NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the six-months ended June 30, 2019 and 2018
NOTE
1 – ORGANIZATION AND BASIS OF PRESENTATION
Trxade
Group, Inc. (“we”, “our”, “Trxade”, the “Company”) owns 100% of Trxade, Inc.,
Integra Pharma Solutions, LLC, Community Specialty Pharmacy, LLC and Alliance Pharma Solutions, LLC. The merger of Trxade, Inc.
and Trxade Group, Inc. occurred in May 2013. Community Specialty Pharmacy was acquired in October 2018.
Trxade,
Inc. operates a web-based market platform that enables commerce among healthcare buyers and sellers of pharmaceuticals, accessories
and services.
Integra
Pharma Solutions, LLC is a licensed pharmaceutical wholesaler and sells brand, generic and non-drug products.
Community
Specialty Pharmacy, LLC is an accredited independent retail pharmacy with a focus on specialty medications. The company operates
with innovative pharmacy model which offers home delivery services to any patient thereby providing convenience.
Alliance
Pharma Solutions, LLC has developed same day Pharma delivery software – Delivmeds.com and invested in SyncHealth MSO, LLC
a managed services organization during January 2019.
Basis
of Presentation
- The accompanying unaudited interim consolidated financial statements of Trxade Group, Inc. have been prepared
in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and
Exchange Commission and should be read in conjunction with the audited financial statements and notes thereto contained in the
Company’s Form 10K.
In
the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have been reflected herein. The results of operations
for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial
statements that would substantially duplicate the disclosures contained in the audited financial statements for the year ended
December 31, 2018 as reported in the Company’s Annual Report on Form 10K have been omitted.
Equity
Investments
– If the investments are less than 50% owned and more than 20% owned the entities use the equity method
of accounting in accordance with ASC 323-10 – Investments – Equity Method and Joint Ventures.
The share of income (loss) of such entities is recorded as a single amount as share in equity income (loss)
of investments. Dividends, if any, are recorded as a reduction of the investment.
Income
Per Common Share
– Basic net income per common share is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding. Diluted net income per common share is computed similar to basic
net income per common share except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The dilutive
effect of the Company’s options and warrants is computed using the treasury stock method while the dilutive effect of our
convertible notes is computed using the if-converted method.
The
following table sets forth the computation of basic and diluted Income per Share:
|
|
For three months ended June 30,
|
|
|
For six months ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
57,981
|
|
|
$
|
20,513
|
|
|
$
|
183,210
|
|
|
$
|
102,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted EPS - income available to common Shareholders
|
|
|
57,981
|
|
|
$
|
20,513
|
|
|
|
183,210
|
|
|
$
|
102,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS – Weighted average shares
|
|
|
33,726,489
|
|
|
|
31,985,827
|
|
|
|
33,546,329
|
|
|
|
31,985,827
|
|
Dilutive Effect of Warrants, Options and Convertible Debt
|
|
|
2,627,262
|
|
|
|
2,493,579
|
|
|
|
2,807,422
|
|
|
|
2,486,984
|
|
Denominator for diluted EPS – adjusted Weighted average shares and assumed Conversions
|
|
|
36,353,751
|
|
|
|
34,479,406
|
|
|
|
36,353,751
|
|
|
|
34,472,811
|
|
Basic and Diluted income per common share
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
Recent
Accounting Pronouncements
– The Company has implemented all new relevant accounting pronouncements that are in effect
through the date of these financial statements. The pronouncements did not have any material impact on the financial statements
unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have
been issued that might have a material impact on its consolidated financial position or results of operations.
Effective
January 1, 2019, the Company adopted ASU No. 2016-02,
Leases (Topic 842
) (“ASU 2016-02”) using the required
modified retrospective approach. The most significant changes under the new guidance include clarification of the definition of
a lease, and the requirements for lessees to recognize a Right of Use (“ROU”) asset and a lease liability for all
qualifying leases with terms longer than twelve months in the consolidated balance sheet. In addition, under Topic 842, additional
disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty
of cash flows arising from leases. See Footnote #7 below for more detail on the Company’s accounting with respect to leases.
Effective
January 1, 2019, the Company adopted ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which aligns accounting for share-based payments issued
to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes
previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.
The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
NOTE
2 – SHORT-TERM DEBT AND RELATED PARTIES DEBT
Convertible
Promissory Note
In
February 2019, convertible promissory notes issued in 2015 for $181,500 were amended to a conversion price of $0.50 and the principal
and accrued interest total of $211,983 were then converted to 423,966 common shares.
As
of June 30, 2019 and December 31, 2018, short-tern convertible notes payable has a balance of $0 and $181,500 respectively, net
of $0 unamortized debt discount.
Related
Party Convertible Promissory Notes
As
of June 30, 2019, $40,000 in convertible promissory notes were due to Mr. Shilpa Patel, a relative of Mr. Prashant Patel. Simple
interest of 10% is payable at the maturity date of the note, which is August 8, 2019. Prior to maturity the note may be converted
for common stock at a conversion price of $1.50.
As
of June 30, 2019, $100,000 in convertible promissory notes were due to Mr. Nitel Patel, the brother of Mr. Prashant Patel. Simple
interest of 10% is payable at the maturity date of the notes, which is July 7, 2019. Prior to maturity the notes may be converted
for common stock at a conversion price of $0.62. In July 2019, the note was extended to October 15, 2019.
NOTE
3 – LONG TERM DEBT – RELATED PARTIES
In
October 2018 in connection with the acquisition of Community Specialty Pharmacy, LLC a $300,000 promissory note was issued to
Nikul Panchal, accruing interest a simple interest of 10%, interest payable annually, and principal payable at maturity in October
2021.
As
of June 30, 2019, $122,552 and $100,000 in promissory notes was due to Mr. Prashant Patel and Mr. Suren Ajjarapu, respectively.
The notes are due July 1, 2020 and each bear an interest rate of 6%.
NOTE
4 – SHAREHOLDERS’ EQUITY
In
February 2019, convertible promissory notes issued in 2015 for $181,500 were amended to a conversion price of $0.50 and the principal
and accrued interest total of $211,983 were then converted to 423,966 common shares.
In
February 2019, 16,666 of warrants issued in 2014 at $0.01 per share were exercised for 16,666 of common shares. $166 was received
in cash.
In
April and May 2019, 505,000 options were granted with exercise prices ranging from $0.41 to $0.44 and a term of 10 years
from the grant date. The options vest over a period ranging from four to five years.
NOTE
5 - WARRANTS
For
the six-month period ended June 30, 2019, 16,666 warrants were exercised, See NOTE 4 – SHAREHOLDERS’ EQUITY, none
were granted or forfeited.
The
Company’s outstanding and exercisable warrants as of June 30, 2019 are presented below:
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Contractual Life
in Years
|
|
|
Intrinsic Value
|
|
Warrants Outstanding as of December 31, 2018
|
|
|
2,880,141
|
|
|
$
|
0.08
|
|
|
|
3.74
|
|
|
$
|
782,385
|
|
Warrants granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants exercised
|
|
|
(16,666
|
)
|
|
$
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding as of June 30, 2019
|
|
|
2,863,475
|
|
|
$
|
0.08
|
|
|
|
3.08
|
|
|
$
|
1,448,356
|
|
NOTE
6 – OPTIONS
The
Company maintains a stock option plan under which certain employees are awarded option grants based on a combination of performance
and tenure. The stock option plan provides for the grant of up to 2,000,000 shares. All options may be exercised for a period
up to four 1/2 years following the grant date, after which they expire. Options are vested up to 5 years from the grant date.
For
the six-month period ended June 30, 2019, 505,000 options were issued, none were forfeited or expired due to employee resignation.
The
Company uses the Black-Sholes option pricing model to estimate the fair value of stock-based awards on the date of the grant.
The following table summarizes the assumptions used to estimate the fair value of the stock options granted during the quarter
ended June 30, 2019.
|
|
2019
|
|
Expected dividend yield
|
|
|
0%
|
|
Weighted-average expected volatility
|
|
|
209-250%
|
|
Weighted-average risk-free interest rate
|
|
|
2.08-2.55%
|
|
Expected life of options
|
|
|
5-7 years
|
|
Total
compensation cost related to stock options was $99,990 and $88,072 for the six-months ended June 30, 2019 and 2018 respectively.
The
following table represents stock option activity for the six-month period ended June 30, 2019:
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Contractual Life
in Years
|
|
|
Intrinsic
Value
|
|
Options Outstanding as of December 31, 2018
|
|
|
1,732,846
|
|
|
$
|
1.19
|
|
|
|
6.98
|
|
|
$
|
-
|
|
Options Exercisable as of December 31, 2018
|
|
|
1,107,259
|
|
|
$
|
0.96
|
|
|
|
5.91
|
|
|
|
|
|
Options granted
|
|
|
505,000
|
|
|
$
|
0.43
|
|
|
|
9.86
|
|
|
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of June 30, 2019
|
|
|
2,237,846
|
|
|
$
|
0.73
|
|
|
|
7.27
|
|
|
$
|
88,350
|
|
Options Exercisable as of June 30, 2019
|
|
|
1,239,384
|
|
|
$
|
0.91
|
|
|
|
5.77
|
|
|
$
|
8,809
|
|
NOTE
7 – LEASES
The
Company elected the practical expedient under ASU 2018-11 “Leases: Targeted Improvements” which allows the Company
to apply the transition provision for Topic 842 at the Company’s adoption date instead of at the earliest comparative
period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019
but without retrospective application. In addition, the Company elected the optional practical expedient permitted under the transition
guidance which allows the Company to carry forward the historical accounting treatment for existing leases upon adoption. No impact
was recorded to the beginning retained earnings for Topic 842. The Company has two operating leases for corporate offices. The
following table outlines the details:
|
|
Lease 1
|
|
|
Lease 2
|
|
Initial Lease Term
|
|
|
December 2017 to December 2021
|
|
|
|
November 2018 to November 2023
|
|
Renewal Term
|
|
|
January 2021 to December 2024
|
|
|
|
November 2023 to November 2028
|
|
Initial Recognition of Right to use assets at January 1, 2019
|
|
$
|
534,140
|
|
|
$
|
313,301
|
|
Incremental Borrowing Rate
|
|
|
10
|
%
|
|
|
10
|
%
|
The
table below reconciles the fixed component of the undiscounted cash flows for each of the first five years and the total remaining
years to the operating lease liabilities recorded in the Consolidated Balance Sheet as of June 30, 2019
Amounts due within twelve months of June 30
|
|
|
|
2019
|
|
$
|
158,366
|
|
2020
|
|
|
163,102
|
|
2021
|
|
|
167,984
|
|
2022
|
|
|
173,038
|
|
2023
|
|
|
178,237
|
|
Thereafter
|
|
|
305,012
|
|
Total minimum lease payments
|
|
|
1,145,739
|
|
Less: effect of discounting
|
|
|
(334,574
|
)
|
Present value of future minimum lease payments
|
|
|
811,165
|
|
Less: current obligations under leases
|
|
|
80,832
|
|
Long-term lease obligations
|
|
$
|
730,333
|
|
For
the three-months and six-months ended June 30, 2019 amortization of assets were $22,195 and $43,939, respectively.
For
the three-months and six-months ended June 30, 2019, amortization of liabilities were $18,363 and 36,276, respectively.
NOTE
8 – SEGMENT REPORTING
The
Company classifies its business interests into reportable segments which are Trxade, Community and Other.
Six Months Ended June 30, 2019
|
|
Trxade, Inc.
|
|
|
Community Specialty Pharmacy, LLC
|
|
|
Other
|
|
|
Total
|
|
Revenue
|
|
$
|
2,182,668
|
|
|
$
|
892,357
|
|
|
$
|
353,910
|
|
|
$
|
3,428,935
|
|
Segment Assets
|
|
$
|
1,401,724
|
|
|
$
|
224,863
|
|
|
$
|
2,051,478
|
|
|
$
|
3,678,065
|
|
Segment Profit/Loss
|
|
$
|
1,166,543
|
|
|
$
|
(61,628
|
)
|
|
$
|
(921,705
|
)
|
|
$
|
183,210
|
|
The
Company had no reportable segments for six months ended June 30, 2018. See NOTE 9 – BUSINESS COMBINATION
NOTE
9 – BUSINESS COMBINATION
On
October 15, 2018, the Trxade Group, Inc. (“Company”) entered into and consummated the purchase of 100% of the equity
interests of Community Specialty Pharmacy, LLC, a Florida limited liability company, (“CSP”), pursuant to the terms
and conditions of the Membership Interest Purchase Agreement, entered into by and among the Company as the buyer, and CSP, and
Nikul Panchal, the equity owner of CSP (collectively, the “Seller”). The purchase price for the 100% equity interest
in CSP was $300,000 in cash, a promissory note from the Company of $300,000 (see Note 3), and warrants to purchase 405,507 shares
of the Common Stock of the Company which vested at the acquisition date, are exercisable for eight (8) years from the issuance
date at a strike price of $0.01 per share, and subject to exercise restrictions which lapse over three (3) years.
The
Company recorded the acquisition under ASC 805 “Business Combination. All the assets acquired and liabilities assumed are
recorded at their corresponding fair values. The excess of the purchase price over the net assets acquired resulted in goodwill
of $725,973. The following table is a summary of the allocation of the purchase price of $770,291 consisting of $300,000 in cash,
a promissory note from the Company of $300,000, and the fair value of the warrants issued calculated under the Black-Scholes calculation
at $170,291.
|
|
Purchase Price Allocation
|
|
Purchase Price
|
|
$
|
770,291
|
|
Cash
|
|
|
(49,728
|
)
|
Accounts Receivable
|
|
|
(114,899
|
)
|
Inventory
|
|
|
(76,156
|
)
|
Prepaid
|
|
|
(3,000
|
)
|
Accounts Payable
|
|
|
199,312
|
|
Accrued Expenses
|
|
|
153
|
|
Goodwill
|
|
$
|
725,973
|
|
The
accompanying unaudited pro forma statements of operations presents the accounts of Trxade and CSP for the six- months ended June
30, 2018, assuming the acquisition occurred on January 1, 2018.
2018 Summary Statement of Operations
|
|
Trxade
|
|
|
CSP
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,690,611
|
|
|
$
|
1,323,117
|
|
|
$
|
3,013,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
102,782
|
|
|
$
|
64,800
|
|
|
$
|
167,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share – basic
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share - diluted
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
31,985,827
|
|
|
|
|
|
|
|
31,985,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
34,472,811
|
|
|
|
|
|
|
|
34,472,811
|
|
The
accompanying unaudited pro forma statements of operations presents the accounts of Trxade and CSP for the three- months ended
June 30, 2018, assuming the acquisition occurred on January 1, 2018.
2018 Summary Statement of Operations
|
|
Trxade
|
|
|
CSP
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
837,688
|
|
|
$
|
677,900
|
|
|
$
|
1,515,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
20,513
|
|
|
$
|
(12,185
|
)
|
|
$
|
8,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share – basic
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share - diluted
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
31,985,827
|
|
|
|
|
|
|
|
31,985,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
34,479,406
|
|
|
|
|
|
|
|
34,479,406
|
|
NOTE
10 – EQUITY METHOD INVESTMENT
In
January 2019, Trxade Group, Inc. through its wholly owned subsidiary Alliance Pharma Solution, LLC (Alliance) entered into a transaction
to form SyncHealth MSO, LLC (“SyncHealth”). SyncHealth is owned by PanOptic Health, LLC (PanOptic) and Alliance. Alliance
contributed $250,000 for the acquisition of a 49% equity interest in SyncHealth and the option to acquire the remaining ownership
from PanOptic shareholders. Prior to March 31, 2019, $210,000 was paid with the remaining $40,000 paid in April 2019. Pursuant
to the operating agreement, PanOptic owns 70% of SyncHealth and Alliance owns 30%; however, pursuant to the Letter Agreement,
PanOptic will transfer to Alliance an additional 6% of SyncHealth’s membership units on May 1, 2019, an additional 6% on
August 1, 2019 and an additional 7% on November 1, 2019 and at Alliance’s option, the 51% balance on January 31, 2020, upon
transfer of Trxade Group, Inc. stock between 2,273,329 and 14,776,638 based on 2019 Gross Revenue Quotas.
For
the three-months and six-months ended June 30, 2019, the Company recorded its equity share in the losses of SyncHealth amounting
to $58,850 and $87,822, respectively.
NOTE
11 – SUBSEQUENT EVENTS
On July 10, Trxade Group, Inc. entered into a securities Purchase Agreement with a certain accredited investor
with respect to the private placement of 2,000,000 share of its common stock at a purchase price of $0.50 per share, for gross
proceeds of $1,000,000.