Here are the forward-looking statements:
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Information
Certain statements contained herein, including, without limitation, statements containing the words “believes”, “anticipates”, “expects” and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; the ability to raise adequate capital on reasonable terms, if at all, to execute the Company’s business plan and other factors referenced in this and previous filings.
Given these uncertainties, readers are cautioned not to place undue reliance on such forward looking statements.
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this document.
Overview
ScripsAmerica, Inc. (www.ScripsAmerica.com) is a provider of efficient pharmaceutical supply chain management services ranging from strategic sourcing to delivering niche generic pharmaceuticals to market. The Company is a Delaware corporation that was formed in May 2008. Currently, ScripsAmerica’s primary focus is on the development, branding and distribution of rapidly dissolving drug formulations for Over the Counter (OTC) drugs, vitamins and supplements. Specifically, we have developed a branded OTC product called “RapiMed” (www.rapimeds.com), which is a children’s pain reliever and fever reducer currently set for launch in retail outlets across North America first half of the year in 2014. In addition, we also generate revenues under agreements with third parties pursuant to which we receive fees based on the gross profit on sales of pharmaceutical products by such third parties.
Evolving Business Model
Since our inception, ScripsAmerica’s business model has evolved significantly. Initially, the company primarily provided pharmaceutical distribution services to a wide range of end users across the health care industry through the pharmaceutical distributors in North America. End users include retail, hospitals, long-term care facilities and government and home care agencies. The majority of our revenue from this model came from orders facilitated by McKesson, the largest pharmaceutical distributor in North America, and a few other clients.
However, because we had no exclusive contract with McKesson to utilize our services and the margins began to shrink, we have moved away from providing these pharmaceutical distribution services as our main source of income and are now primarily focused on generating revenue through our RapiMed and other Quickmelt technology products and our independent pharmacy distribution model.
On September 6, 2013, the Company and Marlex Pharmaceuticals, Inc., its former Contract Packager, entered into an agreement pursuant to which the Company and its former Contract Packager resolved various disagreements that had arisen between the parties on various projects covered by written agreements between the Company and its former Contract Packager, namely (i) the Contract Packager’s agreement with the Office of Health Affairs, a branch of the U.S. Department of Homeland Security, in conjunction with the Defense Logistics Agency (DLA), (ii) the parties agreement with respect to the production and packaging of the Company’s RapiMed products and (iii) shares of the Company’s stock issued to the principals of the Contract Packager for consulting services, entered into a settlement agreement. The settlement agreement provided mutual releases, continued the DLA arrangement under modified terms, as well as a partial reimbursement over fifteen months for previous amounts due the Company (see Note 6).
This agreement provided that the Company will provide Marlex with financing through a related party, Development 72 LLC, for the continuance of its pharmaceutical distribution contract with the DLA and for the Contract Packager to make 15 monthly payments to the Company with respect to prior shipments under DLA contract (which had had stopped in May 2013 due to a dispute but have resumed in September 2013). The Company’s percentage of the profits under the DLA contract had been revised in terms of the rate and the number of bottles of product sold to the DLA for which the Company would receive payments.
To protect our position with respect to the RapiMed product we also terminated the Rapid Melt tablet agreement with the Contract Packager. All development costs through the date of this cancellation agreement have previously been expensed and paid. The Company subsequently entered into a manufacturing and supply contract directly with the manufacturer of this technology.
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The principals of the Contract Packager have returned 500,000 shares of common stock of the Company which were previously valued at $50,000, which they had received under consulting agreements and another 400,000 shares issued to them that would be held as security for the payments due to the Company under this September agreement. A portion of the 400,000 shares would be released in equal amounts on a monthly basis as free trading shares to the principals of the Contract Packager. In September 2013, the Company retired the 500,000 shares and reversed the consulting expense previously incurred through additional paid in capital.
In May 2013, the Company signed a “Development, Manufacturing and Supply Agreement” with a pharmaceutical manufacturer to develop and manufacture our 80mg and 160mg Acetaminophen Rapid melt tablets. The initial term of this Development agreement is two years and the Company has an option to extend the agreement for one five (5) year term. In addition to development and scale up costs, the Company will pay up to $150,000 to license the technology during the first two years. In order to maintain exclusivity rights for the technology the Company must purchase a minimum of 10,000,000 of each of the 80mg and 160mg tablets in the first year and 16,500,000 of each of the 80mg 160mg tablet in the second year. The Company must meet the second year annual volume requirements to maintain the exclusivity of the license under this new Development agreement. Upon approval of sample batches and stability testing the Company anticipates launching this orally disintegrating tablet in the first half of the year 2014, but the timing will be dependent on funding and getting production of product approved.
RapiMed Children’s Pain Reliever and Fever Reducer
Our target market for RapiMed is 2-11 year olds and we anticipate great success because our of our its NEW oral delivery technology (ODT) that is more effective than existing products due to its ability to melt faster, taste better and provide more accurate dosing.
Unlike other products available, ScripsAmerica’s is much smaller and dissolves in the child’s mouth in 25 seconds, therefore entering their system faster. RapiMed contains Acetaminophen (main ingredient in Tylenol), however the bitter taste of this active ingredient is masked by a patented technology. The cherry and wild grape flavors that our product will come in are most appealing to children. Additionally, RapiMed’s dosage is controlled, not like the syringe based competing products and we offer the 80 mg for 2-6 year olds, and 160 mg for the 6-11 year olds.
RapiMed’s packaging is convenient, portable, child resistant and easy to use as well as eye-catching. The product will be labeled in both English and Spanish to serve the expanding Hispanic markets in America. The contents are aspirin free, ibuprofen free, sugar free and gluten free as well. Since the numerous Tylenol recalls in the recent past, there is a clear need for a better controlled, more efficient product to fill the void. We believe our RapiMed is that product.
ScripsAmerica presented RapiMed to retail buyers in February of 2013 at the ECRM Cough and Cold show in Florida and we received very positive feedback. We’ve engaged DPG to roll out the product to retailers nationwide. Depending on the retailer, the product will be promoted through in-store temporary price reductions, coupons, store circulars, buy-two-and save packs, as a clip-strip program, radio and print advertising.
Independent Pharmacy Distribution
In addition to its RapiMed and other Quickmelt products, we are also implementing our plan to generate significant revenue by entering the Independent Pharmacy distribution market.
This market will allow us to provide a much-needed solution to a problem experienced by small retail chains and individual pharmacies which is their inability to fill prescriptions for their clients when the prescription calls for controlled substances. The reason for this problem is that in order to secure these controlled substances the manufacturers of these products impose minimum order quantities that are far beyond the size of orders typically made by small, independent pharmacies.
As of November 1, 2013, ScripsAmerica entered into an agreement with WholesaleRx, Inc., which that represents over 700 such independent pharmacy operations. We will order the goods from the manufacturers and have them shipped to WholesaleRx, which is DEA and State-licensed to store and distribute controlled substances. The goods will be shipped to the pharmacies in the bottles as received by the manufacturer so that this will become a “pick-n-pack” operation. Upon receiving orders from the pharmacies, goods will be sent to them COD which will eliminate any accounts receivable issues. Prior to November 1, 2013, the Company and WholesaleRx had an oral agreement to pursuant to which the Company secured third party financing to fund WholesaleRx’s purchase orders and the Company in consideration of which the Company would receive 12.5% of the WholesaleRx’s “gross profit” for the prior month (which gross profit would consist of (i) sales to all customers minus (ii) cost of goods sold, freight in (to WholesaleRx), credits and allowances). Under the November 1 Agreement, ScripsAmerica agreed to provide purchase order financing to WholesaleRx. In consideration for providing financing for WholesaleRx’s purchaser orders, and to cover the Company’s costs in administering the purchase order financing, WholesaleRx has agreed to pay the Company on or before the 15th calendar day of each month 20% of the gross profit (as described above) for the prior calendar month. If WholesaleRx is late in paying such 20% fee, then the amount owed will accrue interest at the rate of 18% per annum until paid.
Description of Revenues
ScripsAmerica offers fulfillment of prescription and over the counter (“OTC”) orders. To fulfill purchase orders from customers, ScripsAmerica processes orders to the end user’s desired specifications. Capabilities range from unit of use packaging for in-patient nursing homes and hospitals to bulk packaging for government and international organizations.
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Revenue is recognized when product is shipped from a contract packager to our customers’ warehouses and is adjusted for anticipated charge backs from our customers which include inventory credits, discounts or volume incentives. These charge back costs are received monthly from our customers’ and the sales revenue and accounts receivables are reduced accordingly based on historical experience, customer contract programs, product pricing trends and the mix of products shipped.
Purchase orders from our customers generate our shipments, provide persuasive evidence that an arrangement exists and that the pricing is determinable. The credit worthiness of our customers assures that collectability is reasonably assured.
We also recognize a portion of our revenue on a net basis according to ASC 605-45, Revenue Recognition: Principal Agent Considerations. Since we are not deemed to be the principal in these sales transactions we do not report the transaction on a gross basis in our statement of operations. These sales transactions relate to a contract that our Contract Packager has obtained with a government agency. The revenue is reported in a separate line in the statement of operations as Product revenues net from Contract Packager, the gross sales are reduced by the cost of sales fees from our Contract Packager.
We also recognize revenue for a commission fee earned on shipments of generic pharmaceutical and OTC products by WholesaleRx, which is a DEA and State-licensed to store and distribute controlled substances, pursuant to an agreement entered into as of November 1, 2013. Under this written agreement with WholesaleRx, the Company will earn a 20% commission fees on the gross margin of products shipped to independent pharmacies by WholesaleRx. From August 2013 to October 31, 2013, the Company had been receiving a 12.5% commission fee on the gross margin of such shipments under an oral agreement with WholesaleRx.
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