INTRODUCTION
This
information included in this Annual Report on Form 10-K should be read in conjunction with the consolidated financial statements
and related notes in “Item 8. Financial Statements and Supplemental Data” of this Report.
Please
see the “Glossary” above for a list of abbreviations and definitions used throughout this Report.
Our
logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service
marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report
may appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended
to indicate in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable
licensors if any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under
applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names
to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
The
market data and certain other statistical information used throughout this Report are based on independent industry publications,
reports by market research firms or other independent sources that we believe to be reliable sources. Industry publications and
third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to
be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the
disclosures contained in this Report, and we believe these industry publications and third-party research, surveys and studies
are reliable. While we are not aware of any misstatements regarding any third-party information presented in this Report, their
estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties,
and are subject to change based on various factors, including those discussed under the section entitled “Risk Factors”
beginning on page 19 of this Report. These and other factors could cause our future performance to differ materially from our
assumptions and estimates. Some market and other data included herein, as well as the data of competitors as they relate to Trxade
Group, Inc., is also based on our good faith estimates.
Our
fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31, June 30,
and September 30th, the first quarter, second quarter and third quarter, respectively, with the quarter ending December 31st being
referenced herein as our fourth quarter. Fiscal 2020 means the year ended December 31, 2020, whereas fiscal 2019 means the year
ended December 31, 2019.
Unless
the context requires otherwise, references to the “Company,” “we,” “us,”
“our,” “Trxade”, “Trxade Group” and “Trxade Group, Inc.”
refer specifically to Trxade Group, Inc. and its consolidated subsidiaries.
In
addition, unless the context otherwise requires and for the purposes of this Report only:
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“Exchange
Act” refers to the Securities Exchange Act of 1934, as amended;
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“SEC”
or the “Commission” refers to the United States Securities and Exchange Commission; and
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“Securities
Act” refers to the Securities Act of 1933, as amended.
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Where
You Can Find Other Information
We
file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available
to the public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge,
soon after such reports are filed with or furnished to the SEC, on the “NASDAQ: MEDS,” “SEC Filings”
page of our website at www.rx.trxade.com. Copies of documents filed by us
with the SEC are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at
the address and telephone number set forth on the cover page of this Report. Our website
address is www.rx.trxade.com. The information on, or that may be accessed
through, our website is not incorporated by reference into this Report and should not be considered a part of this Report.
CORPORATE
AND ORGANIZATIONAL HISTORY
Background
of XCEL
Our
Company was incorporated in Delaware on July 15, 2005, as “Bluebird Exploration Company” (“Bluebird”).
Bluebird was originally formed to engage in the exploitation of mineral properties. In December 2008, Bluebird changed its name
to “Xcellink International, Inc.” (“XCEL”), and subsequently announced that its business
plan was being expanded to include the development and marketing of platform-independent customer-centric payment systems and
methodologies. XCEL was unable to raise the funds necessary to implement its business strategy, never generated any revenue and
was reporting as a “shell” corporation. On January 9, 2014, Trxade Group, Inc., a privately held Nevada corporation,
merged with and into XCEL, and XCEL changed its name to “Trxade Group, Inc.”
Background
of Trxade
PharmaCycle
LLC, a Nevada limited liability company (“PharmaCycle”), was formed in August 2010 by Prashant Patel, our President,
to serve as a web-based market platform designed to enable trading among healthcare buyers and sellers of pharmaceuticals, accessories
and services. In January 2013, PharmaCycle converted into a Florida corporation and changed its name to Trxade, Inc. (“Trxade
Florida”). In May 2013, Trxade Florida created a new wholly-owned subsidiary, Trxade Group, Inc., a Nevada corporation
(“Trxade Nevada”). Trxade Nevada acquired Trxade Florida pursuant to a reverse triangular merger, resulting
in Trxade Florida becoming a wholly-owned subsidiary of Trxade Nevada (the “Nevada-Florida Merger”). The sole
purpose of the Nevada-Florida Merger was to provide for a holding company to own Trxade Florida, the operating company. At all
times, up to the Nevada-Florida Merger, Trxade Florida was capitalized exclusively by cash capital contributions from Messrs.
Suren Ajjarapu and Patel, our Chief Executive Officer and President, respectively. Immediately following the Nevada-Florida Merger,
Messrs. Ajjarapu and Patel collectively owned 99% of Trxade Nevada. After the Nevada-Florida Merger (but prior to the merger with
XCEL), Trxade Nevada raised $670,000 through the sale of its preferred stock in private placements made to third party investors.
Reverse
Merger with Trxade
On
September 26, 2008, Mark Fingarson, the former President, sole Director and controlling shareholder of XCEL, sold 80,000,000 shares
of XCEL (prior to the reverse split discussed below and the Reverse Stock Split (defined below)) to XCEL’s then attorney,
Ron McIntyre. On November 22, 2013, Trxade Nevada acquired Mr. McIntyre’s controlling interest of 80,000,000 shares in XCEL
pursuant to a Purchase and Sale Agreement dated November 7, 2013. At the time of the sale, XCEL had 104,160,000 shares of common
stock issued and outstanding, including the 80,000,000 shares of stock acquired by Trxade Nevada (prior to the reverse split discussed
below and the Reverse Stock Split).
On
December 16, 2013, Trxade Nevada and XCEL entered into a definitive merger agreement (the “Merger Agreement”)
providing for the merger (the “Merger”) of Trxade Nevada with and into XCEL, with XCEL continuing as the surviving
corporation. The Merger closed on January 8, 2014. Under the terms of the Merger Agreement, we amended our certificate of incorporation
and changed our name to “Trxade Group, Inc.,” and changed our trading symbol to “TRXD”.
Recapitalization
of Common Stock by a Reverse Split and Increase of Authorized Shares of Stock
We
also reversed our issued and outstanding stock at the ratio of one for one thousand (1:1,000) shares effective upon the closing
of the Merger (the “Merger Reverse Split”). In connection with the Merger Reverse Split, 104,160,000 outstanding
shares of our common stock, including the 80,000,000 shares held by Trxade Nevada, were exchanged for 104,160 post-Merger Reverse
Split shares of common stock. As a result of the Merger, Trxade Nevada stockholders holding 28,800,000 shares of common stock
and 670,000 shares of Series A Preferred Stock converted their shares on a one-to-one basis into 28,800,000 shares of our common
stock and 670,000 shares of our Series A Preferred Stock, for an aggregate total of 29,470,000 shares. Further, 100,000 shares
of our common stock (on a post-Reverse Split basis and taking into account the Reverse Stock Split (discussed below)) were issued
following the Merger in connection with the conversion of our promissory notes. The 80,000,000 pre-Merger shares held by Trxade
Nevada, which amounted to 13,334 shares (on a post-Reverse Split basis and taking into account the Reverse Stock Split), reverted
to treasury stock of the Company. Except as otherwise disclosed, the share amounts in the paragraph above have not been adjusted
for the Merger Reverse Split or the Reverse Stock Split.
February
2020 Reverse Stock Split and NASDAQ Capital Market Listing
On
October 9, 2019, our Board of Directors, and on October 15, 2019, stockholders holding a majority of our outstanding voting shares,
approved resolutions authorizing a reverse stock split of the outstanding shares of our common stock in the range from one-for-two
(1-for-2) to one-for-ten (1-for-10), and provided authority to our Board of Directors to select the ratio of the reverse stock
split in their discretion (the “Stockholder Authority”). On February 12, 2020, the Board of Directors of the
Company approved a stock split ratio of 1-for-6 (“Reverse Stock Split”) in connection with the Stockholder
Authority and the Company filed a Certificate of Amendment with the Secretary of Delaware to affect the Reverse Stock Split. The
Reverse Stock Split became effective at 12:01 a.m. Eastern Standard Time on February 13, 2020. The Reverse Stock Split was completed
in order to allow us to meet the initial criteria of The NASDAQ Capital Market.
Our
common stock was approved for listing on The NASDAQ Capital Market under the symbol “MEDS”, on February 13,
2020.
Subsidiaries
We
own 100% of Trxade Florida. This subsidiary is included in our attached consolidated financial statements and is engaged in the
same line of business as Trxade. Trxade Florida is a web-based market platform that enables commerce among healthcare buyers and
sellers of pharmaceuticals, accessories and services.
We
own 100% of Integra Pharma Solutions, LLC (formerly Pinnacle Tek, Inc., a Florida corporation) founded by Mr. Suren Ajjarapu,
our CEO, in 2011 (“Integra”). Until the end of 2016, Integra served as our technology consultant provider,
but we discontinued that line of business in 2016. Integra now serves as our logistics company for pharmaceutical distribution.
We
own 100% of Community Specialty Pharmacy, LLC, an independent retail specialty pharmacy with a focus on specialty medications.
We
own 100% of Alliance Pharma Solutions, LLC, a Florida limited liability company, which was founded in January 2018 (“Alliance”).
Alliance previously owned 30% of SyncHealth MSO, LLC (“SyncHealth”) which was part of a joint venture formed
in January 2019 with PanOptic Health, LLC (“PanOptic”) with the goal of enabling independent retail pharmacies
to better compete with large national pharmacies on pricing, distribution and logistics. We did not realize any income from the
joint venture and we terminated the joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned
the 30% ownership of SyncHealth back to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of
the agreements relating to confidentiality, non-solicitation and each party’s obligation to cease use of the other party’s
intellectual property survive the termination.
We
own 100% of Bonum Health, LLC, a Delaware limited liability company which owns our “Bonum Health Hub” assets
and operations as discussed in further detail below.
We
previously owned 100% of PharmCentrix, LLC, a Delaware limited liability company which had no revenue in 2020 and was dissolved
in December 2020.
We
own 100% of MedCheks, LLC, a Delaware limited liability company which was formed in January 2021 and is
a patient-centered, digital, precision healthcare platform that lets patients consolidate and control their health data via a
digital Health Passport. The digital Health Passport allows users to share their health profile, tests and vaccinations simply
and safely. Secured in a blockchain, the Health Passport includes health and vaccination status verification via a QR code (a
two-dimensional machine-readable optical label), which is available for travel, entry into stadiums, concert venues, events, offices,
industrial plants, warehouses, and other physical access points. MedCheks Health Passport stores all of a user’s health
records securely in one place.
Acquisition
of Community Specialty Pharmacy, LLC
On
October 15, 2018, the 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, a non-executive officer of the Company (collectively, the “Seller”). The purchase price for the 100%
equity interest in CSP was $300,000 in cash, a promissory note issued by the Company in the amount of $300,000, and warrants to
purchase 67,585 shares of common stock of the Company (on a post-Reverse Split basis and taking into account the Reverse Stock
Split) of which 33% of such warrants were revocable by the Company prior to October 15, 2019 (but were not revoked); 33% were
revocable by the Company prior to October 15, 2020 (but were not revoked); and the remaining 33% of such warrants are revocable
by the Company prior to October 15, 2021, which are exercisable for eight (8) years from the issuance date at a strike price of
$0.06 per share.
SyncHealth
MSO, LLC Joint Venture
On
January 17, 2019, the Company and Alliance Pharma Solutions, LLC, a Delaware limited liability company and wholly-owned subsidiary
of the Company (hereafter “Alliance,” with Alliance and Trxade referred to collectively herein as the “Trxade
Parties”), entered into a transaction effective as of January 17, 2019 with PanOptic Health, LLC, a Delaware limited
liability company (“PanOptic”), to create a new entity, SyncHealth MSO, LLC (“SyncHealth”)
as part of a joint venture to enable independent retail pharmacies to better compete with large national pharmacies on pricing,
distribution and logistics. As part of the transaction Alliance owned 30% of SyncHealth. We did not realize any income from the
joint venture and we terminated the joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned
the 30% ownership of SyncHealth back to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of
the agreements relating to confidentiality, non-solicitation and each party’s obligation to cease use of the other party’s
intellectual property survive the termination.
Bonum
Health Asset Acquisition
On
October 23, 2019 (the “Closing Date”), Bonum Health, LLC, a Delaware limited liability company, and a then
newly formed wholly-owned subsidiary of the Company (“Bonum Health”) entered into an Asset Purchase Agreement
with Bonum Health, LLC, a Florida limited liability company (“Seller”) and Hardikkumar Patel, the sole member
of the Seller (the “Member”). Pursuant to the Asset Purchase Agreement, the Company (through Bonum Health)
acquired from the Seller, certain specified assets and certain specified contracts associated with the assets of the Seller’s
operation as a telehealth service provider (the Tele Meds Platform)(the “Assets”). Included with the acquisition
of the Assets, were contracts (relating to the Assets), intellectual property for the Bonum Health Tele Medicine software &
Technology and personal computers. The Company agreed to provide the Seller consideration equal to 41,667 shares of restricted
common stock of the Company at the closing (the “Closing Shares”), and the Seller had the right to earn up
to an additional 108,334 shares of restricted common stock of the Company in the event certain milestones were met within the
first anniversary of the Closing date, none of which were met.
The
Asset Purchase Agreement includes a three year non-compete requirement, prohibiting the Seller and the Member from competing against
the Assets, customary representations and indemnification obligations, subject to a $25,000 minimal claim amount and certain limitations
on liability disclosed in the Asset Purchase Agreement.
Subsequent
to the acquisition, the Company determined that the assets were not usable and wrote off the value of the assets amounting to
approximately $369,000.
BUSINESS
OF TRXADE
Our
Principal Products and Services and their Markets.
Trxade.com
is a web-based pharmaceutical marketplace engaged in promoting and enabling commerce among independent pharmacies and large
pharmaceutical suppliers nationally. Our marketplace has hundreds of suppliers providing over 20,000 branded and generic drugs
available for purchase by pharmacists. We serve approximately 11,800 registered independent pharmacies, providing access to Trxade’s
proprietary pharmaceutical database, data analytics regarding medication pricing, and manufacturer return policies. We generate
revenue from these services by charging a transaction fee to the seller of the products for sales conducted via the Trxade platform.
The buyers do not bear the cost of transaction fees for the purchases that they make, nor do they pay a fee to join or register
with our platform. Substantially all of our revenues during the years ended December 31, 2020, and 2019, were from platform revenue
generated on www.rx.trxade.com and product sales through Integra Pharma Solutions, LLC. For additional information, please
visit us at www.trxadegroup.com, www.rx.trxade.com, www.bonumhealth.com, www.comsprx.com, and www.rxintegra.com.
Information on our websites is not incorporated by reference into this Form 10-K.
Status
of any publicly announced new products or services.
We
have a number of products and services still in development, which are described below.
InventoryRx.com.
InventoryRx, launched in the first quarter of 2014, is a web-based pharmaceutical exchange platform where wholesalers can buy
and sell pharmaceuticals or over-the-counter medications with each other in a systematized online sales platform. The site offers
these trading partners greater product availability and pricing transparency. The site may also substantially improve our customers
buying efficiency and lower their cost of goods on a continuous basis. This product is built into the Trxade.com platform
and, accordingly, we have not generated any independent revenue from this product.
Pharmabayonline.
We formed Pharmabayonline to provide proprietary pharmaceutical data analytics and governmental reimbursement benchmarks analysis
to United States based independent pharmacies and pharmaceutical databases.
RxGuru.
Our RxGuru application was launched in the first quarter of 2014 and underscores our commitment to deliver timely information
to our customers at the moment before purchase. Our industry leading price prediction model “RxGuru” integrates
product insight into pharmacy acquisition benchmarks (“PAC”) to ascertain trends and pricing variances which
result in significant purchasing opportunities. “RX Guru” helps to predict prices and affords our members an
opportunity continuously to benefit from real price purchasing opportunities that are often concealed from the rest of the industry.
This product is built into the Trxade.com platform and, accordingly, this application works in conjunction with the Trxade
platform but, to date, has not generated any independent revenue.
Integra
Pharma Solutions, LLC. Integra is intended to serve as our logistics company for pharmaceutical distribution.
Community
Specialty Pharmacy, LLC. We acquired Community Specialty Pharmacy, LLC, a Florida limited liability company (“CSP”),
on October 15, 2018. CSP is an accredited pharmacy located in St. Petersburg, Florida. CSP has a focus on specialty medications.
The company operates with an innovative pharmacy model which offers home delivery services to any patient thereby providing convenience.
Delivmeds.com.
Delivmeds.com was launched in late 2018 as a consumer-based app to provide delivery of pharmaceutical products associated
with Alliance Pharma Solutions, LLC. To date, we have not generated any revenue from this product.
Trxademso.
Trxademso technology was developed in early 2019 as part of the SyncHealth MSO, LLC joint venture to develop technology that could
potentially assist independent retail pharmacies to compete better with large national pharmacies on prescription generation workflow
optimization, pricing, distribution and logistics. We did not realize any income from the joint venture and we terminated the
joint venture agreements pursuant to their terms effective as of January 31, 2020 and assigned the 30% ownership of SyncHealth
back to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of the agreements relating to confidentiality,
non-solicitation and each party’s obligation to cease use of the other party’s intellectual property survive the termination.
Trxade
Prime. Trxade Prime allows pharmacy members on the Trxade platform to process, consolidate
and ship purchase orders that are placed directly with Trxade suppliers via the Trxade Prime service. This is at no cost, with
the goal of offering a single tool with one low order minimum, one invoice, one package and one delivery from multiple quality
wholesalers and distributors. Revenue has been generated from this service though our Integra subsidiary, which provides the consolidation
of the orders.
Bonum
Health Hub. The “Bonum Health Hub”, a self-enclosed, free standing virtual examination room, was launched
by the Company’s wholly-owned Bonum Health, LLC subsidiary, in November 2019 and was expected to be operational in April
2020; however, due to the COVID-19 pandemic, at present the Company does not anticipate installations moving forward until 2021
at the earliest. The hub is a Health Insurance Portability and Accountability Act (HIPPA)-compliant booth planned to be placed
in various independent retail pharmacies in rural and urban areas to provide care for patients that otherwise would not be able
to afford primary or collaborative care. Each “Bonum Health Hub” is expected to feature an online interface
that will expand the power of the Bonum Health application into a digital, face-to-face platform that brings patients and physicians
eye-to-eye in a fully secure, private setting. This will allow for more substantial and effective dialogue about sensitive conditions
and other collaborative care concerns. The “Bonum Health Hubs” is planned to include a screen for two-way video
communication, the necessary medical equipment for the services available, and a table and chair for in-person consultations.
The Health Hubs will be compatible with the “Bonum Health app”, which provides an overall healthcare experience
comparable to a Primary Care practitioner, and an online portal as a personal electronic medical record and scheduling system.
Following the results of the Company’s initial pilot program of the “Bonum Health Hub” and the effects
of the COVID-19 pandemic, the Company is developing new plans to expand such hubs into its network of independent pharmacies.
To date, we have not generated any revenue from this product.
Bonum+
Business to Business (B2B). Bonum+ bundles telehealth, a COVID-19 risk assessment tool and a Personal Protective Equipment
(PPE) purchasing tool, through a secure mobile dashboard for corporate clients. The B2B platform eases pressure on employees who
are required to report any relevant health issues daily, centralizing communication and contact tracing to deliver risk scores.
This allows employers to monitor employee COVID-19 risk profiles and streamlines the ordering of new PPE as needed. An integrated
artificial intelligence (AI) tool offers health recommendations and connects employees with board certified physicians, as needed.
To date, we have not generated any revenue from this product.
MedCheks
Health Passport. The Health Passport is a patient-centered, digital, precision healthcare
platform that lets patients consolidate and control their health data via a digital Health Passport and allows them to share their
health profile, tests and vaccinations simply and safely. Secured in a blockchain, the Health Passport includes health and vaccination
status verification via a QR code, which is available for travel, entry into stadiums, concert venues, events, offices, industrial
plants, warehouses, and other physical access points. The Passport stores all of a user’s health records securely in one
place. The platform is under development and we have not generated any revenue from this product to date.
All
of our product offerings are focused on the United States markets. Some products are restricted just to certain states, depending
upon the various applicable state regulations and guidelines pertaining to pharmaceuticals, particularly, and drug businesses,
generally. Our services are distributed through our online platform.
Organizational
Structure
The
diagram below depicts our current organizational structure:
Trxade
Group, Inc.
The
Pharmaceutical Industry
According
to the NCPA 2020 Digest Report, United States pharmaceutical companies comprise a burgeoning estimated $685 billion industry
by 2023, consisting of over 65,000 pharmacy facilities. Management believes that few platforms are currently in place to bring
these participants together to share market knowledge, product pricing transparency and product availability. According to this,
the pharmaceutical market is comprised primarily of three wholesalers that control an estimated approximately 92% of the market.
Our management believes that this concentration has, over the years, led to a lack of price and cost transparency, thereby resulting
in severe limitations on the purchasing choices of industry participants. These market dynamics have enabled these large wholesalers
(McKesson, Cardinal Health and AmerisourceBergen), known as ADR distributors, to dominate the industry with respect to both generic
and brand pharmaceuticals. The increasing concentration of generic medications (ANDA or Abbreviated New Drug Application), however,
with many more expected to go to market in the near future (approximately $80 billion in branded medications lost their patent
protection from 2008 to 2018, according to an article in Drug Topics from August 2004, called “Big Pharma uses effective
strategies to battle generic competitors”, by Martin Sipkoff), have enabled smaller suppliers’ access to an increasing
number of medications at highly discounted prices. The market is slowly changing towards one where medications will become commoditized
and influenced by price rather than the business relationships imposed by the dominant participants of the past.
To
fuel this change, insurance companies (Pharmacy Benefits Management (“PBM”) and private health payers) and
the federal government have recently initiated lower medication reimbursement payments to healthcare providers. We believe that
pharmacies in due course will face increasing pressure to source medications as inexpensively as possible and improve operational
efficiency. Trxade seeks to be in the forefront of solving these transparency and pricing concerns by providing independent, retail
pharmacies with real-time, pharmacy acquisition cost (“PAC”) benchmarks to the National Drug Code (the “NDC”)
standard. The NDC mark is a unique product identifier used in the United States for drugs intended for human use.
Competitive
Business Conditions, Our competitive position in our Industry, and our Methods of Competition.
We
expect to face competition from the three large ADR distributors (McKesson, Cardinal Health and AmerisourceBergen), other pharmaceutical
distributors, buying groups, software products, and other start-up companies. Most of our competitors’ operations have substantially
greater financial- and manufacturer-backed resources, longer operating histories, greater name recognition, and more established
relationships in the industry.
Other
Start-up Companies Which Provide Competitive Services.
We
have identified start-ups that provide for supplier-pharmacy trading such as PharmaBid, RxCherrypick, PharmSaver, MatchRx and
GenericBid, and provide web-based services similar to ours, allowing pharmacies to buy from several suppliers. Trxade differentiates
itself from these exchanges by providing our pharmacies with both brand and generic pharmaceutical products. Additional companies
target “direct-to-consumer” pharmacy deliveries, including Amazon.com’s PillPack, Capsule
and GetRoman.com.
Buying
Groups.
Buying
Groups provide discounted prices to their members by negotiating better pricing with one primary wholesaler, while charging administrative
fees generally ranging from 3 to 5 percent. Some Buying Groups are structured like co-operatives (such as Independent Pharmacy
Cooperative (IPC) and American Pharmacy Cooperative, Inc. (APCI)) and offer their members monthly or quarterly rebates. Although
they can function well to bring pricing competition to the industry, they often offer rebates only after the purchase. Management
does not believe Buying Groups will provide long-term savings to customers with this model given the increased transparency and
competition in the industry.
Pharmaceutical
Software.
Some
pharmaceutical software companies compete with us to varying degrees at different levels. SureCost, for example, provides inventory
management software enabling pharmacies to comply with primary supplier contracts. This software is fee-based and requires training.
Pharmacies
may be reluctant to buy pharmaceuticals on the internet due to the historical negativity and uncertainty with respect to the origin
and purity of drugs purchased off the web. Trxade management believes that as we continue to develop our brand, our customer base,
and our vast product offerings, we will gain the trust of the market and overcome the negativity associated with purchasing via
a pharmaceutical online marketplace.
One
advantage that we believe we have over our competition is our ability to be flexible and fast moving in adjusting our business
model to address the needs of our customer base. Trxade started by offering pharmacies a reverse auction model to enhance savings
on the purchase of their pharmaceuticals. Customer feedback suggested that pharmacies prefer a more “buy now”
format, which we implemented. This resulted in a “one-stop-one-search” platform to buy quality pharmaceuticals
for less and a data-rich platform to help pharmacies overcome the complexities related to supply chain purchasing.
Telehealth
Providers
We
also anticipate facing competition in the telehealth industry (in connection with our planned “Bonum Health Hubs”)
from current and future health care companies in the telehealth market including, Teladoc Health, Inc., MDLive, Inc., American
Well Corporation and Grand Rounds, Inc., among other smaller industry participants.
Sources
and Availability of Raw Materials; Principal Suppliers.
Trxade
is a web-based technology platform. Because we are not a manufacturing company, we do not need any raw materials. Our module on
the platform is drug supplier-to-retailer. We bring buyers and sellers together on this platform. Our suppliers include National
Apothecary Solutions, Integral RX, and South Pointe Wholesale, Inc.
Dependence
on One or More Major Customers.
As
of the date of this filing, we have approximately 11,800 registered independent pharmacies and over 30 pharmaceutical suppliers
as customers, with a market potential of approximately 21,000 independent pharmacies and 1,500 regional and local suppliers. We
have a working relationship with over 25 wholesalers and the nation’s largest buying group. Although we believe those entities
are satisfied with their business relationship with Trxade, if our buying group and two or three of the largest wholesalers decided
no longer to do business with Trxade, the resulting supplier void would materially and adversely affect our competitiveness in
the marketplace.
Intellectual
Property.
Although
we believe that our name and brand are protected by applicable state common law trademark laws, we do not currently have any patents,
concessions, licenses, royalty agreements, or franchises, provided that we do currently maintain a number of registered trademarks
and our pharmaceutical pricing benchmarks, PAC. Our business operates under a proprietary software system which includes trade
secrets within our database, business practices and pricing model.
Need
for Government Approval of Products and Services.
We
are required to hold business licenses and to follow applicable state and federal government regulations detailed herein. In October
2018, we acquired Community Specialty Pharmacy, LLC, an accredited independent retail pharmacy with a focus on specialty medications,
which requires state approval, which have been obtained in 34 states.
Effect
of Existing or Probable Government Regulations on the Business.
Federal
Drug Administration Guidelines
On
April 12, 1988, President Ronald Reagan signed into law the Prescription Drug Marketing Act of 1987 (PDMA), setting the baseline
for wholesale distribution regulations. The final regulations were published in 1999, establishing the minimum wholesale distribution
requirements for state licensure. With the intent to prevent the introduction and retail sale of substandard, ineffective, or
counterfeit drugs into the distribution system, state licensing systems moved to update their standards to match those provided
federally as guided under FDA’s Guidelines for State Licensing of Wholesale Prescription Drug Distributors (21 CFR 205).
PDMA established minimum federal pedigree requirements to trace the ownership of prescription drugs through the supply chain.
The principal goal of the PDMA was to further secure the nation’s drug supply from counterfeit and substandard prescription
drugs. The law establishes two types of distributors: “Authorized distributor[s] of record” or ADRs; and “Unauthorized
distributor[s],” such as wholesalers. The pedigree requirement was to require each person engaged in the wholesale distribution
of a prescription drug in interstate commerce, who is not the manufacturer or an authorized distributor of record for that drug,
to provide a pedigree to the recipient. After meeting resistance from various stakeholders, the FDA delayed the effective date
of the regulations several times, until final implementation in December 2006.
At
the federal level the implementation of the track and trace legislation which went into effect in 2018, requires the use of pharmaceutical
pedigree to track the movement of pharmaceuticals along the supply chain. The costs of complying with this new legislation may
be too burdensome for many of the smaller suppliers.
State
Drug Administration Guidelines
There
are a number of national and state-wide regulations that have an effect on our business. All drug wholesalers must be licensed
under state licensing systems, which must in turn meet the FDA guidelines under State Licensing of Wholesale Prescription Drug
Distributors (21 CFR Part 205). The regulations set forth minimum requirements for prescription drug storage and security as well
as for the treatment of returned, damaged, and outdated prescription drugs. Further, wholesale drug distributors must establish
and maintain inventories and records of all transactions regarding the receipt and distribution of prescription drugs and make
these available for inspection and copying by authorized federal, state, or local law enforcement officials. In most states, wholesale
distributor licenses are issued by the State Boards of Pharmacy and require periodic renewal. Approximately 40 states also require
out-of-state wholesalers that distribute drugs within their borders to be licensed as well.
California,
Florida, Nevada, New Mexico and Indiana define the normal distribution channel to not include the lateral sales of pharmaceuticals
between wholesalers. The Supply Chain Act, part of the Quality Drug Act, which was signed into federal law in December 2013, precludes
all states from restricting, investigating or inspecting the distribution channel and transactional history. Until the federal
government provides guidelines for the new federal law, no state regulation or guideline exists.
The
warehousing of pharmaceuticals is also restricted and requires additional state licenses. Some licenses require bonds and written
exams and may take some time to approve. Currently, Integra Pharma Solutions, LLC, our wholesale distributor, asks for formal
pedigrees from the ADR wholesalers and provides pedigrees to those entities they sell to in the marketplace. This requirement
limits liability and provides assurance if a recall is warranted that Trxade and its participants will receive value for the commodity.
Potential
New Regulations
In
addition to the above, regulatory mandates in response to certain unexpected events, such as viral outbreaks, could negatively
impact sales. For example, in December 2019 an outbreak of a coronavirus surfaced in China and has resulted, and may continue
to result, in governments around the world adopting restrictions on public gatherings, travel and restrictions on companies’
(including our) ability to conduct normal business operations.
Price
gouging may be an issue in the coming months due to the continued effects of the coronavirus and responses thereto; as of the
date of this Report, 34 states have enacted price gouging laws of one kind or another. The laws vary from state to state, but
one constant throughout is a prohibition to charge “excessive” or “unconscionable” prices for consumer
goods. Some states define “excessive” or “unconscionable” while others define what makes a prima facia
case for price gouging and what constitutes a prima facia defense, shifting the burden of proof to the accuser. In almost all
of the 34 states with price gouging laws on the books, a price is excessive or unconscionable if the price of a good has increased,
in some states by a certain percentage, over the price of the good prior to the onset of
the abnormal disruption of the market. Some states have clearly excepted from the price gouging definition a rise in prices
caused by an increase in the merchant’s cost of delivering that good for sale – whether it be increased shipping costs,
gasoline prices or simply the cost of the good itself. Other states have less defined exceptions – Virginia for example
only treats the fact of increased input costs as a merchant’s prima facia defense to an accusation of price gouging. Several
states except from the price gouging definition prices that do not exceed a normal margin (i.e., the merchant’s margin immediately
prior to the market disruption) PLUS 10%. In general, while the law may not specifically
define what constitutes an “unconscionably excessive price,” the statutes typically provide that a price may be “unconscionably
excessive” if: the amount charged represents a “gross disparity” from the price such goods or services were
sold or offered for sale immediately prior to the onset of the abnormal disruption of the market. Merchants may provide evidence
that justifies their higher prices were justified by increased costs beyond their control. We will need to comply with the excessive
price statutes; as of the date of this Report, we believe we were in compliance with all 34 states’ price gouging laws.
U.S.
Federal and State Fraud and Abuse Laws
Federal
Stark Law
We
are subject to the federal self-referral prohibitions, commonly known as the Stark Law. Where applicable, this law prohibits a
physician from referring Medicare patients to an entity providing “designated health services” if the physician or
a member of such physician’s immediate family has a “financial relationship” with the entity, unless an exception
applies. The penalties for violating the Stark Law include the denial of payment for services ordered in violation of the statute,
mandatory refunds of any sums paid for such services, civil penalties, disgorgement and possible exclusion from future participation
in the federally funded healthcare programs. A person who engages in a scheme to circumvent the Stark Law’s prohibitions
may be subject to fines for each applicable arrangement or scheme. The Stark Law is a strict liability statute, which means proof
of specific intent to violate the law is not required. In addition, the government and some courts have taken the position that
claims presented in violation of the various statutes, including the Stark Law can be considered a violation of the federal False
Claims Act (described below) based on the contention that a provider impliedly certifies compliance with all applicable laws,
regulations and other rules when submitting claims for reimbursement. A determination of liability under the Stark Law could have
a material adverse effect on our business, financial condition and results of operations.
Federal
Anti-Kickback Statute
We
are also subject to the federal Anti-Kickback Statute. The Anti-Kickback Statute is broadly worded and prohibits the knowing and
willful offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, (i) the referral of a
person covered by Medicare, Medicaid or other governmental programs, (ii) the furnishing or arranging for the furnishing of items
or services reimbursable under Medicare, Medicaid or other governmental programs or (iii) the purchasing, leasing or ordering
or arranging or recommending purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other
governmental programs. In addition, a person or entity does not need to have actual knowledge of this statute or specific intent
to violate it to have committed a violation. Moreover, the government may assert that a claim including items or services resulting
from a violation of the Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act, as
discussed below. Violations of the Anti-Kickback Statute can result in exclusion from Medicare, Medicaid or other governmental
programs as well as civil and criminal penalties and fines. Imposition of any of these remedies could have a material adverse
effect on our business, financial condition and results of operations.
False
Claims Act
Both
federal and state government agencies have continued civil and criminal enforcement efforts as part of numerous ongoing investigations
of healthcare companies and their executives and managers. Although there are a number of civil and criminal statutes that can
be applied to healthcare providers, a significant number of these investigations involve the federal False Claims Act. These investigations
can be initiated not only by the government but also by a private party asserting direct knowledge of fraud. Penalties for False
Claims Act violations include fines, plus up to three times the amount of damages sustained by the federal government. A False
Claims Act violation may provide the basis for exclusion from the federally funded healthcare programs. In addition, some states
have adopted similar fraud, whistleblower and false claims provisions.
State
Fraud and Abuse Laws
Several
states in which we operate have also adopted similar fraud and abuse laws as described above. The scope of these laws and the
interpretations of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad
discretion. Some state fraud and abuse laws apply to items or services reimbursed by any payor, including patients and commercial
insurers, not just those reimbursed by a federally funded healthcare program. A determination of liability under such state fraud
and abuse laws could result in fines and penalties and restrictions on our ability to operate in these jurisdictions.
Other
Healthcare Laws
The
federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic
and Clinical Health Act, or HITECH, and their implementing regulations, which we collectively refer to as HIPAA, established several
separate criminal penalties for making false or fraudulent claims to insurance companies and other non-governmental payors of
healthcare services. Under HIPAA, these two additional federal crimes are: “Healthcare Fraud” and “False Statements
Relating to Healthcare Matters.” The Healthcare Fraud statute prohibits knowingly and recklessly executing a scheme or artifice
to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in
fines, imprisonment or exclusion from government sponsored programs. The False Statements Relating to Healthcare Matters statute
prohibits knowingly and willfully falsifying, concealing or covering up a material fact by any trick, scheme or device or making
any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits,
items or services. These provisions are intended to punish some of the same conduct in the submission of claims to private payors
as the federal False Claims Act covers in connection with governmental health programs.
In
addition, the Civil Monetary Penalties Law imposes civil administrative sanctions for, among other violations, inappropriate billing
of services to federally funded healthcare programs and employing or contracting with individuals or entities who are excluded
from participation in federally funded healthcare programs. Moreover, a person who offers or transfers to a Medicare or Medicaid
beneficiary any remuneration, including waivers of copayments and deductible amounts (or any part thereof), that the person knows
or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of
Medicare or Medicaid payable items or services may be liable for civil monetary penalties for each wrongful act. Moreover, in
certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries can also be held
liable under the Anti-Kickback Statute and civil False Claims Act, which can impose additional penalties associated with the wrongful
act. One of the statutory exceptions to the prohibition is non-routine, unadvertised waivers of copayments or deductible amounts
based on individualized determinations of financial need or exhaustion of reasonable collection efforts. Although this prohibition
applies only to federal healthcare program beneficiaries, the routine waivers of copayments and deductibles offered to patients
covered by commercial payers may implicate applicable state laws related to, among other things, unlawful schemes to defraud,
excessive fees for services, tortious interference with patient contracts and statutory or common law fraud.
Jumpstart
Our Business Startups Act
In
April 2012, the Jumpstart Our Business Startups Act (“JOBS Act”) was enacted into law. The JOBS Act provides,
among other things:
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Exemptions
for “emerging growth companies” from certain financial disclosure and governance requirements for up to
five years and provides a new form of financing to small companies;
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Amendments
to certain provisions of the federal securities laws to simplify the sale of securities and increase the threshold number
of record holders required to trigger the reporting requirements of the Exchange Act;
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Relaxation
of the general solicitation and general advertising prohibition for Rule 506 offerings;
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Adoption
of a new exemption for public offerings of securities in amounts not exceeding $50 million; and
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Exemption
from registration by a non-reporting company of offers and sales of securities of up to $1,000,000 that comply with rules
to be adopted by the SEC pursuant to Section 4(6) of the Securities Act and exemption of such sales from state law registration,
documentation or offering requirements.
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In
general, under the JOBS Act a company is an “emerging growth company” if its initial public offering (“IPO”)
of common equity securities was affected after December 8, 2011 and the company had less than $1.07 billion of total annual gross
revenues during its last completed fiscal year. A company will no longer qualify as an “emerging growth company”
after the earliest of
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(i)
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the
completion of the fiscal year in which the company has total annual gross revenues of $1.07 billion or more,
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(ii)
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the
completion of the fiscal year of the fifth anniversary of the company’s IPO;
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(iii)
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the
company’s issuance of more than $1 billion in nonconvertible debt in the prior three-year period, or
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(iv)
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the
company becoming a “larger accelerated filer” as defined under the Exchange Act.
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The
JOBS Act provides additional new guidelines and exemptions for non-reporting companies and for non-public offerings. Those exemptions
that impact the Company are discussed below.
Financial
Disclosure. The financial disclosure in a registration statement filed by an “emerging growth company”
pursuant to the Securities Act, will differ from registration statements filed by other companies as follows:
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(i)
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audited
financial statements required for only two fiscal years (provided that “smaller reporting companies” such
as the Company are only required to provide two years of financial statements);
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(ii)
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selected
financial data required for only the fiscal years that were audited (provided that “smaller reporting companies”
such as the Company are not required to provide selected financial data as required by Item 301 of Regulation S-K); and
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(iii)
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executive
compensation only needs to be presented in the limited format now required for “smaller reporting companies”.
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However,
the requirements for financial disclosure provided by Regulation S-K promulgated by the Rules and Regulations of the SEC already
provide certain of these exemptions for smaller reporting companies. The Company is a smaller reporting company. Currently a smaller
reporting company is not required to file as part of its registration statement selected financial data and only needs to include
audited financial statements for its two most current fiscal years with no required tabular disclosure of contractual obligations.
The
JOBS Act also exempts the Company’s independent registered public accounting firm from having to comply with any rules adopted
by the Public Company Accounting Oversight Board (“PCAOB”) after the date of the JOBS Act’s enactment,
except as otherwise required by SEC rule.
The
JOBS Act further exempts an “emerging growth company” from any requirement adopted by the PCAOB for mandatory
rotation of the Company’s accounting firm or for a supplemental auditor report about the audit.
Internal
Control Attestation. The JOBS Act also provides an exemption from the requirement of the Company’s independent registered
public accounting firm to file a report on the Company’s internal control over financial reporting, although management
of the Company is still required to file its report on the adequacy of the Company’s internal control over financial reporting.
Section
102(a) of the JOBS Act exempts “emerging growth companies” from the requirements in §14A(e) of the Exchange
Act for companies with a class of securities registered under the Exchange Act to hold stockholder votes for executive compensation
and golden parachutes.
Other
Items of the JOBS Act. The JOBS Act also provides that an “emerging growth company” can communicate with
potential investors that are qualified institutional buyers or institutions that are accredited to determine interest in a contemplated
offering either prior to or after the date of filing the respective registration statement. The JOBS Act also permits research
reports by a broker or dealer about an “emerging growth company” regardless of whether such report provides
sufficient information for an investment decision. In addition, the JOBS Act precludes the SEC and FINRA from adopting certain
restrictive rules or regulations regarding brokers, dealers and potential investors, communications with management and distribution
of research reports on the “emerging growth company’s” initial public offerings (IPOs).
Section
106 of the JOBS Act permits “emerging growth companies” to submit registration statements under the Securities
Act on a confidential basis provided that the registration statement and all amendments thereto are publicly filed at least 21
days before the issuer conducts any road show. This is intended to allow “emerging growth companies” to explore
the IPO option without disclosing to the market the fact that it is seeking to go public or disclosing the information contained
in its registration statement until the company is ready to conduct a roadshow.
Election
to Opt Out of Transition Period. Section 102(b)(1) of the JOBS Act exempts “emerging growth companies”
from being required to comply with new or revised financial accounting standards until private companies (that is, those that
have not had a Securities Act registration statement declared effective or do not have a class of securities registered under
the Exchange Act) are required to comply with the new or revised financial accounting standard.
The
JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that
apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out
of the transition period.
Research
and Development.
During
the last two fiscal years, Trxade.com, InventoryRx.com, Pharmabayonline, DelivMeds, RxGuru and Bonum Health have been developed
as proprietary software. For the years ended December 31, 2020 and 2019, $662,726 and $647,140, respectively, was spent by the
Company in technology activities, which were included in General and Administrative expenses. None of these expenses were borne
directly by customers.
Cost
of Compliance with Environmental Laws.
Our
operations are subject to regulations under various federal, state, local and foreign laws concerning the environment, including
laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes,
and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal
sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under environmental
laws. We are not aware of any costs or effects of our compliance with environmental laws.
Employees
Currently,
we have approximately 43 full-time employees. Our compensation programs are designed to align the compensation of our employees
with performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. The
structure of our compensation programs balances incentives earnings for both short-term and long-term performance such as health
insurance, paid time off and flexibility schedules. To empower employees to unleash their potential, we provide onboarding training,
development mentorship with C-suite executives, and one on one coaching. The Company believes that its rich culture of inclusion
and diversity enables it to create, develop and fully leverage the strength of its workforce to exceed customer expectation and
meet its growth objectives. The Company places a high value on diversity and inclusion.
We
also utilize numerous outside consultants. Our future success will depend partially on our ability to attract, retain and motivate
qualified personnel. We are not a party to any collective bargaining agreements and have not experienced any strikes or work stoppages.
We consider our relations with our employees to be satisfactory.
Seasonality
Our
business is not directly affected by seasonal fluctuations but is affected indirectly by the fall and winter flu season, to the
extent it leads to an increased demand for certain generic pharmaceuticals.
You
should be aware that there are substantial risks for an investment in our common stock. You should carefully consider these risk
factors before you decide to invest in our common stock.
If
any of the following risks were to occur, such as our business, financial condition, results of operations or other prospects,
any of these could materially affect our likelihood of success. If that happens, the market price of our common stock, if any,
could decline, and prospective investors would lose all or part of their investment in our common stock.
Risks
Related to Our Business Operations
Our
business, financial condition and results of operations are subject to various risks and uncertainties, including those described
below. This section discusses factors that, individually or in the aggregate, could cause our actual results to differ materially
from expected and historical results. Our business, financial condition or results of operations could be materially adversely
affected by any of these risks. It is not possible to predict or identify all such factors. Consequently, the following description
of Risk Factors is not a complete discussion of all potential risks or uncertainties applicable to our business.
We
have been, and may in the future be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental
and social impact of which is difficult to predict, which may significantly harm our business, prospects, financial condition
and operating results.
During
2020 and continuing into 2021, there has been a widespread worldwide impact from the COVID-19 pandemic, and we have been, and may in
the future be, adversely affected as a result. Numerous government regulations and public advisories, as well as shifting social behaviors,
have temporarily limited or closed non-essential transportation, government functions, business activities, and person-to-person interactions,
and the duration of such trends is difficult to predict. The outbreak of the COVID-19 coronavirus, the global response to such coronavirus,
including travel restrictions and quarantines that governments are instituting, has adversely affected our operations, may continue to
have an adverse effect on our operations, and/or may have a significant negative impact on our results of operations, the production
of pharmaceuticals and our ability to timely obtain pharmaceuticals for resale. Currently, we are experiencing reductions to, and interruptions
in, the delivery of supply chain pharmaceuticals that are having a negative impact on our wholesalers and certain technology outsourcing
in India and the Philippines. Notwithstanding the above disruptions, our results of operations have not, to date, been materially adversely
affected by the pandemic. However, if we continue to experience production difficulties, quality control problems or further shortages
in supply of pharmaceuticals in the future, this could harm our business and results of operations, any of which could have a material
adverse effect on our operations and the value of our securities. In addition, employee sicknesses and remote working environments, and
the potential negative effect thereof on productivity and internal controls, related to the coronavirus and the federal, state and local
responses to such virus, could materially impact our consolidated results for the year for 2021 and beyond. The COVID-19 outbreak could
also restrict our access to capital such as credit facilities and lead to material nonrecurring charges, write-downs, impairments and
expenses. The Company is actively and continually monitoring the pandemic’s effect on our businesses and endeavoring to
adapt quickly in real time to meet the rapidly-changing demands of our Customers and Suppliers.
To
mitigate the spread of COVID-19, we implemented travel restrictions and remote working arrangements for most of our employees
in order to minimize physical contact, and we implemented additional sanitation and personal protection measures. The
Company’s employees started working remotely around March 17, 2020, and as a result, productivity did not drop, if productivity
drops it could impact revenues and profitability. The Company’s corporate office is closed through June 30, 2021, at the
earliest, unless the current situation improves. These measures might not fully mitigate COVID-19 risks to our workforce
and we could experience unusual levels of absenteeism that might impair operations and delay delivery of products. The COVID-19
pandemic affects product manufacturing, supply and transport availability and cost. The pandemic reduces demand for some products
due to delays or cancellations of elective medical procedures, consumer self-isolation and business closures, among other reasons.
The COVID-19 pandemic also influences shortages of some products, with product allocation resulting in delivery delays for customers.
Additionally, as a result of the recent coronavirus outbreak, various states have adopted
price gouging laws. Our failure to comply with such laws and regulations could subject us to claims, penalties, fines or lawsuits.
We
have been impacted and may be further impacted by COVID-19 as follows:
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As
a result of COVID-19, various states have adopted price gouging laws. Our failure to comply with such laws and regulations
could subject us to claims, penalties, fines or lawsuits;
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Inventory
price fluctuations as a result of supply and demand issues caused by COVID-19 have caused values of inventory to decrease,
which has had a direct impact on gross profit and has resulted in a direct write-off of inventory value;
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Payment
Terms with customers may be altered or extended, which would have an impact on current ratios and cash flow; and
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There
was a material impairment with respect to goodwill and may affect right-of-use assets as the evaluation of the long-term impact
to delivery of service or physical space assessments changes.
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COVID-19
may cause further disruptions to our business, including, but not limited to:
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causing
one or more of our customers to file for bankruptcy protection or shut down, including
as a result of broader economic disruption;
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reducing
health system or health plan subscription agreement fees generated, as well as visit
fees, by customers or providers, as a result of funding constraints related to loss of
revenue or employment;
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negatively
impacting collections of accounts receivable;
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negatively
impacting our ability to facilitate the provision of our telehealth services due to unpredictable
demand;
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negatively
impacting our ability to forecast our business’s financial outlook;
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creating
regulatory uncertainty on our telehealth services, if certain restrictions on reimbursement
or the practice of medicine across state lines are reintroduced at some point in the
future; and
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harming
our business, results of operations and financial condition.
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The
ongoing impacts of the pandemic may cause a general economic slowdown or recession in one or more markets, disruptions and volatility
in global capital markets and other broad and adverse effects on the economy, business conditions, commercial activity and the
healthcare industry. The pandemic might impact our business operations, financial position and results of operation in unpredictable
ways that depend on highly-uncertain future developments, such as determining the effectiveness of current or future government
actions to address the public health or economic impacts of the pandemic. Any of these risks might have a materially adverse impact
on our business operations and our financial position or results of operations.
We
were recently unprofitable, we have recently generated net losses, and we may incur losses in the future.
In
2017, we became profitable for the first time; in prior years, we were unprofitable and generated a net accumulated deficit of
$8,120,113. Our current business model has been in constant and improved development since 2010 with results that culminated in
net income for the years ended December 31, 2017 and 2018 of $288,983 and $9,038, respectively.
Revenues
generated from our consolidated operations for the years ended December 31, 2020 and 2019 were $17,122,520 and $7,436,264, respectively.
We
incurred a net loss of $2,536,051 for the year ended December 31, 2020, compared to a net loss of $284,428 for the year
ended December 31, 2019. We may incur other losses in the foreseeable future due to the significant costs associated with our
business development, including costs associated with maintaining compliance under SEC reporting standards. We cannot assure you
that our operations will annually generate sufficient revenues to fund our continuing operations or to fully implement our business
plan, and thereafter sustain profitability in any future period.
The
likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the start and growth of a business, the implementation and execution of our business plan, and
the regulatory environment affecting the distribution of pharmaceuticals in which we operate.
If
we do not obtain additional financing, our business, prospects, financial condition and results of operations will be adversely
affected.
Management
anticipates that we will require additional working capital in the future to pursue continued development of products, services,
and marketing operations. We cannot accurately predict the timing and amount of such capital requirements. Additional financing
may not be available to us when needed or, if available, it may not be obtained on commercially reasonable terms. If we are not
able to obtain the necessary additional financing on a timely or commercially reasonable basis, we will be forced to delay or
scale down some or all of our development activities (or perhaps even cease the operation of our business).
We
have no commitments for any additional financing, and such commitments may not be obtained on favorable terms, if at all. Any
additional equity financing will be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants
with respect to dividends, raising future capital, and other financial and operational matters. If we are unable to obtain additional
financing as needed, we may be required to reduce the scope of our operations or our anticipated expansion, which could have a
material adverse effect on us.
Our
business is subject to rigorous regulatory and licensing requirements.
As
described in greater detail in “Item 1. Business”, above, our business is highly regulated in the United States, at
both the federal and state level, and in foreign countries. If we fail to comply with regulatory requirements, or if allegations
are made that we fail to comply, our results of operations and financial condition could be adversely affected.
To
lawfully operate our businesses, we are required to obtain and hold permits, product registrations, licenses and other regulatory
approvals from, and to comply with operating and security standards of, numerous governmental bodies. For example, as a wholesale
distributor of controlled substances, we must hold valid DEA registrations and state-level licenses, meet various security and
operating standards, and comply with the Controlled Substances Act (CSA). Failure to maintain or renew necessary permits, product
registrations, licenses or approvals, or to comply with required standards, could have an adverse effect on our results of operations
and financial condition. We are also required to comply with various state pricing gouging laws. Products that we source and distribute
must also comply with regulatory requirements.
Noncompliance
or concerns over noncompliance may result in suspension of our ability to distribute or import products, product bans, recalls
or seizures, or criminal or civil sanctions, which, in turn, could result in product liability claims and lawsuits, including
class actions.
Many
of our competitors are better established and have resources significantly greater than we have, which may make it difficult to
fend off competition.
We
expect to compete with the three largest ADR distributors (McKesson, Cardinal Health and AmerisourceBergen), in addition to other
pharmaceutical distributors, buying groups, software products, and various start-up drug companies. Many of these operations have
substantially greater financial and manufacturer-backed resources, longer operating histories, greater name recognition and more
established relationships in the industry than us. In addition, a number of these competitors may combine or form strategic partnerships.
As a result, our competitors may establish a more favorable footing in the pharmaceutical industry with respect to pricing or
other factors. Our failure to compete successfully with any of these companies would have a material adverse effect on our business
and the trading price of our common stock.
The
three distributors listed above have a strong control over our industry, as they have contracts with approximately 24,000 independent,
retail pharmacies that limit the participants’ ability to purchase pharmaceuticals outside of those primary distributors.
Additional restrictive elements exist within the pharmaceutical channels of distribution. For example, a number of the inventory
management systems, either developed by the distributors or third-party vendors, have been developed to require compliance to
these restrictive purchasing agreements. Management anticipates that other existing and prospective competitors will adopt technologies
or business plans similar to ours or seek other means to develop operations competitive with ours, particularly if our development
of large-scale production progresses as scheduled.
We
will need to expand our member base or our profit margins to attain profitability.
Currently,
we are paid an administrative fee of up to 6 percent of the buying price on the generic pharmaceuticals sold to pharmacies and
up to 1 percent on brand pharmaceuticals that pass through our pharmaceutical exchanges. Our management is aware that the competitiveness
of the group of suppliers that participate in our system and price products on our exchange is a key factor in determining how
many purchasing pharmacies and wholesalers will purchase products through our platforms. However, price is not the only factor
that influences where retail pharmacies will obtain their product. Quality fulfillment services are also important, and retail
pharmacies have historically received quality fulfillment services from the three major ADR distributors. In order to be more
competitive, we must improve our customer service and wholesaler fulfillment efforts, because the independent, retail pharmacy
has for years considered this element of the fulfillment process as important as price. Other factors influencing the pharmacies
purchasing behavior in the future will be changes brought upon by the ACA, which regulates some aspects of pharmaceutical spending
and pricing. Management believes that we should benefit substantially from our pricing and product knowledge that is offered by
our platform.
Profitability
may be further increased as a result of lower cost of goods, should the Company build stronger relationships with manufacturers
and other larger buying groups that serve wholesalers and distributors. On a larger scale, those margins are expected to drop
depending upon the breadth of products provided in the market and the sale turn rates required. We are currently undertaking a
significant effort to increase our membership base through attendance at annual conferences and other strategies. Trxade has an
expanded e-mail marketing strategy based on our competitive price advantages and price trend analysis tools.
There
are inherent risks associated with our operations within the Pharmaceutical Distribution Market.
There
are inherent risks involved with doing business within the pharmaceutical distribution market, including:
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Improperly
manufactured products may prove dangerous to the end consumer.
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Products
may become adulterated by improper warehousing methods or modes of shipment.
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Counterfeit
products or products with fake pedigree papers.
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Unlicensed
or unlawful participants in the distribution channel.
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Risk
with default and the assumption of credit loss.
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Regulatory
risks.
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Risk
related to the loss of supply, or the loss of a number of suppliers, or in the delay of obtaining the supply of drugs.
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Although
all of our end-user agreements require our customers to indemnify us and for any and all liabilities resulting from our participation
in the pharmaceutical distribution industry, we cannot assure you that the parties required to provide such indemnification will
have the financial resources to do so. Additionally, although we have evaluated appropriate state statutes and federal laws pertaining
to pharmaceutical distribution in an effort to diminish our risks, the Board of Pharmacy for each state is responsible for interpreting
their state laws, and their interpretations may not comport with our analysis. It is also possible that any third-party logistics
arrangements may disrupt service, create a loss of income, or other unforeseen disruptions should the service provider experience
any legal, financial or other difficulties of their own.
We
do not have a traditional credit facility with a financial institution, which may adversely impact our operations.
We
do not have a traditional credit facility with a financial institution, such as a working line of credit. The absence of such
a facility could adversely impact our operations, as it may constrain our ability to have available the working capital for equipment
purchases or other operational requirements. If adequate funds are not otherwise available, we may be required to delay, scale
back or eliminate portions of our business development efforts. Without credit facilities, we could be forced to cease operations
and investors in our securities could lose their entire investment.
We
are dependent upon our current management, who may have conflicts of interest.
We
are dependent upon the efforts of our current management. All of our officers and directors have duties and affiliations with
other companies. Even though these companies are not competitors or involved in pharmaceutical distribution, involvement of our
officers and directors in other businesses may still present a conflict of interest regarding decisions they make for Trxade or
with respect to the amount of time available for Trxade. The loss of any of our officers or directors and, in particular, Mr.
Prashant Patel, our President or Mr. Suren Ajjarapu, our Chief Executive Officer and Chairman of the Company, could have a materially
adverse effect upon our business and future prospects.
The
Company purchased, on behalf of and for the benefit of Mr. Suren Ajjarapu, a personal disability insurance policy providing for
a $1,500,000 lump sum benefit, payable to Mr. Ajjarapu, in the event of Mr. Ajjarapu’s disability. The premiums on
such policy will be paid by the Company for so long as Mr. Ajjarapu is employed by the Company.
The
Company also obtained a $4,000,000 key-man life insurance policy on the life of Mr. Suren Ajjarapu, and a $1,500,000 lump sum
disability insurance policy on Mr. Ajjarapu, providing for the Company as beneficiary of such policies.
While
our management team has considerable information technology and entrepreneurial experience, none of our management was involved
in pharmaceutical distribution prior to joining the Company and, as such, did not have any technical experience in pharmaceutical
distribution prior to joining us. In the event of the loss of Mr. Ajjarapu’s services, we will seek to hire and retain a
qualified professional. In the event of the loss of his services in connection with his death, upon obtaining funding from the
key-man life insurance, management intends to hire qualified and experienced personnel. We may be unable to find a suitable or
qualified replacement for Mr. Ajjarapu and as such our operations and/or prospects may suffer.
We
rely on third party contracts.
We
depend on others to provide products and services to us. We do not manufacture pharmaceuticals and we do not sell pharmaceuticals
to the end consumer. We do not control these wholesalers, suppliers and purchasers and, although our arrangements with them will
be terminable or of limited length, a change may be difficult to implement. At this time, we have a working relationship with
over 50 wholesalers and the nation’s largest buying group. Although we believe that those entities are satisfied with their
business relationship with Trxade, if our buying group and two or three of the wholesalers decided no longer to do business with
us, that supplier void would materially and adversely affect our competitiveness in the marketplace.
Rapid
technological change in our industry presents us with significant risks and challenges.
Our
industry is characterized by rapid technological change, changing consumer requirements, short product lifecycles and evolving
industry standards. Our success will depend on our ability to develop or to acquire and market new services. There is no guarantee
that we will possess the resources, either financial or personnel, for the research, design and development of new applications
or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence. Further,
there can be no assurance that technological advances by one or more of our competitors or future competitors will not result
in our present or future applications and services becoming uncompetitive or obsolete.
We
are currently facing and may in the future face difficulties in sourcing products and inventory due to a variety of causes.
Due
to the continued effects of the COVID-19 pandemic, the governmental responses to contain the spread of such virus, we have to
date experienced issues with the availability of certain products, resulting in product allocation and delivery delays, which
has not to date, had a material adverse effect on our results of operations. We might also experience difficulties and delays
in sourcing products and inventory due to a variety of causes in the future, such as: difficulties in complying with the legal
requirements for export or import of pharmaceuticals or components; suppliers’ failures to satisfy production demand; manufacturing
or supply problems such as inadequate resources; real or perceived quality issues; and advanced deposits which are at risk of
return if product is not delivered. Difficulties in product manufacturing or access to raw materials could result in supplier
production shutdowns, product shortages and other supply disruptions. Any of these risks might have a materially adverse impact
on our business operations and our financial position or results of operations.
We
have in the past, and may in the future, not be able to sell our inventory, at or above the price we acquired such inventory for,
and have in the past, and may in the future, be forced to write-down inventory in the future.
Due
to the supply and demand nature of our pharmaceutical business
and the personal protective equipment (PPE) business, especially in connection with the rapidly changing regulations, recommendations
and guidance surrounding COVID-19, the inventory of products we have acquired, or may acquire in the future, has been/may be,
acquired at a cost higher than the price at which we may be able to resell such products. As a result, in the past we have, and
in the future we may not be able to, make a profit on such sales and have in the past and may in the future, have to write-down
a significant portion of our inventory. During the years ended December 31, 2020 and 2019, write-down to market value was $1,220,269
and $0, respectively.
We
may not receive products or receive refunds for deposited amounts and may experience losses in connection with such deposits.
We
might not receive products or the return of funds on deposits that have been provided. We have two deposits outstanding as of
the date of this report in an aggregate amount of approximately $1,081,250. In the event we do not receive products for the deposited
amounts or the return of our deposits (through litigation or otherwise), this will cause us financial harm and result in us taking
a significant charge on our financial statements and taking a loss in the amount of such deposit amount. Additionally, in the
future we may provide additional deposits for products which may be material, which deposits may not be refunded timely, if at
all, and which products may not be delivered, or may be defective or unusable. Any significant losses of deposited funds could
have a material adverse effect on our financial condition, results of operations and the value of our securities.
In July 2020, the Company’s
wholly-owned subsidiary, Integra, entered into an agreement with Studebaker Defense Group, LLC (“Studebaker”) wherein Integra
would pay Studebaker a down payment of $500,000 and Studebaker would deliver 180,000 boxes of nitrile gloves by August 14, 2020. Integra
wired the $500,000 to Studebaker, but to date, Studebaker has not delivered the gloves or provided a refund of the deposit. In December
2020, we filed a complaint against Studebaker Defense Group, LLC in Florida state court, Case No. 20-CA-010118 in the Circuit Court for
the Thirteenth Judicial Circuit in Hillsborough County for, among other things, breach of contract. Studebaker did not answer the complaint,
nor did counsel for Studebaker file an appearance. Accordingly, in February 2021 the Company filed a default judgment; however, on
March 22, 2021, counsel for Studebaker filed an appearance and the Company anticipates that Studebaker will file a motion to vacate
the judgment. A hearing on our motion for a default judgement has been set for April 27, 2021. The Company anticipates that irrespective
of the outcome of such hearing on April 27, 2021, the Company will prevail on the merits; and believes Studebaker has the
ability to satisfy a judgment.
In
August 2020, Company’s subsidiary, Integra, entered into an agreement with Sandwave Group Dsn Bhd, wherein Integra
would pay Sandwave a down payment of $581,250 and Sandwave’s supplier, Crecom Burj Group SDN BHD (“Crecom”),
would deliver 150,000 boxes of nitrile gloves within 45 days. Integra wired the $581,250 to Sandwave, which in turn wired the
purchase price to Crecom, which Crecom accepted; however, to date, Crecom has not delivered the nitrile gloves. Integra
demanded return of its $581,250 and Crecom has acknowledged that Integra is entitled to a refund, but to date Crecom has
failed to return Integra’s money. In February 2021, Integra filed a complaint against Crecom in Malaysia: Case No.
WA-22NCC-55-02/2021 in the High Court of Malaysia at Kuala Lumpur in the Federal Territory, Malaysia for the Malaysian
equivalent of breach of contract. Crecom filed an appearance on March 1, 2021; and Crecom had 14 days to file an answer,
which they did not do; however, Crecom has filed a request for extension which we are contesting. There is a hearing scheduled
on April 20, 2021 to hear the matter and, in the meantime, we are preparing our Application for Summary Judgement. If a judgment is entered against Crecom, the process of executing the judgment, and ultimately
collecting, can take three to six months. The Company believes that it will prevail in the lawsuit filed; and
believes Crecom has the ability to satisfy a judgment, and the steps to enforce a judgment in Malaysia, if any,
may be cumbersome, time consuming or costly.
Risks
Relating to Our Information Systems; Technology and Intellectual Property
We
may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could
require us to pay significant damages and limit our ability to operate.
Companies
on the Internet and technology industries, and other patent and trademark holders seeking to profit from royalties in connection
with grants of licenses, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual property rights. There may be intellectual property rights
held by others, including issued or pending patents and trademarks, that cover significant aspects of our technologies, content,
branding or business methods. Any intellectual property claims against us, regardless of merit, could be time-consuming and expensive
to settle or litigate and could divert our management’s attention and other resources. These claims also could subject us
to significant liability for damages and could result in our having to stop using technology, content, branding or business methods
found to be in violation of another party’s rights. We might be required or may opt to seek a license for rights to intellectual
property held by others, which may not be available on commercially reasonable terms, or at all. If we cannot license or develop
technology, content, branding or business methods for any allegedly infringing aspect of our business, we may be unable to compete
effectively. Even if a license is available, we could be required to pay significant royalties, which could increase our operating
expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which
could require significant effort and expense and be inferior. Any of these results could harm our operating results.
Our
business and operations depend on the proper functioning of information systems, critical facilities and distribution networks.
We
rely on our and third-party service providers’ information systems for a wide variety of critical operations, including
to obtain, rapidly process, analyze and manage data to:
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facilitate
the purchase and distribution of inventory items from distribution centers;
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receive,
process and ship orders on a timely basis;
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manage
accurate billing and collections for thousands of customers;
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process
payments to suppliers; and
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generate
financial information.
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Our
business also depends on the proper functioning of our critical facilities and our distribution networks. Our results of operations
could be adversely affected if our or a service provider’s information systems, critical facilities or distribution networks
are disrupted (including disruption of access), are damaged or fail, whether due to physical disruptions, such as fire, natural
disaster, pandemic or power outage, or due to cyber-security incidents, ransomware or other actions of third parties, including
labor strikes, political unrest and terrorist attacks. Manufacturing disruptions also can occur due to regulatory action, production
quality deviations, safety issues or raw material shortages or defects, or because a key product or component is manufactured
at a single manufacturing facility with limited alternate facilities.
We
rely on network and information systems and other technologies and a disruption, cyber-attack, failure or destruction of such
networks, systems, or technologies may disrupt our business or result in liability.
Network
and information systems and other technologies, including those related to our computer, data back-up and processing systems,
network management, customer service operations and programming delivery, are critical to our business activities. Network and
information systems-related events, such as computer hackings, cyber-attacks, computer viruses, worms or other destructive or
disruptive software, process breakdowns, denial of service attacks, malicious social engineering or other malicious activities,
or any combination of the foregoing, or power outages, natural disasters, terrorist attacks or other similar events, could result
in a degradation or disruption of our services or damage to our properties, equipment and data. These events also could result
in large expenditures to repair or replace the damaged properties, networks or information systems or to protect them from similar
events in the future.
The
risk of these systems-related events and security breaches occurring has intensified, in part because we maintain certain information
necessary to conduct our businesses in digital form stored on cloud servers. While we develop and maintain systems seeking to
prevent systems-related events and security breaches from occurring, the development and maintenance of these systems is costly
and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated.
Despite these efforts, there can be no assurance that these events and security breaches will not occur in the future. Moreover,
we may provide certain confidential, proprietary and personal information to third parties in connection with our businesses,
and while we obtain assurances that these third parties will protect this information, there is a risk that this information could
be compromised.
If
any of our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair
or replace them, and may experience loss or corruption of critical data and interruptions or delays in our ability to perform
critical functions, which could adversely affect our business and results of operations. In addition, we are currently making,
and expect to continue to make, substantial investments in our information technology systems and infrastructure, some of which
are significant. Upgrades involve replacing existing systems with successor systems, making changes to existing systems, or cost-effectively
acquiring new systems with new functionality. Implementing new systems carries significant potential risks, including failure
to operate as designed, potential loss or corruption of data or information, cost overruns, implementation delays, disruption
of operations, and the potential inability to meet business and reporting requirements. While we are aware of inherent risks associated
with replacing these systems and believe we are taking reasonable action to mitigate known risks, these technology initiatives
may not be deployed as planned or may not be timely implemented without disruption to our operations.
There
may be losses or unauthorized access to or releases of confidential information, including personally identifiable information,
that could subject the Company to significant reputational, financial, legal and operational consequences.
The
Company’s business requires it to use, transmit and store confidential information including, among other things, personally
identifiable information (“PII”) with respect to the Company’s customers and employees. The Company devotes
significant resources to network and data security, including through the use of encryption and other security measures intended
to protect its systems and data. But these measures cannot provide absolute security, and losses or unauthorized access to or
releases of confidential information occur and could materially adversely affect the Company’s reputation, financial condition
and operating results. The Company’s business also requires it to share confidential information with third parties. Although
the Company takes steps to secure confidential information that is provided to third parties, such measures are not always effective
and losses or unauthorized access to or releases of confidential information occur and could materially adversely affect the Company’s
reputation, financial condition and operating results.
For
example, the Company may experience a security breach impacting the Company’s information technology systems that compromises
the confidentiality, integrity or availability of confidential information. Such an incident could, among other things, impair
the Company’s ability to attract and retain customers for its products and services, impact the Company’s stock price,
materially damage supplier relationships, and expose the Company to litigation or government investigations, which could result
in penalties, fines or judgments against the Company.
The
Company has implemented systems and processes intended to secure its information technology systems and prevent unauthorized access
to or loss of sensitive data. As with all companies, these security measures may not be sufficient for all eventualities and may
be vulnerable to hacking, employee error, malfeasance, system error, faulty password management or other irregularities. In addition
to the risks relating to general confidential information described above, the Company is also subject to specific obligations
relating to health data and payment card data. Health data is subject to additional privacy, security and breach notification
requirements, and the Company can be subject to audit by governmental authorities regarding the Company’s compliance with
these obligations. If the Company fails to adequately comply with these rules and requirements, or if health data is handled in
a manner not permitted by law or under the Company’s agreements with healthcare institutions, the Company could be subject
to litigation or government investigations, may be liable for associated investigatory expenses, and could also incur significant
fees or fines.
Under
payment card rules and obligations, if cardholder information is potentially compromised, the Company could be liable for associated
investigatory expenses and could also incur significant fees or fines if the Company fails to follow payment card industry data
security standards. The Company could also experience a significant increase in payment card transaction costs or lose the ability
to process payment cards if it fails to follow payment card industry data security standards, which would materially adversely
affect the Company’s reputation, financial condition and operating results.
System
errors or failures of our platform or services to conform to specifications could cause unforeseen liabilities or injury, harm
our reputation and have a material adverse impact on our results of operations.
The
software and technology services that we operate are complex. As with complex systems offered by others, our software and technology
services may contain errors, especially when first introduced. Failure of a customer’s system to perform in accordance with
our documentation could constitute a breach of warranty and could require us to incur additional expense in order to make the
system comply with the documentation. If such failure is not remedied in a timely manner, it could constitute a material breach
under a contract, allowing the client to cancel the contract, obtain refunds of amounts previously paid, or assert claims for
significant damages.
Risks
Associated with Bonum Health Telemedicine Services
The
telehealth market is immature and volatile.
The
telehealth market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand,
consumer acceptance and market adoption. Our success will depend to a substantial extent on the willingness of our clients’
members or patients to use, and to increase the frequency and extent of their utilization of, our services, as well as on our
ability to demonstrate the value of telehealth to employers, health plans, government agencies and other purchasers of healthcare
for beneficiaries. Negative publicity concerning our services or the telehealth market as a whole could limit market acceptance
of our services. If our clients, or their members or patients, do not perceive the benefits of our services, or if our services
are not competitive, then our market may not develop at all, or it may develop more slowly than we expect. Similarly, individual
and healthcare industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth
could limit market acceptance of our healthcare services. If any of these events occurs, it could have a material adverse effect
on our business, financial condition or results of operations.
With
respect to our planned “Bonum Health Hub” telehealth services, the market for such services is new and unproven,
and it is uncertain whether it will achieve consumer acceptance and market adoption. The success of our “Bonum Health
Hub” will depend to a substantial extent on the willingness of patients to use new technologies such as our planned
“Bonum Health Hubs”. Negative publicity concerning our “Bonum Health Hubs” or the telehealth
market as a whole, could limit market acceptance of the “Bonum Health Hubs”. Similarly, individual and healthcare
industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth could limit
market acceptance of our “Bonum Health Hubs”. If any of these events occurs, it could have a material adverse
effect on our business, financial condition or results of operations.
Our
telehealth business could be adversely affected by legal challenges to our business model or by actions restricting our ability
to provide services in certain jurisdictions.
Our
ability to conduct telehealth services in a particular U.S. state is dependent upon the applicable laws governing remote healthcare
and the practice of medicine and healthcare delivery in general in such location which are subject to changing political, regulatory
and other influences. With respect to telehealth services, which we plan to offer through our “Bonum Health Hubs”,
such services and our ability to offer such services are subject to rules established or interpreted by state medical boards and
whether such boards consider such “Bonum Health Hubs” services to be the practice of medicine. The definition
of practicing medicine is subject to change and open to evolving interpretations by medical boards and state attorneys’
generals, among others. Accordingly, we must monitor our compliance with laws in the jurisdictions in which we operate, on an
ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance
with the law. Additionally, it is possible that the laws and rules governing the practice of medicine, including remote healthcare,
in one or more jurisdictions may change in a manner which negatively effects our ability to operate. If a successful legal challenge
or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations
in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition
and results of operations.
In
our telehealth business, we will be dependent on our relationships with affiliated professions and our business would be adversely
affected if those relationships were disrupted.
There
is a risk that state authorities in some jurisdictions may find that contractual relationships with physicians providing telehealth
violate laws prohibiting the corporate practice of medicine. State corporate practice of medicine doctrines also often impose
penalties on physicians themselves for aiding the corporate practice of medicine, which could discourage physicians from participating
in our network of providers. A material changes in our relationship with our healthcare providers, whether resulting from a dispute
among the entities, a change in government regulation, or the loss of these affiliations, could impair our ability to provide
services through our planned “Bonum Health Hub”, and could have a material adverse effect on our business,
financial condition and results of operations.
Our
“Bonum Health Hub” telehealth business will depend on our ability to maintain and expand a network of qualified providers.
The
success of our “Bonum Health Hubs” is dependent upon our ability to maintain a network of qualified telehealth
providers. If we are unable to recruit and retain board-certified physicians and other healthcare professionals, it would have
a material adverse effect on our “Bonum Health Hubs” business and ability to grow such operations. We may not
be willing to pay the costs demanded by such services providers and/or changes in Medicare and/or Medicaid reimbursement levels
and other pressures on healthcare providers and consolidation activity among hospitals, physician groups and healthcare providers
may make such providers harder or more expensive to find and contract with. The result of the above may be that our “Bonum
Health Hubs” are unsuccessful, which may result in a material adverse effect to our operations.
Rapid
technological change in the telehealth industry presents us with significant risks and challenges.
The
telehealth market is characterized by rapid technological change, changing consumer requirements, short product lifecycles and
evolving industry standards. Our success will depend on our ability to enhance our offerings with next-generation technologies
and to develop or to acquire and market new services. There is no guarantee that we will possess the resources, either financial
or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these
resources successfully and avoid technological or market obsolescence. Further, there can be no assurance that technological advances
by one or more of our competitors or future competitors will not result in our present or future software-based products and services
becoming uncompetitive or obsolete.
The
telehealth industry is competitive, and if we are not able to compete effectively, our business, financial condition and results
of operations will be harmed.
While
the telehealth market is in an early stage of development, it is competitive and we expect it to attract increased competition,
which could make it difficult for us to succeed. We currently face competition in the telehealth industry from a range of companies,
including specialized software and solution providers that offer similar solutions, often at substantially lower prices, and that
are continuing to develop additional products and becoming more sophisticated and effective. These competitors include Doctor
On Demand, MDLive and Teladoc. In addition, large, well-financed health systems have in some cases developed their own telehealth
tools and may provide these solutions to their customers at discounted prices. The surge in interest in telehealth, and in particular
the relaxation of HIPAA privacy and security requirements, has also attracted new competition from providers who utilize consumer-grade
video conferencing platforms such as Zoom and Twilio. Competition from large software companies or other specialized solution
providers, communication tools and other parties could result in continued pricing pressures, which is likely to lead to price
declines in certain product segments, which could negatively impact our future market, sales, profitability and market share (if
any). If we are unable to successfully compete in the telehealth market, our business, financial condition and results of operations
could be materially adversely affected.
The
emergence of new technologies may render our telehealth solution obsolete or require us to expend significant resources in order
to remain competitive.
The
U.S. healthcare industry is massive, with a number of large market participants with conflicting agendas, and it is subject to
significant government regulation and is currently undergoing significant change. Changes in the telehealth industry, for example,
such as the emergence of new technologies as more competitors enter our market, could result in our telehealth solution being
less desirable or relevant. If healthcare benefits trends shift or entirely new technologies are developed that replace existing
solutions, our existing or future products could be rendered obsolete and our business could be adversely affected. In addition,
we may experience difficulties with industry standards, design or marketing that could delay or prevent our development, introduction
or implementation of new applications and enhancements.
If
we fail to develop widespread brand awareness cost-effectively, our business may suffer.
We
believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving
widespread adoption of our products and attracting new clients. Our brand promotion activities may not generate client awareness
or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand.
If we fail to successfully promote and maintain our brand, or incur substantial expenses in doing so, we may fail to attract or
retain clients necessary to realize a sufficient return on our brand-building efforts or to achieve the widespread brand awareness
that is critical for broad client adoption of our solution.
Risks
Associated with Our Planned MedCheks Health Passport Platform
The
health passport market may not achieve and sustain high levels of demand, consumer acceptance and market adoption.
The
health passport market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of
demand, consumer acceptance and market adoption. Our success in this new market will depend to a substantial extent on the willingness
of our customers to use, and to increase the frequency and extent of their utilization of, our services, as well as on our ability
to demonstrate the value of health passports to employers, health plans, government agencies and other purchasers. Negative publicity
concerning our services or the health passport market as a whole could limit market acceptance of our services. If our s, or their
members or patients, do not perceive the benefits of our services, or if our services are not competitive, then our market may
not develop at all, or it may develop more slowly than we expect. Similarly, individual and healthcare industry concerns or negative
publicity regarding patient confidentiality and privacy in the context of health passport could limit market acceptance of our
services. Our health passport may not be adopted by customers due to among other things, their belief that smartphones lack appropriate
security or their failure to understand blockchain. If customers fail to adopt our health passport, or health passports fail to
become adopted in the marketplace, it could have a material adverse effect on our business, financial condition or results of
operations. Separately, governments may come out with their own health passports or similar technology which makes our health
passport obsolete.
Risks
Associated with Our Governing Documents and Delaware Law
Our
certificate of incorporation provides for indemnification of officers and directors at our expense and limits their liability,
which may result in a major cost to us and hurt the interests of our stockholders because corporate resources may be expended
for the benefit of officers or directors.
Our
Certificate of Incorporation provides for indemnification as follows: “To the fullest extent permitted by applicable law,
the Corporation is authorized to provide indemnification of, and advancement of expenses to, such agents of the Corporation (and
any other persons to which Delaware law permits the Corporation to provide indemnification) through Bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification
and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by
applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the Corporation, its stockholders
and others.”
We
have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against
public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director,
officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer
or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled
by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process
relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either
of which factors is likely to materially reduce the market and price for our shares.
Our
certificate of incorporation contains a specific provision that limits the liability of our directors for monetary damages to
the Company and the Company’s stockholders and requires us, under certain circumstances, to indemnify officers, directors
and employees.
The
limitation of monetary liability against our directors, officers and employees under Delaware law and the existence of indemnification
rights to them may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our
certificate of incorporation contains a specific provision that limits the liability of our directors for monetary damages to
the Company and the Company’s stockholders. We also have contractual indemnification obligations under our employment and
engagement agreements with our executive officers and directors. The foregoing indemnification obligations could result in us
incurring substantial expenditures to cover the cost of settlement or damage awards against our directors and officers, which
the Company may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against
our directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation
by our stockholders against our directors and officers, even though such actions, if successful, might otherwise benefit us and
our stockholders.
Our
directors have the right to authorize the issuance of shares of preferred stock and additional shares of our common stock.
Our
directors, within the limitations and restrictions contained in our certificate of incorporation and without further action by
our stockholders, have the authority to issue shares of preferred stock from time to time in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights, and terms of redemption, liquidation preferences and
any other preferences, special rights and qualifications of any such series. Any issuance of shares of preferred stock could adversely
affect the rights of holders of our common stock. Should we issue additional shares of our common stock at a later time, each
investor’s ownership interest in our stock would be proportionally reduced.
Anti-takeover
provisions may impede the acquisition of Trxade.
Certain
provisions of the Delaware General Corporation Law (DGCL) have anti-takeover effects and may inhibit a non-negotiated merger or
other business combination. These provisions are intended to encourage any person interested in acquiring Trxade to negotiate
with, and to obtain the approval of, our directors, in connection with such a transaction. As a result, certain of these provisions
may discourage a future acquisition of Trxade, including an acquisition in which the stockholders might otherwise receive a premium
for their shares. In addition, we can also authorize “blank check” preferred stock, which could be issued by
our Board of Directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to
our common stock.
Compliance,
Reporting and Listing Risks
We
incur significant costs to ensure compliance with U.S. and NASDAQ Capital Market reporting and corporate governance requirements.
We
incur significant costs associated with our public company reporting requirements and with applicable U.S. and NASDAQ Capital
Market corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented
by the SEC and The NASDAQ Capital Market. The rules of The NASDAQ Capital Market include requiring us to maintain independent
directors, comply with other corporate governance requirements and pay annual listing and stock issuance fees. All of such SEC
and NASDAQ obligations require a commitment of additional resources including, but not limited, to additional expenses, and may
result in the diversion of our senior management’s time and attention from our day-to-day operations. We expect all of these
applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities
more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for
us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers.
We
will continue to incur increased costs as a result of being a reporting company, and given our limited capital resources, such
additional costs may have an adverse impact on our profitability.
We
are an SEC-reporting company. The rules and regulations under the Exchange Act require reporting companies to provide periodic
reports with interactive data files, which require that we engage legal, accounting and auditing professionals, and eXtensible
Business Reporting Language (XBRL) and EDGAR (Electronic Data Gathering, Analysis, and Retrieval) service providers. The engagement
of such services can be costly, and we may continue to incur additional losses, which may adversely affect our ability to continue
as a going concern. In addition, the Sarbanes-Oxley Act of 2002, as well as a variety of related rules implemented by the SEC,
have required changes in corporate governance practices and generally increased the disclosure requirements of public companies.
For example, as a result of being a reporting company, we are required to file periodic and current reports and other information
with the SEC and we have adopted policies regarding disclosure controls and procedures and regularly evaluate those controls and
procedures.
The
additional costs we continue to incur in connection with becoming a reporting company (expected to be several hundred thousand
dollars per year) will continue to further stretch our limited capital resources. Due to our limited resources, we have to allocate
resources away from other productive uses in order to continue to comply with our obligations as an SEC reporting company. Further,
there is no guarantee that we will have sufficient resources to continue to meet our reporting and filing obligations with the
SEC as they come due.
We
may not be able to comply with NASDAQ’s continued listing standards.
Our
common stock was approved for listing on The NASDAQ Capital Market under the symbol “MEDS”, on February 13,
2020. Notwithstanding such listing, there can be no assurance any broker will be interested in trading our stock. Therefore, it
may be difficult to sell your shares of common stock if you desire or need to sell them. Our underwriters are not obligated to
make a market in our securities, and even they do make a market, they can discontinue market making at any time without notice.
Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our securities will develop
or, if developed, that such market will continue.
There
is also no guarantee that we will be able to maintain our listing on The NASDAQ Capital Market for any period of time by perpetually
satisfying NASDAQ’s continued listing requirements. Our failure to continue to meet these requirements may result in our
securities being delisted from NASDAQ.
Among
the conditions required for continued listing on The NASDAQ Capital Market, NASDAQ requires us to maintain at least $2.5 million
in stockholders’ equity or $500,000 in net income over the prior two years or two of the prior three years, to have a majority
of independent directors, and to maintain a stock price over $1.00 per share. Our stockholders’ equity may not remain above
NASDAQ’s $2.5 million minimum, we may not generate over $500,000 of yearly net income, we may not be able to maintain independent
directors, and we may not be able to maintain a stock price over $1.00 per share. If we fail to timely comply with the applicable
requirements, our stock may be delisted. In addition, even if we demonstrate compliance with the requirements above, we will have
to continue to meet other objective and subjective listing requirements to continue to be listed on The NASDAQ Capital Market.
Delisting from The NASDAQ Capital Market could make trading our common stock more difficult for investors, potentially leading
to declines in our share price and liquidity. Without a NASDAQ Capital Market listing, stockholders may have a difficult time
getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be made more difficult and
the trading volume and liquidity of our stock could decline. Delisting from The NASDAQ Capital Market could also result in negative
publicity and could also make it more difficult for us to raise additional capital. The absence of such a listing may adversely
affect the acceptance of our common stock as currency or the value accorded by other parties. Further, if we are delisted, we
would also incur additional costs under state blue sky laws in connection with any sales of our securities. These requirements
could severely limit the market liquidity of our common stock and the ability of our stockholders to sell our common stock in
the secondary market. If our common stock is delisted by NASDAQ, our common stock may be eligible to trade on an over-the-counter
quotation system, such as the OTCQB Market, where an investor may find it more difficult to sell our stock or obtain accurate
quotations as to the market value of our common stock. In the event our common stock is delisted from The NASDAQ Capital Market,
we may not be able to list our common stock on another national securities exchange or obtain quotation on an over-the counter
quotation system.
Regulatory
Risks
Regulatory
changes that affect our distribution channels could harm our business.
At
the federal level, track and trace legislation requiring the use of pharmaceutical pedigree may restrict and disrupt the movement
of pharmaceuticals along the supply chain should the cost of complying with this legislation be too burdensome for smaller suppliers.
Changes in the United States healthcare industry and regulatory environment could have a material adverse impact on our results
of operations.
Many
of our products and services are intended to function within the structure of the healthcare financing and reimbursement system
currently being used in the United States. In recent years, the healthcare industry in the United States has changed significantly
in an effort to enhance efficiencies, reduce costs and improve patient outcomes. These changes have included cuts in Medicare
and Medicaid reimbursement levels, changes in the basis for payments, shifting away from fee-for-service and towards value-based
payments and risk-sharing models, increases in the use of managed care, and consolidation in the healthcare industry generally.
We expect that the healthcare industry in the United States shall continue to change and evolve in the near future. Changes in
the healthcare industry’s (or our pharmaceutical suppliers’) pricing, selling, inventory, distribution or supply policies
or practices could significantly reduce our revenues and net income. Additionally, if we experience disruptions in our supply
of generic drugs, our margins could be adversely affected.
We
distribute generic pharmaceuticals, which can be subject to both price deflation and price inflation. Continued volatility in
the availability, pricing trends or reimbursement of these generic drugs, or significant fluctuations in the nature, frequency
and magnitude of generic pharmaceutical launches, could have a material adverse impact on our results of operations. Additionally,
any future changes in branded and generics drug pricing could be significantly different than our projections. Generic drug manufacturers
are increasingly challenging the validity or enforceability of patents on branded pharmaceutical products. During the pendency
of these legal challenges, a generics manufacturer may begin manufacturing and selling a generic version of the branded product
prior to the final resolution of its legal challenge over the branded product’s patent. To the extent we source, contract
manufacture, and distribute such generic products, the brand-name company could assert infringement claims against us. While we
generally obtain indemnification against such claims from generic manufacturers as a condition of distributing their products,
these rights may not be adequate or sufficient to protect us.
We
are also required to comply with various state pricing gouging laws.
The
healthcare industry is highly regulated, and further regulation of our distribution businesses and technology products and services
could impose increased costs, negatively impact our profit margins and the profit margins of our customers, delay the introduction
or implementation of our new products, or otherwise negatively impact our business and expose us to litigation and regulatory
investigations.
Healthcare
fraud laws are often vague and uncertain, exposing us to potential liability.
We
are subject to extensive, and frequently changing, local, state and federal laws and regulations relating to healthcare fraud,
waste and abuse. Local, state and federal governments continue to strengthen their position and scrutiny over practices involving
fraud, waste and abuse affecting Medicare, Medicaid and other government healthcare programs. Many of the regulations applicable
to us, including those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts.
The regulations may be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that could require
us to make changes in our operations. If we fail to comply with applicable laws and regulations, we could become liable for damages
and suffer civil and criminal penalties, including the loss of licenses or our ability to participate in Medicare, Medicaid and
other federal and state healthcare programs.
Laws
reducing reimbursements for pharmaceuticals could ruin our industry.
Both
our profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement
rates for pharmaceuticals, medical treatments and related services, or changing the methodology by which reimbursement levels
are determined. The federal government may adopt measures that could reduce Medicare or Medicaid spending, or impose additional
requirements on healthcare entities. We cannot predict what alternative or additional deficit reduction initiatives or Medicare
payment reductions, if any, will ultimately be enacted into law, or the timing or affect any such initiatives or reductions would
have on us. Any of the changes discussed above may have a material adverse impact on our results of operations.
Operating,
security and licensure standards of federal agencies challenge our ability to comply with applicable laws and regulations.
We
are subject to the operating and security standards of the Drug Enforcement Administration (the DEA), the U.S. Food and Drug Administration
(the FDA), various state boards of pharmacy, state health departments, the U.S. Department of Health and Human Services (HHS),
the Centers for Medicare & Medicaid Services (CMS), and other comparable agencies. We are also subject to certain state laws
relating to price gouging. Although we have enhanced our procedures to ensure compliance, a regulatory agency or tribunal may
conclude that our operations are not compliant with applicable laws and regulations. In addition, we may be unable to maintain
or renew existing permits, licenses or any other regulatory approvals or obtain without significant delay, future permits, licenses
or other approvals needed for the operation of our businesses. Any noncompliance by us with applicable laws and regulations or
the failure to maintain, renew or obtain necessary permits and licenses could lead to litigation and have a material adverse impact
on our results of operations.
Pedigree
tracking laws and regulations could increase our regulatory burdens.
Congress
and state and federal agencies, including state boards of pharmacy and departments of health and the FDA, have made increased
efforts in the past year to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit,
adulterated or mislabeled drugs into the pharmaceutical distribution system (otherwise known as “pedigree tracking”).
In November 2013, Congress passed (and President Barack Obama signed into law) the Drug Quality and Security Act (the “DQSA”).
The DQSA establishes federal standards requiring supply-chain stakeholders to participate in an electronic, interoperable, lot-level
prescription drug track-and-trace system. The law also preempts state drug pedigree requirements and establishes new requirements
for drug wholesale distributors and third-party logistics providers, including licensing requirements in states that had not previously
licensed such entities.
In
addition, the Food and Drug Administration Amendments Act of 2007 requires the FDA to establish standards and identify and validate
effective technologies for the purpose of securing the pharmaceutical supply chain against counterfeit drugs. These standards
may include track-and-trace or authentication technologies, such as radio frequency identification devices, 2D data matrix barcodes,
and other similar technologies. On March 26, 2010, the FDA released the Serialized Numerical Identifier (the “SNI”)
guidance for manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI regulations in
our distribution operations. The DQSA and other pedigree tracking laws and regulations have increased the overall regulatory burden
and costs associated with our pharmaceutical distribution business and have had a material adverse impact on our results of operations.
We
are uncertain how new privacy laws shall be interpreted.
There
are numerous federal and state laws and regulations related to the privacy and security of personal information. In particular,
regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) establish privacy
and security standards that limit the use and disclosure of individually identifiable health information (known as “protected
health information”) and require the implementation of administrative, physical and technological safeguards to protect
the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected
health information. We are directly subject to certain provisions of the regulations as a “Business Associate”
through our relationships with customers. We are also directly subject to the HIPAA privacy and security regulations as a “Covered
Entity” with respect to our operations as a healthcare clearinghouse, specialty pharmacy and medical surgical supply
business. If we are unable to properly protect the privacy and security of protected health information entrusted to us, we could
be found to have breached our contracts with our customers. Further, if we fail to comply with applicable HIPAA privacy and security
standards, we could face civil and criminal penalties. Although we have implemented and continue to maintain policies and processes
to assist us in complying with these regulations and our contractual obligations, we cannot provide assurances regarding how these
regulations will be interpreted, enforced or applied by the government and regulators to our operations. In addition to the risks
associated with enforcement activities and potential contractual liabilities, our ongoing efforts to comply with evolving laws
and regulations at the federal and state level might also require us to make costly system purchases /or modifications from time
to time.
There
are continued uncertainties associated with efforts to change or repeal healthcare reforms, and we cannot predict their full effect
on us at this time.
The
ACA significantly expanded health insurance coverage to uninsured Americans and changed the way healthcare is financed by both
governmental and private payers. While certain provisions of the ACA took effect immediately, others have delayed effective dates
or require further rulemaking action or regulatory guidance by governmental agencies to implement or finalize (e.g., nondiscrimination
in health programs and activities, or excise taxes on high-cost employer-sponsored health coverage). Further, there are continued
uncertainties associated with efforts to add, change or repeal certain provisions of the ACA or other healthcare reforms, and
we cannot predict their full effect on us at this time. While there is currently a substantial lack of clarity around the likelihood,
timing and details of any such policies and reforms, such policies and reforms may have a material adverse impact on our results
of operations.
Medical
billing and coding laws may subject us to fines and investigations.
Medical
billing, coding and collection activities are governed by numerous federal and state civil and criminal laws. In connection with
these laws, we may be subjected to federal or state government investigations and possible penalties may be imposed upon us, false
claims actions may have to be defended, private payers may file claims against us and we may be excluded from Medicare, Medicaid
or other government-funded healthcare programs. Any such proceeding or investigation could have a material adverse impact on our
results of operations.
It
may be difficult and costly for us to comply with the extensive government regulations to which our business is subject.
Our
operations are subject to extensive regulation by the U.S. federal and state governments. In addition, as we expand our operations,
we may also become subject to the regulations of foreign jurisdictions, as well as additional regulations relating to environmental
matters, transportation of pharmaceutical products, shipping restrictions, and import and export restrictions. We are also required
to comply with various state pricing gouging laws.
Further,
the enactment of new rules and regulations could adversely affect our business. For example, the ACA has the primary goal of reducing
the cost of healthcare and providing medical coverage to some of the nation’s 25 million uninsured. Depending on future
enforcement or additional rules and regulations created around it, pharmaceutical pricing controls could be established resulting
in substantially reduced margins and limited reimbursement for pharmacies and all other healthcare provider bases. In turn, this
may adversely affect our cash flow, profitability, and growth.
Risks
Relating to Our Industry in General
The
public health crisis involving the abuse of prescription opioid pain medication could have a material negative effect on our business.
Our
Pharmaceutical segment distributes prescription opioid pain medications. In recent years, the abuse of prescription opioid pain
medication has become a public health crisis.
A
significant number of counties, municipalities and other plaintiffs, including a number of state attorney generals, have filed
lawsuits against pharmaceutical manufacturers, pharmaceutical wholesale distributors, retail chains and others relating to the
manufacturing, marketing or distribution of prescription opioid pain medications. The defense and resolution of future lawsuits
and events relating to these lawsuits could have a material adverse effect on our results of operations, financial condition,
cash flows or liquidity or have adverse reputational or operational effects on our business.
Other
legislative, regulatory or industry measures related to the public health crisis involving the abuse of prescription opioid pain
medication and the distribution of these medications could affect our business in ways that we may not be able to predict. For
example, several states have now adopted taxes or other fees on the sale of opioids, and several other states have proposed similar
legislative initiatives. These laws and proposals vary in the tax amounts imposed and the means of calculation. Liabilities for
taxes or assessments under any such laws could have an adverse impact on our results of operations unless we are able to mitigate
them through operational changes or commercial arrangements where permitted.
Changes
to the U.S. healthcare environment may not be favorable to us.
Over
a number of years, the U.S. healthcare industry has undergone significant changes designed to increase access to medical care,
improve safety and patient outcomes, contain costs and increase efficiencies. These changes include adoption of the Patient Protection
and Affordable Care Act (ACA), a general decline in Medicare and Medicaid reimbursement levels, efforts by healthcare insurance
companies to limit or reduce payments to pharmacies and providers, the basis for payments beginning to transition from a fee-for-service
model to value-based payments and risk-sharing models, and the industry shifting away from traditional healthcare venues like
hospitals and into clinics, physician offices and patients’ homes.
We
expect the U.S. healthcare industry to continue to change significantly in the future. Possible changes include repeal and replacement
of major parts of the Patient Protection and Affordable Care Act, further reduction or limitations on governmental funding at
the state or federal level, efforts by healthcare insurance companies to further limit payments for products and services or changes
in legislation or regulations governing prescription pharmaceutical pricing, healthcare services or mandated benefits. These possible
changes, and the uncertainty surrounding these possible changes, may cause healthcare industry participants to reduce the number
of products and services they purchase from us or the price they are willing to pay for our products and services, which could
adversely affect us.
Consolidation
in the U.S. healthcare industry may negatively impact our results of operations.
In
recent years, U.S. healthcare industry participants, including distributors, manufacturers, suppliers, healthcare providers, insurers
and pharmacy chains, have consolidated or formed strategic alliances. Consolidations create larger enterprises with greater negotiating
power, and also could result in the possible loss of a customer where the combined enterprise selects one distributor from two
incumbents. If this consolidation trend continues, it could adversely affect our results of operations.
Accounting
Risks
We
have identified material weaknesses in our internal control over financial reporting which could, if not remediated, adversely
affect our ability to report our financial condition, cash flows and results of operations in a timely and accurate manner and/or
increase the risk of future misstatements, which could have a material adverse effect on our business, financial condition, cash
flows and results of operations and could cause the market value of our shares of common stock and/or debt securities to decline.
Maintaining
effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce
reliable financial statements. As reported under “Item 9A. Controls and Procedures”, as of December 31, 2020, our
CEO and CFO have determined that our disclosure controls and procedures were not effective. Additionally, our management is responsible
for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act. As disclosed below under “Item 9A. Controls and Procedures”, based on reviews conducted by management,
we have concluded that a material weakness exists in the Company’s internal controls over financial reporting. A material
weakness is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a
reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected
on a timely basis.
Maintaining
effective disclosure controls and procedures and effective internal control over financial reporting are necessary for us to produce
reliable financial statements and the Company is committed to remediating its material weaknesses in such controls as promptly
as possible.
The
Company has identified certain remediation actions and is in the process of implementing them, but such efforts are not complete
and remain ongoing. If we do not complete our remediation in a timely manner or if our remedial measures are insufficient to address
the material weaknesses, or if additional material weaknesses in our internal controls are discovered or occur in the future,
it may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate
manner and there will continue to be an increased risk of future misstatements. Although we regularly review and evaluate internal
controls systems to allow management to report on the effectiveness of our internal controls over financial reporting, we may
discover additional weaknesses in our internal controls over financial reporting or disclosure controls and procedures. The next
time we evaluate our internal controls over financial reporting and disclosure controls and procedures, if we identify one or
more new material weaknesses or have been unable to timely remediate our existing material weaknesses, we would be unable to conclude
that our internal controls over financial reporting or disclosure controls and procedures are effective. If we are unable in the
future to conclude that our internal controls over financial reporting or our disclosure controls and procedures are effective,
we may not be able to report our financial condition and results of operations in a timely and accurate manner, which could have
a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market
value of our shares of common stock to decline. In addition, any potential future restatements could subject us to additional
adverse consequences, including sanctions by the SEC, stockholder litigation and other adverse actions. Moreover, we may be the
subject of further negative publicity focusing on such financial statement adjustments and resulting restatement and negative
reactions from our stockholders, creditors or others with whom we do business. The occurrence of any of the foregoing could have
a material adverse effect on our business, financial condition, cash flows and results of operations and could cause the market
value of our shares of common stock to decline.
We
may experience adverse impacts on our reported results of operations as a result of adopting new accounting standards or interpretations.
Our
implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely
affect our reported financial position or operating results or cause unanticipated fluctuations in our reported operating results
in future periods.
A
significant amount of our revenues has historically been due to only a small number of customers, and if we were to lose any of
those customers, our results of operations would be adversely affected.
During
the years ended December 31, 2020 and 2019, sales to two customers represent greater than 10% of revenue at 25% and 15% in 2020
and 10.3% and 10.8% in 2019. As a result, in the event our customers do not pay us amounts owed, sales to such customers cease
or we are unable to find new customers moving forward, it could have a materially adverse effect on our results of operations.
Risks
Related to Our Common Stock
Our
common stock has in the past been a “penny stock” under SEC rules, and may be subject to the “penny
stock” rules in the future. It may be more difficult to resell securities classified as “penny stock.”
In
the past (including immediately prior to our common stock being listed on The NASDAQ Capital Market in February 2020), our common
stock was a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a
per-share price below $5.00). While our common stock is not now considered a “penny stock” because it is listed
on The NASDAQ Capital Market, if we are unable to maintain that listing, unless we maintain a per-share price above $5.00, our
common stock will become “penny stock.” These rules impose additional sales practice requirements on broker-dealers
that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers”
or “accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying
persons of investments in penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise
exempt from the rules, a standardized risk disclosure document that provides information about penny stocks and the risks in the
penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock,
disclose the compensation of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing
the market value of each penny stock held in the customer’s account, provide a special written determination that the penny
stock is a suitable investment for the purchaser, and receive the purchaser’s written agreement to the transaction.
Legal
remedies available to an investor in “penny stocks” may include the following:
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If
a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal
or states securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.
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If
a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons
and firms that committed the fraud for damages.
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These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that
becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our
securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability
to resell our common stock.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not
invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the
increased financial risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time,
if ever, our common stock will not be classified as a “penny stock” in the future.
A
significant number of our shares are eligible for sale and their sale or potential sale may depress the market price of our common
stock.
Sales
of a significant number of shares of our common stock in the public market could harm the market price of our common stock. Most
of our common stock is available for resale in the public market, and if sold would increase the supply of our common stock, thereby
causing a decrease in its price. Some or all of our shares of common stock may be offered from time to time in the open market
pursuant to effective registration statements and/or compliance with Rule 144, which sales could have a depressive effect on the
market for our shares of common stock. Subject to certain restrictions, a person who has held restricted shares for a period of
six months may generally sell common stock into the market. The sale of a significant portion of such shares when such shares
are eligible for public sale may cause the value of our common stock to decline in value.
There
may not be sufficient liquidity in the market for our securities in order for investors to sell their shares. The market price
of our common stock may continue to be volatile.
The
market price of our common stock will likely continue to be highly volatile. Some of the factors that may materially affect the
market price of our common stock are beyond our control, such as conditions or trends in the industry in which we operate or sales
of our common stock. This situation is attributable to a number of factors, including the fact that we are a small company which
is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate
or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we
became more seasoned and viable.
As
a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as
compared to a mature issuer which has a large and steady volume of trading activity that will generally support continuous sales
without an adverse effect on share price. It is possible that a broader or more active public trading market for our common stock
will not develop or be sustained, or that trading levels will not continue. These factors may materially adversely affect the
market price of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme
price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies
for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely
affect the market price of our common stock.
The
exercise of outstanding warrants, options and shares issued in connection with a joint venture and acquisition will be dilutive
to our existing stockholders.
As
of the date of this Report, we had 8,093,199 shares of our common stock issued and outstanding and the following securities, which
are exercisable into shares of our common stock, which are due to be issued or granted, and which are contingently issuable:
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82,751 shares of our common stock issuable upon the exercise of warrants with exercise prices ranging from $0.06 to $9.00 per
share;
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425,817 shares of our common stock issuable upon the exercise of options with exercise prices ranging from $2.46 per share to
$9.60 per share; and
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20,000 shares of common stock issuable upon the exercise of options with an exercise price of $6.55 per share granted in February
2021.
We
have never paid or declared any dividends on our common stock.
We
have never paid or declared any dividends on our common stock or preferred stock. Likewise, we do not anticipate paying, in the
near future, dividends or distributions on our common stock. Any future dividends on common stock will be declared at the discretion
of our Board of Directors and will depend, among other things, on our earnings, our financial requirements for future operations
and growth, and other facts as we may then deem appropriate. Since we do not anticipate paying cash dividends on our common stock,
return on your investment, if any, will depend solely on an increase, if any, in the market value of our common stock.
Our
common stock price is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our common stock has been volatile in the past and the market price of our common stock is likely to be highly
volatile in the future. You may not be able to resell shares of our common stock following periods of volatility because of the
market’s adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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actual
or anticipated fluctuations in our operating results;
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the
absence of securities analysts covering us and distributing research and recommendations about us;
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we
may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
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overall
stock market fluctuations;
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announcements
concerning our business or those of our competitors;
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actual
or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
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conditions
or trends in our industry;
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litigation;
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changes
in market valuations of other similar companies;
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future
sales of common stock;
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departure
of key personnel or failure to hire key personnel; and
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general
market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market
in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to
the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance.
Our
Chief Executive Officer and President are our two largest stockholders and, as a result, they can exert control over us and have
actual or potential interests that may differ from yours.
Mr.
Suren Ajjarapu, our CEO, and Mr. Prashant Patel, our President, beneficially own, in the aggregate, over 53% of our common stock.
As a result, these stockholders, acting together, will be able to influence many matters requiring stockholder approval, including
the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership
may have the effect of delaying, preventing or deterring a change in control, and could deprive our stockholders of an opportunity
to receive a premium for their shares of common stock as part of a sale of our company and may affect the market price of our
stock.
Further,
Mr. Ajjarapu and Mr. Patel may have interests that differ from those of other holders of our common stock. As a result, Mr. Ajjarapu
and Mr. Patel may vote the shares they own or control or otherwise cause us to take actions that may conflict with your best interests
as a stockholder, which could adversely affect our results of operations and the trading price of our common stock.
Through
this control, Mr. Ajjarapu and Mr. Patel can control our management, affairs and all matters requiring stockholder approval, including
the approval of significant corporate transactions, a sale of our company, decisions about our capital structure and the composition
of our Board of Directors.
Our
common stock may continue to be followed by only a limited number of analysts and there may continue to be a limited number of
institutions acting as market makers for our common stock.
For
the foreseeable future, our common stock is unlikely to be followed by a significant number of market analysts, and there may
be few institutions acting as market makers for our common stock. Either of these factors could adversely affect the liquidity
and trading price of our common stock. Until our common stock is fully distributed, and an orderly market develops in our common
stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock are determined
in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common
stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor
perception of us and general economic and market conditions. No assurances can be given that an orderly or liquid market will
ever develop for the shares of our common stock.
Because
of the anticipated low price of the securities being registered, many brokerage firms may not be willing to effect transactions
in these securities. Purchasers of our securities should be aware that any market that develops in our stock will be subject to
the penny stock restrictions.
Risks
Relating to The JOBS Act
The
JOBS Act allows us to postpone the date by which we must comply with certain laws and regulations and to reduce the amount of
information provided in reports filed with the SEC. We cannot be certain if the reduced disclosure requirements applicable to
“emerging growth companies” will make our common stock less attractive to investors.
We
are and we will remain an “emerging growth company” until the earliest to occur of (i) the last day of the
fiscal year during which our total annual revenues equal or exceed $1.07 billion (subject to adjustment for inflation), (ii) the
last day of the end of our 2024 fiscal year (5 years from our first public offering), (iii) the date on which we have, during
the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a
“large accelerated filer” (with at least $700 million in public float) under the Exchange Act. For so long
as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
as described in further detail in the risk factors below. We cannot predict if investors will find our common stock less attractive
because we will rely on some or all of these exemptions. If some investors find our common stock less attractive as a result,
there may be a less active trading market for our common stock and our stock price may be more volatile. If we avail ourselves
of certain exemptions from various reporting requirements, as is currently our plan, our reduced disclosure may make it more difficult
for investors and securities analysts to evaluate us and may result in less investor confidence.
Our
election not to opt out of the JOBS Act extended accounting transition period may not make our financial statements easily comparable
to other companies.
Pursuant
to the JOBS Act, as an “emerging growth company”, we can elect to opt out of the extended transition period
for any new or revised accounting standards that may be issued by the Public Company Accounting Oversight Board (PCAOB) or the
SEC. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and
it has different application dates for public or private companies, we, as an “emerging growth company”, can
adopt the standard for the private company. This may make a comparison of our financial statements with any other public company
which is not either an “emerging growth company” nor an “emerging growth company” which
has opted out of using the extended transition period, more difficult or impossible as possible different or revised standards
may be used.
The
JOBS Act also allows us to postpone the date by which we must comply with certain laws and regulations intended to protect investors
and to reduce the amount of information provided in reports filed with the SEC.
The
JOBS Act is intended to reduce the regulatory burden on “emerging growth companies”. The Company meets the
definition of an “emerging growth company” and so long as it qualifies as an “emerging growth company,”
it will, among other things:
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be
exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting
firm provide an attestation report on the effectiveness of its internal control over financial reporting;
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be
exempt from the “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation
of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder
vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other
business combinations) of The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and certain
disclosure requirements of the Dodd-Frank Act relating to compensation of Chief Executive Officers;
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be
permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange
Act and instead provide a reduced level of disclosure concerning executive compensation; and
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be
exempt from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s
report on the financial statements.
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The
Company currently intends to take advantage of all of the reduced regulatory and reporting requirements that will be available
to it so long as it qualifies as an “emerging growth company”. The Company has elected not to opt out of the
extension of time to comply with new or revised financial accounting standards available under Section 102(b)(1) of the JOBS Act.
Among other things, this means that the Company’s independent registered public accounting firm will not be required to
provide an attestation report on the effectiveness of the Company’s internal control over financial reporting so long as
it qualifies as an “emerging growth company”, which may increase the risk that weaknesses or deficiencies in
the internal control over financial reporting go undetected. Likewise, so long as it qualifies as an “emerging growth
company”, the Company may elect not to provide certain information, including certain financial information and certain
information regarding compensation of executive officers, which it would otherwise have been required to provide in filings with
the SEC, which may make it more difficult for investors and securities analysts to evaluate the Company. As a result, investor
confidence in the Company and the market price of its common stock may be adversely affected.
Notwithstanding
the above, we are also currently a “smaller reporting company”, meaning that we are not an investment company,
an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a
public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year.
In the event that we are still considered a “smaller reporting company”, at such time are we cease being an
“emerging growth company”, the disclosure we will be required to provide in our SEC filings will increase,
but will still be less than it would be if we were not considered either an “emerging growth company” or a
“smaller reporting company”. Specifically, similar to “emerging growth companies”, “smaller
reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt
from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms
provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased
disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited
financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as an “emerging growth
company” or “smaller reporting company” may make it harder for investors to analyze the Company’s
results of operations and financial prospects.
General
Risk Factors
Failure
to adequately manage our planned aggressive growth strategy may harm our business or increase our risk of failure.
For
the foreseeable future, we intend to pursue an aggressive growth strategy for the expansion of our operations through increased
product development and marketing. Our ability to rapidly expand our operations will depend upon many factors, including our ability
to work in a regulated environment, market value-added products effectively to independent pharmacies, establish and maintain
strategic relationships with suppliers, and obtain adequate capital resources on acceptable terms. Any restrictions on our ability
to expand may have a materially adverse effect on our business, results of operations, and financial condition. Accordingly, we
may be unable to achieve our targets for sales growth, and our operations may not be successful or achieve anticipated operating
results.
Additionally,
our growth may place a significant strain on our managerial, administrative, operational, and financial resources and our infrastructure.
Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require
us to, among other things:
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implement
additional management information systems;
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further
develop our operating, administrative, legal, financial, and accounting systems and controls;
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hire
additional personnel;
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develop
additional levels of management within our company;
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locate
additional office space;
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maintain
close coordination among our engineering, operations, legal, finance, sales and marketing, and client service and support
organizations; and
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manage
our expanding international operations.
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As
a result, we may lack the resources to deploy our services on a timely and cost-effective basis. Failure to accomplish any of
these requirements could impair our ability to deliver services in a timely fashion or attract and retain new customers.
If
we do not successfully implement any acquisition strategies, our operating results and prospects could be harmed.
We
face competition within our industry for acquisitions of businesses, technologies and assets, and, in the future, such competition
may become more intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not
be able to complete the acquisition on commercially reasonable terms or at all because of such competition. Furthermore, if we
enter into negotiations that are not ultimately consummated, those negotiations could result in diversion of management time and
significant out-of-pocket costs. Even if we are able to complete such acquisitions, we may additionally expend significant amounts
of cash or incur substantial debt to finance them, which indebtedness could result in restrictions on our business and use of
available cash. In addition, we may finance or otherwise complete acquisitions by issuing equity or convertible debt securities,
which could result in dilution of our existing stockholders. If we fail to evaluate and execute acquisitions successfully, we
may not be able to realize their benefits. If we are unable to successfully address any of these risks, our business, financial
condition or operating results could be harmed.
If
we make any acquisitions, they may disrupt or have a negative impact on our business.
If
we make acquisitions in the future, funding permitting, which may not be available on favorable terms, if at all, we could have
difficulty integrating the acquired company’s assets, personnel and operations with our own. We do not anticipate that any
acquisitions or mergers we may enter into in the future would result in a change of control of the Company. In addition, the key
personnel of the acquired business may not be willing to work for us. We cannot predict the effect expansion may have on our core
business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business,
distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied
by a number of inherent risks, including, without limitation, the following:
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the
difficulty of integrating acquired products, services or operations;
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the
potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
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difficulties
in maintaining uniform standards, controls, procedures and policies;
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the
potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
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the
potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products
to new and existing customers;
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the
effect of any government regulations which relate to the business acquired;
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potential
unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool,
reposition or modify the marketing and sales of acquired products or operations, or the defense of any litigation, whether
or not successful, resulting from actions of the acquired company prior to our acquisition; and
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potential
expenses under the labor, environmental and other laws of various jurisdictions.
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Our
business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other
problems encountered in connection with an acquisition, many of which cannot be presently identified. These risks and problems
could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results
of operations.
We
may apply working capital and future funding to uses that ultimately do not improve our operating results or increase the value
of our securities.
In
general, we have complete discretion over the use of our working capital and any new investment capital we may obtain in the future.
Because of the number and variety of factors that could determine our use of funds, our ultimate expenditure of funds (and their
uses) may vary substantially from our current intended operating plan for such funds.
We
intend to use existing working capital and future funding to support the development of our products and services, product purchases
in our wholesale distribution division, the expansion of our marketing, or the support of operations to educate our customers.
We will also use capital for market and network expansion, acquisitions, and general working capital purposes. However, we do
not have more specific plans for the use and expenditure of our capital. Our management has broad discretion to use any or all
of our available capital reserves. Our capital could be applied in ways that do not improve our operating results or otherwise
increase the value of a stockholder’s investment.
Our
websites may encounter technical problems and service interruptions.
Our
websites may in the future experience slower response times or interruptions as a result of increased traffic or other reasons.
These delays and interruptions resulting from failure to maintain Internet service connections to our site could frustrate visitors
and reduce our future web site traffic, which could have a material adverse effect on our business.
The
sale of shares by our directors and officers may adversely affect the market price for our shares.
Sales
of significant amounts of shares held by our officers and directors, or the prospect of these sales, could adversely affect the
market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders
from realizing a premium over our stock price.
Stockholders
may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional
shares of our common stock.
Wherever
possible, our Board of Directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe
that the non-cash consideration will consist of restricted shares of our common stock or where shares are to be issued to our
officers, directors and applicable consultants. Our Board of Directors has authority, without action or vote of the stockholders,
but subject to NASDAQ rules and regulations (which generally require shareholder approval for any transactions which would result
in the issuance of more than 20% of our then outstanding shares of common stock or voting rights representing over 20% of our
then outstanding shares of stock), to issue all or part of the authorized but unissued shares of common stock. In addition, we
may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result
in dilution of the ownership interests of existing stockholders, which may further dilute common stock book value, and that dilution
may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company
because the shares may be issued to parties or entities committed to supporting existing management.
Our
growth depends in part on the success of our strategic relationships with third parties.
In
order to grow our business, we anticipate that we will need to continue to depend on our relationships with third parties, including
our technology providers. Identifying partners, and negotiating and documenting relationships with them, requires significant
time and resources. Our competitors may be effective in providing incentives to third parties to favor their products or services,
or utilization of, our products and services. In addition, acquisitions of our partners by our competitors could result in a decrease
in the number of our current and potential customers. If we are unsuccessful in establishing or maintaining our relationships
with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our results of operations
may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer use of
our products or increased revenue.
Claims,
litigation, government investigations, and other proceedings may adversely affect our business and results of operations.
As
a company offering a wide range of products and services, we are regularly subject to actual and threatened claims, litigation,
reviews, investigations, and other proceedings, including proceedings relating to goods and services offered by us and by third
parties, and other matters. Any of these types of proceedings, including currently pending proceedings as discussed herein, may
have an adverse effect on us because of legal costs, disruption of our operations, diversion of management resources, negative
publicity, and other factors. The outcomes of these matters are inherently unpredictable and subject to significant uncertainties.
Determining legal reserves and possible losses from such matters involves judgment and may not reflect the full range of uncertainties
and unpredictable outcomes. Until the final resolution of such matters, we may be exposed to losses in excess of the amount recorded,
and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could
have a material effect on our business, consolidated financial position, results of operations, or cash flows. In addition, it
is possible that a resolution of one or more such proceedings, including as a result of a settlement, could require us to make
substantial future payments, prevent us from offering certain products or services, require us to change our business practices
in a manner materially adverse to our business, requiring development of non-infringing or otherwise altered products or technologies,
damaging our reputation, or otherwise having a material effect on our operations.
For
all of the foregoing reasons and others set forth herein, an investment in our securities involves a high degree of risk.