U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-Q
(Mark
One)
[X] | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended June 30, 2014
OR
[ ] | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from __________ to __________
Commission
file number: 333-130446
PRAXSYN
CORPORATION
(Exact
Name of Registrant as Specified in its Charter)
Illinois |
|
20-3191557 |
(State
or Other Jurisdiction of |
|
(I.R.S.
Employer |
Incorporation or Organization) |
|
Identification
No.) |
18011
Sky Park Circle, Suite N |
|
|
Irvine,
CA |
|
92614 |
(Address
of Principal Executive Offices) |
|
(Zip
Code) |
(949)
777-6112
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ] |
Accelerated
filer [ ] |
Non-accelerated
filer [ ] (Do not check if a smaller reporting company) |
Smaller reporting
company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
The number
of shares outstanding of the registrant’s common stock as August 19, 2014 was 343,954,384.
PRAXSYN
CORPORATION
TABLE
OF CONTENTS TO FORM 10-Q
PART
1. FINANCIAL INFORMATION
Item
1. Financial Statements
PRAXSYN
CORPORATION AND SUBSIDIARIES
(FORMERLY
THE PAWS PET COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
| |
June
30, 2014 | | |
December
31, 2013 | |
| |
| | | |
| | |
ASSETS | |
| | | |
| | |
Current
assets: | |
| | | |
| | |
Cash | |
$ | 518,550 | | |
$ | 37,494 | |
Accounts
receivable, net of allowance and long-term portion | |
| 8,523,170 | | |
| 3,564,770 | |
Inventories | |
| 78,383 | | |
| 13,441 | |
Other
current assets | |
| 24,905 | | |
| 20,230 | |
Current
assets | |
| 9,145,008 | | |
| 3,635,935 | |
| |
| | | |
| | |
Property
and equipment, net | |
| 41,332 | | |
| 27,782 | |
Accounts
receivable, long-term | |
| 3,134,858 | | |
| 983,440 | |
Debt
issuance cost, net | |
| - | | |
| 24,361 | |
Other
assets | |
| 5,879 | | |
| 5,879 | |
Deferred
tax asset | |
| 248,455 | | |
| 248,455 | |
Total
assets | |
$ | 12,575,532 | | |
$ | 4,925,852 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
Current
liabilities: | |
| | | |
| | |
Accounts
payable | |
$ | 607,032 | | |
$ | 191,002 | |
Accrued
liabilities | |
| 714,417 | | |
| 187,502 | |
Accrued
interest | |
| 1,348,991 | | |
| 1,011,414 | |
Accrued
marketing | |
| 5,542,017 | | |
| 1,411,493 | |
Notes
payable | |
| 5,304,182 | | |
| 5,639,594 | |
Notes
payable to related parties | |
| 501,567 | | |
| 406,664 | |
Settlement
liability | |
| 697,539 | | |
| 248,000 | |
Liabilities
of discontinued operations | |
| 961,831 | | |
| - | |
Deferred
tax liability | |
| 459,411 | | |
| 459,411 | |
Total
current liabilities | |
| 16,136,987 | | |
| 9,555,080 | |
| |
| | | |
| | |
Commitments
and contingencies (Note 7) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’
Deficit: | |
| | | |
| | |
Series
D, no par value, 500,000 issued; 457,168 and 174,184 outstanding at June 30, 2014 and December 31, 2013, respectively, liquidation
preference $20,000,000 | |
| - | | |
| - | |
Series
B, no par value, 70,565 and 0 issued and outstanding at June 30, 2014 and December 31, 2013, respectively, liquidation preference
$2,116,950 and $0 | |
| - | | |
| - | |
Series
C, no par value, 545 and 0 issued and outstanding at June 30, 2014 and December 31, 2013, respectively, liquidation preference
$54,500 and $0 | |
| - | | |
| - | |
Series
A, no par value, none issued and outstanding at June 30, 2014 and December 31, 2013, respectively, liquidation preference
$0 and $0 | |
| - | | |
| - | |
Common
stock, no par value, 1,400,000,000 and 1,100,000,000 shares authorized, 327,454,384 and 0 issued and outstanding at June 30,
2014 and December 31, 2013, respectively | |
| - | | |
| - | |
Additional
paid-in capital | |
| 49,485,468 | | |
| 35,624,371 | |
Accumulated
deficit | |
| (52,846,923 | ) | |
| (40,053,599 | ) |
Treasury
stock at cost, 389,623 shares at June 30, 2014 and December 31, 2013, respectively | |
| (200,000 | ) | |
| (200,000 | ) |
Total
stockholders’ deficit | |
| (3,561,455 | ) | |
| (4,629,228 | ) |
Total
liabilities and stockholders’ deficit | |
$ | 12,575,532 | | |
$ | 4,925,852 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
PRAXSYN
CORPORATION
(FORMERLY
THE PAWS PET COMPANY)
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
| |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net
revenues | |
$ | 23,242,709 | | |
$ | 498,712 | | |
$ | 32,462,272 | | |
$ | 3,638,285 | |
| |
| | | |
| | | |
| | | |
| | |
Cost
of net revenues | |
| 975,134 | | |
| 156,156 | | |
| 1,306,917 | | |
| 328,811 | |
| |
| | | |
| | | |
| | | |
| | |
Gross
profit | |
| 22,267,575 | | |
| 342,556 | | |
| 31,155,355 | | |
| 3,309,474 | |
| |
| | | |
| | | |
| | | |
| | |
Operating
expenses: | |
| | | |
| | | |
| | | |
| | |
General
and administrative (includes stock-based compensation of $21,317 and $0, $121,317 and
$0, for the three and six months ended June 30, 2014, and 2013, respectively)
| |
| 982,224 | | |
| 275,179 | | |
| 1,582,177 | | |
| 674,662 | |
Sales
and marketing (includes stock-based compensation of $4,975,951 and $0, $8,779,250 and
$0, for the three and six months ended June 30, 2014, and 2013, respectively)
| |
| 12,696,619 | | |
| 37,910 | | |
| 20,077,336 | | |
| 759,456 | |
Total
operating expenses | |
| 13,678,843 | | |
| 313,089 | | |
| 21,659,513 | | |
| 1,434,118 | |
| |
| | | |
| | | |
| | | |
| | |
Operating
income | |
| 8,588,732 | | |
| 29,467 | | |
| 9,495,842 | | |
| 1,875,356 | |
| |
| | | |
| | | |
| | | |
| | |
Other
income and (expense): | |
| | | |
| | | |
| | | |
| | |
Interest
expense | |
| (9,558,629 | ) | |
| (689,554 | ) | |
| (15,266,695 | ) | |
| (1,367,901 | ) |
Warrant
modification expense | |
| - | | |
| - | | |
| (7,111,444 | ) | |
| - | |
Other
gain or loss, net | |
| 188,973 | | |
| - | | |
| 88,973 | | |
| - | |
Other
income (expense), net | |
| (9,369,656 | ) | |
| (689,554 | ) | |
| (22,289,166 | ) | |
| (1,367,901 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income
(loss) from operations before income taxes | |
| (780,924 | ) | |
| (660,087 | ) | |
| (12,793,324 | ) | |
| 507,455 | |
Provision
(benefit) for income taxes | |
| - | | |
| (462,923 | ) | |
| - | | |
| 355,881 | |
| |
| | | |
| | | |
| | | |
| | |
Net
income (loss) | |
$ | (780,924 | ) | |
$ | (197,164 | ) | |
$ | (12,793,324 | ) | |
$ | 151,574 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average
number of common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 304,290,027 | | |
| - | | |
| 153,749,151 | | |
| - | |
Diluted | |
| 304,290,027 | | |
| - | | |
| 153,749,151 | | |
| 332,309,958 | |
| |
| | | |
| | | |
| | | |
| | |
Net
income (loss) income per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.08 | ) | |
$ | 0.00 | |
Diluted | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.08 | ) | |
$ | 0.00 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
PRAXSYN
CORPORATION AND SUBSIDIARIES
(FORMERLY
THE PAWS PET COMPANY)
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
Unaudited
For
the Six Months Ended June 30, 2014
| |
Series
D
Preferred Stock | | |
Series
B Preferred Stock | | |
Series
C Preferred Stock | | |
Series
A Preferred Stock | | |
Common
Stock | | |
Additional
Paid-In | | |
Accumulated | | |
Treasury | | |
Total
Stockholders' | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Stock | | |
Deficit | |
Balance
December 31, 2013 | |
| 174,184 | | |
$ | - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
$ | 35,624,371 | | |
$ | (40,053,599 | ) | |
$ | (200,000 | ) | |
$ | (4,629,228 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares
retained in merger and net liabilities assumed | |
| - | | |
| - | | |
| 72,415 | | |
| - | | |
| 1,245 | | |
| - | | |
| - | | |
| - | | |
| 287,582,556 | | |
| - | | |
| (2,185,778 | ) | |
| - | | |
| - | | |
| (2,185,778 | ) |
Repurchase
and cancellation of stock | |
| (7,549 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (506,000 | ) | |
| - | | |
| - | | |
| (506,000 | ) |
Stock
issued for services | |
| 132,111 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 196,167 | | |
| - | | |
| 8,899,808 | | |
| - | | |
| - | | |
| 8,899,808 | |
Stock
issued to cancel warrants | |
| 155,823 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 7,111,444 | | |
| - | | |
| - | | |
| 7,111,444 | |
Stock
issued to settle debt | |
| 2,599 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 7,175,661 | | |
| - | | |
| 524,726 | | |
| - | | |
| - | | |
| 524,726 | |
Beneficial
conversion feature | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 16,138 | | |
| - | | |
| - | | |
| 16,138 | |
Series
B Preferred stock conversions | |
| - | | |
| - | | |
| (1,850 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 18,500,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Series
C Preferred stock conversions | |
| - | | |
| - | | |
| - | | |
| - | | |
| (700 | ) | |
| - | | |
| - | | |
| - | | |
| 14,000,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Stock
options expense | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 759 | | |
| - | | |
| - | | |
| 759 | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (12,793,324 | ) | |
| - | | |
| (12,793,324 | ) |
Balance
June 30, 2014 | |
| 457,168 | | |
$ | - | | |
| 70,565 | | |
$ | - | | |
| 545 | | |
$ | - | | |
| - | | |
$ | - | | |
| 327,454,384 | | |
$ | - | | |
$ | 49,485,468 | | |
$ | (52,846,923 | ) | |
$ | (200,000 | ) | |
$ | (3,561,455 | ) |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
PRAXSYN
CORPORATION AND SUBSIDIARIES
(FORMERLY
THE PAWS PET COMPANY)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
| |
Six
Months Ended June 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
CASH
FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net
income (loss) | |
$ | (12,793,324 | ) | |
$ | 151,574 | |
Adjustments
to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
Depreciation
and amortization | |
| 4,498 | | |
| 4,641 | |
Loss
on extinguishments of notes payable | |
| 100,000 | | |
| - | |
Loss
on disposal of fixed assets | |
| 5,184 | | |
| - | |
Gain
on settlements and extinguishment of accrued interest | |
| (188,973 | ) | |
| - | |
Loss
on receivables sold to factor | |
| 14,208,849 | | |
| 851,136 | |
Stock-based
compensation | |
| 8,900,567 | | |
| - | |
Warrant
modification expense | |
| 7,111,444 | | |
| - | |
Amortization
of debt discount and beneficial conversion feature | |
| 115,060 | | |
| 61,203 | |
Amortization
of debt issuance costs | |
| 24,361 | | |
| 36,899 | |
Deferred
tax provision (benefit) | |
| - | | |
| 355,881 | |
Change
in operating assets and liabilities | |
| | | |
| | |
Accounts
receivable | |
| (32,248,551 | ) | |
| (3,525,053 | ) |
Inventory | |
| (64,942 | ) | |
| 9,201 | |
Other
current assets | |
| (4,675 | ) | |
| 1,038 | |
Accounts
payable | |
| 53,448 | | |
| 35,767 | |
Accrued
liabilities | |
| (67,486 | ) | |
| 103,663 | |
Accrued
interest | |
| 463,605 | | |
| 5,936 | |
Accrued
marketing | |
| 4,130,524 | | |
| 268,203 | |
Settlement
liability | |
| (652,467 | ) | |
| (8,000 | ) |
| |
| | | |
| | |
Net
cash used in operating activities | |
| (10,902,878 | ) | |
| (1,647,911 | ) |
| |
| | | |
| | |
CASH
FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchases
of property and equipment | |
| (18,048 | ) | |
| - | |
Cash
acquired in connection with merger | |
| 485,012 | | |
| - | |
| |
| | | |
| | |
Net
cash provided by investing activities | |
| 466,964 | | |
| - | |
| |
| | | |
| | |
CASH
FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds
from sale of accounts receivable to factor | |
| 10,929,884 | | |
| 1,288,551 | |
Repayments
of loans payable | |
| (55,417 | ) | |
| (14,882 | ) |
Borrowings
from related parties | |
| 246,767 | | |
| - | |
Repayments
to related parties | |
| (204,264 | ) | |
| 49,102 | |
Net
cash provided by financing activities | |
| 10,916,970 | | |
| 1,322,771 | |
| |
| | | |
| | |
Increase
(decrease) in cash and cash equivalents | |
| 481,056 | | |
| (325,140 | ) |
Cash
and cash equivalents, beginning of period | |
| 37,494 | | |
| 325,551 | |
Cash
and cash equivalents, end of period | |
$ | 518,550 | | |
$ | 411 | |
| |
| | | |
| | |
Supplemental
disclosures of cash flow information: | |
| | | |
| | |
Cash
paid for interest | |
$ | 172,964 | | |
$ | 449,426 | |
Cash
paid for income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Non
cash investing and financing activities: | |
| | | |
| | |
Common
stock issued in exchange for cancellation of note payable | |
$ | 524,726 | | |
$ | - | |
Conversion
of accrued interest into notes payable | |
$ | 20,833 | | |
$ | - | |
Creation
of obligations through settlements | |
$ | 500,000 | | |
$ | - | |
Net
liabilities assumed from reverse merger | |
$ | 2,185,778 | | |
$ | - | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
PRAXSYN
CORPORATION AND SUBSIDIARIES
(FORMERLY
THE PAWS PET COMPANY)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
DESCRIPTION OF BUSINESS
Organization
and Nature of Business
Business
Praxsyn
Corporation (the “Company”) is a health care company dedicated to providing medical practitioners with medications
and services for their patients. Through our facility in Irvine, California, we currently formulate transdermal creams using therapeutic
and preventative agents for pain management. These products are geared to patients suffering from long-term pain associated with
work place related injuries. Our operations consist of the production and sale, by prescription, of our pain management products
to California workers’ compensation insurance providers. The products are shipped directly to patients, and billings for
these products are typically made to and collected from the insurance providers of the patients’ employers.
Merger
On
December 31, 2013, we entered into a First Amended Securities Exchange Agreement (“SEA”) with Mesa Pharmacy, Inc.
(“Mesa”), a wholly-owned subsidiary of Pharmacy Development Corp. (“PDC”), to acquire all of Mesa. On
March 20, 2014, we replaced the SEA by entering into an Agreement and Plan of Merger Agreement (the “APMA”) with PDC
whereby we agreed to acquire all the issued and outstanding shares of PDC in exchange for 500,000 shares of our Series D Preferred
Stock. Each share of Series D preferred stock is convertible into 1,000 shares of our common stock. On January 23, 2014, the Company
entered into an agreement with its primary marketing consultant, Trestles Pain Management Specialists, LLC (“TPS”),
whereby the PDC shareholders have agreed to assign 166,664 (or 1/3) of the 500,000 shares of Praxsyn Series D preferred stock
issued in connection with the merger to TPS. The shares are in exchange for future services with the Company on a performance
basis. At June 30, 2014, 123,832 shares had been earned by, and issued to, TPS leaving 42,832 shares remaining to be issued. Additionally,
in accordance with the APMA, certain of our convertible promissory notes were exchanged for new convertible promissory note, convertible
into shares of Series D Preferred Stock at the rate of one (1) share of Series D Preferred Stock for each One Hundred Dollars
($100.00) of unpaid principal and interest. The APMA closed on March 31, 2014 (the “Acquisition Date”).
For
accounting purposes, this transaction was treated as a reverse-acquisition in accordance with Accounting Standards Codification
(“ASC”) 805, Business Combinations, since control of our Company passed to the PDC shareholders. We determined
for accounting and reporting purposes that PDC is the acquirer because of the significant holdings and influence of its control
group (which includes Mesa) before and after the acquisition. As a result of this transaction, the PDC control group owns 40%
of our issued and outstanding common stock on a diluted basis. In addition, the Series D preferred shares are the only preferred
shares with voting rights. With these voting rights, the PDC control group controlled approximately 63% of our common stock on
a diluted basis after the acquisition. Additionally, the PDC control group, pre-acquisition, was significantly larger than Praxsyn
in terms of assets and operations. Finally, the future operations of the PDC control group will be the Company’s primary
operations and more indicative of the operations of the consolidated entity on a going forward basis.
Accordingly,
the consolidated assets and liabilities of PDC are reported at historical costs and the historical consolidated results of operations
of PDC will be reflected in this and future Praxsyn filings as a change in reporting entity. The assets and liabilities of Praxsyn
are reported at their carrying value, which approximated their fair value, on the Acquisition Date and no goodwill was recorded.
Praxsyn’s results of operations will be included from the Acquisition Date.
The
following is a schedule of Praxsyn’s assets and liabilities at March 31, 2014:
| |
March 31, 2014 | |
ASSETS: | |
| | |
Cash | |
$ | 485,012 | |
Fixed assets | |
| 5,184 | |
Total assets: | |
| 490,196 | |
| |
| | |
LIABILITIES: | |
| | |
Accounts payable | |
| 362,582 | |
Accrued expenses | |
| 588,401 | |
Accrued interest | |
| 96,362 | |
Settlement liability | |
| 289,398 | |
Convertible debentures | |
| 377,400 | |
Liabilities of discontinued operations | |
| 961,831 | |
Total liabilities | |
| 2,675,974 | |
| |
| | |
Net liabilities assumed | |
$ | (2,185,778 | ) |
The
following unaudited pro forma information was prepared as if the acquisition had taken place at the beginning of the period for
the six month periods ended June 30, 2014 and 2013:
| |
Pro-Forma Combined | |
| |
Six Months Ended June 30, 2014 | | |
Six Months Ended June 30, 2013 | |
Revenue | |
$ | 32,462,272 | | |
$ | 3,638,285 | |
| |
| | | |
| | |
Net loss from continuing operations | |
| (21,281,838 | ) | |
| (6,401,952 | ) |
Net loss | |
$ | (21,285,286 | ) | |
$ | (6,437,875 | ) |
| |
| | | |
| | |
Net loss per share, basic and diluted | |
$ | (0.09 | ) | |
$ | (0.07 | ) |
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Consolidation
The
accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
(“GAAP”) as promulgated in the United States of America. The condensed consolidated financial statements include the
accounts of Pharmacy Development Corporation and Mesa Pharmacy, Inc., for the periods ended June 30, 2013, and 2014, and Praxsyn
as of the Acquisition Date of March 31, 2014. All significant intercompany transactions have been eliminated in consolidation.
In
connection with the six months ended June 30, 2014 and 2013, certain information and disclosures normally included in the annual
financial statements prepared in accordance with the accounting principles generally accepted in the Unites States of America
have been condensed or omitted pursuant to the rules and regulations of the United States Securities Exchange Commission. In the
opinion of management, all adjustments and disclosures necessary for a fair presentation of these condensed consolidated financial
statements have been included. Such adjustments consist of normal recurring adjustments. These interim condensed consolidated
financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the years
ended December 31, 2013 and 2012 filed on Form 8-K/A on July 16, 2014. The condensed consolidated results of operations for the
six months ended June 30, 2014 and 2013 are not necessarily indicative of the results that may be expected for the full year.
On
March 31, 2014, the PAWS Pet Company Inc. (the “Company”) closed the APMA with PDC whereby the Company acquired PDC
through a forward triangular merger into the Company’s wholly owned subsidiary PDC, Inc. Since the PDC shareholders effectively
control the Company and since PDC had existing business operations, the merger has been accounted for as a reverse recapitalization
of PDC and a change in reporting entity whereby the historical consolidated financial statements of PDC are reported herein for
the periods presented.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. Since inception, management has funded operations primarily through proceeds received in connection with factoring of
accounts receivable on a non-recourse basis from two primary factors, issuances of notes payable, and through sales of common
stock. In addition, the Company is concentrated within the workers compensation market for which the collection of payments on
receivables may be delayed for a significant period depending on various factors. Additionally, the Company is dependent upon
a few third party referral services, one of them being a related party, in which generate almost 100% of the Company’s revenues.
During the six months ended June 30, 2014 and 2013, the Company incurred a net loss of $12,793,324, and generated net income of
$151,574, respectively. The net loss during the period ended June 30, 2014 included stock-based compensation of $8,900,567. The
Company also has an accumulated deficit of $52,846,923 as of June 30, 2014. Management believes that it will need additional accounts
receivable factoring, or debt and/or equity financing to be able to implement their business plan. Given the indicators described
above, in addition to the capital deficiency and negative working capital, there is substantial doubt about the Company’s
ability to continue as a going concern.
Management
is attempting to find additional financing sources to replace or supplement the current factoring of accounts receivable to sustain
operations until it can achieve profitability. Management believes that the replacement of the factoring of accounts receivable
with more conventional financing will lead the Company to achieve profitability much sooner and with substantial results. The
successful outcome of future activities cannot be determined at this time, and there are no assurances that, if achieved, the
Company will have sufficient funds to execute its intended business plan or generate positive operating results.
The
accompanying condensed consolidated financial statements do not include any adjustments related to the recoverability and classification
of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as
a going concern.
Use
of Estimates
Financial
statements prepared in accordance with accounting principles generally accepted in the United States require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The most significant estimates made by management are
revenue recognition and the related allowance for doubtful accounts and contractual receivables, the allocation of accounts receivable
between current and long-term, the value of stock-based compensation awards, the amount of potential legal settlements and contingencies,
the fair market value of assets and liabilities of Praxsyn and the realization of deferred tax assets. Actual results could differ
from those estimates. Management performs a periodic retrospective review of estimates and modifies assumptions as deemed appropriate.
Revenue
Recognition
The
Company sells compounding pharmaceutical products directly through its pharmacy. Revenues from compounding pharmaceutical products
sold by its pharmacy are recorded using the net method, as required under ASC 954-605-25, Health Care Entities––Revenue
Recognition. Compounding prescription revenue is recorded at established billing rates less estimated contractual adjustments
with each respective insurance carrier. Net revenues include the amount the insurance company and the California Workers Compensation
Fund are expected to pay directly to the Company.
The
Company recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the sales price is
fixed or determinable, and collection is probable. The Company’s pharmacy revenues are recognized when both the services
are performed, which include compounding prescriptions and shipment to the customer.
Net
revenues consisted of the following for the six months ended June 30, 2014 and 2013:
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, 2014 | | |
June 30, 2013 | | |
June 30, 2014 | | |
June 30, 2013 | |
Gross billing revenue | |
$ | 49,353,084 | | |
$ | 1,077,141 | | |
$ | 69,852,030 | | |
$ | 7,342,812 | |
Less: estimated contractual and other adjustments | |
| (26,110,375 | ) | |
| (578,429 | ) | |
| (37,389,758 | ) | |
| (3,704,527 | ) |
Net billing revenue | |
$ | 23,242,709 | | |
$ | 498,712 | | |
$ | 32,462,272 | | |
$ | 3,638,285 | |
Accounts
Receivable
Accounts
receivable represent amounts due from insurance companies, through various networks, for pharmaceutical compounds delivered to
patients. The Company records an allowance for doubtful accounts and contractual reimbursements based on analyses of historical
collections over the expected period until such cases are closed or settled. Management also assesses specific identifiable accounts
considered at risk or uncollectible. The allowance for doubtful accounts and contractual reimbursements amounted to $14,627,928
and $6,265,951 as of June 30, 2014 and December 31, 2013, respectively.
Due
to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required
in order to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk
that they may have to be revised or updated as additional information becomes available. It is possible that management’s
estimates could change, which could have an impact on operations and cash flows. Specifically, the complexity of many third-party
billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments
to amounts originally recorded.
The
Company has factored receivables to multiple agents. The receivables have been sold to factors at rates ranging from 20% to 35%
of the gross billings. These receivables have been determined to have a net realizable value of approximately 46% of the gross
billings for the periods ended June 30, 2014 and 2013. The difference between the estimated net realizable value of receivables
and the factored amounts has been classified as financing costs under interest expense at the time of sale to the factor.
During
the six months ended June 30, 2014, the Company factored $10.1 million of 2013 accounts receivable for 20% and $44.5 million of
2014 prescription sales to a factor for 20% of the gross amount resulting in net proceeds of $10.9 million. In connection with
these sales, the Company recorded financing costs of $14.2 million during the six months ended June 30, 2014 within interest expense
on the accompanying condensed consolidated statement of operations.
During
the six months ended June 30, 2013, the Company factored $4.7 million of accounts receivable for 25-30% of the gross amount resulting
in net proceeds of approximately $1.3 million. In connection with these sales, the Company recorded financing costs of approximately
$851,000 during the six months ended June 30, 2013 within interest expense on the accompanying condensed consolidated statement
of operations.
Shipping
and Handling
Shipping
and handling costs incurred are included in general and administrative expenses. The amount of revenue received for shipping and
handling is less than 0.5% of revenues for all periods presented.
Cash
The
Company considers all highly liquid, income bearing investments purchased with original maturities of six months or less to be
cash equivalents.
Inventory
Inventories
are stated at the lower of cost (first-in, first-out method) or market. The Company’s inventories consist of pharmaceutical
ingredients used within our compounding products. The Company’s inventory for all periods presented is substantially comprised
and classified as raw materials.
Property
and Equipment, Net
Property
and equipment are recorded at historical cost and depreciated on a straight-line basis over their estimated useful lives. Leasehold
improvements are amortized on a straight-line basis over the lesser of the useful lives or the remaining term of the lease. For
tax purposes, accelerated tax methods are used. The Company expenses all purchases of equipment with individual costs of under
$1,000. Ordinary maintenance and repairs are charged to expense as incurred, and replacements and betterments are capitalized.
Debt
Issuance Costs
The
Company capitalizes direct costs related to the issuance of debt, including finder’s fees, underwriting and legal costs.
The debt issuance costs are recorded as an asset and amortized as interest expense over the term of the related debt using the
straight-line method, which approximated the effective interest method. Upon the extinguishment of the related debt, any unamortized
debt issuance costs are expensed as interest expense.
As
of June 30, 2014 and December 31, 2013, the Company had unamortized debt issuance costs of $0 and $24,361 respectively.
Impairment
of Long-Lived Assets
The
Company tests for impairment of its long-lived assets in accordance with Accounting Standards Codification (“ASC”)
360-10-35, Impairment or Disposal of Long-Lived Assets. Under that directive, long-lived assets are grouped with other
assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. Such group is tested for impairment whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future
cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount.
Impairment,
if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted
expected cash flows, of those assets and is recorded in the period in which the determination is made.
Convertible
Debt and Warrants Issued with Convertible Debt
Convertible
debt is accounted for under the guidelines established by ASC 470, Debt with Conversion and Other Options and ASC 740,
Beneficial Conversion Features. The Company records a beneficial conversion feature (“BCF”) when convertible
debt is issued with conversion features at fixed or adjustable rates that are below market value when issued. If, however, the
conversion feature is dependent upon a condition being met or the occurrence of a specific event, the BCF will be recorded when
the related contingency is met or occurs. The BCF for the convertible instrument is recorded as a reduction, or discount, to the
carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized
to interest over the life of the underlying debt using the effective interest method.
The
Company calculates the fair value of warrants issued with the convertible instruments using the Black-Scholes valuation method,
using the same assumptions used for valuing employee options for purposes of ASC 718, Compensation – Stock Compensation,
except that the contractual life of the warrant is used. Under these guidelines, the Company allocates the value of the proceeds
received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants)
on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected
term of the convertible debt to interest expense. For a conversion price change of a convertible debt issue, the additional intrinsic
value of the debt conversion feature, calculated as the number of additional shares issuable due to a conversion price change
multiplied by the previous conversion price, is recorded as additional debt discount and amortized over the remaining life of
the debt.
The
Company accounts for modifications of its BCF’s in accordance with ASC 470, Modifications and Exchanges. ASC 470
requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the
subsequent recognition of interest expense or the associated debt instrument when the modification does not result in a debt extinguishment.
Fair
Value of Financial Instruments
The
Company utilizes ASC 820-10, Fair Value Measurement, for valuing financial assets and liabilities measured on a recurring
basis. ASC 820-10 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles
and expands disclosures about fair value measurements. This standard applies in situations where other accounting pronouncements
either permit or require fair value measurements.
ASC
820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized
on the balance sheet, for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. As of June 30, 2014 and December 31, 2013, the carrying value of certain financial instruments
such as accounts receivable, accounts payable and accrued expenses approximates fair value due to the short-term nature of such
instruments. The notes payable and convertible notes payable also approximate fair value as the interest rate under these notes
approximates the Company’s current borrowing rate.
ASC
820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
The
standard describes six levels of inputs that may be used to measure fair value:
|
Level
1: |
|
Quoted
prices in active markets for identical or similar assets and liabilities. |
|
|
|
|
|
Level
2: |
|
Quoted
prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted
prices in active markets for identical or similar assets and liabilities. |
|
|
|
|
|
Level
3: |
|
Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
As
of June 30, 2014 and December 31, 2013, the Company did not have any level 2 or 3 financial instruments.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance ASC 718-20, Stock-based Compensation. Stock-based compensation
cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite
vesting period.
The
Company issues warrants exercisable into the Company’s common stock and preferred stock as compensation to debt holders.
The fair value of each warrant is estimated on the date of grant using the Black-Scholes pricing model. Assumptions are determined
at the time of grant. No warrants were granted during the six months ended June 30, 2014 and 2013.
The
assumptions used in the Black Scholes models referred to above are based upon the following data: (1) The expected life of the
warrant is estimated by considering the contractual term of the warrant. (2) The expected stock price volatility of the underlying
shares over the expected term of the warrant is based upon historical share price data of an index of comparable publicly-traded
companies. (3) The risk free interest rate is based on published U.S. Treasury Department interest rates for the expected terms
of the underlying warrants. (4) Expected dividends are based on historical dividend data and expected future dividend activity.
(5) The expected forfeiture rate is based on historical forfeiture activity and assumptions regarding future forfeitures based
on the composition of current grantees.
Advertising
Costs
The
Company expenses advertising costs as incurred. For the six months ended June 30, 2014 and 2013, the Company incurred advertising
costs of $0 and $80, respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. The Company recognizes deferred tax assets
and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible
or taxable amounts attributable to events that have been recognized on a cumulative basis in the condensed consolidated financial
statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion
of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes
in tax laws and rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there
have been no interest or penalties assessed or paid.
The
Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized.
As
of the date of this report the Company is current in their income tax filings.
Concentrations,
Uncertainties and Other Risks
Cash
and cash equivalents - Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed
federally insured limits of $250,000 per institution that pays Federal Deposit Insurance Corporation (FDIC) insurance premiums.
The Company has never experienced any losses related to these balances.
Revenues
and accounts receivable - Financial instruments that potentially subject the Company to credit risk principally consist of
receivables. Insurance companies account for a substantial portion of the receivables. This risk is limited due to the ability
to factor and the number of insurance companies comprising the Company’s customer base and their geographic dispersion.
For the six months ended June 30, 2014 and 2013, no single customer represented more than 10% of revenues or accounts receivable,
net.
The
majority of the Company’s accounts receivable arise from product sales and are primarily due from government agencies and
managed health care providers. The Company monitors the financial performance and creditworthiness of its customers so that it
can properly assess and respond to changes in their credit profile. Conditions in the normal course of business, including inherent
variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of
time that it takes to collect accounts receivable outstanding. For accounts receivable that are held and not factored, the Company
does not expect to have write-offs or adjustments to accounts receivable which could have a material adverse effect on its consolidated
financial position, results of operations or cash flows as the portion which is deemed uncollectible is already taken into account
when the revenue is recognized.
During
the six months ended June 30, 2014 and 2013, revenues generated from sales of compounding pharmaceutical products primarily to
worker’s compensation patients represented 100% of total revenues. The Company revenues are generated from sales of compounding
pharmaceutical products primarily to worker’s compensation patients, located primarily throughout Southern California. At
times the collection on these receivables can take in excess of one year, during which the Company, at times, attends legal hearings,
files liens to securitize claims, negotiates before worker’s compensation administrative judges, resolves liens with stipulations
and orders for defendants to pay, and transmits demands to settle liens filed with the adjuster or defense attorneys.
During
the six months ended June 30, 2014 and 2013, two consultants made up substantially 100% of the Company’s selling and marketing
expense, one of which is a related party. Management believes the loss of these consultants to this organization would have a
material impact on the Company’s consolidated financial position, results of operations, and cash flows. For the six months
ended June 30, 2014 and 2013, the consultants earned $20,077,336 and $759,456, respectively. Of the 2014 amounts, $8,779,250 consisted
of stock-based compensation. The amounts payable at June 30, 2014 and December 31, 2013 were $5,542,017 and $1,411,493, respectively.
The terms of each contract entitled the consultant to receive an amount ranging from 13% to 17.5% of the gross prescription sales
generated. The Company estimates that these two consultants generated almost 100% of the revenue for each period presented. In
addition, on March 31, 2014, we added one of these consultants to the Company’s Board of Directors.
The
pharmaceutical industry is highly competitive and regulated, and our future revenue growth and profitability is dependent on our
timely product development, ability to retain proprietary formulas, and continued compliance. The compounding, processing, formulation,
packaging, labeling, testing, storing, distributing, advertising and sale of the Company’s products are subject to regulation
by one or more U.S. and California agencies, including the Board of Pharmacy, the Food and Drug Administration, the Federal Trade
Commission, and the Drug Enforcement Administration as well as several other state and local agencies in localities in which the
Company’s products are sold. In addition, the Company compounds and markets certain of its products in accordance with standards
set by organizations, such as the United States Pharmacopeia Convention, Inc. The Company believes that its policies, operations
and products comply in all material respects with existing regulations. The healthcare reform and a reduction in the coverage
and reimbursement levels by insurance companies and government agencies and/or a change in the regulations or compliance with
related agencies and/or a disruption in the Company’s ability to maintain its competitiveness may have a material impact
on the Company’s consolidated financial position, results of operations, and cash flows.
Vendors
- As of June 30, 2014 and December 31, 2013, two suppliers made up substantially 100% of the Company’s direct materials.
Management believes the loss of either supplier to this organization would have a material impact on the Company’s consolidated
financial position, results of operations, and cash flows. If the Company’s relationship with one of its vendors was disrupted,
the Company could have temporary difficulty filling prescriptions for worker’s compensation related drugs until a replacement
wholesaler agreement was executed, which would negatively impact the business. For the six months ended June 30, 2014 and 2013,
expenses incurred for pharmaceutical compounding materials obtained from vendors were $952,813, and $137,619, respectively. The
amounts payable at June 30, 2014 and December 31, 2013 for such costs were approximately $74,000 and $59,000, respectively.
Recent
Accounting Pronouncements
There
are no recently issued accounting pronouncements or standards updates that the Company has yet to adopt that are expected to have
a material effect on its financial position, results of operations, or cash flows.
3.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following as of June 30, 2014 and December 31, 2013:
| |
June
30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Leasehold improvements | |
$ | 24,749 | | |
$ | 24,749 | |
Machinery and equipment | |
| 27,229 | | |
| 22,629 | |
Furniture and fixtures | |
| 3,997 | | |
| 3,997 | |
Computer equipment | |
| 26,854 | | |
| 13,406 | |
| |
| 82,829 | | |
| 64,781 | |
Less: accumulated depreciation | |
| (41,497 | ) | |
| (36,999 | ) |
| |
$ | 41,332 | | |
$ | 27,782 | |
Depreciation
expense for the six months ended June 30, 2014 and 2013 amounted to $4,498 and $4,641, respectively.
Depreciation
is provided over the estimated useful lives of the assets, principally using the straight-line method. The estimated useful lives
are the lesser of the life of the assets, or the lease for leasehold improvements, and primarily range from six (3) to seven (7)
years for machinery and equipment, furniture and fixtures, and computer equipment.
4.
NOTES AND DEBENTURES PAYABLE
The
Company’s outstanding notes payable consisted of the following:
| |
June
30, 2014 | | |
December
31, 2013 | |
| |
Principal | | |
Accrued Interest | | |
Principal | | |
Accrued Interest | |
| |
| | |
| | |
| | |
| |
Non-related parties: | |
| | | |
| | | |
| | | |
| | |
2007 - 2009 Convertible Notes | |
$ | 397,000 | | |
$ | 97,254 | | |
$ | 497,000 | | |
$ | 78,083 | |
2010 Profit Sharing Notes | |
| 175,000 | | |
| 262,173 | | |
| 675,000 | | |
| 383,163 | |
2010 and 2011 Secured Bridge Notes | |
| 449,275 | | |
| 79,403 | | |
| 449,275 | | |
| 72,901 | |
2012 Convertible Promissory Notes | |
| 3,175,125 | | |
| 682,553 | | |
| 3,299,875 | | |
| 410,174 | |
Unsecured Promissory Notes | |
| 782,782 | | |
| 36,466 | | |
| 817,366 | | |
| 5,793 | |
Convertible Debentures | |
| 325,000 | | |
| 101,093 | | |
| - | | |
| - | |
Less: Discounts on Notes Payable | |
| - | | |
| | | |
| (98,922 | ) | |
| | |
Subtotal non-related parties | |
| 5,304,182 | | |
| 1,258,942 | | |
| 5,639,594 | | |
| 950,114 | |
Related parties: | |
| | | |
| | | |
| | | |
| | |
2007 - 2009 Convertible Notes | |
| 152,500 | | |
| 75,956 | | |
| 152,500 | | |
| 43,300 | |
2012 Convertible Promissory Notes | |
| 150,000 | | |
| 8,588 | | |
| 150,000 | | |
| 18,000 | |
Unsecured Promissory Notes | |
| 146,667 | | |
| 3,019 | | |
| - | | |
| - | |
Convertible Notes | |
| 52,400 | | |
| 2,486 | | |
| - | | |
| - | |
Note Payable Due to Officer | |
| - | | |
| - | | |
| 104,164 | | |
| - | |
Subtotal related parties | |
| 501,567 | | |
| 90,049 | | |
| 406,664 | | |
| 61,300 | |
Total | |
| 5,805,749 | | |
| 1,348,991 | | |
| 6,046,258 | | |
| 1,011,414 | |
| |
| | | |
| | | |
| | | |
| | |
Current Portion | |
| 5,805,749 | | |
| 1,348,991 | | |
| 6,046,258 | | |
| 1,011,414 | |
Long-term Portion | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Discounts
During
the six months ended June 30, 2014 and 2013, the Company amortized $98,922 and $61,203, respectively, of the discount to interest
expense. As of June 30, 2014 and December 31, 2013, unamortized discounts were $0 and $98,922, respectively.
Debt
Issuance Costs
In
connection with various notes payable discussed below, the Company paid issuance costs to third parties in connection with the
notes payable. As of June 30, 2014 and December 31, 2013, the Company had unamortized debt issuance costs of $0 and $24,361, respectively.
2007
- 2009 Convertible Notes
The
2007 – 2009 Convertible Notes were initially issued in 2007 to 2009 to a series of individuals, including a related party
who is a relative of the founder of the PDC control group. These notes are unsecured. The non-related notes in this category bear
interest rates ranging from 18% to 33% per annum and the related party notes bear interest rates ranging from 18% to 48% per annum.
All notes in this category, which were originally written on PDC, contained a provision allowing for conversion into common stock
only if PDC became a public entity. This conversion provision allowed for the conversion of all unpaid principal and accrued interest
at the rate of the average closing price of the common stock for the 10 days prior to conversion.
Upon
finalization of the merger on March 31, 2014, as discussed in Note 1, the remaining notes were rewritten and the conversion feature
modified to allow for conversion into one share one (1) share of Series D Preferred Stock for each One Hundred Dollars ($100)
of unpaid principal and interest. The modification of the conversion feature created a beneficial conversion feature (“BCF”)
and, as of the date of measure of March 31, 2014, the BCF in the amount of $16,138 was recorded to interest expense. Also on March
31, 2004, we entered into a Note Conversion Agreement with a shareholder and holder of one of the 2007 – 2009 Convertible
Notes with a principal amount of $100,000. Under the conversion agreement, the principal was converted into 1,505 shares of Series
D Preferred Stock and we issued a new Unsecured Promissory Note for the remaining balance of accrued and unpaid interest totaling
$20,833 which was paid down to $10,417 as of June 30, 2014. See Unsecured Promissory Notes section below. As a result
of this transaction, we recorded a loss on extinguishment of debt of $100,000 during the six months ended June 30, 2014.
At
both June 30, 2014 and December 31, 2013, these 2007 – 2009 Convertible Notes are past-due and are reflected as current
liabilities at each balance sheet date. There have been no demands for repayment or claims of default, and no conversions have
taken place to date.
2010
Profit Sharing Notes
The
Profit Sharing Notes were initially issued in 2010, have a term of four (4) years, and pay interest monthly on the gross receipts
from workers compensation sales at rates ranging from 0.1% to 5%. These notes are collateralized by all receivables generated
by sales of prescriptions.
On
March 10, 2014, as amended on May 1, 2014, we finalized a settlement agreement with All American T.V., Inc. /John Casoria (“AATV”),
a shareholder and a holder of one of the 2010 Profit Sharing Notes under which we, among other things, agreed to repay the note
and accrued interest for a total payment of $600,000. Based on the finalized settlement agreement, we have reclassified this note
to Settlement Liabilities in 2014 (see Note 7). In connection with the settlement agreement, we recorded a gain on extinguishment
of debt during the three and six months ended June 30, 2014 in the amount of $180,973.
At
both June 30, 2014 and December 31, 2013, these 2010 Profit Sharing Notes are past-due and are reflected as current liabilities
at each balance sheet date. There have been no demands for repayment or claims of default, and no conversions have taken place
to date.
2011
and 2010 Secured Bridge Notes
These
Secured Bridge Notes were initially issued in 2010 and 2011, accrue a one-time flat-rate interest of 15%, and were to be repaid
at the time of a major funding from a specified funding source. The notes are collateralized by all receivables generated by sales
of prescriptions. At both June 30, 2014 and December 31, 2013, these 2010 and 2011 Secured Bridge Notes are reflected as current
liabilities at each balance sheet date since funding from the funding source was never obtained.
2012
Convertible Promissory Notes
These
Convertible Promissory Notes were issued during the second half of 2012, and have a term of four (4) years. One of these notes
was issued to a related party, a relative of the founder of the PDC control group. All of these notes bear interest at 18% per
annum. Each note may be converted, at the option of the note holder, at any time after the second anniversary of the note into
an amount of our common shares calculated by dividing the amount to be converted by 95% of the average daily volume weighted average
price during the five days immediately prior to the date of conversion, defined as the 5-day weighted average of the closing price
of our common stock. As the conversion price of the Convertible Promissory Notes is not known and the notes cannot be converted
for a period of two years from the date of issuance, the beneficial conversion feature, if any, will be calculated upon the contingencies
being met.
On
March 31, 2014, we entered into a Note Conversion Agreement with the holder of a 2012 Convertible Promissory Note in the principal
amount of $124,750, whereby the 2012 Convertible Promissory Note and accrued and unpaid interest of $20,584 was exchanged for
1,094 shares of Series D Preferred Stock.
At
both June 30, 2014 and December 31, 2013, we were in default of the interest payments required under the 2012 Convertible Promissory
notes. Therefore these notes are reflected as current liabilities at each balance sheet date.
Unsecured
Promissory Notes
On
November 18, 2013, we issued an Unsecured Promissory Note with a principal amount of $772,365. This note, which was issued in
exchange for previous notes payable and accrued interest, has a term of five (5) years, bears interest at 18% per annum, and requires
monthly payments of $19,613. At both June 30, 2014 and December 31, 2013, we were in default of the monthly payment requirement
and have therefore reflected this note as a current liability at each balance sheet date.
Effective
December 31, 2014, we issued an Unsecured Promissory Note for $45,000. This note had a term of six months, had no stated interest
rate, and was repayable in monthly payments of $7,500. As of June 30, 2014, this note has been repaid.
On
February 20, 2014, we issued an Unsecured Promissory Note for $96,667 to a company whose managing member is a shareholder. This
note had a stated interest rate of 0.5% per month (6% per annum), and a repayment period of thirty (30) days. We issued a similar
Unsecured Promissory Note for $50,000 to the same company on March 11, 2014. The second note contained the same interest rate
as the first and was also payable in thirty (30) days. The notes are currently past due.
On
March 31, 2014, the Company issued an unsecured promissory note to a shareholder of Praxsyn for $20,833 for accrued and unpaid
interest on an unpaid February 20, 2009 convertible Note Agreement of $100,000. On March 31, 2014, both parties above entered
into a Note Conversion Agreement whereby 1,505 Series D shares were exchanged for the $100,000 combined promissory notes. As of
June 30, 2014, the Company has paid $10,417 against the unsecured note and with the remaining $10,417 to be paid by September
30, 2014.
Convertible
Debentures
The
Convertible Debentures were assumed March 31, 2014 as a result of the Merger discussed in Note 1. The convertible debentures,
which bear interest at 8% per annum, were due in August 2013 and are therefore past due. They are convertible into shares of our
common stock at the rate of $0.50 per share. There was no activity with respect to these convertible debentures during the three
months ended June 30, 2014.
Convertible
Note (Related Party)
On
March 5, 2014, we issued a convertible note in the amount of $42,500 to a shareholder. The convertible note, which has a stated
interest rate of 6% per annum, was to be repaid in April 2014 and is therefore past due. The note is convertible at the option
of the note holder into 260 shares of Series B Preferred Stock. As of June 30, 2014, the total principal amount outstanding for
this note was $52,400.
Note
Payable Due to Officer
These
unsecured notes resulted from advances made in 2013 and 2014, primarily by our Pharmacist in Charge. All amounts, which were due
with no stated interest, have been repaid by June 30, 2014.
5.
STOCKHOLDERS’ DEFICIT
Common
Stock
The
Company is authorized to issue 1,400,000,000 shares of no par value common stock. There were 327,454,384 and zero shares
of common stock outstanding as of June 30, 2014 and December 31, 2013, respectively. The holders of common stock are entitled
to one vote per share on all matters submitted to a vote of stockholders and are not entitled to cumulate their votes in the election
of directors. The holders of common stock are entitled to any dividends that may be declared by the Board of Directors out of
funds legally available therefore subject to the prior rights of holders of any outstanding shares of preferred stock and any
contractual restrictions against the payment of dividends on common stock. In the event of liquidation or dissolution of the Company,
holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive or other subscription rights
and no right to convert their common stock into any other securities.
On
April 29, 2014, the Company issued to a vendor, for services rendered, 196,167 common shares in lieu of payment of $20,588. The
number of shares issued was based on the value of the services and the closing stock price on the day of issuance.
Series
D Preferred Stock
On
December 30, 2013, the Company filed an amended and restated Certificate of Designations of Preferences, Rights and Limitations
of Series D Preferred Stock (the “Certificate of Designations D”) with the Secretary of State of the State of Illinois
that designated 500,000 such shares as Series D Preferred Stock (the “Series D Stock”). A summary of the Certificate
of Designations is set forth below:
Ranking
The Series D Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the Common Stock,
(ii) equal to the Series B Convertible Preferred Stock, (iii) senior to any and all other classes or series of preferred stock
of the Company whether authorized now, or at any time in the future, unless any such subordination to any other class or series
of Preferred Stock, is expressly agreed to, pursuant to an affirmative vote or written consent of holders of at least sixty-seven
percent (67%) of the Series D Stock issued and outstanding at the time of any such vote or written consent. and (iv) junior to
any and all existing and future indebtedness of the Company.
Right
of Conversion Any holder of Series D Stock shall have the right to convert any or all of the holder’s Series D Stock
into a number of fully paid and non-assessable shares of common stock for each share of Series D Stock so converted. The number
of shares of common stock to be issued shall be 1,000 common shares for each Series D Stock share converted. In
no event, shall a holder of any Series D Stock be allowed to convert such shares of Series D Stock into common stock which, upon
giving effect to such conversion, would cause the aggregate number of shares of common stock beneficially owned by the holder,
and/or its affiliates, to exceed four and nine tenths percent (4.9%) of the currently issued and outstanding shares of the Corporation.
Dividends
Series D Stock shall not be entitled to dividends.
Liquidation
In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation (collectively, a “Liquidation”),
the sole participation to which the holders of shares of Series D Stock then issued and outstanding (the “Series D Stockholders”)
shall be entitled, out of the assets of the Corporation legally available for distribution to its stockholders, whether from capital,
surplus or earnings, to receive, before any payment shall be made to the holders of the common stock or any other class or series
of preferred stock ranking on Liquidation junior to such Series D Stock, an amount per share equal to $40 (forty dollars). If
upon any such Liquidation, the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient
to pay the Holders of shares of Series D Stock the full amount to which they shall be entitled, the Holders of shares of Series
D Stock, and of any class or series of stock ranking upon liquidation on a parity with the Series D Stock, shall share pari passu
in any distribution of the remaining assets and funds of the Corporation in proportion to the respective liquidation amounts that
would otherwise be payable to the holders of preferred stock with respect to the shares held by them upon such distribution if
all amounts payable on or with respect to such shares were paid in full. Liquidation preference at June 30, 2014 and December
31, 2013 is $20,000,000 and $0, respectively.
On
January 23, 2014, the Company entered into an agreement with its primary marketing consultant, Trestles Pain Management Specialists,
LLC (“TPS”), whereby Praxsyn has agreed to issue 166,664 (or 1/3) of the 500,000 shares of Praxsyn Series D preferred
stock issued in connection with the merger that occurred on March 31, 2014. The shares are in exchange for future services with
the Company on a performance basis. Per the agreement, 41,666 shares were issued upon execution of the agreement on January 23,
2014. The remaining shares will be issued based on referred prescriptions, at a rate of 1,000 Series D shares per $1 million in
net billable revenues, beginning in February 2014. Shares due for the period of February through June 2014 were to be issued on
June 30, 2014. Thereafter, the remaining net shares due will be issued on a monthly basis at the same rate of 1,000 Series D shares
for each $1 million net referred prescription revenues. As of June 30, 2014, the Company has recorded $7,779,250 in additional
marketing expense in conjunction with the 123,832 Series D shares earned on $69,773,034 of qualified billable gross revenues.
The number of shares to shares to be issued was calculated on a monthly basis by dividing an amount equal to the revenue generated
from qualified referrals within that month by 1 million. The shares to be issued were then valued by multiplication by a factor
equal to the average stock price at closing for each trading day within that month. As additional compensation, the Company also
pays TPS 17.5% of the gross amount of qualified prescriptions billed and shipped by the Company. Effective for the month of June
2014, and going forward, TPS has agreed to a lowered referral fee rate of 13% for any qualified prescriptions billed and shipped
by the Company that are subsequently factored at 20% of gross value or lower.
On
March 10, 2014, as amended on May 1, 2014, the Company entered into an agreement with a third party note and common stock holder
to repurchase 7,504 Series D shares for approximately $66.63 per share totaling $500,000, the shareholders’ initial purchase
price. See also Note 7 for further information.
On
March 31, 2014, the Company entered into a Note Conversion Agreement whereby 1,094 Series D shares were exchanged for the $145,334
combined promissory notes authorized from the July 1, 2012 Note Agreement and Subscription Agreement and related accrued interest.
As
of June 30, 2014, 500,000 shares of Series D Stock were issued, with 457,168 outstanding. There were 42,832 shares of Series D
that have been committed but not yet earned by TPS. See above and Note 1 for additional information.
Series
B Preferred Stock
On
March 15, 2013, the Company filed an amended and restated Certificate of Designations of Preferences, Rights and Limitations of
Series B Preferred Stock (the “Certificate of Designations B”) with the Secretary of State of the State of Illinois
that designated 80,000 such shares as Series B Preferred Stock (the “Series B Stock”). A summary of the Certificate
of Designations is set forth below:
Ranking
The Series B Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the common stock,
Series A and C Preferred Stock, and any other classes of stock or series of preferred stock of the Company whether authorized
now, or at any time in the future, unless any such subordination to any other class or series of Preferred Stock, is expressly
agreed to, pursuant to an affirmative vote or written consent of holders of at least sixty-seven percent (67%) of the Series B
Stock issued and outstanding at the time of any such vote or written consent. and (ii) junior to any and all existing and future
indebtedness of the Company.
Right
of Conversion Any holder of Series B Stock shall have the right to convert any or all of the holder’s Series B Stock
into a number of fully paid and non-assessable shares of common Stock for each share of Series B Stock so converted. The number
of shares of common stock to be issued shall be the number that is equal to 0.001% of the number of shares of the common stock
that would be issued and outstanding after the hypothetical conversion and issuance of all of the outstanding shares of any and
all classes of convertible stock and/or any and all other convertible debt instruments, options and/or warrants outstanding at
the time of conversion (the “Conversion Ratio”). In no event shall the Conversion Ratio be less than four thousand,
three hundred (4,300) shares of common stock and in no event shall the Conversion Ratio be more than ten thousand (10,000) shares
of Common Stock.
Dividends
Series B Stock shall not be entitled to dividends.
Liquidation
In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation (collectively, a “Liquidation”),
the sole participation to which the holders of shares of Series B Stock then issued and outstanding (the “Series B Stockholders”)
shall be entitled, out of the assets of the Corporation legally available for distribution to its stockholders, whether from capital,
surplus or earnings, to receive, before any payment shall be made to the holders of the common stock or any other class or series
of preferred stock ranking on Liquidation junior to such Series B Stock, an amount per share equal to $30 (thirty dollars). If
upon any such Liquidation, the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient
to pay the Holders of shares of Series B Stock the full amount to which they shall be entitled, the holders of shares of Series
B Stock, and of any class or series of stock ranking upon liquidation on a parity with the Series B Stock, shall share pari passu
in any distribution of the remaining assets and funds of the Corporation in proportion to the respective liquidation amounts that
would otherwise be payable to the holders of preferred stock with respect to the shares held by them upon such distribution if
all amounts payable on or with respect to such shares were paid in full.
For
the six months ended June 30, 2014, shareholders elected to convert 1,850 Series B preferred shares into 18,500,000 common shares.
As of June 30, 2014, 70,565 shares of Series B Stock were outstanding.
Series
C Preferred Stock
On
May 15, 2013, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series C Preferred Stock
(the “Certificate of Designations C”) with the Secretary of State of the State of Illinois that designated 50,000
such shares as Series C Preferred Stock (the “Series C Stock”). A summary of the Certificate of Designations is set
forth below:
Ranking
The Series C Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the common stock,
Series A Preferred Stock, and any other classes of stock or series of preferred stock of the Company whether authorized now, or
at any time in the future, unless any such subordination to any other class or series of Preferred Stock, is expressly agreed
to, pursuant to an affirmative vote or written consent of holders of at least sixty-seven percent (67%) of the Series C Stock
issued and outstanding at the time of any such vote or written consent. and (ii) junior to Series C Preferred Stock, and any and
all existing and future indebtedness of the Company.
Right
of Conversion Any holder of Series C Stock shall have the right to convert any or all of the holder’s Series C Stock
into a number of fully paid and non-assessable shares of common stock for each share of Series C Stock so converted. The number
of shares of common stock shares that is equal to ninety percent (66%) of the lowest closing price of the common stock, as quoted
on any exchange or market upon which the common stock is traded over the sixty (60) calendar days preceding the date the Corporation
and the holder enter into an agreement to issue for shares of Series C Stock, for each share of Class C Stock being converted,
provided, however, such ratio shall not be less than $0.005 nor more than $.01.
Dividends
Series C Stock shall not be entitled to dividends.
Liquidation
In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation (collectively, a “Liquidation”),
the sole participation to which the holders of shares of Series C Stock then issued and outstanding (the “Series C Stockholders”)
shall be entitled, out of the assets of the Corporation legally available for distribution to its stockholders, whether from capital,
surplus or earnings, to receive, before any payment shall be made to the holders of the common stock or any other class or series
of preferred stock ranking on Liquidation junior to such Series C Stock, an amount per share equal to $100 (one hundred). If upon
any such Liquidation, the remaining assets of the Corporation available for distribution to its shareholders shall be insufficient
to pay the holders of shares of Series C Stock the full amount to which they shall be entitled, the holders of shares of Series
C Stock, and of any class or series of stock ranking upon liquidation on a parity with the Series C Stock, shall share pari passu
in any distribution of the remaining assets and funds of the Corporation in proportion to the respective liquidation amounts that
would otherwise be payable to the holders of preferred stock with respect to the shares held by them upon such distribution if
all amounts payable on or with respect to such shares were paid in full.
For
the six months ended June 30, 2014, shareholders elected to convert 700 Series C preferred shares into 14,000,000 common shares.
As of June 30, 2014, 545 shares of Series C Stock were outstanding.
Series
A Preferred Stock
On
May 27, 2011, the Company filed an amended and restated Certificate of Designations of Preferences, Rights and Limitations of
Series A Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of Illinois
that designated 500 such shares as Series A Preferred Stock (the “Preferred Stock”). A summary of the Certificate
of Designations is set forth below:
Ranking
The Preferred Stock ranks, with respect to rights upon liquidation, winding-up or dissolution, (i) senior to the common stock
and (ii) junior to Series B and C Stock and any other series of preferred stock, and any and all existing and future indebtedness
of the Company.
No
right of Conversion Series A Stock is not convertible into common stock.
Dividends
and Other Distributions Commencing on the date of issuance of any such shares of Preferred Stock, holders of Preferred Stock
shall be entitled to receive dividends on each outstanding share of Preferred Stock, which shall accrue at a rate equal to 10%
per annum from the date of issuance. Accrued dividends shall be payable upon redemption of the Preferred Stock. So long as any
shares of Preferred Stock are outstanding, no dividends or other distributions may be paid, declared or set apart with respect
to any junior securities other than dividends or other distributions payable on the common stock solely in the form of additional
shares of common stock. After payment of dividends at the annual rates set forth above, any additional dividends declared shall
be distributed ratably among all holders of Preferred Stock and common stock in proportion to the number of shares of common stock
that would be held by each such holder of Preferred Stock as if the Preferred Stock were converted into common stock by taking
the Series A Liquidation Value (as defined below) divided by the market price of one share of common stock on the date of distribution.
Liquidation
Upon any liquidation, dissolution or winding up of the Company after payment or provision for payment of debts and other liabilities
of the Company and any liquidation preferences to the senior securities. Series B and C Preferred Stock has liquidation preference
to the Series A Preferred Stock. Before any distribution or payment is made to the holders of any junior securities, the holders
of Preferred Stock shall first be entitled to be paid out of the assets of the Company available for distribution to its stockholders
an amount with respect to the Series A Liquidation Value, after which any remaining assets of the Company shall be distributed
ratably among the holders of the Preferred Stock and the holders of junior securities, as if the Preferred Stock were converted
into Common Stock by taking the Series A Liquidation Value divided by the market price of one share of Common Stock on the date
of distribution.
Redemption
The Company may redeem, for cash or by an offset against any outstanding note payable from Socius to the Company that was
issued by Socius CG II, Ltd. (“Socius”), any or all of the Preferred Stock at any time at a redemption price per share
equal to $10,000 per share of Preferred Stock, plus any accrued but unpaid dividends with respect to such share of Preferred Stock
(the “Series A Liquidation Value”).
On
June 2, 2011, the Company’s Board of Directors designated 1,200,000 shares as Series A Preferred Stock. As of June 30, 2014,
no shares of Preferred Stock were outstanding.
Warrants
On
March 17, 2014, all of the PDC and its wholly-owned California Corporation subsidiary Mesa Pharmacy, Inc. outstanding warrants
were exchanged for PDC common stock. The Company converted all common and preferred warrants, whether expired or not, into common
stock without consideration for the strike price upon the terms and provisions set forth in the warrant agreements. The conversion
resulted in an issuance of 155,823 Series D shares. This conversion was treated as a modification of the exercise price of the
warrants. Accordingly, the warrants were revalued on the conversion date, resulting in a loss of $7,111,444 being recorded within
the accompanying condensed consolidated statement of operations. Subsequent to the March 17, 2014 conversion, zero warrants for
PDC common or preferred stock remained outstanding.
The
warrants were revalued upon modification of the exercise price using the Black-Scholes option pricing model using the following
assumptions:
| |
June 30, 2014 | |
Annual dividend yield | |
| - | |
Expected life in years | |
| 0
- 8.7 Years | |
Risk-free interest rate | |
| .003%
- .25 | % |
Expected volatility | |
| 75 | % |
Socius
CG II, Ltd. Financing
On
June 30, 2014, there were 40,953,414 Socius warrants outstanding. They have an expiration date of June 3, 2016 and exercise prices
ranging from $0.01-$1.02.
Stock
Incentive Plan
The
Company assumed The PAWS Pet Company’s 2010 adopted Stock Incentive Plan (the “Plan”). Under the Plan, at June
30, 2014, we had 4,000,000 shares approved and reserved for the issuance of stock options to employees, officers, directors and
outside advisors. Under the Plan, the options may be granted to purchase shares of common stock at fair market value at the date
of grant.
At
June 30, 2014, the Company had 367,000 option shares outstanding, and 3,633,000 available for issuance.
The
Company also assumed The PAWS Pet Company’s February 9, 2012 adopted 2012 Stock Incentive Plan (the “2012 Plan”).
Under the 2012 Plan the Company had 10,000,000 shares and shares underlying stock options approved and reserved for the issuance
to employees, officers, directors and outside advisors. At June 30, 2014, the Company had 6,170,950 shares issued under the 2012
Plan and 3,829,050 available for issuance.
6.
RELATED PARTY TRANSACTIONS
Related
Party Convertible Notes
A
relative of Bennie Birch, our founder, is the note-holder of the following instruments: $125,000 2007-2009 Convertible Note issued
in April 2007 accruing interest at the rate of 48%, per annum, $112,500 2007-2009 Convertible Note issued in June 2007 accruing
interest at the rate of 18%, per annum, of which $85,000 of the principal has been repaid, $150,000 2012 Convertible Promissory
Note issued in July 2012 accruing interest at the rate of 18%, per annum. As of June 30, 2014 and December 31, 2013, the Company
had principal amounts of $302,500 of notes held by this relative outstanding. During the six months ended June 30, 2014, and the
year ended December 31, 2013, the Company paid interest amounts of $0 and $38,313, respectively, pertaining to these notes.
On
March 5, 2014, the Company issued a related party convertible promissory note to a shareholder assumed from Paws Pets Company,
for $42,500, with stated interest rates of 6% per annum and is convertible into 260 shares of Series B Convertible Preferred Shares.
The proceeds were used for operations. As of June 30, 2014, the total principal amount outstanding to the shareholder was $52,400.
Total accrued interest for this note as of June 30, 2014 is $2,486.
Related
Party Notes Payable
During
2013, the Company entered into a loan agreement (the “Loan Agreement”) by and between Andrew Do, the Chief Executive
Officer and a shareholder of the Company, as lender (the “Lender”), and the Company, as borrower. Pursuant to the
Loan Agreement, the Lender agreed to advance to the Company a principal amount of $104,165 (the “Loan”) with no stated
interest rate. The Company has promised to pay in full the outstanding principal balance of any and all amounts due under the
Loan Agreement within thirty (30) days of the Company’s receipt of investment financing or a commitment from a third party
to provide $1,000,000 to the Company or one of its subsidiaries (the “Due Date”), to be paid in cash. The total amount
outstanding for the loan agreement above was paid in cash on May 15, 2014.
On
February 28, 2014, the Company issued a related party promissory note to Andrew Do for $100,000 with no stated interest. The proceeds
were used for refinancing current notes payable outstanding. The Company paid $30,000 and $70,000 in cash on April 23, 2014, and
May 15, 2014, respectively.
On
February 20, and March 11, 2014, the Company issued a related party promissory note to a shareholder assumed from The PAWS Pet
Company for $96,667 and $50,000, respectively, with stated interest rates of 6% per annum. The proceeds were used for operations.
As of June 30, 2014, the Company had a principal amount of $146,667 held by this shareholder outstanding. Total accrued interest
for this note as of June 30, 2014 is $3,019.
Related
Party Employees
Seven
relatives of Ed Kurtz, our Director and COO, are employed by us. During the six months ended June 30, 2014 and 2013, these relatives
had a total cash compensation, including base salary, bonus and other compensation, of $67,696 and $55,003; $48,000 and $39,000;
$14,687 and $0; $11,229 and $0; $64,000 and $14,298; $13,550 and $6,001; $64,000 and $51,500; $9,348, and $0; $8,243 and $4,836;
$5,832 and $0; $5,058 and $0; respectively.
A
relative of Andrew Do, our Pharmacist in Charge, is a consultant to the Company providing management consulting and other business
advisory services. During the six months ended June 30, 2014 and 2013, the consultant’s total cash compensation was $19,500
and $39,000, respectively.
Board
of Directors
A
member of the Board of Directors is also the owner of our primary marketing consultant, TPS. See Notes 2 and 5 for additional
information.
7.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases its facilities located in Irvine, California under a rental agreement that expires on September 30, 2016. The rental
agreement includes operating expenses such as common area maintenance, property taxes and insurance. Total rent expense is reflected
in general and administrative expenses in the accompanying condensed consolidated statements of operations. Rental expense under
operating leases during the six months ended June 30, 2014 and 2013 is $43,816 and $25,743, respectively.
In
connection with its assumed, previous operations with The PAWS Pet Company, the Company leased space for certain of its offices
and airport facilities under leases expiring from one month to two years after March 31, 2013. In 2012, the Company abandoned
the leased properties but remain liable for unpaid rent of $360,679 which has been accrued within accounts payable and accrued
liabilities of discontinued operations in the accompanying Condensed Consolidated Balance Sheet.
Litigation
The
Company is involved in various lawsuits and claims regarding shareholder derivative actions, third-party billing agency actions,
negligent misrepresentation, and breach of contract, that arise from time to time in the ordinary course of their business. Below
is a summary of litigation activity for the six months ended June 30, 2014:
Nokley
Group LLC
In
February 2014 we were served with a complaint from Nokley Group LLC (“Nokley”) for breach of contract under a Fee
and First Right of Refusal Agreement dated May 25, 2012 between our company and Nokley. In the complaint, which was filed in Nevada,
Nokley stated, among other things, that we sold certain of our accounts receivable to factoring organizations without offering
Nokley first right of refusal which they allege was required under the agreement. While we estimate we would have cross-complaints
against Nokley that would significantly mitigate any potential damages, we first filed a motion to dismiss based on improper venue.
On July 31, 2014, our Company and Nokley agreed to dismiss the action without prejudice, and to have each party to bear its own
attorney fees and costs.
The
Company estimates that the potential range of exposure for this matter, if refiled in a proper venue, is $17,000 to $30,000. As
of June 30, 2014, we have accrued the minimum amount of potential exposure under our estimation that a loss would be probable.
MedCapGroup
LLC
In
May 2014 we were served with a complaint from MedCapGroup LLC (“MedCap”) for breach of contract, breach of covenant
of good faith and fair dealing, intentional misrepresentation, fraud in the inducement, and deceptive trade practices under a
November 2012 Healthcare Accounts Receivable Purchase Agreement between our company and MedCap. MedCap alleged in its complaint
that because we sell our accounts receivable based on dates of service, and not by patient, that only the original purchaser of
a patient’s claims controls all payments and settlement negotiations with the insurer. As a result, MedCap alleged
that we had misrepresented the collectability of certain accounts receivable they had purchased from us and that they had therefore
been damaged. While we estimate we have significant defenses against MedCap’s complaint, we first filed a motion to dismiss
based on improper venue. On July 30, 2014 our motion to dismiss was granted.
The
Company records accruals for such contingencies when it is probable that a liability will be incurred and the amount of the loss
can be reasonably estimated. As of June 30, 2014 and December 31, 2013, the Company accrues for liabilities associated with certain
litigation matters if they are both probable and can be reasonably estimated. The Company has accrued for these matters and will
continue to monitor each related legal issue and adjust accruals for new information and further developments in accordance with
ASC 450-20-25, Contingencies. For these and other litigation and regulatory matters currently disclosed for which a loss
is probable or reasonably possible, the Company is unable to determine an estimate of the possible loss or range of loss beyond
the amounts already accrued. These matters can be affected by various factors, including whether damages sought in the proceedings
are unsubstantiated or indeterminate; scientific and legal discovery has not commenced or is not complete; proceedings are in
early stages; matters present legal uncertainties; there are significant facts in dispute; or there are numerous parties involved.
In
the Company’s opinion, based on its examination of these matters, its experience to date and discussions with counsel, the
ultimate outcome of legal proceedings, net of liabilities accrued in the Company’s balance sheet, is not expected to have
a material adverse effect on the Company’s consolidated financial position. However, the resolution in any reporting period
of one or more of these matters, either alone or in the aggregate, may have a material adverse effect on the Company’s consolidated
results of operations and cash flows for that period.
Settled
Litigation
Settlement
liabilities consist of the following at:
| |
June
30, 2014 | | |
December
31, 2013 | |
Myhill | |
$ | 130,000 | | |
$ | 200,000 | |
Primary Care | |
| - | | |
| 48,000 | |
Forte Capital | |
| 117,539 | | |
| - | |
AATV | |
| 450,000 | | |
| - | |
Total | |
$ | 697,539 | | |
| 248,000 | |
Myhill
On
August 28, 2012, we received a claim from Roger Saxton, Loren Myhill, Lucas Myhill, Beryl Myhill, and Ann Marie Kaumo (collectively
the “Myhill Litigants”) seeking $358,433 for delayed public entry and illiquidity stemming from an investment made
by the Myhill Litigants. On January 6, 2014, we settled with the Myhill Litigants for $200,000, $20,000 of which was payable on
execution of the settlement agreement and the remainder payable at $10,000 per month over the following 18 months.
The
Counsel for the Plaintiffs agreed to hold the stock certificates during pendency of the payout period. During such period, Plaintiffs
shall have no right to vote such shares, transfer such shares, or encumber such shares, and will not be entitled to receive cash
dividends or stock dividends or any distributions based on ownership of such shares. The Plaintiffs shall return each of their
stock certificates to the Company with a full executed stock power sufficient to transfer such shares. In the event of any transaction
by the Company, including merger or buyout, that results in Plaintiffs’ shares of PDC to be converted to shares of another
entity, such obligations and restrictions stated herein shall apply to such new or different shares.
Primary
Care
In
December 2009, we entered into an agreement with Primary Care Management Services (“Primary Care”) under which Primary
Care would provide services consisting of billing to and collection from various insurance carriers for our products. Primary
Care was to be compensated by a rate equaling two percent of the amounts billed on our behalf. In April 2012, we entered into
a settlement agreement with Primary Care, who by that time had billed in excess of $10 million which it had been unable to collect.
Under the settlement agreement, we agreed to pay Primary Care $92,000, $20,000 of which was payable immediately and the remainder
payable at $2,000 per month over the following 36 months.
On
May 15, 2014 we entered into a new settlement agreement with Primary Care under which we paid them $40,000 in full satisfaction
of all remaining amounts owed them. In connection with this new settlement agreement, we recorded a gain on extinguishment of
debt in the amount of $8,000 during the three and six months ended June 30, 2014.
Forte
Capital
This
obligation was assumed on March 31, 2014 in the amount of $289,398 as a result of the Merger discussed in Note 1. The obligation
arose from a March 2014 agreement with Forte Capital Partners, LLC under which we agreed to repay amounts outstanding under a
14% convertible debenture with a total of 14,351,322 shares of our common stock, issuable in six monthly installments of 2,391,887
shares beginning in March 2014. During the three months ended June 30, 2014, we issued a total of 7,175,661 shares which reduced
this obligation. As of August 19, 2014, we have issued all shares required under the agreement with Forte Capital and no further
amounts are owed.
AATV
As
discussed in Note 5, on May 1, 2014, we finalized a settlement agreement with AATV. Under the finalized agreement, we agreed to
pay AATV $1,100,000 for the following:
| ● | $600,000
for the full repayment of principal and accrued interest on a Profit Sharing Note, $100,000
of which was paid in March 2014 (see Note 4). |
| | |
| ● | $500,000
for the repurchase of 7,504 Series D Preferred shares, representing the amount of AATV’s
original investment (see Note 5). |
Through June 30, 2014, we had repaid $650,000
of our obligation to AATV. In July 2014, we repaid an additional $350,000. As of August 19, 2014, the Company has a remaining
obligation of $100,000.
Other
Commitments and Contingencies
There
are various other pending legal commitments and contingencies involving the Company, principally material breach of contract,
and committed shares with consultants that were never issued. While it is not feasible to predict the outcome of such commitments,
threats, and potential liabilities, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible
loss associated with the resolution of such obligations is not expected to be material to the Company’s financial position,
results of operations or cash flows either individually or in the aggregate. In the opinion of their legal counsel, the Company
has filed cross complaints which should mitigate some Company liability.
Consulting
Agreements – On August 12, 2010, the Company entered into a consulting service agreement with a financial advisor. The
financial advisor assists companies in private placements, recapitalization, and restructuring. The term of the agreement was
for thirty-six months or upon termination by either party. The financial advisor was entitled to $350,000, payable in installments
of which only $250,000 was paid prior to termination, and issue warrants to purchase up to ten percent (10%) of the Company on
a fully-diluted basis at an exercise price of $0.50 per share. As of August 12, 2010, the Company had approximately 7 million
fully diluted shares outstanding. The Company terminated this service agreement in January 2012 without ever issuing the warrants.
As of June 30, 2014, the Company believes that no additional amounts agreed to under the agreement are required as the services
were never provided. In addition, the Company has received no demands for any additional amounts or warrants.
On
April 25, 2011, the Company entered into a consulting service agreement with a law firm. The law firm assists companies in S-1
Registration statement (“S-1”), responses to SEC comments, and FINRA requirements. Either party may terminate the
agreement at any time. In connection, with filing an S-1, the law firm was potentially entitled to 75,000 shares of common stock
and $25,000 upon execution of the agreement and $15,000 upon filing the S-1 The Company has opted to enter the public market by
means unrelated to filing an S-1, thus, the Company intends to terminate the agreement without issuing the potentially committed
shares. As of June 30, 2014, the Company believes that no additional amounts agreed to under the agreement are required as the
services were never provided.
Stock
Issuance to Former Officers – On March 26, 2014, the Company issued 60,000,000 common shares to two former officers
of the Company for cancellation of accrued and unpaid wages and the agreement to purchase the Company’s interest in Pet
Airways, Inc. The sale of Pet Airways, Inc. was to relieve the Company of debts totaling $961,831. As of June 30, 2014, the Company
recognized these liabilities under Liabilities of discontinued operations, on the Condensed Consolidated Balance Sheet, as the
amount is in dispute.
Legal
Proceeding Related to Discontinued Operations
Described
below are material pending legal proceedings (other than ordinary routine litigation incidental to the Company’s business),
material proceedings known to be contemplated by governmental authorities, other proceedings arising under federal, state, or
local environmental laws and regulations (including governmental proceedings involving potential fines, penalties, or other monetary
sanctions in excess of $10,000) and such other pending matters that we may determine to be appropriate. These legal proceedings
were assumed from The PAWS Pet Company and are included in Liabilities of discontinued operations on the June 30, 2014 Condensed
Consolidated Balance Sheet.
On
April 26, 2012, a judgment was entered against our subsidiary, Pet Airways, Inc., in Circuit Court in and for Palm Beach County,
Florida by Sky Way Enterprises, Inc. in the sum of $180,827 for services rendered, damages, including costs, statutory interest
and attorneys’ fees.
On
March 4, 2013, a judgment was entered against our subsidiary, Pet Airways, Inc., in District Court of Douglas County, Nebraska
by Suburban Air Freight in the sum of $87,491 for services rendered, including statutory interest and attorneys’ fees.
On
March 6, 2013, an order was issued a by the labor commissioner of the State of California for our subsidiary, Pet Airways, Inc.,
to pay a former employee Alyce Tognotti wages and penalties in the sum of $17,611 for services rendered, including penalties,
statutory interest and liquidated damages.
On
May 31, 2013, a motion for final judgment was filed against our subsidiary, Pet Airways, Inc., in Circuit Court in and for Broward
County, Florida by AFCO Cargo BWI, LLC in the sum of $31,120 for services rendered, including statutory interest and attorneys’
fees.
Other
than the foregoing, there were no claims, actions, or lawsuits which to our knowledge are pending or threatened that could reasonably
be expected to have a material effect on the results of our operations. The Company is self-insured and has not accrued a reserve
against potential losses from unknown risks and liabilities.
HIPAA
The
Health Insurance Portability and Accountability Act (“HIPAA”) was enacted on August 21, 1996, to assure health insurance
portability, reduce healthcare fraud and abuse, guarantee security and privacy of health information, and enforce standards for
health information. Organizations are required to be in compliance with HIPAA provisions by April 2005. Effective August 2009,
the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) was introduced imposing notification
requirements in the event of certain security breaches relating to protected health information. Organizations are subject to
significant fines and penalties if found not to be compliant with the provisions outlined in the regulations. The Company continues
to be in compliance with HIPAA as of September 30, 2013.
The
Company’s decision to obtain insurance coverage is dependent on market conditions, including cost and availability, existing
at the time such decisions are made. The Company has evaluated its risks and has determined that the cost of obtaining product
liability insurance outweighs the likely benefits of the coverage that is available and, as such, has no insurance for certain
product liabilities effective May 1, 2006.
The
Company believes that there are no compliance issues associated with applicable pharmaceutical laws and regulations that would
have a material adverse effect on the Company.
The
Company is subject from time to time to various claims and lawsuits and governmental investigations arising in the ordinary course
of our business. While the Company’s management cannot predict the outcome of these claims with certainty, the Company’s
management does not believe that the outcome of any of these legal matters will have a material effect on its financial statements.
8.
NET INCOME (LOSS) PER SHARE
Basic
earnings per share are calculated by dividing income available to common stockholders by the weighted-average number of common
shares outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and
dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable
upon conversion of preferred shares, exercise of stock options and warrants (calculated using the treasury stock method). As of
June 30, 2014 there were warrants and options outstanding to purchase 43.4 million shares, with an average exercise price of $0.68.
The preferred stock common share equivalent is calculated using the four and nine tenths percent (4.9%) per shareholder limit
as outlined in the Certificates of Designations. The dilutive common shares equivalents not included in the computation of diluted
earnings per share, because the inclusion would be anti-dilutive are:
| |
June 30, 2014 | |
| |
Common Share Equivalents | |
| |
| |
Convertible Notes | |
| 10,477,094 | |
Preferred Stock | |
| 758,604,924 | |
Options | |
| 367,000 | |
Warrants | |
| 43,044,989 | |
| |
| 812,494,007 | |
If
all dilutive instruments were exercised using the treasury stock method, then the total number of shares outstanding would be
759 million shares. No adjustments were required to reconcile net income as adjusted for
dilutive shares from the net income as presented on the Consolidated Statement of Operations within this report.
The
following table presents the breakdown of the weighted average number of dilutive shares for the six months ended June 30, 2013:
| |
Six Months Ended | |
| |
June 30,
2013 | |
Weighted average number of dilutive shares: | |
| | |
Series D Preferred Stock | |
| 175,728,661 | |
Series B Preferred Stock | |
| - | |
Series C Preferred Stock | |
| - | |
Options | |
| - | |
Warrants | |
| 156,581,297 | |
Total dilutive shares | |
| 332,309,958 | |
9.
SUBSEQUENT EVENTS
In
July 2014, shareholders elected to convert 1,000 Series B preferred shares to 10,000,000 common shares and 325 Series C preferred
shares to 6,500,000 common shares.
As
of July 30, 2014, an additional 21,062 Series D shares have been issued to TPS since June 30, 2014 from the remaining number of
shares reserved as discussed in Note 5.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary
Statements Regarding Forward-Looking Statements
This
Management’s Discussion and Analysis of Financial Condition and Results Of Operation and other parts of this Form 10-Q contain
forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this Form 10-Q are
based on information available to us on the date hereof, and except as required by law, we assume no obligation to update any
such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements
as a result of a number of factors, including those set forth in the current report on the Form 8-K/A as filed with the Securities
and Exchange Commission on July 16, 2014 and other filings with the SEC. The following should be read in conjunction with our
condensed consolidated financial statements contained elsewhere in this report.
Business
Summary
Pharmacy
Development Corporation (“PDC”) was organized on May 31, 2007 as a California Corporation. PDC and its wholly-owned
California Corporation subsidiary Mesa Pharmacy, Inc. (collectively, the “Company”), is a health care company with
one office located in Irvine, California that delivers innovative health solutions through its prescription medicines and consumer
care products. Prior to 2012, the Company operated five retail pharmacies located in Southern California for the primary purpose
of marketing and distributing its compounding products. The Company’s operations consist of the production and sale, by
prescription, of human health pharmaceutical products using therapeutic and preventive agents for pain management. The Company
sells compounding pharmaceutical products primarily via mail order to California worker’s compensation patients.
On
March 31, 2014, the Company entered into an Agreement and Plan of Merger Agreement with Praxsyn Corporation (“Praxsyn”
formerly known as The PAWS Pet Company, Inc.), a publicly traded company (OTCQB:PAWS) whereby Praxsyn would acquire 100% of the
outstanding stock of the Company in for consideration of 500,000 shares of Praxsyn Series D preferred stock. Each share of Series
D preferred stock is convertible into 1,000 shares of Praxsyn common stock. Additionally, the Company’s convertible promissory
notes shall be exchanged for a like Parent convertible promissory note, convertible into shares of Parent Series D Preferred Stock
on the terms herein, into one (1) share of Parent Series D Preferred Stock for each One Hundred Dollars ($100.00) of principal
and interest converted in accordance with the terms of the notes.
Management’s Plan of Operations
We invoice our customers, which are insurance
companies for workers compensation cases, in accordance with the fees permitted according to the State of California fee schedule.
This is our gross billing. Given the nature of our industry and the reimbursement environment in which we operate, we are required
to record our revenues and related accounts receivable from our billings, at their net realizable value. This amount is
often less than the gross billing we are allowed to charge and we have recorded these amounts based on historical collection trends.
In addition, we have had to finance our operations by selling our accounts receivable (recorded at net realizable value) to a
number of factoring companies. The cost of factoring, which we record as interest expense, can be quite high – anywhere
from 70% to 75% of the recorded accounts receivable.
The
two factors discussed above have a material impact on our operating results, but also offer a major opportunity for profit growth
as we move forward. We are currently planning to allocate additional resources to our collections efforts by building out a separate
collection department within the Company or a separate subsidiary of the Company. We believe this will allow us to improve our
collections and thus the net realizable value of our gross billing revenues. In addition we continue to seek more conventional
financing which will allow us to move away from factoring. If we are able to secure this type of financing, we will be able to
dramatically reduce our interest expense. While there is no certainty that we will be able to achieve these goals, Management
is hopeful we will be successful.
Critical
Accounting Policies
The
preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of
revenue and expenses. Critical accounting policies are those that require the application of management’s most difficult,
subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain
and that may change in subsequent periods. In preparing the interim financial statements, the Company utilized available information,
including its past history, industry standards and the current economic environment, among other factors, in forming its estimates
and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other
companies may utilize different estimates, which may impact the comparability of the Company’s results of operations to
other companies in its industry. The Company believes that of its significant accounting policies, the following may involve a
higher degree of judgment and estimation, or are fundamentally important to its business.
There
have been no material changes during the six months period ended June 30, 2014 to the items that the Company disclosed as its
critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of
Operations in its Annual Report on Form 8-K as filed on July 16, 2014, for the year ended December 31, 2013.
Results
of Operations
Comparison
of the Three Months Ended June 30, 2014 and June 30, 2013
Net
Revenue and Cost of Net Revenue
Our
revenues increased from $498,712 to $23,242,709 for the three months ending June 30, 2013 and June 30, 2014, respectively. The
$22,743,997 increase in revenues was primarily attributable to increased marketing and a reformulation of our compounding product
which comprises the primary source of our revenues. Our costs of sales increased from $156,156 (31.3% of revenues) to $975,134
(4.2% of revenues) for the three months ending June 30, 2013 and June 30, 2014. The decrease in cost of sales as a percentage
of revenue from 31.3% to 4.2% was primarily attributable to the reformulation of our compounding product.
General,
Administrative, & Marketing expense
Our
general and administrative expenses increased from $275,179 to $982,224 for the three months ending June 30, 2013 and June 30,
2014. The $707,045 increase in general and administrative expenses was primarily attributable to stock based compensation totaling
$21,317 compared to $0 in 2013, and additional salaries and outside consulting expenses related to increased operations and SEC
reporting requirements. Our selling and marketing expenses increased from $37,910 to $12,696,619 for the three months ending June
30, 2013 and June 30, 2014. The $12,658,709 increase in selling and marketing expenses includes stock based compensation of $4,975,951.
The remaining increase was due to increased qualified prescription referral fees, for which the agreed upon rate increased from
13% to 17.5% from the comparable period.
Interest
expense
Our interest expenses from notes and debentures
increased from $204,753 to $370,183, for the three months ending June 30, 2013 and June 30 2014; the increase of $165,430 was
primarily attributable to additional debt financing and conversions to equity in 2014. Interest from factoring increased from
$484,801 to $9,188,446 for the three months ending June 30, 2013 and June 30, 2014; the $8,703,645 increase in interest expenses
due to factoring was primarily attributable increased revenues and related factoring activity in 2014.
Net
Loss
During
the three months ended June 30, 2014 and 2013, the Company incurred a net loss of $780,924, and $197,164, respectively. The decrease
in net income of $583,760 for the three months ending June 30, 2014 was primarily due to stock-based compensation of $4,997,268
compared to $0 for the comparable prior period.
Comparison
of the Six Months Ended June 30, 2014 and June 30, 2013
Net
Revenue and Cost of Net Revenue
Our
revenues increased from $3,638,285 to $32,462,272 for the six months ending June 30, 2013 and June 30, 2014, respectively. The
$28,823,987 increase in revenues was primarily attributable to increased marketing and a reformulation of our compounding product
which comprises the primary source of our revenues. Our costs of sales increased from $328,811 (9% of revenues) to $1,306,917
(4% of revenues) for the six months ending June 30, 2013 and June 30, 2014. The decrease in cost of sales as a percentage of revenue
from 9% to 4% was primarily attributable to the reformulation of our compounding product.
General,
Administrative, & Marketing expense
Our
general and administrative expenses increased from $674,662 to $1,582,177 for the six months ending June 30, 2013 and June 30,
2014. The $907,515 increase in general and administrative expenses was primarily attributable to stock based compensation totaling
$121,317 compared to $0 in 2013, and additional salaries and outside consulting expenses related to increased operations and SEC
reporting requirements. Our selling and marketing expenses increased from $759,456 to $20,077,336 for the six months ending June
30, 2013 and June 30, 2014. The $19,317,880 increase in selling and marketing expenses includes stock based compensation of $8,779,250.
The
remaining increase was due to increased qualified prescription referral fees, for which the agreed upon rate increased from 13%
to 17.5% from the comparable period.
Interest
expense
Our
interest expenses from notes and debentures increased from $516,765 to $759,160 for the six months ending June 30, 2013 and June
30 2014; the increase of $242,395 was primarily attributable to additional debt financing and conversions to equity in 2014. Interest
from factoring increased from $851,136 to $14,507,535 for the six months ending June 30st, 2013 and June 30, 2014; the $13,656,399
increase in interest expenses due to factoring was primarily attributable increased revenues and related factoring activity in
2014.
Net
Loss
During
the six months ended June 30, 2014 and 2013, the Company incurred a net loss of $12,793,324, and generated net income of $151,574,
respectively. The decrease in net income of $12,944,898 for the period ending June 30, 2014 was primarily due to stock-based compensation
of $8,900,567, losses due to modification of warrants of $7,111,444, and losses on extinguishment of debt of $100,000 related
to a debt-equity conversion. Total expenses related to equity issuances and conversion were $16,112,011 compared to $0 for the
six months ended June 30st, 2014 and June 30, 2013, respectively.
Liquidity
and Capital Resources
We
had cash of $518,550 at June 30, 2014, whereas we had cash of $37,494 at December 31, 2013; the $481,056 increase in cash was
primarily attributable to the acquisition of Praxsyn of $485,012, the remaining difference is attributable to abnormally low cash
balances in the prior period due to the lack of factoring activity in late 2013. The Company received $1,419,023 in cash on January
2, 2014 related to receivables obtained during the 4th quarter of 2013. We had a working capital deficit of $6,991,979 at June
30, 2014, whereas we had a working capital deficit of $5,919,145 at December 31, 2013; the $1,072,834 increase in working capital
deficit was primarily attributable to the $2,185,778 net liabilities in excess of assets obtained in relation to the merger. See
also additional information in the going concern disclosure in Note 2.
Financings
We
do not currently maintain a line of credit or term loan with any commercial bank or other financial institution. We factor all
of our receivables under a non-recourse agreement. We will need to complete additional financing transactions in order to replace
this factoring with in-house billing and collections. Financing transactions, if any, may include the issuance of equity or debt
securities, obtaining credit facilities, or other financing mechanisms. Even if the Company is able to raise the funds required,
it is possible that it could incur unexpected costs and expenses, fail to generate sufficient revenue, or experience unexpected
cash requirements that would force the Company to seek alternative financing. Further, if the Company issues additional equity
or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences
or privileges senior to those of existing holders of the Company’s common stock. If additional financing is not available
or is not available on acceptable terms, the Company may have to continue factoring its receivables.
Non-Cash
Expense Items
During
the six month period ended June 30, 2014, the Company continued to minimize cash usage and seek additional equity financings for
working capital purposes while using equity for the settlement of services rendered in lieu of cash and general corporate purposes.
The Company also issued shares of common stock in lieu of cash for interest payments on debentures. A significant portion of the
equity issuances resulted in non-cash settlements of liabilities that are included in the net loss for the six months period ended
June 30, 2014. Additionally, other transactions and events occurred in which significant non-cash expense arose due to the nature
of those occurrences, as can be further reviewed in our condensed consolidated statement of cash flows.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital
resources that is material to investors.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
Our
management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report pursuant
to Rule 13a-15(b) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of June 30, 2014 our disclosure controls and procedures were not effective to ensure that information we are required
to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms. Our management has identified certain material weaknesses in our internal
control over financial reporting.
Our
management, in consultation with our independent registered public accounting firm, concluded that material weaknesses existed
in the following areas as of June 30, 2014:
(1)
we do not employ full time in-house personnel with the technical knowledge to identify and address some of the reporting issues
surrounding certain complex or non-routine transactions. With material, complex and non-routine transactions, management has and
will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions;
(2)
we have inadequate segregation of duties consistent with the control objectives including but not limited to the disbursement
process, transaction or account changes, account reconciliations and approval and the performance of bank reconciliations;
(3)
we have ineffective controls over the period end financial disclosure and reporting process caused by reliance on third-party
experts and/or consultants and insufficient accounting staff;
(4)
we do not have a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside
directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal
controls, approvals and procedures.
Due
to the material weaknesses that management identified, it was unable to conclude that our disclosure controls and procedures were
effective as of June 30, 2014. The Company has relied on external consultants for a large portion of the recording of complex
transactions and estimates. The Company also hired a controller during the month of May 2014 to further refine their accounting
process.
Changes
in Internal Control over Financial Reporting.
There
have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that occurred during the calendar quarter ended June 30, 2014 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
From
time to time, the Company is involved in legal proceedings, claims, and litigation that occur in connection with its business.
The Company routinely assesses its liabilities and contingencies in connection with these matters based upon the latest available
information and, when necessary, seeks input from its third-party advisors when making these assessments. Consistent with SEC
rules and requirements, described in Note 7 to the financial statements are material pending legal proceedings (other than ordinary
routine litigation incidental to the Company’s business), material proceedings known to be contemplated by governmental
authorities, other proceedings arising under federal, state, or local environmental laws and regulations (including governmental
proceedings involving potential fines, penalties, or other monetary sanctions in excess of $10,000) and such other pending matters
that we may determine to be appropriate. Below is a summary of litigation activity for the six months ended June 30, 2014:
Nokley
Group LLC
In
February 2014 we were served with a complaint from Nokley Group LLC (“Nokley”) for breach of contract under a Fee
and First Right of Refusal Agreement dated May 25, 2012 between our company and Nokley. In the complaint, which was filed in Nevada,
Nokley stated, among other things, that we sold certain of our accounts receivable to factoring organizations without offering
Nokley first right of refusal which they allege was required under the agreement. While we estimate we would have cross-complaints
against Nokley that would significantly mitigate any potential damages, we first filed a motion to dismiss based on improper venue.
On July 31, 2014, our Company and Nokley agreed to dismiss the action without prejudice, and to have each party to bear its own
attorney fees and costs.
The
Company estimates that the potential range of exposure for this matter, if refiled in a proper venue, is $17,000 to $30,000. As
of June 30, 2014, we have accrued the minimum amount of potential exposure under our estimation that a loss would be probable.
MedCapGroup
LLC
In
May 2014 we were served with a complaint from MedCapGroup LLC (“MedCap”) for breach of contract, breach of covenant
of good faith and fair dealing, intentional misrepresentation, fraud in the inducement, and deceptive trade practices under a
November 2012 Healthcare Accounts Receivable Purchase Agreement between our company and MedCap. MedCap alleged in its complaint
that because we sell our accounts receivable based on dates of service, and not by patient, that only the original purchaser of
a patient’s claims controls all payments and settlement negotiations with the insurer. As a result, MedCap alleged
that we had misrepresented the collectability of certain accounts receivable they had purchased from us and that they had therefore
been damaged. While we estimate we have significant defenses against MedCap’s complaint, we first filed a motion to dismiss
based on improper venue. On July 30, 2014 our motion to dismiss was granted.
Item
1A. Risk Factors
Not
applicable because we are a smaller reporting company.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
Applicable.
Item
5. Other Information
None.
information
is compiled and verified for accuracy, and then billed electronically to the insurance carrier.
Item
6. Exhibits
Exhibit
No. |
|
Description |
|
|
|
31.1 |
|
Certification
of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 302, of the Sarbanes-Oxley Act of 2002.* |
|
|
|
32.1 |
|
Certification
of Chief Executive Officer and Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.* |
|
|
|
101.INS |
|
XBRL
Instance Document** |
|
|
|
101.SCH |
|
XBRL
Taxonomy Extension Schema Document** |
|
|
|
101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase Document** |
|
|
|
101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase Document** |
|
|
|
101.LAB |
|
XBRL
Taxonomy Extension Label Linkbase Document** |
|
|
|
101.PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase Document** |
*
Filed herewith
**
In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Quarterly Report
on Form 10-Q shall be deemed “furnished” and not “filed”.
SIGNATURE
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated:
August 19, 2014
|
PRAXSYN
CORPORATION |
|
|
|
/s/
Ed Kurtz |
|
Ed Kurtz |
|
Chief Executive
Officer and Chief Financial Officer |
Exhibit
31.1
SECTION
302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ed Kurtz,
Chief Executive Officer and Chief Financial Officer, certify that:
1. |
I
have reviewed this quarterly report on Form 10-Q of PRAXSYN CORPORATION; |
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
|
|
|
d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions): |
|
a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting,
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal controls over financial reporting. |
Date: August
19, 2014
/s/
Ed Kurtz |
|
Ed Kurtz |
|
Chief Executive
Officer and Chief Financial Officer |
|
Exhibit
32.1
PRAXSYN
CORPORATION
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the quarterly report on Form 10-Q of PRAXSYN CORPORATION (the “Company”) for the period ended June
30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ed Kurtz, the
Chief Executive Officer and Chief Financial Officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, to my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of
operations of the Company.
IN
WITNESS WHEREOF, I have executed this certificate as of this 19th day of August, 2014.
/s/
Ed Kurtz |
|
Ed Kurtz |
|
Chief Executive
Officer and Chief Financial Officer |
|
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