UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

for the quarterly period ended June 30, 2012

 

OR

 

£	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 S    No £

 

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 S    No £

 

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	£	Accelerated filer	£
	Non-accelerated filer	£	Smaller reporting company	S

 

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

Yes £    No S

 

As of August 13, 2012, the registrant had 56,024,972 shares of common stock, $.001 par value, issued and outstanding and 2,990,252 shares of Series A Preferred Stock issued and outstanding.

 

 

SCRIPSAMERICA, INC.

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2012

 

TABLE OF CONTENTS

 

PART I.   FINANCIAL INFORMATION

 

Item 1  -	Financial Statements (unaudited)
	Condensed Balance Sheets (Unaudited) as of June 30, 2012 and December 31, 2011	1
	Condensed Statements of Operations (Unaudited) for the three and six months ended June 30, 2012 and 2011	2
	Condensed Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) for the six months ended June 30, 2012	3
	Condensed Statements of Cash Flows (Unaudited) for the six months ended June 30, 2012 and 2011	4
	Condensed Notes to Financial Statements	5
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4 -	Controls and Procedures	21

 

 

PART II.  OTHER INFORMATION

 

Item 1 -	Legal Proceedings	22
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3 -	Defaults Upon Senior Securities	22
Item 4 -	Mine Safety Disclosures	22
Item 5 -	Other Information	22
Item 6 -	Exhibits	23
SIGNATURES		24
CERTIFICATIONS

 

  

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

SCRIPSAMERICA, INC.

Condensed Balance Sheets

(Unaudited)

 

		June 30,				December 31,
		2012				2011
ASSETS
Current Assets
Cash and cash equivalents		$	67,948			$	467,505
Receivable, net due from factor			576,399				204,640
Loan receivable - vendor			1,397,759				1,052,636
Prepaid expenses and other current assets			224,610				46,300
Deferred tax asset			60,800				41,200
Total Current Assets			2,327,516				1,812,281
Property and Equipment			66,184				–
Other Assets
Notes receivable - related party - net			1,013				6,055
Deposits			200,000				200,000
Total Other Assets			201,013				206,055
TOTAL ASSETS		$	2,594,713			$	2,018,336
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses		$	29,771			$	35,620
Purchase order financing – related party			77,952				–
Royalty payable			–				53,186
Preferred stock dividends payable			62,580				20,860
Convertible notes payable - net of discount of $0 and $0, respectively			–				170,000
Total Current Liabilities			170,303				279,666
Non-Current Liabilities
Convertible notes payable - related parties			130,000				80,000
Convertible notes payable - net of discount of $0 and $55,269, respectively			749,400				624,731
Total Non-Current Liabilities			879,400				704,731
Total Liabilities			1,049,703				984,397
Commitments and Contingencies			–				–
Convertible preferred stock - $.001 par value; 10,000,000 shares authorized, 2,990,252 issued and outstanding			1,043,000				1,043,000
Stockholders' Equity (Deficit)
Common stock - $0.001 par value; 150,000,000 shares authorized; 55,942,972 and 52,521,684 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively			55,943				52,522
Subscription Receivable			–				(170,800	)
Additional paid-in capital			891,766				494,487
Accumulated deficit			(445,699	)			(385,270	)
Total Stockholders' Equity (Deficit)			502,010				(9,061	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	2,594,713			$	2,018,336

  

See accompanying notes to condensed financial statements.

 

   

SCRIPSAMERICA, INC.

Condensed Statements of Operations

(Unaudited)

 

		For the three months ended June 30,								For the six months ended June 30,
		2012				2011				2012				2011
Product Sales - net		$	1,510,952			$	1,775,094			$	2,507,779			$	3,416,328
Cost of Goods Sold			1,213,186				1,302,124				2,041,200				2,477,513
Gross Profit			297,766				472,970				466,579				938,815
General and Administrative Expenses			197,914				272,099				396,408				370,559
Research  and Development			16,370				157,525				26,414				441,494
			214,284				429,624				422,822				812,053
Income from Operations			83,482				43,346				43,757				126,762
Other Expenses
Interest expense			(41,922	)			(81,604	)			(80,087	)			(150,464	)
Income (Loss) Before Provision for Income taxes			41,560				(38,258	)			(36,330	)			(23,702	)
Provision for Income Taxes			21,200				2,000				(17,621	)			4,500
Net Income (Loss)		$	20,360			$	(40,258	)		$	(18,709	)		$	(28,202	)
Preferred Stock Dividend			(20,860	)			(20,860	)			(41,720	)			(20,860	)
Net Loss Available to Common Shareholders		$	(500	)		$	(61,118	)		$	(60,429	)		$	(49,062	)
Earnings Per Common Share
Basic and Diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted Average Number of Common Shares
Basic and Diluted			55,350,744				49,817,246				54,182,892				47,889,782

 

See accompanying notes to condensed financial statements.

 

 

SCRIPSAMERICA, INC.

Condensed Statements of Changes in Stockholders' Equity (Deficit)

For the six months ended June 30, 2012 (unaudited)

  

		Common Stock								Subscription				Additional Paid-In				Retained Earnings				Stockholders'
		Shares				Amount				Receivable				Capital				(Deficit)				Equity
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			32,000				32				–				3,168				–				3,200
Common stock issued for services - employees			114,288				114				–				19,886				–				20,000
Common stock issued for conversion of convertible Notes payable			2,000,000				2,000				–				248,000				–				250,000
Common stock issued for services - non employees			975,000				975				–				96,525				–				97,500
Dividends for convertible preferred stock			–				–				–				–				(41,720	)			(41,720	)
Net Loss			–				–				–				–				(18,709	)			(18,709	)
Balance - June 30, 2012			55,942,972			$	55,943			$	–			$	891,766			$	(445,699	)		$	502,010

 

See accompanying notes to condensed financial statements.

 

 

SCRIPSAMERICA, INC.

Condensed Statements of Cash Flows (unaudited)

 

		For the Six Months Ended June 30,
		2012				2011
Cash Flows from Operating Activities
Net Loss		$	(18,709	)		$	(28,202	)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization of discount on convertible notes payable			2,083				19,484
Common stock issued for services			31,950				74,500
Common stock warrants issued for services							54,809
Deferred Income tax			(19,600	)			–
Change in operating assets and liabilities
(Increase) decrease in:
Receivable due from factor			(371,759	)			(606,361	)
Prepaid expenses and other current assets			(89,560	)			(20,096	)
Increase (decrease) in:
Accounts payable and accrued expenses			(5,849	)			(8,965	)
Cash used in operating activities			(471,444	)			(514,831	)
Cash Flows from Investing Activities
Payment received from note receivable			5,042				–
Purchase of  equipment			(66,184	)			–
Issuance of loan to vendor			(345,123	)			(296,275	)
Cash used in investing activities			(406,265	)			(296,275	)
Cash Flows from Financing Activities
Proceeds from Issuance of common stock			30,000				5,600
Proceeds from issuance of convertible preferred stock - net							912,369
Proceeds from convertible notes payable			320,000				414,000
Proceeds from convertible notes payable - related party			50,000				20,000
Proceeds from purchase order financing - net			77,952				–
Payment for convertible notes payable			(170,600	)			(114,000	)
Collection of stock subscription receivable			170,800				–
Cash provided by financing activities			478,152				1,237,969
Net Increase (Decrease) in Cash and Cash Equivalents			(399,557	)			426,863
Cash and Cash Equivalents - Beginning of year			467,505				171,898
Cash and Cash Equivalents - End of year		$	67,948			$	598,761
Supplemental Disclosures of Cash Flow Information
Cash Paid:
Income Taxes		$	–			$	–
Interest			71,244				120,881
Noncash financing and investing activities:
Conversion of note payable for common stock		$	250,000			$	–
Accrued Preferred Dividend payable			41,720				20,860
Common stock subscription			–				176,000
Common stock issued in connection with the issuance of convertible note payable			–				25,000

 

See accompanying notes to condensed financial statements.

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the six months ended June 30, 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 Company’s common stock became eligible for trading on the Over-the-Counter Bulletin Board (“OTCBB”) under the ticker symbol “SCRC” on July 18, 2012. The OTCBB is a regulated quotation service that displays real-time quotes, last-prices, and volume information in the over-the-counter (“OTC”) equity securities. An OTC equity security is any equity that is not listed or traded on NASDAQ or a national securities exchange. The Company began trading on the OTCBB on July 24, 2012.

 

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 March 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 customers 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.

 

c.

Research and Development - Expenditures for research and development associated with contract research and development provided by third parties are expensed as incurred. The Company had charges of $26,414 and $441,494 for research and development expenses for the six months ended June 30, 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 in June 2012. As of June 30, 2012, gross receivable were $972,322 of which $387,748 was sold to a factor, a contract allowance reverse of $8,175, for a net receivable balance of $576,399. As of December 31, 2011, there were no receivables factored and the net receivable balance was $204,640.

  

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the six months ended June 30, 2012

 

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 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 of the stock as determined by the board of directors since our stock is not publicly traded and the volume is immaterial. As of June 30, 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.

   

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 June 30, 2012, common stock equivalents consisted of preferred stock convertible into 5,980,504 shares, warrants convertible into 478,440 shares and notes payable convertible into 3,517,600 shares of common stock.

   

h.

Reclassification - Certain reclassifications have been made to the 2011 financial statements to conform to the 2012 condensed financial statement presentation. These reclassifications had no effect on net loss or cash flows as previously reported.

 

3 - Loan Receivable - Vendor

 

During the six months ended June 30, 2012, the Company loaned an additional $345,123 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 an oral 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 ability to pay its debt. The loan balance as of June 30, 2012 and December 31, 2011 is $1,397,759 and $1,052,636, respectively.

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the six months ended June 30, 2012

 

4 - Convertible Notes Payable

 

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. Marlex Pharmaceuticals, our re- packager/ supplier, also co-signed this note. 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 includes 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 extended from November 23, 2012 to January, 30, 2014 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 extended from November 23, 2012 to January 30, 2014 and the interest rate was decreased from 2% per month to 1% per month.

 

Also on March 12, 2012 the holder of two other convertible notes, totaling $300,000, agreed to extende the maturity dates of these notes to January 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.

 

On March 12, 2012, the holders of a $250,000 long-term convertible note elected to convert the convertible note into 2,000,000 shares of the Company’s common stock. At the time of conversion the Company modified the conversion price from $0.25 per share to $0.125 per share of common stock resulting in an additional one 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 in price for this conversion was not offered on any other convertible debt which the Company holds. Upon conversion, the royalty liability and debt discount of $53,186 associated with this note were offset resulting in the elimination of both accounts. The Company anticipates launching this orally disintegrating tablet for which a 4% royalty payment is due after the third fiscal quarter of 2012.

 

Interest expense, including the amortization above associated with these notes for the six months ended June 30, 2012 and 2011, was $52,289 and $95,868, respectively. Interest expense for the three months ended June 30, 2012 and 2011, was $27,568 and $65,868, respectively.

  

5 - Notes Payable - Related Parties

 

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 3%, 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, 2016. The principal portion of the note 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. Marlex Pharmaceuticals, our re- packager/ supplier, also co-signed this note. 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 also includes 200,000 shares of the Company’s common stock.

 

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the six months ended June 30, 2012

 

In March 2012, the Company and lender, a company owned by the Company’s president and CEO, mutually agreed to extend the maturity date of $80,000 of notes to January 30, 2014 and the monthly interest rate will decrease from 2% per month to 1% per month effective October 1, 2012.

 

Interest expense associated with these notes for the three and six months ended June 30, 2012 and 2011, was $5,800 and $4,860 and $10,600 and $8,460, respectively.

  

6 - Convertible Preferred Stock

 

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 June 30, 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) Exempted securities – no anti-dilution protection for shares issued to employees, directors or consultants or advisors if the issuance is approved by the Board.

 

The Company has reviewed the rights and privileges of the Series A 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 in the Company’s amended and restated certificate 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 permanent equity.

 

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 $448,824 at June 30, 2012, but we did not record a profit for the six months ended June 30, 2012 (but we did have a net profit for the three months ended June 30, 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 six months period ended June 30, 2012.

 

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

 

On May 25, 2012, the Company issued 400,000 restricted shares of its common stock to Sarav Patel and 500,000 restricted shares of its common stock to Samir Patel for services rendered under their respective consulting agreements with the Company. These services were valued at $40,000 and $50,000, respectively. Sarav and Samir Patel have a controlling interest in Marlex Pharmaceuticals, Inc. During the six month period ended June 30, 2012, the Company charged its operations $7,500, with $82,500 to be amortized over the next eleven months for services to be provided.

 

  

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the six months ended June 30, 2012

 

On May 25, 2012 the Company issued 75,000 of its common stock in connection with services provided by non-employees, these services were valued at $7,500. During the six month period ended June 30, 2012, the Company charged its operations $1,250, with $3,125 to be amortized over the next two months for services to be provided.

 

The Company issued 32,000 restricted shares of its common stock in connection with services provided by members of the board of directors during the six months period ended June 30, 2012. The Company charged its operations for the three months and six months ended June 30, 2012, $2,000 and $3,200 respectively.

 

The Company issued 114,288 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 six months period ended June 30, 2012. These services were valued at $20,000 and the Company charged its operations for the three months and six months ended June 30, 2012 $10,000 and $20,000, respectively.

 

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 above for additional details

  

8 - Commitments and Contingencies

 

In March 2010, the Company signed a “Product, Manufacturing and Supply Agreement” with Marlex our contract packager and labeler for orally disintegrating tablets. The total value of this contract is $935,000. The Company has paid a total of approximately $744,000, of which $200,000 is considered a stand still fee that has been reflected as a deposit on the balance sheet as of June 30, 2012 and December 31, 2011. The project was completed during the first quarter of 2012 and the Company does not expect to incur any more charges toward this contract. Upon the commencement of product being 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 after 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 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.

  

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 $85,000, at an interest rate of prime plus 1% through June 30, 2012, and prime plus 6.25% annually after June 30, 2012. The line is secured by a personal guarantee by the Company’s CEO. During the six months period ended June 30, 2012, the Company did borrow funds ranging from $10,000 to $65,000 but these borrowings were paid in full as of June 30, 2012. Consequently there was no outstanding balance related to this line of credit. The Company incurred interest expense of $373 which was included in the statement of operations for the three and six months period ended June 30, 2012.

  

10 - Purchase Order Financing with related party

 

In June 2012, the Company entered into a purchase order finance agreement with a company owned by a stockholder of the Company, who is also a member of the Board of Directors. The agreement will allow the Company to borrow up to a maximum of $1 million, at an interest rate of 0.6% per 10 day period, 1.8% monthly and 21.6% annually. During the month of June 2012, the Company financed $245,328 of its purchase orders and incurred an interest expense of $1,346 for the three months period ended June 30, 2012. As of June 30, 2012, $77,952 of unpaid purchase order finance is included in accrued expenses.

  

 

SCRIPSAMERICA, INC.

Condensed Notes to Financial Statements

For the six months ended June 30, 2012

 

11 - Concentrations

 

The Company purchased 100% of its product packaging from Marlex during the three and six months periods ended June 30, 2012 and 2011. A disruption in the availability of product packaging from this supplier could cause a possible loss of sales, which could affect operating results adversely.

 

The Company derived approximately $1,913,000, or 76%, and approximately $3,177,000, or 93%, of its revenue from one customer during the six months ended June 31, 2012 and 2011, respectively. For the three months ended June 30, 2012 and 2011, the Company derived approximately $1,311,000 or 87% and $1,651,000 or 93%, of its revenue from this same customer, respectively. 

 

As of June 30, 2012, one customer accounted for approximately $519,000, or 91%, of the Company’s accounts receivable.

 

12 - Subsequent Events

 

On July 23, 2012, the Company entered into a three month consulting agreement whereby the consultant will receive compensation of $1,000 per month for the duration of the contract and in addition, will receive 50,000 shares of common restricted stock.

 

On August 6, 2012, the Company entered into a securities purchase agreement with Asher Enterprises Inc. (“Asher”) pursuant to which Asher purchased from the Company an 8% convertible note in the principal amount of $63,000 (the “Note”). The Company received gross proceeds of $60,000 from the sale of the Note (and $3,000 was used to pay the investor’s legal fees).

 

The Note is due and payable on May 8, 2013 and accrues interest at the rate of 8% per annum. The Note may be prepaid at any time subject to a prepayment penalty of up to 140% of the sum of the principal, accrued but unpaid interest and any other amounts due under the Note.

 

On and after February 2, 2013 and until the maturity date or the full payment of the Note (whichever is later), the principal and all accrued but unpaid interest and any other amounts due under the Note are convertible into shares of the Company’s common stock. The conversion price is at a 42% discount to the average of the five lowest high bid prices for the Company’s common stock at the close of trading during the 10 trading day period prior to the date Asher delivers its notice of conversion. Under the Note, the Company may not declare and pay any dividends or repurchase any of its securities without Asher’s prior written consent, except for any dividends payable with respect to the outstanding shares of the Company’s Series A Preferred Stock.

 

The Note provides Asher with anti-dilution protection from any issuances of shares of common stock or any securities exercisable, convertible or exchangeable for shares of the Company’s common stock at a price per share less than the conversion price under the Note. The anti-dilution protection does not apply to issuances to (i) directors for their attendance at board or committee meetings, (ii) persons who help the Company raise capital, (iii) acquire Marlex Pharmaceutical and (iv) Development 72 LLC upon the conversion of the Series A Preferred Stock.

 

 

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 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 primarily engage in the 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., (“Marlex”), 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 six months ended June 30, 2012, McKesson accounted for approximately 76% and 93% of our sales, respectively, and Curtis Pharmaceuticals and the United States Veterans Administration (“VA”) accounted for the remainder of our sales. The Company expects sales during 2012 will be similarly concentrated, with McKesson accounting for approximately 75% to 90% 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 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 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 ($400,000), (iii) analyze and validate the ODT formula and test sample batches ($94,000) and (iv) acquiring a National Drug Code for the ODT formulation and validate the manufacturing process ($50,000).   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 and debt financing.

 

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 August 14, 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) 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 ensures that collectability is reasonably assured.

 

 

Description of Expenses

 

Our expenses include the following: (a) Costs of Goods sold (the Company purchases all its product from 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 Purchase Order finance agreement); (b) Costs of services, which consists primarily of salaries and contracted professional fees for various consultants used for management of 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 June 30,

 

		2012								2011								$ Change
Product sales - net		$	1,511,000				100%			$	1,775,000				100%			$	(264,000	)
Cost of Goods Sold			1,213,000				80%				1,302,000				73%				(89,000	)
Gross Profit			298,000				20%				473,000				27%				(175,000	)
Operating Costs and Expenses:
General and Administrative			198,000				13%				272,000				15%				(74,,000	)
Research and Development			16,000				1%				157,000				9%				(141,000	)
Total Operating expenses			214,000				14%				429,000				24%				(215,000	)
Total Interest expenses			(42,000	)			-3%				(82,000	)			-5%				40,000
Income  (Loss) before taxes			41,000				3%				(38,000	)			-2%				79,000
Tax Expense			21,000				1%				2,000				0%				19,000
Net  Income (Loss)		$	20,000				1%			$	(40,000	)			-2%			$	60,000

  

The majority of the Company’s sales revenue is generated from the sales of generic pharmaceutical prescription orders. For the three months ended June 30, 2012 the Company generated net product sales of approximately $1.5 million as compared to net product sales of approximately $1.8 million for the three month period ended June 30, 2011, a decrease of approximately $264,000, or 14.9%. 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 renewing a new supply contract which impacted first and second quarter sales in 2012.

 

For the three month period ended June 30, 2012, McKesson accounted for 87% of our net product sales (versus 93% of net product sales for the same period in 2011), and MedVet Supply LLC and Curtis Pharmaceuticals accounted for 13% 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 periods ended June 30, 2012 and 2011.

 

Products sold		2012				% to total				2011				% to total
Prescription drug products		$	1,293,000				77%			$	1,625,000				85%
OTC & non prescription products			386,000				23%				286,000				15%
Gross Sales			1,679,000				100%				1,911,000				100%
Discounts / charge backs			(168,000	)			11%				(136,000	)			8%
Net Sales		$	1,511,000							$	1,775,000

 

Gross Profit: Gross profit for the three month period ended June 30, 2012 was approximately $298,000, which was 20% of our net sales. This was a decline of approximately $175,000 from the same three month period in 2011 and was mainly due to the sales decline of approximately $264,000 from the same three month period a year ago. The gross margin percentage also declined 7% mainly due to product mix changes 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 June 30, 2012, general and administrative expenses (“G&A”) decreased approximately $74,000 to approximately $198,000 as compared to approximately $272,000 for the same three month period in 2011. The significant decrease in G&A expenses was mainly a result of (a) a reduction in board of director’s compensation of approximately $47,000 due to a one-time issuance of common stock grants to new board members in 2011, (b) costs associated with registration and SEC compliance related to our S-1 filing in 2011 decreased by approximately $85,000 (of which approximately $55,000 was a non-cash transaction for stock warrants granted for services provided), and (c) salaries and wages decline approximately $6,000. Offsetting these declines were increases in (i) professional fees consisting mainly of legal costs of approximately $31,000, (ii) costs associated with our marketing efforts to promote the Company within the industry sector increased approximately $34,000 and (iii) various other office type expenses made up the balance of the increase in general and administrative expenses.

 

Research and Development. The Company’s expenditures for research and development cost declined approximately $141,000 for the three month period ended June 30, 2012 compared to the same period in 2011. This decline can mainly be attributed to the completion of our on-going research related to new product development at the end of 2011. . Our research and development costs in the second half of 2012 will be significantly lower than the prior year.

 

Interest Expense. The Interest expense for the three month period ended June 30, 2012 decreased approximately $40,000 from approximately $82,000 in the same three months in 2011 to approximately $42,000 for the three month period ended June 30, 2012. This decrease is mainly due to a decline of approximately $21,000 associated with our interest expense on our convertible notes payable versus the same three month period in 2011. Interest expense associated with the factoring of our accounts receivable which carried a high interest rate declined approximately $10,000. The Company incurred interest expense associated with our factoring fees for the three month period ended June 30, 2012 of approximately $17,500 versus approximately $27,700 in factoring fees incurred for the same three month period in 2011. The Company obtained a line of credit with a bank that carries a lower interest rate. Interest expense associated the our line of credit was only $7 for our second quarter 2012. For the three months ended June 30, 2012 we incurred no expense for related to the amortization of the debt discount on convertible notes whereas in the same period in 2011 the amortization of the debt discount was approximately $8,600.

 

Income taxes expense. The income tax expense for the three months ended June 30, 2012, increased approximately $19,000 to approximately $21,000 as compared to income tax expense of approximately $2,000 for the three months ended June 30, 2011. The increase in the three month tax expense is mainly due to income generated by lower operational expenses and interest expenses for the three months ended June 30, 2012.

 

Net Income (Loss) Applicable to Common Shares. The Company recorded net income of approximately $20,000 for the three month period ended June 30, 2012, as compared to a loss of approximately $40,000 for the same three month period a year ago, an increase of approximately $60,000. This increase in net income is mainly due to a significant decrease in R & D expenses of approximately $140,000 and a reduction in general and administration expense of approximately $74,000. Offsetting the decreases in operating expense was a decline in the gross profit of approximately $175,000, which was mainly due to sales declines of approximately $264,000. The Company was also able to decrease interest expense approximately $40,000. The Company incurred approximately $23,000 of non-cash expense for the issuance of stock for services during the three month period ended June 30, 2012. The income tax expenses increased approximately $19,000 compared to the same three month period in 2011. The Company accrued a preferred stock dividend of $20,860 for both the three month period ended June 30, 2011 and 2012 resulting in a loss of income available to common shareholders of $500 and $61,118 for the three months ended June 30, 2012 and 2011, respectively. Basic and diluted earnings per common share were $0.00 for the three month periods ended June 30, 2012, and 2011, respectively.

 

 

Results for the six month period ended June 30,

 

		2012								2011								$ Change
Product sales - net		$	2,508,000				100%			$	3,416,000				100%			$	(908,000	)
Cost of Goods Sold			2,041,000				81%				2,477,000				73%				(436,000	)
Gross Profit			467,000				19%				939,000				27%				(472,000	)
Operating Costs and Expenses:
General and Administrative			397,000				16%				371,000				11%				26,000
Research and Development			26,000				1%				441,000				13%				(415,000	)
Total Operating expenses			423,000				17%				812,000				24%				(389,000	)
Total Interest expenses			(80,000	)			-3%				(150,000	)			-4%				70,000
Loss before taxes			(36,000	)			-1%				(23,000	)			-1%				(13,000	)
Tax Expense (benefit)			(17,000	)			-1%				5,000				0%				(22,000	)
Net Loss		$	(19,000	)			-1%			$	(28,000	)			-1%			$	9,000

  

The majority of the Company’s sales revenue is generated from the sales of generic pharmaceutical prescription orders. For the six months ended June 30, 2012 the Company generated net product sales of approximately $2.5 million as compared to net product sales of approximately $3.4 million for the six month period ended June 30, 2011, a decrease of approximately $908,000, or 26.6%. The decline in sales versus the same six 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 and second quarter sales in 2012.

 

For the six months ended June 30, 2012, McKesson accounted for76% of our net product sales (versus 93% of net product sales for the same period in 2011), and MedVet Supply LLC and Curtis Pharmaceuticals accounted for 24% 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 six month period ended June 30, 2012 and 2011.

 

Products sold		2012				% to total				2011				% to total
Prescription drug products		$	1,981,000				71%			$	3,052,000				85%
OTC & non prescription products			826,000				29%				538,000				15%
Gross Sales			2,807,000				100%				3,590,000				100%
Discounts / charge backs			(299,000	)			11%				(174,000	)			5%
Net Sales		$	2,508,000							$	3,416,000

 

Gross Profit: Gross profit for the six month period ended June 30, 2012 was approximately $467,000, which was 19% of our net sales. This was a decline of approximately $472,000 from the same six month period in 2011 and was mainly due to the sales decline of approximately $908,000 from the same six month period a year ago. The gross margin percentage also declined 9% mainly due to product mix changes from our sales in OTC non-prescription products, which rose as a percentage of our total sales.

 

Operating Expenses

 

General and Administrative. For the six month period ended June 30, 2012, general and administrative expenses (“G&A”) increased approximately $26,000 to approximately $397,000 as compared to approximately $371,000 for the same six month period in 2011. The changes in G&A expenses was mainly a result of (a) a reduction in board of director’s compensation of approximately $46,000 due to a one-time issuance of common stock grants to new board members in 2011, (b) costs associated with registration and SEC compliance related to our S-1 filing in 2011 decreased by approximately $83,000 (of which approximately $55,000 was a non-cash transaction for stock warrants granted for services provided), (c) salaries and wages increased approximately $19,000, (d) professional fees, consisting mainly of legal costs, increased approximately by $48,000, (e) costs associated with our marketing efforts to promote the Company within the industry sector and launch of new product increased by approximately $86,000 and (f) various other office type expenses made up the balance of the increase in general and administrative expenses.

 

 

Research and Development. The Company’s expenditures for research and development cost declined approximately $415,000, for the six month period ended June 30, 2012, compared to the same period in 2011. The decline in our research and development costs can mainly be attributed to the completion of our on-going research related to new product development at the end of 2011. Our research and development in the second half of 2012 will be significant lower than prior year.

 

Interest Expense. Interest expenses for the six month period ended June 30, 2012 decreased approximately $70,000 from approximately $150,000 in the same six months in 2011 to approximately $80,000 for the six month period ended June 30, 2012. This decrease is mainly due to a decline of approximately $41,000 in interest expense associated with our factoring of our accounts receivable which carried a high interest rate. The Company incurred some interest expense associated with our factoring fees for the six month period ended June 30, 2012 of approximately $17,500 versus incurring approximately $58,000 for the same six month period in 2011. Interest expense associated with convertible notes payable versus the same six month period in 2011 decreased approximately $14,000. For the six months ended June 30, 2012 we incurred approximately $2,000 expense for amortization of debt whereas in the same period in 2011 the amortization of the debt discount was approximately $16,000. The Company obtained a line of credit with a bank that carries a lower interest rate. Interest expense associated our line of credit was $375 for our second quarter 2012. .

 

Income taxes (benefit). Total income taxes (benefits) for the six months ended June 30, 2012 was approximately $17,000 as compared to a tax expense of approximately $5,000 for the six months ended June 30, 2011, an increase in the tax benefit of approximately $22,000 as compared to the same period in the prior year. This tax benefit is a result of a net operating loss of approximately $179,000 for the six months ended June 30, 2012.

 

Net Income (Loss) Applicable to Common Shares. The Company recorded a net loss of approximately $19,000 for the six month period ended June 30, 2012, as compared to a net loss of approximately $28,000 for the same six month period in 2011, an increase in net loss of approximately $44,000. This increase in net loss is mainly due to a significant reduction in net sales of approximately $908,000 resulting in the gross margin decline of approximately $472,000 versus the same six month period in 2011. Offsetting the decline in our gross margin was a decrease in R & D expenses of approximately $416,000 and a reduction in our interest expense of approximately $70,000. Our general and administration expenses increased by approximately $26,000. The Company incurred approximately $32,000 of non-cash expense for the issuance of stock for services during the six month period ended June 30, 2012. The income tax benefit increased approximately $22,000 compared to the same six month period in 2011. The Company accrued a preferred stock dividend of $41,720 and $20,860 for the six months ended June 30 2012 and 2011, repectively, resulting in a loss of income available to common shareholders of $60,429 and $49,062 for the six months ended June 30, 2012 and 2011, respectively Basic and diluted earnings per common share were $0.00 for the six month period ended June 30, 2012, and 2011, respectivly.

 

Liquidity and Capital Resources

 

Summary

 

At June 30, 2012, the Company had total current assets of approximately $2,328,000 and total current liabilities of approximately $170,000 resulting in working capital of approximately $2.2 million. The Company's current assets consisted of approximately $68,000 in cash and cash equivalents, approximately $576,000 in receivables due from factor, approximately $1,398,000 due from our packaging / supplier and approximately $286,000 in prepaid expenses and deferred taxes. Current liabilities at June 30, 2012 consist primarily of accounts payable and accrued expenses, purchase order financing and dividends payable in the amount of approximately $170,000.

 

For the six months ended June 30, 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. We raised $370,000 in cash through the issuance of convertible notes which was used to supplement operations and fund our packager supplier.

 

During the years ended December 31, 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 $0.9 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:

  

		Six months ended June 30,				Six months ended June 30,				Year ended December 31,
		2012				2011				2011
Total cash provided by (used in):
Operating activities			(472,000	)			(515,000	)			(106,000	)
Investing activities			(406,000	)			(296,000	)			(1,050,000	)
Financing activities			478,000				1,238,000				1,452,000
Increase (decrease) in cash and cash equivalents			(400,000	)			427,000				296,000

  

Management believes that, based on the anticipated level of sales, estimated to be approximately $6.0 to $8.0 million for 2012, and no significant increase in operational expense as compared to the 2011 calendar 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 January 31, 2014 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 fourth 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 committed to invest $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 convertible promissory 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. Upon conversion, the royalty liability and debt discount of $53,186 associated with this note were bifurcated resulting in the elimination of both accounts. 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.. The Company expects to start shipments of these products sometime after our fiscal third quarter 2012, which is when royalty payments are schedule to begin.

 

The Company has obtained a line of credit from Wells Fargo Bank to borrow up to $85,000. 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 3% payable monthly 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 also 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.

 

On August 6, 2012, the Company received $60,000 in net proceeds for a convertible promissory note. The note matures on May 8, 2013 and accrues interest at the rate of 8% per annum. The Note may be prepaid at any time subject to a prepayment penalty of up to 140% of the sum of the principal, accrued but unpaid interest and any other amounts due under the Note. On and after February 2, 2013 and until the maturity date or the full payment of the Note (whichever is later), the principal and all accrued but unpaid interest and any other amounts due under the Note are convertible into shares of the Company’s common stock. The conversion price is at a 42% discount to the average of the five lowest high bid prices for the Company’s common stock at the close of trading during the 10 trading day period prior to the date Asher delivers its notice of conversion. Under the Note, the Company may not declare and pay any dividends or repurchase any of its securities without Asher’s prior written consent, except for any dividends payable with respect to the outstanding shares of the Company’s Series A Preferred Stock.

 

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

 

Operating Activities

 

Net cash used by operating activities was approximately $472,000 for the six month period ended June 30, 2012, as compared to cash used by opening activities of approximately $515,000 for the six month period ended June 30, 2011, a decrease in cash used by operations of approximately $43,000. Use of cash from basic operations was approximately $49,000 for the six month period ended June 30, 2012, as compared to cash generated from basic operations of approximately $121,000 in the same period in 2011, a decrease of approximately $72,000 in the use of cash from basic operations. This decrease in cash generated from basic operation is mainly due to lower sales for the six month period in 2012 as compared to the same period in 2011. Sales for the six months ended June 30, 2012 were approximately $908,000 lower than the same period in the prior year, resulting in the gross margin to be approximately $472,000 lower for the six months ended June 30, 2012 compared to the same period in 2011. The other declines and increases in cash used from operations are a result of the following: (i) prepaid expense increased approximately $90,000 for the six month period ended June 30, 2012 as compared to an increase in prepaid expenses during the same period in 2011 of approximately $20,000, for an increase in use of cash of approximately $70,000; (ii) accounts receivable also increased approximately $372,000 for the six month period ended June 30, 2012, as compared to an increase of approximately $606,000 for the same period in 2011, resulting in a decline in the use of cash of approximately $234,000; (iii) accounts payable decreased approximately $59,000 for the six month period ended June 30, 2012, as compared to a decline in accounts payable of approximately $9,000 for the same period in 2011,resulting in a increase in the use of cash of approximately $50,000.

 

  

Investing Activities

 

For the six months period ended June 30, 2012, the Company used approximately $406,000 for investing activities, an increase of approximately $110,000. Investing activities mainly consisted of approximately $345,100 for the issuance of a note receivable to our contract / packager supplier to help support their operational costs which was an increase of approximately $49,000 over the same six months period in 2011. In 2012, the Company also invested approximately $66,000 in manufacturing equipment needed for the production of our new products to be launched in the second half of 2012.

 

Financing Activities

 

Net cash provided by financing activities was approximately $478,000 for six month period ended June 30, 2012 compared to approximately $1,238,000 for the same six month period in 2011, a decrease of approximately $760,000. Financing activities for the six months ended June 30, 2012 consisted of the following: (a) the Company paid down the balance on two convertible notes payable in the amount of $170,600, (b) the Company received the cash balance of $170,800 for subscription receivable, (c) the Company raised $370,000 from the issuance of convertible notes payable, of which $50,000 was from a related party and (d) the Company sold shares of common stock in the amount of $30,000, (e) purchase order financing raise a net amount of approximately $78,000. In six month period ended June 30, 2011, cash provided by financing activities consisted mainly of: (a) proceeds from the issuance of convertible preferred stock of approximately $912,000, (b) proceeds from convertible promissory notes of approximately $434,000, of which $20,000 was issued to a related party and (c) the sale of common stock in the amount of $5,600. These funds were used to fund operations and to pay down $114,000 due on a convertible promissory notes.

 

The following is a listing of our current financing.

 

On August 6, 2012, the Company received $60,000 in net proceeds for a convertible promissory note payable. The note matures on May 8, 2013 and accrues interest at the rate of 8% per annum. The Note may be prepaid at any time subject to a prepayment penalty of up to 140% of the sum of the principal, accrued but unpaid interest and any other amounts due under the Note. On and after February 2, 2013 and until the maturity date or the full payment of the Note (whichever is later), the principal and all accrued but unpaid interest and any other amounts due under the Note are convertible into shares of the Company’s common stock. The conversion price is at a 42% discount to the average of the five lowest high bid prices for the Company’s common stock at the close of trading during the 10 trading day period prior to the date Asher delivers its notice of conversion. Under the Note, the Company may not declare and pay any dividends or repurchase any of its securities without Asher’s prior written consent, except for any dividends payable with respect to the outstanding shares of the Company’s Series A Preferred Stock.

 

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 also 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 also 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 January 30, 2014 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 January 30, 2014 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 two other convertible notes, totaling $300,000, agreed to extend the maturity dates of these notes to January 30, 2014 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.

 

Commitments and Concentrations

 

In March 2010, the Company signed a “Product, Manufacturing and Supply Agreement” with a Marlex our contract packager and labeler for orally disintegrating tablets. The total value of this contract is $935,000. The Company has paid a total of approximately $744000, of which $200,000 is considered a stand still fee that has been reflected as a deposit on the balance sheet as of June 30, 2012 and December 31, 2011. The project was completed during the first quarter of 2012 and the Company does not expect to incur any more charges toward this contract. 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 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 after 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 0.09% on the first $25 million of sales of 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 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 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

 

The Company purchased 100% of its package product from one supplier for the six month period ended June 30, 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 $1,913,000, or 76%, and approximately $3,177,000, or 93%, of its revenue from one customer during the six months ended June 31, 2012 and 2011, respectively. For the three months ended June 31, 2012 and 2011, the Company derived approximately $1,311,000 or 87% and 1,651,000 or 93%, of its revenue from one customer, respectively.

 

As of June 30, 2012, one customer accounted for approximately $519,000, 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 June 30, 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.

  

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 June 30, 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 are 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 May 3, 2012, the Company issued 20,000 restricted shares of its common stock to five directors in connection with services provided by such members of the board of directors for which we charged $2,000 to operations for the quarter ended June 30, 2012.

 

On April 24, 2012 and June 1, 2012, the Company issued an aggregate of 57,144 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 and May, respectively, for which we charged $10,000 to operations for the quarter ended June 30, 2012.

 

On May 25, 2012, the Company issued 400,000 restricted shares of its common stock to Sarav Patel and 500,000 restricted shares of its common stock to Samir Patel for services rendered under their respective consulting agreements with the Company. These services were valued at $40,000 and $50,000, respectively. Sarav and Samir Patel have controlling interest in Marlex Pharmaceuticals, Inc.

 

On May 25, 2012, the Company issued 37,500 restricted shares of its common stock to Robert Rabinowitz and 37,500 restricted shares of its common stock to David Goodfriend. The shares were issued a retainer fee under an agreement the Company entered into with JH Darbie & Co., Inc. for investment banking and placement agent services. Messrs. Goodfriend and Rabinowitz are principals of JH Darbie & Co., Inc. These services were valued at $7,500.

 

The shares of the Company’s common stock issued to its 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 issuances, size of the offering, manner of the offering and number of shares offered. 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 this transaction

 

The shares of the Company’s common stock issued to Sarav Patel, Samir Patel, Robert Rabinowitz and David Goodfriend 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 issuances, size of the offering, manner of the offering and number of shares offered. 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 this transaction.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.

MINE SAFETY DISLCOSURES

 

 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*

 

* Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing date of this Form 10-Q.

 

 

 

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 behalf by the undersigned thereunto duly authorized.

 

 

	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)

 

 

 

 

24