Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
1
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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. The end users included 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 major pharmaceutical distributors.
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
were 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 specialty 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 which is in the process of being 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, in February 2014 we entered into
an agreement with a New Jersey pharmacy that specializes in topical pain creams, and since we 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, Inc.
The accompanying unaudited
interim condensed consolidated financial statements of the Company, have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”)
and should be read in conjunction with the audited financial statements of ScripsAmerica, Inc. and related notes thereto contained
in the Company’s Form 10-K for the year ended December 31, 2013 filed with the SEC on April 15, 2014. Certain information
and note disclosure normally included in annual financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations
for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
2
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Liquidity, Business Risk and Going concern
|
At March 31, 2014, the
Company had approximately $279,000 in cash and has continued to incurr losses from operations. Our accumulated deficit is
approximately $14.8 million (at March 31, 2014). 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 March 31, 2015. The Company’s ability to continue as a going concern
is highly dependent upon management’s ability to (i) re-establish its business model and equal or exceed its planned
operating cash flows, (ii) maintain continued availability on its line of credit and (iii) obtain additional
financing or capital to fund its debt service obligations coming due and its operating expenses.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
Our auditors raised substantial
doubt about the Company’s ability to continue as a going concern in their audit report on our 2013 consolidated financial
statements. 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
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. 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 foreign markets, with the initial market target 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 markets. As of
May 20, 2014, no shipments have been made and we do not expect to make any shipments until sometime in the third quarter of
2014.
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 and/or debt financing. However, such financing has not yet been secured.
3
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Summary of Significant Accounting Policies
|
A summary of significant
accounting policies follows:
a.
Principles
of Consolidation
– The
condensed consolidated financial statements include
the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant
inter-company accounts and transactions have been eliminated in consolidation. Investments which is considered to be a
Variable Interest Entity (VIE) 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. Company ownership is less than 100%, the outside
stockholders’ interests are shown as non-controlling interest. 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. Our equity investment is classified in “Equity Investments” on the balance sheet.
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 and our specialty pharmacy business is recognized when product is shipped from a contract packager or our pharmacy to
our customers’ warehouses or directly to a patient, 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 “Revenues net, from
contract packager”, and the gross sales are reduced by the cost of sales fees from our Contract Packager.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
Commission
fees are recognized when earned on shipments of generic pharmaceutical and OTC products by our pharmaceutical partner, which is
DEA and State-licensed to store and distribute controlled substances. Per our agreement with our pharmaceutical partner, the Company
will earn a 14% commission on the gross profit (sales less cost of goods sold, freight in and credits and allowances) of products
shipped to independent pharmacies
d.
Accounts Receivable Trade,
net
–
Accounts receivable are stated at estimated net realizable value. These receivables are from our
specialty pharmacy, in which we only ship prescription products to patients upon payment approval by the patients’ insurance
company. Payments are usually received with 30 days of product being shipped. As of March 31, 2014 and December 31, 2013, no
allowance for doubtful accounts was deemed necessary.
e.
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 that do not
significantly extend the useful lives of the respective assets and repair costs are charged to operating expense as
incurred.
f.
Intangible
assets
– The Company amortizes the cost of other intangibles over their useful lives unless such lives are deemed
indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows and, if impaired, written
down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are not
amortized; however, they are tested annually for impairment and written down to fair value as required.
g
.
Receivable
– Contract Packager
– The Company has receivables from Marlex Pharmaceuticals, Inc. (“Contract
Packager”), in the amount of $1,084,560 and $1,088,598 at March 31, 2014 and December 31, 2013, respectively. This
receivable consists of purchase order (PO) financing, revenue earned for U.S. government sales and monthly payments due under
the settlement agreement entered into on September 6, 2013. Under the September 6, 2013 settlement agreement, the Company is
entitled to recover $408,150 of these receivables of which $190,473 has been recovered as of March 31, 2014. Consequently,
the reserved amount has been offset for this recovery. Since collectability is still not certain on the remaining receivable,
we have fully reserved it as of March 31, 2014 and December 31, 2013.
h
.
Receivable
– related party
– WholesaleRx, our pharmaceutical partner in which we have a 14% investment, is an entity
from which we recognize commission fees when earned on shipments of generic pharmaceutical and OTC products by our
pharmaceutical partner, which is 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 has been made due to short history and no prior bad debts.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
k.
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.
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.
l
.
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.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended
March 31, 2014
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 5.) 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 10 for fair value of derivative liabilities.
m.
Advertising Expenses
–
The Company expenses advertising costs as incurred. The Company incurred advertising expenses in the
amount of $26,259 and $44,796 for the three month period ended March 31, 2014 and 2013, respectively.
o.
Stock-Based Compensation
– Compensation expense is recognized for the fair value of all share-based payments issued to employees. As of March
31, 2014 and December 31, 2013, the Company issued 5,065,000 and 5,015,000, respectively for employee stock options that would
require calculating the fair value using a pricing model such as the Black-Scholes pricing model. See Note 11 for fair value of
these employee stock options.
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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·
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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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·
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the expected volatility of our common
stock,
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·
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expected dividends on our common stock
(although we do not anticipate paying dividends in the foreseeable future),
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·
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the risk free interest rate for the expected
option or warrant term, and
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·
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the expected forfeiture rate.
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SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
q.
Earnings (Loss) 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. As of March 31, 2014, common stock equivalents consisted of preferred stock convertible into
5,980,504 shares of common stock, warrants convertible into 5,228,572 shares, options convertible into 5,090,000 shares and notes
payable convertible into 8,148,206 shares of common stock.
r.
Reclassification
–
Certain reclassifications have been made to the 2013 financial statements to conform to the interim 2014
condensed financial statements presentation. These reclassifications had no effect on net loss or cash flows as previously
reported.
s.
Recent Accounting
Pronouncements –
Management does not believe that any recently issued but not yet effective accounting pronouncements,
if adopted, would have a material effect on the accompanying financial statements
4
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Revenues net, from contract packager and commission
fees
|
The
Company had a Joint Operating Agreement with the Contract Packager, which was superseded by an agreement entered into on September
6, 2013. 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:
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March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Sales from U.S. government contract
|
|
$
|
3,687,222
|
|
|
$
|
1,955,345
|
|
Cost on U.S. government, per agreement
|
|
|
3,563,520
|
|
|
|
1,818,471
|
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Revenues net, from contract packager
|
|
$
|
123,702
|
|
|
$
|
136,874
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|
In August 2013, we entered into
an agreement with a pharmaceutical partner (Wholesale Rx) which began shipping generic pharmaceutical and OTC products to independent
pharmacies. Under this agreement, amended on November 1, 2013 we receive a commission of 14% on gross margins of pharmaceutical
products sold. For the three month period ended March 31, 2014, this commission structure generated commission revenue of $83,024.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
WholesaleRx
As of March 31, 2014, the Company
has a 14% non-controlling ownership interest in WholesaleRx, Inc., which represents over 700 such independent pharmacy operations
and is 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 realization 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 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).
Per the November 1, 2013 agreement
the Company agreed to make an equity investment of $400,000 for 12,000 shares, which will represent a 20% ownership interest in
WholesaleRx. and to provide purchase order financing, WholesaleRx will pay the Company, on or before the 15th calendar day of each
month, 14% of the gross profit (as described above) for the prior calendar month. If WholesaleRx is late in paying such 14% fee,
then the amount owed will accrue interest at the rate of 18% per annum until paid. The subscription amount is to be paid in three
installments, $150,000 upon execution of the agreement, $125,000 on December 31, 2013 which was paid in January 2014 and $125,000
on February 15, 2014, which has not been made as of May 20, 2014. As a result of the payment of the two installments, the Company
currently has a 14% ownership interest in WholesaleRx as of March 31, 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 from the date of initial investment to March 31, 2014 to
a total of $278,265. WholesaleRx’s unaudited financial information as of March 31, 2014 and December 31, 2013 is as follows:
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As of March 31, 2014
|
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As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
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Current assets
|
|
$
|
261,000
|
|
|
$
|
137,000
|
|
Total assets
|
|
$
|
339,000
|
|
|
$
|
176,000
|
|
Liabilities
|
|
$
|
186,000
|
|
|
$
|
19,000
|
|
Stockholders' Equity
|
|
$
|
153,000
|
|
|
$
|
157,000
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|
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, which is considered to be a Variable Interest Entity (VIE). Our determination
that PIMD is a variable interest entity (VIE) was based on the fact that 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 PIMD’s expected profits and losses. We also will provide
the primary financing for inventory purchases through related parties.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
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 2014 the non-controlling interest in PIMD made
a distribution of $114,237, and in 2013 made a distribution of $119,650 to the shareholders of PIMD making the total equity attributed
to non-controlling interest to be a deficit of $305,203.
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 PIMD. 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 from 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 help PIMD to secure (1) advantageous sources
of drugs and (2) 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 had no significant sales in first quarter 2014.
PIMD unaudited financial information
as of March 31, 2014 and December 31, 2013 is as follows:
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|
As of March 31, 2014
|
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
16,000
|
|
|
$
|
31,000
|
|
Total assets
|
|
$
|
68,000
|
|
|
$
|
31,000
|
|
Liabilities
|
|
$
|
373,000
|
|
|
$
|
177,000
|
|
Stockholders' Equity
|
|
$
|
(305,000
|
)
|
|
$
|
(146,000
|
)
|
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.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
6
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Business Combination and Intangible Assets
|
On January 29, 2014,
Implex Corporation, which is owned by our legal counsel and related party, Richard C. Fox, entered into a stock purchase
agreement to acquire from its owner the specialty pharmacy Main Avenue Pharmacy, Inc.(“MAvP” or “Main
Avenue Pharmacy”), 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 payment 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, Inc.
Under the purchase agreement with
the owner of Main Avenue Pharmacy, Implex acquired the workforce (3 employees) and the applicable state pharmacy licenses but the
purchase did not include cash, receivables or any existing customer lists of the owner. It also excluded any existing liabilities
prior to January 29, 2014. The total purchase price of $550,000 was preliminarily allocated to intangible assets based on the estimated
fair value of intangible assets. The Company is currently in the process of obtaining an independent valuation and upon completion,
the purchase price will be allocated to the identifiable assets acquired which may require modification to the preliminary allocation.
Excess purchase consideration, if any, will be allocated to goodwill. All other tangible assets acquired had no significant fair
value. The preliminary allocation assumes the intangible assets are indefinite lived. This estimate may be modified upon the completion
of the independent valuation. Intangible assets with indefinite lives are not amortized; however, they are tested annually for
impairment and written down to fair value as required.
The payment of the purchase
price of $550,000 is as follows: The initial installment payment of $475,000 was made via a $175,000 payment directly from ScripsAmerica
on Implex’s behalf and $300,000 in borrowings obtained by Implex, $250,000 from a current stockholder and $50,000 from a related
party (See note 9 for note details). A $60,000 installment payment will be made in second quarter 2014 and the final payment of
$15,000 is to be made on July 11, 2014 (unless extended by the parties). This $75,000 of payments to be made has been accrued in
the accrued liabilities in the condensed consolidated balance sheet as of March 31, 2014. MAvP is specialty pharmacy which is license
to prepare and fill prescription via a topical cream format versus pill format. MAvP was basically a dormant business and had no
significant sales in 2014; we acquired the Company for its Pharmacist and license. 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.
The Company’s
condensed consolidated financial statements for the three months ended March 31, 2014 include the results of Main Avenue
Pharmacy since the date of acquisition. The entire product revenue and product cost of sales in the March 31, 2014 statement
of operations is related to Main Avenue Pharmacy. Unaudited proforma results for the three months period ended March 31, 2014
and 2013, as if the acquisition occurred as of January 1, 2013, were not presented because the amounts were not material
because the business was dormant for the past twelve months.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
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 controlling interest in Implex management has consolidated
the activities of Main Avenue Pharmacy into our financial statements in first quarter 2014.
7
-
|
Joint Ventures agreements
|
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.
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.
|
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
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.
|
As of March 31, 2014, no funds
have been provided by either partner, no losses or income generated and this joint venture is still a work in progress.
8
-
|
prepaid expenses and other current assets
|
Prepaid expenses and other
current assets consist of the following:
|
|
March, 31, 2014
|
|
|
December 31, 2013
|
|
Prepayment for product to be manufactured
|
|
|
275,000
|
(a)
|
|
|
275,000
|
|
Prepaid insurances
|
|
|
18,486
|
|
|
|
25,400
|
|
Deferred financing costs, net
|
|
|
24,950
|
|
|
|
27,575
|
|
Prepaid other
|
|
|
10,112
|
|
|
|
1,698
|
|
Total prepaid expenses and other current assets
|
|
|
328,548
|
|
|
|
329,673
|
|
|
(a)
|
funds provided for Rapi-med product to be produce
|
Debt consists
of the following as of March 31, 2014 and December 31, 2014
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
–
|
|
|
|
99,223
|
|
Debt with related party
|
|
|
323,206
|
|
|
|
352,816
|
|
12% Fixed rate Convertible notes payable
|
|
|
648,398
|
|
|
|
574,778
|
|
12% Fixed rate Convertible notes payable-related party
|
|
|
112,776
|
|
|
|
120,738
|
|
8% variable convertible notes payable
|
|
|
50,842
|
|
|
|
116,334
|
|
10% variable convertible notes payable
|
|
|
32,997
|
|
|
|
179,291
|
|
12% variable convertible notes payable
|
|
|
24,025
|
|
|
|
48,230
|
|
12% 1 year term loan
|
|
|
250,000
|
|
|
|
–
|
|
12% 1 year term loan – related party
|
|
|
50,000
|
|
|
|
–
|
|
QuarterSpot – Term loan
|
|
|
95,312
|
|
|
|
–
|
|
Total notes payable
|
|
|
1,587,556
|
|
|
|
1,491,410
|
|
Less current maturities
|
|
|
1,232,499
|
|
|
|
511,590
|
|
Long-term maturities
|
|
|
355,057
|
|
|
|
979,820
|
|
|
|
|
|
|
|
|
|
|
Debt discounts consist of the following:
|
|
|
|
|
|
|
|
|
8% variable convertible notes payable
|
|
|
81,300
|
|
|
|
286,166
|
|
10% variable convertible notes payable
|
|
|
18,253
|
|
|
|
100,709
|
|
12% variable convertible notes payable
|
|
|
0
|
|
|
|
40,794
|
|
|
|
|
99,553
|
|
|
|
427,669
|
|
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
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% ( 9% at March 31, 2014). The line is secured by a personal guarantee by the Company’s
CEO. The outstanding borrowings under this line of credit at March 31, 2014 and December 31, 2013 were $0 and $99,222, respectively.
The Company incurred interest expense under this line of credit of approximately $134 and $1,469 for the three months ended March
31, 2014 and 2013, 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 first quarter 2014
and 2013 related to this and therefore no royalties were 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 three month period ended March 31, 2014 and 2013, was $7,717 and $10,250, respectively. The outstanding
balance at March 31, 2014 and December 31, 2013 was $323,206 and $352,816, respectively, with the current liability balance of
$197,899 and $122,529, respectively.
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 are January 30, 2015 or 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 in shares of common
stock of the Company at $0.17 per share, at the option of the lender.
During three month period ended March 31, 2014 the
following activity occurred relating various notes in this category: the Company received $114,750 in cash for several new convertible
promissory notes; and the Company made $41,131 in principal payments. The outstanding balance at March 31, 2014 and December 31,
2013, was $648,398 and $574,778, respectively, with the current liability balance of $229,750 and $574,778, respectively. The Company
recorded interest expense for the three months ended March 31, 2014 and 2013, of $24,019 and $12,900, respectively.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
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 Chief Executive Officer.
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 in shares of common
stock of the Company at $0.17 per share, at the option of the lender.
As of March 31, 2014 and December
31, 2013 the principal balance was $80,000. The Company recorded interest expense for the three month period ended March 31, 2014
and 2013, of $2,400 and $2,400, 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 in shares of 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. 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. During the three month period ended March 31, 2014,
the Company made cash payment of $7,962 in principal and as of March 31, 2014 and December 31, 2013, the principal balance was
$32,776 and $40,738, respectively. The Company recorded interest expense for first quarter of 2014 and 2013 of $1,353 and $1,500,
respectively. During the three months ended March 31, 2014 the Company, made cash payments for royalty expense in the amount of
$21,098, accrued $4,699 in royalty expense and issued 58,427 shares of its common stock for payment of royalty expense, and recorded
a royalty expense, of $33,000.
8% Variable Convertible
notes payable
In fiscal year 2013 the Company entered into six new
securities purchase agreements (as of December 31, 2013 only four were still outstanding) with various lenders pursuant to which
the lenders purchased an 8% convertible note. The Company received $462,000 in cash for these 8% convertible notes payable with
the aggregate principal amount equaling $547,500. Some of these notes included (i) a 10% discount in the aggregate amount of $27,500,
and (ii) fees totaling $58,000 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
ranging from 125% to 150% of the principal amount and accrued interest thereon if made prepayment is made 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 stock, the instrument includes an embedded derivative. The fair value of the derivative associated with these 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 0.07% to 0.12% 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 these derivatives is being amortized over the life of the notes.
During three month period ended
March 31, 2014 the following activity occurred relating to the various notes in this category: No new borrowings occurred. The
Company paid the sum of $66,732 to a holder of one of these notes for the principal of $50,000. This cash payment of $66,732 included
the accrued interest and a prepayment penalty charge. The Company extinguished the debt and the embedded derivative which resulted
in a gain on extinguishment of $81,792. Two lenders converted $125,000 of principal into 1,890,699 shares of our common stock valued
at $368,606. The Company extinguished the debt and the embedded derivative which resulted in a gain on extinguishment of $68,521.
The Company also partially paid down the principal of a loan by making cash payments of $65,182 and issuing 1,015,637 of our common
stock valued at $112,107. The Company recognized a loss for this partial extinguishment in the amount of $30,890.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
As of March 31, 2014, (only
one note is still outstanding) and December 31, 2013 the principal balance was $132,142 and $402,500, respectively, and the unamortized
debt discount was $81,300 and $286,166, respectively. The Company recorded interest expense for first quarter of 2014 and 2013
of $61,493 and $13,036, respectively. The Company would have been required to issue 2,312,542 and 6,044,978 of common stock if
the lenders converted on March 31, 2014 and December 31, 2013, respectively. The fair value of the derivative liability at March
31, 2014 and December 31, 2013 was $216,654 and $606,112, respectively
10% Variable Convertible
notes payable
During fiscal year 2013 the Company entered into twelve
new securities purchase agreements (as of December 31, 2013 only seven were still outstanding) with various lenders pursuant to
which the lenders purchased a 10% convertible note. The Company received $371,167 in cash for these 10% convertible notes payable
with the aggregate principal amount equaling $405,000. Some of these notes included (i) a 10% discount in the aggregate amount
of $11,250 and (ii) fees totaling $22,583 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 notes there is a prepayment
charge ranging from 125% to 150% of the principal amount and accrued interest thereon if made prepayment is made 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 stock, 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 0.07% to 0.12% 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.
During three month period ended
March 31, 2014 the following activity occurred relating various notes in this category: No new borrowing occurred. The Company
paid the sum of $70,000 to a holder of one of these notes for the principal of $50,000. This cash payment of $70,000 included the
accrued interest and prepayment penalty charge. The Company extinguished the debt and the embedded derivative which resulted in
a gain on extinguishment of $98,390. Five lenders converted $178,750 of principal into 3,146,367 shares of our common stock valued
at $408,028 the Company extinguished the debt and the embedded derivative which resulted in a gain on extinguishment of $152,151.
As of March 31, 2014 (only
one note is still outstanding) and December 31, 2013, the principal balance wass $51,250 and $280,000, respectively, and the unamortized
debt discount was $18,253 and $100,709, respectively. The Company recorded interest expense for first quarter of 2014 and 2013
of $33,077 and $4,788, respectively. The Company would have been required to issue 985,577 and 4,484,138 shares of common stock
if the lenders converted on March 31, 2014 and December 31, 2013, respectively. The fair value of the derivative liability at March
31, 2014 and December 31, 2013 was $71,494 and $383,337, respectively.
12% Variable Convertible
notes payable
During fiscal year 2013 the Company entered into seven
new securities purchase agreements (as of December 31, 2013 only three were still outstanding) with various lenders pursuant to
which the lenders purchased a 12% convertible note. The Company received $233,200 in cash for these 12% convertible notes payable
with the aggregate principal amount of $263,000. Some of these notes included (i) a 10% discount in the aggregate amount of $15,000
and (ii) fees totaling $14,800 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 notes there is a prepayment
charge ranging from 125% to 150% of the principal amount and accrued interest thereon if the payment is made before a set period
of time. We did not incur any penalty costs during 2013 for conversion of 12% variable notes payable.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
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 stock, 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 0.07% to 0.12% 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.
During three month period ended
March 31, 2014 the following activity occurred relating various notes in this category: No new borrowing occurred. The Company
paid the sum of $57,089 to a holder of one of these notes for the principal of $40,000. This cash payment of $57,089 included the
accrued interest and prepayment penalty charge. The Company extinguished the debt and the embedded derivative which resulted in
a gain on extinguishment of $57,249. A lender converted $25,000 of principal into 569,801 shares of our common stock valued at
$68,376. The Company extinguished the debt and the embedded derivative which resulted in a gain on extinguishment of $19,409.
As of March 31, 2014 (only
one note is still outstanding) and December 31, 2013, the principal balance of these notes was $24,025 and $89,025, respectively,
and the unamortized debt discount was $0 and $40,795, respectively. The Company recorded interest expense for first quarter of
2014 and 2013 of $13,804 and $11,559, respectively. The Company would have been required to issue 500,521 and 1,512,736 of common
stock if the lenders converted on March 31, 2014 and December 31, 2013, respectively. The fair value of the derivative liability
at March 31, 2014 and December 31, 2013, is $39,182 and $143,944 respectively.
12% one year Term loan
To finance the purchase of
Main Avenue Pharmacy, Implex Corporation, borrowed $250,000 from a stockholder of the Company. This loan bears interest at the
rate of 12% per annum, with 12 equal monthly installments of interest and principal payments of $22,214 beginning April 1, 2014
and matures on May 1, 2015. Additionally, the Company shall pay to the lender a royalty of $25 on the first 10,000 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) and $8 for all prescription thereafter. The Company has accrued $4,050 for this
royalty payment as of March 31, 2014.
12% one year Term loan
– Related party
To finance the purchase of
Main Avenue Pharmacy, Implex Corporation, borrowed $50,000 from the wife of the Company’s Chief Executive Officer. This loan
bears interest at the rate of 12% per annum, with 12 equal monthly installments of interest and principal payments of $4,412 beginning
April 1, 2014 and matures on May 1, 2015. Additionally, the Company shall pay to the lender a royalty of $5 on the first 10,000
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) and $2 for all prescription thereafter. The Company has accrued $810 for
this royalty payment as of March 31, 2014.
QuarterSpot Term loan
On March 17, 2014, the Company
received $92,000 in cash for a 8.9% note payable with a principal amount of $100,000, and incurred fees totaling $8,000 which were
paid directly to third parties for legal and broker fees. Beginning March 19, 2014 daily payments of $520.83 began and will continue
until this loan is paid in full on or about December 17, 2014. As of March 31, 2014, the principal balance is $95,312 and the Company
recorded interest expense for the first quarter of 2014 of $3,664
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
10
-
|
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 :
|
|
March 31, 2014
|
December 31, 2013
|
Volatility
|
|
132.9% - 198.9%
|
110.4% - 228.5%
|
Expected life (in years)
|
|
0.4 – 0.9
|
0.03 – 0.6
|
Risk-free interest rate
|
|
0.10% - 0.13%
|
0.07% - 0.12%
|
Dividend yield
|
|
0.00%
|
0.00%
|
These derivative financial instruments
are indexed to an aggregate of 3,798,640 shares and 13,176,251 shares of the Company’s common stock as of March 31,
2014 and December 31, 2013, respectively, and are carried at fair value using level 2 inputs. The balance at March 31, 2014
and December 31, 2013 was $327,330 and $1,133,393, respectively.
Activity during the current period
is as follows:
Derivative liabilities at December 31, 2013
|
$ 1,133,393
|
|
|
New derivative liabilities issued in first quarter 2014
|
–
|
Extinguishment
|
(1,296,083)
|
Revalue at reporting period
|
490,020
|
Derivative liabilities at March 31, 2014
|
$ 327,330
|
11
-
|
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 as of March 31, 2014, 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.
On March 26, 2014 the Board adopted
a resolutions to amend the Certificate of Incorporation of the Company to change the capital structure of the corporation by increasing
the authorized shares of Common Stock of the Company from 150,000,000 to 250,000,000. On April 16, 2014 ten shareholders holding
a majority in interest of the voting power of the Company (52.088%) approved the amendment by written consent and as a result no
further votes will be needed.
The filing of a Certificate
of Amendment with the Delaware Secretary of State which will effect the foregoing amendment will not be done until a date which
is at least twenty (20) days after the mailing of this definitive Information Statement. This Information Statement was mailed
on May 12, 2014 to the Company’s shareholders of record on the record date (April 25, 2014) who have not been solicited for
their consent to this corporate action. Pursuant to Delaware law, there are no dissenter’s or appraisal rights relating to
the action taken.
On March 26, 2014, the Company’s
board of directors approved the ScripsAmerica, Inc., Incentive Stock Plan (“SOP”) and on April 16, 2016, approved
by majority shareholders. The SOP was designed to serve as incentive for retaining qualified and competent employees, officers
and directors, and certain consultants and advisors. There are 6,000,000 shares authorized for issuance under the SOP.
The purchase price per share of
a Common Stock option under the SOP plan shall not be less than 100 percent of the fair market value at the time the options are
granted. The purchase price per share of Common Stock option under the SOP plan to a person who owns more than 10 percent of the
voting power of the Corporation's voting stock shall not be less than 110 percent of the fair market value of such shares, at the
time the options are granted. The total value of options granted, under this Plan, to any one person, shall not exceed any limit
imposed by Section 422 or the rules and regulations promulgated by the Internal Revenue Service thereunder. Currently, the limitation
is One Hundred Thousand Dollars ($100,000) in value in any one corporate fiscal year.
As of March 31, 2014 no options
have been authorized or issued under this plan.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
Issuances during 2014
During the three months period
ended March 31, 2014, Company issued 20,860,073 restricted shares of common stock for cash proceeds of $1,203,447 in various private
subscription agreements.
During the first quarter of 2014,
the Company issued 1,699,334 restricted shares of its common stock to non-employees for services rendered during the quarter. These
services were valued at $207,920 and the Company charged its operations in 2014.
During the first quarter 2014,
the Company issued 32,000 restricted shares of its common stock in connection with payment provided by members of the board of
directors during the quarter. The Company charged its operations $2,880 in 2014.
During the first quarter of 2014,
the Company issued 1,740,550 restricted shares of its common stock in connection with financing costs during the quarter. The Company
charged its operations $224,022 in 2014.
Pursuant to its the settlement
agreement with GEM Global Yield Fund Limited (as described below), (a) the Company sold 887,280 shares of its common stock to GEM
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.
During the first quarter 2014, the Company issued 756,400
restricted shares of its common stock to non-employees for payment of stock to be issued for cash received in 2013.
During the first quarter 2014, the Company issued 453,703
restricted shares of its common stock to non-employees for payment of royalties. The payment of royalties was valued at $56,553.
During the first quarter 2014, the Company issued 6,622,504
shares of its common stock for the conversion of approximately $424,108 of principal of our convertible notes payable. These shares
have a fair value of $957,117.
Warrants
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 Regulation D. The Registrant was expecting to 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, 2013 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 financing agreement entered into on October 11, 2013 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 has been expensed in our first quarter
earnings in 2014.
Pursuant to its the settlement
agreement with GEM, (a) the Company sold 887,280 shares of its common stock to GEM 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.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
Summary
of our warrant activity and related information as of March 31, 2014
|
|
Number of shares under warrants
|
|
|
Weighted Average Exercise price
|
|
|
Weighted Average Remaining Contractual term in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2013
|
|
|
228,572
|
|
|
$
|
0.39
|
|
|
|
3.6
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,000,000
|
|
|
$
|
0.55
|
|
|
|
5
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
5,228,572
|
|
|
$
|
0.55
|
|
|
|
4.7
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at March 31, 2014
|
|
|
5,228,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value per warrant
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.65%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
183%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terms in years
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
On March 27, 2014, the Company
issued 50,000 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 $.099 and the fair value of these warrants is $3,971 which was expensed to
selling, general and administrative.
Summary
of our options activity and related information as of March 31, 2014
|
|
Number of shares under Options
|
|
|
Weighted Average Exercise price
|
|
|
Weighted Average Remaining Contractual term in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
5,015,000
|
|
|
$
|
0.16
|
|
|
|
2.8
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000
|
|
|
$
|
0.10
|
|
|
|
3
|
|
|
|
0
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
5,090,000
|
|
|
$
|
0.16
|
|
|
|
2.6
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at March 31, 2014
|
|
|
5,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Option fair value
|
|
|
0.079
|
|
|
|
$0.10 - $0.19
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
.82%
|
|
|
|
.34% - .78%
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
183%
|
|
|
|
186% - 195%
|
|
|
|
|
|
|
|
|
|
Terms in years
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
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 March 31, 2014 applicable to this royalty payment.
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. 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. During the three months
ended March 31, 2014, the Company also made cash payments for royalty expense associated with one of the notes in the amount of
$91,572, and issued 395,276 shares of its common stock which have a fair value of $49,350 for payment of royalty expense and recorded
a royalty expense of $132,000, the overpayment was recorded to prepayment. In first quarter of 2013 the Company issued 455,556
shares of common stock as payment for the royalty expense and the Company recorded an expense of $70,000.
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. As of May 20, 2014, the $4 million raise has not been reached,
consequently these conditions are not effective.
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 first quarter 2014, the Company issued 50,000 options that had a
fair value of $3,971 which were expensed to the statement of operations.
Operating Lease -
In November,
2013 PIMD 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 and $4,724 for the last twelve months. The total
minimum lease payments are $111,714 for 2014, $50,441 for 2015, $56,548 for 2016, and $4,724 for 2017.
13
-
|
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 first quarter 2014 and 2013, the Company financed $3,168,000
and $1,200,000, respectively of its purchase orders and incurred an interest expense of $21,876 and $39,591, respectively. As of
March 31, 2014 and December 31, 2013, the unpaid purchase order finance balance was $1,008,000 and $1,037,494 respectively, and
accrued fees and interest are $24,876 and $24,192, respectively
During the three month period
ended March 31, 2014, the Company purchased product from three suppliers, and in first quarter 2013 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.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
For the three month period ended
March 31, 2014, the Company derived $206,726 or 25% of its revenue from two customers, of this total one customer accounted for
15% and the other accounted for 10%. For the three month period ended March 31, 2013, the Company derived approximately $287,000
or 100% of its revenue from two customers, of this total one customer accounted for 52% and the other accounted for 48%.
As of March 31, 2014, the
Company had two customers representing 100% of our accounts receivable-related party, and numerous customers with none more
than 10% for accounts receivable-trade. As of December 31, 2013, the Company had one customer representing 100% of our
accounts receivable-related party, and no customers in our accounts receivable-trade.
The Company
issued to Ironridge Global IV, Ltd. (“Ironridge”) 8,690,000 shares of its common stock in settlement of bona fide claims
against the Company which were purchased by Ironridge from various creditors of the Company (the “Claim Amount”).
The
shares issued to Ironridge were freely tradable and exempt from registration under the Securities Act of 1933, as amended (the
“Securities Act”)
pursuant to Section 3(a)(10) of the Securities Act.
Pursuant
to the court order issued by the California Superior Court for the County of Los Angeles (“California State Court”)
on November 8, 2013, the shares of the Company’s common stock were deemed issued in settlement of the claims (subject to
certain adjustments based on the future trading value of the stock) when delivered to Ironridge.
The
number of shares issued to Ironridge is subject to an adjustment based on the trading price of our stock such that the value of
the shares is sufficient to cover the Claim Amount, a 10% agent fee amount and Ironridge’s reasonable legal fees and expenses
(the “Final Amount”), which was determined to be $766,238.29.
On February
10, 2014, Ironridge made a request for, and we issued, an additional 1,615,550 shares of the Registrant’s common stock as
a result of the adjustment provisions under the Stipulation in the court order issued by the California State Court.
On
April 4, 2014, Ironridge requested even more shares pursuant to the adjustment provision under the Stipulation in the court
order issued by the California State Court. This time their request was for an additional 1,646,550 shares of the
Company’s common stock. We declined to issue these additional shares because Ironridge had already received, to that
date, approximately 10,305,550 shares of free trading stock with a market value of approximately $1.2 million (based on the
closing stock price on May 6, 2012), in settlement of a Final Amount of
$766,238.29.
The shares issued to Ironridge represent a premium of 48% to the Final Amount.
On
May 6, 2014, Ironridge submitted an ex parte application to the California State Court to compel the issuance of the 1,646,550
shares requested from the Company on April 4, 2014, and the California State Court without a hearing entered an order to compel
the Company to issue the additional shares. On the same day, we
filed a notice of appeal with
the California State Court’s order. The appeal automatically stays enforcement of the California State Court’s May
6 order.
We believes that Ironridge is
not entitled to additional shares as it has received a significant premium on the Final Amount which Ironridge itself had declared
to the California State Court served as the basis of the adjustment mechanism for the number of shares issued based on the Company’s
stock price. We will vigorously pursue the appeal, and reversal, of the California State Court order.
The Company accrued the potential
issuance of these shares and have expensed $164,655 to financing cost in the financial statement as of March 31, 2014.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the three months ended March 31,
2014
From April 1, 2014 to May
20 2014, the Company issued 4,074,128 shares of common stock for the following transactions: a) We issued 2,776,993 shares of
common stock in a private subscription sale , for $159,378 in cash, b) 189,000 shares for payment of royalty expense valued
at $22,680, c) 1,072,135 shares for conversion of $122,953 of principal for various convertible notes payable, of which the
fair value of stock issued was $124,040, and d) 36,000 shares were issued to members of the Board of Directors for services
provided, valued at $3,960.
On April 21, 2014, 250,000
common stock shares were returned to the Company by Sean R. Fitzgibbons and were cancelled by the Company. These shares were issued
in 2013 and were valued at $32,500.
On April 25, 2014, the Company
issued 5,010,000 employee options which have an excise price of $0.118, are exercisable immediately and expire on April 25, 2017.
The Company’s Chief Executive officer received 2,510,000 options and the Chief Financial Officer received 2,500,000. The
fair value of these options are $436,747 and will be expense in our second quarter of 2014. The fair value was determined by using
the Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility of 179.7% risk-free interest
rate of .88% and expected life of three years.