UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
|
[X] |
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
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For
the fiscal year ended: December
31, 2004
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[
] |
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT |
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For
the transition period from _________ to ________ |
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Commission
file number: 000-33165 |
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eRXSYS,
Inc. |
|
(Name
of small business issuer in its charter) |
|
Nevada |
98-0233878 |
|
(State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
|
18021
Sky Park Circle, Suite G2, Irvine, California |
92614 |
|
(Address
of principal executive offices) |
(Zip
Code) |
|
Issuer’s
telephone number: 949-222-9971
|
|
|
Securities
registered under Section 12(b) of the Exchange Act:
|
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Title
of each class |
Name
of each exchange on which registered |
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None |
Not
Applicable |
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Securities
registered under Section 12(g) of the Exchange Act: |
|
Common
Stock, par value $0.001 |
|
(Title
of class) |
Check
whether the Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [
]
Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
State
issuer’s revenue for its most recent fiscal year. $1,164,568
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity, as of a specified date within the past 60 days.
$19,731,228
as of March 15, 2005
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date. 38,688,682
Common Shares as of March 15, 2005
Transitional
Small Business Disclosure Format (Check One): Yes: __; No X
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PART
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Item
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Item
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PART
II |
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Item
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Item
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Item
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Item
8: |
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Item
8A: |
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Item
8B: |
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PART
III |
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Item
9: |
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32 |
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Item
10: |
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Item
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PART
I
Overview
We were
organized as a Nevada corporation on October 22, 1999 under the name
Surforama.com, Inc. We have since reorganized our operations. We are
engaged in the
business of operating pharmacies that specialize in the dispensing of highly
regulated pain medication by utilizing technology that allows physicians to
transmit prescriptions from a wireless hand-held device or desktop computer
directly to our dedicated pharmacies, thus eliminating or reducing the need for
paper prescriptions. Our technology is web-based and we do not provide
physicians with any equipment. Physicians are able to electronically transmit
prescriptions to our pharmacies simply by accessing our web portal. There is no
software required by the physicians. We do provide physicians with training on
how to utilize our web portal to electronically transmit prescriptions to our
pharmacies. Physicians are not charged any fees or costs for transmitting
prescriptions to our pharmacies or for any training they may receive on how to
utilize our web portal.
Because
our focus is on physicians whose practice necessitates that they frequently
prescribe medication to manage their patients’ chronic pain, we typically will
not keep in inventory non-prescription drugs, or health and beauty related
products such as walking canes, bandages and shampoo. We do not intend to sell
over-the-counter medication or fill prescriptions unrelated to chronic pain
management at our pharmacies. We will fill prescriptions that address any side
effects experienced by individuals who have health conditions that require them
to be treated for chronic pain. We derive our revenue from the sale of
prescription drugs.
The
majority of our business is derived from physicians who send prescriptions
directly to our store electronically. We have limited “walk-in” prescriptions.
Within the previous 90 days, approximately 52 physicians have transmitted
prescriptions to our pharmacies through our web portal. Currently, we generate
reoccurring business from approximately 38 physicians and 10 of those physicians
account for approximately 83% of all prescriptions filled at our pharmacies. The
number of physicians that send reoccurring business to our pharmacies has
decreased from December 2004 when at that time we generated reoccurring business
from approximately 41 physicians, but at that time 10 of those physicians
accounted for approximately 81% of all prescriptions.
Safescript
Pharmacies, Inc. (formerly known as RTIN Holdings, Inc.)
License
Our
former CEO, Mr. David Parker, founded
RxSystems, Inc. (“RxSystems”) in March 2002. In March 2002, RxSystems acquired
from Safescript Pharmacies, Inc. (the “Licensor”) the exclusive licensing rights
to establish and operate pharmacies under the name “Safescript Pharmacies”
throughout California, Oregon, Washington and Alaska. In May 2003, RxSystems
assigned to us all of their rights under this exclusive license (the
“License”).
In
exchange, we agreed to indemnify RxSystems for any claims with respect to the
License against RxSystems in any amount now or in the future. Subsequent to this
assignment, RxSystems, Inc. filed articles of dissolution with the Nevada
Secretary of State. We also agreed to reimburse the former CEO $370,000 for
personal funds advanced to the Licensor to secure the License. These funds plus
five percent (5%) interest per annum were due and payable in full to Mr. Parker
on December 31, 2007. In a termination and settlement agreement entered into
with Mr. Parker on February 1, 2005, Mr. Parker agreed to accept $10,000 cash
and 494,000 shares of our common stock and release and forever discharge us from
all liability associated with this debt.
At the
time of the assignment we assumed a note payable to the Licensor of $3,176,615
with monthly payments of $25,000 through December 1, 2004, with the remaining
principal and accrued interest due on December 31, 2004. On June 30, 2003, the
Licensor agreed to convert $2,000,000 of the note payable into 100,000 shares of
the Company’s convertible preferred stock which was then converted into
4,444,444 shares of our restricted common stock with an estimated fair value of
$1,393,000. Due to the conversion of all of our issued and outstanding preferred
shares, there are currently no preferred shares issued or outstanding. We
remained obligated to make payments of $25,000 per month through December 1,
2004, with the remaining principal and interest due on December 31, 2004. As of
December 2004, monthly installments of $25,000 for the note payable due to the
Licensor are eleven months in arrears and no monthly installment has been paid
since January 2004. The current balance of the note payable to the Licensor is
approximately $1,013,000.
The
Licensor failed to provide us with essential services as set forth in the
license agreement and this has forced us to terminate our use of all technology
granted by the Licensor. On March 17, 2004, we filed a lawsuit in Nevada State
Court against Safescript Pharmacies, Inc. seeking damages, declaratory relief,
to rescind the License and to recover the consideration paid. On March 19, 2004,
Safescript Pharmacies, Inc. filed for Chapter 11 bankruptcy protection. The
litigation in Nevada State Court has been stayed by reason of Safescript
Pharmacies, Inc.’s filing for bankruptcy. We refiled substantially the same
claim as an adversary proceeding in Safescript Pharmacies, Inc.’s bankruptcy
case in the U.S. Bankruptcy court located in Tyler, Texas. In July 2004, this
case was transferred to the U.S. District Court for the Eastern District of
Texas located in Tyler, Texas.
We
originally recorded the intangible asset at the carrying value of the notes
payable assumed in the amount of $3,586,615. In accordance with accounting
principles generally accepted in the United States of America, we subsequently
engaged a third party valuation firm to estimate the fair value of the acquired
License and the consideration given. Based on this independent valuation, we
reduced the book value (by the excess of the carrying value of the portion of
the note payable converted over the estimated fair value of the common stock
issued) and recorded the following amounts, as adjusted:
|
License
rights |
$ |
- |
|
Cost
in excess of estimated fair value |
|
2,977,000 |
|
Intangible
assets |
$ |
2,977,000 |
| |
|
|
|
Consideration: |
|
|
|
Notes
payable |
$ |
1,547,000 |
|
Common
stock |
|
1,393,000 |
|
Cash
paid |
|
37,000 |
| |
$ |
2,977,000 |
In
February 2004, the Licensor announced that it had been notified that the
Securities and Exchange Commission (the “SEC”) may commence an enforcement
action against the Licensor and certain executive officers of the Licensor for
alleged violation of the Securities Act and the Exchange Act. On October 5,
2004, the SEC announced that it filed a civil action in the United States
District Court for the Eastern District of Texas against Safescript Pharmacies,
Inc., f/k/a RTIN holdings, Inc. and former officers and directors of the
Licensor.
As of the
reporting period ended March 31, 2004, management determined that the License
was 100% impaired based on (a) the uncertainty of the Licensor’s ability to
continue as a going concern, which creates substantial doubt about the
Licensor’s ability to continue to support their e-prescribing
technology,
(b) our dispute with the Licensor, and (c) our implementation of other
technologies at our
first two
pharmacies. Accordingly, as of March 31, 2004, we impaired the entire intangible
asset of approximately $2,977,000.
License
Agreement with Network Technology, Inc. ("RxNT")
As a
result of Safescript Pharmacies, Inc.’s failure to provide us with essential
services as set forth in the license agreement, we entered into a technology
license agreement (“Technology License”) with Network Technology, Inc. (“RxNT”)
on March 15, 2004. The Technology License grants us the right to use RxNT’s
e-prescribing technology under the brand name “Assured Script.” Pursuant to the
Technology License agreement, we paid RxNT a licensing fee of $100,000 and are
also responsible for paying RxNT a royalty equal to twenty five percent (25%) of
the gross profit from sales of the “Assured Script” product, which refers to the
licensed products and technology set forth in the Technology License and not
prescription drug sales. Given that we are in the business of owning and
operating pharmacies, management does not anticipate that we would make any
sales of the “Assured Script” product resulting in a royalty payment to RxNT.
Agreement
with TPG Partners, L.L.C.
On April
24, 2003, we entered into an agreement with TPG Partners, L.L.C. (“TPG”) for the
purpose of funding the establishment and operations of pharmacies. Under this
agreement, TPG holds the right to fund on a joint venture basis fifty pharmacies
that we establish. In exchange for contributing financing in the amount of
$230,000 per pharmacy location, TPG will acquire a 49% ownership interest in
each pharmacy established under this agreement and we will own the remaining
51%. Under the terms of the agreement with TPG, our contribution to establish
pharmacies primarily consisted of the right
to utilize the rights granted under a license agreement we own and to render
services consisting of sales and marketing expertise.
In April
2003, Safescript Pharmacies of California, LLC was formed to establish and
operate the pharmacies that would be operated under the agreement with TPG. In
accordance with the terms of the agreement with TPG, we own 51% of Safescript
Pharmacies of California, LLC and TPG owns the remaining 49%. In June 2003,
Safescript Pharmacies of California, LLC formed a wholly owned subsidiary,
Safescript of California, Inc. (“Safescript”), which will own and operate the
pharmacies. Effective September 8, 2004, Safescript filed amended articles of
incorporation and changed its name to Assured Pharmacies, Inc.
(“API”).
TPG has
advanced a total of $448,000 for the establishment of our first pharmacy located
in Santa Ana, California and our second pharmacy located in Riverside,
California. Currently, only these two pharmacies are operated under the
agreement with TPG.
Agreement
with TAPG, L.L.C.
In
February 2004, we entered into an agreement with TAPG, L.L.C. ("TAPG"), a
Louisiana limited liability company, and formed Safescript Northwest, Inc.
("Safescript Northwest"), a Louisiana corporation. Safescript Northwest was
formed to
establish and operate up to five pharmacies. Effective August 19, 2004,
Safescript Northwest filed amended articles of incorporation and changed its
name to Assured Pharmacies Northwest, Inc. ("APN"). We own
75% of APN, while TAPG owns the remaining 25%. In accordance with our
shareholders agreement with TAPG, TAPG will provide start-up costs in the amount
of $335,000 per pharmacy location established not to exceed five pharmacies.
Under the
terms of
the agreement with TAPG, our contribution to establish pharmacies primarily
consisted of the
right to
utilize the rights granted under a license agreement we own and to render
services consisting of sales and marketing expertise.
TAPG
advanced a total of $664,000 for the start-up costs of our third pharmacy in
Kirkland, Washington and our fourth pharmacy in Portland, Oregon. Currently,
only these two pharmacies are operated under the agreement with
TAPG.
Industry
Overview
According
to the National Institute for Health Management, the $200 billion prescription
drug market is the fastest-growing segment of the health care industry today,
rising 17% or more a year since 1998. At the same time, the market has been
plagued by several chronic and growing problems that underscore the need to
modernize the way medications are prescribed and dispensed in the United States.
These problems include, but are not limited to:
| · |
Deaths
and injuries due to illegible prescriptions. According to the Institute of
Medicine, errors in reading hand-written drug prescriptions are reportedly
responsible for over 7,000 deaths a year in the U.S., $77 billion in
additional medical expenses, and rapidly escalating medical malpractice
insurance costs. Indeed, the Institute for Safe Medical Practices (ISMP),
a non-profit medical research group, has called for the complete
elimination of handwritten prescriptions. |
| · |
A
study by the American Pain Society and the American Academy of Pain
Management determined that an estimated 48 million suffer from chronic
pain in the U.S. and this number is projected to continue
growing; |
| · |
Too
few qualified pharmacists. A recent study conducted by the United States
Department of Health and Human Services confirmed that there is a growing
shortage of trained and licensed
pharmacists. |
| · |
Handwritten
prescriptions are prone to counterfeiting. Unscrupulous patients can alter
prescriptions in dose and/or quantity. Many patients falsely report lost
prescriptions or just forge the prescription to visit multiple
pharmacies. |
Market
for Our Products and Services
The
target market we will serve in dispensing pharmaceutical products is patients
who require medication for chronic pain management. Patients
in this category are likely to require prescription medications far more
frequently and for longer periods of time than patients in most other medical
categories. In order to access this target market, we will enable physicians
whose practice necessitates that they frequently prescribe medication to manage
their patients’ chronic pain to transmit prescriptions to our pharmacies
electronically using our web portal. We do not pay physicians to transmit
prescriptions to our pharmacies and physicians do not pay us to transmit
prescriptions to our pharmacies. We generate our revenue exclusively from the
sale of prescription drugs at our pharmacies.
Within
the previous 90 days, approximately 52 physicians have transmitted prescriptions
to our pharmacies through our web portal. Currently, we generate reoccurring
business from approximately 38 physicians and 10 of those physicians account for
approximately 83% of all prescriptions filled at our pharmacies. The number of
physicians that send repeat business to our pharmacies has increased from
September
2004 when at that time we generated repeat business from approximately 32
physicians and 10 of those physicians account for approximately 81% of all
prescriptions.
Principal
Suppliers
We
purchased 95% of our inventory of prescription drugs from one wholesale drug
vendor during the year ended December 2004. During the same period of time, we
purchased the remaining 5% of our inventory from 3 different wholesale drug
vendors. Management believes that the wholesale pharmaceutical and
non-pharmaceutical distribution industry is highly competitive because of the
consolidation of the pharmacy industry and the practice of certain large
pharmacy chains to purchase directly from product manufacturers. Although
management believes we could obtain the majority of our inventory through other
distributors at competitive prices and upon competitive payment terms if our
relationship with our primary wholesale drug vendor was terminated, there can be
no assurance that the termination of such a relationship would not adversely
affect us.
Customers
and Third-Party Payors
In fiscal
2004, nearly all of our pharmacy sales were to customers covered by health care
insurance plans, which typically contract with a third-party payor such as an
insurance company, a prescription benefit management company, a governmental
agency, workers’ compensation, a private employer, a health maintenance
organization or other managed care provider that agrees to pay for all or a
portion of a customer's eligible prescription purchases. Any significant loss of
third-party payor business could have a material adverse effect on our business
and results of operations.
Competition
We face
intense competition with local, regional and national companies, including other
drugstore chains, independently owned drugstores, supermarkets, mass
merchandisers, discount stores, dollar stores, mail order pharmacies and drug
importation. Competition in this industry is intense primarily because national
pharmacies including Walgreens and CVS Pharmacy have expanded significantly and
prescription drugs are now offered at a variety of retail establishments when
traditionally prescription drugs were only provided at local pharmacies.
Supermarkets and discount stores now maintain retail pharmacies onsite as a part
of a business plan to provide consumers with all of their retail needs at one
location. Retail
pharmacies such as Walgreens, CVS Pharmacy, and Rite Aid use proprietary and/or
commercialized paperless prescription technology in their pharmacy operations.
However, these pharmacies are not focused or dedicated to physicians practicing
in pain management. These retail pharmacies traditionally keep in
inventory non-prescription drugs, or health and beauty related products such as
walking canes, bandages and shampoo. Consumers
are able to have their prescriptions filled at these retail pharmacies, but
typical retail pharmacies either do not keep in inventory or keep limited
amounts of Class 2 drugs in inventory. As a result, the time it takes for
traditional retail pharmacies to fill a prescription for Class 2 drug is
extended. Because of our pain management focus, we maintain an appropriate
inventory level of Class 2 drugs to meet the needs of physicians that transmit
prescription to our pharmacies and do not keep in
inventory non-prescription drugs or health and beauty related products. We do
not intend to sell over-the-counter medication or fill prescriptions unrelated
to chronic pain management at our pharmacies. We will fill prescriptions that
address any side effects experienced by individuals who have health conditions
that require them to be treated for chronic pain.
Currently,
Safescript Pharmacies, Inc. is the only company that our management is aware of
that operates pharmacies in the United States that exclusively dispense
pharmaceutical products to patients who require medication for chronic pain
management while also providing technological support to physicians to enable
them to e-prescribe medication for their patients to the pharmacy.
There are
companies that are in the business of developing and manufacturing proprietary
software and hardware that facilitate e-scripting. We are not in this business.
We constantly seek out and evaluate available technologies to integrate into our
business model; as such, we do not consider ourselves a technology company
because we do not develop, program, or manufacture proprietary hardware and/or
software used by our pharmacies or by physicians that transmit prescriptions to
our pharmacies.
Patents,
Licenses, Trademarks, Franchises, Concessions, Royalty Agreements, or Labor
Contracts
On March
27, 2003, RxSystems assigned to us all of their rights under an exclusive
license agreement with Safescript Pharmacies, Inc. (formerly known as RTIN
Holdings, Inc.) which
enables the licensee to operate
pharmacies under the name “Safescript Pharmacies” throughout California, Oregon,
Washington and Alaska. Thereafter, the licensor failed to provide us with
essential services underlying the license agreement and this forced us to
terminate our use of all technology granted under the license agreement. On
March 17, 2004, we initiated suit in Nevada State Court against Safescript
Pharmacies, Inc. seeking damages, declaratory relief, to rescind our license
agreement with them and to recover the consideration paid, including all cash
and 4,444,444 restricted common shares of our stock, which were issued to retire
$2,000,000 of the debt owed on the License. This case has been stayed by reason
of Safescript Pharmacies, Inc.’s March 19, 2004 bankruptcy filing. We refiled
substantially the same claim as an adversary proceeding in Safescript’s
bankruptcy case which was pending in the U.S. Bankruptcy Court located in Tyler,
Texas. In July 2004, this case was transferred to the U.S. District Court for
the Eastern District of Texas located in Tyler, Texas.
On March
15, 2004, we entered into a technology license agreement (“Technology License”)
with Network Technology, Inc. (“RxNT”). The Technology License grants us the
right to use RxNT’s e-prescribing technology under the brand name “Assured
Script.”
On
November 9, 2004, we
received trademark approval (registration number 2901258) by the United States
Patent and Trademark Office for the “eRXSYS” company
logo.
State law
requires pharmacies to apply to the State Board of Pharmacy to receive a license
to operate. The application process to operate a pharmacy is substantially
similar among different states. The application process for a license on average
takes sixty days in the state of California. We have retained the services of a
law firm that specializes in healthcare and pharmacy to oversee the application
process for our pharmacies. In addition, each pharmacy must employ a licensed
pharmacist to serve as the Pharmacist in Charge (PIC). The PIC oversees
personnel and reports on the operations at a specific pharmacy. State law
regulates the number of employees and clerks that can work under the supervision
of one PIC. Currently, we are licensed to operate four pharmacies.
Research
and Development
We did
not incur any research and development expenditures in either the fiscal year
ended November 30, 2003, the one month transition period ended December 31,
2003, or the fiscal year ended December 31, 2004.
Existing
and Probable Governmental Regulation
Pharmacy
operations are subject to significant governmental regulation on the federal and
state level. Compliance with governmental regulation is essential to continued
operations. We are in compliance with each of the laws, rules, and regulations
set forth below and have not experienced any incidence of
noncompliance.
Licensure
Laws
Each
state’s board of pharmacy enforces laws and regulations governing pharmacists
and pharmacies. Each of our pharmacies applied and received a license. Licensure
requires strict compliance with state pharmacy standards. Although we believe
our pharmacies are compliant, changes in pharmacy laws and differing
interpretations regarding such laws could impact our level of compliance. A
pharmacy’s failure to comply with applicable law and regulation could result in
licensure revocation as well as the imposition of fines and
penalties.
Drug
Enforcement Laws
The
United States Department of Justice enforces the Drug Enforcement Act through
the Drug Enforcement Agency (DEA). The DEA strictly enforces regulations
governing controlled substances. In addition to regulation by the DEA, we are
subject to significant state regulation regarding controlled substances. Because
our pharmacies’ operations focus on highly regulated pain medications, failure
to adhere to DEA and state controlled substance requirements could jeopardize
our ability to operate. While we believe we are in compliance with current DEA
requirements, such requirements and interpretation of these requirements do
change over time.
Federal
Health Programs
As we
grow, we believe that a significant amount of our revenues will be derived from
governmental programs such as Medicaid. With the recent passage of the Medicare
Modernization and Prescription Drug Act of 2003, we also believe that Medicare
will become a significant source of funding.
Medicare
Medicare
reimbursement is determined by the Centers for Medicare and Medicaid Services
(“CMS”), an agency of the United States Department of Health and Human Services.
CMS establishes reimbursement policy for services provided to Medicare
beneficiaries in a manner consistent with the Social Security Act, as amended by
Congress. CMS has not yet established the reimbursement methodology pursuant to
which it will reimburse prescription drugs.
Medicaid
Medicaid
is a federal/state program that provides health coverage (including prescription
drug coverage) to the needy. Each state’s Medicaid program is different, and
some states impose limitations on the pharmacies that may serve the Medicaid
population. We currently participate in Medicaid in Oregon and Washington. We
submitted an application to participate in California’s Medicaid program, known
as Medi-Cal.
Medicare
and Medicaid Participation
In order
to participate in the Medicare and Medicaid programs, each pharmacy must enroll
as a participating supplier. There can be no assurance that our pharmacies will
be able to obtain the necessary approvals to participate in the Medicare and
Medicaid programs, which could have a material adverse financial impact on us,
our operations, and our investors.
The
Federal Health Care Programs Anti-Kickback Act
Federal
law prohibits the solicitation or receipt of remuneration in return for
referrals and the offer or payment of remuneration to induce the referral of
patients or the purchasing, leasing, ordering or arranging for any good,
facility, service or item for which payment may be made under a “federal health
care program” (defined as “any plan or program that provides health benefits,
whether directly, through insurance, or otherwise, which is funded directly, in
whole or in part, by the United States Government other than the Federal
Employees Health Benefit Program”).
Because
our business and operations involve providing health care services, we are
subject to the Federal Health Care Programs Anti-Kickback Act (the
“Act”). The
Anti-Kickback Statute, codified in 42 U.S.C. § 1320a-7b(b), prohibits
individuals and entities from knowingly and wilfully soliciting, receiving,
offering or paying any remuneration to other individuals and entities (directly
or indirectly, overtly or covertly, in cash or in kind):
| (i) |
In
return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may
be made under a federal or state health care program;
or |
| (ii) |
In
return for purchasing, leasing, ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service or item for
which payment may be made under a federal or state health care
program. |
There are
both criminal and civil penalties for violating the Federal Statute. Criminal
sanctions include a fine not to exceed $25,000 or imprisonment up to five years
or both, for each offense. In addition, monetary penalties for each offense may
be increased to up to $250,000 for individuals and up to $500,000 for
organizations. Civil penalties include fines of up to $50,000 for each
violation, monetary damages up to three times the amount paid for referrals
and/or exclusion from the Medicare program. Courts have broadly construed the
Anti-Kickback Statute to include virtually anything of value given to an
individual or entity if one purpose of the remuneration is to influence the
recipient’s reason or judgment relating to referrals.
The
Department of Health and Human Service’s Office of Inspector General (“OIG”)
promulgated safe harbor regulations specifying payment practices that will not
be considered to violate the statute. If a payment practice falls within one of
the safe harbors, it will be immune from criminal prosecution and civil
exclusion under the Act even if it fails to fall within another potentially
applicable safe harbor. Significantly, failure to fall within any safe harbor
does not necessarily mean that the payment arrangement violates the statute.
Failure to comply with a safe harbor can mean one of three things: (1) the
arrangement does not fall within the broad scope of the anti-fraud and abuse
rules so there is no risk of prosecution; (2) the arrangement is a clear
statutory violation and is subject to prosecution; or (3) the arrangement
may violate the anti-fraud and abuse rules in a less serious manner, in which
case there is no way to predict the degree of risk.
Because
our pharmacies maintain relationships with referring physicians, our operations
are subject to scrutiny under the Act. Although we will attempt to structure our
financial relationships with physicians in a manner that qualifies for safe
harbor protection, we anticipate that our relationships with physicians will not
qualify for safe harbor protection.
If our
operations fail to comply with the Act, we could be criminally sanctioned. In
addition, the right of any of our pharmacies to participate in governmental
health plans could be terminated.
Ethics
in Patient Referrals Act
The
Ethics in Patient Referrals Act, 42 U.S.C. §1395nn, commonly referred to as
Stark II (“Stark II”), prohibits physicians from referring or ordering certain
Medicare or Medicaid reimbursable “designated health services” from any entity
with which the physician or any immediate family member of the physician has a
financial relationship. A financial relationship is generally defined as a
compensation or ownership/investment interest. The purpose of the prohibition is
to assure that physicians base their treatment decisions upon the needs of the
patients and not upon any financial benefit that would inure to the physician as
a result of the referral.
Prescription
medications are classified as “designated health services” under Stark II.
Physicians owning stock in our Company are not allowed to refer any Medicare or
Medicaid patient to any of our pharmacies until and unless our Company’s
capitalization exceeds $75,000,000. A referral made in violation of Stark II
results in non-payment to the pharmacy and could result in the imposition of
fines and penalties as well as termination of our participation in Medicare and
Medicaid.
State
Fraud and Abuse Laws
States
have generally adopted their own laws similar to the Act and Stark II. However,
in some instances, state laws apply to all health care services, regardless of
whether such services are payable by a government health plan. For example, in
California, physicians and other practitioners are not permitted to own more
than 10% of any entity that owns a pharmacy.
HIPAA
We are
impacted by the Health Insurance Portability and Accountability Act of 1996
(“HIPAA”), which mandates, among other things, the adoption of standards to
enhance the efficiency and simplify the administration of the healthcare system.
HIPAA requires the Department of Health and Human Services to adopt standards
for electronic transactions and code sets for basic healthcare transactions such
as payment and remittance advice (“transaction standards”); privacy of
individually identifiable healthcare information (“privacy standards”); security
and electronic signatures (“security standards”), as well as unique identifiers
for providers, employers, health plans and individuals; and enforcement. We are
required to comply with these standards and are subject to significant civil and
criminal penalties for failure to do so.
Management
believes that we are in material compliance with these standards. However,
HIPAA's privacy and transaction standards only recently became effective, and
the security standards will become mandatory as of April 21, 2005. Considering
HIPAA's complexity, there can be no assurance that future changes will not
occur. Changes in standards as well as changes in the interpretation of those
standards could require us to incur significant costs to ensure compliance.
Management
anticipates that federal and state governments will continue to review and
assess alternate healthcare delivery systems, payment methodologies and
operational requirements for pharmacies. Given the continuous debate regarding
the cost of healthcare services, management cannot predict with any degree of
certainty what additional healthcare initiatives, if any, will be implemented or
the effect that any future legislation or regulation may have on us.
OBRA
1990
Our
business is subject to various other federal and state regulations. For example,
pursuant to the Omnibus Budget Reconciliation Act of 1990 ("OBRA") and
comparable state regulations, our pharmacists are required to offer counselling,
without additional charge, to our customers about medication, dosage, delivery
systems, common side effects and other information deemed significant by the
pharmacists and may have a duty to warn customers regarding any potential
adverse effects of a prescription drug if the warning could reduce or negate
such effect.
California
Senate Bill #151 was chaptered by the California Secretary of State on September
17, 2003. This legislation tightens the regulations on prescribing prescription
medication. The legislation allows for electronic prescribing of all
prescription medication except Class 2 substances. Generally, Class 2 substances
are drugs that exhibit a high potential for abuse or diversion. Class 2
substances are required to be dispensed only against a hard copy prescription.
This will not pose any operational problem for us because we currently generate
a hard copy of the electronic prescription for all Class 2 prescriptions issued.
Management believes that this legislation will create no undue burden or
competitive disadvantage for us.
Other
Laws
In recent
years, an increasing number of legislative proposals have been introduced or
proposed in Congress and in some state legislatures that would effect major
changes in the healthcare system, either nationally or at the state level. The
legislative initiatives include prescription drug benefit proposals for Medicare
participants. Although we believe we are well positioned to respond to these
developments, we cannot predict the outcome or effect of legislation resulting
from these reform efforts.
Compliance
with Environmental Laws
We did
not incur any costs in connection with the compliance with any federal, state,
or local environmental laws.
Employees
We
currently have fourteen full-time employees in addition to seven consultants.
Our employees are not represented by labor unions or collective bargaining
agreements. The
classification of our full-time employees and consultant positions are broken
down as follows:
|
Characterization
of Employee’s Duties |
Number
of Employees |
Number
of Consultants |
|
Corporate
Management / Officer |
1 |
2 |
|
Sales |
2 |
1 |
|
Technology |
0 |
2 |
|
Accounting |
1 |
2 |
|
Pharmacist |
4 |
0 |
|
Technicians
/ Pharmacy Support |
6 |
0 |
We are
currently leasing our executive offices and pharmacy locations. Our executive
offices are located at 18021 Sky
Park Circle, Suite G2, Irvine, California 92614. During
the last ninety days, we closed our regional office located at 420 Throckmorton
Street, Suite 620, Ft. Worth, Texas, 76102 in an attempt to reduce expenses.
Our first
pharmacy is located at 2431 N. Tustin Ave., Unit L, Santa Ana, California,
92705. Our second pharmacy is located at 7000 Indiana, Ave., Suite 112,
Riverside, California, 92506. Our third pharmacy is located at 12071
124th Avenue NE, Kirkland, Washington, 98034. Our fourth pharmacy is located at
3822 S.E. Powell Blvd, Portland, Oregon, 97202.
We
entered into leases to establish pharmacies at the following locations:
| · |
10196 SW Park Way, Portland, Oregon, 97225 |
| · |
2716 Santa Monica Blvd, Santa Monica, California,
90403 |
| · |
2024 Sixth Ave, Tacoma, Washington, 98405. |
Following
our management’s decision to suspend the development of new pharmacies, we were
able to terminate our lease on the property located in Santa Monica, California.
We have continued to maintain our lease on the property located in Portland,
Oregon. However, there was a construction lien placed on this location in the
amount of $38,950 as a result of our failure to compensate the builder that
constructed the pharmacy on the premises. Our management is currently
negotiating a settlement with the builder.
Future
store locations, when established, will be selected based on the following
criteria: 1) proximity to the physician members and medical facilities, 2)
convenience of location, and 3) fast growing metropolitan areas with a
population of at least 500,000. Retail pharmacies are approximately 1,500 square
feet and are leased from various property management companies for approximately
five years.
Our agent
for service of process in Nevada is Cane Clark LLP, 3273 E. Warm Springs Rd.,
Las Vegas, Nevada 89120.
From time
to time, we may be involved in various claims, lawsuits, disputes with third
parties, actions involving allegations of discrimination or breach of contract
actions incidental to the normal operations of the business.
Providing
pharmacy services entails an inherent risk of medical and professional
malpractice liability. We may be named as a defendant in such lawsuits and thus
become subject to the attendant risk of substantial damage awards. We believe
that we have adequate professional and medical malpractice liability insurance
coverage. There can be no assurance, however, that we will not be sued, that any
such lawsuit will not exceed our insurance coverage, or that we will be able to
maintain such coverage at acceptable costs and on favorable terms.
Safescript
Pharmacies, Inc. (formerly known as RTIN, Inc.) failed to provide us with
essential services as set forth in the license agreement that they entered into
and this has forced us to terminate our use of all technology granted under the
license agreement entered into with Safescript Pharmacies, Inc. On March 17,
2004, we filed a lawsuit in Nevada State Court against Safescript Pharmacies,
Inc. seeking
damages,
declaratory relief, to rescind the License and to recover the consideration
paid. On March 19, 2004, Safescript Pharmacies, Inc. filed for Chapter 11
bankruptcy protection. The litigation in Nevada State Court has been stayed by
reason of Safescript Pharmacies, Inc.’s filing for bankruptcy. We refiled
substantially the same claim as an adversary proceeding in Safescript’s
bankruptcy case which was pending in the U.S. Bankruptcy Court located in Tyler,
Texas. In July 2004, this case was transferred to the U.S. District Court for
the Eastern District of Texas located in Tyler, Texas.
On April
14, 2004, a former officer filed a lawsuit against us in Orange County
California Superior Court. The former officer is seeking additional compensation
in the amount of $213,000 and other further relief that the court deems just and
appropriate. This lawsuit is in the early stages and its outcome is not
reasonably predictable. A trial date was originally set for March 7, 2005 and
was later extended. On or about April 12, 2005, we filed for summary judgment.
We believe the lawsuit is without merit and we are aggressively defending this
case.
Other
than as disclosed herein, we are not currently involved in any litigation which
we believe could have a material adverse effect on our financial position or
results of operations.
Item 4: Submission
of Matters to a Vote of Security Holders
During
the fourth quarter of the reporting period, we held our annual meeting of
shareholders. The matters voted upon at the meeting were as
follows:
| · |
To
consider and act upon a proposal to amend our
Articles of Incorporation to grant the board of directors the power to
prescribe by resolution the voting rights, designations, preferences,
limitations, restrictions, and relative, participating, optional and other
rights, and the qualifications, limitations, or restrictions as it relates
to our Preferred Stock; |
| · |
To
confirm the appointment of Squar, Milner, Reehl & Williamson, LLP as
our auditors; and |
| · |
To
elect four directors for a term expiring at the next annual meeting of
shareholders, or until their successors are duly elected or
qualified |
The total
number of shares of common stock outstanding at the record date, August 25,
2004, was 44,712,896 shares. The number of votes represented at this meeting was
24,983,278 shares, or 55.87% of shares eligible to vote.
All of
the nominees for director recommended by the board of directors were elected and
the results
of the voting were as follows:
|
Name |
Votes
for |
Votes
Against |
Abstentions |
|
David
Parker * |
24,983,278 |
0 |
0 |
|
A.J.
LaSota * |
24,983,278 |
0 |
0 |
|
James
Manfredonia |
24,983,278 |
0 |
0 |
|
Richard
Falcone |
24,983,278 |
0 |
0 |
*
Mr.
Parker and Mr. LaSota entered into Termination and Settlement Agreements with us
and resigned their positions on the board of director effective February 1,
2005.
The
amendment to the Articles of Incorporation was approved and the results were as
follows:
|
Votes
for |
Votes
Against |
Abstentions |
|
24,758,778 |
225,500 |
0 |
The
appointment of Squar, Milner, Reehl & Williamson, LLP as our auditors was
confirmed and the results were as follows:
|
Votes
for |
Votes
Against |
Abstentions |
|
24,983,278 |
0 |
0 |
PART
II
Item
5: Market
for Common Equity and Related Stockholder Matters
Market
Information
Our
common stock is currently quoted on the OTC Bulletin Board (“OTCBB”), which is
sponsored by the NASD. The OTCBB is a network of security dealers who buy and
sell stock. The dealers are connected by a computer network that provides
information on current "bids" and "asks", as well as volume information. Our
shares are quoted on the OTCBB under the symbol “ERXI.”
The
following table sets forth the range of high and low bid quotations for our
common stock for each of the periods indicated as reported by the OTCBB. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
|
Fiscal
Year Ending December 31, 2004 |
|
Quarter
Ended |
|
High
$ |
|
Low
$ |
|
March
31, 2004 |
|
0.87 |
|
0.46 |
|
June
30, 2004 |
|
0.69 |
|
0.52 |
|
September
30, 2004 |
|
0.65 |
|
0.43 |
|
December
31, 2004 |
|
0.62 |
|
0.25 |
| |
|
Fiscal
Year Ended November 30, 2003 |
|
Quarter
Ended |
|
High
$ |
|
Low
$ |
|
February
28, 2003 |
|
0.45 |
|
0.17 |
|
May
31, 2003 |
|
0.37 |
|
0.17 |
|
August
31, 2003 |
|
0.64 |
|
0.27 |
|
November
30, 2003 |
|
0.64 |
|
0.37 |
On March
31, 2005, the last sales price of our common stock was $0.35.
Penny
Stock
The SEC
has adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. Penny stocks are generally equity securities with
a market price of less than $5.00, other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system. The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock, to deliver a
standardized risk disclosure document prepared by the SEC, that: (a) contains a
description of the nature and level of risk in the market for penny stocks in
both public offerings and secondary trading; (b) contains a description of the
broker's or dealer's duties to the customer and of the rights and remedies
available to the customer with respect to a violation of such duties or other
requirements of the securities laws; (c) contains a brief, clear, narrative
description of a dealer market, including bid and ask prices for penny stocks
and the significance of the spread between the bid and ask price; (d) contains a
toll-free telephone number for inquiries on disciplinary actions; (e) defines
significant terms in the disclosure document or in the conduct of trading in
penny stocks; and (f) contains such other information and is in such form,
including language, type, size and format, as the SEC shall require by rule or
regulation.
The
broker-dealer also must provide, prior to effecting any transaction in a penny
stock, the customer with (a) bid and offer quotations for the penny stock; (b)
the compensation of the broker-dealer and its salesperson in the transaction;
(c) the number of shares to which such bid and ask prices apply, or other
comparable
information relating to the depth and liquidity of the market for such stock;
and (d) a monthly account statement showing the market value of each penny stock
held in the customer's account.
In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from those rules; the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement as to transactions involving
penny stocks, and a signed and dated copy of a written suitability
statement.
These
disclosure requirements may have the effect of reducing the trading activity for
our common stock. Therefore, stockholders may have difficulty selling our
securities.
Holders
of Our Common Stock
As of
March 15, 2005, we had approximately one hundred twenty five holders of
record of our common stock and several other stockholders hold shares in street
name.
Dividends
There are
no restrictions in our articles of incorporation or bylaws that
restrict us from
declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends where, after giving effect to the distribution of the
dividend:
| |
1. |
We
would not be able to pay our debts as they become due in the usual course
of business; or |
| |
2. |
Our
total assets would be less than the sum of our total liabilities, plus the
amount that would be needed to satisfy the rights of shareholders who have
preferential rights superior to those receiving the
distribution. |
Recent
Sales of Unregistered Securities
The
information set forth below relates to our issuances of securities without
registration under the Securities Act of 1933 during the past three
years.
Subsequent
to the reporting period and during the first quarter of 2005, we issued 100,000
shares of restricted common stock to two consultants in connection with services
rendered. These shares were issued pursuant to Section 4(2) of the Securities
Act. We did not engage in any general solicitation or advertising.
Subsequent
to the reporting period and during the first quarter of 2005, we issued 150,000
shares of restricted common stock to four independent members of our board of
directors in advance of services to be rendered for the year ended December 31,
2005. These shares were issued pursuant to Section 4(2) of the Securities Act.
We did not engage in any general solicitation or advertising.
During
the three months ended December 31, 2004, we issued 74,997 shares of restricted
common stock in connection with services rendered during the year ended December
31, 2004 by four independent members of our board of directors. These shares
were issued pursuant to Section 4(2) of the Securities Act. We did not engage in
any general solicitation or advertising.
During
the three months ended September 30, 2004, we issued 25,003 shares of restricted
common stock in connection with services rendered by two independent members of
our board of directors. These shares were issued pursuant to Section 4(2) of the
Securities Act. We did not engage in any general solicitation or advertising.
During
the three months ended September 30, 2004, we issued 40,000 shares of restricted
common stock in connection with consulting services rendered by four members of
our advisory board. These shares were issued pursuant to Section 4(2) of the
Securities Act. Each advisory board member received 10,000 shares of restricted
common stock. We did not engage in any general solicitation or advertising.
On June
17, 2004, we completed an exempt offering of units to thirty-eight accredited
investors pursuant to Rule 506 of Regulation D under the Securities Act. Each
unit was priced at $0.80 and consisted of two shares of restricted common stock
and one warrant to purchase one share of restricted common stock at an exercise
price of $0.60 exercisable for twenty-four months after the close of the
offering. We received proceeds of $2,652,702 net of broker/dealer commission and
legal fees related to the offering in the amount of $303,998. We issued
7,391,750 shares of restricted common stock and 3,695,875 warrants in connection
with this offering. Each purchaser represented his or her intention to acquire
the securities for investment only and not with a view toward distribution. Each
investor was given adequate information about us to make an informed investment
decision. We did not engage in any general solicitation or advertising. We
issued the stock certificates and affixed the appropriate legends to the
restricted stock.
During
the three months ended June 30, 2004, in connection with the extension of a
consulting agreement, we issued 150,000 shares of restricted common stock, with
warrants to purchase 350,000 shares of common stock, exercisable at $0.60 per
share for a period of five years from the date of issuance, for services
valued at approximately $70,500 (estimated to be fair value based on the
trading price on the issuance date) and included in consulting and other
compensation in the accompanying consolidated statements of operations. These
shares and warrants were issued pursuant to Section 4(2) of the Securities Act.
We did not engage in any general solicitation or advertising. We issued the
stock certificates and affixed the appropriate legends to the restricted stock.
During
the three months ended June 30, 2004, we issued 126,625 shares of restricted
common stock to consultants for services rendered valued at approximately
$62,000 (estimated to be fair value based on the trading price on the issuance
date). These shares and warrants were issued pursuant to Section 4(2) of the
Securities Act. We did not engage in any general solicitation or advertising. We
issued the stock certificates and affixed the appropriate legends to the
restricted stock.
During
the three months ended June 30, 2004, we issued warrants to purchase 100,000
shares of the Company’s common stock, exercisable at $0.60 per share for a
period of five years from the date of issuance, to a consultant. These warrants
were issued pursuant to Section 4(2) of the Securities Act. We did not engage in
any general solicitation or advertising.
During
the three months ended March 31, 2004, we issued 1,050,000 shares of restricted
common stock to consultants for services rendered valued at approximately
$468,000 (estimated to be fair value based on the trading price on the issuance
date). These shares were issued pursuant to Section 4(2) of the Securities Act.
We did not engage in any general solicitation or advertising.
During
the three months ended March 31, 2004, we issued 20,000 shares of restricted
common stock in connection with notes payable issued to certain shareholders and
certain third parties valued at approximately $9,500 (estimated to be fair value
based on the trading price on the issuance date). These
shares
were issued pursuant to Section 4(2) of the Securities Act. We did not engage in
any general solicitation or advertising.
During
the one month transition period ended December 31, 2003, we issued 1,544,149
shares of restricted common stock to consultants for services rendered valued at
approximately $664,000 (estimated to be fair value based on the trading price on
the issuance date). These shares were issued pursuant to Section 4(2) of the
Securities Act. We did not engage in any general solicitation or advertising. We
issued the stock certificates and affixed the appropriate legends to the
restricted stock.
On
September 17, 2003, we completed an exempt offering of common stock at the price
of $0.25 per share. Twenty-nine accredited investors and fifteen unaccredited
investors purchased shares in this offering. We received total proceeds in the
amount of $1,330,750 and issued 5,323,000 shares of our restricted common stock.
This exempt offering was conducted pursuant to Rule 506 of Regulation D under
the Securities Act. Each purchaser represented his or her intention to acquire
the securities for investment only and not with a view toward distribution. Each
investor was given adequate information about us to make an informed investment
decision. We did not engage in any public solicitation or general advertising.
No registration rights were granted to any of the purchasers. We issued the
stock certificates and affixed the appropriate legends to the restricted stock.
Subsequent to November 30, 2003, we issued 46,400 shares of restricted common
stock to finders in connection with this exempt offering.
During
the year ended November 30, 2003, we issued 4,013,600 shares of restricted
common stock to various consultants estimated to be valued at $1,329,008 based
on the market prices on the issuance dates. These shares were issued pursuant to
an exemption available under Section 4(2) of the Securities Act. In connection
with this issuance, there was no public solicitation or general advertising
used.
During
the year ended November 30, 2003, we issued 4,444,444 shares of restricted
common stock to retire $2,000,000 of a note payable. These shares were issued
pursuant to an exemption available under Section 4(2) of the Securities Act. In
connection with this issuance, there was no public solicitation or general
advertising used.
In
November 2003, we agreed to issue 1,000,000 shares of restricted common stock in
connection with the extension of certain consulting contracts. In accordance
with this agreement, 600,000 shares were issued in November 2003 and the
remaining 400,000 shares were issued in December 2003 and January 2004. The
estimated fair value of the 1,000,000 shares was $320,000 based on the trading
price on the issuance dates. These shares were issued pursuant to an exemption
available under Section 4(2) of the Securities Act. In connection with this
issuance, there was no public solicitation or general advertising
used.
On
September 5, 2003, we issued 1,273,600 shares to our officers and employees in
settlement of accrued consulting and salary expense. These
shares were issued pursuant to an exemption available under Section 4(2) of the
Securities Act.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information about our compensation plans under which
shares of common stock may be issued upon the exercise of options as of December
31, 2004. See notes 2 and 6 to the our consolidated financial statements
included in Item 7: Financial Statements.
Equity
Compensation Plans as of December 31, 2004
| |
A |
B |
C |
|
Plan
Category |
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights |
Weighted-average
exercise price of outstanding options, warrants and
right |
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(A)) |
|
Equity
compensation plans
approved
by security holders |
55,000
|
$0.50
|
5,490,613
|
|
Equity
compensation plans
not
approved by security holders |
4,145,875
|
$0.60 |
-
|
|
Total |
4,200,875 |
-
|
5,490,613
|
Purchases
of Equity Securities
Subsequent
to the reporting period on February 1, 2005, we entered into a Termination and
Settlement Agreements with Mr. David Parker and Mr. A.J. LaSota. Mr. Parker and
Mr. LaSota resigned from their positions as officers and directors. In
accordance with the terms of these agreements, Mr. Parker and Mr. LaSota
returned to the corporate treasury 5,400,000 and 429,353 shares of our common
stock respectively. Also on February 1, 2005, we entered into a Settlement
Agreement with Ron Folse, our former Executive Vice President. In accordance
with the terms of this agreement, Mr. Folse returned to the corporate treasury
429,353 shares of our common stock.
Item
6: Management’s
Discussion and Analysis
Forward-Looking
Statements
Historical
results and trends should not be taken as indicative of future operations.
Management’s statements contained in this report that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934 (the “Exchange Act”), as amended. Actual results may differ
materially from those included in the forward-looking statements. The Company
intends such forward-looking statements to be covered by the safe-harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
complying with those safe-harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the
words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,”
“prospects,”
or similar expressions. The Company’s ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects of
the Company on a consolidated basis include, but are not limited to: changes in
economic conditions, legislative/regulatory changes, availability of capital,
interest rates, competition, significant restructuring activities in calendar
2004 and thereafter, and generally accepted accounting principles. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that could
materially affect the Company’s financial results, is included herein and in the
Company’s other filings with the SEC.
We
currently have four operating pharmacies. Our first pharmacy was opened on
October 13, 2003 in Orange County, California in the city of Santa Ana. On June
10, 2004, we opened our second pharmacy location in Riverside, California. We
opened our third pharmacy in Kirkland, Washington on August 11, 2004. Our fourth
pharmacy was opened in Portland, Oregon on September 21, 2004.
We
originally planned to establish nine operating pharmacies by December 31, 2004.
We announced in our quarterly report for the three months ended September 30,
2004 that we were suspending the development of new pharmacies for a period of
sixty to ninety days in order to evaluate and potentially improve the operations
of our four existing pharmacies. It was the belief of our board of directors and
executive management that all four stores were not operating at their full
potential. This basis for this belief was primarily the reluctance of physicians
to adopt our technology for electronically transmitting prescriptions and our
failure to implement a successful marketing strategy to attract business. Since
this announcement, management postponed activity related to the development of
new locations. At the present time and following this period of evaluation, our
management decided not to close any of our existing pharmacy locations. We are
hopeful that we will resume the development of new pharmacies in the third or
fourth quarter of 2005.
The
catalyst for the decision to suspend the development of new pharmacies was
substantially attributable to a lack of sufficient cash to fund the expenses
associated with the development of new pharmacies. We have incurred significant
expenditures in connection with purchases of inventory for our existing
pharmacies. As sales increased, a time gap developed between inventory
replenishing and accounts receivable. Nearly all of our pharmacy sales are to
customers whose medications were covered by health benefit plans and other third
party payors. As a result, we typically do not receive cash for our sales at the
time of transactions and are dependent on health benefit plans to pay for all or
a portion of our customers’ prescription purchases. There is a significant delay
from the time of a customer’s purchase of medication to the time when we receive
payment for the customer’s purchase from a health benefit plan or other third
party payor.
Management
evaluated various alternatives available to us as it related to financing future
inventory purchases in the early stages of our planned principal operations. Our
management was successful in securing financing for inventory purposes on an
interim basis. On or about December 21, 2004, we received a loan evidenced by a
promissory note from Robert James, Inc., a company under the control of our
current CEO Mr. Robert DelVecchio, for the purpose of purchasing inventory for
our pharmacies. The promissory note was for a maximum of $150,000 and matured on
the earlier of March 6, 2005 or the date that we were able to consummate an
accounts receivable factoring arrangement for our working capital. The
outstanding principal amount of this promissory note bears interest at three
percent (3%) per month. In consideration for this promissory note, we agreed to
pay the lender an administrative fee of $1,500 and a financing fee of $2,100. In
addition to these fees, we agreed to pay the lender by the fifth day of every
month from January 2005 until the principal amount is repaid an administrative
fee of
$1,875
and a financing fee of $2,675. We paid the loan evidenced by the promissory note
from Robert James, Inc. in full on February 21, 2005.
On
February 23, 2005, we entered into an accounts receivable servicing agreement
and line of credit agreement with Mosaic Financial Services, LLC. These
agreements allow us to successfully secure financing for inventory purchases
over an extended period of time. Under the terms of the line of credit
agreement, we can draw a maximum of $500,000 to purchase inventory. Beginning
July 1, 2005, the maximum amount of the available line of credit will be
increased to $700,000. These agreements are for a term of one year and shall
automatically renew for another one year period unless either party provides
notice to the other of termination within 180 days prior to the end of the
effective term.
Following
our period of evaluation, management cited our previous marketing practice as an
area for improvement. Our prior marketing strategy consisted exclusively of
making sales calls in person at physicians’ offices to secure business. In 2005,
management has now successfully implemented a new marketing strategy that
dramatically expands our efforts to attract business. Our current marketing
strategy is targeted to physicians, new customers, and existing customers. With
respect to new customers, we are offering a $10.00 coupon to be applied toward
the customers first prescription filled at any of our pharmacies and a $5.00
gift card at any Starbucks location. With respect to our current customers, we
commenced a promotion through direct mailing. We are offering our current
customers a $10.00 coupon to be applied toward the purchase of prescription
drugs for any prescription that is transferred to one of our pharmacies. In
addition, we will hold a monthly drawing at each pharmacy for those customers
that transferred a prescription and the winner will receive a $150.00 gift card.
We have also recently commenced a direct mailing campaign to physicians
informing them of our pharmacy operations. In an attempt to build more name
recognition, we have created brochures and posters that are available in
physicians’ waiting rooms.
Our new
marketing strategy set forth above has in a short time period produced a
significant increase in business. Prior to our new marketing strategy and for
the three month period ended December 31, 2004, our four pharmacies filled an
average of 254 prescriptions per week. From the beginning of the current fiscal
year through March 31, 2005, our four pharmacies filled an average of 346
prescriptions per week. This represents an increase in the average prescriptions
filled per week at our four pharmacies of approximately 36%.
Additionally,
our two pharmacy locations in California have experienced difficulty
participating in California’s Medicaid program, known as Medi-Cal. Medicaid is a
federal/state program that provides health coverage, including prescription drug
coverage to the needy. Each state’s Medicaid program is different, and some
states impose limitations on the pharmacies that may serve the Medicaid
population. In order to participate in Medicaid programs, each pharmacy must
enroll as a participating supplier. The application process required to enroll
as a participating supplier in Medi-Cal is onerous. We submitted our application
and have not received any response at the present time. Under California law,
applicants are assigned a temporary contract number if no response is received
for a six month period after an application has been submitted. The receipt of a
temporary contract number allows applicant to bill for services rendered until
such time that their application is denied or they are assigned a permanent
contract number. During the application process and until such time that we are
assigned a temporary contract number, our two pharmacies in California are
unable to fill prescriptions for customers who obtain health coverage through
Medi-Cal because our pharmacies are not sanctioned as a participating pharmacy.
We anticipate that we will have a decision on our application some time prior to
August 31, 2005 and/or receive a temporary contract number by June 30, 2005.
The
Medicaid program is administered and all benefits are processed by CalOptima
specifically in Orange County, California. All applications to participate in
the Medicaid programs for pharmacies located in Orange County are processed by
CalOptima. CalOptima placed a moratorium on additional pharmacies enrolling as a
supplier of prescription drugs in Orange County approximately three years ago in
2002 and this moratorium remains in effect. As a result, our location in Santa
Ana, California is unable to participate as a supplier of prescription drugs to
potential customers who rely on health coverage through Medicaid.
Approval
to participate as a supplier to Medi-Cal would increase the customer base at our
California pharmacy locations; however, there can be no assurance that our
pharmacies will be able to obtain the necessary approvals to participate in
California’s Medicaid program. The failure to obtain the mandatory approval
could have a material adverse financial impact on our financial
results.
Our
management is evaluating the possibility of acquiring a pharmacy that has a
current billing relationship with Medi-Cal and Cal-Optima. Such an acquisition
would enable our pharmacies to participate as a supplier of prescription drugs
to patients receiving benefits through Medi-Cal and Cal-Optima. We have not
entered into any formal discussions and can provide no assurance that we will be
successful in acquiring a pharmacy with a current billing relationship with
Medi-Cal and Cal-Optima.
Similarly,
some third party payors such as Health Net in California have also placed a
moratorium on additional pharmacies which they will sanction as a supplier of
medication to participants enrolled in the health benefit plans that they
administer. The failure of government plans and other third party payors to
approve additional pharmacies as suppliers of medication to participants
enrolled in their health benefit plans could have a material adverse financial
impact on us, and our operations.
To
further strengthen our corporate infrastructure to support our existing
management with their efforts to evaluate and improve our operations, management
established an advisory board to consult with us on various issues relating to
operating pharmacies and the implementation of our business plan. Management has
contracted with sales personnel to secure agreements with physicians, technology
specialists to insure the continued operation and viability of our technology,
and pharmacists to insure the proper internal controls are implemented and
followed in each pharmacy. In addition, management has also established methods,
policies, and procedures to be implemented at each pharmacy that are designed to
maximize efficiency. Management expects to hire a Chief Operating Officer and
additional personnel over the next six months as needed to continue to
strengthen the corporate infrastructure.
Over the
next twelve months management will continuously evaluate our business plan
including assessing the technology we utilize. Our business plan calls for us to
continually assess the technology we utilize and improve our efficiency. We must
continuously evaluate and implement the most user-friendly technology. We
retained two consultants for the purpose of assessing and improving the
efficiency of our technology at an anticipated cost of approximately of $200,000
annually.
Management
will also consider taking actions designed to mitigate any risks associated with
our business plan.
Results
of Operations for the Year Ended December 2004 and November
2003
On the
cash basis of accounting, our total revenue reported for the year ended December
31, 2004 was $1,164,568, $1,038 for the year ended November 30, 2003, and $7,982
for the one month transition period ended December 31, 2003. As of
November 30, 2003 and December 31, 2003, we had established our first pharmacy.
During the year ended December 31, 2004, we established three additional
pharmacies
and had
established a total of four pharmacies by the end of the fiscal year. For this
reason, our revenue ability to generate revenue dramatically increased.
We are in
the process of monitoring our revenues
and are creating several criteria in developing a historical trend analysis
based on actual claims paid in order to estimate potential contractual
allowances on a monthly basis. Given that we are considered to be in the startup
stage and lack sufficient operational history, we are unable to determine the
fixed settlement of our revenue. Therefore, we are recognizing revenue on a cash
basis until such time as management has developed the history and trends to
estimate potential contractual adjustments. On an accrual basis, we would have
recorded additional revenue of approximately $221,000 for the year ended
December 31, 2004. As we undertake our plan of operations, we anticipate that
our revenues will significantly increase.
The total
cost of sales for the year ended December 31, 2004 was $1,411,163, $12,784 for
the year ended November 30, 2003, and
$26,267 for the one month transition period ended December 31, 2003. The cost
of sales consists primarily of the pharmaceuticals. As of November 30, 2003 and
December 31, 2003, we had established our first pharmacy. During the year ended
December 31, 2004, we established three additional pharmacies and had
established a total of four pharmacies by the end of the fiscal year. Purchasing
and replenishing our inventory supply for an increased number of pharmacies over
the prior fiscal year resulting in a significant increase in our total cost of
sales.
We
incurred total operating expenses of $8,197,168 for the year ended December 31,
2004, $1,402,262 for the year ended November 30, 2003, and
$740,050 for the one month transition period ended December 31, 2003.
Our
operating expenses for the year ended December 31, 2004 consisted of salaries
and related expenses of $1,401,017, consulting and other compensation of
$2,253,848, selling, general and administrative expenses of $1,564,855, and
$2,977,448 for the impairment of an intangible asset. Our operating expenses for
the year ended November 30, 2003 consisted of salaries and related expenses of
$314,650, consulting and other compensation of $805,455, and selling, general
and administrative expenses of $282,157. For the one month transition period
ended December 31, 2003, our operating expenses consisted of salaries and
related expenses of $595,922, consulting and other compensation of $80,526,
selling, general and administrative expenses of $63,602.
Our
operating expenses incurred during the year ended December 31, 2004 were
exclusively attributable to establishing our corporate infrastructure and
establishing additional pharmacies. During the year ended December 31, 2004, we
established three additional pharmacies and had established a total of four
pharmacies by the end of the fiscal year. In the first quarter of 2004, we
expensed $2,977,448 for the impairment of a license. For these reasons, our
operating expenses dramatically increased in the year ended December 31, 2004
when compared to the prior year.
Our net
loss for the year ended December 31, 2004
was $8,011,287 and the loss for the year ended November 30, 2003 was $1,458,995
with additional losses of $751,748 for the one month transition period ended
December 31, 2003. We
previously projected that each store would be cash flow positive by the ninth
month of operation; however, none of our operating pharmacies currently is or
ever has been cash flow positive. Increased net losses in 2004 as compared to
the prior fiscal year is primarily attributable to the impairment of a license
and significant expenditures related to establishing additional pharmacies in
the absence of a successfully marketing strategy to generate revenue.
Our basic
and diluted loss per common share for the year ended December 31, 2004
was $(0.18), $(0.06) for the year ended November 30, 2003, and $(0.02) for the
one month transition period ended December 31, 2003.
Assets
As of
December 31, 2004, we had total assets of $1,019,340. As of December 31, 2004,
our current assets consisted of cash of $86,325, inventory of $158,009, and
$34,812 in prepaid expenses and other assets. Property and equipment, net of
accumulated depreciation was $740,194.
Inventory
increased by $117,109, or 286%, from the transition period ended December 31,
2003 due to the increase in sales. In addition to replenishing depleted
inventory, additional inventory may be required to meet the needs of an
increasing number of physicians.
Property
and equipment increased by $677,928, or 924%, from the transition period ended
December 31, 2003. The increase in property and equipment is attributed to the
build out of new pharmacies which required computer systems, furniture and
fixtures, and leasehold improvements.
Liabilities
and Stockholders Deficit
Our total
liabilities as of December 31, 2004 were $2,264,157. Our liabilities consisted
of current liabilities of $1,894,157 and long term portion of notes payable of
$370,000. The notes payable consist of a note payable to our former chief
executive officer in the amount of $370,000 respectively. The current portion of
the notes payable to RTIN, recorded in the current liabilities section of the
consolidated balance sheet, amounts to $1,013,465.
Accounts
payable and accrued liabilities increased by $718,651 from December 31, 2003.
This increase is primarily attributable to the new pharmacies opened and the
build out of our corporate infrastructure.
Our
operations were primarily funded through equity financings. Stockholders’
deficit was $1,938,225 as of December 31, 2004.
Liquidity
and Capital Resources
As of
December 31, 2004, we maintained $86,325 in cash which primarily resulted from
funds raised in the private offering of common stock and receivables financing.
This cash was used, among other things, to fund additional working capital
needs, support the establishment of our corporate infrastructure, and to pay for
additional purchases of inventory.
As of
September 30, 2004, we maintained $150,000 in restricted cash. This restricted
cash was set aside to be used exclusively to satisfy our obligations under
leases that were personally guaranteed by an officer of our Company in the event
that we are unable to pay rent at these locations from our daily operating
account. We no longer maintain any restricted cash because we terminated the
leases which were personally guaranteed by an officer of our Company.
During
the fiscal year ended December 31, 2004, net cash used in operating activities
was $3,432,266, net cash used in investing activity was $719,872, and net cash
provide by financing activities was $3,528,021.
During
the fourth quarter of fiscal 2004, our management anticipated that the current
cash on hand was sufficient for us to operate our four existing pharmacies at
the current level until December 31, 2004. Following a period of evaluation and
restructuring, our management has taken aggressive steps to reduce our operating
costs. During the last ninety days, we closed our regional office located in Ft.
Worth, Texas. In January 2005, we relocated our corporate headquarters to a new
location. We reduced our staff from
nineteen
full time employees in December 2004 to fourteen at the present time. We also
reduced expenses by suspending the development of new pharmacies and terminating
certain leases. The cost reducing actions set forth above are estimated to
reduce our operating expenses on an annual basis by approximately $1,024,000.
The breakdown of these projected cost reductions is as follows:
|
Costs
Reducing Action |
Annualized
Savings |
|
Closure
of the Ft. Worth Regional Office |
$
139,295
|
|
Relocation
of corporate headquarters |
85,200
|
|
Reduction
in full time employees |
567,508
|
|
Reduced
expense by suspending development of new pharmacies |
232,016
|
|
Total
Cost Savings on an Annualized Basis |
1,024,019
|
Our
operations since December 31, 2004 have been primarily funded through debt
financings. In addition to the agreements entered into for the purpose of
financing inventory purchases, we have entered into several loan and security
agreements to fund our operations. The following table summarizes those other
loan and security agreements we have entered into since December 31,
2004:
|
Lender |
Execution
Date |
Amount |
Annual
Interest Rate |
Maturity
Date |
|
TAPG
LLC |
1/27/05 |
$270,000 |
3%
|
1/14/06 |
|
VVPH |
2/4/05 |
$50,000 |
3%
|
5/8/05
* |
|
Steven
Rosner |
2/10/05 |
$50,000 |
3%
|
5/8/05
* |
|
Steven
Rosner |
2/16/05 |
$90,000 |
3%
|
5/8/05
* |
|
Weil
Consulting Corp. |
3/11/05 |
$50,000 |
7.5%
|
5/11/05 |
*
The
maturity dates on the promissory notes entered into with VVPH and Steven Rosner
are the earlier of May 8, 2005 or such date that we consummate an accounts
receivable factoring arrangement. On February 21, 2005, we consummated an
accounts receivable factoring arrangement with Mosaic Financial services, LLC.
As a result, the loans from VVPH and Steven Rosner have matured. We are
currently negotiating the conversion of this debt into equity with VVPH and
Steven Rosner.
The
underlying drivers that resulted in material changes and the specific inflows
and outflows of cash in calendar 2004 are as follows:
| a. |
Expenses
such as salaries, rents, legal fees, selling and administrative costs were
necessary to fund our on-going business and pursue expanding doctor
enrollments to increase revenue. Legal and administrative expenses
resulted from expenditures to establish the business and to maintain
compliance with government reporting requirements. Selling and
administrative expenses have been reduced via work force reductions and
expenditures associated with establishing the enterprise are
non-recurring. |
| b. |
A
significant breach by a licensor severely impaired our ability to operate
under the original license agreement, which resulted in a material
impairment of an intangible asset. |
| c. |
Our
inventory level increased with the addition of two pharmacies. We
continually track inventory usage and adjust inventory levels to market
requirements. |
| d. |
Increases
in accounts payable are the result of expenses and fees associated with
establishing existing business and two new pharmacies in the Northwest.
|
| e. |
We
obtained the necessary funding from the issuance of common stock. Our
management believes that additional issuance of stock and/or debt
financing will be required to provide us with working capital and a
positive cash flow in 2005. |
We intend
to fund operations through increased sales and debt and/or equity financing
arrangements, which may be insufficient to fund our capital expenditures,
working capital, or other cash requirements for the year ending December 31,
2005. We have commenced a private equity offering in an attempt to secure
funding for our operations. There can be no assurance that we will be successful
in raising additional funding. If we are not able to secure additional funding,
the implementation of our business plan will be impaired. There can be no
assurance that such additional financing will be available to us on acceptable
terms or at all.
Off
Balance Sheet Arrangements
As of
December 31, 2004, there were no off balance sheet arrangements. Please refer to
the Commitment and Contingency footnote to the Company’s consolidated financial
statements included elsewhere herein.
Going
Concern
The
accompanying consolidated financial statements have been prepared assuming we
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of December 31, 2004, we had an accumulated deficit of
approximately $10.5 million, largely due the expansion of the pharmacies and the
establishment of a regional corporate office in Fort Worth, Texas, which is now
closed.
We intend
to fund operations for the year ending December 31, 2005 through increased sales
and debt and/or equity financing arrangements. Thereafter, we may be required to
seek additional funds to finance long-term operations. The successful outcome of
future financing activities cannot be determined at this time and there is no
assurance that if achieved, we will have sufficient funds to execute our
intended business plan or generate positive operating results.
These
factors, among others, raise substantial doubt about our ability to continue as
a going concern. The accompanying consolidated financial statements do not
include any adjustments related to recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should we be unable to continue as a going concern.
In
response to these problems, management in coordination with our board of
directors has taken the following actions:
| · |
We
suspended the development of new pharmacies for a period in order to
evaluate the potential in existing pharmacies and, where needed,
restructure current operations. |
| · |
We
are aggressively signing up new physicians. |
| · |
We
implemented a new marketing strategy to attract
business. |
We are
seeking investment capital through the public markets.
Inflation
Since the
opening of our first pharmacy in October 2003, management believes that
inflation has not had a material effect on our results of operations.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants list their three to five
most “critical accounting polices” in the Management Discussion and Analysis.
The SEC indicated that a “critical accounting policy” is one which is both
important to the portrayal of the Company’s financial condition and results, and
requires management’s most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. We believe that the following accounting policies fit this
definition:
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or estimated market, and
consist primarily of pharmaceutical drugs. Market is determined by comparison
with recent sales or net realizable value. Net realizable value is based on
management’s forecasts for sales of the Company’s products or services in the
ensuing years and/or consideration and analysis of changes in customer base,
product mix, payor mix, third party insurance reimbursement levels or other
issues that may impact the estimated net realizable value. Management regularly
reviews inventory quantities on hand and records a reserve for shrinkage and
slow-moving, damaged and expired inventory, which is measured as the difference
between the inventory cost and the estimated market value based on management’s
assumptions about market conditions and future demand for the Company’s
products. Such reserve was insignificant to the accompanying consolidated
financial statements. Should the demand for the Company’s products prove to be
significantly less than anticipated, the ultimate net realizable value of the
Company’s inventories could be substantially less than reflected in the
accompanying consolidated balance sheet.
Inventories
are comprised of brand and generic pharmaceutical drugs. Brand drugs are
purchased primarily from one wholesale vendor and generic drugs are purchased
primarily from another wholesale vendor. Our pharmacies maintain a wide variety
of different drug classes, known as Schedule II, Schedule III, and Schedule IV
drugs, which vary in degrees of addictiveness. Schedule II drugs, considered
narcotics by the DEA are the most addictive; hence, they are highly regulated by
the DEA and are required to be segregated and secured in a separate cabinet.
Schedule III and Schedule IV drugs are less addictive and are not regulated.
Because our business model focuses on servicing pain management doctors and
chronic pain patients, we carry in inventory a larger amount of Schedule II
drugs than most other pharmacies. The cost of acquisition for Schedule II drugs
is higher than Schedule III and IV drugs.
Long-Lived
Assets
In
July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. If the cost basis of a
long-lived asset is greater than the projected future undiscounted net cash
flows from such asset, an impairment loss is recognized. Impairment losses are
calculated as the difference between the cost basis of an asset and its
estimated fair value. SFAS No. 144 also requires companies to separately report
discontinued operations, and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are reported
at the lower of the carrying amount or the estimated fair value less costs to
sell.
Our
long-lived assets consist of computers, software, office furniture and
equipment, and leasehold improvements on pharmacy build-outs which are
depreciated with useful lives varying from 3 to 10 years. Leasehold improvements
are depreciated over the shorter of the useful life or the remaining lease term,
typically 5 years. We assess the impairment of these long-lived assets at least
annually and make adjustment accordingly.
Intangible
Assets
Statement
of Financial Accounting standard (“SFAS”) No. 142, "Goodwill
and Other Intangible Assets",
which is effective for fiscal years beginning after December 15, 2001, addresses
how intangible assets that are acquired individually or with a group of other
assets should be accounted for upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and identifiable intangible assets that have indefinite lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their estimated useful
lives.
SFAS
No. 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. In addition, SFAS No. 142 expands the
disclosure requirements about intangible assets in the years subsequent to their
acquisition. Impairment losses for goodwill and indefinite-life intangible
assets that arise due to the initial application of SFAS No. 142 are to be
reported as a change in accounting principle.
In March
2004, management determined that the aforementioned license was 100%
impaired.
Revenue
Recognition
We
recognize revenue on a cash basis when we receive payments from third-party
insurance carriers or government agencies. The prices that we are paid for
prescription drugs are agreed upon upfront; however, insurance carriers and/or
governmental agencies can adjust the contractual price. As a result, we do not
have a fixed price at the time of sale. We are monitoring the historical trend
of these
contractual
adjustments to develop a reasonable and conservative allowance for these
adjustments. We anticipate that we will switch to the accrual basis of revenue
recognition in 2005.
Recently
Issued Accounting Pronouncements
In
January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51." The primary objectives
of FIN No. 46 are to provide guidance on the identification of entities for
which control is achieved through means other than voting rights (variable
interest entities, or "VIEs"), and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity for which either (1) the equity investors do not have a controlling
financial interest; or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN No. 46 requires that both
the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. As amended in December 2003, the
effective dates of FIN No. 46 for public entities that are small business
issuers, as defined ("SBIs"), are as follows: (a) For interests in
special-purpose entities: periods ended after December 15, 2003; and (b) For all
other VIEs: periods ended after December 15, 2004. The December 2003 amendment
of FIN No. 46 also includes transition provisions that govern how an SBI which
previously adopted the pronouncement (as it was originally issued) must account
for consolidated VIEs. Management has concluded that the Company does not have a
significant variable interest in any VIEs.
In
April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. This pronouncement is effective for contracts entered into
or modified after June 30, 2003 (with certain exceptions), and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's consolidated
financial statements.
In
May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for public companies as follows: (i) in November 2003, the FASB
issued FASB Staff Position (“FSP”) FAS 150-03 (“FSP 150-3”), which defers
indefinitely (a) the measurement and classification guidance
of SFAS No. 150 for all mandatorily redeemable non-controlling interests in (and
issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150’s
measurement guidance for other types of mandatorily redeemable non-controlling
interests, provided they were created before November 5, 2003; (ii) for
financial instruments entered into or modified after May 31, 2003 that are
outside the scope of FSP 150-3; and (iii) otherwise, at the beginning of the
first interim period beginning after June 15, 2003. The Company adopted SFAS No.
150 on the aforementioned effective dates. The adoption of this pronouncement
did not have a material impact on the Company’s results of operations or
financial condition.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. In Chapter 4
of ARB 43, paragraph five previously stated that "...under some circumstances,
items such as idle facility expense, excessive spoilage, double freight, and
re-handling costs may be so abnormal as to require treatment as current period
charges...." SFAS No. 151 requires that such items be recognized as
current-period charges, regardless of whether they meet the criterion of “so
abnormal” (an undefined term). This pronouncement also requires that allocation
of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred in years beginning after June 15, 2005.
In
December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, and
supersedes APB Opinion No. 25. Small Business Issuers are required to apply SFAS
No. 123-R in the first interim reporting period that begins after December 15,
2005. Thus, the Company's consolidated financial statements will reflect an
expense for (a) all share-based compensation arrangements granted after December
31, 2005 and for any such arrangements that are modified, cancelled, or
repurchased after that date, and (b) the portion of previous share-based awards
for which the requisite service has not been rendered as of that date, based on
the grant-date estimated fair value.
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
The amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured using the estimated fair value of the
assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary
exchanges of similar productive assets, and replaces it with a broader exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has "commercial substance" if the future cash flows of the
entity are expected to change significantly as a result of the transaction. This
pronouncement is effective for nonmonetary exchanges in fiscal periods beginning
after June 15, 2005.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants, and
the Securities and Exchange Commission (the “SEC”) did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
Index to
Consolidated Financial Statements:
Audited
Financial Statements:
F-1 Report of
Independent Registered Public Accounting Firm
F-2 Consolidated
Balance Sheet as of December 31, 2004
F-3 Consolidated
Statements of Operations - Years Ended December 31, 2004 and November 30, 2003
and the
one month transition period ended December 31, 2003
F-4 Consolidated
Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the
Years Ended December 31, 2004 and November 30, 2003 and the one month transition
period ended December 31, 2003
F-5 Consolidated
Statements of Cash Flows for the Years Ended December 31, 2004 and November 30,
2003 and the one month transition period ended December 31, 2003
F-6 Notes to
Consolidated Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING
FIRM
To the
Board of Directors and Stockholders
eRXSYS,
Inc. (Formerly Known As Surforama.com, Inc.) And Subsidiaries
We have
audited the accompanying consolidated balance sheet of eRXSYS, Inc. and
Subsidiaries (collectively the “Company”), as of December 31, 2004, and the
related consolidated statements of operations, stockholders’ equity (deficit)
and comprehensive loss and cash flows for the years ended December 31, 2004 and
November 30, 2003 and for the one-month transition period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of eRXSYS, Inc. and Subsidiary
as of December 31, 2004, and the results of their operations and their cash
flows for years ended December 31, 2004 and November 30, 2003 and for the
one-month transition period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company had negative cash flow from
operations of approximately $3.4 million in 2004, an accumulated deficit of
approximately $10.5 million at December 31, 2004 and recurring losses from
operations. These factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans regarding
these matters are also described in Note 1. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ SQUAR,
MILNER, REEHL & WILLIAMSON, LLP
April 8,
2005
Newport
Beach, California
|
eRXSYS,
INC. AND SUBSIDIARIES |
|
|
|
|
CONSOLIDATED
BALANCE SHEET |
|
|
|
|
DECEMBER
31, 2004 |
|
|
|
| |
|
|
|
| |
|
|
|
|
ASSETS |
|
|
|
|
|
Current
Assets |
|
|
|
|
|
Cash |
|
$ |
86,325 |
|
|
Inventories |
|
|
158,009
|
|
|
Prepaid
expenses and other assets |
|
|
34,812
|
|
|
Related
party receivable |
|
|
279,146
|
|
| |
|
|
279,146
|
|
| |
|
|
|
|
|
Property
and Equipment, net |
|
|
740,194
|
|
| |
|
$ |
1,019,340 |
|
| |
|
|
|
|
| |
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|
|
|
|
| |
|
|
|
|
|
Current
Liabilities |
|
|
|
|
|
Accounts
payable and accrued liabilities |
|
$ |
830,692 |
|
| |
|
|
|
|
|
Notes
payable to related party and stockholders |
|
|
1,063,465
|
|
| |
|
|
1,894,157
|
|
| |
|
|
|
|
|
Notes
Payable to Related Party and Stockholder, net of current
portion |
|
|
370,000
|
|
| |
|
|
2,264,157
|
|
| |
|
|
|
|
|
Minority
Interest |
|
|
693,408
|
|
| |
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
| |
|
|
|
|
|
Stockholders'
Deficit |
|
|
|
|
|
Preferred
shares; par value $0.001 per share; |
|
|
|
|
|
authorized
5,000,000 shares; no preferred shares issued |
|
|
|
|
|
and
outstanding |
|
|
-
|
|
| |
|
|
|
|
|
Common
shares; par value $0.001 per share; |
|
|
|
|
|
authorized
70,000,000 shares; 44,977,899 common shares issued and |
|
|
|
|
|
outstanding |
|
|
44,978
|
|
| |
|
|
|
|
|
Additional
paid-in capital, net |
|
|
8,778,024
|
|
| |
|
|
|
|
|
Deferred
compensation |
|
|
(217,200 |
) |
| |
|
|
|
|
|
Accumulated
deficit |
|
|
(10,544,027 |
) |
| |
|
|
|
|
|
Stockholders'
deficit |
|
|
(1,938,225 |
) |
| |
|
|
|
|
| |
|
$ |
1,019,340 |
|
| |
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated Financial
Statements. |
|
|
eRXSYS,
INC. AND SUBSIDIARIES |
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS |
|
|
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2004, NOVEMBER 30, 2003 AND THE ONE MONTH
TRANSITION PERIOD ENDED DECEMBER 31, 2003 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
ONE
MONTH |
|
| |
|
|
|
|
|
TRANSISTION |
|
| |
|
YEARS
ENDED |
|
PERIOD
ENDED |
|
| |
|
DECEMBER
31, 2004 |
|
NOVEMBER
30, 2003 |
|
DECEMBER
31, 2003 |
|
| |
|
|
|
|
|
|
|
|
GROSS
SALES |
|
$ |
1,164,568 |
|
$ |
1,038 |
|
$ |
7,982 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES |
|
|
(1,411,163 |
) |
|
(12,784 |
) |
|
(26,267 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
GROSS
LOSS |
|
|
(246,595 |
) |
|
(11,746 |
) |
|
(18,285 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| OPERATING
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
Salaries and related |
|
|
1,401,017
|
|
|
314,650
|
|
|
595,922
|
|
|
Consulting and other compensation |
|
|
2,253,848
|
|
|
805,455
|
|
|
80,526
|
|
|
Selling, general and administrative |
|
|
1,564,855
|
|
|
282,157
|
|
|
63,602
|
|
|
Impairment of intangible asset |
|
|
2,977,448
|
|
|
-
|
|
|
-
|
|
| |
|
|
8,197,168
|
|
|
1,402,262
|
|
|
740,050
|
|
| |
|
|
(8,443,763 |
) |
|
(1,414,008 |
) |
|
(758,335 |
) |
| OTHER
(EXPENSE) INCOME |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(92,468 |
) |
|
(38,346 |
) |
|
(4,605 |
) |
|
Interest income |
|
|
-
|
|
|
1,073
|
|
|
1,991
|
|
|
Other expense |
|
|
(12,289 |
) |
|
(52,201 |
) |
|
(17,884 |
) |
| |
|
|
(104,757 |
) |
|
(89,474 |
) |
|
(20,498 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| LOSS
BEFORE MINORITY INTEREST |
|
|
(8,548,520 |
) |
|
(1,503,482 |
) |
|
(778,833 |
) |
|
MINORITY
INTEREST |
|
|
537,233
|
|
|
44,487
|
|
|
27,085
|
|
| |
|
|
|
|
|
|
|
|
|
|
| NET
LOSS |
|
$ |
(8,011,287 |
) |
$ |
(1,458,995 |
) |
$ |
(751,748 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Basic
and diluted loss per common share |
|
$ |
(0.19 |
) |
$ |
(0.06 |
) |
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Basic
and diluted weighted average number of common |
|
|
|
|
|
|
|
|
|
|
|
shares outstanding |
|
|
41,112,800
|
|
|
24,115,700
|
|
|
35,875,700
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated Financial
Statements. |
|
eRXSYS,
INC. AND SUBSIDIARIES |
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
LOSS |
|
|
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2004, NOVEMBER 30, 2003 AND THE ONE MONTH
TRANSITION PERIOD ENDED DECEMBER 31, 2003 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| |
|
Common
Stock |
|
Additional |
|
Cumulative |
|
Comprehensive |
|
|
|
|
|
Stockholders' |
|
| |
|
|
|
|
|
Paid
In |
|
Translation |
|
Income |
|
Deferred |
|
(Accumulated) |
|
(Deficit) |
|
| |
|
Shares |
|
Amount |
|
Capital |
|
Adjustment |
|
(Loss) |
|
Compensation |
|
Deficit) |
|
Equity |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2002 |
|
|
19,828,899
|
|
$ |
19,829 |
|
$ |
168,560 |
|
$ |
(2,508 |
) |
$ |
- |
|
$ |
- |
|
$ |
(321,997 |
) |
$ |
(136,116 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with a private placement |
|
|
5,323,000
|
|
|
5,323
|
|
|
1,325,427
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,330,750
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services rendered |
|
|
4,613,600
|
|
|
4,614
|
|
|
1,516,394
|
|
|
-
|
|
|
-
|
|
|
(972,000 |
) |
|
-
|
|
|
549,008
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the conversion of debt |
|
|
4,444,444
|
|
|
4,444
|
|
|
1,388,889
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,393,333
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the conversion of related party note
payable |
|
|
220,429
|
|
|
221
|
|
|
133,387
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
133,608
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred consulting fees |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
120,000
|
|
|
-
|
|
|
120,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,458,995 |
) |
|
(1,458,995 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,508
|
|
|
-
|
|
|
-
|
|
|
2,508
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
November 30, 2003 |
|
|
34,430,372
|
|
|
34,431
|
|
|
4,532,657
|
|
|
(2,508 |
) |
|
2,508
|
|
|
(852,000 |
) |
|
(1,780,992 |
) |
|
1,934,096
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services rendered |
|
|
1,544,149
|
|
|
1,544
|
|
|
662,440
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
663,984
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred consulting fees |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
59,600
|
|
|
-
|
|
|
59,600
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(751,748 |
) |
|
(751,748 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003 |
|
|
35,974,521
|
|
|
35,975
|
|
|
5,195,097
|
|
|
(2,508 |
) |
|
2,508
|
|
|
(792,400 |
) |
|
(2,532,740 |
) |
|
1,905,932
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with a private placement |
|
|
7,391,750
|
|
|
7,392
|
|
|
2,642,760
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,650,152
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services rendered |
|
|
1,611,628
|
|
|
1,611
|
|
|
706,167
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
707,778
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
maket value of warrants issued to consultants |
|
|
-
|
|
|
-
|
|
|
234,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
234,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred consulting fees |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
575,200
|
|
|
-
|
|
|
575,200
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,011,287 |
) |
|
(8,011,287 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004 |
|
|
44,977,899
|
|
|
44,978
|
|
|
8,778,024
|
|
|
(2,508 |
) |
|
2,508
|
|
|
(217,200 |
) |
|
(10,544,027 |
) |
|
(1,938,225 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated Financial
Statements. |
|
eRXSYS,
INC. AND SUBSIDIARIES |
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS |
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2004, NOVEMBER 30, 2003 AND THE ONE MONTH
TRANSITION PERIOD ENDED DECEMBER 31, 2003 |
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
ONE
MONTH |
|
| |
|
|
|
|
|
TRANSITION |
|
| |
|
YEAR
ENDED |
|
YEAR
ENDED |
|
PERIOD
ENDED |
|
| |
|
DECEMBER
31, 2004 |
|
NOVEMBER
30, 2003 |
|
DECEMBER
31, 2003 |
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) |
|
$ |
(8,011,287 |
) |
$ |
(1,458,995 |
) |
$ |
(751,748 |
) |
|
Adjustments
to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment |
|
|
50,448
|
|
|
4,022
|
|
|
328
|
|
|
Amortization
of deferred consulting fee |
|
|
575,200
|
|
|
120,000
|
|
|
59,600
|
|
|
Impairment
of intangible asset |
|
|
2,977,448
|
|
|
-
|
|
|
-
|
|
|
Minority
interest in net loss of Joint Venture |
|
|
(537,233 |
) |
|
(44,487 |
) |
|
(27,085 |
) |
|
Issuance
of common stock for services |
|
|
932,401
|
|
|
549,008
|
|
|
663,984
|
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Related
party receivable |
|
|
-
|
|
|
(10,646 |
) |
|
10,646
|
|
|
Restricted
cash |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Inventories |
|
|
(119,961 |
) |
|
(40,900 |
) |
|
2,852
|
|
|
Prepaid
expenses and other current assets |
|
|
(3,136 |
) |
|
(24,225 |
) |
|
(966 |
) |
|
Other
assets |
|
|
-
|
|
|
(6,792 |
) |
|
307
|
|
|
Accounts
payable and accrued liabilities |
|
|
718,651
|
|
|
273,459
|
|
|
(160,251 |
) |
|
Related
party payable |
|
|
(14,797 |
) |
|
14,797
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities |
|
|
(3,432,266 |
) |
|
(624,759 |
) |
|
(202,333 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment |
|
|
(719,872 |
) |
|
(76,288 |
) |
|
-
|
|
|
Purchase
of market license |
|
|
-
|
|
|
(37,000 |
) |
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities |
|
|
(719,872 |
) |
|
(113,288 |
) |
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
Principal
repayments on notes payable |
|
|
(15,000 |
) |
|
|
|
|
|
|
|
Principal
repayments on notes payable to related party and
shareholder |
|
|
(130,131 |
) |
|
(125,596 |
) |
|
(20,395 |
) |
|
Proceeds
from the issuance of notes payable |
|
|
50,000
|
|
|
-
|
|
|
-
|
|
|
Proceeds
from the issuance of notes payable to related party and
shareholder |
|
|
109,409
|
|
|
15,000
|
|
|
-
|
|
|
Issuance
of common stock for cash |
|
|
2,650,030
|
|
|
1,330,750
|
|
|
-
|
|
|
Issuance
of common stock in connection with issuance of notes
payable |
|
|
9,500
|
|
|
-
|
|
|
-
|
|
|
Minority
interest |
|
|
854,213
|
|
|
448,000
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used for) financing activities |
|
|
3,528,021
|
|
|
1,668,154
|
|
|
(20,395 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation |
|
|
-
|
|
|
2,508
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash |
|
|
(624,117 |
) |
|
932,615
|
|
|
(222,728 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period |
|
|
710,442
|
|
|
555
|
|
|
933,170
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period |
|
$ |
86,325 |
|
$ |
933,170 |
|
$ |
710,442 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information- |
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for: |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
92,468 |
|
$ |
38,346 |
|
$ |
4,605 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes |
|
$ |
4,912 |
|
$ |
- |
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated Financial
Statements. |
|
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
1.
ORGANIZATION AND BASIS OF PRESENTATION
eRXSYS,
Inc. was organized as a Nevada corporation on October 22, 1999 under the name
Surforama.com, Inc. From October 1999 to August 2002, Surforama was in the
business of developing and marketing on-line advertising for service providers,
corporations and individuals. After this time, Surforama reorganized its
operations and became engaged
in
the business of operating pharmacies that specialize in the dispensing of highly
regulated pain medication by utilizing technology that allows physicians to
transmit prescriptions from a wireless hand-held device or desktop computer
directly to our dedicated pharmacies, thus eliminating or reducing the need for
paper prescriptions. Because the focus is on physicians whose practice
necessitates that they frequently prescribe medication to manage their patients’
chronic pain, non-prescription drugs, or health and beauty related products such
as walking canes, bandages and shampoo are not typically kept in inventory.
Revenues are derived exclusively from the sale of prescription
drugs.
The
majority of the business is derived from physicians who transmit prescriptions
directly to our store electronically. “Walk-in” prescriptions from other
physicians are limited.
In
April 2003, Surforama entered into a joint venture with TPG Partners, L.L.C.
(“TPG”) to form Safescript Pharmacies of California, L.L.C. (“Joint Venture”).
This Joint Venture was formed to establish and operate pharmacies. Surforama
owns 51% of the Joint Venture with TPG owning the remaining 49%. In June 2003,
the Joint Venture formed a wholly owned subsidiary, Safescript of California,
Inc. (“Safescript”), to own and operate the pharmacies. Effective September 8,
2004, Safescript filed amended articles of incorporation and changed its name to
Assured Pharmacies, Inc. (“API”).
In
October 2003, Surforama changed its name to eRXSYS, Inc. (“eRXSYS”).
In
February 2004, eRXSYS entered into an agreement with TAPG, L.L.C. ("TAPG"), a
Louisiana limited liability company, and formed Safescript Northwest, Inc.
("Safescript Northwest"), a Louisiana corporation. Effective
August 19, 2004, Safescript Northwest filed amended articles of incorporation
and changed its name to Assured Pharmacies Northwest, Inc. ("APN"). eRXSYS
owns 75% of APN, while TAPG owns the remaining 25%. In accordance with our
shareholders agreement, TAPG will provide start-up costs in the amount of
$335,000 per pharmacy location established up to five pharmacies, and eRXSYS
will contribute technology, consulting services, and marketing expertise.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
1.
ORGANIZATION AND BASIS OF PRESENTATION (continued)
Organization
and Nature of Operations (continued)
eRXSYS,
Inc., API, Joint Venture, and APN are hereinafter collectively referred to as
the “Company”
Going
Concern Considerations
The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
ordinary course of business.
As of December 31, 2004, the Company had an accumulated deficit of approximately
$10.6 million, recurring losses from operations and negative cash flow from
operating activities of approximately $3.4 million for the year then ended.
The
Company intends to fund operations through increased sales and debt and/or
equity financing arrangements, which may be insufficient to fund its capital
expenditures, working capital or other cash requirements for the year ending
December 31, 2005. The Company will be required to seek additional funds to
finance its immediate and long-term operations. The successful outcome of future
financing activities cannot be determined at this
time and there is no assurance that, if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operating results.
These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments related to recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going
concern.
In
response to these problems, management has taken the following actions:
| · |
The
Company suspended the development of new pharmacies as part of the
restructuring activities that took place in the fourth calendar quarter of
2004 and the first quarter of 2005 (See Note 7 for more
information) |
| · |
The
Company is aggressively signing up new
physicians. |
| · |
The
Company is seeking investment capital through the public
markets. |
| · |
The
Company implemented a new marketing strategy to attract business.
|
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
summary of significant accounting policies presented below is designed to assist
in understanding the Company's consolidated financial statements. Such
consolidated financial statements and accompanying notes are the representations
of the Company’s management, who is responsible for their integrity and
objectivity. These accounting policies conform to accounting principles
generally accepted in the United States of America (“GAAP") in all material
respects, and have been consistently applied in preparing the accompanying
consolidated financial statements.
Principles
of Consolidation
The
consolidated financial statements include the accounts of eRXSYS, Inc., its
wholly owned subsidiary, Safescript, and its 51% owned Joint Venture. The
Company has the ability to exercise control over the Joint Venture; as such, the
Company has consolidated the Joint Venture into its consolidated financial
statements. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Transition
Period Reporting
On
February 2, 2004, the Company reported its decision to change its fiscal year
end from November 30 to December 31. This action created a "transition period"
(as defined), which is the one month period ended December 31, 2003. Under the
SEC’s reporting rules, a registrant is not required to file a separate
transition report for transition periods that do not exceed one month. Rule
13a-10 of the Securities and Exchange Act of 1934 (as amended) requires
registrants that have a transition period of one month or less to include
audited financial statements for that transition period in the first audited
financial statements filed thereafter. Accordingly, the Company’s December 31,
2003 audited consolidated balance sheet and its consolidated statements of
operations and cash flows for the one month transition period then ended are
included in accompanying financial statements.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates made by
management include current and deferred income taxes, the deferred tax asset
valuation allowance, and realization of inventories and long-lived assets.
Actual results could materially differ from these estimates.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks
and Uncertainties
The
Company operates in a highly competitive industry that is subject to intense
competition. The Company has a limited operating history since it has just
finished its first year of operations and has not yet generated significant
revenue. As a new operating entity, the Company faces risks and uncertainties
relating to its ability to successfully implement its business strategy. Among
other things, these risks include the ability to develop and sustain revenue
growth; managing expanding operations; competition; attracting, retaining and
motivating qualified personnel; maintaining and developing new strategic
relationships; and the ability to anticipate and adapt to the changing markets
and any changes in government regulations.
Therefore,
the Company may be subject to the risks of delays in obtaining or failing to
obtain regulatory clearance and other uncertainties, including financial,
operational, technological, regulatory and other risks associated with an
emerging business, including the potential risk of business
failure.
The
Company’s leased pharmacies are subject to licensing and regulation by the
health, sanitation, safety, building and fire agencies in the state or
municipality where located. Difficulties or failures in obtaining or maintaining
the required licensing or approvals could prevent the continued operation of
such pharmacies. Management believes that the Company is operating in compliance
with all applicable laws and regulations.
The
Company purchased 95% of its inventory of prescription drugs from one wholesale
vendor during the year ended December 31, 2004. Management believes that the
wholesale pharmaceutical and non-pharmaceutical distribution industry is highly
competitive because of the consolidation of the pharmacy industry and the
practice of certain large pharmacy chains to purchase directly from product
manufacturers. Although management believes we could obtain the majority of our
inventory through other distributors at competitive prices and upon competitive
payment terms if our relationship with our primary wholesale drug vendor was
terminated, there can be no assurance that the termination of such a
relationship would not adversely affect us.
The
Company’s pharmacies sell highly regulated and high-risk drugs that are
prescribed by physicians. The Company’s business may be directly affected by the
number of physicians that transmit to the pharmacies.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Risks
and Uncertainties (continued)
Governmental
Regulations
The
pharmacy business is subject to extensive and often changing federal, state and
local regulations, and our pharmacies are required to be licensed in the states
in which they are located or do business. While management continuously monitors
the effects of regulatory activity on the Company’s operations and we currently
have a pharmacy license for each pharmacy the Company operates, the failure to
obtain or renew any regulatory approvals or licenses could adversely affect the
continued operations of the Company’s business.
The
Company is also subject to federal and state laws that prohibit certain types of
direct and indirect payments between healthcare providers. These laws, commonly
known as the fraud and abuse laws, prohibit payments intended to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider of products and/or services. Violation of these laws can result in a
loss of licensure, civil and criminal penalties and exclusion from various
federal and state healthcare programs. The Company expends considerable
resources in connection with compliance efforts. Management believes that the
Company is in compliance with federal and state regulations applicable to its
business.
The
Company is also impacted by the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA"), which mandates, among other things, the adoption of
standards to enhance the efficiency and simplify the administration of the
healthcare system. HIPAA requires the Department of Health and Human Services to
adopt standards for electronic transactions and code sets for basic healthcare
transactions such as payment and remittance advice ("transaction standards");
privacy of individually identifiable healthcare information ("privacy
standards"); security and electronic signatures ("security standards"), as wells
as unique identifiers for providers, employers, health plans and individuals;
and enforcement. The Company is required to comply with these standards and is
subject to significant civil and criminal penalties for failure to do so.
Management believes the Company is in compliance with these standards. There can
be no assurance, however, that future changes will not occur which the Company
may not be, or may have to incur significant costs to be, in compliance with new
standards or regulations. Management anticipates that federal and state
governments will continue to review and assess alternate healthcare delivery
systems, payment methodologies and operational requirements for pharmacies.
Given the continuous debate regarding the cost of healthcare services,
management cannot predict with any degree of certainty what additional
healthcare initiatives, if any, will be implemented or the effect any future
legislation or regulation will have on the Company.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less, when purchased, to be cash equivalents.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or estimated market, and
consist primarily of pharmaceutical drugs. Market is determined by comparison
with recent sales or net realizable value. Net realizable value is based on
management’s forecasts for sales of the Company’s products or services in the
ensuing years and/or consideration and analysis of changes in customer base,
product mix, payor mix, third party insurance reimbursement levels or other
issues that may impact the estimated net realizable value. Management regularly
reviews inventory quantities on hand and records a reserve for shrinkage and
slow-moving, damaged and expired inventory, which is measured as the difference
between the inventory cost and the estimated market value based on management’s
assumptions about market conditions and future demand for the Company’s
products. Such reserve was insignificant to the accompanying consolidated
financial statements. Should the demand for the Company’s products prove to be
significantly less than anticipated, the ultimate net realizable value of the
Company’s inventories could be substantially less than reflected in the
accompanying consolidated balance sheet.
Property
and Equipment
Property
and equipment are stated at cost, and are being depreciated using the
straight-line method over the estimated useful lives of the related assets,
which generally range between three and five years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the estimated useful
lives of the assets or the remaining lease terms. Maintenance and repairs are
charged to expense as incurred. Significant renewals and betterments are
capitalized. At the time of retirement, other disposition of property and
equipment or termination of a lease, the cost and accumulated depreciation or
amortization are removed from the accounts and any resulting gain or loss is
reflected in results of operations.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
and Intangible Assets
Statement
of Financial Accounting standard (“SFAS”) No. 142, "Goodwill
and Other Intangible Assets",
which is effective for fiscal years beginning after December 15, 2001, addresses
how intangible assets that are acquired individually or with a group of other
assets should be accounted for upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and identifiable intangible assets that have indefinite lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their estimated useful
lives.
SFAS
No. 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. In addition, SFAS No. 142 expands the
disclosure requirements about intangible assets in the years subsequent to their
acquisition. Impairment losses for goodwill and indefinite-life intangible
assets that arise due to the initial application of SFAS No. 142 are to be
reported as a change in accounting principle.
For
additional information, see the discussion in
“Long-Lived Assets” immediately below.
Long-Lived
Assets
In
July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
144, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. If the cost basis of a
long-lived asset is greater than the projected future undiscounted net cash
flows from such asset, an impairment loss is recognized. Impairment losses are
calculated as the difference between the cost basis of an asset and its
estimated fair value. SFAS No. 144 also requires companies to separately report
discontinued operations, and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are reported
at the lower of the carrying amount or the estimated fair value less costs to
sell.
In
March 2004, management determined that the license underlying the license
agreement entered into with Safescript Pharmacies, Inc. was 100% impaired (See
Note 4).
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business
Combinations
SFAS
No. 141, "Business
Combinations,"
which is effective for transactions initiated after June 30, 2001, eliminates
the pooling of interest method of accounting for business combinations and
requires that all business combinations occurring after July 1, 2001 be
accounted for using the purchase method. The adoption of SFAS No. 141 did not
have an impact on the Company’s consolidated financial statements.
Emerging
Issues Task Force ("EITF") No. 98-3, "Determining
Whether a Nonmonetary Transaction Involves Receipt of a Productive Asset or of a
Business,"
defines the elements necessary to evaluate whether a business has been received
in a nonmonetary exchange transaction. EITF 98-3 defines a business as a
self-sustaining integrated set of activities and assets conducted and managed
for the purpose of providing a return to investors. A business consists of (a)
inputs, (b) processing applied to those inputs, and (c) resulting outputs that
are used to generate revenues. Pursuant to EITF 98-3, since the acquisition of
certain assets (See Note 4) did not have all the required elements to be
considered the purchase of a business, the Company recorded the transaction as
an asset purchase.
Revenue
Recognition
The
Company generates revenue from prescription drug sales which primarily are
reimbursed by healthcare insurance carriers and government agencies. The
Company’s ultimate expected revenue may be adjusted for contractual allowances
by such third parties and are adjusted to actual as cash is received and charges
are settled. The Company is monitoring its revenues from these sources and is
creating several criteria in developing a historical trend analysis based on
actual claims paid in order to estimate these potential contractual allowances
on a monthly basis. As the Company is considered to be in the startup stage and
lacks sufficient operational history, management is unable to determine the
fixed settlement of such revenue. Therefore, the Company is recognizing revenue
on a cash basis until such time as management has developed the history and
trends to estimate potential contractual adjustments. On an accrual basis, the
Company would have recorded additional revenue of approximately $221,000 in
2004.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising
The
Company expenses the cost of advertising when incurred. Advertising costs for
the years ended December 31, 2004 and November 30, 2003 were immaterial to the
consolidated financial statements, and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Exit
and Disposal Activities
The
Company accounts for expenses related to non-discretionary restructuring
activities (including workforce reductions) in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit and Disposal Activities.” GAAP
prohibits the recognition of an exit-activity liability until (a) certain
criteria (which demonstrate that it is reasonably probable that a present
obligation to others has been incurred) are met, and (b) the fair value of such
liability can be reasonably estimated. The Company recorded a
restructuring charge of approximately $48,000 in calendar 2004. See Note 7
for additional information.
Stock-Based
Compensation
The
Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
(“APB”) Opinion No. 25, "Accounting
for Stock issued to Employees" and
related interpretations. Under the intrinsic value based method, compensation
expense is the excess, if any, of the fair value of the stock at the grant date
or other measurement date over the amount an employee must pay to acquire the
stock. Compensation expense, if any, is recognized over the applicable service
period, which is usually the vesting period.
SFAS
No. 123, "Accounting
for Stock-Based Compensation,"
if fully adopted, changes the method of accounting for employee stock-based
compensation to the fair value based method. For stock options and warrants,
fair value is estimated using an option pricing model that takes into account
the stock price at the grant date, the exercise price, the
expected
life of the option or warrant, stock volatility and the annual rate of quarterly
dividends. Compensation expense, if any, is recognized over the applicable
service period, which is usually the vesting period.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based
Compensation (continued)
The
adoption of the accounting methodology of SFAS No. 123 is optional and the
Company has elected to account for stock-based compensation issued to employees
using APB No. 25; however, pro forma disclosures, as if the Company had adopted
the cost recognition requirement of SFAS No. 123, are required to be presented.
For stock-based compensation issued to non-employees, the Company uses the fair
value method of accounting under the provisions of SFAS No. 123.
FASB
Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
25," clarifies
the application of APB No. 25 for (a) the definition of employee for purpose of
applying APB No. 25, (b) the criteria for determining whether a stock option
plan qualifies as a non-compensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. Management believes that the Company accounts for
transactions involving stock compensation in accordance with FIN
44.
SFAS
No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
No. 123,"
was issued in December 2002 and is effective for fiscal years ending after
December 15, 2002. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. At
December 31, 2004 the Company has one stock-based employee compensation plan
which is described more fully in Note 6. The following table illustrates the
effect on net loss and loss per common share for the years ended December 31,
2004 and November 31, 2003, as if the Company had applied the fair value
recognition provisions of SFAS No. 123 for all of its stock-based employee
compensation plans.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based
Compensation (continued)
| |
|
2004 |
|
2003 |
|
|
Net
(loss) as reported |
|
$ |
(8,011,287 |
) |
$ |
(1,458,995 |
) |
|
Stock
based compensation,
net of tax |
|
|
(8,550 |
) |
|
-
|
|
|
Pro
forma net (loss) |
|
$ |
(8,019,837 |
) |
$ |
(1,458,995 |
) |
|
Basic
and diluted (loss)
per
common share: |
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(0.18 |
) |
$ |
(0.06 |
) |
|
Pro
forma |
|
$ |
(0.18 |
) |
$ |
(0.06 |
) |
The
assumptions used in the Black Scholes
option pricing model for the years ended December 31, 2004 and November 30, 2003
were as follows:
| |
2004 |
|
2003 |
| |
|
|
|
|
Discount
rate |
5% |
|
- |
|
Volatility |
1.3 |
|
- |
|
Expected
life (years) |
3.0 |
|
- |
|
Expected
dividend yield |
- |
|
- |
The
above proforma effects of applying SFAS 123 are not necessarily representative
of the impact on the results of operations for future years.
Basic
and Diluted Loss Per Common Share
The
Company computes loss per common share using SFAS No. 128 “Earnings
Per Share”.
Basic loss per share is computed by dividing net loss applicable to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted loss per share reflects the potential dilution that
could occur if securities or other contracts, such as stock options and warrants
to issue common stock, were exercised or converted into common stock. There were
no dilutive potential common shares at December 31, 2004. Because the Company
has incurred net losses and there are no potential common shares, basic and
diluted loss per common share are the same.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income
Taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting
for Income Taxes".
SFAS No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or income tax returns. Under this method deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates for the year in which the differences are expected to reverse (See Note
9).
Recently
Issued Accounting Pronouncements
In
January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51." The primary objectives
of FIN No. 46 are to provide guidance on the identification of entities for
which control is achieved through means other than voting rights (variable
interest entities, or "VIEs"), and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity for which either (1) the equity investors do not have a controlling
financial interest; or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN No. 46 requires that both
the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. As amended in December 2003, the
effective dates of FIN No. 46 for public entities that are small business
issuers, as defined ("SBIs"), are as follows: (a) For interests in
special-purpose entities: periods ended after December 15, 2003; and (b) For all
other VIEs: periods ended after December 15, 2004. The December 2003 amendment
of FIN No. 46 also includes transition provisions that govern how an SBI which
previously adopted the pronouncement (as it was originally issued) must account
for consolidated VIEs. Management has concluded that the Company does not have a
significant variable interest in any VIEs.
In
April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. This pronouncement is effective for contracts entered into
or modified after June 30, 2003 (with certain exceptions), and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's consolidated
financial statements.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently
Issued Accounting Pronouncements
In
May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for public companies as follows: (i) in November 2003, the FASB
issued FASB Staff Position (“FSP”) FAS 150-03 (“FSP 150-3”), which defers
indefinitely (a) the measurement and classification guidance
of SFAS No. 150 for all mandatorily redeemable non-controlling interests in (and
issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150’s
measurement guidance for other types of mandatorily redeemable non-controlling
interests, provided they were created before November 5, 2003; (ii) for
financial instruments entered into or modified after May 31, 2003 that are
outside the scope of FSP 150-3; and (iii) otherwise, at the beginning of the
first interim period beginning after June 15, 2003. The Company adopted SFAS No.
150 on the aforementioned effective dates. The adoption of this pronouncement
did not have a material impact on the Company’s results of operations or
financial condition.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. In Chapter 4
of ARB 43, paragraph five previously stated that "...under some circumstances,
items such as idle facility expense, excessive spoilage, double freight, and
re-handling costs may be so abnormal as to require treatment as current period
charges...." SFAS No. 151 requires that such items be recognized as
current-period charges, regardless of whether they meet the criterion of “so
abnormal” (an undefined term). This pronouncement also requires that allocation
of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is effective for inventory
costs incurred in years beginning after June 15, 2005.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently
Issued Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, and
supersedes APB Opinion No. 25. Small Business Issuers are required to apply SFAS
No. 123-R in the first interim reporting period that begins after December 15,
2005. Thus, the Company's consolidated financial statements will reflect an
expense for (a) all share-based compensation arrangements granted after December
31, 2005 and for any such arrangements that are modified, cancelled, or
repurchased after that date, and (b) the portion of previous share-based awards
for which the requisite service has not been rendered as of that date, based on
the grant-date estimated fair value.
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."
The amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured using the estimated fair value of the
assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary
exchanges of similar productive assets, and replaces it with a broader exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has "commercial substance" if the future cash flows of the
entity are expected to change significantly as a result of the transaction. This
pronouncement is effective for nonmonetary exchanges in fiscal periods beginning
after June 15, 2005.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants, and
the Securities and Exchange Commission (the “SEC”) did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
3.
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following at December 31, 2004:
| |
|
|
|
|
Furniture
and equipment |
|
$ |
41,961 |
|
|
Computer
equipment and information systems |
|
|
296,816 |
|
|
Leasehold
improvements |
|
|
454,475 |
|
| |
|
|
793,252 |
|
| |
|
|
|
|
|
Less
accumulated depreciation and amortization |
|
|
(53,058 |
) |
| |
|
$ |
740,194 |
|
4.
INTANGIBLE ASSETS
In
2003, the Company acquired the rights to an exclusive license ("License") to
operate Safescript Pharmacies in California, Oregon, Washington, and Alaska from
Safescript Pharmacies, Inc., formerly known as RTIN Holdings, Inc., (the
"Licensor"). In connection with this transaction, the Company assumed a note
payable to the Licensor (see Note 5), executed a new note payable with its
former Chief Executive Officer (see Note 5) and paid $370,000 in
cash.
On
March 12, 2004,
the
Company entered into a technology license agreement ("Technology License") with
Network Technology, Inc. ("RxNT"). The Technology License grants the Company the
right to use RxNT’s e-prescribing technology under the Company’s brand name
"Assured Script". Pursuant to the Technology License agreement, the Company paid
RxNT $50,000 at the execution of the agreement and $50,000 at the launch of the
Company’s branded pharmacy. At December 31, 2004, the Company has paid $100,000
which has been recorded in property and equipment in the accompanying
consolidated balance sheet.
On
March 17, 2004, the Company filed a lawsuit in Nevada State Court against the
Licensor seeking damages, declaratory relief, to rescind the License and to
recover the consideration paid therefor. On March 19, 2004, the Licensor filed
for Chapter 11 bankruptcy protection. The litigation in Nevada State Court has
been stayed by reason of the Licensor filing for bankruptcy. The Company refiled
substantially the same claim as an adversary proceeding in the Licensor’s
bankruptcy case in the U.S. Bankruptcy court in Tyler, Texas. In July 2004, this
case was transferred to the U.S. District Court for the Eastern District of
Texas located in Tyler, Texas.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
4.
INTANGIBLE ASSETS (continued)
As
of March 31, 2004, management determined that the License was 100% impaired
based on (a) the uncertainty of the Licensor’s ability to continue as a going
concern, which created substantial doubt about the Licensor’s ability to support
their e-prescribing technology, (b) the Company’s dispute with the Licensor, and
(c) the Company’s implementation of the RxNT technologies at its first two
pharmacies. Accordingly, the Company impaired the entire intangible asset of
approximately $2,997,000 in the accompanying consolidated statement of
operations.
5.
NOTES PAYABLE TO RELATED PARTY AND STOCKHOLDERS
The
Company assumed a note payable (“Note A”) of approximately $3,177,000 in
connection with acquisition of a License (see Note 4), of which $2,000,000 was
converted into 4,444,444 shares of the Company’s restricted common stock. The
remaining balance of approximately $1,177,000 was payable in monthly
installments of $25,000 including interest at 5% per annum with a balloon
payment of approximately $802,000 due in December 2004. Note A is secured by the
License. At December 31, 2004, the total outstanding principal balance of Note A
approximated $1,013,000, and monthly installments were eleven months in arrears
due to the Company’s dispute with the Licensor (See Note 4).
The
Company executed a note payable (“Note B”) with a stockholder for $370,000 in
connection with the acquisition of a License (see Note 4). Note B accrues
interest at a fixed rate of 5% per annum. Note B is secured by the License and
matures in December 2007. At December 31, 2004, the total outstanding principal
balance on Note B was $370,000 and accrued interest expense of approximately
$20,000 has been included in the accompanying consolidated balance sheet.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
5.
NOTES PAYABLE TO RELATED PARTY AND STOCKHOLDERS (continued)
In
December 2004, the Company executed a note payable (“Note C”) with a shareholder
for the purpose of purchasing inventory for our pharmacies. Note C is for a
maximum of $150,000 and matures on the earlier of March 6, 2005 or the date that
the Company is able to consummate an accounts receivable factoring arrangement
for its working capital. The outstanding principal amount of Note C bears
interest at a rate of three percent (3%) per month. In consideration of Note C,
the Company agreed to pay an administrative fee of $1,500 and a financing fee of
$2,100. In addition to these fees, the Company agreed to pay by the fifth day of
every month from January 2005 until the principal amount is repaid an
administrative fee of $1,875 and a financing fee of $2,675. As of December 31,
2004, the total outstanding balance on Note C was $50,000. Subsequent to
December 31, 2004, this shareholder was appointed as the Company’s Chief
Executive Officer (“CEO”).
6.
EQUITY TRANSACTIONS
Common
Stock
During
the one month transition period ended December 31, 2003, the Company issued
1,544,149 shares of restricted common stock to consultants for services rendered
valued at approximately $664,000 (estimated to be fair value based on the
trading price on the issuance date).
During
the year ended December 31, 2004, the Company issued 500,000 shares of
restricted common stock to a investment banker for services
valued at approximately $280,000 (estimated to be fair value based on
the trading price on the issuance date) included in consulting and other
compensation in the accompanying consolidated statement of operations.
During
the year ended December 31, 2004, in connection with the extension of a
consulting agreement with the aforementioned investment banker, the Company
issued 150,000 shares of restricted common stock, with warrants to purchase
350,000 shares of the Company’s common stock, exercisable at $0.60 per share for
a period of five years from the date of issuance, to the investment banker
for services rendered. The 150,000 shares of restricted common stock were valued
at approximately $70,500 (estimated to be fair value based on the trading price
on the issuance date) and the 350,000 warrants were valued at approximately
$196,000 (estimated to be fair value based on the Black-Scholes pricing model on
the issuance date).
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
6.
EQUITY TRANSACTIONS (continued)
Common
Stock (continued)
Such
expense included in consulting and other compensation in the accompanying
consolidated statement of operations. Subsequent to December 31, 2004, the
investment banking firm’s president (who is the stockholder/creditor referenced
in the third paragraph of Note 5) was appointed as the Company’s
CEO.
During
the year ended December 31, 2004, the Company issued 716,625 shares of
restricted common stock to consultants for services rendered valued at
approximately $268,400 (estimated to be fair value based on the trading price on
the issuance date).
During
the year ended December 31, 2004, the Company issued 20,000 shares of restricted
common stock in connection with notes payable issued to certain shareholders and
third parties valued at approximately $9,500 (estimated to be fair value based
on the trading price on the issuance date).
During
the year ended December 31, 2004, the Company completed its offering of common
stock to accredited investors through a private placement. The Company offered a
maximum of 4,375,000 units at a price of $0.80 per unit, with a minimum offering
of 625,000 units. Each unit consisted of two shares of restricted common stock
and one warrant to purchase one share of restricted common stock at an exercise
price of $0.60 per share exercisable for twenty-four months after June 17, 2004.
The Company agreed to commence the registration process with the SEC for the
common stock issued and the common stock underlying the warrants within ninety
days after the (June 17, 2004) termination date of this offering. If the average
closing price of the Company’s common stock on the OTC Bulletin Board for the
thirty consecutive trading days following the effectiveness of the registration
statement is equal to or greater than $1.20, the Company has the right to call
the warrants at the exercise price within fifteen business days of such
occurrence. During the three months ended June 30, 2004, the Company issued
7,391,750 shares of its restricted common stock in connection with the private
placement. The Company received proceeds of $2,650,152, net of broker/dealer
commission, legal fees, and Blue Sky fees related to the private placement of
$306,548 which were recorded in additional paid-in capital in the accompanying
consolidated balance sheet.
On
December 15, 2004, the Company filed the registration statement described in the
preceding paragraph (the “Registration Statement”) with the SEC. The Company has
since received comments on the Registration Statement from the SEC. However,
pending the filing of the Company’s December 31, 2004 Form 10-KSB, the Company
had not amended the Registration Statement as of April 8, 2005. Thus, as of that
date, the Registration Statement had not been declared effective.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
6.
EQUITY TRANSACTIONS (continued)
Common
Stock (continued)
During
the year ended December 31, 2004, the Company issued 225,003 shares of
restricted common stock to two of its directors for services rendered valued at
approximately $80,000 (estimated to be fair value based on the trading price on
the issuance date). Such amount is included in consulting and other compensation
in the accompanying consolidated statement of operations.
Warrants
During
the year ended December 31, 2004, in connection with the private placement
described above, the Company issued 3,695,875 warrants to purchase one share of
restricted common stock at an exercise price of $0.60 exercisable for
twenty-four months from June 17, 2004.
During
the year ended December 31, 2004, the Company issued warrants to purchase
100,000 shares of the Company’s common stock, exercisable at $0.60 per share for
a period of five years from the date of issuance, to a consultant. The
warrants are valued at approximately $56,000 (estimated to be fair value based
on the Black-Scholes pricing model on the issuance date). Such expense is
included in consulting and other compensation in the accompanying consolidated
statement of operations.
The
number of outstanding and exercisable warrants as of December 31, 2004 provided
below:
| |
|
Number
of Shares |
|
Weighted-Average
Exercise Price |
|
|
Warrants
outstanding and exercisable at
January
1, 2004 |
|
|
- |
|
$ |
- - |
|
|
Granted |
|
|
4,145,875 |
|
$ |
0.60 |
|
|
Warrants
outstanding and exercisable at
December
31, 2004 |
|
|
4,145,875 |
|
$ |
0.60 |
|
No
warrants were issued prior to January 1, 2004.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
6.
EQUITY TRANSACTIONS (continued)
Stock
Options
During
the year ended November 30, 2003, the Company’s Board of Directors approved an
Incentive Stock Option Plan ("ISOP") to grant options to its key personnel.
There are two types of options that can be granted under the ISOP: i) options
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code ("Qualified Stock Options"), and ii) options not specifically
qualified for favorable income tax treatment under the Internal Revenue Code
("Non-Qualified Stock Options"). The ISOP is administered by the Company’s board
of directors or the compensation committee (the "Administrator"). The Company is
authorized to grant qualified stock options to any of its employees or
directors.
The
purchase price for the shares subject to any option shall be determined by the
ISOP Administrator at the time of the grant, but shall not be less than 85% of
the fair market value per share of the Company’s common stock on the grant date.
Except as described below, the purchase price for the shares subject to any
Qualified Stock Option shall not be less than 100% of fair market value per
share of common stock on the grant date. In the case of any Qualified Stock
Option granted to an employee who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company, or any of
its subsidiaries, the option price shall not be less than 110% of the fair
market value per share of the Company’s common stock on the grant
date.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
6.
EQUITY TRANSACTIONS (continued)
Stock
Options (continued)
No
option shall be exercisable after the expiration of the earliest of: (a) ten
years after the option is granted, (b) three months after the optionee’s
employment with the Company and its subsidiaries terminates, or a non-employee
director or consultant ceases to provide services to the Company, if such
termination or cessation is for any reason other than disability or death, or
(c) one year after the optionee’s employment with the Company and its
subsidiaries terminates, or a non-employee director or consultant ceases to
provide services to the Company, if such termination or cessation is a result of
death or disability; provided, however, that the agreement for any option may
provide for shorter periods in each of the foregoing instances.
The
ISOP Administrator has the right to set the period within which each option
shall vest or be exercisable and to accelerate such time frames; provided
however each option shall be exercisable at the rate of at least 20% per year
from the grant date. Unless otherwise provided by the ISOP Administrator, each
option will not be subject to any vesting requirements.
For
the year ended December 31, 2004, under the ISOP, the Company granted options to
purchase 165,000 shares of common stock to employees. The stock options have an
exercise price of $0.50 per share and vest one-third each consecutive year
following the date of grant. Such stock options expire on the earlier of three
years after vesting or ninety days after termination of employment with the
Company.
| |
|
Number
of Shares |
|
Weighted-Average
Exercise Price |
|
|
Options
outstanding and exercisable at
January
1, 2004 |
|
|
- |
|
$ |
- |
|
|
Granted |
|
|
165,000 |
|
$ |
0.50 |
|
|
Cancelled
or forfeited |
|
|
(110,000 |
) |
$ |
0.50 |
|
|
Options
outstanding at
December
31, 2004 |
|
|
55,000 |
|
$ |
0.50 |
|
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
6.
EQUITY TRANSACTIONS (continued)
Stock
Options (continued)
The
number of outstanding and exercisable options as of December 31, 2004 is
provided below:
| |
|
Outstanding |
|
Exercisable |
|
Range
of Exercise Price |
|
Number
of Shares |
Weighted-Average
Exercise Price |
Weighted-Average
Remaining Life (Years) |
|
Number
of Shares |
Weighted-Average
Exercise Price |
Weighted-Average
Remaining Life (Years) |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
$0.50 |
|
55,000 |
$0.50 |
0.8 |
|
- |
$- |
- |
| |
|
|
|
|
|
|
|
|
7.
RESTRUCTURING COSTS
Because
the Company’s revenue and operating margin had not grown in line with
managements original expectations, the Company adopted a non-discretionary
restructuring plan that resulted in a workforce reduction and other cost
reductions (collectively, the “Restructuring”) intended to strengthen the
Company’s future operating performance. The Company has implemented the
Restructuring during the fourth quarter of calendar 2004. The Company’s
total charge related to this Restructuring was approximately
$48,000.
The
Restructuring charge recognized during 2004 is comprised primarily of: (i)
severance pay (including related payroll taxes) and associated one-time employee
termination costs related to the reduction of the Company’s workforce; (ii) the
closure and; (iii) terminating the construction of leasehold improvements at two
of the Company’s planned pharmacies and vacating the premises; and (iv)
professional fees incurred to improve the financial and competitive position of
the Company. The Company accounts for the costs associated with exiting an
activity, including costs associated with the reduction of the Company’s
workforce, in accordance with SFAS 146.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
7.
RESTRUCTURING COSTS (continued)
The
following table summarizes the Company’s Restructuring-related expenses incurred
during the year ended December 31, 2004:
| |
|
|
|
|
Employee
termination costs |
|
$ |
18,000 |
|
|
Professional
fees |
|
|
30,000 |
|
| |
|
|
|
|
| |
|
$ |
48,000 |
|
As
part of the Restructuring, the Company has reduced its workforce by a total of
seventy one employees, from 22 to 17 (which includes voluntary resignations) or
approximately 23% of its workforce.
8.
OTHER RELATED PARTY TRANSACTIONS
During
the fiscal year ended December 31, 2004, the Company appointed three physicians,
who are also customers, to its Professional Advisory Board ("Advisory Board").
Pursuant to the Advisory Board agreement, the Company is to issue 10,000 shares
of restricted common stock annually, compensate the physicians $1,500 per
speaking engagement and $1,500 per Advisory Board meeting.
For
the years ended December 31, 2004 and November 30, 2003, the Company recorded
approximately $320,000 and $414,000 of revenue from these physicians,
respectively.
On
January 26, 2004, the Company entered into an agreement with Brockington
Securities, Inc. (“Brockington”) to act as its financial advisor, investment
banker, and placement agent. Pursuant to this agreement, Brockington received
500,000 shares of its common stock. As more fully described in the third
paragraph of Note 6, on June 18, 2004, our board of directors approved an
extension for an additional term of eighteen months to the agreement entered
into with Brockington. Mr. Robert DelVecchio, who is the President of
Brockington, became the Company’s CEO on February 3, 2005.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
9. INCOME
TAXES
A
reconciliation of income taxes computed at the U.S. Federal Statutory income tax
rate to the provision for income taxes is as follows:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
U.S.
Federal Statutory tax at 34% |
|
$ |
(2,907,000 |
) |
$ |
(527,000 |
) |
|
State
Taxes, net of federal benefit |
|
|
(513,000 |
) |
|
(93,000 |
) |
|
Valuation
Allowance |
|
|
3,420,000 |
|
|
620,000 |
|
| |
|
|
|
|
|
|
|
|
Provision
for income taxes |
|
$ |
- |
|
$ |
- |
|
The
net deferred income tax asset (liability) consists of the following at December
31, 2004 and November 30, 2003:
| |
|
2004 |
|
2003 |
|
| |
|
|
|
|
|
|
Net
Operating Losses |
|
$ |
2,904,000 |
|
$ |
620,000 |
|
|
Depreciable
Assets |
|
|
1,191,000 |
|
|
- |
|
|
Deferred
Tax Assets |
|
|
4,095,000 |
|
|
620,000 |
|
|
Valuation
Allowance |
|
|
(4,095,000 |
) |
|
(620,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
$ |
- |
|
Based
upon the net operating losses incurred since inception, management has
determined that it is more likely than not that the deferred tax assets as of
December 31, 2004 and 2003 will not be recognized. Consequently, the Company has
established a valuation allowance against the entire deferred tax
assets.
As
of December 31, 2004, the Company has federal and state net operating losses of
approximately $7,300,000 that begin to expire in 2022 and 2009 for federal and
state purposes, respectively.
The
utilization of some or all of the Company’s net operating losses may be severely
restricted now or in the future by a significant change in ownership as defined
under the provisions of Section 382 of the Internal Revenue Code of 1986, as
amended. In addition, utilization of the Company’s California net operating
losses for the years beginning in 2002 and 2003 has been suspended under state
law.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
10. LOSS
PER COMMON SHARE
The
following is a reconciliation of the numerators and denominators of the basic
and diluted loss per common share computations for the years ended December 31,
2004 and November 30, 2003.
| |
|
Year
Ended December 31, 2004 |
|
Year
Ended November 30, 2003 |
|
| |
|
|
|
|
|
Numerator
for basic and diluted loss
per
common share: |
|
|
|
|
|
|
|
|
Net
loss charged to common stockholders |
|
$ |
(8,011,287 |
) |
$ |
(1,458,995 |
) |
| |
|
|
|
|
|
|
|
|
Denominator
for basic and diluted loss
per
common share: |
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding |
|
|
41,112,800 |
|
|
24,115,700 |
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share |
|
$ |
(0.19 |
) |
$ |
(0.06 |
) |
11.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company occupies buildings and retail space under operating lease agreements
expiring on various dates through June 2010 with monthly payments ranging from
approximately $600 to $5,600. Certain leases include future rental escalations
and renewal options.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
11.
COMMITMENTS AND CONTINGENCIES (continued)
Operating
Leases (continued)
At
December 31, 2004 future minimum payments under operating leases approximated
the following for the years ending December 31, 2005 and
thereafter:
|
2005 |
|
$ |
296,684 |
|
|
2006 |
|
|
265,680 |
|
|
2007 |
|
|
271,046 |
|
|
2008 |
|
|
265,155 |
|
|
2009 |
|
|
187,184 |
|
|
Thereafter |
|
|
33,980 |
|
| |
|
$ |
1,319,729 |
|
Total
rent expense for the years ended December 31, 2004 and November 30, 2003 was
approximately $217,000 and $20,000 is included in selling, general, and
administrative expenses in the accompanying consolidated statement of
operations.
Legal
Matters
From
time to time, the Company may be involved in various claims, lawsuits, disputes
with third parties, actions involving allegations of discrimination or breach of
contract actions incidental to the normal operations of the business.
Providing
pharmacy services entails an inherent risk of medical and professional
malpractice liability. The Company may be named as a defendant in such lawsuits
and thus become subject to the attendant risk of substantial damage awards. The
Company believes it possesses adequate professional and medical malpractice
liability insurance coverage. There can be no assurance, however, that the
Company will not be sued, that any such lawsuit will not exceed our insurance
coverage, or that it will be able to maintain such coverage at acceptable costs
and on favorable terms.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
11.
COMMITMENTS AND CONTINGENCIES (continued)
Legal
Matters (continued)
Safescript
Pharmacies, Inc. (formerly known as RTIN, Inc.) failed to provide us with
essential services as set forth in the license agreement that they entered into
and this has forced us to terminate our use of all technology granted under the
license agreement entered into with Safescript Pharmacies, Inc. On March 17,
2004, we filed a lawsuit in Nevada State Court against Safescript Pharmacies,
Inc. seeking damages, declaratory relief, to rescind the License and to recover
the consideration paid. On March 19, 2004, Safescript Pharmacies, Inc. filed for
Chapter 11 bankruptcy protection. The litigation in Nevada State Court has been
stayed by reason of Safescript Pharmacies, Inc.’s filing for bankruptcy. We
refiled substantially the same claim as an adversary proceeding in Safescript
Pharmacies, Inc.’s bankruptcy case, which was pending in the U.S. Bankruptcy
Court located in Tyler, Texas. In July 2004, this case was transferred to the
U.S. District Court for the Eastern District of Texas located in Tyler,
Texas.
On
April 14, 2004, a former officer filed a lawsuit against us in Orange County
California Superior Court. The former officer is seeking additional compensation
in the amount of $213,000 and other relief that the court deems just and
appropriate. This lawsuit is in the early stages and its outcome is not
reasonably predictable. Management believes
the lawsuit is without merit and the Company is aggressively defending this
case.
Other
than as disclosed herein, the Company is not currently involved in any
litigation which it believes could have a material adverse effect on its
financial position or results of operations.
12.
SUBSEQUENT EVENTS
On
February 1, 2005, the Company entered into Termination and Settlement Agreements
(“Settlement Agreement”) with Mr. David Parker and Mr. A.J. LaSota. Mr. Parker
and Mr. LaSota resigned from their positions as officers and directors. In
accordance with the terms of these agreements, Mr. Parker and Mr. LaSota
returned to the corporate treasury 5,400,000 and 429,353 shares of the Company’s
common stock respectively. Also on February 1, 2005, the Company entered into a
Settlement Agreement with Ron Folse, the former Executive Vice President. In
accordance with the terms of this agreement, Mr. Folse returned to the corporate
treasury 429,353 shares of the Company’s common stock.
eRXSYS,
INC. AND SUBSIDIARIES
(Formerly
Known As Surforama.com, Inc.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2004, November 30, 2003, and the One Month
Transition
Period Ended December 31, 2003
12.
SUBSEQUENT EVENTS (continued)
On
February 23, 2005, the Company entered into an accounts receivable servicing and
line of credit agreement with Mosaic Financial Services, LLC. Under the terms of
the line of credit agreement, the Company can draw a maximum of $500,000 to
purchase inventory. Beginning July 1, 2005, the maximum amount of the available
line of credit will be increased to $700,000. These agreements are for a term of
one year and will automatically renew for another one year period unless either
party provides notice to the other of termination within 180 days prior to the
end of the effective term.
Item 8: Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
No events
occurred requiring disclosure under Item 304(b) of Regulation S-B.
We
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of December 31, 2004. This evaluation was carried
out under the supervision and with the participation of our former Chief
Executive Officer and Chief Financial Officer, Mr. David Parker. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of December 31, 2004, our disclosure controls and procedures are of
limited effectiveness. There have been no significant changes in our internal
controls over financial reporting during the quarter ended December 31, 2004
that have materially affected or are reasonably likely to materially affect such
controls.
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
Limitations
on the Effectiveness of Internal Controls
Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
None.
PART
III
Item 9: Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act
The
following information sets forth the names of our directors and executive
officers, their ages and their present positions with the Company as of April 5,
2005.
|
Name |
Age |
Office(s)
Held |
|
Robert
DelVecchio |
40 |
Chief
Executive Officer, Chief Financial Officer, &
Director |
|
James
Manfredonia |
43 |
Director |
|
Richard
Falcone |
51 |
Director |
Set forth
below is a brief description of the background and business experience of each
of our current executive officers and directors.
Robert
DelVecchio. On
February 3, 2005, our board of directors appointed Mr. Robert DelVecchio to
serve as Chief Executive Officer. Mr. DelVecchio was appointed as our Chief
Financial Officer and as a member of the board of directors on March 31, 2005.
Since 1995, Mr. Delvecchio has acted as Chief Executive Officer and President of
Brockington Securities, Inc., a broker-dealer who is a member of the National
Association of Securities Dealers.
James
Manfredonia. Mr.
Manfredonia was appointed to the board of directors of eRXSYS, Inc. in June
2004. Since 2002, Mr. Manfredonia has served as manager of listed equity trading
and New York Stock Exchange operations at Bear Stearns. Mr. Manfredonia
currently serves as the Chairman of the New York Stock Exchange Upstairs Traders
Advisory Committee and as a member of the Market Performance Committee of the
New York Stock Exchange. Prior to joining Bear Stearns, Mr. Manfredonia worked
for ten years at Merrill Lynch where he managed the listed trading desk with
additional responsibilities for NASDAQ, portfolio trading, sales trading, and
NYSE staff. Mr. Manfredonia was the founding general partner of Blair
Manfredonia Limited Partners, a hedge fund/broker-dealer. Mr. Manfredonia has
also worked at Lehman Brothers, Salomon Brothers, and Drexel Burnham.
Richard
Falcone. Mr.
Falcone was appointed to the board of directors of eRXSYS, Inc. in July 2004.
Since 2001, Mr. Falcone has served as Chief Financial Officer of The A
Consulting Team, Inc., an IT service company. Mr. Falcone has served as Chief
Financial Officer of Netgrocer.com. In 1990, Mr. Falcone joined Bed Bath &
Beyond, Inc. as its Chief Financial Officer. In 1983, Mr. Falcone joined Tiffany
& Co. and served as Manager of Audit, Director of Financial Control, and
Director of International Finance and Operations. Mr. Falcone has also worked at
PriceWaterhouseCoopers & Co., an international public accounting firm.
The
following information sets forth the names of former directors and executive
officers, their ages and period of service with the Company.
|
Name |
Age |
Office(s)
Previously Held |
Period
of Service |
|
David
B. Parker |
49 |
Chairman
of the Board of Directors, Chief Executive Officer, Chief Financial
Officer |
April 2003 - February 2005 |
|
A.J.
LaSota |
61 |
President
and Director |
July 2003 - February 2005 |
|
Ron
Folse |
59 |
Executive
Vice President |
July 2003 - November 2004 |
|
Michael
Doan |
32 |
Secretary
and Treasurer |
January
2004 - December 2004 |
|
Dr.
Geoffrey S. Carroll |
48 |
Director |
October 2004 - February 2005 |
|
Annette
M. McEvoy |
54 |
Director |
October 2004 - February 2005 |
David
B. Parker. Mr.
Parker served as Chief Executive Officer of eRXSYS, Inc. from April 2003 until
February 1, 2005. From April 2003 to July 2003, Mr. Parker also served as
President our company. Mr. Parker founded RxSystems, Inc. in March 2002 and
served as its Chairman and Chief Executive Officer until its dissolution in
2003. RxSystems, Inc. was a private company that was formed to acquire a
franchise and never commenced operations. From December 2001 to June 2002, Mr.
Parker served as a business consultant and assisted early stage development
companies in preparing detailed business plans. Mr. Parker has more than 20
years of experience in the financial, merchant banking, and financial public
relations industries. Mr. Parker served as Vice President of Retail Sales for
Prudential Securities from November 1989 to December 1991. Mr. Parker launched
and operated his own independent consulting practice from January 1991 until
December 2001. During this time period, Mr. Parker’s duties were focused on
preparing detailed business plans for early stage development companies. From
August 1983 to February 1988, Mr. Parker was employed at Merrill Lynch Pierce
Fenner & Smith, where he rose to the position of executive Vice President.
Mr. Parker graduated from Texas Christian University in 1981.
A.J.
LaSota. Mr.
LaSota served as a member of the Board of Directors and as President of eRXSYS,
Inc. from July 2003 until February 1, 2005. From September 1995 to January 2003,
Mr. LaSota served as the Vice-President and General Manager of the Metrex
Division of Syborn Dental Specialties which is located in Orange, California and
traded on the New York Stock Exchange. From 1993 to 1995, Mr. LaSota served a
Vice President of Sales and Marketing for Metrex Research Corporation located in
Parker, Colorado. In 1990, Mr. LaSota was President and Co-Founder of Endolap,
Inc., a business which specializes in selling endoscopy surgical product to
hospital operating rooms and outpatient surgery centers in the United States.
Since its inception in September 2000, Mr. LaSota served as the Chairman of the
Board of Directors of Endolap, Inc. From 1976 to 1990, Mr. LaSota founded and
operated A.J. LaSota, Inc., a business which focused on selling specialty
surgical products to hospitals and surgery clinics. Mr. LaSota worked in sales
for Johnson & Johnson, Inc. from 1967 to 1976. Mr. LaSota graduated from
University of Florida, Gainesville in 1965.
Ron
Folse. Mr. Folse
served as Executive Vice President of eRXSYS, Inc. from July 2003 to November
2004. Prior to joining eRXSYS, Mr. Folse was CEO of Custom Healthcare, Inc., a
custom wheelchair company started in 1997 with single office in New Orleans.
Mr. Folse has over 35 years successful experience in direct medical sales,
both on a corporate level and as an entrepreneur. After a five year sales
career with Arbrook, Inc., a subsidiary of Johnson & Johnson, Mr. Folse
established Ron Folse Sales, Inc., a franchise for R. Wolf Medical Instruments,
Corp. Mr. Folse’s significant contributions included establishing training
course centers for surgeons training in the fields of Arthroscopy and
Laparoscopic
Cholecystectomy. From 1990 to 2000, Mr. Folse co-founded a specialty business
targeting physicians involved in frontier endoscopy procedures called Endolap,
Inc. Mr. Folse attended Louisiana State University, concentrating core
curriculum in management and marketing.
Michael
Doan. Mr. Doan
served as Secretary, Corporate Controller, and Treasurer of eRXSYS, Inc. from
January 2004 until December 31, 2004. Prior to joining eRXSYS, Mr. Doan was the
Assistant Controller in the Tax Compliance division of CCH, INC., a tax and
accounting software development company from December 2000 to December 2003,
located in Torrance, California. From November 1996 to June 2000 Mr. Doan was
employed at various public accounting firms located in Orange County,
California. While at the C.P.A. firms, Mr. Doan served as senior auditor for
both public and private companies in a wide variety of industries. Mr. Doan is a
certified public accountant in the State of California. Mr. Doan was conferred a
B.A. of Business Administration with a concentration in accounting from
California State University, Fullerton in 1996.
Dr.
Geoffrey S. Carroll. Dr.
Carroll was appointed to the board of directors of eRXSYS, Inc. in October 2004
and served until February 11, 2005. Dr. Carroll served as CEO and President of
LCCI International, a supplier of integrated end-to-end infrastructure services
to wireless telecommunications consumers from 1997 to 1998. From 1989 to 1996,
Dr. Carroll was employed by Electronic Data Systems, holding the positions of
member of the board of directors and Group Executive for Europe. Dr. Carroll
also served as CEO of Origin B.V., the information technology services
subsidiary of Philips N.V. from 1996 to 1997.
Annette
M. McEvoy. Ms.
McEvoy was appointed to the board of directors of eRXSYS, Inc. in October 2004
and served until February 16, 2005. Since September 2003, Ms. McEvoy has served
as President of A. McEvoy & Associates, a consumer product consulting firm.
In 1993, Ms. McEvoy joined Gryphon Development (Limited Brands, Inc.) and served
as the General Manager of Development of Body & Bath Works until September
2003. From June 2001 to September 2003, Ms. McEvoy also served as Executive Vice
President of Brand and Category planning. From 1992 to 1993, Ms. McEvoy joined
Revlon, Inc. and served as Senior Vice President of International Marketing and
later Senior Vice President of Marketing Beauty Care.
Term
of Office
Our
directors are appointed for a one-year term to hold office until the next annual
meeting of our shareholders or until removed from office in accordance with our
bylaws.
Our
executive officers are appointed by our board of directors and hold office until
removed by the board.
Family
Relationships
There are
no family relationships between or among the directors, executive officers or
persons nominated or chosen by the Company to become directors or executive
officers.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, during the past five years, none of the following
occurred with respect to a present or former director, executive officer, or
employee of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a
criminal
proceeding or being subject to a pending criminal proceeding (excluding traffic
violations and other minor offenses); (3) being subject to any order, judgment
or decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his or her involvement in any type of business,
securities or banking activities; and (4) being found by a court of competent
jurisdiction (in a civil action), the SEC or the Commodities Futures Trading
Commission to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended or vacated.
Audit
Committee
The
entire board of directors is acting as our audit committee. We do not have a
separately-designated standing audit committee. Richard Falcone is an audit
committee financial expert and is independent, as the term is used in Item
7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires the Company’s directors and executive
officers and persons who beneficially own more than ten percent of a registered
class of the Company’s equity securities to file with the SEC initial reports of
ownership and reports of changes in
ownership of common stock and other equity securities of the Company. Officers,
directors and greater than ten percent beneficial shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file. To the best of our knowledge based solely on a review of Forms 3, 4,
and 5 (and any amendments thereof) received by the Company during or with
respect to the year ended December 31, 2004, the following persons have failed
to file, on a timely basis, the identified reports required by Section 16(a) of
the Exchange Act during fiscal year ended December 31, 2004:
|
Name
and principal position |
Number
of
late
reports |
Transactions
not
timely
reported |
Known
failures to
file
a required form |
|
Richard
Falcone
Director |
3 |
3 |
0 |
|
James
Manfredonia
Director |
3 |
3 |
0 |
|
Annette
M. McEvoy
Former
Director |
2 |
2 |
0 |
|
Geoffrey
S. Carroll
Former
Director |
2 |
2 |
0 |
|
David
Parker
Former
CEO, CFO, and Director |
1 |
1 |
0 |
|
A.J.
LaSota
Former
President and Director |
0 |
0 |
0 |
|
Ronald
Folse
Former
Executive Vice President |
0 |
0 |
0 |
|
Michael
Doan
Former
Secretary and Treasurer |
0 |
0 |
0 |
Code
of Ethics Disclosure
As of
December 31, 2004, we have not adopted a Code of Ethics for Financial
Executives, which include our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions, as required for listed issuers by sections 406 and 407 of the
Sarbanes-Oxley Act of 2002.
We have
begun the process of drafting a code of ethics which will be filed with the
Security and Exchange Commission upon its adoption by the board of directors.
Item 10: Executive
Compensation
The table
below summarizes all compensation awarded to, earned by, or paid to our current
executive officers for each of the last three completed fiscal
years.
| |
|
Annual
Compensation |
Long
Term Compensation |
|
Name |
Title |
Year |
Salary
($) |
Bonus
($) |
Other
Annual Compensation
($) |
Restricted
Stock
Awarded
($) |
Options/
SARs
(#) |
LTIP
Payouts
($) |
All
Other
Compensation
($) |
|
Robert
DelVecchio |
CEO |
2004
2003
2002 |
n/a
n/a
n/a |
n/a
n/a
n/a |
n/a
n/a
n/a |
n/a
n/a
n/a |
n/a
n/a
n/a |
n/a
n/a
n/a |
n/a
n/a
n/a |
|
David
Parker (1)
|
Former
CEO,
CFO, and Director |
2004
2003
2002 |
129,082
33,923
n/a |
0
0
n/a |
0
144,000
n/a |
0
0
n/a |
0
0
n/a |
0
0
n/a |
0
0
n/a |
|
A.J.
LaSota (2)
|
Former
President
and Director |
2004
2003
2002 |
108,940
29,400
n/a |
0
0
n/a |
0
129,600
n/a |
0
0
n/a |
0
0
n/a |
0
0
n/a |
0
0
n/a |
|
Ron
Folse (3)
|
Former
Executive
Vice-President |
2004
2003
2002 |
91,138
24,877
n/a |
0
0
n/a |
0
105,600
n/a |
0
0
n/a |
0
0
n/a |
0
0
n/a |
0
0
n/a |
| (1) |
On
February 1, 2005, we received the resignation of David Parker. Under the
terms of a settlement and termination agreement, Mr. Parker returned to
the corporate treasury 5,400,000 shares of our common
stock. |
| (2) |
On
February 1, 2005, we received the resignation of A.J. LaSota. Under the
terms of a settlement and termination agreement, Mr. LaSota returned to
the corporate treasury 684,861 shares of our common
stock. |
| (3) |
On
November 19, 2004, we accepted the resignation of Ron Folse. Under the
terms of a settlement agreement entered into on February 1, 2005, Mr.
Folse returned to the corporate treasury 429,353 shares of our common
stock. |
.
On
September 5, 2003, we
entered into verbal agreements with our executive officers and issued shares of
common stock to each of them in settlement of accrued consulting and salary
expense for the period of March 2003 through July 2003. The shares issued were
valued at $0.48 per share, the estimated fair value at the date of the
agreement.
| · |
David
Parker was issued 300,000 shares of restricted common stock valued at
$144,000 on the issuance date, and at approximately $102,000 on December
31, 2004. |
| · |
A.J.
LaSota was issued 270,000 shares of restricted common stock valued at
$129,600 on the issuance date, and at approximately $91,800 on December
31, 2004. |
| · |
Ron
Folse was issued 220,000 shares of restricted common stock valued at
$105,600 on the issuance date, and at approximately $74,800 on December
31, 2004. |
The
common stock described in the preceding paragraph is “restricted” only by the
sale limitations of SEC Rule 144. There are no performance-based conditions
associated with such stock sale, which fully vested on the issuance date.
On
December 20, 2003, we entered into agreements with our executive officers to
reduce their salaries and discontinue any automobile allowances for the period
from December 20, 2003 until such time as determined by our board of directors.
As a part of these agreements, David Parker’s annual salary was reduced from
$180,000 to $135,000, A.J. LaSota’s annual salary was reduced from $156,000 to
$117,000, and Ron Folse’s annual salary was reduced from $132,000 to
$99,000.
Compensation
to Directors
Only our
outside directors receive compensation for their services as director. We have
compensated our outside directors for their service on the board of directors as
follows:
|
Outside
Director |
Year |
Shares
of Common
Stock
Received |
|
Richard
Falcone |
2005
2004 |
50,000
50,000 |
|
James
Manfredonia |
2005
2004 |
50,000
50,000 |
|
Annette
McEvoy (1) |
2005
2004 |
25,000
50,000 |
|
Geoffrey
S. Carroll (2) |
2005
2004 |
25,000
50,000 |
| (1) |
On
February 16, 2005, Annette McEvoy resigned as a member of our board of
directors |
| (2) |
On
February 11, 2005, Geoffrey Carroll resigned as a member of our board of
directors. |
Other
than as set forth above, our outside directors currently receive $1,500 for
attending any board of director’s meeting in-person, $1,500 for any speaking
engagement on our behalf, and reimbursement for reasonable expenses incurred in
attending board or committee meetings
Summary
of Options Grants
The
following table sets forth the individual grants of stock options made by the
company during the year ended December 31, 2004, for the participating
employees:
There
were no options granted to our executive officers in the year ended
2004.
Item 11: Security
Ownership of Certain Beneficial Owners and Management and related
Stockholder
Matters
The
following table sets forth, as of March 29, 2005, the beneficial ownership of
the Company’s common stock by each executive officer and director, by each
person known by us to beneficially own more than 5% of the Company’s common
stock and by the executive officers and directors as a group. Except as
otherwise indicated, all shares are owned directly and the percentage shown is
based on 38,688,682 shares of common stock issued and outstanding on March 15,
2005.
|
Title
of class |
Name
and address
of
beneficial owner (1) |
Amount
of
beneficial
ownership |
Percent
of
class* |
|
Executive
Officers & Directors: |
|
Common |
Robert
DelVecchio
18021
Sky Park Circle, Suite G2
Irvine,
California 92614 |
970,860
shares (2) |
3.4%
(3) |
|
Common |
James
Manfredonia
18021
Sky Park Circle, Suite G2
Irvine,
California 92614 |
100,000
shares |
0.3% |
|
Common |
Richard
Falcone
18021
Sky Park Circle, Suite G2
Irvine,
California 92614 |
100,000
shares |
0.3% |
|
Total
of All Directors and Executive Officers: |
1,170,860
shares |
3.9% |
|
More
Than 5% Beneficial Owners: |
|
Common |
Safescript
Pharmacies, Inc.
(f/k/a
RTIN Holdings, Inc.)
911
West Loop 281, Suite 400
Longview,
Texas 75604 |
4,444,444
shares (4) |
11.5% |
| (1) |
As
used in this table, "beneficial ownership" means the sole or shared power
to vote, or to direct the voting of, a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose
of, or to direct the disposition of, a security). In addition, for
purposes of this table, a person is deemed, as of any date, to have
"beneficial ownership" of any security that such person has the right to
acquire within 60 days after such date. |
| (2) |
Mr.
DelVecchio is the indirect beneficial owner of 970,860 shares held by
Brockington Securities, Inc. |
| (3) |
Included
in the calculation of beneficial ownership for Mr. DelVecchio are 350,000
warrants which are exercisable within 60 days. Brockington Securities,
Inc. holds 350,000 warrants to purchase 350,000 shares of common stock at
the exercise price of $0.60 per share. These warrants are immediately
exercisable and expire on June 17, 2009. Mr. DelVecchio is the indirect
beneficial owner of the warrants held by Brockington Securities, Inc.
|
| (4) |
We
filed a lawsuit in Nevada State Court against Safescript Pharmacies, Inc.
seeking damages, declaratory relief, to rescind the License and to recover
the consideration paid including 4,444,444 shares of our common stock. On
March 19, 2004, Safescript Pharmacies, Inc. filed for Chapter 11
bankruptcy protection. We refiled substantially the same claim as an
adversary proceeding in Safescript Pharmacies, Inc.’s bankruptcy case
pending in the U.S. Bankruptcy court in Tyler, Texas. In July 2004, this
case was transferred to the U.S. District Court for the Eastern District
of Texas located in Tyler, Texas. |
Item 12: Certain
Relationships and Related Transactions
Except as
disclosed below, none of our directors or executive officers, nor any proposed
nominee for election as a director, nor any person who beneficially owns,
directly or indirectly, shares carrying more than 5% of the voting rights
attached to all of our outstanding shares, nor any members of the immediate
family (including spouse, parents, children, siblings, and in-laws) of any of
the foregoing persons has any material interest, direct or indirect, in any
transaction over the last two years or in any presently proposed transaction
which, in either case, has or will materially affect us.
| 1. |
Our
former CEO, David Parker, founded
RxSystems, Inc. (“RxSystems”) in March 2002. In March 2002, RxSystems
acquired from the Safescript Pharmacies, Inc. (formerly known as RTIN
Holdings, Inc.) the exclusive licensing rights to establish and operate
pharmacies under the name “Safescript Pharmacies” throughout California,
Oregon, Washington and Alaska. On March 27, 2003, RxSystems assigned to us
all of its rights under this exclusive license.
We
agreed to reimburse Mr. Parker $370,000 for personal funds advanced to
secure the License. These funds plus five percent (5%) interest per annum
were due and payable in full to Mr. Parker on December 31, 2007. In a
termination and settlement agreement entered into with Mr. Parker on
February 1, 2005, Mr. Parker agreed to accept $10,000 cash and 494,000
shares of our common stock and release and forever discharge us from all
liability associated with this debt. |
| 2. |
On
November 27, 2003, we entered into an agreement with David Parker to
cancel debt owed to him and reported in our financial statements as
“Advances due to a shareholder.” Initially, Mr. Parker agreed to release
and forever discharge us from all liability associated with this debt and
we agreed to transfer, assign, and convey all of our rights under the
exclusive license granted by Safescript Pharmacies, Inc. solely for the
consolidated statistical metropolitan area of Fresno, California. As a
part of this agreement, we agreed to continue to make all payments under
the license agreement, including those owed on the Fresno market, until
the current existing obligation to Safescript Pharmacies, Inc. for this
license regarding the consolidated statistical metropolitan area of
Fresno, California is fully paid. This agreement was amended on February
16, 2004. As a result of this amendment to the agreement, Mr. Parker
received 220,429 shares of our common stock and released and forever
discharged us from all liability associated with this debt. Mr. Parker
also relinquished to us all of his rights under the exclusive license
granted by Safescript Pharmacies, Inc. solely for the consolidated
statistical metropolitan area of Fresno, California.
|
| 3. |
On
April 24, 2003, we entered into an agreement with TPG for the purpose of
funding the establishment and operations of pharmacies. Ron Folse, our
former Executive Vice President, and A.J. LaSota, our former President and
Director
each own approximately 19% of TPG. On March 5, 2004, Mr. Folse and Mr.
LaSota resigned from all positions of authority in
TPG. |
| 4. |
On
January 26, 2004, we entered into an agreement with Brockington
Securities, Inc. (“Brockington”) to act as our financial advisor,
investment banker, and placement agent. Our current CEO, Mr. Robert
DelVecchio, is the President and CEO of Brockington. Pursuant to this
agreement, Brockington received 500,000 shares of our common stock. On
June 18, 2004, our board of directors approved an extension for an
additional term of eighteen months to the agreement entered into with
Brockington. Pursuant to the terms of this extension, Brockington received
an additional 150,000 shares of our common stock and warrants to purchase
350,000 shares of our common stock exercisable for a period of five years
from the date of issuance at the price of $0.60 per share. In connection
with the aforementioned extension, Brockington was granted certain
“piggy-back” registration rights relating to the equity instruments issued
in June 2004. |
| 5. |
On
June 17, 2004, we completed an exempt offering to accredited investors
pursuant to Rule 506 of Regulation D under the Securities Act and
Brockington acted as placement agent for this offering. Upon closing of
this offering, Brockington received a commission of $295,670 and expenses
in the amount of $8,000. |
| 6. |
In
December, 2004, we received a loan from Robert James, Inc. (the “Lender”),
a company under the control of Mr. Delvecchio, evidenced by a promissory
note (“Note”) for the purpose of purchasing inventory for our pharmacies.
This Note is for a maximum of $150,000 and matures on the earlier of March
6, 2005 or the date that we are able to consummate an accounts receivable
factoring arrangement for our working capital. The outstanding principal
amount of this Note bears interest at a rate of three percent (3%) per
month. In consideration of this Note, we agreed to pay the Lender an
administrative fee of $1,500 and a financing fee of $2,100. In addition to
these fees, we agreed to pay the Lender by the fifth day of every month
from January 2005 until the principal amount is repaid an administrative
fee of $1,875 and a financing fee of $2,675. On February 13, 2005, the
loan was paid in full. |
| 7. |
On
February 1, 2005, we entered into a Termination and Settlement Agreements
with Mr. David Parker and Mr. A.J. LaSota. Mr. Parker and Mr. LaSota
resigned from their positions as officers and directors. In accordance
with the terms of these agreements, Mr. Parker and Mr. LaSota returned to
the corporate treasury 5,400,000 and 429,353 shares of our common stock
respectively. Also on February 1, 2005, we entered into a Settlement
Agreement with Ron Folse, our former Executive Vice President. In
accordance with the terms of this agreement, Mr. Folse returned to the
corporate treasury 429,353 shares of our common stock.
|
|
Exhibit
Number |
Description |
|
3.1 |
Articles
of Incorporation, as amended (1) |
|
3.2 |
By-laws,
as amended (1) |
|
4.1 |
Sample
Share Certificate (1) |
|
5.1 |
Opinion
of Cane Clark LLP, with consent to use (1) |
|
10.1 |
License
Agreement between RTIN Holdings, Inc. and RxSystems, Inc. (2) |
|
10.2 |
Assignment
of Safescript Pharmacies (f/k/a RTIN Holdings, Inc.) License from
RxSystems, Inc. to Surforama.com, Inc. (2) |
|
10.3 |
Amendment
to the License Agreement (3) |
|
10.4 |
Second
Amendment to License Agreement (4) |
|
10.5 |
Agreement
for Payment Pursuant to Assignment of License Agreement (3) |
|
10.6 |
Cancellation
of Debt and Assignment Agreement for CMSA of Fresno, CA (5) |
|
10.7 |
Amendment
to Cancellation of Debt and Assignment Agreement for CMSA of Fresno, CA
(5) |
|
10.8 |
Termination
and Settlement Agreement with David Parker (6) |
|
10.9 |
Settlement
Agreement with Ronald Folse (6) |
|
10.10 |
Termination
and Settlement Agreement with A.J. LaSota (6) |
|
10.11 |
Agreement
with TPG (5) |
|
10.12 |
Agreement
with TAPG (7) |
|
10.13 |
|
|
10.14 |
|
|
10.15 |
|
|
10.16 |
|
|
10.17 |
|
|
10.18 |
|
|
10.19 |
|
|
10.20 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1 |
|
| (1) |
Previously
included as an exhibit to the registration statement filed on Form SB-2 on
December 15, 2004 |
| (2) |
Incorporated
by reference to Current Report on Form 8-K filed May 28,
2003 |
| (3) |
Incorporated
by reference to Current Report on Form 8-K filed July 21,
2003 |
| (4) |
Incorporated
by reference to Quarterly Report on Form 10-QSB for the three month period
ended August 31, 2003 and filed on October 20,
2003 |
| (5) |
Incorporated
by reference to Annual report on Form 10-KSB/A for the year ended November
30, 2003 filed on March 23, 2004 |
| (6) |
Incorporated
by reference to Current Report on Form 8-K filed February 7,
2005 |
| (7) |
Incorporated
by reference to Current Report on Form 8-K filed April 21,
2004 |
Item
14: Principal
Accountant Fees and Services
Audit
Fees
The
aggregate fees billed by our auditors for professional services rendered in
connection with a review of the financial statements included in our quarterly
reports on Form 10-QSB and the audit of our annual consolidated financial
statements for the fiscal years ended December 31, 2004 and November 30, 2003
were approximately $91,000 and $52,000 respectively.
Audit-Related
Fees
Our
auditors did bill additional fees of $33,000 for assurance and related services
that are reasonably related to the performance of the audit and review of our
Form SB-2 filing with the SEC.
Tax
Fees
The
aggregate fees billed by our auditors for professional services for tax
compliance, tax advice, and tax planning were $20,000 for the fiscal year ended
December 31, 2004 and $9,000 for the fiscal year ended November 30,
2003.
All
Other Fees
The
aggregate fees billed by our auditors for all other non-audit services, such as
attending meetings and other miscellaneous financial consulting, for the fiscal
year ended December 31, 2004 is approximately $6,000.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eRXSYS,
Inc.
By:
/s/ Robert
DelVecchio
Robert
DelVecchio
Chief
Executive Officer,
Chief
Financial Officer and Director
April 15,
2005
In accordance
with the requirements of the Securities Act of 1933, this registration statement
was signed by the following persons in the capacities and on the date
stated:
By:
/s/ Richard
Falcone
Richard
Falcone
Director
April 15,
2005
