UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 2)

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the quarterly period ended March 31, 2012

 

OR

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number:  000-54550

 

SCRIPSAMERICA, INC.

(Exact name of registrant as specified in its charter)

 

	DELAWARE		26-2598594
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

77 McCullough Drive, Suite 7, New Castle, Delaware 19720

(Address of principal executive offices)

 

800-957-7622

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer	o	Accelerated filer	o
	Non-accelerated filer	o	Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

 

As of May 10, 2012, the registrant had 54,939,400 shares of common stock, $.001 par value, issued and outstanding and 2,990,252 shares of Series A Preferred Stock issued and outstanding.

 

 

 

 

EXPLANATORY NOTE

 

This Amendment No. 2 to the quarterly report on Form 10-Q/A (this “Amendment”) is being filed by ScripsAmerica, Inc. (the “Company”) to amend the Company’s unaudited financial statements for the three months ended March 31, 2012 and to clarify why the Company does not record its outstanding shares of Series A Preferred Stock in the Shareholders’ Equity section of the balance sheet. This Amendment replaces in its entirety the Form 10-Q that was filed with the Securities and Exchange Commission (the “SEC”) on May 15, 2012 (the “Original Form 10-Q”). The Company is filling this Amendment in order correct an error in the recording of a note payable on its balance sheet as of March 31, 2012. The Company had expensed as interest the amount attributed to debt discount upon the conversion of a convertible debt at its stated terms. This discount was a result of a bifurcated payable at the original date of the issuance of the convertible debt during the fourth quarter of 2011. The Company determined the bifurcated payable should have been evaluated and treated as part of the converted debt and the Company should have not recorded interest expense but should have reduced the payable. The Company also determined that its outstanding shares of Series A Preferred Stock has a liquidation preference which is outside of the Company’s control and, therefore, must be recorded as a non-equity item.

 

The effects on the financial statements in this Amendment are as follows:  (i) Interest expense will decrease $53,186 and the net loss will also decrease by the same amount; (ii) there will be a decrease in the royalty payable of $53,186; and (iii) retained deficit will decrease by $53,186. The Company’s cash flow statement and statement of stockholders’ deficit will reflect the changes to the net income and retained deficit. The Company has informed its prior independent auditor, REM Co. LLP and its current independent auditor Friedman LLP of the matters disclosed above.

 

This Amendment revises “Item 1. Financial Statements” (including the notes thereto) and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

In connection with the filing of this Amendment and pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, the Company includes with this Amendment certain currently dated certifications.

 

This Amendment speaks as of the filing date of the Original Form 10-Q, except for the changes noted above. Except as noted above, this Amendment does not reflect events that may have occurred subsequent to the filing date of the Original Form 10-Q and does not modify or update in any way disclosures made in the Original Form 10-Q.

 

 

 

 

SCRIPSAMERICA, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED MARCH 31, 2012

 

TABLE OF CONTENTS

 

PART I.   FINANCIAL INFORMATION

 

Item 1  -	Financial Statements (unaudited)
	Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011	1
	Statements of Operations (Unaudited) for the three months ended March 31, 2012 and 2011	2
	Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2012 (Unaudited)	3
	Statements of Cash Flows (Unaudited) for the three months ended March 31, 2012 and 2011	4
	Condensed Notes to Financial Statements	5
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4 -	Controls and Procedures	23

 

PART II.  OTHER INFORMATION

 

Item 1 -	Legal Proceedings	24
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3 -	Defaults Upon Senior Securities	25
Item 4 -	Mine Safety Disclosures	25
Item 5 -	Other Information	25
Item 6 -	Exhibits	25
SIGNATURES		26
CERTIFICATIONS

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS (Unaudited)

 

SCRIPSAMERICA, INC.

Balance Sheets

 

		March 31, 2012				December 31, 2011
		(unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	87,319			$	467,505
Receivable due from factor			296,436				204,640
Loan receivable - vendor			1,285,056				1,052,636
Prepaid expenses and other current assets			61,156				46,300
Deferred tax asset			82,000				41,200
Total Current Assets			1,811,967				1,812,281
Other Assets
Notes receivable - related party - net			3,534				6,055
Deposits			200,000				200,000
Total Other Assets			203,534				206,055
TOTAL ASSETS		$	2,015,501			$	2,018,336
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses		$	28,371			$	35,620
Royalty payable			–				53,186
Preferred Stock dividends payable			41,720				20,860
Convertible notes payable			–				170,000
Total Current Liabilities			70,091				279,666
Non-Current Liabilities
Convertible notes payable - net of discount of $0 and $53,186, respectively			–				196,814
Convertible notes payable - related parties			80,000				80,000
Convertible notes payable - net of discount of $0 and $2,083, respectively			429,400				427,917
Total Non-Current Liabilities			509,400				704,731
Total Liabilities			579,491				984,397
Commitments and Contingencies			–				–
Series A Convertible preferred stock - derivative liability, $.001 par value; 10,000,000 shares authorized, 2,990,252 issued and outstanding as of December 31, 2011			1,043,000				1,043,000
Stockholders' Equity (Deficit)
Common stock - $0.001 par value; 150,000,000 shares authorized; 54,890,828 and 52,521,684 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively			54,891				52,522
Subscription Receivable			–				(170,800	)
Additional paid-in capital			783,318				494,487
Retained earnings (deficit)			(445,199	)			(385,270	)
Total Stockholders' Equity (Deficit)			393,010				(9,061	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	2,015,501			$	2,018,336

 

See accompanying notes to financial statements.

 

SCRIPSAMERICA, INC.

Statements of Operations   (unaudited)

 

		For the Three Months Ended March 31,
		2012				2011
Product Sales - net		$	996,827			$	1,641,233
Cost of Goods Sold			828,014				1,175,389
Gross Profit			168,813				465,844
General and Administrative Expenses			198,494				98,459
Research  and Development			10,044				283,969
			208,538				382,428
Income (Loss) Before Other Income (Expenses)			(39,725	)			83,416
Other Expenses
Interest expense			(38,165	)			(68,860	)
(Loss) Income Before Provision for Income taxes			(77,890	)			14,556
Provision(Benefit) for Income Taxes			(38,821	)			2,500
Net (Loss) Income		$	(39,069	)		$	12,056
Preferred stock dividend			(20,860	)			–
Net Income (loss) available to common Shareholders		$	(59,929	)		$	12,056
Earnings Per Common Share
Basic		$	(0.00	)		$	0.00
Diluted		$	(0.00	)		$	0.00
Weighted Average Number of Common Shares
Basic			54,449,559				45,940,902
Diluted			54,449,559				48,260,902

 

See accompanying notes to financial statements.

 

 

 

 

SCRIPSAMERICA, INC.

Statements of Changes in Stockholders' Equity (Deficit)

For the three months end March 31, 2012  (unaudited)

 

			Common Stock								Subscription				Additional Paid-In				Retained Earnings			Stockholders’ Equity
			Shares				Amount				Receivable				Capital				(Deficit)			(Deficit)
Balance - December 31, 2011			52,521,684			$	52,522			$	(170,800	)		$	494,487			$	(385,270	)		$	(9,061	)
Payment received for stock subscription											170,800												170,800
Common stock issued for cash			300,000				300								29,700				–				30,000
Common stock issued for services - BOD			12,000				12								1,188								1,200
Common stock issued for services - employees			57,144				57								9,943								10,000
Common stock issued for conversion of convertible Notes payable			2,000,000				2,000								248,000								250,000
Dividends for convertible preferred stock																			(20,860	)			(20,860	)
Net (Loss)																			(39,069	)			(39,069	)
Balance - March 31, 2012			54,890,828			$	54,891			$	–			$	783,318			$	(445,199	)		$	393,010

 

 

See accompanying notes to financial statements.

 

 

 

SCRIPSAMERICA, INC.

Statements of Cash Flows

(unaudited)

 

		For the Three Months Ended March 31,
		2012				2011
Cash Flows from Operating Activities
Net (Loss) income		$	(39,069	)		$	12,056
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Amortization of discount on convertible notes payable			2,083				7,380
Common stock issued for services			11,200				7,500
Deferred Income tax			(40,800	)
Change in operating assets and liabilities
(Increase) decrease in:
Receivable due from factor			(91,796	)			(39,903	)
Prepaid expenses and other current assets			(14,856	)			154,924
Increase (decrease) in:
Accounts payable and accrued expenses			(7,249	)			(1,315	)
			(180,487	)			140,642
Cash Flows from Investing Activities
Payment received from note receivable – related party			2,521				–
Issuance of loan to vendor			(232,420	)			–
			(229,899	)			–
Cash Flows from Financing Activities
Proceeds from Issuance of common stock			30,000				–
Proceeds from convertible notes payable			–				200,000
Proceeds from convertible notes payable - related party			–				20,000
Payment for convertible notes payable			(170,600	)			–
Collection of stock subscription receivable			170,800				–
			30,200				220,000
Net Increase (Decrease) in Cash and Cash Equivalents			(380,186	)			360,642
Cash and Cash Equivalents - Beginning			467,505				171,898
Cash and Cash Equivalents - End		$	87,319			$	532,540
Supplemental Disclosures of Cash Flow Information
Cash Paid:
Income Taxes		$	–			$	–
Interest		$	36,082			$	61,480
Noncash financing and investing activities:
Conversion of note payable for common stock		$	250,000			$	–
Discount on convertible note payable		$	–			$	25,000
Accrued Preferred Dividend payable		$	20,860			$	–
Common stock issued for services		$	11,200			$	7,500

 

See accompanying notes to financial statements.

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the three months ended March 31, 2012

 

1 -	BASIS OF PRESENTATION

 

The accompanying financial statements reflect financial information of ScripsAmerica, Inc., (the “Company” or “ScripsAmerica” or “we”).

 

We were incorporated in the State of Delaware on May 12, 2008, and primarily engage in the sale of generic pharmaceutical drugs through our main customer, McKesson Corporation (McKesson”), to various end users, including physicians’ offices, retail pharmacies, long-term care sites, hospitals and home care agencies, located throughout the United States. We use a single vendor, Marlex Pharmaceuticals, Inc. for our packaging, distribution, warehouse and customer service needs.

 

The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements of ScripsAmerica, Inc. and related notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2011 filed with the SEC on Mach 22, 2012.  Certain information and note disclosure normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

 

2 -	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of significant accounting policies follows:

 

	a.	Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
	b.	Revenue Recognition - Revenue is recognized when product is shipped from our contract packager (Marlex Pharmaceuticals Inc.) to our customers’ warehouses, mainly McKesson, and is adjusted for any charge backs received from our customers which include inventory credits, discounts or volume incentives.  These charge back costs are received monthly from our customers’ and the sales revenue for the corresponding period is reduced accordingly.
		Purchase orders from our customer generate our shipments, provide persuasive evidence that an arrangement exists and that the pricing is determinable.  The credit worthiness of our customer assures that collectability is reasonable assured.

 

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the three months ended March 31, 2012

 

	c.	Research and Development - Expenditures for research and development associated with contract research and development provided by third parties are expensed as operating expenses, as incurred. The Company had charges of $10,044 and $283,969 for research and development expenses for the three months ended March 31, 2012 and 2011, respectively.
	d.	Receivable Due From Factor - Accounts receivable are stated at estimated net realizable value and net of accounts receivable sold subject to charge-back.  Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on its assessment of the current status of individual accounts and historical collection information.  Balances that are deemed uncollectible after management has used reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. The Company has entered into an accounts receivable factoring facility agreement but as of March 31, 2012 and December 31, 2011, there were no receivables sold to a factor.
	e.	Income Taxes - The Company provides for income taxes using an asset and liability based approach for reporting for income taxes.  Deferred income tax assets and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
		The Company also complies with the provisions of Accounting for Uncertainty in Income Taxes. The accounting regulation prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return.  The Company classifies any assessment for interest and/or penalties as other expenses in the financial statements.
	f.	Stock-Based Compensation – The Company adopted FASB ASC No. 718  “Share-Based Payment ,” requiring the expense recognition of the fair value of all share-based payments issued to employees. Stock grants to employees were valued using the fair value to the stock as determined by the board of directors since our stock is not publicly traded and the volume is immaterial.  As of March 31, 2012 the Company has not issued any employee stock options that would require calculating the fair value using a pricing model such as the Black-Scholes pricing model.
		For non-employees, stock grants issued for services are valued at either the invoiced or contracted value of services provided, or to be provided, or the fair value of stock at the date the agreement is reached, whichever is more readily determinable.  For stock options granted to non-employees the fair value at the grant date is used to value the expense.  In calculating the estimated fair value of its stock options, the Company used a Black-Scholes pricing model which requires the consideration of the following seven variables for purposes of estimating fair value:

 

·

the stock option or warrant exercise price,

 

·

the expected term of the option or warrant,

 

·

the grant date fair value of our common stock, which is issuable upon exercise of the option or warrant,

 

·

the expected volatility of our common stock,

 

·

expected dividends on our common stock (we do not anticipate paying dividends for the foreseeable future),

 

·

the risk free interest rate for the expected option or warrant term, and

 

·

the expected forfeiture rate.

 

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the three months ended March 31, 2012

 

g.

Earnings Per Share -    Basic net income per common share is computed using the weighted average number of common shares outstanding during the periods. Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock warrants and convertible notes payable. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive.  As of March 31, 2011, common stock equivalents consisted of preferred stock convertible into 5,980,504 shares, warrants convertible into 478,440 shares and notes payable convertible into 2,037,600 shares of common stock.

 

h.

Recent Accounting Pronouncements – Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

3 -	LOAN RECEIVABLE - VENDOR

 

During the three months ended March 31, 2012, the Company loaned an additional $232,420 to Marlex Pharmaceuticals Inc., our contract packager.  The amount is unsecured, non-interest bearing and has no stipulated repayment terms as the loan was made pursuant to a verbal agreement.  Although there is no written contract for this loan, the Company considers this to be a current asset based on assurances from the management of Marlex Pharmaceuticals that the loan would be repaid within twelve months and Marlex’s abilitiy to pay its debt.

 

4 -	CONVERTIBLE NOTES PAYABLE

 

On March 12, 2012 the Company prepaid the sum of $85,300 to a holder of a $100,000 convertible note payable, leaving a balance of $14,700. By mutual consent the maturity date was also extended from November 23, 2012 to April 30, 2013 and the interest rate was decreased from 2% per month to 1% per month.

 

On March 12, 2012 the Company prepaid the sum of $85,300 to a holder of a $200,000 convertible note payable, leaving a balance of $114,700. By mutual consent the maturity date was also extend from November 23, 2012 to April 30, 2013 and the interest rate was decreased from 2% per month to 1% per month.

 

Also on March 12, 2012 the holder of the two other convertible notes, totaling $300,000, agreed to extend the maturity dates of these notes to April 30, 2013 and also agreed to reduce the interest rate from 2% per month to 1% per month.

 

The principal portion of these convertible notes can be converted into common stock at any time at the rate of $.25 per share at the option of the lender.

 

Interest expense associated with these notes for the three months ended March 31, 2012 and 2011, was $24,721 and $30,000, respectively.

 

 

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the three months ended March 31, 2012

 

On March 12, 2012, the holders of a $250,000 long-term convertible note payable elected to convert the convertible note payable into 2,000,000 shares of the Company’s common stock.  At the time of conversion the Company changed the conversion price from $0.25 per share to $0.125 per share of common stock resulting in an additional million shares being issued per the original loan agreement.   At the time of the conversion the fair value of the Company’s stock was below the revised $0.125 conversion price, consequently the Company did not have to record any extra expense for this beneficial conversion feature.  This reduction price change for this conversion was not offered on any other convertible debt which the Company holds.  Upon conversion, the Company fully amortized the debt discount of $53,186 associated with this note. A $53,186 royalty liability associated with this note was recorded at March 31, 2012 and December 31, 2011.  (See note 7 for details on the royalty payments).

 

Interest expense, including the amortization above associated with these notes for the three months ended March 31, 2012 and 2011, was $64,436 and $0, respectively.

 

5 -	NOTES PAYABLE - RELATED PARTIES

 

In March 2012, the Company and the lenders, who are the Company’s president and CEO and a company owned by the CEO, mutually agreed to extend the maturity date of these notes to April 30, 2013 and to reduce the monthly interest rate from 2% per month to 1% per month effective October 1, 2012.

 

Interest expense associated with these notes for the three months ended March 31, 2012 and 2011, was $4,800 and $3,600, respectively.

 

6 -	CONVERTIBLE PREFERRED STOCK

 

On April 1, 2011 the Company issued 2,990,252 shares of convertible preferred stock (“Series A Preferred stock”) for $1,043,000 to one investor.  The Series A Preferred stock has the following rights, preferences, powers, privileges, and restrictions:  (a) 8% dividend (appropriately adjusted to reflect any stock splits), the dividends shall accrue and be paid on March 31, June 30, September 30 and December 31. (b) Preferential payments of the assets available for distribution to its stockholders by reason of their ownership in an amount equal to the Series A Preferred stock Original Issue price ($.1744).  (c) Voting rights - one vote for the number equal to the number of whole shares of common stock and shall be entitled to elect one director of the Corporation. (d) Rights to Convert – Each share of Series A Preferred stock shall be convertible, at the option of the holder at any time and from time to time without the payment of additional consideration by the holder into such number of fully paid and non-assessable shares of common stock as determined by dividing the Original Issue price by the Conversion price in effect at the time of the conversion.  The conversion price is initially equal to $.1744 and can be adjusted any time if the Company issues non-exempted common shares at a price below $.1744. At March 31, 2012 these convertible preferred stock shares can be converted into 5,980,504 shares of the Company’s common stock (e) the owner of the Series A Preferred stock can waive its right to adjust the conversion price at his choosing.  (f) Defined, Non-Exempt Issuances are all issuances except those issued to employees, directors or consultants or advisors if the issuance is approved by the Board.  During the current quarter, non – exempt sales of common stock and conversions of debt into common stock occurred at prices below $0.1744.  The Series A Preferred Stock holder has waived his rights to adjust his conversion price regarding these transactions and, accordingly, no adjustment is required.

     

 

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the three months ended March 31, 2012

 

The Company has reviewed the rights and privileges of the Series A Preferred stock and determined the holder has a liquidation preference which requires the Company to redeem the preferred shares at the original issuance price as a result of either an voluntary or involuntary liquidation event (as defined in the Company’s amended and restated articles of incorporation).  The Company has determined this preference meets the requirement that the potential redemption is outside of the control of the Company.  As a result, the convertible preferred stock has to be recorded outside of shareholders’ equity (as further explained below).

 

Because this Series A Preferred Stock has liquidation preference which is outside the control of the Company it was not recorded in the Shareholders' Equity section of our balance sheet, but rather is shown as a liability in the balance sheet per SEC rules and regulations. Because we also had a loss for 2011 and we have a retained deficit, under Section 174 of the Delaware General Corporation Law our directors cannot declare a dividend without incurring personal liability. We had stockholders’ equity of $393,010 at March 30, 2012, but we did not record a profit for the three months ended March 31, 2012. Unless we generate net income in remaining periods in 2012, our board of directors will not be able to declare a dividend nor will we be able to pay the dividend owed to the Series A Preferred Stockholder which dividends will accrue on our balance sheet. We will not be able to declare any dividends to our common stockholders until the accrued dividends owed to the Series A Preferred Stockholder have been paid.

 

  

7 -	STOCKHOLDERS’ EQUITY (DEFICIT)

 

Common Stock

 

The Company issued 300,000 restricted shares of common stock for cash proceeds of $30,000 during the three month period ended March 31, 2012.

 

In March 2012, the Company received payment for balance of the outstanding common stock receivable, $170,800. The sales of these shares were initially recorded as a stock subscription receivable, contra equity account, to the equity section of the balance sheet in April 2011.

 

The Company issued 12,000 restricted shares of its common stock in connection with services provided by members of the board of directors during the three months period ended March 31, 2012. The Company recorded an expense of $1,200 for the three months ended March 31, 2012.

 

The Company issued 57,144 restricted shares of its common stock to the Company’s President and CEO for payment of his salary in lieu of a cash compensation payments for services rendered during the three months period ended March 31, 2012. These services were valued at $10,000 and the Company recorded an expense of $10,000 for the three months ended March 31, 2012.

 

On March 12, 2012, the holders of a long-term note payable in the amount of $250,000 elected to convert the convertible note payable into 2,000,000 shares of the Company’s common stock.  See note 4 for additional details

 

8 -	COMMITMENTS AND CONTINGENCIES

 

In March 2010, the Company signed a “Product, Manufacturing and Supply Agreement” with a contract packager and labeler for orally disintegrating tablets.  The total value of this contract is $935,000.   The Company has paid a total of $935,000, of which $200,000 is considered a stand still fee that has been reflected as a deposit on the balance sheet as of December 30, 2011.  The project was completed during the current quarter leaving a balance of $190,778 at March 31, 2012 and December 31, 2011..  Upon the commencement of product shipped, a 7% royalty on the gross profit related to the orally disintegrating tablet sales will be due on a quarterly basis. The Company anticipates launching this orally disintegrating tablet in the third fiscal quarter of 2012. The $200,000 deposit will be applied towards future royalty payments.

 

The holders of a $250,000 convertible note payable which was converted into 2,000,000 shares of our common stock on March 12, 2012 (see footnote 4 for details) are still entitled to a 4% royalty from the sales of our orally disintegrating rapidly dissolving 80mg and 160mg pain relief tablets.  The royalty payments associated with this agreement have no minimum guarantee amounts and royalty payments will end only if the product line of Acetaminophen rapidly dissolving 80mg and 160mg tablets is sold to a third party.

 

 

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the three months ended March 31, 2012

 

9 -	LINE OF CREDIT

 

On October 19, 2011, the Company was approved for a line of credit from Wells Fargo Bank. This line of credit will allow the Company to borrow up to a maximum of $70,000, at an interest rate of prime plus 1% through June 30, 2012, and prime plus 6.25% annually after June 30, 2012.  The note is secured by personal guarantee from the Company’s CEO.  During the three months ended March 31, 2012, the Company did borrow funds ranging from $10,000 to $65,000 but these borrowings were paid in full as of March 31, 2012.   Consequently there was no outstanding balance related to this line of credit.  The Company incurred interest expense of $368, related to this line, which was included in the statement of operations for the three months ended March 31, 2012.

 

10 -	CONCENTRATIONS

 

The Company purchased 100% of its product packaging from one supplier during the three months period ended March 31, 2012 and 2011.  A disruption in the availability of product packaging from this supplier would cause a possible loss of sales, which would affect operating results adversely.

 

The Company derived approximately $850,400 or 85% and approximately $1,641,000 or 100%, of its revenue from one customer during the three months ended March 31, 2012 and 2011, respectively.

 

As of March 31, 2012, one customer accounted for approximately $270,000, or 91% of the Company’s accounts receivable. 

 

11 -	SUBSEQUENT EVENTS

 

On May 1, 2012, the Company received $50,000 in cash for one convertible promissory note payable from a related party. The note provides for interest only payments of 1%, payable quarterly in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity which is November 1, 2015.  The principal portion of the notes can be converted into common stock at any time during the term of the loan at the rate of $.25 per share at the option of the lender.  The note can be extended by mutual consent of the lender and the Company.  In addition, the Company shall pay to the lender a royalty of 0.9% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies. Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 200,000 shares of the Company’s common stock.

 

On May 7, 2012, the Company received $320,000 in cash for one convertible promissory note payable.  The note provides for interest only payments of 2%, payable monthly until March 14, 2013 and 1% monthly thereafter, in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity which is November 7, 2013.  The principal portion of the notes can be converted into common stock at any time during the term of the loan at the rate of $.25 per share at the option of the lender.  The note can be extended by mutual consent of the lender and the Company.  In addition, the Company shall pay to the lender a royalty ranging from 2.6% to 3.5% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies. Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 1,400,000 shares of the Company’s common stock.

 

In April 2012, the Company issued 20,000 restricted shares of its common stock in connection with services provided by members of the board of directors.

 

In May 2012, the Company issued 28,572 restricted shares of its common stock to the Company’s President and CEO for payment of his salary in lieu of a cash compensation payments for services rendered during the month of April. These services were valued at $5,000.

 

 

 

12 -	RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

On August 8, 2012, management, after consulting with its board of directors and its independent registered public accounting firm, concluded it had recorded the conversion of a note payable incorrectly for the quarter ended March 31, 2012. The Company had previously expensed as interest expense the amount attributed to debt discount upon the conversion of the convertible debt, at its stated terms, during the first quarter of 2012.  This discount was a result of a bifurcated payable at the original date of the issuance of the convertible debt during the fourth quarter of 2011.  The Company has determined the bifurcated payable should have been evaluated and treated as part of the converted debt and the Company should not have recorded interest expense but should have reduced the royalty payable. The following table below summarizes the impact of the restatements of the error described above on the financial statements:  

 

		For the Three Months Ended March 31, 2012
Statement of operations:		As previously reported				Adjustments				As restated
Income (Loss) Before Other Income (Expenses)			(39,725	)							(39,725	)
Other Income (expense)
Interest expense			(38,165	)							(38,165	)
Interest expense - Fully amortized discount due to conversion of debt discount			(53,186	)			53,186				–
Total other expense			(91,351	)			53,186				(38,165	)
(Loss) Income Before Provision for Income Taxes			(131,076	)			53,186				(77,890	)
Net (loss) Income		$	(92,255	)		$	53,186			$	(39,069	)
Preferred stock dividend			–			$	(20,860	)		$	(20,860	)
Net loss available to common shareholders		$	(92,255	)		$	32,326			$	(59,929	)
Earnings Per Common Share
Basic and Diluted			(0.00	)			0.00				(0.00	)
Weighted Average Number of Common Shares
Basic and Diluted			54,449,559				54,449,559				54,449,559

 

		At March 31, 2012
Balance Sheet		as Stated				adjustment				as restated
Royalty payments			53,186				(53,186	)			–
Total current liabilities			123,277				(53,186	)			70,091
Total liabilities			632,677				(53,186	)			579,491
Retained earnings (deficit)			(498,385	)			53,186				(445,199	)
Total Stockholders' Equity (deficit)			339,824				53,186				393,010
Total Liabilities and stockholders' equity (deficit)			2,015,501				–				2,015,501

 

 

		At March 31, 2012
Statement of cash flows		as Stated				adjustment				as restated
Net loss			(92,255	)			53,186				(39,069	)
											–
Amortization of debt discount on convertible notes payable			55,269				(53,186	)			2,083
											–
Cash used in operating activities			(180,487	)			–				(180,487	)

 

 

 

 

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; and other factors referenced in this and previous filings.

 

Given these uncertainties, readers of this prospectus and investors are cautioned not to place undue reliance on such forward-looking statements.

 

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this document.

 

Overview

 

We are ScripsAmerica, Inc., and we were incorporated in the State of Delaware on May 12, 2008.  We are a healthcare services company focused on efficient supply chain management, from strategic sourcing to delivering niche generic pharmaceuticals to market.  We are primarily engage in sale of generic pharmaceutical drugs through our main customer, McKesson Corporation (“McKesson”), the largest pharmaceutical distributor in North America, to a wide range of end users across the health care industry, including physicians’ offices, retail pharmacies, long-term care sites, hospitals, and government and home care agencies, located throughout the United States.  Current therapeutic categories include pain, arthritis, prenatal, urinary, and hormonal replacement drugs.  We use a single vendor, Marlex Pharmaceuticals, Inc., for our packaging, distribution, warehouse and customer service needs.

 

The United States constitutes the largest market in the world for generic pharmaceuticals, and its aging population represents a key driver for the growth of the global pharmaceuticals and domestic consumer products markets.  Competitive pressures among U.S. generics providers are continuing to increase as a result of the number of new market entrants growing faster than the generics market as a whole, leading to cost competition on the manufacturing side and squeezed profit margins.  On the sales side, generics prices are eroding due to low-cost suppliers from India and China capturing market share, as well as the success of health insurers and health maintenance organizations in negotiating lower reimbursement rates.  Finally, large direct purchase customers such as chain drugstores demand product variety and reliability of supply that allows them to lower their inventory levels. We compete in the current environment by providing a low cost system of broad-based marketing, sales, and distribution capabilities for generics, branded pharmaceuticals, over the counter medicines, vitamins, and nutraceuticals.   A significant percentage of the Company’s sales are to one customer, McKesson.  For the year ended December 31, 2011 and the three months ended March 31, 2012, McKesson accounted for 83% and 75% of our sales, respectively, and Cardinal Health, Curtis Pharmaceuticals and the United States Veterans Administration (“VA”) accounted for 14% and 25% of our sales, respectively.   The Company expects sales during 2012 will be similarly concentrated, with McKesson accounting for approximately 75% to 85% of the total sales.

 

 

Oral drug delivery remains the preferred dosing method among patients and physicians, with more than 80% of all drugs administered in this manner.  Rapid melt technology provides pharmaceutical companies with the opportunity for product line extensions for a wide variety of drugs, and we believe there is a significant opportunity as a contract developer of rapidly dissolving drug formulations for specialty prescription pharmaceuticals.   The combined US, EU and Japanese ODT market has doubled in size over the past four years to surpass $6.4 billion in 2009, according to Technology Catalysts International’s report on Orally Disintegrating Table and Film Technologies (sixth edition), which is available for purchase from TCI.

 

In March 2010, we entered into a product development, manufacturing and supply agreement with our contract supplier, Marlex Pharmaceuticals Inc., which develops generic drug products.  Under this agreement, we are developing a pain relief orally disintegrating rapidly dissolving 80 mg and 160 mg tablets for OTC products.  We have committed to investing approximately $935,000 with Marlex Pharmaceuticals Inc. for the cost of developing these rapidly dissolving tablets.  We completed the development of these rapid melt products in the first quarter of 2012.  The development costs consisted of (i) an advance payment to Marlex to cover their internal expenses for the development ($200,000), (ii) acquiring raw materials and developing the ODT formulation ($406,000), (iii) analyze and validate the ODT formula and test sample batches ($154,000) and (iv) acquiring a National Drug Code for the ODT formulation and validate the manufacturing process ($175,000).   However, we estimate that we will need approximately $1.5 million of incremental funding for expenses required to launch these products.  The funding for launching the rapid melt products will have to come from the sale of equity securities, preferred and/or common stock securities.

 

The Drug Efficacy Study Implementation (“DESI”) Program was a program begun by the FDA in the 1960s based on the requirement of the Kefauver-Harris Drug Control Act that all drugs be efficacious as well as safe. The DESI program was intended to classify all pre-1962 drugs that were already on the market as either effective, ineffective, or needing further study. According to the U.S. Department of Health and Human Services drug efficacy study ( http://www7.nationalacademies.org/archives/drugefficacy.html ) and The Annals of Pharmacotherapy (Vol.39, No.7, pp.1260-1264),, to date, DESI has evaluated over 3,000 separate products and over 16,000 therapeutic claims. By 1984, final action had been completed on 3,443 products; of these, 2,225 (64.6%) were found to be effective, 1,051 (30.5%) were found not effective, and 167 (4.9%) were pending.  Once a DESI drug has been FDA approved and granted market exclusivity, the applicant will have the right to be the single source producer of the drug and control market supply and pricing.

 

We have identified Compound SA 1022, a non-steroidal anti-inflammatory drug, as our initial drug candidate for the DESI program approval. We estimate that the Company will need to raise approximately $2.0 million to $3.0 million for clinical trials to obtain FDA approval of Compound SA 1022 under the DESI program.  This funding is also expected to come from the sale of equity securities, preferred and/or common stock securities.  We met with the FDA on August 9, 2011 to determine what must be submitted in order to gain approval by the FDA for Compound SA1022.  The FDA discussed with us what kind of clinical trials and safety data we would need to submit for Compound SA 1022 based on whether we would use it for acute pain (an OTC use) or chronic pain (a prescription use).  We received a written summary of the meeting from the FDA on September 9, 2011.    We are meeting with our consultants, advisors and legal staff to draft a response to the FDA meeting minutes. We will be requesting clarification from the FDA in regard to their requirements to get approval for Compound SA 1022, in particular the clinical testing requirements/studies, because there are conflicts in the FDA’s position on this issue. On January 13, 2012 we submitted a proposal to the FDA outlining the steps we intended to take in order to move the approval process forward. As of May 11, 2012 we are awaiting a response from the FDA.

 

We also plan for an acquisition of a pharmaceutical packager and distributor and management estimates we will require approximately $2.5 million of investment capital which we expect to raise from the sale of equity securities, preferred and/or common stock securities.

 

Management believes that, based on anticipated level of sales, the Company can fund its current operational expenses for the next twelve months but if we are to achieve our four new objectives for sales and profit growth described above we will need to raise approximately $9 million to $12 million.  Funding is expected to come from the sale of equity securities, preferred and/or common stock securities. We may not be able to accomplish our four objectives and obtain the necessary financing within the next twelve months.

 

 

Description of Revenues

 

ScripsAmerica offers fulfillment of prescription and over the counter (OTC) orders. To fulfill purchase orders from customers, ScripsAmerica processes orders to the end user’s desired specifications. Capabilities range from unit of use packaging for in-patient nursing homes and hospitals to bulk packaging for government and international organizations.

 

The Company’s revenue is generated from the purchases of product from its suppliers and shipments of the completed product per the end users’ specifications to distribution centers. The Company recognizes revenues in accordance with the guidance in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104. Accordingly, revenue is recognized when product is shipped from our contract packager (Marlex Pharmaceuticals Inc.) to our customers’ warehouses, mainly McKesson and is adjusted for any charge backs from our customer which may include inventory credits, discounts or volume incentives. These charge backs costs are received monthly from our customers and the sales revenue is reduced accordingly. Any product returns or non -confirmation of receipt of product is included in the customers’ monthly charge back charge.

 

Purchase orders from our customers generate our shipments. These purchase orders are the persuasive evidence that an arrangement exists. The pricing has also been agreed upon and determined via the customer purchase orders and the credit worthiness of our customer assures that collectability is reasonable.

 

Description of Expenses

Our expenses include the following: (a) Costs of Goods sold (the Company purchases all its product form suppliers at various contracted prices and does not own or maintain any inventory. Upon shipment of product the Company is charged the contracted price. The Company may finance the purchases of product sold based on confirmed purchase orders via a revolving finance agreement); (b) Costs of services, which consists primarily of salaries and contracted professional fees for various consultants used in management for the Company; (c) Marketing costs associated with contracts and selling product; (d) General administrative costs, which consists of overhead expenses, such as travel, telecommunications and office expenses; (e) Interest expenses mainly related to our factoring and facility agreement and convertible debt; and (f) Research and development cost associated with the development of new product delivery forms.

 

Results of Operations

 

Results for the three month period ended March 31, 2012 versus the three month period ended March 31, 2011

 

		2012								2011								$ Change
Product sales - net		$	996,800				100%			$	1,641,200				100%			$	(644,400	)
Cost of Goods Sold			828,000				83%				1,175,400				72%				(347,400	)
Gross Profit			168,800				17%				465,800				28%				(297,000	)
Operating Costs and Expenses:
General and Administrative			198,500				20%				98,500				6%				100,000
Research and Development			10,000				1%				283,900				17%				(273,900	)
Total Operating expenses			208,500				21%				382,400				23%				(173,900	)
Total Other Income / (expenses)			(38,200	)			-4%				(68,900	)			-4%				30,700
Income  (Loss) before taxes			(77,900	)			-13%				14,500				6%				(92,400	)
Tax Expense (benefit)			(38,800	)			-4%				2,500				0%				(41,300	)
Net (Loss) Income		$	(59,100	)			-6%			$	12,000				1%			$	(71,100	)

 

 

 

 

The majority of the Company’s sales revenue is generated from the sales of generic pharmaceutical prescription orders. For the three months ended March 31, 2012 the Company generated net product sales of approximately $996,800 as compared to net product sales of approximately $1,641,200 for the three month period ended March 31, 2011, a decrease of approximately $644,400, or 39.3%.  The decline in sales versus the same three month period a year ago was mainly a result of the completion of a supply agreement with the VA at the end of 2011.  The VA delayed the renewing a new supply contract which impacted first quarter sales in 2012. The Company expects a new supply contract will be executed by end of the second quarter 2012 and sales will return to our expected levels.

 

For the three months ended March 31, 2012, McKesson accounted for 85% of our net product sales (100% for net product sales in 2011) and Cardinal Health, and Curtis Pharmaceuticals accounted for 15% of our net product sales.

 

Product Sales:  The following table sets forth selected statement of operations data as a percentage of gross sales for the three month period ended March 31, 2012 and 2011.

 

Products sold		2012				% to total				2011				% to total
Prescription drug products		$	688,100				61%			$	1,427,200				85%
OTC & non prescription products			440,000				39%				251,00				15%
Gross Sales			1,128,000				100%				1,679,100				100%
Discounts / Charge backs			(131,300	)			13%				(37,900	)			2%
Net Sales		$	996,800							$	1,641,200

 

Gross Profit:  Gross profit for the three month period ended March 31, 2012 was approximately $168,800, which was 17% of our net sales.  This was a decline of approximately $297,000 from the same three month period in 2011 and was mainly due to the sales decline of approximately $644,400 from the same three month period a year ago.  The gross margin percentage also declined 11% mainly due to product mix changes that stemmed from our sales in OTC non-prescription products, which rose as a percentage of our total sales.

 

Operating Expenses

 

General and Administrative. For the three month period ended March 31, 2012, general and administrative expenses (“G&A”) increased approximately $100,000 to approximately $198,500 as compared to approximately $98,500 for the same three month period in 2011.  The significant increase in G&A expenses was mainly a result of an increase in (a) salaries and wages of approximately $25,000 and (b) costs associated with our marketing efforts to promote the Company within the industry sector of approximately $52,000.  Professional fees increased approximately $11,000, which consist mainly of legal and accounting fees, and various other office type expenses made up the balance of approximately $12,000 increases for general and administrative expenses.

 

Research and Development. The Company’s expenditures for research and development cost declined approximately $274,000, for the three month period ended March 31, 2012 compared to the same period in 2011.  The decline in our research and development costs was mainly attributed to the completion at the end of 2011 of some our on-going research related to new product development.  Our research and development will continue in the second half of 2012.

 

 

 

Total Other Income and Expenses. Other income/expenses for the three month period ended March 31, 2012 decreased approximately $30,700 from approximately $68,900 in the same three months in 2011 to approximately $38,200 for the three month period ended March 31, 2012.  This decrease is mainly due to interest expense associated with other debt declined approximately $30,700 because the Company no longer has any significant reliance on factoring our accounts receivable which carried a high interest rate.  The Company obtained a line of credit with a bank that carries a lower interest rate. The Company incurred no interest expense associated with our factoring fees for the three month period ended March 31, 2012 versus incurring approximately $30,480 for the same three month period in 2011.  Interest expense associated the our line of credit was only $368 for our first quarter 2012.  Our interest expense on our convertible notes payable was basically flat versus the same three month period except for the amortization of the debt discount associated with the conversion of a $250,000 note mention above.

 

Income taxes benefit. Total income taxes benefit for the three months ended March 31, 2012 was approximately $38,800 as compared to a tax expense was approximately $2,500 for the three months ended March 31, 2011, an increase of the tax benefit approximately $41,300, versus the same three month period a year ago. This tax benefit is a result of a net operating loss of approximately $119,900 for the three months ended March 31, 2012.

 

Net (Loss) Income Applicable to Common Shares. The Company recorded a loss of approximately $39,100 for the three month period ended March 31, 2012, as compared to a net income of approximately $12,000 for the same three month period a year ago, a decrease of approximately $51,100. This decline in net income is mainly due to a significant decrease in net sales of approximately $644,400 resulting in a decline in gross profit of approximately $297,000 over the same three month period in 2011 and the amortization expense of approximately $53,200 associated with the early conversion of a $250,000 note payable.  Offsetting the decline in the gross profit were decreases in research and development cost of approximately $273,900 and a decline in interest expense of approximately $30,700. The Company had an increase in general and administrative expense of approximately $100,000.  The Company did incur approximately $11,200 of non-cash expense for the issuance of stock for services during the three month period ended March 31, 2012. The income tax benefit increased approximately $41,300 compared to the same three month period in 2011. Earnings per common share were $0.00 for basic and diluted for the both three month period ended March 31, 2012, and 2011.

 

Liquidity and Capital Resources

 

Summary

 

At March 31, 2012, the Company had total current assets of approximately $1,812,000 and total current liabilities of approximately $70,100 resulting in working capital of approximately $1.7 million.  The Company's current assets consisted of approximately $87,000 in cash and cash equivalents, approximately $296,000 in receivables due from factor, approximately $1,285,000 due from our packaging / supplier and approximately $125,000 in prepaid expenses and deferred taxes.  Current liabilities at March 31, 2012 consist primarily of accounts payable and accrued expenses and dividends payable in the amount of approximately $70,000.

 

For the three months ended March 31, 2012, we mainly used funds from operations to support our operations and payoff some of our debt.   We were able to convert $250,000 of debt into equity, but we did not raise any significant cash via financing activities.

 

 

 

 

During the fiscal years 2011 and 2010, we met our liquidity needs primarily from financing activities. The Company raised approximately $1.5 million in cash via financing activity by: 1) selling preferred stock, raising approximately $1.0 million and 2) borrowing approximately $0.6 million through the sale of convertible notes.  The Company loaned a significant portion the cash raise from financing activity, approximately $1.1 million, to our packager / supplier in order to assure supply and shipping activities would not be interrupted.   The balance of funds were used to support a new product development and cover operational costs.

 

The following table summarizes our cash flows from operating investing and financing activities for the past three years:

 

		Three months 2012				Fiscal year 2011				Fiscal year 2010
Total cash provided by (used in):
Operating activities			(180,000	)			(106,000	)			(186,000	)
Investing activities			(230,000	)			(1,050,,000	)			(4,000	)
Financing activities			30,000				1,452,000				362,000
Increase (decrease) in cash and cash equivalents			(380,000	)			296,000				172,000

 

Management believes that, based on the anticipated level of sales, estimated to be approximately $6.5 to $8.0 million for 2012, and no significant increase in operational expense as compared to the 2011 fiscal year spending of approximately $1.6 million, the Company can fund its current operational expenses for fiscal year 2012.   Our gross profit margin is expected to continue to be in the range of approximately 25% and our outlays of cash for general and administrative costs are expected to be in the range of 5% to 7% of net sales. Current Research and Development costs are almost complete and any incremental spending in the R & D area will be funded from additional funds raised via equity instruments, as described below.   To the extent that any excess cash is generated from operations, it has been, and will continue to be, used for payment of our debt obligations. The Company negotiated an extension to April 30, 2013 of all debt due to mature in 2012. Additionally management negotiated the conversion of $250,000 of long term notes into 2,000,000 shares of common stock. However, should the sales decline significantly, profits will decline and additional funding will be required and the Company can provide no guarantee that the funding will be realized.

 

 Management plans to pursue sales and profit growth through (a) expansion of its distribution network (b) development of new products (i.e. rapidly dissolving drug formulation pain relief products scheduled to ship in the third quarter of 2012) (c) an acquisition of a pharmaceutical packager /supplier and (d) acquisition of a pharmaceutical manufacturer. These future plans will be dependent upon securing additional sources of liquidity.

 

In March 2010, we entered into a product development, packaging and supply agreement with our current packaging supplier, Marlex Pharmaceuticals Inc., which develops and packages generic drug products. Under this agreement, we are developing a pain relief orally disintegrating rapidly dissolving 80 mg and 160 mg tablets for a OTC product. The Company has committed invested $935,000 with Marlex Pharmaceuticals Inc. for the cost of developing these rapidly dissolving tablets.  The Company completed the development of these rapid melt products in the first quarter of 2012. The development costs consisted of (i) an advance payment to Marlex to cover their internal expenses for the development ($200,000), (ii) acquiring raw materials and developing the ODT formulation ($406,000), (iii) analyze and validate the ODT formula and test sample batches ($154,000) and (iv) acquiring a National Drug Code for the ODT formulation and validate the manufacturing process ($175,000). However, the Company estimates that it will need approximately $1.5 million of incremental funding for expenses required to launch these products. The funding for launching the rapid melt products will have to come from the sale of equity securities.

 

We are in the process of selecting our initial drug candidate for the DESI program approval. We estimate that the Company will need to raise approximately $2.0 million to $3.0 million for clinical trials to obtain FDA approval of our initial drug candidate under the DESI program. This funding is also expected to come from the sale of equity securities, preferred and/or common stock securities.

 

 

 

 

The Company also plans for an acquisition of a pharmaceutical packager and distributor and management estimates it will require approximately $2.5 million of investment capital which the Company expects to raise from the sale of equity securities, preferred and/or common stock securities.

 

To reduce costs from manufacturers, thus improving our gross profit, the Company plans include the acquisition of a pharmaceutical manufacturer which management estimates it will require approximately $7.0 million of investment capital, which the Company expects to raise form the sale of equity securities, preferred and /or common stock securities.

 

If the Company is to achieve its four new objectives for sales and profit growth described above the Company will need to raise approximately $9 million to $12 million. The Company does not expect to have any excess cash from operations to adequately fund these expansion programs and current sales growth and operational profits will not be nearly enough to support these expansion programs. So funding is expected to come from the sale of equity securities, preferred and/or common stock securities.

 

In October 2011 the Company received $250,000 for a promissory convertible note payable.  The proceeds were used to fund the product development for pain relief disintegrating rapidly dissolving 80mg and 160mg tablets.  This note was converted into 2,000,000 shares of the Company’s common stock on March 12, 2012 at $0.125 per share.  The Company recorded an expense of $53,186 at the time of the conversion for the debt discount associated with the original issuance of this converted note.  The holders of this converted note are entitled to a royalty of 4% on all sales of a pain relief orally disintegrating rapidly dissolving 80mg and 160mg tablets from January 1, 2012 on until/unless the product line of these rapidly dissolving tables are sold to a third party. A royalty liability also associated with this note of $53,186 remains on the balance sheet until the Company incurs royalty expense of $53,186.  The Company expects to start shipments of these products sometime in our fiscal third quarter 2012 that is when royalty payments are schedule to begin.

 

In October 2011, the Company was approved for a $70,000 line of credit from Wells Fargo Bank. The line of credit has an interest rate of prime plus 1% through June 30, 2012 and prime plus 6.25% annually after June 30, 2012.  This credit line will allow the Company to fund basic operation and also reduce any reliance on factoring the Company’s receivable, which will reduce possible future interest expense.

 

On May 1, 2012, the Company received $50,000 in cash for one convertible promissory note payable from a related party. The note provides for interest only payments of 1%, payable quarterly in cash, or common stock of the Company valued at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity, which is November 1, 2015.  The principal portion of the notes can be converted, at the option of the holder, into common stock at any time during the term of the loan at the rate of $.25 per share.  The note can be extended by mutual consent of the lender and the Company.  In addition, the Company shall pay to the lender a royalty of 0.9% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies. Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 200,000 shares of the Company’s common stock.

 

On May 7, 2012, the Company received $320,000 in cash for one convertible promissory note payable.  The note provides for interest only payments of 2%, payable monthly until March 14, 2013 and 1% monthly thereafter, in cash, or common stock of the Company valued at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity, which is November 7, 2013.  The principal portion of the notes can be converted, at the option of the holder, into common stock at any time during the term of the loan at the rate of $0.25 per share.  The note can be extended by mutual consent of the lender and the Company.  In addition, the Company shall pay to the lender a royalty ranging from 2.6% to 3.5% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.  Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan also included 1,400,000 shares of the Company’s common stock.

 

These funding efforts will proceed unabated but the Company can provide no guarantee that the funding will be realized.

 

 

 

 

Operating Activities

 

Net cash used by operating activities was approximately $180,000 for the three month period ended March 31, 2012, as compared to cash generated by opening activities of approximately $141,000 for the three month period ended March 31, 2011, a decrease in cash generated by operations of approximately $321,000. This decrease in  cash generated by operations for the three month period ended March 31, 2012 as compared to the same three month period in  2011 is mainly a result of a significant decline in our net sales of approximately $644,400, resulting in the gross profit decline of approximately $297,000.  As a result, cash generated from operations decreased approximately $67,000 for the three month period ended March 31, 2012 as compared to cash generated from operations for the same period in 2011 of approximately $27,000, a decrease of approximately $94,000.  The other declines in cash generated from operations are a result of the following:  (i) prepaid expense increased approximately $15,000 for the three month period ended 2012 as compared to a reduction in prepared expenses during the same period in 2011 of approximately $155,000, for an increase of approximately $170,000; (ii) accounts receivable also increased approximately $92,000 for the fiscal first quarter 2012 as compared an increase of approximately $40,000 for the same period in 2011, for a decline of approximately $52,000; and (iii) accounts payable declined approximately $7,000 for the three month period ended March 31, 2012, as compared to a decline of approximately $1,000 versus the prior year for an increase of approximately $6,000.

 

Investing Activities

 

For the three month period ended March 31, 2012, the Company used approximately $232,000 for the issuance of a note receivable to our contract / packager supplier to help support there operational costs and for the three month period ended March 31, 2011 there was no cash used in investing activities.

 

Financing Activities

 

Net cash provided by financing activities was approximately $30,000 for three month period ended March 31, 2012 compared to approximately $220,000 for the same three month period in 2011, a decline of approximately $190,000. The decrease in cash provided by financing activities was mainly due to: (a) the Company paying down the balance on two convertible notes payable in the amount of $170,600, (b) the Company receiving the cash balance of $170,800 for subscription receivable, and (c) the Company selling shares of common stock in the amount of $30,000.   In three month period ended March 31, 2011, the Company raised $220,000 from the issuance of convertible notes payable, of which $20,000 was from a related party.

 

The following is a listing of our current financing.

 

On May 1, 2012, the Company received $50,000 in cash for one convertible promissory note payable from a related party. The note provides for interest only payments of 1%, payable quarterly in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity which is November 1, 2015.  The principal portion of the notes can be converted, at the option of the holder, into common stock at any time during the term of the loan at the rate of $0.25 per share.  The note can be extended by mutual consent of the lender and the Company.  In addition, the Company shall pay to the lender a royalty of 0.9% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.  Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 200,000 shares of the Company’s common stock.

 

On May 7, 2012, the Company received $320,000 in cash for one convertible promissory note payable.  The note provides for interest only payments of 2%, payable monthly until March 14, 2013 and 1% monthly thereafter, in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity which is November 7, 2013.  The principal portion of the notes can be converted, at the option of the holder, into common stock at any time during the term of the loan at the rate of $0.25 per share.  The note can be extended by mutual consent of the lender and the Company.  In addition, the Company shall pay to the lender a royalty ranging from 2.6% to 3.5% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.  Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 1,400,000 shares of the Company’s common stock.

 

 

 

 

On March 12, 2012 the Company prepaid the sum of $85,300 to a holder of a $100,000 convertible note payable, leaving a balance of $14,700. By mutual consent the maturity date was also extend from November 23, 2012 to April 30, 2013 and the interest rate was decreased from 2% per month to 1% per month.  $85,000 of this note was classified in the balance sheet as current in the December 31, 2011 balance.

 

On March 12, 2012 the Company prepaid the sum of $85,300 to a holder of a $200,000 convertible note payable, leaving a balance of $114,700. By mutual consent the maturity date was also extend from November 23, 2012 to April 30, 2013 and the interest rate was decreased from 2% per month to 1% per month.  $85,000 of this note was classified in the balance sheet as current in the December 31, 2011 balance.

 

On March 12, 2012 the holder of the two other convertible notes, totaling $300,000, agreed to extend the maturity dates of these notes to April 30, 2013 and also agreed to reduce the interest rate from 2% per month to 1% per month.

 

The principal portion of these convertible notes can be converted, at the option of the holder, into common stock at any time at the rate of $0.25 per share.

 

On March 12, 2012, the holders of a long-term convertible note in the amount of $250,000 elected to convert the note into 2,000,000 shares of the Company’s common stock.  At the time of conversion the Company changed the conversion price from $0.25 per share to $0.125 per share of common stock, resulting in an additional 1,000,000 shares being issued than was provided under the original loan agreement.   At the time of the conversion the fair value of the Company’s stock was below the revised $0.125 conversion price.  Consequently the Company did not have to record any extra expense for this beneficial conversion feature.  This reduction in the conversion price was not offered on any other outstanding convertible notes payable issued by the Company.

 

During the fiscal year 2011, the Company received cash and issued convertible promissory notes payable as follows: (a) two $100,000 promissory notes payable, aggregating $200,000, with a maturity date of February 14, 2012, (b) one $200,000 promissory note with a maturity date of April 11, 2012 and (c) one $14,000 promissory note with a maturity date of February 14, 2012, which was subsequently paid in full in June 2011.  The funds from these notes were used exclusively for the Company’s purchase orders. All these notes provide for interest only payments of 2%, payable monthly in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity.  The principal portion of these notes can be converted, at the option of the holders, into common stock at any time during the one year term at the rate of $0.25 per share.  All the notes can be extended by mutual consent of the holder and the Company.  In March 2012 the Company prepaid the sum of $85,000 to a holder of a $200,000 convertible note payable, leaving a balance of $115,000.  The maturity date of the balance of this note was extended to April 11, 2013.

 

In October 2011 the company received $250,000 for a promissory convertible note payable.  The proceeds will be used to fund the product development for pain relief disintegrating rapidly dissolving 80mg and 160mg tablets.  The notes provides for interest only payments of 1%, payable monthly in cash or common stock of the Company at $0.25 per share, at the option of the lender which was later changed to $0.125 per share when converted on March 12, 2012.  This note was converted into 2,000,000 shares of the Company’s common stock on March 12, 2012.  In addition, the Company shall pay to the lender a royalty of 4% on all sales of a pain relief orally disintegrating rapidly dissolving 80mg and 160mg tablets from January 1, 2012 on until/unless the product line of these rapidly dissolving tables are sold to a third party. Payments are schedule to begin quarterly after September 30, 2012.

 

During fiscal year 2010, the Company issued three one year $100,000 promissory notes payable, aggregating $300,000.  In June of 2011, the Company paid in full $100,000 for one of the three notes that were issued in 2010. In November 2011 the two remaining $100,000 notes were extended for one year by mutual consent, their new maturity dates are November 23, 2012 and January 4, 2013.  The terms of the monthly interest rate was reduced from 2% to 1% payable monthly in cash or common stock of the Company at $0.25 per share, at the option of the lender.  The proceeds from these notes were used exclusively for the Company’s purchase orders. These original notes provided for interest only payments of 2%, payable monthly in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the notes until maturity.  The principal portion of the notes can be converted, at the option of the holders, into common stock at any time during the one year term at the rate of $0.25 per share.  The notes can be extended by mutual consent of the lender and the Company.  In March 2012, the Company prepaid the sum of $85,000 to a holder of a $100,000 convertible note payable, leaving a balance of $15,000.  The maturity date of the balance of this note was also extended until April 30, 2013.

 

 

 

 

Interest expense associated with these notes for the years ended December 31, 2011 and 2010, was $131,715 and $7,494, respectively. Additionally, the Company issued to the note holder a total of 168,080 shares of common stock, 100,000 shares in 2011 and 68,080 shares in 2010.  These shares of common stock were valued at $0.25 per share and are being amortized over the life of the notes.  Total value assigned to these shares was $42,020 and $25,000 for the 2011 shares, respectively, and $17,020 for the 2010 shares, of which $37,537 has been amortized as interest expense in fiscal year 2011 and $2,400 was expensed in fiscal year 2010. The unamortized discount on these notes as of December 31, 2011 and 2010 was $2,083 and $14,620, respectively.

 

On April 1, 2011 the Company issued 2,990,252 shares of convertible preferred stock (“Series A Preferred stock”) for $1,043,000 to one investor (The net cash received was $912,369, $130,631 was incurred for legal fees and other fees which was a charge to additional paid in capital). The Series A Preferred stock has the following rights, preferences, powers, privileges, and restrictions: (a) 8% dividend (appropriately adjusted to reflect any stock splits); the dividends shall accrue and be paid on March 31, June 30, September 30 and December 31.  The Company has reviewed the rights and privileges of the convertible preferred stock and determined the holders have a liquidation preference which requires the company to redeem the preferred shares at the original issuance price as a result of either an voluntary or involuntary liquidation event, as defined.  The Company has determined this preference meets the requirement that the potential redemption is outside of the control of the Company.  As a result, the convertible preferred stock has to be recorded outside of permanent equity. The $1,043,000 invested in such Series A Preferred Stock was not recorded in the Shareholders' Equity section of our balance sheet, but rather is shown as a liability per the accounting regulations.  Consequently, for the year ended December 31, 2011, we had a stockholders’ deficit of $385,270 (rather than stockholders’ equity of $1,033,939 if not for accounting regulation this investment would have been recorded in the Shareholders’ Equity section of the balance sheet).  Because we also had a loss for 2011 and we have a retained deficit on our balance, under Section 174 of the Delaware General Corporation Law our directors cannot declare a dividend without incurring personal liability.  Unless we have a profit in 2012, our board of directors will not be able to declare a dividend nor will we be able to pay the dividend owed to the Series A Preferred Stockholder which dividends will accrue on our balance sheet.  We will not be able to declare any dividends to our common stockholders until the accrued dividends owed to the Series A Preferred Stockholder have been paid. (b) preferential payments of the assets available for distribution to its stockholders by reason of their ownership in an amount equal to the Series A Preferred stock Original Issue price ($.1744). (c) voting rights – one vote for the number equal to the number of whole shares of common stock and shall be entitled to elect one director of the Corporation. (d) rights to Convert – Each share of Series A Preferred stock shall be convertible, at the option of the holder at any time and from time to time without the payment of additional consideration by the holder into such number of fully paid and non-assessable shares of common stock as determined by dividing the Original Issue price by the Conversion price in effect at the time of the conversion. The conversion price is initially equal to $.1744 and can be adjusted any time if the Company issue non-exempted common shares at a price below $.1744. (e) the owner of the Series A Preferred stock can waive its right to adjust the conversion price at his choosing. (f) defined, non-exempt issuances are all issuances except those issued to employees, directors or consultants or advisors if the issuance is approved by the Board.  During the current quarter, non – exempt sales of common stock and conversions of debt into common stock occurred at prices below $0.1744.  The Series A Preferred Stock holder has waived his rights to adjust his conversion price regarding these transactions and, accordingly, no adjustment is required.

 

Commitments and Concentrations

 

In March 2010, the Company signed a “Product, Manufacturing and Supply Agreement” with a contract packager and labeler for orally disintegrating tablets.  The total value of this contract is $935,000.  The Company has paid a total of $935,000, of which $200,000 is considered a stand still fee that has been reflected as a deposit on the balance sheet as of March 31, 2012 and December 30, 2011. The project was completed during the current quarter leaving a balance of $190,778 at March 31, 2012 and December 31, 2011 will be used for new product development projects in 2012.  Upon the commencement of product shipped, a 7% royalty on the gross profit related to the orally disintegrating tablet sales will be due on a quarterly basis. The Company anticipates launching this orally disintegrating tablet in the third fiscal quarter of 2012. The $200,000 deposit will be applied towards this royalty payment.

 

 

 

 

The holders of a $250,000 convertible note payable which was converted into 2,000,000 shares of our common stock are still entitled to a 4% royalty for upon the commencement of the shipment of a new Acetaminophen product developed by the Company for a pain relief orally disintegrating rapidly dissolving 80mg and 160mg tablets, per a non-current convertible notes payable agreement.   All sales of the rapidly dissolving 80mg and 160mg tablets will be subject to this 4% royalty beginning January 1, 2012, and the Company expects the royalty payments to begin after the third quarter of 2012.  The Company anticipates the launch of these rapidly dissolving tablets sometime in the third quarter of 2012.  The royalty payments to the note holders have no minimum guarantee amounts and royalty payments will end only if and when the product line of Acetaminophen rapidly dissolving 80mg and 160mg tablets are sold to a third party.

 

The holder of a $50,000 convertible note payable issued by the Company on May 1, 2012 to a related party is entitled to royalty payments as follows:  The Company shall pay to the lender a royalty of 0.9% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.  Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan  included 200,000 shares of the Company’s common stock.

 

The holders of a $320,000 convertible note payable issued by the Company on May 7, 2012 is entitled to royalty payments as follows:   The Company shall pay to the lender a royalty ranging from 2.6% to 3.5% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.  Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 1,400,000 shares of the Company’s common stock

 

The Company purchased 100% of its package product from one supplier for the three month period ended March 31, 2012 and during the years ended December 31, 2011 and 2010. A disruption in the availability of package product from this supplier could cause a possible loss of sales, which could affect operating results adversely.

 

The Company derived approximately $850,400, or 85%, and approximately $1,641,000, or 100%, of its revenue from one customer during the three months ended March 31, 2012 and 2011, respectively.

 

As of March 31, 2012, one customer accounted for approximately $270,000, or 91% of the Company’s accounts receivable.  As of December 31, 2011, one customer accounted for approximately $204,640, or 100% of the Company’s accounts receivable.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements.

 

Critical Accounting Policies

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex difficult and subjective estimates and judgments:

 

 

 

 

Revenue Recognition - Revenue is recognized when product is shipped from our contract packager (Marlex Pharmaceuticals Inc.) to our customers’ warehouses, mainly McKesson, and is adjusted for any charge backs received from our customers which include inventory credits, discounts or volume incentives.  These charge back costs are received monthly from our customers’ and the sales revenue for the corresponding period is reduced accordingly.

 

Purchase orders from our customer generate our shipments, provide persuasive evidence that an arrangement exists and that the pricing is determinable.  The credit worthiness of our customer assures that collectability is reasonable assured.

 

Research and development - Expenditures for research and development associated with contract research and development provided by third parties, are expensed as operating expenses as incurred.

 

Accounts receivable -Accounts receivable are stated at estimated net realizable value and net of accounts receivable sold subject to charge-back. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on its assessment of the current status of individual accounts and historical collection information. Balances that are deemed uncollectible after management has used reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. The Company has entered into an accounts receivable factoring facility agreement.

 

Stock based compensation - The Company adopted FASB ASC No. 718 “ Share -Based Payment,” requiring the expense recognition of the fair value of all share-based payments issued to employees. Stock grants to employees were valued using the fair value to the stock as determined by the board of directors since our stock is not publicly traded and the volume is immaterial. As of September 30, 2011 the Company has not issued any employee stock options that would require calculating the fair value using a pricing model such as the Black-Scholes pricing model.  For non-employees, stock grants issued for services are valued at either the invoiced or contracted value of services provided, or to be provided, or the fair value of stock at the date the agreement is reached, whichever is more readily determinable.

 

For stock options granted to non-employees the fair value at the grant date is used to value the expense. In calculating the estimated fair value of its stock options, the Company used a Black-Scholes pricing model which requires the consideration of the following seven variables for purposes of estimating fair value:

 

·

the stock option or warrant exercise price,

 

·

the expected term of the option or warrant,

 

·

the grant date fair value of our common stock, which is issuable upon exercise of the option or warrant,

 

·

the expected volatility of our common stock,

 

·

expected dividends on our common stock (we do not anticipate paying dividends for the foreseeable future),

 

·

the risk free interest rate for the expected option or warrant term, and

 

·

the expected forfeiture rate.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

(a)    Disclosure Controls and Procedures.    Our management, with the participation of our principal executive officer (chief executive officer) and principal financial officer (chief financial officer), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2012 (the “Evaluation Date”).  Based on this evaluation, our chief executive officer and chief financial officer concluded that as of the Evaluation Date, our disclosure controls and procedures were effective.

 

(b)    Internal Controls Over Financial Reporting.  There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On March 12, 2012, the holders of a long-term note payable in the amount of $250,000 elected to convert the convertible note payable into 2,000,000 shares of the Company’s common stock. At the time of conversion the Company changed the conversion price from $0.25 per share to $0.125 per share of common stock resulting in an additional 1,000,0000 million shares being issued per the original loan agreement. At the time of the conversion the fair value of the Company stock was below the revised $0.125 conversion price, consequently the Company did not have to record any extra expense for this beneficial conversion feature. This reduced price change for this conversion was not offered on any other convertible debt which the Company has issued.

 

In March 2012 the Company sold 300,000 shares of common stock in a private placement for $30,000.

 

In March 2012, the CEO and president of the Company agreed to amend the maturity date and interest rate on his $80,000 related party convertible notes payable. The maturity date has been extend from September 30, 2012 until April 30, 2013. The interest rate will decrease from 2% monthly to 1% monthly effectively October 1, 2012.

 

Also in March 2012, two convertible notes payable, in the amounts of $100,000 and 200,000 with maturity dates of January 3, 2013 and February 13, 2013, respectively, were extended by the lender to a maturity date for both notes of April 30, 2013.

 

On May 1, 2012, the Company received $50,000 in cash for one convertible promissory note payable from a related party. The note provides for interest only payments of 1%, payable quarterly in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity which is November 1, 2015.  The principal portion of the notes can be converted, at the option of the holder, into common stock at any time during the term of the loan at the rate of $0.25 per share.  The note can be extended by mutual consent of the holder and the Company.  In addition, the Company shall pay to the lender a royalty of 0.9% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.  Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 200,000 shares of the Company’s common stock.

 

On May 7, 2012, the Company received $320,000 in cash for one convertible promissory note payable.  The note provides for interest only payments of 2%, payable monthly until March 14, 2013 and 1% monthly thereafter, in cash, or common stock of the Company at $0.25 per share, at the option of the lender. There is no required principal payment on the note until maturity which is November 7, 2013.  The principal portion of the notes can be converted, at the option of the holder, into common stock at any time during the term of the loan at the rate of $0.25 per share.  The note can be extended by mutual consent of the holder and the Company.  In addition, the Company shall pay to the lender a royalty ranging from 2.6% to 3.5% on the first $25 million of sales of a generic prescription drug under distribution contracts with Federal government agencies.  Payments for royalty will be paid quarterly commencing December 31, 2012.  Collateral for this loan included 1,400,000 shares of the Company’s common stock.

 

The convertible notes qualified for exemption under Section 4(2) of the Securities Act since the issuances by the Company did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of shares offered.  The recipients of the convertible notes were accredited investors and/or existing security holders of the Company and acknowledged the restricted nature of the notes and/or common stock they acquired.  Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act for the above transactions.

 

 

 

 

 

 

In April 2012, the Company issued 20,000 restricted shares of its common stock in connection with services provided by members of the board of directors.

 

In May 2012, the Company issued 28,572 restricted shares of its common stock to the Company’s President and CEO for payment of his salary in lieu of cash compensation payments for services rendered during the month of April. These services were valued at $5,000.

 

The shares of the Company’s common stock issued to our outside directors and the Company’s Chief Executive Office qualified for an exemption under Section 4(2) of the Securities Act because the issuance of shares by the Company did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the offering, the size of the offering, the manner of the offering and the number of shares offered.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

 

Not applicable.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

 

None.

 

ITEM 6.

EXHIBITS

 

Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

 

 

 

 

 

SIGNATURE PAGE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its

 

 

	SCRIPSAMERICA, INC.
Dated: August 14, 2012
	By:  /s/ Robert Schneiderman
	Chief Executive Officer (Duly Authorized Officer)
	By:  /s/ Jeffrey Andrews
	Chief Financial Officer (Principal Financial and Accounting Officer and Duly Authorized Officer)