Business context and reporting period
This unaudited Form 10-Q covers the three months ended March 31, 2016. The filing identifies the registrant as Trxade Group, Inc., not Scienture Holdings, Inc.; verify that this is the intended filing. Trxade operates a pharmaceutical business-to-business marketplace and sells pharmaceuticals through its Westminster subsidiary. Pinnacle Tek is inactive.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $1.847 million | $696,133; up 165% |
| Gross profit and margin | $831,069; 45.0% | $465,670; 66.9% |
| Operating loss | $309,747 | $442,651 |
| Net loss | $372,380; $0.01 per share | $443,620 in the financial statements; $446,620 in the MD&A table |
| Cash used in operations | $351,853 | $370,304 |
| Cash | $508,279 at March 31 | $860,132 at December 31, 2015 |
| Working capital | $651,541 | $975,405 at December 31, 2015 |
| Total liabilities / shareholders’ equity | $1.902 million / $(77,838) | Equity was $267,017 at December 31, 2015 |
Revenue growth was attributed to platform fees and pharmaceutical sales. Westminster revenue rose to $1.203 million from $127,639, while Trxade revenue increased to $641,826 from $483,527. Higher pharmaceutical sales also drove cost of sales up to $1.016 million, reducing gross margin. General and administrative expense rose to $1.141 million, including $601,904 in payroll expense. Interest expense was $62,633, including $59,015 of debt-discount amortization; cash interest paid was $3,618.
Operating cash use reflected, among other items, a $191,144 increase in inventory. There were no investing or financing cash flows during the quarter. Current liabilities were $1.172 million, including $437,327 of short-term debt. Long-term convertible debt, net of discount, was $729,379. The filing reports no off-balance-sheet arrangements.
Outlook, risks, and unusual items
- Management’s 2016 priorities are to develop the platform and grow customers and revenue. It estimates the next 12 months’ cost of sales at $5.3 million and general and administrative expense at $2.4 million.
- Management says additional funding is needed for operations, platform expansion, and working capital, and expects to pursue financing. It gives no assurance that financing will be available on favorable terms or that operations will generate significant positive cash flow; equity financing could dilute shareholders.
- A class-action lawsuit alleges use of “junk fax” advertising and seeks statutory damages on behalf of a proposed class. Management disputes material liability, but says damages or settlement costs are more likely than not, the outcome is unpredictable, and no accrual was recorded.
- Management reported that disclosure controls and procedures were not effective at period-end. The filing also marks “No” for having filed all required reports during the preceding 12 months; verify the reporting-compliance status.
- The filing provides no specific revenue or earnings guidance. It cautions that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Confirm the registrant identity and whether this Trxade Group filing corresponds to the requested company.
- Reconcile the Q1 2015 net-loss discrepancy: $443,620 in the financial statements versus $446,620 in the MD&A comparison table.
- Assess near-term liquidity and financing needs against cash of $508,279, declining working capital, and the stated need for additional capital.
- Review debt maturity, conversion, warrant, and discount terms, including the $200,000 short-term convertible notes and $250,000 face-value promissory note due in 2016.
- Monitor the class-action litigation, the decision not to accrue a loss, and remediation of ineffective disclosure controls.