
|
|
59,164
|
|
|
|
40,059
|
|
|
Proceeds from Issuance of common stock
|
|
|
531,108
|
|
|
|
30,000
|
|
|
Proceeds for stock to be issued
|
|
|
50,925
|
|
|
|
–
|
|
|
Proceeds from convertible notes payable
|
|
|
1,579,867
|
|
|
|
435,150
|
|
|
Proceeds (Payments) from convertible notes payable - related party
|
|
|
(9,262
|
)
|
|
|
50,000
|
|
|
Proceeds from note payable - related party
|
|
|
–
|
|
|
|
500,001
|
|
|
Proceeds from PO financing from related party, net
|
|
|
437,964
|
|
|
|
878,867
|
|
|
Payments to factor, net
|
|
|
(141,725
|
)
|
|
|
141,725
|
|
|
Payments on convertible notes payable
|
|
|
(288,336
|
)
|
|
|
(200,000
|
)
|
|
Payments on note payable - related party
|
|
|
(112,021
|
)
|
|
|
(35,164
|
)
|
|
Payments to members of noncontrolling interest
|
|
|
(119,650
|
)
|
|
|
|
|
|
Collection of stock subscription receivable
|
|
|
–
|
|
|
|
170,800
|
|
|
Cash provided by financing activities
|
|
|
1,988,034
|
|
|
|
2,011,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
33,780
|
|
|
|
(453,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- Beginning of
year
|
|
|
13,513
|
|
|
|
467,505
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
- End of year
|
|
$
|
47,293
|
|
|
$
|
13,513
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
–
|
|
|
|
|
|
|
Cash Paid:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
192,732
|
|
|
|
186,474
|
|
|
Noncash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
Accrued Preferred Dividend payable
|
|
|
83,440
|
|
|
|
83,440
|
|
|
Conversion of note payable for common stock
|
|
|
979,554
|
|
|
|
250,000
|
|
|
Reduction in loan receivable from contract packager in exchange for inventory
|
|
|
–
|
|
|
|
250,000
|
|
|
Purchase order direct financing in exchange for inventory
|
|
|
–
|
|
|
|
300,587
|
|
|
Purchase of manufacturing equipment
|
|
|
–
|
|
|
|
69,650
|
|
|
Stock issued for inventory advance
|
|
|
275,010
|
|
|
|
–
|
|
See accompanying notes to consolidated
financial statements.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
|
1 -
|
Organization and Business
|
The accompanying financial statements
reflect financial information of ScripsAmerica, Inc., (the “Company” or “ScripsAmerica” or “we”
or “our”).
ScripsAmerica, Inc. was incorporated
in the State of Delaware on May 12, 2008. Since our inception, ScripsAmerica’s business model has evolved significantly.
Through March 2013, and to a lesser extent into early 2014, the Company primarily provided pharmaceutical distribution services
to a wide range of end users across the health care industry through major pharmaceutical
distributors in North America, such as McKesson Corporation and
Cardinal Health
.
The end users include retail, hospitals, long-term care facilities and government and home care agencies. The majority of the Company’s
revenue from this model came from orders facilitated by McKesson,
the largest pharmaceutical distributor in North America,
and a few other clients.
However, we had no exclusive contract
with McKesson and the Company’s other pharmaceutical distributors to utilize our services and our margins became compressed.
As a result, in 2013
the business of providing these pharmaceutical distribution services
became curtailed and we are now primarily focused
on generating revenue through (1) the marketing, sale
and distribution of our RapiMed® products, (2) our services to the independent pharmacy distribution business and (3) our entry
into the compounding pharmacy business.
Specifically, we have developed a branded OTC
product called “RapiMed” (www.rapimeds.com), which is a children’s pain reliever and fever reducer currently
launched in China though our joint venture entity Global Pharma Hub, and which we hope to launch in retail outlets in North
America
sometime in 2014.
We have also entered into
agreements with third parties pursuant to which we receive fees based on a formula tied to the gross profit on sales of pharmaceutical
products to independent pharmacies by such third parties. Lastly, on February 20, 2014 we entered into an agreement with a New
Jersey compounding pharmacy that specializes in topical pain creams, pursuant to which we manage their business operations in exchange
for a percentage of the pharmacy’s total revenue.
|
2 -
|
Liquidity, Business Risk and Going Concern
|
At December 31, 2013, the
Company had approximately $47,000 in cash and incurred a loss from operations of approximately $7.3 million, of which
approximately $5.1 million of the loss was due to non-cash charges and also had an accumulated deficit of $13.6 million.
Further business with our largest customer in 2012 was stopped during 2013 which reduced our revenue by $3.3 million from
2012. After taking into consideration our 2014 interim results to date and current projections for the remainder of 2014,
management believes that the Company’s cash flow from operations, coupled with recent financings are not sufficient to
support the working capital requirements, debt service, applicable debt maturity requirements, and operating expenses through
December 31, 2014. The Company’s ability to continue as a going concern is highly dependent upon (i) management’s
ability to re-establish its business model and equal or exceed its planned operating cash flows (ii), maintain continued
availability on its line of credit and the ability to obtain additional financing or capital to fund its debt service
obligations coming due and operating expenses.
These conditions raise substantial
doubt regarding the Company’s ability to continue as a going concern. The accompanying financial statements do not include
any adjustments that may result from the outcome of this uncertainty.
Although the Company has successfully
obtained various funding and financing in the past, future financing and funding options may be challenging in the current environment
and cannot be expected based on past results.
We
completed the development of
a children’s pain relief rapid orally disintegrating 80 mg
and 160 mg tablets for OTC products. In the second quarter of 2013, we signed a supply agreement with a generic manufacturer for
the production of these rapid orally disintegrating products.
In January 2014, the Company formed a joint venture entity,
Global Pharma Hub, Inc., for the licensing, marketing and distribution of our pediatric RapiMed® acetaminophen in China.
On
March 10, 2014, we received a
$200,000 purchase order for our
children’s pain
relief rapid orally disintegrating
80mg tablets from Global Pharma Hub for the China market.
However, we estimate that we will need approximately $1.5 million of incremental funding to launch RapiMed® products
in the United States. The funding for launching the rapid orally disintegrating products in the U.S. is expected to come from the
sale of equity securities, or debt financing. However, such financing has not yet been secured.
|
3 -
|
Summary of Significant Accounting Policies
|
A summary of significant
accounting policies follows:
a.
Principles of Consolidation
- The
consolidated financial statements include the
accounts of the Company and all of its subsidiary in which a controlling interest is maintained. All significant
inter-company accounts and transactions have been eliminated in consolidation. Investments in entities in which the Company
does not have a controlling financial interest, but over which we have significant influence are accounted for using the
equity method. Investments in which we do not have the ability to exercise significant influence are accounted for using the
cost method. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders’
interests are shown as non-controlling interest. Our equity investment is classified in Investments on the balance
sheet.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2013
|
b.
Use of
Estimates
- The preparation of financial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
c.
Revenue
Recognition
–
Product revenue associated with our pharmaceutical distribution services is recognized when product is shipped from a contract
packager to our customers’ warehouses, and is adjusted for anticipated charge backs from our customers which include inventory
credits, discounts or volume incentives. These charge back costs are received monthly from our customers’ and the sales
revenue and accounts receivables are reduced accordingly based on historical experience, customer contract programs, product pricing
trends and the mix of products shipped.
Purchase
orders from our customers generate our shipments, provide persuasive evidence that an arrangement exists and that the pricing is
determinable. The credit worthiness of our customers assures that collectability is reasonably assured.
We
also recognize revenue from our contract packager on a net basis according to ASC 605-45,
Revenue Recognition: Principal Agent
Considerations.
Since we are not deemed to be the
principal in these sales transactions we do not report the transaction
on a gross basis in our statement of operations. These sales transactions relate to a contract that a Contract Packager has obtained
with a government agency. The revenue is reported in a separate line in the statement of operations as “Product revenues
net from Contract Packager”, and the gross sales are reduced by the cost of sales fees from our Contract Packager.
Commission
fees are recognized when earned on shipments of generic pharmaceutical and OTC products by our pharmaceutical partner, which is
a DEA and State-licensed to store and distribute controlled substances. Per our agreement with our pharmaceutical partner, the
Company will earn a 20% commission on the gross profit (sales less cost of goods sold, freight in and credits and allowances) of
products shipped to independent pharmacies on or after November 1, 2013 and 12.5% commission on gross profit of products shipped
to independent pharmacies prior to November 1, 2013.
d.
Research and
Development
- Expenditures for research and development (“R & D”) associated with contract research
and development provided by third parties are expensed, as incurred. The Company had charges of $0 and $37,524 for research
and development expenses for the years ended December 31, 2013 and 2012, respectively.
e.
Accounts
Receivable Trade, net
-
Accounts receivable are stated at estimated net realizable value net of the sales
allowance due to charge backs. The Chargeback reserve at December 31, 2013 was zero because we did not have any receivable
associated with McKesson and we no longer sell product to McKesson. Management provides for uncollectible amounts
through a charge to earnings and a credit to an allowance for bad debts based on its assessment of the current status of
individual accounts and historical collection information. Balances that are deemed uncollectible after management
has used reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable.
As of December 31, 2013 and 2012 no allowance for doubtful accounts
was deemed
necessary.
The
Company entered into an accounts receivable factoring facility agreement in June 2012. As of December 31, 2012, gross receivables
were $395,974 of which $141,725 was sold to a factor, and has been included in the liabilities section in the balance sheet.
Gross accounts receivable was reduced $105,443 to provide for an allowance for charge backs, for a net accounts receivable balance
of $290,531.
f.
Property and Equipment
-
Property and equipment are stated at cost less accumulated depreciation. The Company computes depreciation using the
straight-line method over the estimated useful lives of the assets. Maintenance costs, which do not significantly extend the useful
lives of the respective assets and repair costs are charged to operating expense as incurred. In December 2013, it was discovered
that a potential supplier of product who physically had the equipment which we had purchased in 2012, had gone bankrupt. It was
determined that the equipment was unrecoverable and, consequently, we wrote-off the assets and expensed $69,650 to the statement
of operations.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
g. R
eceivable –
Contract Packager
- The Company has receivables from Marlex Pharmaceuticals, Inc. (Contract Packager), in the amount of
$1,088,598 and $1,579,051 at December 31, 2013 and 2012, respectively. As of December 31, 2013, this receivable consists of PO
financing, revenue earned for
U.S. government
sales and monthly payments due under the settlement
agreement entered into on September 6, 2013 (see Note 10). The 2012 receivable consists of the following: a) receivables relating
to sales with a government agency in the amount of $772,809, b) the Company’s payment of $600,000 to a vendor for the product
to be manufactured on behalf of our Contract Packager, and c) the Company’s advance of $206,241 to our Contract Packager
for the purchase of product inventory. In the second quarter of 2013, the Company fully reserved and expensed $1,210,999 which
was the remaining balance. Per the September 6, 2013 settlement agreement, the Company is entitled to recover $408,150 of which
$81,632 has been recovered during 2013. Consequently the reserved amount has been offset against the allotment and since collectability
is still not certain on the remaining receivable, we have fully reserved it as of December 31, 2013.
h.
Receivable
– related party
–
WholesaleRx in which we have a 14% investment where we recognized
Commission fees when earned on shipments of generic pharmaceutical and OTC products by our pharmaceutical partner, which is a
DEA and State-licensed to store and distribute controlled substances. The receivable consists of PO financing, and revenue
earned for commission sales agreement entered into in November 1, 2013. No reserve for un-collectability due to short history
and no prior bad debts.
i.
Customer,
Product, and Supplier Concentrations
-
For the first four months of 2013 and the entire 2012
fiscal year we sold our products directly to a wholesale drug distributor who, in turn, supplies products to pharmacies,
hospitals, governmental agencies, and physicians. The Company used one Contract Packager exclusively for all of its
warehouse, customer service, distribution, and labeling services for the first four months of 2013 and entire 2012 fiscal
year. In September 2013, the Company added a second supplier of products.
In 2013, we entered into an
agreement with a company that represents over 700 pharmacy independent operations. Under this agreement, this partner company will
order the goods from the manufacturers and have them shipped to our pharmaceutical partner, which is DEA and State-licensed to
store and distribute controlled substances. The goods will be shipped to the pharmacies in the bottles as received by the manufacturer.
j.
Concentration in Cash
-
. We maintain cash at financial institutions and, at times, balances may exceed federally insured limits. We have never
experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at December
31, 2013 and 2012.
k.
Income Taxes
-
The
Company provides for income taxes using the asset and liability based approach for reporting for income
taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial
statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based
on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable
income. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.
The Company had a full valuation allowance of $2,015,200 and $597,591 against deferred tax assets at December 31, 2013 and
2012, respectively.
The Company also complies with
the provisions of
Accounting for Uncertainty in Income Taxes
. The accounting regulation prescribes a recognition threshold
and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax
return. The Company classifies any assessment for interest and/or penalties as other expenses in the financial statements, if applicable.
There were no uncertain tax positions at December 31, 2013 and 2012.
l.
Derivative
Financial Instruments
-
Derivative financial instruments consist of financial instruments or other contracts that contain
a notional amount and one or more underlying values (e.g. interest rate, security price or other variable) that require no initial
net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial
instruments. Further, derivative financial instruments are, initially, and subsequently, measured at fair value and recorded as
liabilities or, in rare instances, assets. The Company generally does not use derivative financial instruments to hedge exposures
to cash-flow, market or foreign-currency risks. However, the Company has entered into various types of financing arrangements to
fund its business capital requirements, including convertible debt and other financial instruments. These contracts require evaluation
to determine whether derivative features embedded in host contracts require bifurcation and fair value measurement or, in the case
of freestanding derivatives (principally warrants) whether certain conditions for equity classification have been achieved. In
instances where derivative financial instruments require liability classification, the Company is required to initially and subsequently
measure such instruments at fair value. Accordingly, the Company adjusts the fair value of these derivative components at each
reporting period through a charge to income until such time as the instruments acquire classification in stockholders’ deficit.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
Derivative financial instruments
are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. The Company
estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered
to be consistent with the objective measuring fair values. In selecting the appropriate technique, management considers, among
other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex
derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton option valuation technique
because it embodies all of the requisite assumptions (including trading volatility, dividend yield, estimated terms and risk free
rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development
of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes
in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the
trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially
and subsequently carried at fair values, our income (loss) will reflect the volatility in these estimate and assumption changes.
m.
Fair Value
Measurements
-
The Company follows the provision of ASC No. 820,
Fair Value Measurements and
Disclosures
(“ASC 820”). ASC 820 clarifies that fair value is an estimate of the exit price,
representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants (i.e., the exit price at the measurement date) and provides for use of a fair value hierarchy
that prioritizes inputs to valuation techniques used to measure fair value into three levels:
Level 1:
Unadjusted
quoted prices in active markets for identical assets or liabilities.
Level 2:
Input other
than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs
reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data
obtained from sources independent of the Company.
Level 3:
Unobservable
inputs reflect the assumptions that the Company develops based on available information about what market participants would use
in valuing the asset or liability.
An asset or liability’s
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability
of observable inputs can vary and is affected by a variety of factors.
The Company uses judgment in determining the fair value
of assets and liabilities, and level 3 assets and liabilities involve greater judgment than level 1 and level 2 assets and liabilities.
The carrying values of accounts receivable, inventory,
accounts payable and accrued expenses, royalty payable, obligation due factor, and notes payable approximate their fair values
due to their short-term maturities. The carrying value of the Company’s investments approximate fair value because the investments
were made in 2013 and the carrying value includes the Company’s share of the investee’s earnings from the date of acquisition.
(See Note 8.) The carrying value of the Company’s long-term debt approximates fair value due to the borrowing rates currently
available to the Company for loans with similar terms. See note 13 for fair value of derivative liabilities.
n.
Advertising Expenses
-
The Company expenses advertising costs as incurred. The Company incurred advertising expenses in
the amount of $371,786 and $62,875 for the years ended December 31, 2013 and 2012, respectively.
o.
Shipping and Handling Cost
– The Company expenses all shipping and handling costs as incurred. These costs are included in cost of sales on the
accompanying financial statements.
p.
Stock-Based
Compensation
– Compensation expense is recognized for the fair value of all share-based payments issued to
employees. As of December 31, 2013, the Company has issued 1,320,000 employee stock options that would require calculating
the fair value using a pricing model such as the Black-Scholes pricing model, see note 15 for fair value. As of December 31,
2012, the Company had not issued any employee stock options that would require calculating the fair value using a pricing
model such as the Black-Scholes pricing model.
For non-employees, stock grants
issued for services are valued at either the invoiced or contracted value of services provided, or the fair value of stock at the
date the agreement is reached, whichever is more readily determinable. For stock options and warrants granted to non-employees
the fair value at the grant date is used to value the expense. In calculating the estimated fair value of its stock options and
warrants, the Company used a Black-Scholes pricing model which requires the consideration of the following seven variables for
purposes of estimating fair value:
|
·
|
|
the stock option or warrant exercise price,
|
|
·
|
|
the expected term of the option or warrant,
|
|
·
|
|
the grant date fair value of our common stock, which is issuable upon exercise of
the option or warrant,
|
|
·
|
|
the expected volatility of our common stock,
|
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
|
·
|
|
expected dividends on our common stock (we do not anticipate paying dividends in the
foreseeable future),
|
|
·
|
|
the risk free interest rate for the expected option or warrant term, and
|
|
·
|
|
the expected forfeiture rate.
|
q.
Cost
of Goods Sold
–
In fiscal year 2012 and for the first half of fiscal year 2013, the Company
purchases all of its products from one supplier, Marlex
Pharmaceuticals Inc., a related party
at various contracted prices. Raw materials were re-packaged by Marlex. Upon shipment of product, the Company is charged the
contracted price for services provided to ship the product. Cost of goods consists of raw material costs,
re-packaging costs and shipping and handling. The Company financed the purchase of inventory based on confirmed
purchase orders via a revolving finance agreement, provided by a related party (see notes 6 and 10 below). Beginning is
August 2013 we added a second source for supplying our pharmaceutical product needs. These purchases are also financed based
on confirmed purchase orders via a revolving finance agreement, provided by a related party.
r.
Earnings Per Share
- Basic net income (loss) per common share is computed using the weighted average number
of common shares outstanding during the period.
Diluted earnings per share include additional dilution from common
stock equivalents, such as stock issuable pursuant to the exercise of stock warrants, options, convertible notes payable and
Series A convertible preferred shares. Common stock equivalents are not included in the computation of diluted earnings per
share when the Company reports a loss because to do so would be anti-dilutive. For details on number of common stock
equivalents see Note 18 below.
s.
Reclassification -
Certain amounts in the financial statements as of and for the year ended December 31, 2012 have been reclassified for comparative
purposes to conform to the presentation in the financial statements as of and for the year ended December 31, 2013.
t. New Accounting Pronouncements
–
On July 18, 2013, the Financial
Accounting Standards Board (“FASB”) issued ASU No. 2013-11, “
Presentation of an Unrecognized Tax Benefit
When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
” (“ASU 2013-11”).
ASU 2013-11 states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward,
except as follows. The unrecognized tax benefit should be presented in the financial statements as a liability and should not be
combined with deferred tax assets to the extent (i) a net operating loss carryforward, a similar tax loss or a tax credit carryforward
is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that
would result from the disallowance of a tax position, or (ii) the tax law of the applicable jurisdiction does not require the entity
to use, and the entity does not intend to use, the deferred tax assets for such purpose. The amendments in ASU 20103-11 are effective
prospectively for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected
to have a material impact on our financial position, results of operations or cash flows.
In December 2011, the FASB
issued ASU No. 2011-11, “
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
,” and
in January 2013 issued ASU No. 2013-01, “
Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities
.”
These standards create new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements
associated with its derivative instruments, repurchase agreements, and securities lending transactions. Certain disclosures of
the amounts of certain instruments subject to enforceable master netting arrangements would be required, irrespective of whether
the entity has elected to offset those instruments in the statement of financial positions. ASU 2011-11 and ASU 2013-01 are effective
for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption
of ASU 2011-11 did not have a material impact on the Company’s financial position or results of operations.
Management does not believe
there would have been a material effect on the accompanying financial statements had any other recently issued, but not yet effective,
accounting standards been adopted in the current period.
|
4 -
|
Accounts Receivable Trade, Net
|
The Company may at certain times
during the year sell qualified receivables to a factor (United Capital Funding). This agreement allows the Company to sell its
qualified accounts receivable with recourse in exchange for advances of funds equivalent to 83% of the value of receivables, leaving
17% of the receivables as a reserve by the factor for potential non-payment of the Company’s receivables. The factoring facility
is for a term of one year, which was renewed in May 2013 and is cancellable by either party upon one month’s written notice,
which provides a factoring line of up to $1,000,000. As collateral for the repayment of advances for receivables sold, the factor
has a priority security interest in all present and future assets and rights of the Company. The factor has required that the Company
notify all customers that all payments must be made to a lock-box controlled by the factor. The factoring fee is 2.2% every thirty
days or 26.4% annually. Factoring fees charged to interest expense for the fiscal year ended December 31, 2013 and 2012, were $5,069
and $48,948 respectively.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
As of December 31, 2013, there
were no open receivables sold to a factor. As of December 31, 2012, gross accounts receivables were $395,974 of which $141,725
were sold to the factor and have been included in the liabilities section of the balance sheet.
|
5 -
|
Revenues Net, From Contract Packager and Commission Fees
|
In September 2012, the Company
announced that our Contract Packager, secured an 8-year, $79 million pharmaceutical distribution contract with the
U.S.
government
. On September 30, 2012, our Contract Packager began shipping its first order on this distribution contract with
the
U.S. government
.
The Company had a Joint Operating
Agreement with the Contract Packager which was superseded by an agreement entered into on September 6, 2013 (see Note 10). Under
this September 6
th
agreement, the Company is entitled to receive a percentage of the Contract Packager’s profit,
as defined, net of financing charges and royalties. Since we are not deemed to be the
principal in these sales transactions
we do not report these sales transactions on a gross basis in our condensed statements of operations. The revenue is reported separately
in the condensed statements of operations as revenues net, from Contract Packager. The gross sales and cost of sales from this
U.S. government
contacts were:
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Sales from U.S. government contract
|
|
$
|
6,433,644
|
|
|
$
|
1,173,207
|
|
|
Cost on U.S. government, per agreement
|
|
|
6,100,006
|
|
|
|
1,020,690
|
|
|
Revenues net, from contract packager
|
|
$
|
333,638
|
|
|
$
|
152,517
|
|
In August 2013, we entered into
an agreement with a pharmaceutical partner which began shipping generic pharmaceutical and OTC products to independent pharmacies.
Under the master agreement with our pharmaceutical partner, we received a commission of 12.5% on gross margins of pharmaceutical
products shipped prior to November 1, 2013 and 20% on the gross margin of pharmaceutical products shipped after November 1, 2013.
During 2013, this commission structure generated commission revenue of $69,902.
|
6 -
|
Receivable
and Other Assets-Contract Packager
|
|
|
|
Beginning in fiscal year 2011, the Company loaned money to the Contract Packager in an unsecured,
non-interest bearing loan which has no stipulated repayment terms as the loan was made pursuant to an oral agreement. The outstanding
balance at December 31, 2013, and 2012 was $717,503 and $743,503 respectively. On September 14, 2012 the Company entered into a
letter of intent agreement to purchase the Contract Packager. Upon closing of the purchase of the Contract Packager, the loan receivable
would be eliminated. Management had determined that the outstanding balance should be fully reserved as of December 31, 2012 and
was written off in the quarter ending September 30, 2013.
|
|
|
|
As of December 31, 2013, the outstanding receivable balance is $1,088,598 which consists of a receivable
for PO financing, revenue earned on
U.S. government
sales and monthly payments.
|
|
|
|
The Company also had a $200,000 deposit in other assets as of December 31, 2012 which it considered
a stand still fee and was to be applied towards future royalty payments. In March of 2013, the Company recorded a reserved against
this deposit since there was uncertainty concerning the royalty agreement with its Contract Packager, as this amount may never
be applied to future royalty payments or otherwise recovered (see Note 17). This deposit was written off in the quarter ending
September 30, 2013 (see Note 8).
|
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
|
7 -
|
Receivable– related party
|
WholesaleRx in which we have a 14% investment where we recognized Commission
fees when earned on shipments of generic pharmaceutical and OTC products by our pharmaceutical partner, which is a DEA and State-licensed
to store and distribute controlled substances. The receivable consists of PO financing, and revenue earned for commission sales
agreement entered into in November 1, 2013. The balances at December 31, 2013 is $24,223 . No reserve for un-collectability was
deemed.
WholesaleRx
As
of December 31, 2013, the Company has a 14% non-controlling ownership interest in WholesaleRx, Inc., which represents over 700
such independent pharmacy operations and is a DEA and State-licensed to store and distribute controlled substances (which are drugs
that have the potential for abuse or dependence and are regulated under the
federal Controlled Substances Act)
.
WholesaleRx
orders the goods from the manufacturers and has them shipped to its warehouse facility. WholesaleRx
then
ships the
goods to the pharmacies
in the bottles as received by the manufacturer. Upon receiving orders from the pharmacies, goods will be sent to them COD which
will eliminate any accounts receivable issues.
Prior to November 1, 2013, the Company and WholesaleRx had an oral agreement
to pursuant to which the Company secured third party financing to fund WholesaleRx’s purchase orders and the Company in consideration
of which the Company would receive 12.5% of the WholesaleRx’s “gross profit” for the prior month (which gross
profit would consist of (i) sales to all customers minus (ii) cost of goods sold, freight in (to WholesaleRx), credits and allowances).
Under the November 1 Agreement, ScripsAmerica agreed to provide purchase order financing to WholesaleRx and purchased a 20% equity
stake in WholesaleRx. In consideration for providing financing for WholesaleRx’s purchaser orders, and to cover the Company’s
costs in administering the purchase order financing, WholesaleRx has agreed to pay the Company on or before the 15
th
calendar day of each month 20% of the gross profit (as described above) for the prior calendar month. If WholesaleRx is late in
paying such 20% fee, then the amount owed will accrue interest at the rate of 18% per annum until paid.
Per the November 1, 2013 agreement
with WholesaleRx the Company agreed to make an equity investment of $400,000 for 12,000 shares, which will represent 20% ownership
interest in WholesaleRx. The subscription amount is to be paid in three installments ($150,000 upon execution of the agreement,
$125,000 on December 31, 2013 (and was paid in January 2014) and $125,000 on February 15, 2014, which has not been made as of April
10, 2014).
This investment is accounted
for under the equity method because the Company exercises significant influence but does not exercise control. Our initial investment
of $275,000 was increased for the equity earnings of our 14% interest in WholesaleRx to $276,956. WholesaleRx’s unaudited
financial information as of December 31, 2013 is as follows: (i) Current assets are approximately $137,000 of which inventory was
valued at $72,000; (ii) Total assets were approximately $160,000; (iii) Total liabilities were approximately $19,000; and (iv)
Stockholders’ equity was approximately $141,000.
P.I.M.D International, LLC
The Company is the primary beneficiary
of
P.I.M.D. International, LLC (“
PIMD”), a start-up limited
liability company based in, and proposing to do business in, Florida and Variable Interest Entity (VIE. Our determination PIMD
investment is a variable interest entity (VIE) was based on the fact PIMD’s equity at risk is insufficient to finance its
activities. The Company would be considered the primary beneficiary of the VIE as it has both of the following characteristics:
(a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the
obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the VIE that
could potentially be significant. ScripsAmerica receives a majority of its expected profits and losses. We also will provide be
the primary financing for inventory purchases through related parties. Our loan receivable of $272,000 with Implex Corporation
and PIMD’s loan payable was eliminated in the accompanying consolidated financial statements. The assets and liabilities
and revenues and expenses of PIMD have been included in the accompanying consolidated financial statements. At November 1, 2013,
PIMD’s beginning capital was $41,000 and they had accumulated deficit of $49,607. During December 2013 the non-controlling
interest made a distribution of $119,650, making the total equity attributed to non-controlling interest to be a deficit of $146,566.
Details of the loan agreement
are as follows: In December, 2013, the Company revised an October 2013 purchase agreement to acquire 90% of the Membership Units
in
P.I.M.D. International, LLC (“
PIMD”), a start-up limited
liability company based in, and proposing to do business in, Florida. Although founded approximately 4 years ago, PIMD has had
no sales, but has the necessary licenses for operation of a drug wholesale operation. The purchase of the Membership Units in PIMD
was subject to certain conditions precedent, of which the most important was that the Company obtain the necessary licenses from
Florida (and the DEA) for the ownership of a drug distribution company like PIMD. However, it was determined that securing the
licenses was going to require a substantially longer period of time than the parties had anticipated. Consequently, in order to
preserve the business opportunity, it was necessary to change the structure of the relationship. Accordingly, the original purchase
agreement was cancelled and voided. The funds already advanced by ScripsAmerica to PIMD were converted to a loan and the relationship
between PIMD and ScripsAmerica became a Sourcing and Marketing Agreement. Implex Corporation, owned by the Company’s legal
counsel, who is a Florida resident, has stepped in to assist with any licensing issues. The Company believes that if licensing
is required it will be that of Implex, based in Florida and with a Florida owner.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
Under this Sourcing and Marketing
Agreement, which the Company entered into with PIMD in December 2013, the Company will assist PIMD by helping PIMD to (1) secure
advantageous sources of drugs and (2) secure marketing and sales assistance in selling the drugs. For these services, the Company
will receive a “Sourcing and Marketing Fee” which is 45% of the “Calculated Basis” to be calculated under
a formula in the Sourcing and Marketing Agreement.
The funds already advanced
by ScripsAmerica to PIMD were converted to a loan. Implex, a related party, borrowed $272,000 from ScripsAmerica at an interest
rate of 2% and it has re-loaned the funds to PIMD at an interest rate of 5%. Implex will keep the 3% differential. The Company’s
loan to Implex and Implex’s loan to PIMD are both for a 5-year period. Implex will be entering into a “Business Development
and Retention Agreement” with PIMD to assist PIMD with the development of its business.
Main Avenue Pharmacy, Inc.
agreement with Implex Corporation a related party
On January 29, 2014, Implex Corporation,
which is owned by our legal counsel, Richard C. Fox, entered into a stock purchase agreement with the owner to acquire the
specialty pharmacy Main Avenue Pharmacy, Inc., located in Clifton, New Jersey, for $550,000. The purchase price will be paid in
installments and the shares will be held by an escrow agent until the final payment is made. Under the purchase agreement, the
final agreement is to be made on July 11, 2014 (unless extended by the parties). Since ScripsAmerica will have significant controlling
interest via related party relationships and will be the primary beneficiary the company will consolidate financial activities
of Main Avenue Pharmacy In. in first quarter 2014.
For details of this transactions
see note 20.
|
9 -
|
Prepaid
Expenses and Other Current Assets
|
|
Prepaid expenses and other current assets consist of the following :
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Prepayment for product to be manufactured
|
|
|
275,000
|
|
|
|
–
|
|
|
Prepaid insurances
|
|
|
25,400
|
|
|
|
23,676
|
|
|
Deferred financing costs, net
|
|
|
27,575
|
|
|
|
38,076
|
|
|
Prepaid consulting
|
|
|
–
|
|
|
|
114,268
|
|
|
Prepaid other
|
|
|
1,698
|
|
|
|
22,800
|
|
|
TOTAL PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
329,673
|
|
|
|
198,820
|
|
|
10 -
|
Cancellation of Material Definitive Agreement – Contract Packager
|
On September 6, 2013, the Company
and Marlex Pharmaceuticals, Inc., its former Contract Packager, entered into a settlement agreement pursuant to which the Company
and its former Contract Packager resolved various disagreements that had arisen between the parties on various projects covered
by written agreements between the Company and its former Contract Packager, namely (i) the Contract Packager’s agreement
with the
U.S. government
, (ii) the parties agreement with respect
to
the production and packaging of the Company’s RapiMed® products and (iii) shares of the Company’s stock issued
to the principals of the Contract Packager for consulting services
. The settlement agreement provided mutual releases, continued
the
U.S. government
arrangement under modified terms, as well as a partial reimbursement over
fifteen months for previous amounts due the Company.
This agreement provides Marlex
with financing through a related party, Development 72 LLC, for the continuance of its pharmaceutical distribution contract with
the
U.S. government
and for Marlex to make 15 monthly payments to the Company with respect to
prior shipments under the
U.S. government
contract (which had had stopped in May 2013 due to
a dispute but have resumed in September 2013). The Company’s percentage of the profits under the
U.S.
government
contract had been revised in terms of the rate and the number of bottles of product sold to the
U.S.
government
for which the Company would receive revenue.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
To protect our position with respect
to the RapiMed® products we also terminated the Product Development, Manufacturing and Supply Agreement with the Contract Packager.
All development costs through the date of the cancellation of this agreement have previously been expensed and paid. The Company
subsequently entered into a manufacturing and supply contract directly with the manufacturer of this technology for the RapiMed®
products; however, that agreement was terminated in the first quarter of 2014.
Pursuant to the September 6
th
settlement
agreement, the principals of the Contract Packager returned 500,000 shares of common stock of the Company which were previously
valued at $50,000, and which they had received under consulting agreements and another 400,000 shares of common stock of the Company
issued to them that would be held as security for the payments due to the Company under this September agreement. In September
2013, the Company retired the 500,000 shares and reversed the consulting expense previously incurred through additional paid in
capital.
|
11 -
|
Related Party Transactions
|
In January 2013, the Company entered
into consulting agreement with Implex Corporation, a consulting firm owned by the Company’s legal counsel. The initial agreement
terms are for six months and the agreement shall automatically be renewed for a successive month period(s) until one party gives
written notice to terminate the agreement thirty days prior to the next termination date. Fees are $25,000 per month and such fees
shall be paid in shares of the Company’s common stock rather than cash so as to permit the Company to conserve cash. During
2013 the Company issued to Implex Corporation 824,956 shares of common stock at a fair value of $259,996.
During fiscal year 2013, the
Company paid $120,000 in consulting fees and $23,231 for interest expense on loans to a consulting firm owned by the Company’s
CEO and a note payable owned to the wife of the CEO. The Company also paid $178,000 in consulting fees to a consulting firm owned
by the Company’s Chief Financial Officer.
During fiscal year 2012, the Company
received payment of $6,055 from a stockholder, who is also an officer of the Company. As of December 31, 2012 and 2011, the outstanding
balance is $0 and $6,055, respectively, and is classified as
notes receivable - related party- net
.
In 2012, the Company paid $120,000
in consulting fees and interest expense on loans to a consulting firm owned by the Company’s CEO. The Company issued 114,288
shares of common stock valued at $20,000 to the consulting firm owned by the CEO for services provided, and the Company accrued
$5,000 for services provided in 2012 and accrued $4,000 for interest expense on a note payable to the wife of the CEO. The Company
also paid $180,000 in consulting fees to a consulting firm owned by the Company’s Chief Financial Officer.
See note 12 for related party
debt
See note 19 for purchase order
financing with related party
Debt consists
of the following as of December 31, 2013 and 2012:
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
99,223
|
|
|
|
40,059
|
|
|
Debt with related party
|
|
|
352,816
|
|
|
|
464,837
|
|
|
12% Fixed rate Convertible notes payable
|
|
|
574,778
|
|
|
|
719,400
|
|
|
12% Fixed rate Convertible notes payable-related party
|
|
|
120,738
|
|
|
|
130,000
|
|
|
8% variable convertible notes payable
|
|
|
116,334
|
|
|
|
64,832
|
|
|
10% variable convertible notes payable
|
|
|
179,291
|
|
|
|
–
|
|
|
12% variable convertible notes payable
|
|
|
48,230
|
|
|
|
–
|
|
|
Total notes payable
|
|
|
1,491,410
|
|
|
|
1,419,128
|
|
|
Less current maturities
|
|
|
511,590
|
|
|
|
216,912
|
|
|
Long-term maturities
|
|
|
979,820
|
|
|
|
1,202,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discounts consist of the following:
|
|
|
|
|
|
|
|
|
|
8% variable convertible notes payable
|
|
|
286,166
|
|
|
|
50,918
|
|
|
10% variable convertible notes payable
|
|
|
100,709
|
|
|
|
–
|
|
|
12% variable convertible notes payable
|
|
|
40,794
|
|
|
|
–
|
|
|
|
|
|
427,669
|
|
|
|
50,918
|
|
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
Line of Credit
In October 2013, the Company’s
line of credit from Wells Fargo Bank was renewed. This line of credit will allow the Company to borrow up to a maximum of $100,000,
at an interest rate of prime plus 6.25% (of 9% at December 31, 2013). The line is secured by a personal guarantee by the Company’s
CEO. The outstanding borrowings under this line of credit at December 31, 2013 and 2012 were $99,222 and $40,059, respectively.
The Company incurred interest expense under this line of credit of approximately $3,725 and $580 for the years ended December 30,
2013 and 2012, respectively.
Debt with related party
On August 15, 2012, the Company
entered into a four year term loan agreement in the amount of $500,001 with Development 72, LLC (a related party) for the purpose
of funding the inventory purchases of RapiMed® rapid orally disintegrating formulation products. This loan bears interest at
the rate of 9% per annum, with 48 equal monthly installments of interest and principal payments of $12,443 and matures on August
15, 2016. The Company may prepay the loan, in full or in part, subject to a prepayment penalty equal to 5% of the amount of principal
being prepaid. The loan is secured by the assets of the Company.
In addition to the monthly
loan repayments, during the 48 month period ending August 15, 2016, and regardless if the loan is prepaid in full, the Company
will pay to Development 72 a royalty equal to one percent (1%) of all revenues that the Company receives from the Company’s
sale or distribution of its RapiMed® rapid orally disintegrating formulation products. The royalty payments will be made quarterly
and are subject to a fee for late payment or underpayment Development 72 is a related party because the manager of Development
72, Andrius Pranskevicius, is a member of the Company’s board of directors. There were no sales during 2013 and 2012 related
to and therefore no royalties expensed or owed.
In the event of a default on
our loan from Development 72, the interest rate on the loan will increase to 13% for as long as the default continues. A default
will occur upon (i) non-payment of a monthly installment or non-performance under the note or loan agreement, which is not cured
within ten (10) days of written notice of such non-payment or nonperformance from Development 72, (ii) a materially false representation
or warranty made to Development 72 in connection with the loan, (iii) a bankruptcy or dissolution of the Company or (iv) a change
of control of the Company or an acquisition of an entity or business by the Company without the affirmative vote of Andrius Pranskevicius
as a member of the Company’s board of directors.
The Company is subject to various
negative covenants in its loan agreement with Development 72, including but not limited to (i) restrictions on secured loans (subject
to certain exceptions), (ii) judgments against the Company in excess of $25,000, (iii) prepayment of any long-term debt of the
Company other than promissory notes held by certain investors in the Company, and (iv) repurchases by the Company of outstanding
shares of its common stock. The loan agreement also provides certain financial covenants which limit the amount of indebtedness
the Company may incur until the loan is repaid and restricts the payment of any dividends on its capital stock except for dividends
payable with respect to the Company’s outstanding shares of its Series A Preferred Stock.
Interest expense associated
with this note for the fiscal, 2013, was $37,289. The outstanding balance at December 31, 2013 and 2012, was $352,816 and $464,837,
respectively with the current liability balance of $122,529 and $112,021, respectively.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
12% Fixed rate Convertible
notes payable
The Company has obtained
loans
in various amounts beginning in 2011, these notes currently have terms of no required
principal payment until maturity which currently is January 30, 2015, and November 30, 2015. The principal portion of these notes
can be converted into common stock at any time during the term of the loan at the rate of $0.17 per share at the option of the
lender. These notes provides for interest only payments of 3%, payable quarterly (12% annually), in cash, or common stock of the
Company at $0.17 per share, at the option of the lender.
In December 2013, the Company and the lenders mutually
agreed to change the conversion rate for loans issued in 2012 from $.25 per share to $.17 per share and also agree to extend the
maturity date from January 30, 2014 to January 30, 2015. In addition, for some of these loans by mutual consent the interest rate
was decreased from 2% per month to 1% per month. The Company determined that the resulting modification of the these notes were not
substantial in accordance with ASC 470-50, “Modification and Extinguishments.” During fiscal year 2013 the following
activity occurred relating various notes in this category: the Company received $418,200 in cash for several new convertible promissory
notes, the Company made $115,522 in principal payments, $229,400 of principal was converted into new notes with new terms which
are disclose in the variable convertible description, $230,000 of principal was retired via a liability exchange for stock. The
Company recorded interest expense for fiscals years 2013 and 2012, of $77,250 and $86,164, respectively.
12% Fixed rate Convertible
notes payable-related party
The
Company obtained loans in the amount of $80,000 in 2011 from a company owned by ScripsAmerica Company’s president and CEO.
There is no required principal payment on the note until maturity which is January 30, 2015. The principal portion of the note
can be converted into common stock at any time during the term of the loan at the rate of $0.17 per share at the option of the
lender. These notes provides for interest only payments of 3%, payable quarterly (12% annually), in cash, or common stock of the
Company at $0.17 per share, at the option of the lender.
In December 2013, the Company
and the lender mutually agreed to change the conversion rate from $.25 per share to $.17 per share and also agree to extend the
maturity date from January 30, 2014 to January 30, 2015. In 2012 by mutually consent the interest rate was changed from 2% per
month to 1% per month effective October 1, 2012. As of December 31, 2013 and 2012 the principal balance is $80,000. The Company
recorded interest expense for fiscals years 2013 and 2012, of $9,600 and $16,000, respectively.
In 2012, the Company
received $50,000 in cash for one convertible promissory note payable from a related party. The note provides for interest
only payments of 3%, payable quarterly (12% annually), in cash, or common stock of the Company at $0.17 per share, at the
option of the lender. There is no required principal payment on the note until maturity which is January 30, 2015. The
principal portion of the note can be converted into common stock at any time during the term of the loan at the rate of $0.17
per share at the option of the lender. The note can be extended by mutual consent of the lender and the Company. In December
2013, the Company and the lender mutually agreed to change the conversion rate from $.25 per share to $.17 per share and also
agree to extend the maturity date from January 30, 2014 to January 30, 2015. The Company determined that the resulting
modification of these notes were not substantial in accordance with ASC 470-50, “Modification and Extinguishments.”
Our Contact Packager also co-signed this note. Additionally, the Company shall pay to the lender a royalty of 0.9% on the
first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.
Payments for royalty will be paid quarterly beginning December 31, 2012. In December 2013 the Company made a cash principal
payment in the amount of $9,262. As of December 31, 2013 and 2012 the principal balance is $40,738 and $50,000, respectively.
The Company recorded interest expense for fiscal years 2013 and 2012, of $6,000 and $16,000, respectively. As of December 31,
2012, the Company has accrued $10,500 in royalties. In fiscal 2013 the Company issued 224,944 shares of its common stock for
payment of royalty expense and recorded a royalty expense of $57,580. Collateral for this loan also includes 200,000 shares
of the Company’s common stock.
6% Variable Convertible
notes payable
During fiscal year 2013, the
Company entered into three securities purchase agreement with a lender pursuant to which the leader purchased a 6% convertible
note. The Company received $95,300 in cash for three 6% convertible note payable with a principal amounts totaling 110,000. These
notes did not include a discount, but $14,700 was paid directly to a third party on the Company’s behalf. The accrued interest
and principal were due one year from the issuance date. The conversion price is equal to 70% of the lowest trading price of the
Company’s common stock at the close of trading during the 5 trading day period prior to the date of the notice of conversion.
During fiscal year 2013 the
lender converted $110,000 of principal into 1,235,868 shares of our common stock valued at $246,941. In connection with these conversion
the Company recorded a gain on extinguishment of $40,026 after taking into consideration the carrying value of the note and the
corresponding embedded derivative liability related to the note on the conversion date.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
8% Variable Convertible
notes payable
During fiscal year 2012, the
Company entered into two securities purchase agreement with lenders pursuant to which the leader purchased a 8% convertible note.
The Company received $110,000 in cash for two 8% convertible note payable with a principal amounts totaling $115,750. These notes
did not include a discount, but $5,750 was paid directly to a third party on the Company’s behalf. The accrued interest and
principal were due six months and eight months from the issuance date. Since these notes had a convertible feature with a significant
discount and could result in the note principal being converted to a variable number of the Company’s common shares we recorded
the associated embedded derivative as a discount. The conversion price for one loan was equal to 35% of the lowest trading price
of the Company’s common stock at the close of trading during the 10 trading day period prior to the date of the notice of
conversion. The conversion price for the second loan was equal to 42% of the lowest trading price of the Company’s common
stock at the close of trading during the 10 trading day period prior to the date of the notice of conversion.
During fiscal year 2013 the
Company paid the sum of $167,365 to the holders of these notes for the principal of $115,750, accrued interest. These payments
included a prepayment penalty charge of $51,615. The company extinguished the debt and the embedded derivative of which resulted
in a gain on extinguishment of $103,170.
Also during fiscal year 2013 the Company entered into
six new securities purchase agreements with various lenders to which the lenders purchased a 8% convertible note. The Company received
$462,000 in cash for these 8% convertible notes payable with principal amounts equaling $547,500, some of these notes included
a 10% discount the discount amounts equal $27,500 and fees totaling $58,000 were paid directly to third parties for legal and finder
fees. The maturity dates for these notes range from six months to nineteen months from date of issuance. The conversion price for
these notes is equal to a 40% to 65% discount to the lowest closing trading prices or an average of trading prices of the Company’s
common stock at the close of trading during a 5 to 10 trading day period prior the date of the notice of conversion. For some of
these note there is a prepayment charge range from 150% to 125% of the principal amount and accrued interest before a set period
of time.
Since these notes have a convertible
features with a significant discount and could result in the note principal being converted to a variable number of the Company’s
common shares, the instrument includes an embedded derivative. The fair value of the derivative associated with this note was determined
by using the Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility ranges between
161.6% to 200.7%, risk-free interest rate ranges between .07% to .12% and expected life of 12 to 11 months. The fair value of the
derivative at the date issued amounted to $1,329,815 and was revalued at December 31, 2013 to be $606,112. The debt discount associated
with this derivative is being amortized over the life of the notes.
In addition to obtaining new
borrowings in 2013 lenders converted $237,526 of principal into 2,902,496 shares of our common stock valued at $971,103. Along
with these stock conversions the Company paid the sum of $37,410 to the holders of these notes for the principal of $22,174, and
accrued interest. These payments included a prepayment penalty charge of $15,236. The company extinguished the debt and the embedded
derivative which resulted in a gain on extinguishment of $238,015.
As of December 31, 2013 and
2012 the principal balance is $402,500 and $115,750 and the unamortized debt discount is $286,166 and $50,918, respectively. The
Company recorded interest expense for fiscals years 2013 and 2012, of $112,593 and $36,809, respectively. The Company would have
been required to issue 6,044,978 of common stock if the lenders converted on December 31, 2013. The Fair value of the derivative
liability at December 31, 2013 and 2012 is $606,112 and $94,477, respectively
10% Variable Convertible
notes payable
During fiscal year 2013 the Company entered into twelve
new securities purchase agreements with various lenders to which the lenders purchased a 10% convertible note. The Company received
$371,167 in cash for these 10% convertible notes payable with principal amounts equaling $405,000, some of these notes included
a 10% discount the discount amounts equal $11,250 and fees totaling $22,583 were paid directly to third parties for legal and
finder fees. The maturity dates for these notes range from six months to twelve months from date of issuance. The conversion price
for these notes are equal to a 35% to 65% discount to the lowest closing trading prices or an average of trading prices of the
Company’s common stock at the close of trading during a 5 to 20 trading day period prior the date of the notice of conversion.
For some of these note there is a prepayment charge range from 150% to 125% of the principal amount and accrued interest before
a set period of time.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
Since these notes have a convertible
features with a significant discount and could result in the note principal being converted to a variable number of the Company’s
common shares, the instrument includes an embedded derivative. The fair value of the derivative associated with this note was determined
by using the Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility ranges between
161.6% to 200.7%, risk-free interest rate ranges between .07% to .12% and expected life of 12 to 11 months. The fair value of the
derivative at the date issued amounted to $631,361 and was revalued at December 31, 2013 to be $383,337. The debt discount associated
with this derivative is being amortized over the life of the notes.
In addition to obtaining new
borrowings in 2013 lenders converted $203,702 of principal into 2,654,353 shares of our common stock valued at $1,073,185. Along
with these stock conversions the Company paid the sum of $53,339 to the holders of these notes for the principal of $52,468. These
payments included a prepayment penalty charge of $871. The company extinguished the debt and the embedded derivative which resulted
in a gain on extinguishment of $204,091.
As of December 31, 2013 and
2012 the principal balance is $280,000 and the unamortized debt discount is $100,709. The Company recorded interest expense for
fiscal years 2013 of $178,547. The Company would have been required to issue 4,484,138 of common stock if the lenders converted
on December 31, 2013. The Fair value of the derivative liability at December 31, 2013, is $383,337.
12% Variable Convertible
notes payable
During fiscal year 2013 the Company entered into seven
new securities purchase agreements with various lenders to which the lenders purchased a 12% convertible note. The Company received
$233,200 in cash for these 12% convertible notes payable with principal amounts equaling $263,000, some of these notes included
a 10% discount the discount amounts equal $15,000 and fees totaling $14,800 were paid directly to third parties for legal and finder
fees. The maturity dates for these notes range from three months to twelve months from date of issuance. The conversion price for
these notes are equal to a range of 42.5% to 60% discount to the lowest closing trading prices or an average of trading prices
of the Company’s common stock at the close of trading during a 5 to 20 trading day period prior the date of the notice of
conversion. For some of these note there is a prepayment charge range from 25% to 125% of the principal amount and accrued interest
before a set period of time. We did not incur any penalty costs during 2013 for conversion of 12% variable notes payable.
Since these notes have a convertible
features with a significant discount and could result in the note principal being converted to a variable number of the Company’s
common shares, the instrument includes an embedded derivative. The fair value of the derivative associated with this note was determined
by using the Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility ranges used were
between 161.6% to 187.9%, risk-free interest rate ranges between .07% to .12% and expected life of 12 to 11 months. The fair value
of the derivative at the date issued amounted to $407,104 and was revalued at December 31, 2013 to be $143,944. The debt discount
associated with this derivative is being amortized over the life of the notes.
In addition to obtaining new
borrowings in 2013 lenders converted $198,326 of principal into 3,028,466 shares of our common stock valued at $655,239. The company
extinguished the debt and the embedded derivative which resulted in a gain on extinguishment of $124,500.
As of December 31, 2013, the
principal balance is $89,025 and the unamortized debt discount is $40,795. The Company recorded interest expense for fiscal years
2013 of $116,348. The Company would have been required to issue 1,512,736 of common stock if the lenders converted on December
31, 2013. The Fair value of the derivative liability at December 31, 2013, is $143,944.
|
13 -
|
Derivative Financial Instruments
|
Derivative liabilities consist
of convertible notes with features that could result in the note principal being converted to a variable number of the Company’s
common shares. The fair value of the embedded derivative associated with these notes was determined by using the Black-Scholes
pricing model with the following assumptions:
|
As of :
|
|
December 31, 2012
|
|
|
December 31, 2013
|
|
|
Volatility
|
|
|
61.7% - 63.7%
|
|
|
|
110.4% - 228.5%
|
|
|
Expected life (in years)
|
|
|
.5 – 2.5
|
|
|
|
.03 – .6
|
|
|
Risk-free interest rate
|
|
|
.12% - .35%
|
|
|
|
.07% - .12%
|
|
|
Dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
These derivative financial instruments
are indexed to an aggregate of 13,176,251 shares and 702,852 shares of the Company’s common stock as of December 31,
2013 and December 31, 2012, respectively, and are carried at fair value using level 2 inputs. The balance at December 31,
2013 and December 31, 2012 was $1,333,393 and $94,477, respectively.
Activity during the current period
is as follows:
|
Derivative liabilities at December 31, 2011
|
|
$
|
–
|
|
|
|
|
|
|
|
|
New derivative liabilities issued in
2012
|
|
|
87,724
|
|
|
Extinguishment
|
|
|
–
|
|
|
Revalue at reporting period
|
|
|
6,753
|
|
|
Derivative liabilities at December 31, 2012
|
|
$
|
94,477
|
|
|
New derivative liabilities issued in 2013
|
|
|
2,590,688
|
|
|
Extinguishment
|
|
|
(2,840,395
|
)
|
|
Revalue at reporting period
|
|
|
1,288,623
|
|
|
Derivative liabilities at December 31, 2013
|
|
$
|
1,133,393
|
|
The significant fluctuations in
the revaluation of derivative liabilities at December 31, 2013 relate partially to the Company having sufficient trading activity
to utilize the actual volatility of the trading of the Company’s common stock as an assumption when computing the fair value
of derivative liabilities which were deemed to be sufficient trading activity commencing in January 2013. The Company had previously
estimated the volatility assumption by averaging the volatility of three similar entities which resulted in a lower volatility.
The increase in value of the volatility assumption has led to a higher valuation of derivative liabilities associated with the
convertible notes payable, disclosed in Note 12.
|
14 -
|
Convertible Preferred Stock
|
Convertible Preferred Stock
On April 1, 2011 the Company issued
2,990,252 shares of convertible preferred stock (“Series A Preferred stock”) for $1,043,000 to a related party. The
Series A Preferred stock has the following rights, preferences, powers, privileges, and restrictions: (a) 8% dividend (appropriately
adjusted to reflect any stock splits); the dividends shall accrue and are payable quarterly when the Company has positive equity
and earnings per Delaware General Corporation Law. (b) Preferential payments of the assets available for distribution to its stockholders
by reason of their ownership in an amount equal to the Series A Preferred stock Original Issue price ($.1744). (c) Voting rights
- one vote for the number equal to the number of whole shares of common stock and shall be entitled to elect one director of the
Corporation. (d) Rights to Convert – Each share of Series A Preferred stock shall be convertible, at the option of the holder
at any time and from time to time without the payment of additional consideration by the holder into such number of fully paid
and non-assessable shares of common stock as determined by dividing the Original Issue price by the Conversion price in effect
at the time of the conversion. The conversion price is initially equal to $.1744 and can be adjusted any time if the Company issues
non-exempted common shares at a price below $.1744. At December 31, 2013 and December 31, 2012 these convertible preferred stock
shares can be converted into 5,980,504 shares of the Company’s common stock. (e) the owner of the Series A Preferred stock
can waive its right to adjust the conversion price at his choosing and as of April 10, 2014 has not exercise his right to do so.
(f) Exempted securities – no anti-dilution protection for shares issued to employees, directors or consultants or advisors
if the issuance is approved by the Board.
The Company has reviewed the
rights and privileges of the convertible preferred stock and determined the holders have a liquidation preference which requires
the Company to redeem the preferred shares at the original issuance price as a result of either a voluntary or involuntary liquidation
event, as defined. The Company has determined this preference meets the requirement that the potential redemption is outside
of the control of the Company. As a result, the convertible preferred stock has to be recorded outside of permanent equity.
Since this Series A Preferred
Stock has liquidation preference which is outside the control of the Company it was not recorded in the stockholders' deficit section
but rather as mezzanine equity in the consolidated balance sheets. Because we also had losses for 2012 and 2013 and an accumulated
deficit, under Section 174 of the Delaware General Corporation Law our directors cannot declare a dividend without incurring personal
liability. However, in accordance with privileges of the Series A Preferred stock, as noted above, the Company shall continue to
accrue dividends regardless of declaration by the Board of Directors. We had a stockholders’ deficit of $3,470,827 at December
31, 2013. Since we did not generate net income in fiscal years 2013 and 2012, our board of directors will not be able to declare
a dividend nor will we be able to pay the dividend owed to the Series A Preferred Stockholder, and as such, dividends will be accrued.
As of December 31, 2013 we have accrued $187,740 which is classified as a long-term liability in the balance sheet. We will not
be able to declare any dividends to our common stockholders until the accrued dividends owed to the Series A Preferred Stockholder
have been paid.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
|
15 -
|
Stockholders’ Deficit
|
Common Stock
General
The preferred shares have a
par value of $.001 per share, and the Company is authorized to issue 10,000,000 shares. The preferred stock of the Company shall
be issued by the board of directors of the Company in one or more classes or one or more series within any class, and such classes
or series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations
or restrictions as the board of directors of the Company may determine, from time to time.
The common stock shares have a
par value of $.001 per share and the Company is authorized to issue 150,000,000 shares, each share shall be entitled to cast one
vote for each share held at all stockholders’ meeting for all purposes, including the election of directors. The common stock
does not have cumulative voting rights.
Issuances during 2013
The Company issued 4,854,952 restricted
shares of common stock for cash proceeds of $531,108 in various private subscription agreements during the fiscal year 2013. A
significant portion of these issuances where part of securities purchase agreement with Seaside 88, L.P., the details of the transactions
are as follows:
On November 4, 2013, the Company entered into a securities
purchase agreement with Seaside 88, L.P. ("Seaside") pursuant to which the Company agreed to sell, and Seaside agreed
to purchase, up to seven million (7,000,000) restricted shares of the Company’s common stock in one or more closings. The
number of shares to be purchased at each closing will be equal to ten percent (10%) of the aggregate trading volume of shares of
the Company’s common stock during normal trading hours for the 20 consecutive trading days prior to each closing. The purchase
price for the shares to be purchased by Seaside at each closing will be equal to sixty percent (60%) of the average of “daily
average stock price” for the five (5) trading days preceding the date of the closing. The “daily average stock price”
for a trading day is equal to the quotient of (a) the sum of the highest and lowest sale price for the trading day divided by (b)
two.
The Company had an initial closing
under the securities purchase agreement on November 4, 2013, at which the Company sold to Seaside 1,152,514 restricted shares of
its common stock for gross proceeds of $200,537, of which $7,500 was used to pay the legal fees for Seaside and $19,303 was paid
for a finder’s fee. The Company also had closings on (i) December 4, 2013, at which the Company sold to Seaside 841,426 restricted
shares of common stock for gross proceeds of $90,926 of which $2,500 was used to pay the legal fees for Seaside. (ii) January 6,
2014, at which the Company sold to Seaside 928,670 restricted shares of common stock for gross proceeds of $69,093 of which $2,500
was used to pay the legal fees for Seaside and (iii) February 4, 2014, at which the Company sold to Seaside 1,342,070 restricted
shares of common stock for gross proceeds of $142,527 and (iv) on February 24, 2014 the Company issued 1,615,550 restricted shares
of common stock for financing fees which were accrued and expense in 2013
During the fiscal year 2013, the
Company issued 9,177,027 restricted shares of its common stock to non-employees for services rendered during the year. These services
were valued at $3,387,112 and the Company charged its operations in fiscal year 2013.
During the fiscal year 2013, the
Company issued 333,633 restricted shares of its common stock in connection with conversion of 478,440 warrants in a cashless transaction.
During the fiscal year 2013, the
Company issued 136,000 restricted shares of its common stock in connection with payment provided by members of the board of directors
during the year. The Company charged its operations $35,200 in fiscal year 2013.
During the fiscal year 2013, the Company issued 1,339,616
restricted shares of its common stock to non-employees for payment of royalties. The payment of royalties was valued at $346,802.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
On November 18, 2013, the Company issued 8,690,000
unrestricted shares of its common stock in a debt payment agreement whereas debt financing company (Ironridge) purchased from ScripsAmerica
liabilities from our creditors previously incurred by the us. The liabilities and expenses paid on our behalf were valued at $755,658
and the Company recorded a Financing fee of $547,842.
During the fiscal year 2013, the Company issued 11,456,639
shares of its common stock for the conversion of approximately $1,805,000 of principal and interest of our convertible notes payable.
The Company retired 600,000 shares of its common stock
that was previously issued in 2012 and 2013. The value was determined to be $76,500. The Company received and retired 500,000 shares
from the Contract Packager as part of a settlement agreement (see Note 9). These shares were valued at $50,000 in 2012 when issued
and we reversed the consulting expense for this value. 100,000 shares issued in September 2013 were also returned and retired during
the third quarter 2013.
Issuances during 2012
The Company issued 300,000 restricted
shares of common stock for cash proceeds of $30,000 during the fiscal year 2012.
In March 2012, the Company received
payment for the balance of the outstanding subscription stock receivable, $170,800. This payment is related to an April 29, 2011
transaction where the Company agreed to issue 5,200,000 restricted shares of common stock to four purchasers for an aggregate purchase
price of $176,000. The stock subscription receivable was recorded as a, contra equity account, in the equity section of the balance.
The Company had received $5,200 in fiscal year 2011.
During the year ended December
31, 2012, the Company issued 1,345,000 restricted shares of its common stock to non-employees for services rendered during the
year or to be rendered. These services were valued at $231,100 and the Company charged its operations $122,906 in fiscal year 2012.
The unamortized amount of prepaid services at December 31, 2012 is $108,194.
During the year ended December
31, 2012, the Company issued 124,000 restricted shares of its common stock in connection with services provided by members of the
board of directors during the fiscal year 2012. The Company charged its operations $34,480 in fiscal year 2012.
The Company issued 114,288 restricted
shares of its common stock to the Company’s President and CEO for payment of his salary in lieu of cash compensation payments
for services rendered during the year ended December 31, 2012. These services were valued at $20,000 and the Company charged this
amount to operations in fiscal year 2012.
On March 12, 2012, the holders
of a long-term note payable in the amount of $250,000 elected to convert the convertible note payable into 2,000,000 shares of
the Company’s common stock.
Warrants
On August 15, 2012, the Company
issued 228,572 common stock warrants to a third party for debt issue costs. These warrants have a strike price of $0.39, are 100%
vested and have a contractual life of 5 years, expiring on August 14, 2017. The Company calculated the fair value of the warrants
to be $34,588, using the Black-Scholes option pricing model. The fair value of $34,588 will be amortized over the life of the long
term debt. The Company recorded a $3,243 in interest expense related to the amortization of the warrants for the year ended December
31, 2012. The assumptions used in computing the fair value are a closing stock price of $0.39, expected term of 2.5 years utilizing
the “plain vanilla” method. Also since the Company does not have a history of stock prices over 5 years the Company
used the expected volatility of three peer entities within our sector whose share or option price are publicly available, per Staff
Accounting Bulletin topic 14 interpretations and guidance. The average of the three comparable companies was used to determine
that the expected volatility of 63.7 %, while the risk free rate was estimated to be .35%
.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
Summary of our warrant activity and related information for 2013 and 2012
|
|
|
Number of shares under warrants
|
|
|
Weighted Average Exercise price
|
|
|
Weighted Average Remaining Contractual term in Years
|
|
|
Aggregate Intrinsic Value
|
|
|
Outstanding at December 31, 2011
|
|
|
478,440
|
|
|
$
|
0.17
|
|
|
|
4.3
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
228,572
|
|
|
$
|
0.39
|
|
|
|
4.6
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
707,012
|
|
|
$
|
0.24
|
|
|
|
3.7
|
|
|
$
|
45,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(478,440
|
)
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
228,572
|
|
|
$
|
0.39
|
|
|
|
3.6
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2013
|
|
|
228,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per warrant
|
|
|
$0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
.35% - 1.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
63.70%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms in years
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
On September 11, 2013 the Company
issued 2,000,000 options to a consultant for services provided. These options vested immediately and will expire 3 years from the
date of issuance. The option price is $.15 and the fair value of these warrants is $249,335 which was expensed to selling, general
and administrative.
On November 6, 2013 the Company
issued 1,000,000 options to a consultant for services provided. These options vested immediately and will expire 3 years from the
date of issuance. The option price is $.22 and the fair value of these warrants is $190,494 which was expensed to selling, general
and administrative.
On October 15, 2013, the Company
issued 1,320,000 options to members of the Board of directors for services provided. These options vested immediately and will
expire 3 years from date of issuance. The option price is $.15 and the fair value of these warrants is $166,373 which was expensed
to selling, general and administrative.
On December 18, 2013, the Company
issued 60,000 options to members of the Board of directors for services provided. These options vested immediately and will expire
3 years from date of issuance. The option price is $.13 and the fair value of these warrants is $6,464 which was expensed to selling,
general and administrative.
On December 31, 2013, the Company
issued 635,000 options to members of the Board of directors for services provided. These options vested immediately and will expire
3 years from date of issuance. The option price is $.14 and the fair value of these warrants is $73,893 which was expensed to selling,
general and administrative.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
|
|
|
Number of shares under options
|
|
|
Weighted Average Exercise price
|
|
|
Weighted Average Remaining Contractual term in Years
|
|
|
Aggregate Intrinsic Value
|
|
|
Outstanding at December 31, 2012
|
|
|
–
|
|
|
$
|
–
|
|
|
|
0
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,015,000
|
|
|
$
|
0.16
|
|
|
|
3
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
5,015,000
|
|
|
$
|
0.16
|
|
|
|
2.8
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2013
|
|
|
5,015,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option fair value
|
|
|
$ 0.10 - $ 0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
.34% - .78%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
190.06%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms in years
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, the
Company had a net operating loss carryforward of approximately $5,927,000 available to reduce future federal and state taxable
income, expiring through 2033. We established valuation allowance of $2,015,200 and $597,591, or 100%, as of December 31, 2013
and 2012, respectively, of the deferred tax asset because of the uncertainty of the utilization of the operating losses in future
periods. The allowance increased $1,417,609 and $597,591 during 2013 and 2012, respectively.
Future ownership changes may limit the future utilization
of these net operating loss and research and development tax credit carry-forwards as defined by the Internal Revenue Code. We
performed an analysis and determined that the Net operating losses and research and development expenses are not limited under
Section 382. The net deferred tax asset has been fully offset by a valuation allowance due to our history of taxable losses and
uncertainty regarding our ability to generate sufficient taxable income in the future to utilize these deferred tax assets.
The Company files federal and
Delaware state income taxes. Currently, there are no tax examinations in progress, nor has the Company had any federal or state
examinations since its inception in 2008. All of the Company’s tax years are subject to federal and state tax examination.
Our provision for income taxes
at December 31, 2013 and 2012 consisted of the following
|
|
|
2013
|
|
|
2012
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
–
|
|
|
$
|
41,200
|
|
|
State
|
|
|
–
|
|
|
|
1,797
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
$
|
–
|
|
|
$
|
43,179
|
|
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
The effective tax rates differ
from the statutory rates for 2012 and 2011 primarily due to the following:
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Amount
|
|
|
Effective Tax Rate
Percentage
|
|
|
Amount
|
|
|
Effective Tax Rate
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax liability (benefit)
|
|
$
|
(3,794,531
|
)
|
|
|
-34.0
|
%
|
|
$
|
(618,542
|
)
|
|
|
-34.0
|
%
|
|
State taxes
|
|
|
–
|
|
|
|
0
|
%
|
|
|
1,979
|
|
|
|
0.1
|
%
|
|
Permanent deductible expense
|
|
|
1,700,633
|
|
|
|
15.2
|
%
|
|
|
62,151
|
|
|
|
3.4
|
%
|
|
Adjustment in valuation allowance
|
|
|
2,093,898
|
|
|
|
18.8
|
%
|
|
|
587,591
|
|
|
|
19.0
|
%
|
|
Tax expense (benefit)
|
|
$
|
–
|
|
|
|
0.0
|
%
|
|
$
|
43,179
|
|
|
|
-2.4
|
%
|
The components of the net deferred tax assets (liabilities)
at December 31, 2013 and 2012 are as follows:
|
|
|
2013
|
|
|
2012
|
|
|
Deferred Tax asset
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
423,497
|
|
|
$
|
252,791
|
|
|
Net Operating Loss
|
|
|
1,591,703
|
|
|
|
344,800
|
|
|
Total Deferred Tax asset
|
|
|
2,015,200
|
|
|
|
597,591
|
|
|
Deferred Tax Liability
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Valuation Allowance
|
|
|
2,015,200
|
|
|
|
597,591
|
|
|
Total Deferred tax asset
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company periodically assesses
the likelihood that it will be able to recover its deferred tax assets and determines if a valuation allowance is necessary. We
consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated
with estimates of future taxable income. As a result of this analysis the Company concluded that it is more likely than not that
the Company will not recover the deferred tax asset and, accordingly, recorded a valuation allowance for the years ended December
31, 2013 and 2012.
|
17 -
|
Commitments and Contingencies
|
In May 2013, the Company signed
a “Development, Manufacturing and Supply Agreement” with a pharmaceutical manufacturer to develop and manufacture our
80mg and 160mg Acetaminophen RapiMed® rapid orally disintegrating tablets. The initial term of the agreement is two years with
an option to a one five year contract extension. In addition to development and scale up costs, the Company will pay up to $150,000
to license the technology during the first two years. In order to maintain exclusivity rights for the technology the Company must
purchase a minimum of 10,000,000 tablets each of the 80mg and 160mg tablets in the first year and 16,500,000 tablets for both 80mg
160mg in the second year. After the second year annual volume requirements need to be achieved for the Company to maintain exclusivity
of the license. In 2014, the Company terminated this agreement with the pharmaceutical manufacturer due to the manufacturer’s
deteriorating financial condition. There were no obligations due to the third party at December 31, 2013 and through the termination
date.
Previously, the Company had
entered into a Product Development, Manufacturing and Supply Agreement with Marlex Pharmaceuticals, Inc. (the “Contract Manufacturer”
or “Marlex”) in March 2010. The Contract Manufacturer was to develop rapid melt tablets in accordance with the specifications
of the agreement with the Company responsible for all associated costs with the proprietary rights owned by the Company. The Company
and the Contract Manufacturer agreed upon a projected product cost to be paid to the Contract Manufacturer as well as 7% of gross
profits for the term of the agreement. The Company can terminate this agreement and did so in the third quarter 2013 (see note
10). All development costs through the date of notice have previously been expensed and paid.
The holders of a $250,000 convertible
note which was converted into 2,000,000 shares of our common stock on March 12, 2012 are entitled to a 4% royalty from the sales
of our orally disintegrating rapidly dissolving 80mg and 160mg pain relief tablets. The royalty payments associated with this agreement
have no minimum guarantee amounts and royalty payments will end only if the product line of Acetaminophen rapidly dissolving 80mg
and 160mg tablets is sold to a third party. There have been no shipments through December 31, 2013 applicable to this royalty payment.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
The holder of a $320,000 note
payable are entitled to a to 1.8% royalty payment on the first $10 million of sales of a generic prescription drug under distribution
contracts with Federal government agencies and
0.09%
on the next $15 million of such sales. Payments
for royalties will be paid quarterly and as of December 31, 2012, the Company had accrued $42,000 in royalties. During fiscal year
2013 the Company issued the holder of this note 1,114,672 shares of its common stock for payment of royalty expense. In addition
a holder of a $50,000 note payable, a related party, is entitled to a 0.9% on the first $25 million of sales of a generic prescription
drug under distribution contracts with Federal government agencies. The Company had accrued $10,500 in royalties as of December
31, 2012, and in fiscal year 2013 the Company issued 224,944 shares of its common stock for payment of royalty expense. The Company
has recorded a royalty expense of $304,290 for fiscal year 2013, respectively.
In July of 2013, the Company
entered into a memorandum of understanding (“MOU”) with a Forbes Investments Ltd (“Forbes”) to provide
future services. Upon the signing of this MOU agreement the Company issued 350,000 shares of our Company’s common stock to
two parties of this agreement. The value of the common stock at issuance was $154,000 and this amount was recorded to prepaid and
was expensed to selling, general and administrative through balance of 2013. The MOU agreement has a 12 month exclusivity clause,
a two-way break-up fee of $50,000 in cash or securities at 50% of market rate upon 30 day running average of termination. Upon
successfully completing the goal of this agreement the two parties are entitled to each receive 200,000 shares of ScripsAmerica’s
common stock and also shall be entitled to receive 25,000 shares of our common stock per $250,000 financing arranged from any source
up to $5 million during the first 12 months of this agreement. In January 2014 licensing agreements were entered into (see note
21 below Global Pharma Hub) and the 400,000 shares of ScripsAmerica’s common stock was issued at a value of $52,000.
On October 15, 2013 the Board of Directors approved
a revised compensation plan for our CEO, Robert Schneiderman and our CFO, Jeffrey Andrews, contingent on the Company raising $4
million via equity, debt or a combination of both. Contingent on raising the $4 million compensation would be as follows: CEO annual
salary $200,000, CFO annual salary $192,000, and both would receive 50,000 options quarterly at 120% of our market price on the
date granted with a one year vesting period.
On October 15, 2013, the Board
of Directors approved additional compensation to Board members in the form of issuance of stock options. Board members were granted
100,000 stock options for each year served commencing in 2012. The chairman of the Board was granted 135,000 stock options for
each year served. The effective date of the grants was October 7, 2013. The options vest immediately and the option exercise price
was 110% of the market price on the grant date. Additionally, directors will also receive 10,000 options for each board meeting
attended 5,000 options for each committee meeting attended. In fiscal year 2013 the Company issued 2,015,000 options that had a
fair value of $246,731 which were expensed to the statement of operations (see note 13 option).
Operating Lease -
In
November our subsidiary PIMD (see note 19) entered into a 25 month operating lease for a distribution facility in Doral
Florida. The lease begins January 1, 2014 and expires January 31, 2016, monthly rent is $4,585 for the first thirteen months
with the first month free and $4,724 for the last twelve months. The total minimum lease payments are $111,714, for 2014, $50,441 for 2015, $56,548, and for 2016 the are $4,724.
|
18 -
|
Earnings Per Common Share
|
The basic earnings per share
or loss per share is computed using the weighted average number of common shares outstanding. The assumed exercise of common stock
equivalents were excluded from the calculation of diluted net loss per common share for the years ended December 31 2013 and 2012
because their inclusion would have been anti-dilutive. As of December 31, 2013, common stock equivalents consisted of preferred
stock convertible into 5,980,504 shares, warrants convertible into 228,572 shares, options convertible into 5,015,000 shares and
notes payable convertible into 16,016,229 shares of common stock. As of December 31, 2012, common stock equivalents consisted of
preferred stock convertible into 5,980,504 shares, warrants convertible into 707,012 shares and notes payable convertible into
4,220,452 shares of common stock.
|
|
|
For the Year Ended December 31, 2013
|
|
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss attributed to ScripsAmerica, Inc.
|
|
$
|
(11,195,096
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(83,440
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss attributable to common stockholders
|
|
$
|
(11,278,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(11,278,536
|
)
|
|
|
68,119,715
|
|
|
$
|
(0.17
|
)
|
|
Diluted earnings per common share
|
|
$
|
(11,278,536
|
)
|
|
|
68,119,715
|
|
|
$
|
(0.17
|
)
|
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
|
|
|
For the Year Ended December 31, 2012
|
|
|
|
|
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per Share
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,861,832
|
)
|
|
|
|
|
|
|
|
|
|
Preferred Stock Dividend
|
|
|
(83,440
|
)
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(1,945,272
|
)
|
|
|
55,140,192
|
|
|
$
|
(0.04
|
)
|
|
Effect of dilutive securities - notes payable
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
(1,945,272
|
)
|
|
|
55,140,192
|
|
|
$
|
(0.04
|
)
|
|
19 -
|
Purchase
Order Financing with related party
|
In June 2012, the Company entered
into a purchase order finance agreement with Development 72, a major stockholder of the Company which is controlled by a member
of the Board of Directors. The agreement will allow the Company to borrow up to $1.2 million on a case by case basis, at an interest
rate of 0.6% per 10 day period, 1.8% monthly and 21.6% annually. During the fiscal year 2013, the Company financed $5,114,321 of
its purchase orders and incurred an interest expense of $73,232. As of December 31, 2013 and 2012, the unpaid purchase order finance
balance was $1,037,494 and $578,280, respectively, and accrued fees and interest are $24,192 and $8,280, respectively
During the fiscal year 2013 the
Company purchased product from two suppliers, and in 2012 the Company purchased 100% of its product packaging from its Contract
Packager. A disruption in the availability of product packaging from the Company’s suppliers could cause a possible loss
of sales, which could affect operating results adversely.
During the year ended December
31, 2013, the Company derived approximately $403,000, or 73%, of its revenue from two customers, of this total one customer accounted
for 61% and the other accounted for 12%. During the year ended December 31, 2012, the Company derived approximately $3,524,000
or 90% of its revenue from two customers, of this total one customer accounted for 74% and the other accounted for 16%.
As of December 31, 2012, the Company had two customers in
our accounts receivable – trade, one customer accounted for $175,054, or 60% of the Company’s accounts receivable
balance of $290,531.
From January 1, 2014 to April
1 2014, the Company issued 33,817,597 shares of common stock for the following transactions: a) We issued 19,207,420 shares of
common stock in a private subscription sale , for $1,009,067 in cash, b) 642,703 shares for payment of royalty expense valued at
$79,233, c) 2,531,400 shares for services performed and to be performed, valued at $306,768, d) 6,622,504 shares for conversion
of $416,895 of principal for various convertible notes payable, of which the fair value of stock issued was $957,117, e) 32,000
shares were issued to members of the Board of Directors for services provided, and f) As part of our securities purchase agreement
with Seaside (see note 17) We issued the following shares in 2014:(i) January 6, 2014, sold to Seaside 928,670 restricted shares
of common stock for gross proceeds of $69,093 of which $2,500 was used to pay the legal fees for Seaside and (ii) February 4, 2014,
sold to Seaside 1,342,070 restricted shares of common stock for gross proceeds of $142,528 and (iii) on February 24, 2014 we issued
1,615,550 restricted shares of common stock for financing fees which were expensed in 2013. (iv) we issued 925,153 restricted shares
of common stock for gross proceeds of $58,200, g) on January we issued 887,7820 restricted shares for $125,381 in cash as part of
a settlement agreement with GEM see cancellation agreement below in this note for details
In January 2014, the Company
formed Global Pharma Hub, Inc. with Forbes Investments, Ltd. (and its assigns) and Sterling, LLC (and its assigns) for the purpose
of marketing, supplying and distributing OTC products as RapiMed® orally dissolving tablets in foreign markets. The initial
market is in China, where Global Pharma Hub began marketing and distributing
our RapiMed® children’s
acetaminophen in China
. The ownership of Global Pharma Hub, Inc. is as follows: (a) the Company owns 37%, (b) Forbes Investments,
Ltd. owns 37% and (c) Sterling, LLC owns 26%. Forbes Investment, Ltd. is based in Shenzhen, China. The parties have a written
understanding of this joint venture although a final, binding contract is in process of being prepared for signature.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Consolidated Financial statements
|
December 31, 2013 and 2012
|
In January 2014, we entered into
an exclusive world-wide licensing agreement with Global Pharma Hub for the marketing and distribution of our children’s pain
reliever and fever reducer OTC product called RapiMed® in all countries except the United States. The license will allow Global
Pharma Hub to market and distribute the children’s acetaminophen orally dissolving tablets under our registered trademark,
RapiMed® as well as our registered trade mark “
MELTS IN YOUR CHILD'S
MOUTH”
. In order to keep the license agreement, Global Pharma Hub must meet minimum sales quotas terms which are as
follows:
|
|
1.
|
$500,000 in purchase orders during first 12 months of License Agreement;
|
|
|
2.
|
$1,400,000 in purchase orders during second 12 months; and
|
|
|
3.
|
$2,400,000 in purchase orders during the third 12 months.
|
Global Pharma Hub signed an exclusive
sub-licensing agreement for RapiMed in the territory of Hong Kong on January 28, 2014, with NYJJ Hong Kong Ltd.
to generate initial and ongoing orders for the product following its registration approval by the Hong Kong government.
The minimum sales quotas terms of the exclusive Hong Kong sub-licensing agreement are as follows:
|
|
1.
|
$550,000 in purchase orders during first 12 months;
|
|
|
2.
|
$1,500,000 in purchase orders during the second 12 months; and
|
|
|
3.
|
$2,500,000 in purchase orders during the third12 months
|
On February 22, 2014, Global Pharma
Hub signed an exclusive sub-licensing agreement with Jetsaw Pharmaceutical, Inc. the marketing and distribution of RapiMed®
pediatric acetaminophen in the territory of Canada for an initial term of three years. The minimum sales quotas terms of the exclusive
Hong Kong sub-licensing agreement are as follows:
|
|
1.
|
$120,000 in purchase orders during first 12 months;
|
|
|
2.
|
$220,000 in purchase orders during the second 12 months; and
|
|
|
3.
|
$320,000 in purchase orders during the third 12 months.
|
Main Ave Pharmacy Management agreement:
On January 29, 2014, Implex Corporation,
which is owned by our legal counsel, Richard C. Fox, entered into a stock purchase agreement with the owner to acquire the
specialty pharmacy Main Avenue Pharmacy, Inc., located in Clifton, New Jersey, for $550,000. The purchase price will be paid in
installments and the shares will be held by an escrow agent until the final payment is made. Under the purchase agreement, the
final agreement is to be made on July 11, 2014 (unless extended by the parties).
On February 20, 2014, Implex
Corporation and Main Avenue Pharmacy, Inc., the specialty pharmacy being acquired by Implex, entered into a Business
Management Agreement with ScripsAmerica, effective as of February 7, 2014. Under this agreement, Implex has engaged the
Company to manage the day to day business operations of Main Avenue Pharmacy, subject to the directives of Implex. The
Company’s day to day management responsibilities includes financial management but excludes any matters related to
licensing and those responsibilities which require Federal or state licensure (“Licensing Matters”). Prior to the
final closing, the Licensing Matters will be handled by Main Avenue Pharmacy’s owner and after the final closing Implex
will be responsible for managing Licensing Matters. The Company will also provide funding (as a loan or advance), to the
extent not covered by the funds of the pharmacy, to pay all costs and expenses incurred in the operation of Main Avenue
Pharmacy.
Implex will be entitled to make
monthly draws on the first day of each month, as owner of Main Avenue Pharmacy, as follows: (i) commencing on April 1, 2014 and
continuing to, and including, March 1, 2015, $47,003 plus $30 for each prescription processed by Main Avenue Pharmacy during the
preceding month (except that the first such payment shall include prescriptions processed since the initial closing on February
7, 2014); (ii) commencing on April 1, 2015 and continuing to, and including, March 1, 2016, $8,827 plus $30 for each prescription
processed by Main Avenue Pharmacy during the preceding month; (iii) commencing on April 1, 2016 and continuing thereafter plus
$30 for each prescription processed by Main Avenue Pharmacy during the preceding month and (iv) commencing on the 10,001 prescription
processed by Main Avenue Pharmacy the rate will be reduced to $10 for each prescription processed by Main Avenue Pharmacy during
the preceding month.
|
SCRIPSAMERICA, INC.
|
|
|
Notes to Notes to Financial statements
|
December 31, 2013 and 2012
|
For the management services
provided by the ScripsAmerica under this Business Management Agreement, Implex will pay us a combined monthly Management and Financing
Fee. This combined fee will be equal to 97% of the Calculation Basis (receipts from paid invoices less Implex’s monthly draw
and various expenses of Main Avenue Pharmacy). Since ScripsAmeica will have controlling interest in Implex management plans to
consolidate activities of Main Ave into our financial statements in first quarter 2014.
Cancellation
of GEM Agreement
On October 11, 2013, the Company
entered into a financing agreement with GEM Global Yield Fund Limited ("GEM Global") and a related party to provide
funding to the Company of up to $2 million. Under the terms of the financing agreement, the Company may sell restricted shares
of its common stock to GEM Global, subject to the satisfaction of certain conditions, at a purchase price to be negotiated between
the Company and GEM Global pursuant to section 4(2) and/or rule 506 of regulator. The Registrant will use the capital raised from
the financing agreement primarily to fund the manufacturing and marketing of its RapiMed® children's pain reliever domestically
and internationally, as well as for working capital. As of November 14 there were no shares issued for funding.
On January 14, 2014, the Company
entered into a settlement agreement with GEM Global, 590 Partners, LLC and the GEM Group, pursuant to which, among other things,
the parties agreed to declare null and void and of no further effect the October 2013 financing agreement as well as any other
negotiated but unsigned documents between and/or among the parties. In addition, in connection with such voiding, the GEM Warrants
were cancelled and the Company issued to each of GEM Global and 590 Partners, LLC (i) a warrant exercisable to purchase 1,000,000
shares of common stock at an exercise price of $0.41, (ii) a warrant exercisable to purchase 750,000 shares of common stock at
an exercise price of $0.55 and (iii) a warrant exercisable to purchase 750,000 shares of common stock at an exercise price of $0.75
(collectively, the “New GEM Warrants”). All of the New GEM Warrants expire on January 14, 2019 and are only exercisable
on a cash basis (they do not contain any cashless exercise provisions) Additionally, the Company granted registration rights to
590 Partners and GEM Global to register the resale of the shares underlying the New GEM Warrants. The New GEM Warrants do have
price protection features. Additionally, in the event that the closing price of the Company’s common stock is equal to or
greater than 160% of the exercise price of the applicable New GEM Warrant for 22 consecutive trading days, then such New GEM Warrant
will automatically be cancelled 30 days after the Company delivers notice of such cancellation to GEM Global and 590 Partners.
However, each of GEM Global and 590 Partners may exercise their New GEM Warrant in full after the notice from the Company but prior
to the cancellation date.
The fair value of these 5.0
million warrants on January 14, 2014, was $552,318 using the Black-Sholes model with the following assumptions: Volatility 182.9%,
5 year life, risk free rate of 1.65% and zero dividend rate. This fair value of $552,318 will be expensed in our first quarter
earnings in 2014.
Pursuant to its the settlement
agreement with GEM, (a) the Company sold 887,280 to GEM 887,280 restricted shares of common stock for a purchase price of $125,381,
and (b) GEM concurrently assigned to Steve Urbanski the right to receive the 887,280 shares of the Company's common stock upon
the receipt by the Company of the purchase price (net of $15,211 which was paid to GEM's legal counsel). The Company issued
the 887,280 shares to Mr. Urbanski on January 22, 2014.