Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Amexdrug Corporation is located at 7251 Condor Street, Commerce, California 90040. Its phone number is (323) 725-3100. Its fax number is (323) 725-3133. Its website is
www.amexdrug.com
. Shares of Amexdrug common stock are traded on the OTC Bulletin Board under the symbol AXRX.OB. The President of Amexdrug has had experience working in the pharmaceutical industry for the past 30 years.
Amexdrug Corporation, through its wholly-owned subsidiaries, BioRx Pharmaceuticals, Inc., Allied Med, Inc., Dermagen, Inc. and Royal Health Care, Inc., is a pharmaceutical and cosmeceutical company specializing in the research and development, manufacturing and distribution of pharmaceutical drugs, cosmetics and distribution of prescription and over-the-counter drugs, private manufacturing and labeling and a quality control laboratory. At Amexdrug Corporation, it is our anticipation to give our clientele the opportunity to purchase cost effective products while attempting to maximize the return of investments to our shareholders.
Amexdrug Corporation distributes its products through its subsidiaries, BioRx Pharmaceuticals, Inc., Allied Med, Inc., Dermagen, Inc. and Royal Health Care, Inc. primarily to independent pharmacies and secondarily to small-sized pharmacy chains, alternative care facilities and other wholesalers and retailers in the state of California.
BioRx Pharmaceuticals, Inc. is a proud member of the National Association of Chain Drug Stores (NACDS). BioRx Pharmaceuticals, Inc. has developed fourteen unique innovative products in the industry under the name Sponix.
Our team of professionals fully pledges the effectiveness of our distinct products.
At this time, we have certain distribution channels with suppliers and customers whom we know and trust, such as Amazon, and hundreds of independent pharmacies. Of the estimated 100,000 retailers (drug stores and food mass), our goal is to have 20,000 stores carry our products in 2013.
References in this report to "we," "our," "us," the "company" and "Amexdrug" refer to Amexdrug Corporation and also to our subsidiaries, BioRx Pharmaceuticals, Inc., Allied Med, Inc., Dermagen, Inc. and Royal Health Care.
Amexdrug currently has 1,000,000,000 shares of authorized common stock $.001 par value, of which 169,409,620 are issued and outstanding as of June 30, 2013, including 302,440 shares held as treasury shares.
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Forward Stock Split and Increase in Authorized Shares
The Company’s Board of Directors approved a 20 to 1 forward stock split and an increase in the number of authorized shares of the Company’s common stock from 50,000,000 shares to 1,000,000,000 shares. The par value remains at $0.001. Both of these actions were approved pursuant to Section 78.209 of the Nevada Revised Statutes, and became effective on December 3, 2012. After giving effect to the 20 to 1 forward stock split, the number of outstanding shares of the Company’s common stock increased from 8,470,481 pre-split shares to 169,409,620 post-split shares outstanding, as each outstanding share of the Company’s common stock became 20 shares as a result of the forward stock split. The effects of the 20 to 1 forward stock split have been applied to the Company’s financial statements included in this report as though the forward stock split had already occurred. The effects of the 20 to 1 forward stock split have also been applied to any share amounts and price per share amounts appearing in this report.
BioRx Pharmaceuticals
On November 8, 2004, Amexdrug formed a new subsidiary, BioRx Pharmaceuticals, Inc. as a Nevada corporation. BioRx Pharmaceutical, Inc. sells pharmacy and laboratory supplies nationwide. BioRx Pharmaceuticals, Inc. is also committed to offer skin care and over the counter (OTC) products that are recommended with trust and faith by physicians, primarily podiatrists and dermatologists. The focus and mission of BioRx Pharmaceuticals, Inc. is to create, develop and manufacture products to help ease pain and restore and maintain the overall well-being of our customers. We strive for high performance and quality. Our commitment is to offer natural and OTC products that are recommended with confidence by doctors and pharmacists and that the customer can use with pleasure. Our compliance program is diligently followed through the Company. BioRx Pharmaceuticals, Inc. maintains high ethics for animal welfare and our products are never tested on animals. All products are made in the USA.
A total of fourteen innovative health and wellness products have been manufactured for sale by BioRx Pharmaceuticals, Inc. These over-the-counter and natural products are effective for treatment of fungus, arthritis, sunburn protection and for healthy feet and nails. BioRx Pharmaceuticals is planning to sell these products to national chain drugstores, sport chain stores, natural food markets and other mass markets. These products are being marketed under the name of Sponix, and are being sold under the name of BioRx Pharmaceuticals.
Allied Med, Inc.
On December 31, 2001, Amexdrug acquired all of the issued and outstanding common shares of Allied Med, Inc., an Oregon corporation, in a share exchange in a related party transaction.
Allied Med, Inc., was formed as an Oregon corporation in October 1997 to operate in the pharmaceutical wholesale business of selling a full line of brand name and generic pharmaceutical products, over-the-counter (OTC) drug and non-drug products and health and beauty products to independent and chain pharmacies, alternative care facilities and other wholesalers. At Allied Med our sincere interest is our customers' needs. Our competitive discount pricing allows our customers an advantage.
Amexdrug assumed the operations of Allied Med, and Amexdrug has been building on the wholesale pharmaceutical operations of Allied Med.
The accompanying financial information includes the operations of Allied Med for all periods presented and the operations of Amexdrug Corporation from April 25, 2000.
Dermagen, Inc.
Amexdrug completed its purchase of Dermagen, Inc. on October 7, 2005. Dermagen, Inc. is now an operating subsidiary of Amexdrug. The acquisition of Dermagen, Inc. is not considered to be an acquisition of an significant amount of assets which would require audited financial statements of Dermagen, Inc.
Dermagen, Inc. is a growing manufacturing company specializing in the manufacturing and distribution of certain pharmaceuticals,and health and beauty products. Dermagen, Inc. has a U.S.-FDA registered and state FDA approved manufacturing facility licensed to develop high margin skin and novel health and beauty products for niche markets. Dermagen’s competitive advantage is in its excellent product research and development.
Royal Health Care Company
In October 2003, Allied Med, Inc. acquired 100% of the assets of Royal Health Care Company. Royal Health Care Company is a health and beauty company which has sold specially manufactured facial and body creams, arthritic pain relief medications and an exclusive patented hair care product to pharmacies, beauty salons, beauty supply stores and other fine shops. Royal Health Care Company uses the highest quality ingredients for the finest quality products. Each product has been formulated with the essential ingredients and plant extracts to achieve optimum potential and quality. Royal Health Care Company products are manufactured by Dermagen, Inc. in an FDA approved manufacturing facility.
The Royal Health Care Company assets acquired include the “Royal Health Care Company” name, logo, and related trademarks, all formulas to products manufactured for sale under the Royal Health Care Company name, and the Royal Health Care Company list of customers. These intellectual property rights were acquired without cost from a company in which Jack Amin’s wife is a principal shareholder. Mr. Amin is the CEO and Chairman of Amexdrug Corporation and Allied Med, Inc. Management believes this acquisition will provide the Company with an opportunity to increase the number of products sold by the Company, and expand the Company’s customer base.
On October 28, 2004, Amexdrug formed a new subsidiary, Royal Health Care, Inc. as a Nevada corporation. Royal Health Care, Inc. was formed to manufacture and sell health and beauty products.
Lease Agreements
The Company's principal executive offices and its warehouse and distribution operations moved to 7251 Condor Street, Commerce California in March 2011. The Company leases 27,500 square feet at this location. The rental amount increased from $7,700 per month to $8,800 per month effective March 1, 2013. Approximately 2,500 square feet of the premises is used for executive offices, and the balance of the premises is used for warehouse and distribution operations. The lease is for a period of three years which commenced on March 1, 2011 and terminates on February 28, 2014. The Company has the option to extend the lease for two additional three year periods. If the Company exercises the first option to extend, the rental rate would increase to $9,900 per month effective March 1, 2014, $11,000 per month effective March 1, 2015 and $11,550 per month effective March 1, 2016. If the Company exercises the second option to extend, the rental rate would be adjusted to a fair market rental value as may be agreed to by the parties or as may be determined by an appraiser or arbitrator as provided in the Option to Extend Addendum. Payment of the lease has been personally guaranteed by Jack Amin and his wife, Nora Amin. The Company believes this space will be sufficient for at least the next twelve months.
The Company’s Dermagen, Inc. manufacturing operations are currently located at 2500 East Fender Avenue, Units I&J, Fullerton, California, which is leased under one lease agreement dated March 1, 2011. The Company leases approximately 3,520 square feet at a rental rate of $2,464 per month. The lease was initially for a period of one year which commenced on March 1, 2011. In early 2012, and again in early 2013, the parties executed Amendments to extend the lease term for one year. The lease will now expire on February 28, 2014. Payment of the lease has been personally guaranteed by Jack Amin. The Company believes this space will be sufficient for at least the next twelve months.
The Company believes that the various facilities covered by the leases described above will be sufficient for at least the next twelve months.
Bank Line of Credit
The Company received a line of credit from Wells Fargo Bank for $70,000. The interest rate is prime plus 4% per annum payable every month.
Promissory Notes
On June 9, 2013, the Company renewed a line of credit promissory note with the National Bank of California. The Change in Terms Agreement decreased the maximum loan amount from $700,000 to $350,000 or 80% of the eligible accounts, whichever is less. The maturity date was extended to June 9, 2014. The loan has an interest rate of 2.5% over the index per annum payable every month. It is secured with the assets of the Company and its subsidiaries, and it is personally guaranteed by Jack Amin and his wife, Nora Amin.
Also on June 9, 2013, the Company entered into a promissory note with the National Bank of California for a loan in the amount of $350,000, with a variable interest rate which is the Prime Rate as published in the West Coast Edition of The Wall Street Journal (which was 3.25% per annum at the time the loan was made) plus 2.25%. The interest rate shall not be less than 5.5% per annum). The loan is payable upon lender’s demand. If no demand is made, the loan is payable in 60 monthly payments of $6,698.49 each. The final payment due June 9, 2018 will include all remaining principal and all accrued interest not yet paid. The loan is personally guaranteed by Jack Amin and his wife, Nora Amin. It is secured by substantially all of the assets of the Company and its subsidiaries.
The Company also has a third loan with the National Bank of California. On July 30, 2012, the Company entered into a promissory note with the National Bank of California for the purchase of equipment in the amount of $393,920, with an interest rate of 4.5% per annum. The loan is secured by the equipment that was purchased. The loan provides for the first three (3) monthly consecutive interest payments which began August 30, 2012 calculated on the unpaid principal balance, to be followed by fifty-nine (59) monthly consecutive principal and interest payments of $5,488 each, which began on November 30, 2012. The final payment of principal and interest of $131,093 is due on October 30, 2017, the note’s maturity date.
Loan with Nora Amin
The Company borrowed $109,202 from the President’s wife, Nora Amin, to facilitate the purchase of Dermagen and to cover operating expenses. The balance of $108,023 is payable on demand and carries an annual interest rate of 8%, payable every 6 months. The Company’s loan agreement with Nora Amin is verbal.
Written Agreements
The Company does not have written contracts with its major suppliers or buyers. Copies of the Company’s written lease agreements and written loan agreements have been filed as exhibits to certain of its quarterly and annual reports. See the Exhibit Index for a description of these agreements and for information on where copies can be located.
Business Segments
Since 2005, Amexdrug has had operations in two segments of its business, namely: Distribution and Health and Beauty Products. Distribution consists of the wholesale pharmaceutical distribution and resale of brand and generic pharmaceutical products, over-the-counter drugs and non-drug products and health and beauty products. Health and Beauty Products consist of the manufacture and distribution of primarily health and beauty products. Manufacturing includes expertise in research and development for health care industry products, including pharmacy supplies.
Results of Operations
For the Three Months Ended June 30, 2013
Revenues
For the three months ended June 30, 2013, Amexdrug reported sales of $2,153,617, comprised of $1,356,791 of sales from the Company’s pharmaceutical wholesale business of selling brand name and generic pharmaceutical products and over the counter
(OTC) health and beauty products, and $796,825 of sales of health and beauty products manufactured by the Company. This is $161,087
less than the $2,314,704 of sales reported for the three months ended June 30, 2012, which was comprised primarily of $1,835,243 sales from the Company’s pharmaceutical wholesale distribution business of selling brand name and generic pharmaceutical products and over the counter (OTC) health and beauty products, and $479,460 of sales of health and beauty products manufactured by the Company. During the three month period ended June 30, 2013, Amexdrug experienced a decrease in total sales due, in part, to declining sales of some brand name drugs which became generically available.
Costs of Goods Sold
Cost of goods sold for the three months ended June 30, 2013 was $1,796,853, a decrease of $261,923
from the $2,058,776 cost of goods sold for the three months ended June 30, 2012.
Gross Profit
During the three months ended June 30, 2013 gross profit increased by $100,836
to $356,764 or 16.6%
of sales, from the $255,928, or 11.1% of sales recorded for the three months ended June 30, 2012. The change in gross profit margin is largely attributable to a larger percentage of sales of higher gross profit margin products sold in 2013.
Expenses
Total operating expenses for the three months ended June 30, 2013, consisting entirely of selling, general and administrative expenses, were $231,987, an increase of $39,077 from the total operating expenses of $192,910 recorded for the three months ended June 30, 2012. The increase in selling, general and administrative expense is primarily attributed to increased marketing expenses.
Net Income
During the three months ended June 30, 2013, Amexdrug earned net income of $57,875, an increase of $15,744 from the net income of $42,331 earned in the three months ended June 30, 2012. Amexdrug’s increase in net income during the three month period ended June 30, 2013 is attributable largely to the larger gross profit generated in the later period and to a larger percentage of sales of higher gross margin products sold in the later period.
For the Six Months Ended June 30, 2013
Revenues
For the six months ended June 30, 2013, Amexdrug reported sales of $4,514,527, comprised of $3,075,222 of sales from the Company’s pharmaceutical wholesale business of selling brand name and generic pharmaceutical products and over the counter (OTC) health and beauty products, and $1,439,305 of sales of health and beauty products manufactured by the Company. This is $18,834
more than the $4,495,693 of sales reported for the six months ended June 30, 2012 which was comprised primarily of $3,623,318 of sales from the Company’s pharmaceutical wholesale distribution business of selling brand name and generic pharmaceutical products and over the counter (OTC) health and beauty products, and $872,375 of sales of health and beauty products manufactured by the Company. During the six month period ended June 30, 2013, Amexdrug experienced slight increase in total sales due, in part, to increased marketing efforts.
Costs of Goods Sold
Cost of goods sold for the six months ended June 30, 2013 was $3,639,019, a decrease of $240,108
from the $3,879,127 cost of goods sold for the six months ended June 30, 2012.
Gross Profit
During the six months ended June 30, 2013 gross profit increased by $258,942 to $875,508, or 19.4%
of sales, from the $616,566, or 13.7% of sales recorded for the six months ended June 30, 2012. The change in gross profit margin is largely attributable to a larger percentage of sales of higher gross margin products sold in the first six months of 2013.
Expenses
Total operating expenses for the six months ended June 30, 2013, consisting entirely of selling, general and administrative expense, were $475,191, an increase of $93,508 from the total operating expenses of $381,683 recorded for the six months ended June 30, 2012. The increase in selling, general and administrative expense is primarily attributed to increased marketing expenses.
Net Income
During the six months ended June 30, 2013, Amexdrug earned net income of $230,218, an increase of $83,800 from the net income of $146,418 experienced in the six months ended June 30, 2012. Amexdrug's increase in net income during the six month period ended June 30, 2013, is attributable largely to the larger gross profit generated in the later period partially offset by the increase in operating expenses in the later period.
Liquidity and Capital Resources – June 30, 2013
As of June 30, 2013, Amexdrug reported total current assets of $1,780,179, comprised of cash of $162,565, accounts receivable of $724,307, inventory of $798,429, prepaid corporate taxes of $77,605, other asset of $11,829, and an investment of $5,444. Total assets as of June 30, 2013 were $2,284,608 which included total current assets, plus net property and equipment of $456,237, deposits of $29,862, Trademark of $565, and goodwill of $17,765.
Amexdrug’s liabilities as of June 30, 2013 consisted of accounts payable of $472,217, loan payable of $350,000, notes payables to related parties of $108,023, business lines of credit of $141,680, corporate tax payable of $117,357, accrued liabilities of $11,192, corporate tax payable of $54,900, promissory note, current portion of $58,370, and deferred operating lease liability of $9,594.
During the six months ended June 30, 2013, Amexdrug used $12,383 cash in operating activities compared to $98,354 cash used in operating activities in the six months ended June 30, 2012. The primary adjustments to reconcile net income to net cash used in operating activities during the six months ended June 30, 2012 were as follows: an increase in accounts receivable of $162,489, a decrease in accounts payable and accrued liabilities of $222,709, an increase in corporate income tax payable of $117,357, and depreciation and amortization of $35,345. Amexdrug had $162,565
in cash and cash equivalents at June 30, 2013. Operations have primarily been funded through cash generated from operations and an increase in the credit line balance when needed. Management does not anticipate that Amexdrug will need to seek additional financing during the next twelve months.
Stock Repurchases
Between approximately June 2007 and June 30, 2013, Amexdrug repurchased a total of 302,440 post-split shares of its common stock at prices ranging from a low of $0.01 per share to a high of $0.15 per share. These shares are held by Amexdrug as treasury shares. Amexdrug anticipates that it may make additional small purchases of its shares throughout the remainder of 2013.
Inflation
In the opinion of management, inflation has not and will not have a material effect on our operations in the immediate future. Management will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations.
Capital Expenditures
The Company expended $0 and $0 on capital expenditures during the three month periods ended June 30, 2013 and 2012, respectively. The Company has no current plans for any significant capital expenditures.
Critical Accounting Policies
In the notes to the audited consolidated financial statements for the year ended December 31, 2012, included in the Company’s Annual Report on Form 10-K, the Company discusses those accounting policies that are considered to be significant in determining the results of operations and its financial position. The Company believes that the accounting principles utilized by it conform to accounting principles generally accepted in the United States of America.
The preparation of financial statements requires Company management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, the Company evaluates estimates. The Company bases its estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
Forward-looking statements
This document includes various forward-looking statements with respect to future operations of Amexdrug that are subject to risks and uncertainties. Forward-looking statements include information concerning expectations of future results of operations and such statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates” or similar expressions. For those statements, Amexdrug claims the protection of the safe harbor for forward-looking statements contained in the Private Litigation Reform Act of 1995. Actual results may vary materially.