Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
1 -
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Organization and Business
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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
was 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 upon obtaining financing sometime in 2015.
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, Main Ave Pharmacy Inc., that specializes in topical pain creams
and since we will have significant controlling interest via related party relationships and are the primary beneficiary,
the Company will consolidate financial activities of specialty pharmacy.
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
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At June 30, 2014, the Company
had approximately $346,000 in cash and has continued to incur losses from operations. Our accumulated deficit is approximately
$15.5 million (at June 30, 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,
may not be sufficient to support the working capital requirements, debt service, applicable debt maturity requirements, and operating
expenses through June 30, 2015. 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 the
ability to obtain additional financing or capital to fund and reduce its debt service obligations coming due and its operating
expenses.
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.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
We completed the development
of a children’s pain relief rapid orally disintegrating 80 mg and 160 mg tablets for OTC 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 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 market. However, as of August 14, 2014, no shipments have been made.
In
addition
, 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 inter-company accounts and transactions
have been eliminated in consolidation. For investments which are considered to be a Variable Interest Entity (VIE), the Company
would be considered the primary beneficiary of the VIE if 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. 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.
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.
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
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
d.
Accounts
Receivable Trade, net
-
Accounts receivable are stated at estimated net realizable value. These
receivable 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 June 30, 2014, $10,000
has been recorded as an allowance for doubtful accounts. As of 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. Intangible assets with indefinite lives are not amortized; however,
they are tested annually for impairment and written down to fair value if required.
We review the carrying values of property and equipment
and long-lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying values
may not be recoverable. Such events or circumstances include the following:
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significant declines in an asset’s market price;
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significant deterioration in an asset’s physical condition;
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significant changes in the nature or extent of an asset’s use or operation;
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significant adverse changes in the business climate that could impact an asset’s value, including adverse actions or
assessments by regulators;
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accumulation of costs significantly in excess of original expectations related to the acquisition or construction of an asset;
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current-period operating or cash flow losses combined with a history of such losses or a forecast that demonstrates continuing
losses associated with an asset’s use; and
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expectations that it is more likely than not that an asset will be sold or otherwise disposed of significantly before the end
of its previously estimated useful life.
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If impairment indicators are present,
we determine whether an impairment loss should be recognized by testing the applicable asset or asset group’s carrying value
for recoverability. This test requires long-lived assets to be grouped at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities, the determination of which requires judgment. We estimate
the undiscounted future cash flows expected to be generated from the use and eventual disposal of the assets and compare that estimate
to the respective carrying values in order to determine if such carrying values are recoverable. This assessment requires the exercise
of judgment in assessing the future use of and projected value to be derived from the eventual disposal of the assets to be held
and used. If the carrying value of the assets is not recoverable, then we record a loss for the difference between the assets’
fair value and respective carrying value. We believe our current assumptions and estimates are reasonable and appropriate. Unanticipated
events and changes in market conditions, however, could affect such estimates, resulting in the need for an impairment charge in
future periods
g
.
R
eceivable – Contract Packager
- The Company has receivables from Marlex Pharmaceuticals, Inc.
(“Contract Packager”), in the amount of $1,157,926 and $1,088,598 at June 30, 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 from 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 $244,893 has been recovered as of June
30, 2014. Since collectability is not certain on the remaining receivable, we have fully reserved it as of June 30, 2014 and
December 31, 2013.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
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 (as subsequently amended by
oral agreements).
i
Inventory
-
Inventories represent purchased finished products at our PIMD inventory location and at a third party manufacture’s
warehouse location. Raw materials represent the cost of purchased material use to make our compounded prescription products at
our Main Ave Pharmacy location. Both finished products and raw material costs are stated at the lower of cost or market determined
by the first in, first out method.
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.
SCRIPSAMERICA,
INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
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.
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, 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
to March 31, 2014. (See Note 7.) 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 12 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 $2,758 and $159,917 for the three month period ended June 30, 2014 and 2013, respectively, and $29,017 and 204,413 for
the six months ended June 30, 2014 and 2013, respectively.
n.
Stock-Based
Compensation
– Compensation expense is recognized for the fair value of all share-based payments issued to employees.
As of June 30, 2014 and December 31, 2013, the Company issued 10,400,000 and 5,015,000, respectively for employee stock options
that required calculating the fair value using a pricing model such as the Black-Scholes pricing model. See Note 13 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 if the options or warrants are for future services, they are revalued
at each reporting period.
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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·
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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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o.
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 June 30, 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 10,400,000 shares and notes payable
convertible into 4,546,494 shares of common stock.
p.
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.
q.
Recent Accounting Pronouncements
–
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers:
Topic
606 (“ASU 2014-09”), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle
of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects
the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve
this principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process
than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The new standard permits the use of either the retrospective or cumulative effect transition methods. ASU 2014-09 is effective
for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early
application is not permitted. We are currently in the process of evaluating this new guidance.
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.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
4 -
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Revenues net, from contract packager and commission fees
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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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Three month sales as of June 30,
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Six month sales as of June 30,
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2014
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2013
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2014
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2013
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Sales from U.S. government contract
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3,519,621
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1,293,880
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7,206,843
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3,249,225
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Cost on U.S. government, per agreement
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3,400,405
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1,202,252
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6,963,925
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3,020,723
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Revenue - net , from contract packager
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119,216
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91,628
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242,918
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228,502
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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, which was amended on November 1, 2013, and then, subsequently amended by oral agreements, we
received a commission of 14% on gross margins of pharmaceutical products sold. For the three and six months period ended June 30,
2014, this commission structure generated commission revenue of $74,713 and $157,737, respectively.
Inventory consists of the following:
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As of June 30, 2014
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As of December 31, 2013
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Finished product at subcontract –
RapiMed®
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275,010
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–
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Finished product at PIMD, net of discounts
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22,545
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–
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Raw material at Main Ave Pharmacy
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65,433
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–
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Total Inventory
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362,988
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–
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No inventory reserves have been
made since all product are less than 12 months in age. The finished goods product at subcontractor is for product to be sold once
we get approval from China regulators.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
6 -
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Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consist of the following :
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June 30, 2014
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December 31, 2013
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Prepayment for product to be manufactured
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$
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- (a)
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$
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275,000
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Prepaid insurances
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9,649
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25,400
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Deferred financing costs, net
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22,326
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27,575
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Deposit for purchase Pharma-Net America LLC
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70,000 (b)
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-
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Prepaid other
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23,600
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1,698
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Advances to WholesaleRx
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33,615
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–
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Total prepaid expenses and other current assets
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$
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159,190
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$
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329,673
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(a)
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Funds provided for production of RapiMed® tablets by third party manufacturer.
The production was completed and the tablets were reclassified as inventory in June 2014.
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(b)
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The Company has made a $70,000 deposit for a 100% ownership in a start-up limited liability
company based in Florida named Pharma-Net America LLC (“Pharma-Net”). Pharma-Net’s business purpose is to provide doctor’s
offices with special software that would act as a platform/link/network with the PBMs and doctors. It will provide 3
rd
party access for doctors, payers (insurance companies) and pharmacies. The agreement and final terms have not been signed or finalized
by either party as of August 14, 2014.
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SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
WholesaleRx
As of June 30, 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 was 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 paid as of August 14, 2014.
Subsequent to November 1, 2013,
the Company and Wholesale Rx made certain changes to the agreement, whereby the Company’s investment was reduced to $275,000,
and the Company’s ownership interest was reduced to 14%, and the Company’s monthly fee was reduced to 14% of the gross
profit for the preceding month if the purchase order financing was used during such prior month but only 8% if the purchase order
financing was not used in such prior month. The subsequent amendments to the arrangement have not been reduced to a formal, written
agreement and some of the arrangements are oral amendments. The parties are operating under their understanding of the current
arrangement and Wholesale Rx is current in its obligations.
This investment was
originally accounted for under the equity method because the Company expected the investment to exceed 20%. 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. It was originally anticipated that the investment would be 20% or possibly greater so we
had recorded the investment using the equity method but circumstances have changed. We do not have significant influence and
management has determined that the investment will not be greater than 20% so the Company will record this investment using
the cost method .
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.
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 also made a distribution of $119,650 to the shareholders of PIMD. The six months period
ending June 30, 2014 loss recorded to statement of operations was $85,634 for cumulative loss of $103,944 making the total equity
attributed to non-controlling interest to be a deficit of $346,437 at June 30, 2014.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
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 and a shareholder, 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 for the first six months 2014.
PIMD unaudited financial information
as of June 30, 2014 and December 31, 2013 is as follows:
|
|
As of
June 30, 2014
|
|
|
As of
December 31, 2013
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
109,000
|
|
|
$
|
31,000
|
|
Total assets
|
|
$
|
132,000
|
|
|
$
|
31,000
|
|
Liabilities
|
|
$
|
33,000
|
|
|
$
|
177,000
|
|
Stockholders' Equity
|
|
$
|
99,000
|
|
|
$
|
(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 five year period. Implex will be entering into
a “Business Development and Retention Agreement” with PIMD to assist PIMD with the development of its business.
|
8 -
|
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”), located in Clifton, New Jersey, for
$550,000. The purchase price was paid in installments and paid in full as of June 30, 2014. Since ScripsAmerica will have significant
controlling interest via related party relationships and will be the primary beneficiary, the Company consolidated 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 preliminary allocated to MAvP’s net tangible and intangible
assets based on the estimated fair value as of January 29, 2014. Excess purchase consideration, if any, was allocated to goodwill.
All other tangible assets acquired had no significant fair value. This preliminary valuation determined that
the only intangible assets acquired were the licenses with an estimated value of $12,000 and a one year life. As a result, $538,000
was allocated to goodwill for the excess of the purchase price. The Company amortized the intangible assets for the licenses beginning
in March 2014 and has recorded an amortization expense of $4,000 as of June 30, 2014. Intangible assets with indefinite lives are
not amortized (Goodwill); however, they are tested annually for impairment and when events or circumstances indicate change in
fair value.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
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 10 for note details). A $60,000 installment payment was
made in April 2014 and the final payments were made by June 30, 2014. MAvP is a specialty
pharmacy which is licensed to prepare and fill prescriptions via a topical cream format versus pill format. MAvP was
basically a dormant business and had no significant sales prior to the acquisition in 2014, and MAvP was acquired
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 six months ended June 30, 2014 include the results of Main Avenue Pharmacy since the
date of acquisition. The entire product revenue and product cost of sales in the June 30, 2014 statement of operations is related
to Main Avenue Pharmacy. Unaudited proforma results for the six months period ended June 30, 2014 is as follows
|
|
As of
June 30, 2014
|
|
|
|
|
|
Current assets
|
|
$
|
1,339,000
|
|
Total assets
|
|
$
|
1,339,000
|
|
Liabilities
|
|
$
|
884,000
|
|
Stockholders' Equity
|
|
$
|
455,000
|
|
The December 31, 2013, amounts
were not presented because the amounts were immaterial and unavailable because the business was dormant for the past twelve months.
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”). 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.
The original agreement date
February 20, 2014 has been amended so that Scrips for its management services provided by the amended Business Management Agreement,
effective April 1, 2014, ScripsAmerican will receive 100% of the profits and losses of Main Ave Pharmacy as defined by GAAP for
profits and losses.and since ScripsAmeica has controlling interest in Implex, management has consolidated the activities of Main
Avenue Pharmacy into our financial statements in 2014.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
9 -
|
Joint Ventures Agreement
|
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.
|
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 Canadian 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 June 30, 2014, no funds have been
provided by either partner, no losses or income generated and this joint venture is still in the development stage.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
10 -
|
Accounts Payable and accrued expenses
|
Accounts payable and accrued expenses consist of the following:
|
|
|
|
|
|
As of
June 30, 2014
|
|
|
As of
December 31, 2013
|
|
Accounts payable and general accruals
|
|
$
|
139,187
|
|
|
$
|
226,570
|
|
Accrued commission expense
|
|
|
818,653
|
|
|
|
–
|
|
Accrued Ironridge expense (see note 17)
|
|
|
164,655
|
|
|
|
–
|
|
Deferred rent payable - PIMD
|
|
|
9,638
|
|
|
|
–
|
|
Total
|
|
$
|
1,132,133
|
|
|
$
|
226,570
|
|
Debt consists of the following
as of June 30, 2014 and December 31, 2014
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Line of credit
|
|
|
12
|
|
|
|
99,223
|
|
Debt with related party
|
|
|
292,925
|
|
|
|
352,816
|
|
12% Fixed rate Convertible notes payable
|
|
|
594,048
|
|
|
|
574,778
|
|
12% Fixed rate Convertible notes payable-related party
|
|
|
108,776
|
|
|
|
120,738
|
|
8% variable convertible notes payable
|
|
|
–
|
|
|
|
116,334
|
|
10% variable convertible notes payable
|
|
|
22,418
|
|
|
|
179,291
|
|
12% variable convertible notes payable
|
|
|
–
|
|
|
|
48,230
|
|
12% 1 year term loan
|
|
|
190,270
|
|
|
|
–
|
|
12% 1 year term loan – related party
|
|
|
38,054
|
|
|
|
–
|
|
24% 1 year term loan
|
|
|
250,000
|
|
|
|
–
|
|
24% 1 year term loan – related party
|
|
|
75,000
|
|
|
|
–
|
|
QuarterSpot – Term loan
|
|
|
61,981
|
|
|
|
–
|
|
Total notes payable
|
|
|
1,633,484
|
|
|
|
1,491,410
|
|
Less current maturities
|
|
|
765,884
|
|
|
|
511,590
|
|
Long-term debt
|
|
|
867,600
|
|
|
|
979,820
|
|
|
|
|
|
|
|
|
|
|
Debt discounts consist of the following:
|
|
|
|
|
|
|
|
|
8% variable convertible notes payable
|
|
|
–
|
|
|
|
286,166
|
|
10% variable convertible notes payable
|
|
|
3,207
|
|
|
|
100,709
|
|
12% variable convertible notes payable
|
|
|
–
|
|
|
|
40,794
|
|
|
|
|
3,207
|
|
|
|
427,669
|
|
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 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 June 30, 2014). The line is secured by a personal guarantee by the Company’s
CEO. The outstanding borrowings under this line of credit at June 30, 2014 and December 31, 2013 were $12 and $99,222, respectively.
The Company incurred interest expense under this line of credit of approximately $12 and $437 and $146 and $2,406 for the three
and six months ended June 30, 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 the first quarter
and second quarter of 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 and six month periods ended June 30, 2014 and 2013, was $7,046 and $9,436, $14,763 and $19,000,
respectively. The outstanding balance at June 30, 2014 and December 31, 2013 was $292,925 and $352,816, respectively, with a current
liability balance of $128,149 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 payments until maturity which currently are April 1, 2016. In June of 2014 the owners of these notes agreed to extend
the maturity dates to April 1, 2016
from 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 in shares of common stock of the Company at $0.17 per share, at the option of the lender.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
During the six month period
ended June 30, 2014 the following activity occurred relating to various notes in this category: the Company received $114,750 in
cash for several new convertible promissory notes; the Company made $95,480 in principal payments. The outstanding balance at June
30, 2014 and December 31, 2013, was $594,048 and $574,778, respectively, with the current liability balance $0 and $574,778, respectively.
The Company recorded interest expense for the three months and six months period ended June 30, 2014, of $18,249 and $42,268, respectively,
and for the three and six months period ended June 30, 2013, $12,900 and $24,800, 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 Chief Executive Officer.
There is no required principal payment on the note until maturity which is April 1, 2016. The owner of this note agreed in June
of 2014 to extend the maturity date to April 1, 2016 from 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 June 30, 2014 and December
31, 2013 the principal balance of this note with our Chief Executive Officer was $80,000. The Company recorded interest expense
for the three months and six month period ended June 30, 2014 and 2013, of $2,400 and $4,800 and $2,400 and $4,800, respectively.
In 2012, the Company received
$50,000 in cash for one convertible promissory note 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 April 1, 2016. The owner of this note agreed to change
the maturity date from 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 under the 2012 $50,000 note 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 six month
period ended June 30, 2014, the Company made cash payment of $11,962 in principal and as of June 30, 2014 and December 31, 2013,
the principal balance was $28,776 and $40,738, respectively. The Company recorded interest expense for three and six months period
ended June 30, 2014 of $1,523 and $2,876, respectively. For the three and six months period ended June 30, 2013, it recorded interest
expense on this note of $1,500 and $3,000, respectively. During the three months and six months period ended June 30, 2014 the
Company, made cash payments for royalty expense in the amount of $16,800 and $37,898, respectively, and issued 63,000 and 121,427,
shares of its common stock, respectively, for payment of royalty expense, and recorded a royalty expense, of 31,000 and $64,000,
for the three and six months period ended June 30, 2014 respectively.
8% Variable Convertible
notes payable
In fiscal year 2013 the Company entered into six new
securities purchase agreements (as of June 30, 2014 no notes were outstanding and 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.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 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 these note was determined
by using the Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility ranges between161.6%
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 the six month period
ended June 30, 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 $127,260 and issuing 2,039,864
of our common stock valued at $224,230. The Company recognized a gain for this extinguishment in the amount of $82,450.
As of June 30, 2014, and December
31, 2013 the principal balance was $0 and $402,500, respectively, and the unamortized debt discount was $0 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 0 and 6,044,978 of common stock if the lenders converted on June 30, 2014 and December 31, 2013, respectively.
The fair value of the derivative liability at June 30, 2014 and December 31, 2013 was $0 and $606,112, respectively
10% Variable Convertible
notes payable
During the fiscal year 2013 the Company entered into
twelve new securities purchase agreements (as of June 30, 2014 only one note was still outstanding and 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 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
feature 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 the six month
period ended June 30, 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, and the Company extinguished the debt and the embedded derivative
which resulted in a gain on extinguishment of $169,323. One lender partially convert a note with a principal a $51,250 into
457,099 shares of our common stock value at $54,852, with a remaining principal balance of $25,625.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
As of June 30, 2014 (only one
note is still outstanding) and December 31, 2013, the principal balance was $22,418 and $280,000, respectively, and the unamortized
debt discount was $3,202 and $100,709, respectively. The Company recorded interest expense for the three and six months period
ended June 30, 2014, of $463 and $33,540 respectively. For the three and six months period ended June 30, 2013, the Company recorded
interest expense of $4,800 and $9,588, respectively. The Company would have been required to issue 366,071 and 4,484,138 shares
of common stock if the lenders converted on June 30, 2014 and December 31, 2013, respectively. The fair value of the derivative
liability at June 30, 2014 and December 31, 2013 was $15,763 and $383,337, respectively.
12% Variable Convertible
notes payable
During fiscal year 2013 the
Company entered into seven new securities purchase agreements (as of June 30, 2014 no notes were outstanding and 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.
Since these notes have 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 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 11 to 12 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 six 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 $26,220.
As of June 30, 2014 and December
31, 2013, the principal balance of these notes was $0 and $89,025, respectively, and the unamortized debt discount was $0 and $40,795,
respectively. The Company recorded interest expense for three and six months period ended June 30, 2014 of $1,790 and $15,594,
respectively. For the three and six month period ended June 30, 2013, the Company recorded interest expense of $11,500 and $23,059,
respectively. The Company would have been required to issue 0 and 1,512,736 of common stock if the lenders converted on June 30,
2014 and December 31, 2013, respectively. The fair value of the derivative liability at June 30, 2014 and December 31, 2013, is
$0 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 recorded a royalty expense
of $19,890 for the six month period ended June 30, 2014, to the Scrips statement of operations. The Company on Implex’s behalf,
paid $59,730 in principal payments and recorded interest expense of $6,914 and the balance as of June 30, 2014 is $190,270.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 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 recorded a royalty
expense of $2,710 for the six month period ended June 30, 2014. The Company on Implex’s behalf paid $11,946 in principal
payments and recorded interest expense of $1,262 and the balance as of June 30, 2014 is $38,054.
24% one year Term loan
On May 19, 2014, Main Ave Pharmacy
borrowed $250,000 from a stockholder of the Company in order to provide funding for inventory and payment of commission expenses.
This loan bears interest at the rate of 24% per annum, interest payments are due monthly beginning July 1, 2014, and the principal
payment is due at the maturity date of May 18, 2015, along with any outstanding interest payments. Additionally, the Company shall
pay to the lender a royalty of $2 for each prescription processed by Main Avenue Pharmacy upon the commencement of the $8.00 royalty
under the investment contract dated January 17, 2014, with the Implex Corporation. The Company recorded a royalty expense to the
statement of operation in the second quarter of 2014 in the amount of $23,940. The balance as of June 30, 2014 is $190,270.
24% one year Term loan
– Related party
On May 19, 2014, Main Ave Pharmacy
borrowed $75,000 from the wife of the Company’s Chief Executive Officer in order to provide funding for inventory and payment
of commission expenses. This loan bears interest at the rate of 24% per annum, interest payments are due monthly beginning July
1, 2014, and the principal payment is due at the maturity date of May 18, 2015 along with any outstanding interest payments. Additionally,
the Company shall pay to the lender a royalty of $2 for each prescription processed by Main Avenue Pharmacy upon the commencement
of the $8.00 royalty under the investment contract dated January 17, 2014, with the Implex Corporation. The Company recorded
a royalty expense to the statement of operation in the second quarter of 2014 in the amount of $4,788. The balance as of June 30,
2014 is $75,000.
QuarterSpot Term loan
On March 17, 2014, the Company
received $92,000 in cash for an 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 June 30, 2014, the principal balance is $61,981 and
the Company recorded interest expense for the three and six months period ended June 30, 2014 of $2,895 and $6,559, respectively.
12 -
|
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 :
|
|
June 30, 2014
|
|
March 31, 2014
|
|
December 31, 2013
|
Volatility
|
|
133.6%
|
|
132.9% - 198.9%
|
|
110.4% - 228.5%
|
Expected life (in years)
|
|
0.11
|
|
0.4 – 0.9
|
|
0.03 – 0.6
|
Risk-free interest rate
|
|
0.10%
|
|
0.10% - 0.13%
|
|
0.07% - 0.12%
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
These derivative financial instruments
are indexed to an aggregate of 366,071 shares and 13,176,251 shares of the Company’s common stock as of June 30, 2014
and December 31, 2013, respectively, and are carried at fair value using level 2 inputs. The balance at June 30, 2014 and
December 31, 2013 was $15,660 and $1,133,393, respectively.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
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
|
|
|
(1,318,853
|
)
|
Revalue at reporting period
|
|
|
512,790
|
|
Derivative liabilities at March 31, 2014
|
|
|
327,330
|
|
|
|
|
|
|
New derivative liabilities issued in second quarter 2014
|
|
|
–
|
|
Extinguishment
|
|
|
(310,791
|
)
|
Revalue at reporting period
|
|
|
(879
|
)
|
Derivative liabilities at June 30, 2014
|
|
$
|
15,660
|
|
13 -
|
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 250,000,000 shares as of June 30, 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 resolution 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, the increase in the authorized shares of common stock was approved by the written consent of shareholders holding a
majority of the voting power of the Company’s outstanding capital stock (“Shareholder Consent”). On June 2,
2014, the Company filed its Certificate of Amendment to the Certificate of Incorporation to effect the increase in the number
of shares authorized common stock.
On March 26, 2014, the Company’s
board of directors approved the ScripsAmerica, Inc., Incentive Stock Plan (“SOP”) and on April 16, 2016, it was approved
by Shareholder Consent. 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 p
lan 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 p
lan 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 June 30, 2014 no options
have been issued under this plan.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
Issuances during 2014
During the six months period ended
June 30, 2014, the Company issued 24,917,066 restricted shares of common stock for cash proceeds of $1,425,325 in various private
subscription agreements. Subscription price issued in a range from $0.05 to $.0633
During the six months period ended
June 30, 2014, the Company issued 4,329,334 restricted shares of its common stock to non-employees for services rendered during
2014. These services were valued at $497,520 and the Company charged its operations in 2014.
During the six months period ended
June 30, 2014, the Company issued 68,000 restricted shares of its common stock in connection with payments provided to members
of the board of directors during 2014. The Company charged its operations $6,840 in 2014.
During the six months period ended
June 30, 2014, the Company issued 1,740,550 restricted shares of its common stock in connection with financing costs during 2014.
The Company charged to financing cost in the statement of 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 six months
period ended June 30,
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 six months period ended June 30, 2014, the
Company issued 705,703 restricted shares of its common stock to non-employees for payment of royalties. The payment of royalties
was valued at $86,793.
During the six months period ended June 30, 2014, the
Company issued 8,563,213 shares of its common stock for the conversion of approximately $597,821 of principal of our convertible
notes payable. These shares have a fair value of $1,182,278.
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. The Company reversed the expense that was recorded to the statement of operation in 2013 and
the second quarter of 2014.
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(a)(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
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
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. 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.
Warrants
Summary of our warrant activity and related information
as of June 30, 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
|
|
|
3.1
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
5,000,000
|
|
$
|
0.55
|
|
|
4.5
|
|
|
|
|
Exercised
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
5,228,572
|
|
$
|
0.55
|
|
|
4.5
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 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%
|
|
|
|
|
|
|
|
|
|
|
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
Options
On March 27, 2014, the Company
issued 75,000 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.
On April 25, 2014, 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 $.121 and the fair value of these options is $4,841 which was expensed to selling, general
and administrative in the second quarter of 2014.
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 $437,620 and were expensed 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 181.27% risk-free interest
rate of .88% and an expected life of three years.
On June 23, 2014, the Company
issued 250,000 employee options to an employee for services. These options have an excise price of $0.143, are exercisable immediately
and expire on June 23, 2017, with a fair value of these options is $28,296 and were expensed to selling, general and administrative
expenses in the second quarter of 2014.
Summary of our options activity and related information
as of June 30, 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
|
|
5,015,000
|
|
$
|
0.16
|
|
|
2.3
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
5,385,000
|
|
$
|
0.12
|
|
|
2.8
|
|
|
825
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
10,400,000
|
|
$
|
0.14
|
|
|
2.6
|
|
$
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 2014
|
|
10,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
Option fair value
|
|
$0.079 - $.113
|
|
|
$ 0.10 - $ 0.19
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
.82 - .88%
|
|
|
.34% - .78%
|
|
|
|
|
|
|
|
Volatility
|
|
177 - 183%
|
|
|
186% - 195%
|
|
|
|
|
|
|
|
Terms in years
|
|
3
|
|
|
3
|
|
|
|
|
|
|
|
Dividend yield
|
|
0%
|
|
|
0%
|
|
|
|
|
|
|
|
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 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 June 30, 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 six months ended
June 30, 2014, the Company also made cash payments for royalty expense associated with one of the notes in the amount of $133,572,
and issued 584,276 shares of its common stock which have a fair value of $72,030 for payment of royalty expense and recorded a
royalty expense of $213,000 to the statement of operation for the six months period ended June 30, 2014. For the six months ended
June 30, 2013 the Company issued 513,834 shares of common stock as payment for the royalty expense and the Company recorded an
expense of $132,730.
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 August 13, 2014, the $4 million raise has not been
reached and 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 and 5,000 options for each committee meeting attended. For the six months ended June 30, 2014, the Company issued 100,000
options that had a fair value of $8,812 which were recorded in the statement of operations for the six months ended June 30, 2014.
On June 23, 2014, the Company
entered into a two year employee contract with an employee, the contract has an annual salary of $115,000, a signing bonus of $4,000,
the Employee shall be reimbursed for monthly medical and dental insurance costs and the employee was granted 250,000 options that
vest immediately at an excise price of $0.143 per share.
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. Payments
did not begin until April 2014, and the minimum lease payments as of June 30, 2014 are as follows:
|
2014
|
|
|
$
|
27,514
|
|
|
2015
|
|
|
$
|
56,272
|
|
|
2016
|
|
|
$
|
14,172
|
|
|
Total
|
|
|
$
|
97,958
|
|
15 -
|
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 six months period ended June 30, 2014 and 2013, the
Company financed $6,200,000 and $2,311,600, respectively of its purchase orders and incurred an interest expense of $46,752 and
$59,767, respectively. As of June 30, 2014 and December 31, 2013, the unpaid purchase order finance balance was $1,028,192 and
$1,037,494 respectively, and accrued fees and interest are $20,192 and $0, respectively
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
During the six month period ended
June 30, 2014, the Company purchased product from three suppliers, and during the first and second quarters of 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.
For the three and six months
period ended June 30, 2014, no customer accounted for more than 10% of revenue. For the three month period ended June 30, 2013,
the Company derived approximately $91,600 or 100% of its revenue from one customer. For the six month period ended June 30, 2013,
the Company derived revenue from two customers with one customer accounting for 60% of the revenue.
As of June 30, 2014, the Company
had one customer representing 100% of our accounts receivable-related party, and numerous customers with no 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 costs in the financial statement as of June 30, 2014, as well
as reversing 1,646,550 shares of the Company’s common stock.
SCRIPSAMERICA, INC.
Condensed Notes to Consolidated Financial
Statements (Unaudited)
For the six months ended June 30, 2014
From July 1, 2014 to August
4 2014, the Company issued 3,147,210 shares of common stock for the following transactions: We issued a) 1,010,350 shares of common
stock in a private subscription sale , for $58,260 in cash, stock issued at a price range between $0.05 and $0.06 b) 38,350 shares
for payment of royalty expense valued at $3,835 c) 446,724 shares for conversion of $25,625 of principal for various convertible
notes payable, of which the fair value of stock issued was $67,009, d) 20,000 shares were issued to members of the Board of Directors
for services provided, valued at $2,600, e) 121,786 shares for our liability of stock to be issued and f) 1,510,000 restricted
shares of common stock to a consultant under a consulting agreement with regard to investor relations services,
which were valued at $211,000.