SCRCQ ScripsAmerica Inc (CE)

SCRIPSAMERICA, INC.

Condensed Consolidated Balance Sheets

See accompany notes to the condensed consolidated financial statements.

See accompany notes to the condensed consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

See accompany notes to the condensed consolidated financial statements.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

1 – ORGANIZATION AND BUSINESS

ScripsAmerica, Inc, (“us”, “we”, “our” or the “Company”) was incorporated in the State of Delaware on May 12, 2008. At March 31, 2015 the Company had one wholly owned subsidiary, Main Avenue Pharmacy Inc. (“Main Avenue”), a Delaware Corporation, and owned 90% of PIMD International LLC., (“PIMD”), a Florida Limited Liability Company. The accompanying condensed consolidated financial statements reflect our financial information and that of Main Avenue and PIMD.

In December 2014, we acquired a 90% interest in PIMD. Prior to acquiring a 90% interest in PIMD, PIMD was consolidated as it was considered a variable interest entity (“VIE”).

Since February 2014, our primary business has been the sale and compounding of non-sterile topical and transdermal pain creams through the acquisition of Main Avenue and fulfillment services to the independent pharmacy distribution business, which we service through PIMD.

We also have entered into agreements with third parties pursuant to which we receive a percentage of the gross profit on sales of pharmaceutical products.

The accompanying unaudited interim condensed consolidated financial statements of the Company, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements of ScripsAmerica, Inc. and related notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2014 filed with the SEC on January 29, 2016. Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

2 – LIQUIDITY AND BUSINESS RISKS

As of March 31, 2015, we had approximately $161,000 in cash, approximately $3,800,000 in current assets and approximately $6,200,000 in current liabilities for a negative working capital of approximately $2,400,000. For the three months ended March 31, 2015, we had a loss from operations of approximately $1,529,000 and incurred a net loss of approximately $1,647,000. As of March 31, 2015, our accumulated deficit was approximately $20,100,000. Management believes that after taking into consideration our projections for 2015 and 2016, that our cash flows from operations will be sufficient to support the working capital requirements, debt service requirements, and operating expenses for the next twelve months.

3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.            Principles of Consolidation - The condensed consolidated financial statements include our accounts, our wholly-owned subsidiary, Main Avenue, our 90% owned subsidiary, PIMD, and Implex for the first three fiscal quarters of 2014 as it was considered to be a variable interest entity (“VIE”). All inter-company accounts and transactions have been eliminated in consolidation. For investments which are considered to be a VIE, we would be considered the primary beneficiary of the VIE if both of the following characteristics are present: (a) we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) we have the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the VIE that could potentially be significant. Investments in entities in which we do not have a controlling financial interest, but over which we have significant influence are accounted for using the equity method. For those consolidated entities where Company ownership is less than 100%, the outside stockholders’ interests are shown as non-controlling interest.

b.           Use of Estimates - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenues, and expenses during the reporting period. Significant estimates made by management are, among others, allowance for doubtful receivables and contractual adjustments, realizability of inventories, valuation of deferred taxes and intangible assets, recoverability of long-lived assets and indefinite lived intangible assets, reserve for chargebacks, valuation of debt instruments and derivative liabilities, and valuation of stock-based compensation issued to employees and non-employees. Actual results could differ from those estimates.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

c.           Revenue Recognition –

Product Revenues – Specialty Pharmacy - Our specialty pharmacy revenue is not recognized until the patient receives the filled prescription. Typically, we prepare and fill a prescription that has been approved by an insurance provider, ship the filled prescription to the patient, and upon confirmation of receipt of the prescription by the patient, we recognize revenue. Any prescription in which the patient has not received product, but we may have been reimbursed by the insurance provider, is recorded as deferred revenue or accounts receivable reserved, for future deductions. Occasionally, a patient may return the product or the product was not deliverable, in such cases the revenue related to the prescription is reversed. If we received payment from a third-party payor for undelivered product, we record an allowance for deductions to be applied to future reimbursements due from the third-party payors. As of March 31, 2015 and December 31, 2014, we had no deferred revenue, but we did have an allowance for future deductions of $429,415 and $589,415 reserved against accounts receivable, respectively.

Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required in order to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they may have to be revised or updated as additional information becomes available. It is possible that management’s estimates could change, which could have an impact on operations and cash flows. Specifically, the complexity of many billing arrangements and the uncertainty of reimbursement amounts for certain services from certain third-party payors may result in adjustments to amounts originally recorded.

As of March 31, 2015 and December 31, 2014, $1,383,438 and $1,302,441, respectively, has been recorded as a reserve for third-party payors deductions and chargebacks. We believe we have adequate allowances for contractual adjustments relating to all known third-party payors disputes. However, no assurance can be given with respect to such estimates of reimbursements and offsets or the ultimate outcome of any refund requests.

Product Revenues – Pharmaceutical Distribution Services - Product revenue associated with our pharmaceutical distribution services is recognized when the product is shipped from a contract packager to our customers’ warehouses, and is adjusted for anticipated chargebacks. The sales revenue is reduced accordingly based on historical experience, customer contract programs, product pricing trends and the mix of products shipped.

Purchase orders from our customers provide persuasive evidence that an arrangement exists and that the pricing is determinable. The credit worthiness of our customers assures that collectability is reasonably assured.

Revenues from Contract Packager - We recognize revenue from our contract packager on a net basis according to Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 605-45, Revenue Recognition: Principal Agent Considerations. Since we are not deemed to be the principal in these sales transactions we do not report the transaction on a gross basis in our condensed consolidated statements of operations. These sales transactions relate to a contract that a contract packager has obtained with a government agency. The revenue is reported in a separate line in the condensed consolidated statements of operations as “Revenues net, from contract packager”, and the gross sales are reduced by the cost of sales fees from Marlex Pharmaceuticals, Inc. (“Marlex Pharmaceuticals”), our contract packager.

Commission Fees - Commission fees are recognized when earned on shipments of generic pharmaceutical products by WholesaleRx, LLC (“WholesaleRx”), which is licensed by the Drug Enforcement Agency and sixteen states to store and distribute controlled substances. Under the terms of our amended agreement with WholesaleRx, we earn a 14% commission fee on the gross profit (sales less cost of goods sold, freight in and credits and allowances) of products shipped to independent pharmacies.

We also earn commission fees with various other pharmacies for shipments on generic pharmaceutical products in which we broker the costs from various supplies. Under this agreement we earned an agreed commission fee from the pharmacies.

d.           Accounts Receivable Trade, Net - Accounts receivable are stated at an estimated net realizable value. These receivables are primarily from our pharmacy business and represent amounts due from insurance companies, through various third-party payor networks. Payments are usually received within 30 days of the product being shipped. Occasionally a patient may return the product or the product was not deliverable, in such cases the receivable is reversed. The timing of these adjustments may carry over from one month to the next month and we may have received payment before the third-party payor’s system recognizes changes in the billing status. If this occurs, we record an allowance for deductions to be applied to future reimbursements due form the third-party payor. In addition to the allowance for future deductions, we examine other receivables and will record an allowance for doubtful receivables if deemed necessary. As of March 31, 2015 and December 31, 2014, no allowance for doubtful receivables was deemed necessary.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

e.           Intangible Assets - We amortize the cost of intangibles over their useful lives unless such lives are deemed indefinite. Intangible assets with indefinite lives are not amortized; however, they are tested annually for impairment and written down to fair value if required.

f.           Long-Lived Assets - We review the carrying values of property and equipment and long-lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. If impairment indicators are present, we determine whether an impairment loss should be recognized by testing the applicable asset or asset group’s carrying value for recoverability. This test requires long-lived assets to be grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, the determination of which requires judgment. We estimate the undiscounted future cash flows expected to be generated from the use and eventual disposal of the assets and compare that estimate to the respective carrying values in order to determine if such carrying values are recoverable. This assessment requires the exercise of judgment in assessing the future use of, and projected value to be derived from, the eventual disposal of the assets to be held and used. If the carrying value of the assets is not recoverable, then we record a loss for the difference between the assets’ fair value and respective carrying value. We believe our current assumptions and estimates are reasonable and appropriate. Unanticipated events and changes in market conditions, however, could affect such estimates, resulting in the need for an impairment charge in future periods.

g.           Inventories - Inventories represent purchased finished products at PIMD’s inventory location and at a third party location. Raw materials represent the cost of purchased materials used to make our compounded prescription products at Main Avenue’s location. Both finished products and raw material costs are stated at the lower of cost or market determined by the first in, first out method.

h.           Income Taxes - We provide for income taxes using the asset and liability based approach for reporting income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized.

We also comply with the provisions of ASC 740 which prescribes a recognition threshold and measurement process for recording in the condensed consolidated financial statements uncertain tax positions taken or expected to be taken in a tax return. We classify any assessment for interest and/or penalties as the other expenses in the condensed consolidated financial statements, if applicable. There were no uncertain tax positions at March 31, 2015 and December 31, 2014.

i.           Fair Value Measurements - We follow the provision of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date) and provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Input other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of us.

Level 3: Unobservable inputs reflect the assumptions that we develop based on available information about what market participants would use in valuing the asset or liability.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors.

We use judgment in determining the fair value of assets and liabilities, and level 3 assets and liabilities involve greater judgment than level 1 and level 2 assets and liabilities.

The carrying values of receivables, inventories, accounts payable and accrued expenses, royalty payable, and short-term debt approximate their fair values due to their short-term maturities. Management believes the carrying values of our lines of credit and long-term debt approximates fair value due to the borrowing rates currently available to us for loans with similar terms.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

j.           Stock-Based Compensation - Compensation expense is recognized for the fair value of all share-based payments issued to employees and consultants. During the three months ended March 31, 2015 and 2014, we issued 205,000 and 75,000 employee and directors stock options, respectively, that required calculating the fair value using a pricing model such as the Black-Scholes pricing model (see Note 10).

For non-employees, stock grants issued for services are valued at either the invoiced or contracted value of services rendered, or the fair value of stock at the date the agreement is reached, whichever is more readily determinable. For stock options and warrants granted to non-employees, the fair value at the grant date is used to value the expense. If the options or warrants are for future services, they are revalued at each reporting period unless there is a significant disincentive for non-performance. In calculating the estimated fair value of our stock options and warrants, we used a Black-Scholes pricing model which requires the consideration of the following variables for purposes of estimating fair value:

k.           Noncontrolling Interest - We recognize noncontrolling interest as equity in the condensed consolidated financial statements separate from the parent company’s equity (deficit). Noncontrolling interest results from a partner in PIMD owning 10% of PIMD as of March 31, 2015, and December 31, 2014. The amount of net income (loss) attributable to noncontrolling interests is included in condensed consolidated net income (loss) on the condensed consolidated statements of operations. For the three months ended March 31, 2015 and 2014, the noncontrolling interests’ share of net income (loss) totaled $13,374 and ($44,400), respectively. Additionally, operating losses are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest member.

l.           Earnings (Loss) Per Share - Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock warrants, options, convertible notes payable and Series A Convertible Preferred Shares. Common stock equivalents are not included in the computation of diluted earnings per share when we report a loss because to do so would be anti- dilutive. For details on number of common stock equivalents, see Note 11 below.

m.           Recent Accounting Pronouncements - In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases , which requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the condensed consolidated balance sheet. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating ASU 2016-02, the Company expects the adoption of ASU 2016-02 to have a material effect on the Company’s condensed consolidated financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company does not expect ASU 2016-02 to have a material effect on the Company’s results of operations and cash flows.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”),” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under the new guidance, inventory is “measured at the lower of cost and net realizable value,” which eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The Company is evaluating the impact of adoption of this guidance on its condensed consolidated financial statements.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs . This update requires capitalized debt issuance costs to be classified as a reduction to the carrying value of debt rather than a deferred charge, as is currently required. This update will be effective for the Company for all annual and interim periods beginning after December 15, 2015 and is required to be adopted retroactively for all periods presented, and early adoption is permitted. In August 2015, ASU 2015-15 was issued to address ASU 2015-03 as it relates to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company is evaluating the impact of adoption of this guidance on its condensed consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-05, Presentation Of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. ASU 2014- 15 is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. We do not expect the adoption of the ASU 2014-15 to have a material effect on our condensed consolidated financial statements and disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated guidance is effective for interim and annual periods beginning after December 15, 2016, and early adoption is not permitted. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 until December 15, 2017. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The Company is currently evaluating which transition method it will adopt and the expected impact of the updated guidance on its condensed consolidated financial statements.

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

n.           Reclassification - Certain reclassifications have been made to the 2014 condensed consolidated financial statements to conform to the 2015 condensed consolidated financial statements presentation. These reclassifications had no effect on the net loss or cash flows as previously reported.

No inventory reserves or lower of cost or market adjustments are considered necessary as of March 31, 2015 and December 31, 2014.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

Depreciation expense for the three months ended March 31, 2015 and 2014, was $9,226 and $0, respectively.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

Line of Credit – Wells Fargo

In October 2013, our line of credit from Wells Fargo Bank was renewed through October 2017. This line of credit allowed us to borrow up to a maximum of $100,000, at an interest rate of prime plus 6.25% (9.50% as of March 31, 2015). The line of credit was secured by a personal guarantee from our former Chief Executive Officer. The outstanding borrowings under this line of credit as of March 31, 2015 and December 31, 2014, was $0. During the three months ended March 31, 2015, we borrowed $76,000 and paid off the $76,000 balance. We incurred interest expense under this line of credit of approximately $50 and $134 during the three months ended March 31, 2015 and 2014, respectively. In July 2015, this line of credit was terminated with the bank in connection with our former Chief Executive Officer’s resignation (see Note 17 for details).

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

Line of Credit – Triumph

On December 8, 2014, Main Avenue entered into an agreement for a revolving line of credit facility with Triumph Community Bank, N.A. d/b/a Triumph Healthcare Finance (“Triumph”). The agreement is for a term of three years. The facility covers, and is both secured through a lockbox account arrangement and limited by, the accounts receivable of the pharmacy, as well as being secured by a security interest in all of the other assets of Main Avenue. Main Avenue may draw against the line of credit, up to a maximum of $4,000,000, as accounts receivable are developed from the filling of prescriptions for the specialty drugs and may continue to draw as the then outstanding line is reduced by the payment of the previously financed receivables. The amount drawn cannot exceed 85% of the accounts receivable. The interest rate is variable, being calculated as the Base Rate plus the Margin (3%). The Base Rate is the greater of the Prime Rate or the Floor Rate (3.25%). As of March 31, 2015, the interest rate was 6.25% per annum.

On December 9, 2014, Main Avenue paid $197,095 directly to third parties for various financing fees covering origination, legal, audit and finder fees. These fees were recorded as prepaid financing fees and will be amortized using the straight-line method which approximates the effective interest method over the term of 36 months.

The agreement has a facility fee of $50,000 payable as follows: $25,000 payable on December 8, 2015 and $25,000 on the second anniversary on December 8, 2016. This fee is included in the prepaid finance fees which is being amortized over the term of this agreement. The agreement has an early termination fee of $120,000 if terminated before the first anniversary of the closing date, $60,000 to the second anniversary closing date and $20,000 until the day immediately prior to December 8, 2017. The agreement has an unused line fee of 0.75% per annum payable in arrears on the first day of each month, calculated on the difference between the average daily balance and the total facility limit.

The agreement contains certain customary and financial covenants that must be met each fiscal quarter beginning with the quarterly period ended December 31, 2014. Financial covenants are as follows: (a) Minimum Debt Service Coverage Ratio (as defined) shall be at least 1.10 to 1.0, (b) Minimum Current Ratio (as defined) shall be at least 1.10 to 1.0 and (c) Minimum Tangible net worth (as defined) of $2,500,000. As of March 31, 2015 and December 31, 2014, we were not in compliance with these covenants and have obtained a waiver from Triumph which has cured the events of default (see Note 17).

On January 5, 2016, as part of the waiver, Triumph amended and modified covenants as follows: (a) Minimum Debt Service Coverage Ratio (as defined) shall be at least 1.10 to 1.0, (b) Minimum Current Ratio (as defined) shall be at least 0.85 to 1.0 (c) Minimum Tangible net worth (as defined) of 100,000 at December 31, 2015 increasing $50,000 per quarter until reaching $300,000, (d) Minimum EBITDA (as defined) shall be at least $10,000 per quarter, and (e) added concentration limits (as defined) percent on the total accounts receivable deemed eligible.

The outstanding borrowings under this line of credit as of March 31, 2015 and December 31, 2014 was $624,376 and $377,056, respectively. We incurred interest expense under this line of credit of $22,202 and recorded a finance fee expense of $25,591 for the three months ended March 31, 2015, related to the amortization of deferred financing fees.

Debt with Related Party

On August 15, 2012, we entered into a four year term loan agreement in the amount of $500,001 with Development 72, LLC (“Development 72”), a Limited Liability Company, a company controlled by Andrius Pranskevicius, a member of our Board of Directors and related party, for the purpose of funding the inventory purchases of RapiMed®. This loan bears interest at the rate of 9% per annum, with 48 equal monthly installments of interest and principal payments of $12,443 and matures on August 15, 2016. We may prepay the loan, in full or in part, subject to a prepayment penalty equal to 5% of the amount of principal being prepaid. The loan is secured by our assets.

In addition to the monthly loan repayments during the 48 month period ending August 15, 2016, and regardless if the related debt is prepaid in full, we will pay to Development 72 a royalty equal to one percent (1%) of all revenues that we receive from our sale or distribution of RapiMed®. The royalty payments will be made quarterly and are subject to a fee for late payment or underpayment. There were no sales of RapiMed® during the three months ended March 31, 2015 and 2014, and therefore, no royalties were paid or owed. 

Interest expense associated with this note for the three months ended March 31, 2015 and 2014 was $4,940 and $7,717, respectively. The total outstanding balance on this loan as of March 31, 2015 and December 31, 2014 was $197,899 and $230,286, respectively, with current maturities balance of $137,062 and $134,024, respectively. On January 14, 2016, we prepaid Development 72 $96,985 for balance of principal and interest related to this note payable.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

12% Fixed Rate Convertible Notes Payable

We obtained loans in various amounts beginning in 2011. In June 2014, the owners of these notes agreed to extend the maturity dates from January 30, 2015 and November 30, 2015 to April 1, 2016. The holders of these notes may elect to convert the principal and interest outstanding into shares of our common stock at the price of $0.17 per share at any time during the term of the note. These notes provide for interest only payments of 3%, payable quarterly (12% annually) in cash, or common stock of the Company at $0.17 per share, at the option of the holder.

During the three months ended March 31, 2015, no payment of principal occurred and we recorded interest expense of $16,796. The Company recorded interest expense of $24,019 for the three months ended March 31, 2014. The outstanding balance at March 31, 2015 and December 31, 2014 was $559,852.

With respect to one of the notes in this category, we are also obligated to pay the holder of the note a 1.8% royalty payment on the first $10 million of sales of a generic prescription drug under distribution contracts with Federal government agencies and 0.09% on the next $15,000,000 of such sales. Payments for royalties were made monthly and quarterly.

During the three months ended March 31, 2015 and 2014, we recorded royalty expense of $0 and $112,000, respectively. The contract with the Federal government agencies expired December 31, 2014, and no more royalty expense is expected related to this particular note.

On December 30, 2015, we paid $86,250 to the holder of one of these notes to repay the note in full.

12% Fixed Rate Convertible Notes Payable-Related Party

We obtained loans in the aggregate amount of $80,000 from a company owned by our former Chief Executive Officer. The loans were aggregated into one note. We are not required to make a principal payment on the note until maturity, which is April 1, 2016. In June 2014, the holder agreed to extend the maturity date from January 30, 2015 to April 1, 2016. At the option of the holder, the principal and interest due under the note can be converted into our common stock at any time during the term of the note at the rate of $0.17 per share. These notes provide for interest only payments of 3%, payable quarterly (12% annually) in cash, or common stock of the Company at $0.17 per share, at the option of the holder.

As of March 31, 2015 and December 31, 2014, the principal balance of the note with our former Chief Executive Officer was $80,000. We recorded interest expense of $2,400 for each of the three months ended March 31, 2015 and 2014.

In 2012, we received $50,000 in cash for a convertible promissory note from the wife of our former Chief Executive Officer. The note provides for interest only payments of 3%, payable quarterly (12% annually), in cash, or in shares of our common stock at $0.17 per share, at the option of the holder. There is no required principal payment due on the note until maturity which is April 1, 2016. Marlex Pharmaceuticals also co-signed this note.

At March 31, 2015 and December 31, 2014, the principal balance of this note was $32,669. We recorded interest expense of $901 and $980 for the three months ended March 31, 2015 and 2014, respectively. On November 19, 2015, we paid the holder $23,031 for principal and interest to retire this note in full.

We are also obligated to pay a royalty of 0.9% to the holder on the first $25,000,000 of sales of generic prescription drugs under distribution contracts with Federal government agencies. Royalties are required to be paid quarterly. The contract with the Federal government agencies expired December 31, 2014, and no more royalty expense is expected related to this particular note.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

12% Note Payable

On November 18, 2014, Main Avenue borrowed $200,000 from a stockholder in order to provide funding for inventory. This loan bears interest at the rate of 12% per annum, interest payments are due monthly beginning in December 2014, and on December 31, 2014, by mutual consent, the maturity date was changed from February 18, 2015, to January 30, 2016, for the principal payment along with any outstanding interest payments. Additionally, we shall pay to the lender a royalty of $6.67 for every box of pain patches sold for a period of 90 days beginning November 18, 2014. We recorded interest expense of $6,000 for the three months ended March 31, 2015. We recorded a royalty expense of $2,174 for the pain patches sold during the three months ended March 31, 2015. The balance as of March 31, 2015 and December 31, 2014 is $200,000.

On December 30, 2015, we paid $200,000 to the holder to repay this note in full.

12% Notes Payable – Related Party

On November 18, 2014, Main Avenue borrowed $100,000 from the wife of our former Chief Executive Officer in order to provide funding for inventory. This loan bears interest at the rate of 12% per annum. Interest payments are due monthly beginning in December 2014, and on December 31, 2014, by mutual consent, the maturity date was changed from February 18, 2015, to January 30, 2016, for the principal payment along with any outstanding interest payments. Additionally, we shall pay to the lender a royalty of $3.33 for every box of pain patches sold for a period of 90 days beginning November 18, 2014. We recorded interest expense for the three months ended March 31, 2015 of $3,000. We recorded a royalty expense of $1,086 for the pain patches sold during the three months ended March 31, 2015. The note balance as of March 31, 2015 and December 31, 2014 is $100,000. On February 4, 2016, we paid the holder $112,000 for principal and interest to repay this note in full.

On March 27, 2015, ScripsAmerica borrowed $41,000 from the wife of our former Chief Executive Officer in order to provide funding for inventory. This loan was non-interest bearing. We made various principal payments during April to August 2015 and this loan was paid in full on August 13, 2015.

10 – STOCKHOLDERS’ DEFICIT

General

We are authorized to issue 250,000,000 common shares with a par value of $0.001 per share. Each share is entitled to cast one vote for each share held at all stockholders’ meetings for all purposes, including the election of Directors. The common stock does not have cumulative voting rights.

We are authorized to issue 10,000,000 preferred shares, $0.001 par value per share. Our preferred stock may be issued by our Board of Directors in one or more classes or one or more series within any class, and such classes or series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations or restrictions as the Board of Directors may determine, from time to time as a class or series is issued.

On March 26, 2014, our Board of Directors approved the “ScripsAmerica, Inc. Incentive Stock Plan” (“SOP”). On April 16, 2014, the SOP was approved by the written consent of our shareholders. The SOP is designed to serve as an incentive for retaining qualified and competent employees, officers and Directors, and certain consultants and advisors. There are 6,000,000 shares authorized for issuance under the SOP.

The purchase price per share of common stock options issued under the SOP shall not be less than 100% of the fair market value at the time the options are granted. The purchase price per option under the SOP to a person who owns more than 10% of our voting power of our voting stock shall not be less than 110% of the fair market value of such shares at the time the options are granted. The total value of options granted, under the SOP, to any one person, shall not exceed any limit imposed by Section 422 or the rules and regulations promulgated by the Internal Revenue Service thereunder. Currently, the limitation is $100,000 in value in our fiscal year.

As of March 31, 2015, no options were issued under the SOP.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

Issuances during the three months ended March 31, 2015:

During the three months ended March 31, 2015, the Company issued 583,000 restricted shares of common stock in connection with payments for services provided by members of the Board of Directors. These shares were valued at $120,440.

During the three months ended March 31, 2015, the Company issued 328,000 restricted shares of common stock in connection with payments for services provided by employees. These shares were valued at $65,600.

During the three months ended March 31, 2015, we issued 1,165,303 restricted shares of our common stock to non-employee consultants for services rendered. These shares were valued at $231,604.

Options

On January 7, 2015, we granted 80,000 options to members of the Board of Directors and employees for services rendered. These options vested immediately and will expire three years from date of issuance. The options are exercisable at the price of $0.22 per share. The fair value of these options is $12,921, which was expensed to general and administrative expenses.

On January 28, 2015, we granted 45,000 options to members of the Board of Directors for services rendered. These options vested immediately and will expire three years from date of issuance. The options are exercisable at the price of $0.22 per share. The fair value of these options is $7,269, which was expensed to general and administrative expenses.

On March 26, 2015, we granted 80,000 options to members of the Board of Directors and employees for services rendered. These options vested immediately and will expire three years from date of issuance. The options are exercisable at the price of $0.132 per share. The fair value of these options is $7,624 which was expensed to general and administrative expenses.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

Summary of options activity and related information as of March 31, 2015:

11 – EARNINGS (LOSS) PER COMMON SHARE

The basic earnings (loss) per share is computed using the weighted average number of common shares outstanding. The assumed exercise of common stock equivalents were excluded from the calculation of diluted net loss per common share for the three months ended March 31, 2015 and 2014 because their inclusion would have been anti-dilutive. As of March 31, 2015, common stock equivalents consisted of preferred stock convertible into 5,980,504 shares, warrants exercisable into 5,228,572 shares, options exercisable into 11,650,000 shares and notes payable convertible into 3,956,006 shares of common stock. As of March 31, 2014, common stock equivalents consisted of preferred stock convertible into 5,980,504 shares, options exercisable into 5,090,000 shares, warrants exercisable into 5,228,572 shares and notes payable convertible into 8,148,206 shares of common stock.

12 – INCOME TAXES

Deferred income tax assets and liabilities are determined based upon difference between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We do not expect to pay any significant federal or state income tax for 2015 as a result of (i) the losses recorded during the three months ended March 31, 2015, (ii) additional losses expected for the remainder of 2015, and/or (iii) net operating loss carry forwards from prior years. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is "more likely than not" that some component or all of the benefits of deferred tax assets will not be realized. As of March 31, 2015, we maintain a full valuation allowance for all deferred tax assets. Based on these requirements, no provision or benefit for income taxes has been recorded. There were no recorded unrecognized tax benefits at the end of the reporting period.

We file federal and Delaware state income taxes. Currently, there are no tax examinations in progress, nor have we had any federal or state examinations since our inception in 2008. All of our tax years are subject to federal and state tax examination.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

13 – COMMITMENTS

Operating Lease - We entered into two long-term leases for rented space. On December 1, 2014, Main Avenue entered into a second addendum for additional space in Clifton, N.J. for store/production facility and office space. This addendum revised prior terms for leases entered into by Main Avenue in April 2014 and October 2014. The lease expires on November 30, 2019. The monthly rent is $5,432, escalating by 3% annually, for total minimum payments over the life of the lease of $369,065. In November 2013, PIMD entered into a 25 month operating lease for a distribution facility in Doral, Florida. The lease began January 1, 2014 and expired February 14, 2016. The monthly rent was $4,585 for the first thirteen months and $4,724 for the last twelve months. The total minimum payments over the life of the lease were $111,714. In February 2016, PIMD entered into a new 36 month lease for a distribution facility in Pooler, Georgia. This new lease begins March 1, 2016 and expires February 28, 2019. The monthly rent is $3,700 for the first twelve months, $3,750 for the next twelve months and $3,800 for the last twelve months.

In connection with various notes payable that we have entered into, we are obligated to pay the holders of these notes royalty fees, see Note 9 for details concerning royalty fees and payments.

On March 5, 2015, we entered into two non-binding letters of intent for the acquisition of an equity interest in third-party pharmacies which, if acquired, will expand our activities into approximately forty states, most of which are not currently serviced by Main Avenue. In September 2015, we notified both pharmacies of cancellation of intent for the acquisitions.

On June 30, 2015, our then Chief Executive Officer, President and Secretary, Robert Schneiderman, resigned all positions he held with us. See Note 17 for details on settlement agreement.

See Note 17 for details concerning our Recapitalization/Repurchase plan for the Series A Convertible Preferred Stock.

14 – CONCENTRATIONS

During the three months ended March 31, 2015, and 2014, we purchased product from four suppliers. A disruption in the availability of raw materials from our suppliers could cause a possible loss of sales, which could affect operating results adversely.

For the three months ended March 31, 2015, no customer accounted for more than 10% of net revenues but two third-party payors account for approximately 78% of our net revenues. Should our contract be cancelled with these third-party payors it would have a significant impact on our future net revenues.

On March 4, 2015, CVS/Caremark notified Main Avenue that it was terminating the provider agreement with Main Avenue. No basis for the termination was provided. During the three months ended March 31, 2015, CVS/Caremark represented approximately 26% of our net revenues.

As of March 31, 2015 and December 31, 2014 we had two insurance third-party payors representing 87% of our accounts receivable.

15 – CONTINGENCIES

Ironridge

In November 2013, we entered into an agreement with Ironridge Global IV, Ltd. (“Ironridge”) whereby we issued 8,690,000 shares of our common stock to Ironridge in settlement for bona fide claims owed to our creditors (the “Claim Amount”). The shares issued to Ironridge were unrestricted securities and exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as amended. Under the terms of the transaction, the number of shares issuable to Ironridge is subject to an adjustment based on the trading price of our common shares such that the value of the shares is sufficient to cover the Claim Amount, a 10% agent fee amount, and Ironridge’s reasonable legal fees and expenses which were determined to be $766,238.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

On February 10, 2014, Ironridge made a request for, and we issued, an additional 1,615,550 shares of our common stock as a result of the adjustment provisions contained in the stipulation (the “Stipulation”) in the Court Order issued by the California State Court. We expensed these additional shares in December 2013, valued at $210,022, and on February 22, 2014 we issued 1,615,550 share of our common stock to Ironridge.

On April 4, 2014, Ironridge requested an additional 1,646,008 common shares. We declined to issue these additional shares because Ironridge had already received approximately 10,305,550 common shares with a market value of approximately $1,300,000 in satisfaction of $766,238.

On May 6, 2014, Ironridge submitted an ex parte application to the California State Court to compel the issuance of the 1,646,008 common shares, and the California State Court entered an order compelling us to issue the additional shares. The order also prohibits us from issuing or transferring new shares to third parties before issuing these shares. We appealed the court's decision. On the same day, we filed a notice of appeal with the California State Court’s order which automatically stayed the Court’s order. The matter is pending.

We accrued the potential issuance of the shares to Ironridge during the year ended December 31, 2014 and have recorded $164,655. In October 2015, to stop a contempt action, we requested the 1,646,008 shares be issued and such shares were ultimately issued on January 22, 2016. the shares were not accepted by Ironridge until March 17, 2016.

We pursued an appeal, and reversal, of the California State Court order and are in litigation in California and New Jersey. On October 29, 2015, Ironridge in California, requested the issuance of an additional 87,000,000 shares under the formula set forth in the Stipulation.

In New Jersey, Ironridge brought an action against Olde Monmouth, our transfer agent, to force it to issue shares or pay damages resulting from their refusal to issue the shares requested by Ironridge. We intervened and contested jurisdiction in New Jersey.

In January 2016, we were ordered by the Federal Court in California to pay for Ironridge’s legal fees and on February 22, 2016 we paid this legal fee in the amount of $269,365. The Court instructed both parties to work out a mutually agreeable settlement. We believe that we have a valid defense to the issuance of the 87,000,000 shares sought by Ironridge based upon usury laws and also violations of the California business code for unconscionable actions since Ironridge paid $766,238 of debt obligations and received a return of approximately $1,300,000. Due to expensive costs and uncertainty in litigation we believe it is in the best interest of the Company to settle the matter.

In February 2016, we proposed the following settlement agreement to Ironridge to fully resolve all litigation and any and all claims, causes of action or potential causes of action between the parties, principals, affiliates and ScripsAmerica’s transfer agent, Olde Monmouth Transfer Company:

1.  ScripsAmerica will make a $400,000 payment at the time the settlement agreement is fully executed and all cases are dismissed that were brought by Ironridge.

2.  ScripsAmerica will issue a non-interest bearing note to Ironridge in the amount of $1 million to be paid over a ten month period in installments of $100,000 per month starting the month after settlement agreement and lawsuits brought by Ironridge are dismissed.   This payment is in lieu of any shares to be issued to Ironridge. 

3.  The parties will dismiss all pending litigation with prejudice, including the Los Angeles Superior Court action, the Los Angeles federal court action, the New Jersey action and the New York action. Ironridge would release any and all claims to the LNK funding ($160,000).

4.  The parties shall execute general releases in favor of each other and their respective officers, directors, affiliates and related parties excluding only ScripsAmerica’s obligation to pay the note specified in paragraph 2, above.

Ironridge notified our attorney of acceptance of this settlement but subsequent to signing of the final agreement Ironridge’s principal reneged on the acceptance. We plan to purse enforcement of the settlement and our attorneys are preparing a motion to enforce settlement terms. We recorded an expense of $1,400,000 to the condensed consolidated statement of operations for the three months ended March 31, 2015 for the expected settlement amount.

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

Pharmanostics

On December 29, 2015, Pharmanostics Group, LLC, (“Pharmanostics”), a Florida limited liability company, filed a civil lawsuit in Broward County Florida seeking payment from us of $1,835,712 for billing services it alleges it provided during 2014 and first two months of 2015. In January 2016, we filed a motion to move the suit to Federal Court from Florida and the motion was granted. In February 2016, we filed a counter suit for damages caused by Pharmanostics’ poor business practices. In March 2016, due to expensive costs and uncertainty in litigation we believe it is in the best interest of the Company to settle the matter with Pharmanostics. On March 10, 2016, we paid the owner of Pharmanostics $287,500 in cash and thus accrued and recorded an expense of $287,500 to the condensed consolidated statement of operations for the three months ended March 31, 2015.

16 – RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2015, and 2014 the Company paid $32,500 and $30,950, respectively, in consulting fees to a consulting firm owned by the Company’s former CEO.

During the three months ended March 31, 2015 and 2014, the Company also paid $49,500 and $44,050, respectively, in consulting fees to a consulting firm owned by the Company’s Chief Financial Officer.

The Company has entered into transactions with Mr. Adam Brosius, our interim president as of July 1, 2015 and our newly approved president as of November 13, 2015. Mr. Brosius is also owner of Black Cat Consulting and Pharma Sales Group, privately held companies that provide marketing consulting and business services to Main Avenue Pharmacy. During the three months ended March 31, 2015, we paid Black Cat Consulting $52,000 in cash, paid Pharma Sales Group in cash $710,738 and accrued $1,925,922 for consulting and commission fees to be paid to marketers by Pharma Sales Group on our behalf. As our President, Mr. Brosius receives $8,000 per month and a travel allowance of $1,000 per month. We also reimbursed Mr. Brosius for various purchases of inventory and supplies using his personal credit card since our credit line was not large enough to support business activities required.

See Note 9 for related party debt and royalties paid to a related party.

See Note 17 for the repurchase of the Series A Convertible Preferred stock in February 2016. 

17 – SUBSEQUENT EVENTS

From April 1, 2015 to date of this filing, we issued 425,000 shares of our common stock to members of the Board of Directors and employees for services rendered which were valued at $38,210.

On June 30, 2015, our then Chief Executive Officer, President and Secretary, Robert Schneiderman, resigned all positions he held with us. Upon the acceptance of Mr. Schneiderman’s resignation on June 30, 2015, Brian Ettinger, the Chairman of our Board of Directors became our Chief Executive Officer and Chairman of our Board of Directors and Adam Brosius became our President.

On June 30, 2015, we entered into an agreement with Mr. Schneiderman, our then Chief Executive Officer, President and Secretary that provides for the following terms:

SCRIPSAMERICA, INC.

Notes to condensed consolidated financial statements (Unaudited)

For the three months ended March 31, 2015

On April 10, 2015, we formed a wholly owned subsidiary, known as DispenseDoc, Inc. in the state of a Delaware to provide services for our new pharmacy dispensing program with individual doctors. On February 22, 2016, we entered into an agreement to sell DispenseDoc to Bread and Circuses Media, Inc. for $26,520 plus royalty payments of 1% of the amount of the adjudicated value of the monthly sales made through the DispenseDoc system by each DispenseDoc until March 20, 2017.

On July 21, 2015, we formed a wholly owned subsidiary, known as Pharmacy Administration, Inc. in the state of Delaware to provide billing and administrative services to other independent pharmacies. As of the date of this Form 10-Q we have not generated any significant sales from this subsidiary.

In November 2015, WholesaleRx’s management proposed a settlement to pay-off the receivable balance of $143,569, which was written off in 2014, and a tentative agreement obligates WholesaleRx to pay us $6,000 monthly until the receivable amount is paid. To date, we have received an aggregate of $18,000.

On January 5, 2016, the Company and Triumph entered into amendment no. 1 to the revolving line of credit facility. The amendment was entered into to waive all events of default as a result of the financial covenant violations as described in Note 9 for the period December 31, 2014 through September 30, 2015. The amendment also amended the defined terms of the financial covenants beginning with the three months period ended December 31, 2015. The Company was required to pay a $15,000 modification fee in connection with the amendment.

On February 22, 2016, our Board of Directors authorized the repurchase of the Series A Convertible Preferred Stock (“Preferred Stock”) from Development 72 LLC., a related party, for a price of $1,439,340, which covers the original purchase price, accrued but unpaid dividends, and deemed interest rate of 8% per annum (“Recapitalization Plan Agreement”). This Recapitalization Plan Agreement is to be effective retroactively to February 1, 2016. The Company will make 24 payments of $65,097 for the repurchase of all 2,990,552 shares of the Series A Convertible Preferred Stock. Upon making of the first installment payment the Preferred Stock shall be deemed to occur and the shareholder shall deliver the stock certificate(s) representing such 2,990,252 shares promptly following such initial payment and the Company shall cancel such shares and then, (i) in accordance with the provision in Section 160 of the Delaware General Corporation Act, and (ii) in accordance with the provisions of the Series A Convertible Preferred Stock, shall take all steps necessary to retire such shares as provided in Sections 243 and 244 of the Delaware General Corporation Act. Simultaneously, the capital applicable to the Preferred Stock ($1,043,000) shall be reduced to the full extent thereof, which sum shall be a liability to shareholder.

On March 25, 2016, Pharmacy Administration, Inc. (“Manager”) entered into a Membership Participation Agreement (“Agreement”) with the member owners of Lake Side Pharmacy, LLC, (“LSP members”) an Alabama limited liability company. Lake Side Pharmacy, LLC engages in operations of a non-sterile compounding pharmacy.

Per the Agreement for the aggregate sum of $740,000, Manager shall purchase from the LSP members 49% of their Class One voting units, for the total amount of $453,250. Manager shall also loan to each LSP member various amounts for an aggregate sum of $286,750 with a maturity date of March 1, 2018. The purchase of 49% of units of LSP members and the loans will entitle Manager a portion of the distribution fees earned by Lake Side Pharmacy, LLC and a management fee.