Item 1. Business
ITEM
1.
BUSINESS
INTRODUCTION
This
information included in this Annual Report on Form 10-K should be read in conjunction with the consolidated financial statements and
related notes in “ Item 8. Financial Statements and Supplemental Data ” of this Report.
Please
see the “ Glossary ” above for a list of abbreviations and definitions used throughout this Report.
Our
logo and some of our trademarks and tradenames are used in this Report. This Report also includes trademarks, tradenames and service
marks that are the property of others. Solely for convenience, trademarks, tradenames and service marks referred to in this Report may
appear without the ®, ™ and SM symbols. References to our trademarks, tradenames and service marks are not intended to indicate
in any way that we will not assert to the fullest extent under applicable law our rights or the rights of the applicable licensors if
any, nor that respective owners to other intellectual property rights will not assert, to the fullest extent under applicable law, their
rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with,
or endorsement or sponsorship of us by, any other companies.
The
market data and certain other statistical information used throughout this Report are based on independent industry publications, reports
by market research firms or other independent sources that we believe to be reliable sources. Industry publications and third-party research,
surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do
not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosures contained in this Report,
and we believe these industry publications and third-party research, surveys and studies are reliable. While we are not aware of any
misstatements regarding any third-party information presented in this Report, their estimates, in particular, as they relate to projections,
involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those
discussed under the section entitled “ Risk Factors ” beginning on page 19 of this Report. These and other factors could
cause our future performance to differ materially from our assumptions and estimates. Some market and other data included herein, as
well as the data of competitors as they relate to TRxADE HEALTH, INC., is also based on our good faith estimates.
Our
fiscal year ends on December 31st. Interim results are presented on a quarterly basis for the quarters ended March 31st, June 30th, and
September 30th, the first quarter, second quarter and third quarter, respectively, with the quarter ending December 31st being referenced
herein as our fourth quarter. Fiscal 2021 means the year ended December 31, 2021, whereas fiscal 2020 means the year ended December 31,
2020.
Unless
the context requires otherwise, references to the “ Company, ” “ we, ” “ us, ” “ our, ”
“ Trxade ”, “ Trxade Group ” and “ TRxADE HEALTH, INC. ” refer specifically to TRxADE
HEALTH, INC. and its consolidated subsidiaries.
In
addition, unless the context otherwise requires and for the purposes of this Report only:
●
“ Exchange
Act ” refers to the Securities Exchange Act of 1934, as amended;
●
“ SEC ”
or the “ Commission ” refers to the United States Securities and Exchange Commission; and
●
“ Securities
Act ” refers to the Securities Act of 1933, as amended.
Where
You Can Find Other Information
We
file annual, quarterly, and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the
public over the Internet at the SEC’s website at www.sec.gov and are available for download, free of charge, soon after
such reports are filed with or furnished to the SEC, on the “ NASDAQ: MEDS ,” “ SEC Filings ” page
of our website at www.rx.trxade.com . Copies of documents filed by us with the SEC
are also available from us without charge, upon oral or written request to our Secretary, who can be contacted at the address and telephone
number set forth on the cover page of this Report. Our website addresses are www.rx.trxade.com
www.trxadegroup.com , www.rx.trxade.com , www.bonumhealth.com , www.comsprx.com , and www.rxintegra.com .
Information on our websites is not incorporated by reference into this Form 10-K. The information
on, or that may be accessed through, our website is not incorporated by reference into this Report and should not be considered a part
of this Report.
6
CORPORATE
AND ORGANIZATIONAL HISTORY
Background
of XCEL
Our
Company was incorporated in Delaware on July 15, 2005, as “ Bluebird Exploration Company ” (“ Bluebird ”).
Bluebird was originally formed to engage in the exploitation of mineral properties. In December 2008, Bluebird changed its name to “ Xcellink
International, Inc. ” (“ XCEL ”), and subsequently announced that its business plan was being expanded to include
the development and marketing of platform-independent customer-centric payment systems and methodologies. XCEL was unable to raise the
funds necessary to implement its business strategy, never generated any revenue and was reporting as a “ shell ” corporation.
On January 9, 2014, Trxade Group, Inc., a privately held Nevada corporation, merged with and into XCEL, and XCEL changed its name to
“ Trxade Group, Inc. ” On June 1, 2021, the Company changed its name from “Trxade Group, Inc” to “TRxADE
HEALTH, INC.”
Background
of Trxade
PharmaCycle
LLC, a Nevada limited liability company (“ PharmaCycle ”), was formed in August 2010 by Prashant Patel, our President,
to serve as a web-based market platform designed to enable trading among healthcare buyers and sellers of pharmaceuticals, accessories
and services. In January 2013, PharmaCycle converted into a Florida corporation and changed its name to Trxade, Inc. (“ Trxade
Florida ”). In May 2013, Trxade Florida created a new wholly-owned subsidiary, Trxade Group, Inc., a Nevada corporation (“ Trxade
Nevada ”). Trxade Nevada acquired Trxade Florida pursuant to a reverse triangular merger, resulting in Trxade Florida becoming
a wholly-owned subsidiary of Trxade Nevada (the “ Nevada-Florida Merger ”). The sole purpose of the Nevada-Florida Merger
was to provide for a holding company to own Trxade Florida, the operating company. At all times, up to the Nevada-Florida Merger, Trxade
Florida was capitalized exclusively by cash capital contributions from Messrs. Suren Ajjarapu and Patel, our Chief Executive Officer
and President, respectively. Immediately following the Nevada-Florida Merger, Messrs. Ajjarapu and Patel collectively owned 99% of Trxade
Nevada. After the Nevada-Florida Merger (but prior to the merger with XCEL), Trxade Nevada raised $670,000 through the sale of its preferred
stock in private placements made to third party investors.
Reverse
Merger with Trxade
On
September 26, 2008, Mark Fingarson, the former President, sole Director and controlling shareholder of XCEL, sold 80,000,000 shares of
XCEL (prior to the Merger Reverse Split and Reverse Stock Split (each discussed and defined below)) to XCEL’s then attorney, Ron
McIntyre. On November 22, 2013, Trxade Nevada acquired Mr. McIntyre’s controlling interest of 80,000,000 shares in XCEL pursuant
to a Purchase and Sale Agreement dated November 7, 2013. At the time of the sale, XCEL had 104,160,000 shares of common stock issued
and outstanding, including the 80,000,000 shares of stock acquired by Trxade Nevada (prior to the Merger Reverse Split and Reverse Stock
Split (each discussed and defined below)).
On
December 16, 2013, Trxade Nevada and XCEL entered into a definitive merger agreement (the “ Merger Agreement ”) providing
for the merger (the “ Merger ”) of Trxade Nevada with and into XCEL, with XCEL continuing as the surviving corporation.
The Merger closed on January 8, 2014. Under the terms of the Merger Agreement, we amended our certificate of incorporation and changed
our name to “ Trxade Group, Inc., ” and changed our trading symbol to “ TRXD ”.
7
Recapitalization
of Common Stock by a Reverse Split and Increase of Authorized Shares of Stock
We
also reversed our issued and outstanding stock at the ratio of one for one thousand (1:1,000) shares effective upon the closing of the
Merger (the “ Merger Reverse Split ”). In connection with the Merger Reverse Split, 104,160,000 outstanding shares of
our common stock, including the 80,000,000 shares held by Trxade Nevada, were exchanged for 104,160 post-Merger Reverse Split shares
of common stock. As a result of the Merger, Trxade Nevada stockholders holding 28,800,000 shares of common stock and 670,000 shares of
Series A Preferred Stock converted their shares on a one-to-one basis into 28,800,000 shares of our common stock and 670,000 shares of
our Series A Preferred Stock, for an aggregate total of 29,470,000 shares. Further, 100,000 shares of our common stock (on a post-Reverse
Split basis and considering the Reverse Stock Split (discussed below)) were issued following the Merger in connection with the conversion
of our promissory notes. The 80,000,000 pre-Merger shares held by Trxade Nevada, which amounted to 13,334 shares (on a post-Reverse Split
basis and taking into account the Reverse Stock Split), reverted to treasury stock of the Company. Except as otherwise disclosed, the
share amounts in the paragraph above have not been adjusted for the Merger Reverse Split or the Reverse Stock Split.
February
2020 Reverse Stock Split and NASDAQ Capital Market Listing
On
October 9, 2019, our Board of Directors, and on October 15, 2019, stockholders holding a majority of our outstanding voting shares, approved
resolutions authorizing a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to
one-for-ten (1-for-10), and provided authority to our Board of Directors to select the ratio of the reverse stock split in their discretion
(the “ Stockholder Authority ”). On February 12, 2020, the Board of Directors of the Company approved a stock split
ratio of 1-for-6 (“ Reverse Stock Split ”) in connection with the Stockholder Authority and the Company filed a Certificate
of Amendment with the Secretary of Delaware to affect the Reverse Stock Split. The Reverse Stock Split became effective at 12:01 a.m.
Eastern Standard Time on February 13, 2020. The Reverse Stock Split was completed in order to allow us to meet the initial criteria of
The NASDAQ Capital Market.
Our
common stock was approved for listing on The NASDAQ Capital Market under the symbol “ MEDS ”, on February 13, 2020.
Subsidiaries
We
own 100% of Trxade Inc. (a Florida corporation). This subsidiary is included in our attached consolidated financial statements and is
engaged in the same line of business as Trxade. Trxade Inc. is a web-based market platform that enables commerce among healthcare buyers
and sellers of pharmaceuticals, accessories and services.
We
own 100% of Integra Pharma Solutions, LLC (formerly Pinnacle Tek, Inc., a Florida corporation) founded by Mr. Suren Ajjarapu, our CEO,
in 2011 (“ Integra ”). Until the end of 2016, Integra served as our technology consultant provider, but we discontinued
that line of business in 2016. Integra now serves as our logistics company for pharmaceutical distribution.
We
own 100% of Community Specialty Pharmacy, LLC, an independent retail specialty pharmacy with a focus on specialty medications.
We
own 100% of Alliance Pharma Solutions, LLC (d.b.a. DelivMeds), a Florida limited liability company, which was founded in
January 2018 (“ Alliance ”). Alliance previously owned 30% of SyncHealth MSO, LLC (“ SyncHealth ”)
which was part of a joint venture formed in January 2019 with PanOptic Health, LLC (“ PanOptic ”) with the goal of enabling
independent retail pharmacies to better compete with large national pharmacies on pricing, distribution and logistics. We did not realize
any income from the joint venture, and we terminated the joint venture agreements pursuant to their terms effective as of January 31,
2020, and assigned the 30% ownership of SyncHealth back to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only
the terms of the agreements relating to confidentiality, non-solicitation and each party’s obligation to cease use of the other
party’s intellectual property survive the termination.
We
own 100% of Bonum Health, LLC, a Delaware limited liability company which owns our “ Bonum Health Hub ” assets and operations
as discussed in further detail below.
8
We
previously owned 100% of MedCheks, LLC, a Delaware limited liability company which was formed in January 2021, had no revenue in 2021
and was dissolved in December 2021.
We
previously owned 100% of PharmCentrix, LLC, a Delaware limited liability company which had no revenue in 2020 and was dissolved in December
2020.
Acquisition
of Community Specialty Pharmacy, LLC
On
October 15, 2018, the Company entered into and consummated the purchase of 100% of the equity interests of Community Specialty Pharmacy,
LLC, a Florida limited liability company, (“ CSP ”), pursuant to the terms and conditions of the Membership Interest
Purchase Agreement, entered into by and among the Company as the buyer, and CSP, and Nikul Panchal, the equity owner of CSP, a non-executive
officer of the Company (collectively, the “ Seller ”). The purchase price for the 100% equity interest in CSP was $300,000
in cash, a promissory note issued by the Company in the amount of $300,000, and warrants to purchase 67,585 shares of common stock of
the Company (on a post-Reverse Split basis and taking into account the Reverse Stock Split) of which 33% of such warrants were revocable
by the Company prior to October 15, 2019 (but were not revoked); 33% were revocable by the Company prior to October 15, 2020 (but were
not revoked); and the remaining 33% of such warrants are revocable by the Company prior to October 15, 2021 (which were revoked on September
23, 2021), which are exercisable for eight (8) years from the issuance date at a strike price of $0.06 per share. As of the date of this
Report, there are no warrants to purchase shares of common stock remain outstanding in connection with the purchase.
SyncHealth
MSO, LLC Joint Venture
On
January 17, 2019, the Company and Alliance Pharma Solutions, LLC, a Delaware limited liability company and wholly-owned subsidiary of
the Company (hereafter “ Alliance, ” with Alliance and Trxade referred to collectively herein as the “ Trxade
Parties ”), entered into a transaction effective as of January 17, 2019 with PanOptic Health, LLC, a Delaware limited liability
company (“ PanOptic ”), to create a new entity, SyncHealth MSO, LLC (“ SyncHealth ”) as part of a joint
venture to enable independent retail pharmacies to better compete with large national pharmacies on pricing, distribution and logistics.
As part of the transaction Alliance owned 30% of SyncHealth. We did not realize any income from the joint venture, and we terminated
the joint venture agreements pursuant to their terms effective as of January 31, 2020, and assigned the 30% ownership of SyncHealth back
to PanOptic. As of February 1, 2020, we own no equity in SyncHealth and only the terms of the agreements relating to confidentiality,
non-solicitation and each party’s obligation to cease use of the other party’s intellectual property survive the termination.
Bonum
Health Asset Acquisition
On
October 23, 2019, Bonum Health, LLC, a Delaware limited liability company, and a then newly formed wholly-owned subsidiary of the Company
(“ Bonum Health ”) entered into an Asset Purchase Agreement with Bonum Health, LLC, a Florida limited liability company
(“ Seller ”) and the sole member of the Seller (the “ Member ”). Pursuant to the Asset Purchase Agreement,
the Company (through Bonum Health) acquired from the Seller, certain specified assets and certain specified contracts associated with
the assets of the Seller’s operation as a telehealth service provider (the Tele Meds Platform)(the “ Assets ”).
Included with the acquisition of the Assets, were contracts (relating to the Assets), intellectual property for the Bonum Health Tele
Medicine software & Technology and personal computers. The Company agreed to provide the Seller consideration equal to 41,667 shares
of restricted common stock of the Company at the closing, and the Seller had the right to earn up to an additional 108,334 shares of
restricted common stock of the Company in the event certain milestones were met within the first anniversary of the Closing date, none
of which were met.
The
Asset Purchase Agreement includes a three year non-compete requirement, prohibiting the Seller and the Member from competing against
the Assets, customary representations and indemnification obligations, subject to a $25,000 minimal claim amount and certain limitations
on liability disclosed in the Asset Purchase Agreement.
Subsequent
to the acquisition, the Company determined that the assets were not usable and wrote off the value of the assets amounting to approximately
$369,000.
9
BUSINESS
OF TRXADE
Company
Overview
We
are a health services IT company focused on digitalizing the retail pharmacy experience by optimizing drug procurement, the prescription
journey and patient engagement in the U.S. and have designed and developed, and now own and operate, a business-to-business web-based
marketplace. Our core service brings the nation’s independent pharmacies, accredited national suppliers, and manufacturers of pharmaceuticals
together to provide efficient and transparent buying and selling opportunities.
We
began operations as Trxade Group, Inc., a Nevada corporation (“ Trxade Nevada ”) in August of 2010 and spent over two
years creating and enhancing our web-based services. The Company changed its name on June 1, 2021, from “Trxade Group, Inc”
to “TRxADE HEALTH, INC.” Our services provide pricing transparency, purchasing capabilities and other value-added services
on a single platform focused on serving the nation’s approximately 19,397 independent pharmacies with annual purchasing power of
$67.1 billion (according to the National Community of Pharmacists Association’s 2021 Digest). Our national wholesale supply partners
and manufacturers are able to fulfill orders on our platform in real-time and provide pharmacies and wholesale suppliers with cost-saving
payment terms and next-day delivery capabilities in unrestrictive states. We have expanded significantly since 2015 and now serve
approximately 13,100+ registered members on our sales platform.
Our
Principal Products and Services and their Markets.
Trxade.com
is a web-based pharmaceutical marketplace engaged in promoting and enabling commerce among independent pharmacies, small chains,
hospitals, clinics, and alternate dispensing sites with large pharmaceutical suppliers nationally. Our marketplace has over 60 national
and regional pharmaceutical suppliers providing over 120,000 branded and generic drugs, including over-the-counter drugs (OTCs), and
drugs available for purchase by pharmacists. We serve approximately 13,100+ registered members, providing access to Trxade’s
proprietary pharmaceutical database and data analytics regarding medication pricing. We generate revenue from these services by charging
a transaction fee to the seller of the products for sales conducted via the Trxade platform. The buyers do not bear the cost of transaction
fees for the purchases that they make, nor do they pay a fee to join or register with our platform. Substantially all of our revenues
during the years ended December 31, 2021 and 2020, were from platform revenue generated on www.rx.trxade.com , product sales through
Integra Pharma Solutions, LLC, and prescription sales through Community Specialty Pharmacy, LLC.
Status
of current products and services.
We
have a number of products and services still in development, which are described below.
Integra
Pharma Solutions, LLC . Integra is intended to serve as our logistics company for pharmaceutical distribution.
Community
Specialty Pharmacy, LLC . We acquired Community Specialty Pharmacy, LLC, a Florida limited liability company (“ CSP ”),
on October 15, 2018. CSP is an accredited pharmacy located in St. Petersburg, Florida. CSP has a focus on specialty medications. The
company operates with an innovative pharmacy model which offers home delivery services to any patient thereby providing convenience.
Delivmeds.com .
Delivmeds.com was launched in late 2018 as a consumer-based app to provide delivery of pharmaceutical products associated with
Alliance Pharma Solutions, LLC. We are currently working on reformulating the application from a prescription delivery portal to a fully
integrated, interoperable, end-to-end prescription delivery and medication adherence tool. The new product has been rebranded and is
targeted for consumer re-release and use in the near future. To date, we have not generated any revenue from this product.
Trxade
Prime. Trxade Prime allows pharmacy members on the Trxade platform to process, consolidate
and ship purchase orders that are placed directly with Trxade suppliers via the Trxade Prime service. This is at no cost, with the goal
of offering a single tool with one low order minimum, one invoice, one package and one delivery from multiple quality wholesalers and
distributors. Revenue has been generated from this service though our Integra subsidiary, which provides the consolidation of the orders.
10
Bonum
Health Hub and Application . The “ Bonum Health Hub ”, a self-enclosed, free standing virtual examination room, was
launched by the Company’s wholly-owned Bonum Health, LLC subsidiary, in November 2019 and was expected to be operational in April
2020; however, due to the COVID-19 pandemic, the Company does not anticipate installations moving forward, and has taken a write off
of the hubs purchased at June 30, 2021 in the amount of $143,891, which is included under loss on inventory investments in the statement
of operations for the year ended December 31, 2021, in Note 8 - Other Receivables ” to the Notes to Consolidated Financial Statements
included herein under “ Item 8. Financial Statements and Supplemental Data ”.
The
“ Bonum Health app ”, which provides an overall healthcare experience comparable to a Primary Care practitioner, and
an online portal as a personal electronic medical record and scheduling system is available on a subscription basis, primarily as a stand-alone
telehealth software application that can be licensed on a business-to-business (B2B) model to clients as an employment health benefit
for the clients’ employees. Revenue has been generated from this service through our Bonum subsidiary.
Bonum+
Business to Business (B2B). Bonum+ bundles telehealth, a COVID-19 risk assessment tool and a Personal Protective Equipment (PPE)
purchasing tool, through a secure mobile dashboard for corporate clients. The B2B platform eases pressure on employees who are required
to report any relevant health issues daily, centralizing communication and contact tracing to deliver risk scores. This allows employers
to monitor employee COVID-19 risk profiles and streamlines the ordering of new PPE as needed. An integrated artificial intelligence (AI)
tool offers health recommendations and connects employees with board certified physicians, as needed. To date, we have not generated
any revenue from this product.
MedCheks
Health Passport . The Health Passport is a patient-centered, digital, precision healthcare platform
that lets patients consolidate and control their health data via a digital Health Passport and allows them to share their health profile,
tests and vaccinations simply and safely. Secured in a blockchain, the Health Passport includes health and vaccination status verification
via a QR code, which is available for travel, entry into stadiums, concert venues, events, offices, industrial plants, warehouses, and
other physical access points. The Passport stores all of a user’s health records securely in one place. W e have not generated
any revenue from this product to date and the product was discontinued at the end of December 2021. We previously owned 100% of MedCheks,
LLC, a Delaware limited liability company which was formed in January 2021, had no revenue in 2021 and was dissolved in December 2021.
SOSRx,
LLC. On February 15, 2022, the Company entered into a relationship with Exchange
Health, LLC, a technology company providing an online platform for manufacturers and suppliers to sell and purchase pharmaceuticals (“ Exchange
Health ”). SOSRx LLC, a Delaware limited liability company (“ SOSRx ”), was formed, which is owned 51% by the
Company and 49% by Exchange Health.
All of our product offerings
are focused on the United States markets. Some products are restricted just to certain states, depending upon the various applicable
state regulations and guidelines pertaining to pharmaceuticals, particularly, and drug businesses, generally. Our services are distributed
through our online platform
11
Organizational
Structure
The
diagram below depicts our current organizational structure:
The
Pharmaceutical Industry
According
to the NCPA 2020 Digest Report, United States pharmaceutical companies comprise a burgeoning estimated $685
billion industry by 2023, consisting of over 65,000 pharmacy facilities. Management believes that few platforms are currently in place
to bring these participants together to share market knowledge, product pricing transparency and product availability. According to this,
the pharmaceutical market is comprised primarily of three wholesalers that control an estimated approximately 92% of the market. Our
management believes that this concentration has, over the years, led to a lack of price and cost transparency, thereby resulting in severe
limitations on the purchasing choices of industry participants. These market dynamics have enabled these large wholesalers (McKesson,
Cardinal Health and AmerisourceBergen), known as ADR distributors, to dominate the industry with respect to both generic and brand pharmaceuticals.
To
fuel this change, insurance companies (Pharmacy Benefits Management (“ PBM ”) and private health payers) and the federal
government have initiated lower medication reimbursement payments to healthcare providers. We believe that pharmacies face increasing
pressure to source medications as inexpensively as possible and improve operational efficiency. Trxade seeks to be in the forefront of
solving these transparency and pricing concerns by providing independent, retail pharmacies with real-time, pharmacy acquisition cost
(“ PAC ”) benchmarks to the National Drug Code (the “ NDC ”) standard. The NDC mark is a unique product
identifier used in the United States for drugs intended for human use.
Competitive
Business Conditions, Our competitive position in our Industry, and our Methods of Competition.
We
expect to face competition from the three large ADR distributors (McKesson, Cardinal Health and AmerisourceBergen), other pharmaceutical
distributors, buying groups, software products, and other start-up companies. Most of our competitors’ operations have substantially
greater financial- and manufacturer-backed resources, longer operating histories, greater name recognition, and more established relationships
in the industry.
Other
Start-up Companies Which Provide Competitive Services.
We
have identified start-ups that provide for supplier-pharmacy trading such as PharmaBid, RxCherrypick, PharmSaver, MatchRx and GenericBid,
and provide web-based services similar to ours, allowing pharmacies to buy from several suppliers. Trxade differentiates itself from
these exchanges by providing our pharmacies with both brand and generic pharmaceutical products. Additional companies target “ direct-to-consumer ”
pharmacy deliveries, including Amazon.com ’s PillPack , Capsule, Costplusdrugs, and GetRoman.com .
Buying
Groups.
Buying
Groups provide discounted prices to their members by negotiating better pricing with one primary wholesaler, while charging administrative
fees generally ranging from 3 to 5 percent. Some Buying Groups are structured like co-operatives (such as Independent Pharmacy Cooperative
(IPC) and American Pharmacy Cooperative, Inc. (APCI)) and offer their members monthly or quarterly rebates. Although they can function
well to bring pricing competition to the industry, they often offer rebates only after the purchase. Management does not believe Buying
Groups will provide long-term savings to customers with this model given the increased transparency and competition in the industry.
12
Pharmaceutical
Software.
Some
pharmaceutical software companies compete with us to varying degrees at different levels. SureCost, for example, provides inventory management
software enabling pharmacies to comply with primary supplier contracts. This software is fee-based and requires training.
Pharmacies
may be reluctant to buy pharmaceuticals on the internet due to the historical negativity and uncertainty with respect to the origin and
purity of drugs purchased off the web. Trxade management believes that as we continue to develop our brand, our customer base, and our
vast product offerings, we will gain the trust of the market and overcome the negativity associated with purchasing via a pharmaceutical
online marketplace.
One
advantage that we believe we have over our competition is our ability to be flexible and fast moving in adjusting our business model
to address the needs of our customer base. Trxade started by offering pharmacies a reverse auction model to enhance savings on the purchase
of their pharmaceuticals. Customer feedback suggested that pharmacies prefer a more “ buy now ” format, which we implemented.
This resulted in a “ one-stop-one-search ” platform to buy quality pharmaceuticals for less and a data-rich platform
to help pharmacies overcome the complexities related to supply chain purchasing.
Telehealth
Providers
We
also anticipate facing competition in the telehealth industry (in connection with “ Bonum Health ”) from current and
future health care companies in the telehealth market including, Teladoc Health, Inc., MDLive, Inc., American Well Corporation and Grand
Rounds, Inc., among other smaller industry participants.
Sources
and Availability of Raw Materials; Principal Suppliers.
Trxade
is a web-based technology platform. Because we are not a manufacturing company, we do not need any raw materials. Our module on the platform
is drug supplier-to-retailer. We bring buyers and sellers together on this platform. Our suppliers include National Apothecary Solutions,
Integral RX, and South Pointe Wholesale, Inc.
Dependence
on One or More Major Customers.
As
of the date of this filing, we have approximately 13,100+ registered members and over 30 pharmaceutical suppliers as customers,
with an estimated market potential of approximately 19,397 independent pharmacies and 1,500 regional and local suppliers. We have
a working relationship with over 25 wholesalers and the nation’s largest buying group. Although we believe those entities are satisfied
with their business relationship with Trxade, if our buying group and two or three of the largest wholesalers decided no longer to do
business with Trxade, the resulting supplier void would materially and adversely affect our competitiveness in the marketplace.
Intellectual
Property.
Although
we believe that our name and brand are protected by applicable state common law trademark laws, we do not currently have any patents,
concessions, licenses, royalty agreements, or franchises, provided that we do currently maintain a number of registered trademarks and
our pharmaceutical pricing benchmarks, PAC. Our business operates under a proprietary software system which includes trade secrets within
our database, business practices and pricing model. We also maintain a number of websites.
We
believe that we have taken all necessary steps to protect our proprietary rights, but no assurance can be given that we will be able
to successfully enforce or protect our rights in the event that they are infringed upon by a third party.
13
Need
for Government Approval of Products and Services.
We
are required to hold business licenses and to follow applicable state and federal government regulations detailed herein. In October
2018, we acquired Community Specialty Pharmacy, LLC, an accredited independent retail pharmacy with a focus on specialty medications,
which requires state approval, which have been obtained in 36 states.
Effect
of Existing or Probable Government Regulations on the Business .
Federal
Drug Administration Guidelines
On
April 12, 1988, President Ronald Reagan signed into law the Prescription Drug Marketing Act of 1987 (PDMA), setting the baseline for
wholesale distribution regulations. The final regulations were published in 1999, establishing the minimum wholesale distribution requirements
for state licensure. With the intent to prevent the introduction and retail sale of substandard, ineffective, or counterfeit drugs into
the distribution system, state licensing systems moved to update their standards to match those provided federally as guided under FDA’s
Guidelines for State Licensing of Wholesale Prescription Drug Distributors (21 CFR 205). PDMA established minimum federal pedigree requirements
to trace the ownership of prescription drugs through the supply chain. The principal goal of the PDMA was to further secure the nation’s
drug supply from counterfeit and substandard prescription drugs. The law establishes two types of distributors: “ Authorized
distributor[s] of record ” or ADRs; and “ Unauthorized distributor[s], ” such as wholesalers. The pedigree
requirement was to require each person engaged in the wholesale distribution of a prescription drug in interstate commerce, who is not
the manufacturer or an authorized distributor of record for that drug, to provide a pedigree to the recipient. After meeting resistance
from various stakeholders, the FDA delayed the effective date of the regulations several times, until final implementation in December
2006.
At
the federal level the implementation of the track and trace legislation which went into effect in 2018, requires the use of pharmaceutical
pedigree to track the movement of pharmaceuticals along the supply chain. The costs of complying with this new legislation may be too
burdensome for many of the smaller suppliers.
State
Drug Administration Guidelines
There
are a number of national and state-wide regulations that have an effect on our business. All drug wholesalers must be licensed under
state licensing systems, which must in turn meet the FDA guidelines under State Licensing of Wholesale Prescription Drug Distributors
(21 CFR Part 205). The regulations set forth minimum requirements for prescription drug storage and security as well as for the treatment
of returned, damaged, and outdated prescription drugs. Further, wholesale drug distributors must establish and maintain inventories and
records of all transactions regarding the receipt and distribution of prescription drugs and make these available for inspection and
copying by authorized federal, state, or local law enforcement officials. In most states, wholesale distributor licenses are issued by
the State Boards of Pharmacy and require periodic renewal. Approximately 40 states also require out-of-state wholesalers that distribute
drugs within their borders to be licensed as well.
California,
Florida, Nevada, New Mexico and Indiana define the normal distribution channel to not include the lateral sales of pharmaceuticals between
wholesalers. The Supply Chain Act, part of the Quality Drug Act, which was signed into federal law in December 2013, precludes all states
from restricting, investigating or inspecting the distribution channel and transactional history. Until the federal government provides
guidelines for the new federal law, no state regulation or guideline exists.
The
warehousing of pharmaceuticals is also restricted and requires additional state licenses. Some licenses require bonds and written exams
and may take some time to approve. Currently, Integra Pharma Solutions, LLC, our wholesale distributor, asks for formal pedigrees from
the ADR wholesalers and provides pedigrees to those entities they sell to in the marketplace. This requirement limits liability and provides
assurance if a recall is warranted that Trxade and its participants will receive value for the commodity.
Our
national wholesale supply partners are able to fulfill orders on our platform in real-time and provide pharmacies with cost-saving payment
terms and next-day delivery capabilities in unrestrictive states under the Model State Pharmacy Act and Model Rules of the National Association
of Boards of Pharmacy (Model Act).
14
Potential
New Regulations; Price Gouging Rules
In
addition to the above, regulatory mandates in response to certain unexpected events, such as viral outbreaks, could negatively impact
sales. For example, in December 2019 an outbreak of a coronavirus surfaced in China and resulted in governments around the world adopting
restrictions on public gatherings, travel and restrictions on companies’ (including our) ability to conduct normal business operations.
Price
gouging may be an issue in the coming months due to the continued effects of the coronavirus and responses thereto and supply chain issues
associated therewith and separately; as of the date of this Report, 42 states have enacted price gouging laws of one kind or another.
The laws vary from state to state, but one constant throughout is a prohibition to charge “excessive” or “unconscionable”
prices for consumer goods. Some states define “excessive” or “unconscionable” while others define what makes
a prima facia case for price gouging and what constitutes a prima facia defense, shifting the burden of proof to the accuser. In almost
all of the 42 states with price gouging laws on the books, a price is excessive or unconscionable if the price of a good has increased,
in some states by a certain percentage, over the price of the good prior to the onset of the abnormal
disruption of the market. Some states have clearly excepted from the price gouging definition a rise in prices caused by an increase
in the merchant’s cost of delivering that good for sale – whether it be increased shipping costs, gasoline prices or simply
the cost of the good itself. Other states have less defined exceptions – Virginia for example only treats the fact of increased
input costs as a merchant’s prima facia defense to an accusation of price gouging. Several states except from the price gouging
definition prices that do not exceed a normal margin (i.e., the merchant’s margin immediately prior to the market disruption) PLUS
10%. In general, while the l aw may not specifically define what constitutes an “unconscionably
excessive price,” the statutes typically provide that a price may be “unconscionably excessive” if: the amount charged
represents a “gross disparity” from the price such goods or services were sold or offered for sale immediately prior to the
onset of the abnormal disruption of the market. Merchants may provide evidence that justifies their higher prices were justified by increased
costs beyond their control. We will need to comply with the excessive price statutes; as of the date of this Report, we believe we were
in compliance with all 42 states’ price gouging laws.
U.S.
Federal and State Fraud and Abuse Laws
Federal
Stark Law
We
are subject to the federal self-referral prohibitions, commonly known as the Stark Law. Where applicable, this law prohibits a physician
from referring Medicare patients to an entity providing “designated health services” if the physician or a member of such
physician’s immediate family has a “financial relationship” with the entity, unless an exception applies. The penalties
for violating the Stark Law include the denial of payment for services ordered in violation of the statute, mandatory refunds of any
sums paid for such services, civil penalties, disgorgement and possible exclusion from future participation in the federally funded healthcare
programs. A person who engages in a scheme to circumvent the Stark Law’s prohibitions may be subject to fines for each applicable
arrangement or scheme. The Stark Law is a strict liability statute, which means proof of specific intent to violate the law is not required.
In addition, the government and some courts have taken the position that claims presented in violation of the various statutes, including
the Stark Law can be considered a violation of the federal False Claims Act (described below) based on the contention that a provider
impliedly certifies compliance with all applicable laws, regulations and other rules when submitting claims for reimbursement. A determination
of liability under the Stark Law could have a material adverse effect on our business, financial condition and results of operations.
Federal
Anti-Kickback Statute
We
are also subject to the federal Anti-Kickback Statute. The Anti-Kickback Statute is broadly worded and prohibits the knowing and willful
offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, (i) the referral of a person covered
by Medicare, Medicaid or other governmental programs, (ii) the furnishing or arranging for the furnishing of items or services reimbursable
under Medicare, Medicaid or other governmental programs or (iii) the purchasing, leasing or ordering or arranging or recommending purchasing,
leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other governmental programs. In addition, a person
or entity does not need to have actual knowledge of this statute or specific intent to violate it to have committed a violation. Moreover,
the government may assert that a claim including items or services resulting from a violation of the Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the False Claims Act, as discussed below. Violations of the Anti-Kickback Statute can result
in exclusion from Medicare, Medicaid or other governmental programs as well as civil and criminal penalties and fines. Imposition of
any of these remedies could have a material adverse effect on our business, financial condition and results of operations.
15
False
Claims Act
Both
federal and state government agencies have continued civil and criminal enforcement efforts as part of numerous ongoing investigations
of healthcare companies and their executives and managers. Although there are a number of civil and criminal statutes that can be applied
to healthcare providers, a significant number of these investigations involve the federal False Claims Act. These investigations can
be initiated not only by the government but also by a private party asserting direct knowledge of fraud. Penalties for False Claims Act
violations include fines, plus up to three times the amount of damages sustained by the federal government. A False Claims Act violation
may provide the basis for exclusion from the federally funded healthcare programs. In addition, some states have adopted similar fraud,
whistleblower and false claims provisions.
State
Fraud and Abuse Laws
Several
states in which we operate have also adopted similar fraud and abuse laws as described above. The scope of these laws and the interpretations
of them vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. Some state
fraud and abuse laws apply to items or services reimbursed by any payor, including patients and commercial insurers, not just those reimbursed
by a federally funded healthcare program. A determination of liability under such state fraud and abuse laws could result in fines and
penalties and restrictions on our ability to operate in these jurisdictions.
Other
Healthcare Laws
The
federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and
Clinical Health Act, or HITECH, and their implementing regulations, which we collectively refer to as HIPAA, established several separate
criminal penalties for making false or fraudulent claims to insurance companies and other non-governmental payors of healthcare services.
Under HIPAA, these two additional federal crimes are: “Healthcare Fraud” and “False Statements Relating to Healthcare
Matters.” The Healthcare Fraud statute prohibits knowingly and recklessly executing a scheme or artifice to defraud any healthcare
benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion
from government sponsored programs. The False Statements Relating to Healthcare Matters statute prohibits knowingly and willfully falsifying,
concealing or covering up a material fact by any trick, scheme or device or making any materially false, fictitious or fraudulent statement
in connection with the delivery of or payment for healthcare benefits, items or services. These provisions are intended to punish some
of the same conduct in the submission of claims to private payors as the federal False Claims Act covers in connection with governmental
health programs.
In
addition, the Civil Monetary Penalties Law imposes civil administrative sanctions for, among other violations, inappropriate billing
of services to federally funded healthcare programs and employing or contracting with individuals or entities who are excluded from participation
in federally funded healthcare programs. Moreover, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration,
including waivers of copayments and deductible amounts (or any part thereof), that the person knows or should know is likely to influence
the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services
may be liable for civil monetary penalties for each wrongful act. Moreover, in certain cases, providers who routinely waive copayments
and deductibles for Medicare and Medicaid beneficiaries can also be held liable under the Anti-Kickback Statute and civil False Claims
Act, which can impose additional penalties associated with the wrongful act. One of the statutory exceptions to the prohibition is non-routine,
unadvertised waivers of copayments or deductible amounts based on individualized determinations of financial need or exhaustion of reasonable
collection efforts. Although this prohibition applies only to federal healthcare program beneficiaries, the routine waivers of copayments
and deductibles offered to patients covered by commercial payers may implicate applicable state laws related to, among other things,
unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud.
16
Climate
Change Regulation
The
U.S. government and foreign governments are currently in the process of considering new or expanded laws to address climate change. Such
laws, if adopted, may include limitations on greenhouse gas (“ GHG ”) emissions, mandates that companies implement processes
to monitor and disclose climate-related matters, additional taxes or offset charges on specified energy sources, and other requirements.
Compliance with climate-related laws may be further complicated by different regulatory approaches and requirements in the various jurisdictions
in which we operate. New or expanded climate-related laws could impose substantial costs on us. Until the timing and extent of climate-related
laws are clarified, we cannot predict their potential effect on our capital expenditures or our results of operations .
Environmental
Regulations
Our
operations are subject to regulations under various federal, state, local and foreign laws concerning the environment, including laws
addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the
cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party
damage or personal injury claims, if in the future we were to violate or become liable under environmental laws. We are not aware of
any costs or effects of our compliance with environmental laws.
Jumpstart
Our Business Startups Act
In
April 2012, the Jumpstart Our Business Startups Act (“ JOBS Act ”) was enacted into law. The JOBS Act provides, among
other things:
●
Exemptions
for “ emerging growth companies ” from certain financial disclosure and governance requirements for up to five years
and provides a new form of financing to small companies;
●
Amendments
to certain provisions of the federal securities laws to simplify the sale of securities and increase the threshold number of record
holders required to trigger the reporting requirements of the Exchange Act;
●
Relaxation
of the general solicitation and general advertising prohibition for Rule 506 offerings;
●
Adoption
of a new exemption for public offerings of securities in amounts not exceeding $50 million; and
●
Exemption
from registration by a non-reporting company of offers and sales of securities of up to $1,000,000 that comply with rules to be adopted
by the SEC pursuant to Section 4(6) of the Securities Act and exemption of such sales from state law registration, documentation
or offering requirements.
In
general, under the JOBS Act a company is an “ emerging growth company ” if its initial public offering (“ IPO ”)
of common equity securities was affected after December 8, 2011, and the company had less than $1.07 billion of total annual
gross revenues during its last completed fiscal year. A company will no longer qualify as an “ emerging growth company ”
after the earliest of
(i)
the
completion of the fiscal year in which the company has total annual gross revenues of $1.07 billion or more,
(ii)
the
completion of the fiscal year of the fifth anniversary of the company’s IPO;
(iii)
the
company’s issuance of more than $1 billion in nonconvertible debt in the prior three-year period, or
(iv)
the
company becoming a “ larger accelerated filer ” as defined under the Exchange Act.
17
The
JOBS Act provides additional new guidelines and exemptions for non-reporting companies and for non-public offerings. Those exemptions
that impact the Company are discussed below.
Financial
Disclosure. The financial disclosure in a registration statement filed by an “ emerging growth company ” pursuant
to the Securities Act, will differ from registration statements filed by other companies as follows:
(i)
audited
financial statements required for only two fiscal years (provided that “ smaller reporting companies ” such as the
Company are only required to provide two years of financial statements);
(ii)
selected
financial data required for only the fiscal years that were audited (provided that “ smaller reporting companies ”
such as the Company are not required to provide selected financial data as required by Item 301 of Regulation S-K); and
(iii)
executive
compensation only needs to be presented in the limited format now required for “ smaller reporting companies ”.
However,
the requirements for financial disclosure provided by Regulation S-K promulgated by the Rules and Regulations of the SEC already provide
certain of these exemptions for smaller reporting companies. The Company is a smaller reporting company. Currently a smaller reporting
company is not required to file as part of its registration statement selected financial data and only needs to include audited financial
statements for its two most current fiscal years with no required tabular disclosure of contractual obligations.
The
JOBS Act also exempts the Company’s independent registered public accounting firm from having to comply with any rules adopted
by the Public Company Accounting Oversight Board (“ PCAOB ”) after the date of the JOBS Act’s enactment, except
as otherwise required by SEC rule.
The
JOBS Act further exempts an “ emerging growth company ” from any requirement adopted by the PCAOB for mandatory rotation
of the Company’s accounting firm or for a supplemental auditor report about the audit.
Internal
Control Attestation. The JOBS Act also provides an exemption from the requirement of the Company’s independent registered public
accounting firm to file a report on the Company’s internal control over financial reporting, although management of the Company
is still required to file its report on the adequacy of the Company’s internal control over financial reporting.
Section
102(a) of the JOBS Act exempts “ emerging growth companies ” from the requirements in §14A(e) of the Exchange Act
for companies with a class of securities registered under the Exchange Act to hold stockholder votes for executive compensation and golden
parachutes.
Other
Items of the JOBS Act. The JOBS Act also provides that an “ emerging growth company ” can communicate with potential
investors that are qualified institutional buyers or institutions that are accredited to determine interest in a contemplated offering
either prior to or after the date of filing the respective registration statement. The JOBS Act also permits research reports by a broker
or dealer about an “ emerging growth company ” regardless of whether such report provides sufficient information for
an investment decision. In addition, the JOBS Act precludes the SEC and FINRA from adopting certain restrictive rules or regulations
regarding brokers, dealers and potential investors, communications with management and distribution of research reports on the “ emerging
growth company’s ” initial public offerings (IPOs).
Section
106 of the JOBS Act permits “ emerging growth companies ” to submit registration statements under the Securities Act
on a confidential basis provided that the registration statement and all amendments thereto are publicly filed at least 21 days before
the issuer conducts any road show (which time period has since been reduced to 15 days). This is intended to allow “ emerging
growth companies ” to explore the IPO option without disclosing to the market the fact that it is seeking to go public or disclosing
the information contained in its registration statement until the company is ready to conduct a roadshow.
Election
to Opt Out of Transition Period. Section 102(b)(1) of the JOBS Act exempts “ emerging growth companies ” from being
required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities
Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to
comply with the new or revised financial accounting standard.
18
The
JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to
non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of the transition
period.
Status
as Emerging Growth Company . Our first sale of common equity securities pursuant to an effective registration statement under the
Securities Act occurred on or around May 2019. As such, we will remain an emerging growth company, until no later than December 31, 2024,
the completion of the fiscal year of the fifth anniversary of the Company’s IPO.
Research
and Development.
During
the last two fiscal years, Trxade.com, DelivMeds, MedCheks Health Passport and Bonum Health have been developed as proprietary
software. For the years ended December 31, 2021, and 2020, $509,210 and $662,726, respectively, was
spent by the Company in research and development activities, which were included in general and administrative expenses. None of these
expenses were borne directly by customers.
Employees
Currently,
we have approximately 47 full-time employees. Our compensation programs are designed to align the compensation of our employees
with performance and to provide the proper incentives to attract, retain and motivate employees to achieve superior results. The structure
of our compensation programs balances incentives earnings for both short-term and long-term performance such as health insurance, paid
time off and flexibility schedules. To empower employees to unleash their potential, we provide onboarding training, development mentorship
with C-suite executives, and one on one coaching. The Company believes that its rich culture of inclusion and diversity enables it to
create, develop and fully leverage the strength of its workforce to exceed customer expectation and meet its growth objectives. The Company
places a high value on diversity and inclusion.
We
also utilize numerous outside consultants. Our future success will depend partially on our ability to attract, retain and motivate qualified
personnel. We are not a party to any collective bargaining agreements and have not experienced any strikes or work stoppages. We consider
our relations with our employees to be satisfactory.
Seasonality
Our
business is not directly affected by seasonal fluctuations but is affected indirectly by the fall and winter flu season, to the extent
it leads to an increased demand for certain generic pharmaceuticals.