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Caution Regarding Forward-Looking Information
Certain statements contained herein, including, without limitation, statements
containing the words "believes", "anticipates", "expects" and words of similar
import, constitute forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this prospectus and investors are
cautioned not to place undue reliance on such forward-looking statements.
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the financial statements and the
related notes thereto included in this document.
Overview
We are ScripsAmerica, Inc., and we were incorporated in the State of Delaware on
May 12, 2008. We are a healthcare services company focused on efficient supply
chain management, from strategic sourcing to delivering niche generic
pharmaceuticals to market. We are primarily engage in sale of generic
pharmaceutical drugs through our main customer, McKesson Corporation
("McKesson"), the largest pharmaceutical distributor in North America, to a wide
range of end users across the health care industry, including physicians'
offices, retail pharmacies, long-term care sites, hospitals, and government and
home care agencies, located throughout the United States. Current therapeutic
categories include pain, arthritis, prenatal, urinary, and hormonal replacement
drugs. We use a single vendor, Marlex Pharmaceuticals, Inc., for our packaging,
distribution, warehouse and customer service needs.
The United States constitutes the largest market in the world for generic
pharmaceuticals, and its aging population represents a key driver for the growth
of the global pharmaceuticals and domestic consumer products
markets. Competitive pressures among U.S. generics providers are continuing to
increase as a result of the number of new market entrants growing faster than
the generics market as a whole, leading to cost competition on the manufacturing
side and squeezed profit margins. On the sales side, generics prices are eroding
due to low-cost suppliers from India and China capturing market share, as well
as the success of health insurers and health maintenance organizations in
negotiating lower reimbursement rates. Finally, large direct purchase customers
such as chain drugstores demand product variety and reliability of supply that
allows them to lower their inventory levels. We compete in the current
environment by providing a low cost system of broad-based marketing, sales, and
distribution capabilities for generics, branded pharmaceuticals, over the
counter medicines, vitamins, and nutraceuticals. A significant percentage of
the Company's sales are to one customer, McKesson. For the year ended December
31, 2011 and the three months ended March 31, 2012, McKesson accounted for 83%
and 75% of our sales, respectively, and Cardinal Health, Curtis Pharmaceuticals
and the United States Veterans Administration ("VA") accounted for 14% and 25%
of our sales, respectively. The Company expects sales during 2012 will be
similarly concentrated, with McKesson accounting for approximately 75% to 85% of
the total sales.
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Oral drug delivery remains the preferred dosing method among patients and
physicians, with more than 80% of all drugs administered in this manner. Rapid
melt technology provides pharmaceutical companies with the opportunity for
product line extensions for a wide variety of drugs, and we believe there is a
significant opportunity as a contract developer of rapidly dissolving drug
formulations for specialty prescription pharmaceuticals. The combined US, EU
and Japanese ODT market has doubled in size over the past four years to surpass
$6.4 billion in 2009, according to Technology Catalysts International's report
on Orally Disintegrating Table and Film Technologies (sixth edition), which is
available for purchase from TCI.
In March 2010, we entered into a product development, manufacturing and supply
agreement with our contract supplier, Marlex Pharmaceuticals Inc., which
develops generic drug products. Under this agreement, we are developing a pain
relief orally disintegrating rapidly dissolving 80 mg and 160 mg tablets for OTC
products. We have committed to investing approximately $935,000 with Marlex
Pharmaceuticals Inc. for the cost of developing these rapidly dissolving
tablets. We completed the development of these rapid melt products in the first
quarter of 2012. The development costs consisted of (i) an advance payment to
Marlex to cover their internal expenses for the development ($200,000), (ii)
acquiring raw materials and developing the ODT formulation ($406,000), (iii)
analyze and validate the ODT formula and test sample batches ($154,000) and (iv)
acquiring a National Drug Code for the ODT formulation and validate the
manufacturing process ($175,000). However, we estimate that we will need
approximately $1.5 million of incremental funding for expenses required to
launch these products. The funding for launching the rapid melt products will
have to come from the sale of equity securities, preferred and/or common stock
securities.
The Drug Efficacy Study Implementation ("DESI") Program was a program begun by
the FDA in the 1960s based on the requirement of the Kefauver-Harris Drug
Control Act that all drugs be efficacious as well as safe. The DESI program was
intended to classify all pre-1962 drugs that were already on the market as
either effective, ineffective, or needing further study. According to the U.S.
Department of Health and Human Services drug efficacy study (
http://www7.nationalacademies.org/archives/drugefficacy.html ) and The Annals of
Pharmacotherapy (Vol.39, No.7, pp.1260-1264),, to date, DESI has evaluated over
3,000 separate products and over 16,000 therapeutic claims. By 1984, final
action had been completed on 3,443 products; of these, 2,225 (64.6%) were found
to be effective, 1,051 (30.5%) were found not effective, and 167 (4.9%) were
pending. Once a DESI drug has been FDA approved and granted market exclusivity,
the applicant will have the right to be the single source producer of the drug
and control market supply and pricing.
We have identified Compound SA 1022, a non-steroidal anti-inflammatory drug, as
our initial drug candidate for the DESI program approval. We estimate that the
Company will need to raise approximately $2.0 million to $3.0 million for
clinical trials to obtain FDA approval of Compound SA 1022 under the DESI
program. This funding is also expected to come from the sale of equity
securities, preferred and/or common stock securities. We met with the FDA on
August 9, 2011 to determine what must be submitted in order to gain approval by
the FDA for Compound SA1022. The FDA discussed with us what kind of clinical
trials and safety data we would need to submit for Compound SA 1022 based on
whether we would use it for acute pain (an OTC use) or chronic pain (a
prescription use). We received a written summary of the meeting from the FDA on
September 9, 2011. We are meeting with our consultants, advisors and legal
staff to draft a response to the FDA meeting minutes. We will be requesting
clarification from the FDA in regard to their requirements to get approval for
Compound SA 1022, in particular the clinical testing requirements/studies,
because there are conflicts in the FDA's position on this issue. On January 13,
2012 we submitted a proposal to the FDA outlining the steps we intended to take
in order to move the approval process forward. As of May 11, 2012 we are
awaiting a response from the FDA.
We also plan for an acquisition of a pharmaceutical packager and distributor and
management estimates we will require approximately $2.5 million of investment
capital which we expect to raise from the sale of equity securities, preferred
and/or common stock securities.
Management believes that, based on anticipated level of sales, the Company can
fund its current operational expenses for the next twelve months but if we are
to achieve our four new objectives for sales and profit growth described above
we will need to raise approximately $9 million to $12 million. Funding is
expected to come from the sale of equity securities, preferred and/or common
stock securities. We may not be able to accomplish our four objectives and
obtain the necessary financing within the next twelve months.
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Description of Revenues
ScripsAmerica offers fulfillment of prescription and over the counter (OTC)
orders. To fulfill purchase orders from customers, ScripsAmerica processes
orders to the end user's desired specifications. Capabilities range from unit of
use packaging for in-patient nursing homes and hospitals to bulk packaging for
government and international organizations.
The Company's revenue is generated from the purchases of product from its
suppliers and shipments of the completed product per the end users'
specifications to distribution centers. The Company recognizes revenues in
accordance with the guidance in the Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 104. Accordingly, revenue is recognized when
product is shipped from our contract packager (Marlex Pharmaceuticals Inc.) to
our customers' warehouses, mainly McKesson and is adjusted for any charge backs
from our customer which may include inventory credits, discounts or volume
incentives. These charge backs costs are received monthly from our customers and
the sales revenue is reduced accordingly. Any product returns or non
-confirmation of receipt of product is included in the customers' monthly charge
back charge.
Purchase orders from our customers generate our shipments. These purchase orders
are the persuasive evidence that an arrangement exists. The pricing has also
been agreed upon and determined via the customer purchase orders and the credit
worthiness of our customer assures that collectability is reasonable.
Description of Expenses
Our expenses include the following: (a) Costs of Goods sold (the Company
purchases all its product form suppliers at various contracted prices and does
not own or maintain any inventory. Upon shipment of product the Company is
charged the contracted price. The Company may finance the purchases of product
sold based on confirmed purchase orders via a revolving finance agreement); (b)
Costs of services, which consists primarily of salaries and contracted
professional fees for various consultants used in management for the Company;
(c) Marketing costs associated with contracts and selling product; (d) General
administrative costs, which consists of overhead expenses, such as travel,
telecommunications and office expenses; (e) Interest expenses mainly related to
our factoring and facility agreement and convertible debt; and (f) Research and
development cost associated with the development of new product delivery forms.
Results of Operations
Results for the three month period ended March 31, 2012 versus the three month
period ended March 31, 2011
2012 2011 $ Change
Product sales - net $ 996,800 100% $ 1,641,200 100% $ (644,400 )
Cost of Goods Sold 828,000 83% 1,175,400 72% (347,400 )
Gross Profit 168,800 17% 465,800 28% (297,000 )
Operating Costs and Expenses:
General and Administrative 198,500 20% 98,500 6% 100,000
Research and Development 10,000 1% 283,900 17% (273,900 )
Total Operating expenses 208,500 21% 382,400 23% (173,900 )
Total Other Income / (expenses) (38,200 ) -4% (68,900 ) -4% 30,700
Income (Loss) before taxes (77,900 ) -13% 14,500 6% (92,400 )
Tax Expense (benefit) (38,800 ) -4% 2,500 0% (41,300 )
Net (Loss) Income $ (59,100 ) -6% $ 12,000 1% $ (71,100 )
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The majority of the Company's sales revenue is generated from the sales of
generic pharmaceutical prescription orders. For the three months ended March 31,
2012 the Company generated net product sales of approximately $996,800 as
compared to net product sales of approximately $1,641,200 for the three month
period ended March 31, 2011, a decrease of approximately $644,400, or 39.3%. The
decline in sales versus the same three month period a year ago was mainly a
result of the completion of a supply agreement with the VA at the end of
2011. The VA delayed the renewing a new supply contract which impacted first
quarter sales in 2012. The Company expects a new supply contract will be
executed by end of the second quarter 2012 and sales will return to our expected
levels.
For the three months ended March 31, 2012, McKesson accounted for 85% of our net
product sales (100% for net product sales in 2011) and Cardinal Health, and
Curtis Pharmaceuticals accounted for 15% of our net product sales.
Product Sales: The following table sets forth selected statement of operations
data as a percentage of gross sales for the three month period ended March 31,
2012 and 2011.
Products sold 2012 % to total 2011 % to total
Prescription drug products $ 688,100 61% $ 1,427,200 85%
OTC & non prescription products 440,000 39% 251,00 15%
Gross Sales 1,128,000 100% 1,679,100 100%
Discounts / Charge backs (131,300 ) 13% (37,900 ) 2%
Net Sales $ 996,800 $ 1,641,200
Gross Profit: Gross profit for the three month period ended March 31, 2012 was
approximately $168,800, which was 17% of our net sales. This was a decline of
approximately $297,000 from the same three month period in 2011 and was mainly
due to the sales decline of approximately $644,400 from the same three month
period a year ago. The gross margin percentage also declined 11% mainly due to
product mix changes that stemmed from our sales in OTC non-prescription
products, which rose as a percentage of our total sales.
Operating Expenses
General and Administrative. For the three month period ended March 31, 2012,
general and administrative expenses ("G&A") increased approximately $100,000 to
approximately $198,500 as compared to approximately $98,500 for the same three
month period in 2011. The significant increase in G&A expenses was mainly a
result of an increase in (a) salaries and wages of approximately $25,000 and (b)
costs associated with our marketing efforts to promote the Company within the
industry sector of approximately $52,000. Professional fees increased
approximately $11,000, which consist mainly of legal and accounting fees, and
various other office type expenses made up the balance of approximately $12,000
increases for general and administrative expenses.
Research and Development. The Company's expenditures for research and
development cost declined approximately $274,000, for the three month period
ended March 31, 2012 compared to the same period in 2011. The decline in our
research and development costs was mainly attributed to the completion at the
end of 2011 of some our on-going research related to new product
development. Our research and development will continue in the second half of
2012.
15
Total Other Income and Expenses. Other income/expenses for the three month
period ended March 31, 2012 decreased approximately $30,700 from approximately
$68,900 in the same three months in 2011 to approximately $38,200 for the three
month period ended March 31, 2012. This decrease is mainly due to interest
expense associated with other debt declined approximately $30,700 because the
Company no longer has any significant reliance on factoring our accounts
receivable which carried a high interest rate. The Company obtained a line of
credit with a bank that carries a lower interest rate. The Company incurred no
interest expense associated with our factoring fees for the three month period
ended March 31, 2012 versus incurring approximately $30,480 for the same three
month period in 2011. Interest expense associated the our line of credit was
only $368 for our first quarter 2012. Our interest expense on our convertible
notes payable was basically flat versus the same three month period except for
the amortization of the debt discount associated with the conversion of a
$250,000 note mention above.
Income taxes benefit. Total income taxes benefit for the three months ended
March 31, 2012 was approximately $38,800 as compared to a tax expense was
approximately $2,500 for the three months ended March 31, 2011, an increase of
the tax benefit approximately $41,300, versus the same three month period a year
ago. This tax benefit is a result of a net operating loss of approximately
$119,900 for the three months ended March 31, 2012.
Net (Loss) Income Applicable to Common Shares. The Company recorded a loss of
approximately $39,100 for the three month period ended March 31, 2012, as
compared to a net income of approximately $12,000 for the same three month
period a year ago, a decrease of approximately $51,100. This decline in net
income is mainly due to a significant decrease in net sales of approximately
$644,400 resulting in a decline in gross profit of approximately $297,000 over
the same three month period in 2011 and the amortization expense of
approximately $53,200 associated with the early conversion of a $250,000 note
payable. Offsetting the decline in the gross profit were decreases in research
and development cost of approximately $273,900 and a decline in interest expense
of approximately $30,700. The Company had an increase in general and
administrative expense of approximately $100,000. The Company did incur
approximately $11,200 of non-cash expense for the issuance of stock for services
during the three month period ended March 31, 2012. The income tax benefit
increased approximately $41,300 compared to the same three month period in 2011.
Earnings per common share were $0.00 for basic and diluted for the both three
month period ended March 31, 2012, and 2011.
Liquidity and Capital Resources
Summary
At March 31, 2012, the Company had total current assets of approximately
$1,812,000 and total current liabilities of approximately $70,100 resulting in
working capital of approximately $1.7 million. The Company's current assets
consisted of approximately $87,000 in cash and cash equivalents, approximately
$296,000 in receivables due from factor, approximately $1,285,000 due from our
packaging / supplier and approximately $125,000 in prepaid expenses and deferred
taxes. Current liabilities at March 31, 2012 consist primarily of accounts
payable and accrued expenses and dividends payable in the amount of
approximately $70,000.
For the three months ended March 31, 2012, we mainly used funds from operations
to support our operations and payoff some of our debt. We were able to convert
$250,000 of debt into equity, but we did not raise any significant cash via
financing activities.
16
During the fiscal years 2011 and 2010, we met our liquidity needs primarily from
financing activities. The Company raised approximately $1.5 million in cash via
financing activity by: 1) selling preferred stock, raising approximately $1.0
million and 2) borrowing approximately $0.6 million through the sale of
convertible notes. The Company loaned a significant portion the cash raise from
financing activity, approximately $1.1 million, to our packager / supplier in
order to assure supply and shipping activities would not be interrupted. The
balance of funds were used to support a new product development and cover
operational costs.
The following table summarizes our cash flows from operating investing and
financing activities for the past three years:
Three months Fiscal year
2012 Fiscal year 2011 2010
Total cash provided by (used in):
Operating activities (180,000 ) (106,000 ) (186,000 )
Investing activities (230,000 ) (1,050,,000 ) (4,000 )
Financing activities 30,000 1,452,000 362,000
Increase (decrease) in cash and cash
equivalents (380,000 ) 296,000 172,000
Management believes that, based on the anticipated level of sales, estimated to
be approximately $6.5 to $8.0 million for 2012, and no significant increase in
operational expense as compared to the 2011 fiscal year spending of
approximately $1.6 million, the Company can fund its current operational
expenses for fiscal year 2012. Our gross profit margin is expected to continue
to be in the range of approximately 25% and our outlays of cash for general and
administrative costs are expected to be in the range of 5% to 7% of net sales.
Current Research and Development costs are almost complete and any incremental
spending in the R & D area will be funded from additional funds raised via
equity instruments, as described below. To the extent that any excess cash is
generated from operations, it has been, and will continue to be, used for
payment of our debt obligations. The Company negotiated an extension to April
30, 2013 of all debt due to mature in 2012. Additionally management negotiated
the conversion of $250,000 of long term notes into 2,000,000 shares of common
stock. However, should the sales decline significantly, profits will decline and
additional funding will be required and the Company can provide no guarantee
that the funding will be realized.
Management plans to pursue sales and profit growth through (a) expansion of its
distribution network (b) development of new products (i.e. rapidly dissolving
drug formulation pain relief products scheduled to ship in the third quarter of
2012) (c) an acquisition of a pharmaceutical packager /supplier and (d)
acquisition of a pharmaceutical manufacturer. These future plans will be
dependent upon securing additional sources of liquidity.
In March 2010, we entered into a product development, packaging and supply
agreement with our current packaging supplier, Marlex Pharmaceuticals Inc.,
which develops and packages generic drug products. Under this agreement, we are
developing a pain relief orally disintegrating rapidly dissolving 80 mg and 160
mg tablets for a OTC product. The Company has committed invested $935,000 with
Marlex Pharmaceuticals Inc. for the cost of developing these rapidly dissolving
tablets. The Company completed the development of these rapid melt products in
the first quarter of 2012. The development costs consisted of (i) an advance
payment to Marlex to cover their internal expenses for the development
($200,000), (ii) acquiring raw materials and developing the ODT formulation
($406,000), (iii) analyze and validate the ODT formula and test sample batches
($154,000) and (iv) acquiring a National Drug Code for the ODT formulation and
validate the manufacturing process ($175,000). However, the Company estimates
that it will need approximately $1.5 million of incremental funding for expenses
required to launch these products. The funding for launching the rapid melt
products will have to come from the sale of equity securities.
We are in the process of selecting our initial drug candidate for the DESI
program approval. We estimate that the Company will need to raise approximately
$2.0 million to $3.0 million for clinical trials to obtain FDA approval of our
initial drug candidate under the DESI program. This funding is also expected to
come from the sale of equity securities, preferred and/or common stock
securities.
17
The Company also plans for an acquisition of a pharmaceutical packager and
distributor and management estimates it will require approximately $2.5 million
of investment capital which the Company expects to raise from the sale of equity
securities, preferred and/or common stock securities.
To reduce costs from manufacturers, thus improving our gross profit, the Company
plans include the acquisition of a pharmaceutical manufacturer which management
estimates it will require approximately $7.0 million of investment capital,
which the Company expects to raise form the sale of equity securities, preferred
and /or common stock securities.
If the Company is to achieve its four new objectives for sales and profit growth
described above the Company will need to raise approximately $9 million to $12
million. The Company does not expect to have any excess cash from operations to
adequately fund these expansion programs and current sales growth and
operational profits will not be nearly enough to support these expansion
programs. So funding is expected to come from the sale of equity securities,
preferred and/or common stock securities.
In October 2011 the Company received $250,000 for a promissory convertible note
payable. The proceeds were used to fund the product development for pain relief
disintegrating rapidly dissolving 80mg and 160mg tablets. This note was
converted into 2,000,000 shares of the Company's common stock on March 12, 2012
at $0.125 per share. The Company recorded an expense of $53,186 at the time of
the conversion for the debt discount associated with the original issuance of
this converted note. The holders of this converted note are entitled to a
royalty of 4% on all sales of a pain relief orally disintegrating rapidly
dissolving 80mg and 160mg tablets from January 1, 2012 on until/unless the
product line of these rapidly dissolving tables are sold to a third party. A
royalty liability also associated with this note of $53,186 remains on the
balance sheet until the Company incurs royalty expense of $53,186. The Company
expects to start shipments of these products sometime in our fiscal third
quarter 2012 that is when royalty payments are schedule to begin.
In October 2011, the Company was approved for a $70,000 line of credit from
Wells Fargo Bank. The line of credit has an interest rate of prime plus 1%
through June 30, 2012 and prime plus 6.25% annually after June 30, 2012. This
credit line will allow the Company to fund basic operation and also reduce any
reliance on factoring the Company's receivable, which will reduce possible
future interest expense.
On May 1, 2012, the Company received $50,000 in cash for one convertible
promissory note payable from a related party. The note provides for interest
only payments of 1%, payable quarterly in cash, or common stock of the Company
valued at $0.25 per share, at the option of the lender. There is no required
principal payment on the note until maturity, which is November 1, 2015. The
principal portion of the notes can be converted, at the option of the holder,
into common stock at any time during the term of the loan at the rate of $.25
per share. The note can be extended by mutual consent of the lender and the
Company. In addition, the Company shall pay to the lender a royalty of 0.9% on
the first $25 million of sales of a generic prescription drug under distribution
contracts with Federal government agencies. Payments for royalty will be paid
quarterly commencing December 31, 2012. Collateral for this loan included
200,000 shares of the Company's common stock.
On May 7, 2012, the Company received $320,000 in cash for one convertible
promissory note payable. The note provides for interest only payments of 2%,
payable monthly until March 14, 2013 and 1% monthly thereafter, in cash, or
common stock of the Company valued at $0.25 per share, at the option of the
lender. There is no required principal payment on the note until maturity, which
is November 7, 2013. The principal portion of the notes can be converted, at the
option of the holder, into common stock at any time during the term of the loan
at the rate of $0.25 per share. The note can be extended by mutual consent of
the lender and the Company. In addition, the Company shall pay to the lender a
royalty ranging from 2.6% to 3.5% on the first $25 million of sales of a generic
prescription drug under distribution contracts with Federal government
agencies. Payments for royalty will be paid quarterly commencing December 31,
2012. Collateral for this loan also included 1,400,000 shares of the Company's
common stock.
These funding efforts will proceed unabated but the Company can provide no
guarantee that the funding will be realized.
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Operating Activities
Net cash used by operating activities was approximately $180,000 for the three
month period ended March 31, 2012, as compared to cash generated by opening
activities of approximately $141,000 for the three month period ended March 31,
2011, a decrease in cash generated by operations of approximately $321,000. This
decrease in cash generated by operations for the three month period ended March
31, 2012 as compared to the same three month period in 2011 is mainly a result
of a significant decline in our net sales of approximately $644,400, resulting
in the gross profit decline of approximately $297,000. As a result, cash
generated from operations decreased approximately $67,000 for the three month
period ended March 31, 2012 as compared to cash generated from operations for
the same period in 2011 of approximately $27,000, a decrease of approximately
$94,000. The other declines in cash generated from operations are a result of
the following: (i) prepaid expense increased approximately $15,000 for the three
month period ended 2012 as compared to a reduction in prepared expenses during
the same period in 2011 of approximately $155,000, for an increase of
approximately $170,000; (ii) accounts receivable also increased approximately
$92,000 for the fiscal first quarter 2012 as compared an increase of
approximately $40,000 for the same period in 2011, for a decline of
approximately $52,000; and (iii) accounts payable declined approximately $7,000
for the three month period ended March 31, 2012, as compared to a decline of
approximately $1,000 versus the prior year for an increase of approximately
$6,000.
Investing Activities
For the three month period ended March 31, 2012, the Company used approximately
$232,000 for the issuance of a note receivable to our contract / packager
supplier to help support there operational costs and for the three month period
ended March 31, 2011 there was no cash used in investing activities.
Financing Activities
Net cash provided by financing activities was approximately $30,000 for three
month period ended March 31, 2012 compared to approximately $220,000 for the
same three month period in 2011, a decline of approximately $190,000. The
decrease in cash provided by financing activities was mainly due to: (a) the
Company paying down the balance on two convertible notes payable in the amount
of $170,600, (b) the Company receiving the cash balance of $170,800 for
subscription receivable, and (c) the Company selling shares of common stock in
the amount of $30,000. In three month period ended March 31, 2011, the Company
raised $220,000 from the issuance of convertible notes payable, of which $20,000
was from a related party.
The following is a listing of our current financing.
On May 1, 2012, the Company received $50,000 in cash for one convertible
promissory note payable from a related party. The note provides for interest
only payments of 1%, payable quarterly in cash, or common stock of the Company
at $0.25 per share, at the option of the lender. There is no required principal
payment on the note until maturity which is November 1, 2015. The principal
portion of the notes can be converted, at the option of the holder, into common
stock at any time during the term of the loan at the rate of $0.25 per
share. The note can be extended by mutual consent of the lender and the
Company. In addition, the Company shall pay to the lender a royalty of 0.9% on
the first $25 million of sales of a generic prescription drug under distribution
contracts with Federal government agencies. Payments for royalty will be paid
quarterly commencing December 31, 2012. Collateral for this loan included
200,000 shares of the Company's common stock.
On May 7, 2012, the Company received $320,000 in cash for one convertible
promissory note payable. The note provides for interest only payments of 2%,
payable monthly until March 14, 2013 and 1% monthly thereafter, in cash, or
common stock of the Company at $0.25 per share, at the option of the lender.
There is no required principal payment on the note until maturity which is
November 7, 2013. The principal portion of the notes can be converted, at the
option of the holder, into common stock at any time during the term of the loan
at the rate of $0.25 per share. The note can be extended by mutual consent of
the lender and the Company. In addition, the Company shall pay to the lender a
royalty ranging from 2.6% to 3.5% on the first $25 million of sales of a generic
prescription drug under distribution contracts with Federal government
agencies. Payments for royalty will be paid quarterly commencing December 31,
2012. Collateral for this loan included 1,400,000 shares of the Company's common
stock.
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On March 12, 2012 the Company prepaid the sum of $85,300 to a holder of a
$100,000 convertible note payable, leaving a balance of $14,700. By mutual
consent the maturity date was also extend from November 23, 2012 to April 30,
2013 and the interest rate was decreased from 2% per month to 1% per
month. $85,000 of this note was classified in the balance sheet as current in
the December 31, 2011 balance.
On March 12, 2012 the Company prepaid the sum of $85,300 to a holder of a
$200,000 convertible note payable, leaving a balance of $114,700. By mutual
consent the maturity date was also extend from November 23, 2012 to April 30,
2013 and the interest rate was decreased from 2% per month to 1% per
month. $85,000 of this note was classified in the balance sheet as current in
the December 31, 2011 balance.
On March 12, 2012 the holder of the two other convertible notes, totaling
$300,000, agreed to extend the maturity dates of these notes to April 30, 2013
and also agreed to reduce the interest rate from 2% per month to 1% per month.
The principal portion of these convertible notes can be converted, at the option
of the holder, into common stock at any time at the rate of $0.25 per share.
On March 12, 2012, the holders of a long-term convertible note in the amount of
$250,000 elected to convert the note into 2,000,000 shares of the Company's
common stock. At the time of conversion the Company changed the conversion price
from $0.25 per share to $0.125 per share of common stock, resulting in an
additional 1,000,000 shares being issued than was provided under the original
loan agreement. At the time of the conversion the fair value of the Company's
stock was below the revised $0.125 conversion price. Consequently the Company
did not have to record any extra expense for this beneficial conversion
feature. This reduction in the conversion price was not offered on any other
outstanding convertible notes payable issued by the Company.
During the fiscal year 2011, the Company received cash and issued convertible
promissory notes payable as follows: (a) two $100,000 promissory notes payable,
aggregating $200,000, with a maturity date of February 14, 2012, (b) one
$200,000 promissory note with a maturity date of April 11, 2012 and (c) one
$14,000 promissory note with a maturity date of February 14, 2012, which was
subsequently paid in full in June 2011. The funds from these notes were used
exclusively for the Company's purchase orders. All these notes provide for
interest only payments of 2%, payable monthly in cash, or common stock of the
Company at $0.25 per share, at the option of the lender. There is no required
principal payment on the note until maturity. The principal portion of these
notes can be converted, at the option of the holders, into common stock at any
time during the one year term at the rate of $0.25 per share. All the notes can
be extended by mutual consent of the holder and the Company. In March 2012 the
Company prepaid the sum of $85,000 to a holder of a $200,000 convertible note
payable, leaving a balance of $115,000. The maturity date of the balance of this
note was extended to April 11, 2013.
In October 2011 the company received $250,000 for a promissory convertible note
payable. The proceeds will be used to fund the product development for pain
relief disintegrating rapidly dissolving 80mg and 160mg tablets. The notes
provides for interest only payments of 1%, payable monthly in cash or common
stock of the Company at $0.25 per share, at the option of the lender which was
later changed to $0.125 per share when converted on March 12, 2012. This note
was converted into 2,000,000 shares of the Company's common stock on March 12,
2012. In addition, the Company shall pay to the lender a royalty of 4% on all
sales of a pain relief orally disintegrating rapidly dissolving 80mg and 160mg
tablets from January 1, 2012 on until/unless the product line of these rapidly
dissolving tables are sold to a third party. Payments are schedule to begin
quarterly after September 30, 2012.
During fiscal year 2010, the Company issued three one year $100,000 promissory
notes payable, aggregating $300,000. In June of 2011, the Company paid in full
$100,000 for one of the three notes that were issued in 2010. In November 2011
the two remaining $100,000 notes were extended for one year by mutual consent,
their new maturity dates are November 23, 2012 and January 4, 2013. The terms of
the monthly interest rate was reduced from 2% to 1% payable monthly in cash or
common stock of the Company at $0.25 per share, at the option of the lender. The
proceeds from these notes were used exclusively for the Company's purchase
orders. These original notes provided for interest only payments of 2%, payable
monthly in cash, or common stock of the Company at $0.25 per share, at the
option of the lender. There is no required principal payment on the notes until
maturity. The principal portion of the notes can be converted, at the option of
the holders, into common stock at any time during the one year term at the rate
of $0.25 per share. The notes can be extended by mutual consent of the lender
and the Company. In March 2012, the Company prepaid the sum of $85,000 to a
holder of a $100,000 convertible note payable, leaving a balance of $15,000. The
maturity date of the balance of this note was also extended until April 30,
2013.
20
Interest expense associated with these notes for the years ended December 31,
2011 and 2010, was $131,715 and $7,494, respectively. Additionally, the Company
issued to the note holder a total of 168,080 shares of common stock, 100,000
shares in 2011 and 68,080 shares in 2010. These shares of common stock were
valued at $0.25 per share and are being amortized over the life of the
notes. Total value assigned to these shares was $42,020 and $25,000 for the 2011
shares, respectively, and $17,020 for the 2010 shares, of which $37,537 has been
amortized as interest expense in fiscal year 2011 and $2,400 was expensed in
fiscal year 2010. The unamortized discount on these notes as of December 31,
2011 and 2010 was $2,083 and $14,620, respectively.
On April 1, 2011 the Company issued 2,990,252 shares of convertible preferred
stock ("Series A Preferred stock") for $1,043,000 to one investor (The net cash
received was $912,369, $130,631 was incurred for legal fees and other fees which
was a charge to additional paid in capital). The Series A Preferred stock has
the following rights, preferences, powers, privileges, and restrictions: (a) 8%
dividend (appropriately adjusted to reflect any stock splits); the dividends
shall accrue and be paid on March 31, June 30, September 30 and December 31.
The Company has reviewed the rights and privileges of the convertible preferred
stock and determined the holders have a liquidation preference which requires
the company to redeem the preferred shares at the original issuance price as a
result of either an voluntary or involuntary liquidation event, as defined. The
Company has determined this preference meets the requirement that the potential
redemption is outside of the control of the Company. As a result, the
convertible preferred stock has to be recorded outside of permanent equity. The
$1,043,000 invested in such Series A Preferred Stock was not recorded in the
Shareholders' Equity section of our balance sheet, but rather is shown as a
liability per the accounting regulations. Consequently, for the year ended
December 31, 2011, we had a stockholders' deficit of $385,270 (rather than
stockholders' equity of $1,033,939 if not for accounting regulation this
investment would have been recorded in the Shareholders' Equity section of the
balance sheet). Because we also had a loss for 2011 and we have a retained
deficit on our balance, under Section 174 of the Delaware General Corporation
Law our directors cannot declare a dividend without incurring personal
liability. Unless we have a profit in 2012, our board of directors will not be
able to declare a dividend nor will we be able to pay the dividend owed to the
Series A Preferred Stockholder which dividends will accrue on our balance
sheet. We will not be able to declare any dividends to our common stockholders
until the accrued dividends owed to the Series A Preferred Stockholder have been
paid. (b) preferential payments of the assets available for distribution to its
stockholders by reason of their ownership in an amount equal to the Series A
Preferred stock Original Issue price ($.1744). (c) voting rights - one vote for
the number equal to the number of whole shares of common stock and shall be
entitled to elect one director of the Corporation. (d) rights to Convert - Each
share of Series A Preferred stock shall be convertible, at the option of the
holder at any time and from time to time without the payment of additional
consideration by the holder into such number of fully paid and non-assessable
shares of common stock as determined by dividing the Original Issue price by the
Conversion price in effect at the time of the conversion. The conversion price
is initially equal to $.1744 and can be adjusted any time if the Company issue
non-exempted common shares at a price below $.1744. (e) the owner of the Series
A Preferred stock can waive its right to adjust the conversion price at his
choosing. (f) defined, non-exempt issuances are all issuances except those
issued to employees, directors or consultants or advisors if the issuance is
approved by the Board. During the current quarter, non - exempt sales of common
stock and conversions of debt into common stock occurred at prices below
$0.1744. The Series A Preferred Stock holder has waived his rights to adjust his
conversion price regarding these transactions and, accordingly, no adjustment is
required.
Commitments and Concentrations
In March 2010, the Company signed a "Product, Manufacturing and Supply
Agreement" with a contract packager and labeler for orally disintegrating
tablets. The total value of this contract is $935,000. The Company has paid a
total of $935,000, of which $200,000 is considered a stand still fee that has
been reflected as a deposit on the balance sheet as of March 31, 2012 and
December 30, 2011. The project was completed during the current quarter leaving
a balance of $190,778 at March 31, 2012 and December 31, 2011 will be used for
new product development projects in 2012. Upon the commencement of product
shipped, a 7% royalty on the gross profit related to the orally disintegrating
tablet sales will be due on a quarterly basis. The Company anticipates launching
this orally disintegrating tablet in the third fiscal quarter of 2012. The
$200,000 deposit will be applied towards this royalty payment.
21
The holders of a $250,000 convertible note payable which was converted into
2,000,000 shares of our common stock are still entitled to a 4% royalty for upon
the commencement of the shipment of a new Acetaminophen product developed by the
Company for a pain relief orally disintegrating rapidly dissolving 80mg and
160mg tablets, per a non-current convertible notes payable agreement. All sales
of the rapidly dissolving 80mg and 160mg tablets will be subject to this 4%
royalty beginning January 1, 2012, and the Company expects the royalty payments
to begin after the third quarter of 2012. The Company anticipates the launch of
these rapidly dissolving tablets sometime in the third quarter of 2012. The
royalty payments to the note holders have no minimum guarantee amounts and
royalty payments will end only if and when the product line of Acetaminophen
rapidly dissolving 80mg and 160mg tablets are sold to a third party.
The holder of a $50,000 convertible note payable issued by the Company on May 1,
2012 to a related party is entitled to royalty payments as follows: The Company
shall pay to the lender a royalty of 0.9% on the first $25 million of sales of a
generic prescription drug under distribution contracts with Federal government
agencies. Payments for royalty will be paid quarterly commencing December 31,
2012. Collateral for this loan included 200,000 shares of the Company's common
stock.
The holders of a $320,000 convertible note payable issued by the Company on May
7, 2012 is entitled to royalty payments as follows: The Company shall pay to
the lender a royalty ranging from 2.6% to 3.5% on the first $25 million of sales
of a generic prescription drug under distribution contracts with Federal
government agencies. Payments for royalty will be paid quarterly commencing
December 31, 2012. Collateral for this loan included 1,400,000 shares of the
Company's common stock
The Company purchased 100% of its package product from one supplier for the
three month period ended March 31, 2012 and during the years ended December 31,
2011 and 2010. A disruption in the availability of package product from this
supplier could cause a possible loss of sales, which could affect operating
results adversely.
The Company derived approximately $850,400, or 85%, and approximately
$1,641,000, or 100%, of its revenue from one customer during the three months
ended March 31, 2012 and 2011, respectively.
As of March 31, 2012, one customer accounted for approximately $270,000, or 91%
of the Company's accounts receivable. As of December 31, 2011, one customer
accounted for approximately $204,640, or 100% of the Company's accounts
receivable.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our financial statements, we believe the following critical accounting
policies involve the most complex difficult and subjective estimates and
judgments:
22
Revenue Recognition -Revenue is recognized when product is shipped from our
contract packager (Marlex Pharmaceuticals Inc.) to our customers' warehouses,
mainly McKesson, and is adjusted for any charge backs received from our
customers which include inventory credits, discounts or volume incentives. These
charge back costs are received monthly from our customers' and the sales revenue
for the corresponding period is reduced accordingly.
Purchase orders from our customer generate our shipments, provide persuasive
evidence that an arrangement exists and that the pricing is determinable. The
credit worthiness of our customer assures that collectability is reasonable
assured.
Research and development- Expenditures for research and development associated
with contract research and development provided by third parties, are expensed
as operating expenses as incurred.
Accounts receivable -Accounts receivable are stated at estimated net realizable
value and net of accounts receivable sold subject to charge-back. Management
provides for uncollectible amounts through a charge to earnings and a credit to
an allowance for doubtful accounts based on its assessment of the current status
of individual accounts and historical collection information. Balances that are
deemed uncollectible after management has used reasonable collection efforts are
written off through a charge to the allowance and a credit to accounts
receivable. The Company has entered into an accounts receivable factoring
facility agreement.
Stock based compensation - The Company adopted FASB ASC No. 718 " Share -Based
Payment," requiring the expense recognition of the fair value of all share-based
payments issued to employees. Stock grants to employees were valued using the
fair value to the stock as determined by the board of directors since our stock
is not publicly traded and the volume is immaterial. As of September 30, 2011
the Company has not issued any employee stock options that would require
calculating the fair value using a pricing model such as the Black-Scholes
pricing model. For non-employees, stock grants issued for services are valued at
either the invoiced or contracted value of services provided, or to be provided,
or the fair value of stock at the date the agreement is reached, whichever is
more readily determinable.
For stock options granted to non-employees the fair value at the grant date is
used to value the expense. In calculating the estimated fair value of its stock
options, the Company used a Black-Scholes pricing model which requires the
consideration of the following seven variables for purposes of estimating fair
value:
the stock option or warrant exercise price,
the expected term of the option or warrant,
the grant date fair value of our common stock, which is issuable
upon exercise of the option or warrant,
the expected volatility of our common stock,
expected dividends on our common stock (we do not anticipate paying
dividends for the foreseeable future),
the risk free interest rate for the expected option or warrant term, and
the expected forfeiture rate.
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