Scienture Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Information This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II. Other Information – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 22, 2024 (the “Annual Report”). Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited consolidated financial statements included above under “Part I – Financial Information” – “Item 1. Financial Statements”. Please see the section entitled “Glossary” in our Annual Report for a list of abbreviations and definitions used throughout this Report. Unless the context requires otherwise, references to the “Company,” “we,” “us,” and “our” refer specifically to Scienture Holdings, Inc., formerly TRxADE HEALTH, INC., and its consolidated subsidiaries. References to “Q1”, “Q2”, “Q3”, and “Q4” refer to the first, second, third, and fourth quarter, respectively, of the applicable year. Unless otherwise stated or the context otherwise requires, comparisons from one period to another are to the same period of the prior fiscal year. 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; and ● “Securities Act” refers to the Securities Act of 1933, as amended. Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows: ● Company Overview . Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A. ● Recent Events . Summary of material transactions occurring during the three and nine months ended September 30, 2024. ● Liquidity and Capital Resources . An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition. ● Results of Operations . An analysis of our financial results comparing the three and nine months ended September 30, 2024, and 2023. ● Critical Accounting Policies . Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. Company Overview On September 20, 2024, the Company filed with the Secretary of State of the State of Delaware an amendment to its Second Amended and Restated Certificate of Incorporation to change the legal name of the Company from “TRxADE HEALTH, Inc.” to “Scienture Holdings, Inc.” The Company owned, as of September 30, 2024, 100% of Softell Inc. (f/k/a Trxade Inc.), Integra Pharma Solutions, LLC and Scienture, LLC (f/k/a Scienture, Inc.). On October 4, 2024, the Company and Softell entered into IPS Assignment Agreement, pursuant to which the Company transferred, and Softell accepted, 100% of the membership interests of IPS. As a result, IPS is now a wholly-owned subsidiary of Softell. During the year ended December 31, 2023 and a portion of the quarter ended March 31, 2024, Softell, operated a web-based market platform that enabled commerce among healthcare buyers and sellers of pharmaceuticals, accessories and services. Softell’s current primary operations are conducted through IPS. IPS is a licensed pharmaceutical wholesaler and sells brand, generic and non-drug products to customers. IPS’ customers include all healthcare markets including government organizations, hospitals, clinics and independent pharmacies nationwide. 29 Table of Contents Bonum Health, LLC was formed to hold certain telehealth assets acquired in October 2019. The “Bonum Health Hub” was launched in February 2020; however, the Company does not anticipate installations moving forward. The Company anticipates dissolving Bonum Health, Inc. and Bonum Health, LLC. Scienture is a New York based branded, specialty pharmaceutical research company which is engaged in the research and development of branded pharmaceutical products. The intellectual property application process was initiated in November 2019 and the product development activities commenced in January 2020. Scienture also plans to foray into commercialization of innovative and branded pharmaceutical products in the US market. Scienture’s assets in development are across therapeutics areas and indications and cater to different market segments. Scienture’s mission is to identify, develop and bring to market innovative technology-based products to address unmet medical needs. Its targeted portfolio consists of short term and long-term opportunities with efficient development, regulatory, and go to market strategies. Acquisitions Superlatus Merger On July 14, 2023, the Company entered into the Superlatus Merger Agreement with Superlatus and Merger Sub. On July 31, 2023, the Company completed its acquisition of Superlatus in accordance with the terms and conditions of the Superlatus Merger Agreement, pursuant to which the Company acquired Superlatus by way of a merger of the Merger Sub with and into Superlatus, with Superlatus being a wholly owned subsidiary of the Company and the surviving entity in the Superlatus Merger. Under the terms of the Superlatus Merger Agreement, at the closing of the Superlatus Merger, shareholders of Superlatus received an aggregate of 136,441 shares of the Company’s common stock and 306,855 shares of the Company’s Series B Preferred Stock. Each share of Series B Preferred Stock is convertible into 100 shares of the Company’s common stock. At Closing, the value of the Company’s common stock was $7.30 per share, resulting in a total value of $225,000,169. Not all of the closing conditions of the Superlatus Merger Agreement were met. As a result, the Company entered into Amendment No. 1 to the Superlatus Amendment on January 8, 2024. Under the terms of the Superlatus Amendment, the merger consideration to the shareholders of Superlatus was adjusted to an aggregate of 136,441 shares of the Company’s common stock and 15,759 shares of the Company’s Series B Preferred Stock, resulting in a total value of $12,500,089. Additionally, the shareholders of Superlatus agreed to surrender back to the Company 291,096 shares of the Company’s Series B Preferred Stock. As described below, in March 2024, the Company divested of its interest in Superlatus. Scienture Merger On July 25, 2024, the Company entered into and closed the Scienture Merger Agreement with Merger Sub I, Merger Sub II, and Scienture. Pursuant to the Scienture Merger Agreement, (i) Merger Sub I merged with and into Scienture, with Scienture continuing as the surviving entity and a wholly owned subsidiary of the Company, and (ii) Scienture merged with and into Merger Sub II, with Merger Sub II continuing as the surviving entity. In connection with the transactions, the Company changed its name to “Scienture Holdings, Inc.” and Merger Sub II, as the surviving entity of the Second Merger, changed its name to “Scienture, LLC”. As consideration for the Scienture Merger, at the Effective Time, the shares of Scienture common stock issued and outstanding immediately prior to the Effective Time were converted into the right to receive, in the aggregate, (i) 291,536 shares of the Company’s common stock and (ii) 6,826,753 shares of the Company’s Series X Preferred Stock, each share of which is convertible into one share of common stock. Dispositions MMS APA On February 16, 2024, the Company, together with Softell and MMS entered into the MMS APA, under which MMS agreed to purchase for cash substantially all of the assets of Softell. On February 16, 2024, the parties consummated the closing of the transactions contemplated by the MMS APA. Softell operated a web-based market platform designed to enable trading among healthcare buyers and sellers of pharmaceuticals, accessories and services. The purchase price paid at closing was $22,660,182. Pursuant to the terms and conditions of the MMS APA, because MMS received $1,600,000 or greater in certain collections from third parties resulting from any products or services sold, or provided, by the business assets and operations acquired from Softell during the period ending on the four-month anniversary of the closing date, the Company was due an additional $7,500,000 payment from MMS. The Company received the $7,500,000 in May 2024. Superlatus SPA On March 5, 2024, the Company entered into the Superlatus SPA with the Buyer. Pursuant to the Superlatus SPA, the Company sold all of the issued and outstanding stock of Superlatus to the Buyer. The $1.00 purchase price for the stock was delivered to the Company at the closing, which occurred simultaneously with the execution of the Superlatus SPA. As a result of the transaction, Superlatus ceased to be a subsidiary of the Company, and the rights and assets of Superlatus together with various liabilities and obligations that were specific to Superlatus became rights and obligations of the Buyer. 30 Table of Contents Recent Events On September 20, 2024, the Company filed with the Secretary of State of the State of Delaware an amendment to its Second Amended and Restated Certificate of Incorporation to change the legal name of the Company from “TRxADE HEALTH, Inc.” to “Scienture Holdings, Inc.” (the “Name Change”). Other than the Name Change, there were no changes to the Company’s certificate of incorporation or bylaws. Effective September 23, 2024, the Company’s common stock trades under the ticker symbol “SCNX”. The Name Change resulted in a change to the CUSIP number for the Company’s outstanding shares of common stock offered on the Nasdaq Stock Market LLC. Liquidity and Capital Resources Cash Cash was $579,103 as of September 30, 2024, compared to $314 as of December 31, 2023. The increase in cash was primarily due to the proceeds in February 2024 and May 2024 related to the disposition of certain assets to MMS as described above. We expect that our future available capital resources will consist primarily of cash generated from operations, remaining cash balances, borrowings, and additional funds raised through sales of debt and/or equity securities. Liquidity Cash, current assets, current liabilities, short term debt and working capital at the end of each period were as follows: September 30, December 31, Percent 2024 2023 Change Change Cash $ 579,103 $ 314 $ 578,789 184328 % Current assets (excluding cash) $ 6,676,813 $ 2,752,749 $ 3,924,064 143 % Current liabilities $ 5,413,438 $ 11,556,355 $ (6,142,917 ) -53 % Working capital $ 1,842,478 $ (8,803,292 ) $ 10,645,770 -121 % Our principal sources of liquidity have historically been cash provided by operations, sales of business assets and operations from time to time, sales of equity, and borrowings under various debt arrangements. Our principal uses of cash have been for operating expenses, technology development, and acquisitions. We anticipate these uses will continue to be our principal sources of, and uses of, cash in the future. 31 Table of Contents The increase in cash as of September 30, 2024, compared to December 31, 2023, was primarily due to the proceeds received in February 2024 and May 2024 resulting from the disposition of assets to MMS as described above. Special Cash Dividend On March 6, 2024, the Company announced the declaration of a special cash dividend of eight dollars ($8.00) per share of common stock, payable to stockholders of record as of March 18, 2024, with the dividend being paid on March 22, 2024. The special dividend of $12,671,072 was paid using a portion of the proceeds from the closing of the sale of certain assets. On July 9, 2024, the Company announced the declaration of a special cash dividend of one dollar and fifty cents ($1.50) per share of common stock, payable to stockholders of record as of July 19, 2024, with the dividend being paid on July 22, 2024. The special dividend was $2,187,759 paid using a portion of the proceeds received in May 2024 in connection with the February 2024 sale of certain assets. Liquidity Outlook Cash Explanation Cash Requirements Our primary objectives for the remainder of 2024 are expected to be the continued implementation of Scienture’s business plan, marketing the IPS business, and to complete potential strategic transactions of our business-to-consumer subsidiaries, which may include a potential sale, spin-off, fund raising, combination or other strategic transaction, and also include the winding down of such entities. There can be no assurance that our operations will generate significant positive cash flow, or that additional funds will be available to us, through borrowings or otherwise, on favorable terms if required in the future, or at all. We may also raise additional funding in the future through the sale of equity. We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows: Projected Expenses from October 2024 to September 2025 Amount General and administrative (1) $ 9,800,000 Total $ 9,800,000 (1) Includes estimated wages and payroll, legal and accounting, marketing, rent and web development. We may require additional funding in the future to implement on our business plan and potentially to expand or complete acquisitions. The sources of this capital are expected to be equity investments and notes payable. Our plan for the next twelve months is to integrate Scienture and its research and development activities, continue using the same marketing and management strategies to promote our IPS assets and operations, exploring strategic transactions involving our corporate assets, while also seeking to expand our operations organically or through acquisitions, as funding and opportunities arise. In the event we require additional funding, we plan to raise that through the sale of debt or equity, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues. Going Concern The accompanying interim consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued. In accordance with Financial Accounting Standards Board, or the FASB, Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. As of September 30, 2024, the Company had an accumulated deficit of $31,876,241. As of September 30, 2024, the Company had $579,103 in cash. We will need to raise additional capital or secure debt funding to support on-going operations, and to fund the assets and operations of any businesses or assets we acquire. The sources of this capital are expected to be the sale of equity and debt, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues, our financial position, and liquidity. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Unless Management is able to obtain additional financing, it is unlikely that the Company will be able to meet its funding requirements during the next 12 months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Cash Flows The following table summarizes our Consolidated Statements of Cash Flows for the following periods: Nine Months Ended September 30, Percent 2024 2023 Change Change Net cash used in operating activities from continuing operations $ (10,585,173 ) $ (2,036,715 ) $ (8,548,457 ) 420 % Net cash (used in) provided by operating activities from discontinued operations $ (770,653 ) $ 830,638 $ (1,601,291 ) -193 % Operating Activities $ (11,355,826 ) $ (1,206,077 ) $ (10,149,749 ) 449 % Net cash (used in) provided by investing activities from continuing operations $ (2,379,024 ) $ 5,546 $ (2,384,570 ) -42996 % Net cash provided by investing activities from discontinued operations $ 29,931,815 $ 68,737 $ 29,863,078 43445 % Investing Activities $ 27,552,791 $ 74,283 $ 27,478,508 449 % Net cash (used) provided by in financing activities from continuing operations $ (15,764,770 ) $ 570,934 $ (16,335,704 ) -2861 % Net cash used in financing activities from discontinued operations $ (5,000 ) $ (500,000 ) $ 495,000 0 % Financing Activities $ (15,769,770 ) $ 70,934 $ (15,840,704 ) -2861 % Net change in cash $ 427,195 $ (1,060,860 ) $ 1,488,055 -140 % 32 Table of Contents Cash used in operating activities for the nine months ended September 30, 2024, was $11,355,826, compared to cash used in operations for the nine months ended September 30, 2023, of $1,206,077. The increase in cash used in operations for the nine months ended September 30, 2024 compared to September 30, 2023, was mainly due to our net loss and cash used in operating assets and liabilities in the 2024 period. Cash provided by investing activities for the nine months ended September 30, 2024, was $27,552,791 and cash provided by investing activities was $74,283 for the nine months ended September 30, 2023. The increase in cash provided by investing activities in the 2024 period was primarily due to the MMS disposition in the first quarter, partially offset by the investment in securities of $2,500,000. Cash (used) provided by in financing activities for the nine months ended September 30, 2024, was ($15,769,770) compared to $70,934 of cash provided by financing activities for the nine months ended September 30, 2023. The change was primarily due to the payment of dividends of $14,858,831 in 2024. In August 2024, the Company received note proceeds of $314,000. Results of Operations The following selected consolidated financial data should be read in conjunction with the unaudited consolidated financial statements and the notes to these statements included above. Three Month Period Ended September 30, 2024, compared to Three Month Period Ended September 30, 2023 Three Months Ended September 30, Percent 2024 2023 Change Change Revenues $ 64,861 $ 392,286 (327,425 ) -83 % Cost of sales 60,978 352,694 (291,716 ) -83 % Gross profit 3,883 39,592 (35,709 ) -90 % Operating expenses: Wage and salary expense 708,977 7,342 701,635 9556 % Professional fees 593,364 295,497 297,867 101 % Accounting and legal expense 619,227 409,480 209,747 51 % Technology expense 157,474 22,071 135,403 613 % General and administrative (less stock-based compensation expense) 168,212 63,119 105,093 166 % Research and development 1,253,983 - 1,253,983 100 % Warrants and options expense 437 3,761 (3,324 ) -88 % Total operating expenses 3,501,674 801,270 2,700,404 337 % Change in fair value of warrant liability 502,178 925,320 (423,142 ) -46 % Interest income 29,445 - 29,445 100 % Interest expense (217,433 ) (251,778 ) 34,345 -14 % Net loss from operations (3,183,601 ) (88,136 ) (3,095,465 ) 3512 % Income (loss) on discontinued operations - (3,436,978 ) 3,436,978 -100 % Net loss $ (3,183,601 ) $ (3,525,114 ) $ 341,513 -10 % 33 Table of Contents There were $64,861 in revenues for the three months ended September 30, 2024. Revenues decreased by $327,425, compared to the same period ended September 30, 2023 primarily because of the disposition of the assets and operations of Softell completed in February 2024 which resulted in the Company having fewer revenue generating operations when compared to the comparable period in 2023. For the three-month period ended September 30, 2024, cost of goods sold and gross (loss) profit were $60,978 and $3,883, and $352,694 and $39,592, all respectively for the same period in 2023. Gross profit as a percentage of sales was 5.99% for the three months ended September 30, 2024, compared to 10.09% for the three months ended September 30, 2023. Wages and salary expense increased by $701,635 for the three months ended September 30, 2024 to $708,977 compared to $7,342 for the comparable period in 2023. The increase is primarily due to an increase in salary of the COO and CEO of IPS, as well as the Scienture Merger in July 2024, as compared to the same period in 2023. Professional fees increased by $297,867 to $593,364 compared to $295,497 for the comparable period in 2023. The increase was primarily due to increase in board members’ fees and consulting expense and post-acquisition professional fees expense of Scienture. Accounting and legal expenses increased by $209,747 for the three months ended September 30, 2024 to $619,227 compared to $409,480 for the comparable period in 2023. The increase is primarily due to increased legal services during the three months ended September 30, 2024 as compared to the same period in 2023. General and administrative expenses (including stock-based compensation expense) increased by $101,769 for the three months ended September 30, 2024, to $168,649 compared to $66,880 for the comparable period in 2023. The increase was mainly due to increase in headcount in connection with our acquisition of Scienture’s operations in July 2024. Technology expense increased $135,403 for the three months ended September 30, 2024 to $157,474 compared to $22,071 for the comparable period in 2023. The increase was mainly due to increased software expense and software support expense. Research and development expense increased $1,253,983 for the three months ended September 30, 2024 to $1,253,983 compared to $0 for the comparable period in 2023. The increase was mainly due to contract research organization costs of Scienture upon the merger in July 2024. We had interest expense of $217,433 for the three months ended September 30, 2024, compared to interest expense of $251,778 for the three months ended September 30, 2023. The decrease is due to the sale of note payable of Superlatus subsequent to the sale of the Company’s equity interest in Superlatus to Superlatus Foods, Inc. thereby transferring all assets and liabilities, and partially offset by interest expense of $43,200 deemed incurred in full on the date of issue of convertible note of $360,000 and amortization of debt discount. We recognized a gain on the change in the fair value of the warrant liability of $502,178 for the three months ended September 30, 2024, compared to a gain of $925,320 during the three months ended September 30, 2023, based on the underlying valuation inputs. During the three months ended September 30, 2024, the Company incurred a net loss from continuing operations of $2,783,601 compared to a net loss from continuing operations of $88,136 for the three months ended September 30, 2023. The increase in net loss is mainly driven by the integration of Scienture upon its merger in July 2024. Net loss from discontinued operations was $3,436,978 for the three months ended September 30, 2023. Nine Month Period Ended September 30, 2024, compared to Nine Month Period Ended September 30, 2023 Nine Months Ended September 30, Percent 2024 2023 Change Change Revenues $ 83,560 1,235,168 (1,151,608 ) -93 % Cost of sales 80,380 1,072,178 (991,798 ) -93 % Gross profit 3,180 162,990 (159,810 ) -98 % Operating expenses: Wage and salary expense 1,243,621 345,235 898,386 260 % Professional fees 1,282,053 619,794 662,259 107 % Accounting and legal expense 1,129,982 782,495 347,487 44 % Technology expense 295,763 74,946 220,817 295 % General and administrative (less stock-based compensation expense) 5,259,084 457,396 4,801,688 1050 % Research and development 1,253,983 - 1,253,983 100 % Warrants and options expense 25,147 25,978 (831 ) -3 % Total operating expenses 10,489,633 2,305,844 7,783,789 355 % Change in fair value of warrant liability (392,843 ) (443,308 ) 50,465 -11 % Interest income 133,397 4,198 129,199 3078 % Loss on disposal of asset (374,968 ) (352,244 ) (22,724 ) 100 % Interest expense (320,897 ) (494,904 ) 174,007 -35 % Net loss from operations (11,441,764 ) (3,429,112 ) (8,012,652 ) 234 % Income (loss) from discontinued operations 27,670,294 (2,748,833 ) 30,419,127 -1107 % Net income (loss) $ 16,228,530 $ (6,177,945 ) $ 22,406,475 -363 % 34 Table of Contents There were $83,560 in revenues for the nine months ended September 30, 2024. Revenues decreased by $1,151,608, compared to the same period ended September 30, 2023 primarily because of the disposition of the assets and operations of Softell completed in February 2024 which resulted in the Company having fewer revenue generating operations when compared to the comparable period in 2023. For the nine-month period ended September 30, 2024, cost of goods sold and gross (loss) profit were $80,380 and $3,180, and $1,072,178 and $162,990, all respectively for the same period in 2023. Gross profit as a percentage of sales was 3.81% for the nine months ended September 30, 2024, compared to 13.20% for the nine months ended September 30, 2023. Wages and salary expense increased by $898,386 for the nine months ended September 30, 2024 to $1,243,621 compared to $345,235 for the comparable period in 2023. The increase is primarily due to an increase in salary of the COO and CEO of IPS, as well as the Scienture Merger in July 2024, as compared to the same period in 2023. Professional fees increased by $662,259 to $1,282,053 compared to $619,794 for the comparable period in 2023. The increase was primarily due to increase in Board members’ fees and consulting expense and post acquisition professional fees of Scienture. Accounting and legal expenses increased by $347,487 for the nine months ended September 30, 2024 to $1,129,982 compared to $782,495 for the comparable period in 2023. The increase is primarily due to increased legal services during the nine months ended September 30, 2024 as compared to the same period in 2023. General and administrative expenses (including stock-based compensation expense) increased by $4,800,857 for the nine months ended September 30, 2024, to $5,284,231 compared to $483,374 for the comparable period in 2023. The increase was mainly due to shares issued for services at fair value of $4,450,919. Technology expense increased by $220,817 for the nine months ended September 30, 2024 to $295,763 compared to $74,946 for the comparable period in 2023. The increase was mainly due to increased software expense and software support expense. Research and development expense increased $1,253,983 for the nine months ended September 30, 2024 to $1,253,983 compared to $0 for the comparable period in 2023. The increase was mainly due to contract research organization costs of Scienture upon the merger in July 2024. We had interest expense of $320,897 for the nine months ended September 30, 2024, compared to interest expense of $494,904 for the nine months ended September 30, 2023. The decrease is due to the sale of note payable of Superlatus subsequent to the sale of the Company’s equity interest in Superlatus to Superlatus Foods, Inc. thereby transferring all assets and liabilities, and partially offset by interest expense of $43,200 deemed incurred in full on the date of issue of convertible note of $360,000 and amortization of debt discount. We recognized a loss on the change in the fair value of the warrant liability of $392,843 for the nine months ended September 30, 2024, compared to a loss of $443,308 during the nine months ended September 30, 2023, based on the underlying valuation inputs. During the nine months ended September 30, 2024, the Company incurred a net loss from continuing operations of $11,041,764 compared to a net loss from continuing operations of $3,429,112 for the nine months ended September 30, 2023. The increase in net loss is mainly driven by stock compensation in 2024, as well as the integration of Scienture upon its merger in July 2024. Net income from discontinued operations increased by $30,419,127 to a net income of $27,670,294 for the nine months ended September 30, 2024, compared to a net loss from discontinued operations of $2,748,833 for the nine months ended September 30, 2023. The increase was primarily due to the disposal of Softell assets, partially offset by loss on disposal of Superlatus during the nine months ended September 30, 2024. 35 Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Revenue Recognition In general, the Company accounts for revenue recognition in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” IPS is a licensed wholesaler of brand, generic and non-drug products to Customers. IPS takes orders for products, creates invoices for each order and recognizes revenue at the time the Customer receives the product. Customer returns are not material. Step One: Identify the contract with the Customer – IPS requires that an application and a credit card for payment be completed by the Customer prior to the first order. Each transaction is evidenced by an order form sent by the Customer and an invoice for the product is sent by IPS. The collection is probable based on the application and credit card information provided prior to the first order. Step Two: Identify the performance obligations in the contract – Each order is distinct and evidenced by the shipping order and invoice. Step Three: Determine the transaction price – The consideration is variable if product is returned. The variability is determined based on the return policy of the product manufacturer. There are no sales or volume discounts. The transaction price is determined at the time of the order evidenced by the invoice. Step Four: Allocate the transaction price – There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – The Revenue is recognized when the Customer receives the product. 36 Table of Contents Stock-Based Compensation The Company accounts for stock-based compensation to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock option forfeitures are recognized at the date of employee termination. Effective January 1, 2019, the Company adopted ASU 2018-07 for the accounting of share-based payments granted to non-employees for goods and services. Recently Issued Accounting Standards For more information on recently issued accounting standards, see “NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION”, to the Notes to Consolidated Financial Statements included herein under “PART I. - ITEM 1. FINANCIAL STATEMENTS”. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).