10-Q 1 20180331prlxform10q.htm QUARTERLY REPORT Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

or

o   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from__________ to _________

Commission File Number 000-52534

Picture 1 

PARALLAX HEALTH SCIENCES, INC.
(Exact name of registrant as specified in its charter)

Nevada

46-4733512

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1327 Ocean Avenue, Suite B, Santa Monica, CA

90401

(Address of principal executive offices)

(Zip Code)

 

 

Registrant's telephone number, including area code:

(310) 899-4442

 

Copy of all Communications to:

Peter Hogan, Esq.

Buchalter

1000 Wilshire Blvd., Suite 1500

Los Angeles, CA 90017

(213) 891-0700

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 last 90 days.

Yes No

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration statement was required to submit and post such files).

Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

148,757,090 common shares issued and outstanding as of September 20, 2018



PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

The Company’s unaudited interim consolidated financial statements for the three months ended March 31, 2018, form part of this quarterly report. They are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles.

 

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2017, on Form 10-K, as filed with the Securities and Exchange Commission on September 10, 2018.


1


PARALLAX HEALTH SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

$

1,362

 

$

2,604

 

Accounts receivable, net

 

40,278

 

 

44,131

 

Employee advances

 

––

 

 

1,800

 

Prepaid expenses

 

449

 

 

6,884

 

Total current assets

 

42,089

 

 

55,419

 

 

 

 

 

 

 

 

Loans receivable-long-term

 

169,902

 

 

169,902

 

Property and equipment, net

 

10,000

 

 

10,000

 

Intangible assets, net

 

2,188,437

 

 

2,298,094

 

Goodwill

 

785,060

 

 

785,060

 

Deposits

 

22,000

 

 

22,000

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

3,217,488

 

$

3,340,475

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable and accrued expenses

$

6,734,025

 

$

6,027,480

 

Pension plan contribution payables

 

12,570

 

 

12,570

 

Notes payable, convertible

 

966,000

 

 

741,000

 

Note payable, related party

 

––

 

 

185,000

 

Related party payables

 

1,195,465

 

 

1,098,774

 

Total current liabilities

 

8,908,060

 

 

8,064,824

 

 

 

 

 

 

 

 

Long term liabilities

 

 

 

 

 

 

License fees payable, net of unamortized discount

 

1,880,000

 

 

1,890,000

 

Royalties payable

 

1,070,000

 

 

1,000,000

 

Notes and loans payable, unsecured

 

280,975

 

 

95,975

 

Notes payable, convertible

 

720,154

 

 

144,000

 

Notes payable, related party, convertible

 

591,100

 

 

1,167,254

 

Notes payable, secured, net of unamortized discount

 

19,639,430

 

 

18,368,066

 

Total long term liabilities

 

24,181,659

 

 

22,665,295

 

Total liabilities

 

33,089,719

 

 

30,730,119

 

 

 

 

 

 

 

 

Stockholders' deficit

 

 

 

 

 

 

Preferred stock, $.001 par, 10,000,000 shares authorized,

 

864

 

 

864

 

863,691 issued and outstanding at March 31, 2018,

 

 

 

 

 

 

and December 31, 2017

 

 

 

 

 

 

Common stock, $.001 par, 250,000,000 shares authorized,

 

144,444

 

 

136,754

 

144,444,530 and 136,754,530 issued and outstanding

 

 

 

 

 

 

at March 31, 2018, and December 31, 2017, respectively

 

 

 

 

 

 

Additional paid in capital-preferred

 

665,803

 

 

665,803

 

Additional paid in capital-common

 

6,946,610

 

 

5,580,668

 

Subscriptions receivable

 

(342

)

 

(592

)

Accumulated deficit

 

(37,629,610

)

 

(33,773,141

)

Total stockholders' deficit

 

(29,872,231

)

 

(27,389,644

)

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$

3,217,488

 

$

3,340,475

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements


2


PARALLAX HEALTH SCIENCES, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

 

For the three months ended

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

 

 

 

Revenue

$

4,890

 

$

1,960,960

 

Cost of sales

 

5,538

 

 

1,601,006

 

Gross profit

 

(648

)

 

359,954

 

 

 

 

 

 

 

 

Sales, marketing, and pharmacy expenses

 

125,335

 

 

300,785

 

General and administrative expenses

 

2,050,745

 

 

1,091,140

 

 

 

 

 

 

 

 

Operating loss

 

(2,176,728

)

 

(1,031,971

)

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

Discount amortization

 

(1,335,000

)

 

(1,305,000

)

Interest expense

 

(344,741

)

 

(303,302

)

Total other expenses

 

(1,679,741

)

 

(1,608,302

)

 

 

 

 

 

 

 

Net loss

$

(3,856,469

)

$

(2,640,273

)

 

 

 

 

 

 

 

Net loss per common share - basic

$

(0.027

)

$

(0.025

)

Net loss per common share - diluted

 

(0.019

)

 

(0.017

)

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

143,173,863

 

 

107,271,498

 

Weighted average common shares outstanding - diluted

 

202,447,083

 

 

152,378,745

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements


3


PARALLAX HEALTH SCIENCES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

March 31, 2018

 

March 31, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

$

(3,856,469

)

$

(2,640,273

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

109,657

 

 

29,743

 

Stock compensation/stock option amortization

 

1,332,882

 

 

11,862

 

Discount amortization

 

1,335,000

 

 

1,305,000

 

Allowance for bad debt

 

236

 

 

30,288

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Decrease in trade and other receivables

 

5,417

 

 

229,584

 

Decrease in inventories

 

––

 

 

135,963

 

Decrease in prepaid expenses

 

6,435

 

 

11,418

 

Increase in accounts payable and accrued expenses

 

541,192

 

 

653,590

 

Decrease in pension plan contribution payable

 

––

 

 

(8,460

)

Increase in related party payables

 

262,044

 

 

209,682

 

Net cash used by operating activities

 

(263,606

)

 

(31,603

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Repayment of notes payable

 

(3,636

)

 

(152,961

)

Proceeds from convertible notes payable

 

225,000

 

 

––

 

Proceeds from issuance of preferred shares

 

––

 

 

150,000

 

Proceeds from issuance of common shares

 

41,000

 

 

1,000

 

Net cash provided (used) by financing activities

 

262,364

 

 

(1,961

)

 

 

 

 

 

 

 

Net decrease in cash

 

(1,242

)

 

(33,564

)

Cash - beginning of period

 

2,604

 

 

63,363

 

 

 

 

 

 

 

 

Cash - end of period

$

1,362

 

$

29,799

 

 

 

 

 

 

 

 

NON-CASH ACTIVITIES

 

 

 

 

 

 

Discounts on long-term liabilities

$

1,335,000

 

$

1,305,000

 

Conversion of convertible related party payable to common stock

$

––

 

$

257,952

 

Conversion of short-term related party note payable to long-term non-related party note payable

$

185,000

 

$

––

 

Conversion of related party convertible note payable to non-related party convertible note payable

$

576,154

 

$

––

 

Conversion of related party payables to non-related party payables

$

165,353

 

$

105,746

 

Subscriptions receivable

$

(342

)

$

(342

)

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION

 

 

 

 

 

 

Interest paid

$

904

 

$

81,959

 

Income taxes paid

$

––

 

$

––

 

 

 

The accompanying notes are an integral part of these consolidated financial statements


4


PARALLAX HEALTH SCIENCES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

 

NOTE 1. OVERVIEW AND NATURE OF BUSINESS

 

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2017. Notes to the unaudited interim consolidated financial statements that would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.

 

Parallax Health Sciences, Inc. (the “Company”) was incorporated in the State of Nevada on July 6, 2005.  The Company’s principal focus is on personalized patient care through remote health care services provided by Parallax Health Management, Inc. (“PHM”), and eventually through the Parallax Diagnostics Inc.'s medical diagnostic testing platform, which is capable of diagnosing and monitoring several health issues. In 2017, the Company’s operations also included pharmacy services provided by RoxSan Pharmacy, Inc.

 

RoxSan Pharmacy, Inc.: Acquisition, Closure, and Bankruptcy

 

On August 13, 2015, the Company entered into an agreement with RoxSan Pharmacy, Inc., a California corporation, and its sole shareholder, Shahla Melamed, to purchase 100% of the issued and outstanding shares of RoxSan's common stock and its assets and inventory. As a result, effective August 13, 2015, RoxSan became the Company's wholly-owned subsidiary.  Concurrently, Mrs. Melamed resigned from all positions within RoxSan, and Mr. J. Michael Redmond was appointed RoxSan's President and Chief Executive Officer, and Ms. Calli R. Bucci its Chief Financial Officer.  Mr. Redmond and Ms. Bucci were also appointed as Chairman and member, respectively, of RoxSan’s board of directors.

 

On December 22, 2017, RoxSan Pharmacy, Inc. terminated its operations and closed the business location in Beverly Hills, CA.

 

On May 14, 2018, pursuant to a unanimous resolution of the Boards of Directors of RoxSan Pharmacy, Inc. and Parallax Health Sciences, Inc., RoxSan filed a Chapter 7 petition in the United States Bankruptcy Court for the Central District of California.  Mr. Timothy Yoo was appointed trustee on May 15, 2018.  In connection with this filing, RoxSan seeks to discharge approximately $5 million of liabilities owed to various parties including more than $1 million owed to the Company.

 

Business Overview

 

On January 20, 2017, the Company changed the name of its wholly-owned subsidiary, Qolpom, Inc., to Parallax Health Management, Inc.

 

On March 22, 2017, the Company formed a wholly-owned subsidiary, Parallax Behavioral Health, Inc. ("PBH"), a Delaware corporation.

 

On April 26, 2017, pursuant to a resolution of the Board of Directors, the Company, through its wholly-owned subsidiary, Parallax Behavioral Health, Inc., completed the acquisition of 100% of certain intellectual property from ProEventa Inc., a Virginia Corporation (“ProEventa”), in accordance with the Intellectual Property Purchase Agreement between the Company, PBH and ProEventa (the “ProEventa Agreement”). ProEventa has an expertise in the development of behavioral health technologies, and is the wholly-owned subsidiary of Grafton Integrated Health Network, Inc., a non-profit Virginia corporation (“Grafton”), Pursuant to the ProEventa Agreement, consideration to ProEventa for the acquisition of the intellectual property was:

 

a stock purchase agreement to purchase 2,500,000 shares of the Company’s common stock; and 

a revenue sharing agreement, providing for a cash earn-out to be paid to the ProEventa shareholders of up to $3,000,000, to be derived from certain net revenue generated by the Company, as defined in the agreement; and 

a royalty agreement, providing for a royalty of 3% of the revenues generated from the intellectual property, ending at such time as Parallax has paid ProEventa $25,000,000; and 

a limited license to ProEventa for the use of certain of the Intellectual Property's technology at Grafton Schools. 

 

On April 26, 2017, in conjunction with the ProEventa Agreement, the Company entered into a consulting agreement with James Gaynor, founder of ProEventa, that, among other things, provides for consideration to Mr. Gaynor as follows:

 

a stock purchase agreement to purchase 500,000 shares of the Company’s common stock at $0.001 per share; and 

a grant of options to purchase 1,000,000 shares of the Company's common stock at a price of $0.25 per share, vesting annually over a three (3) year period beginning September 1, 2017. 

 

On July 6, 2017, Mr. J. Michael Redmond was terminated as Chief Executive Officer and President of the Company and resigned as chairman and member of the board of directors, pursuant to his employment agreement.  Effective July 7, 2017, Mr. Paul R. Arena was appointed as Chief Executive Officer and President of the Company and elected as a member of the board of directors.


5


 

 

Business Segments

 

During 2018, the Company has the following business segments: Remote Care Services (RCS), Behavioral Health Services (BHS), and Corporate. In 2017, the Company’s operations also included Retail Pharmacy Services (RPS), for services provided by RoxSan Pharmacy, Inc. (“RoxSan”).

 

Remote Care Systems Services (RCS)

PHM provides the health care industry’s first comprehensive remote patient monitoring system, which utilizes proprietary software and technology to bridge clinical behavioral science with technology and logistics across a variety of wellness and clinical devices, including both fitness and clinical applications, for payers, providers and clinical professionals.

 

PHM generates revenues primarily through the licensing, installation and maintenance of its patented Qolpom Hub, an integrated, secure and scalable platform for collecting, transmitting and analyzing biometric data, as well as the sale of wireless medical devices and home monitoring kits.

 

Behavioral Health Services (BHS)

In April 2017, the Company through its wholly-owned subsidiary, Parallax Behavioral Health, Inc., acquired the intellectual property known as REBOOT, the acronym for Reliable Evidence-Based Outcomes Optimization Technologies.  In 2018, the Company rebranded the technology as Intrinsic Code (“Intrinsic Code”), a software platform specifically designed to improve health treatment outcomes using proprietary behavioral technology systems, that enables its users and user groups to more effectively achieve goals within a prescribed timeline. Through a proprietary behavioral health technology, Intrinsic Code powers decision support that can also be delivered securely to any internet connected device. The software can be used by an individual or an organization of any size. 

 

PBH generates revenues primarily through licensing and subscription of the Intrinsic Code software and systems. As of March 31, 2018, the BHS segment had not yet begun full operations, generating limited test market sales.

 

Retail Pharmacy Services (RPS)

RoxSan provided a full range of pharmacy services including retail, compounding and fertility medications.  

 

RoxSan generated revenues primarily by dispensing prescription drugs, both through local channels by direct delivery as well as mail order. RoxSan also sold a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, seasonal merchandise and convenience foods, through the Company’s pharmacy.  In 2017, the pharmacy was fully licensed and qualified to conduct business in over 40 US States.  

 

Since the Company’s acquisition of RoxSan, the deleterious actions against the pharmacy by the former owner, including, among other things, interference with management and operations, and attempts to damage and/or divert customer and vendor relationships, had a significant adverse impact on the pharmacy. Furthermore, the discovery of the former owner’s alleged involvement in suspected insurance fraud caused RoxSan’s contract with its primary In Vitro Fertilization (“IVF”) drug rebate program to be terminated in August 2016. As a result, RoxSan was no longer eligible to receive incentive rebates for the majority of its IVF drug purchases, which were key to the profitability of the IVF drug sales; and for which without the rebates, RoxSan was unable to provide its customers with comparably priced IVF drugs.   This, among other things, caused a precipitous drop of over 90% in RoxSan’s IVF revenues, and ultimate exit from the IVF market in mid-2017.  The total IVF revenues for 2017 and 2016, respectively, were $953,680 and $17,216,036, or 29.8% and 75.7% of total revenues.

 

Soon thereafter, in July 2017, RoxSan’s contract with its primary drug supplier was terminated for similar reasons connected to the former owner and alleged criminal activities associated with the Melamed family name, despite the Company’s new ownership and management. After careful consideration, the Company determined that RoxSan was unable to generate enough profits to sustain its pharmacy business, and in December 2017, the RPS segment ceased operations.  In May 2018, RoxSan filed a Chapter 7 bankruptcy petition.

 

Corporate

The Corporate Segment provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, and corporate information technology and finance departments.  In addition, the Corporate Segment supports the costs and operating expenses related to the continued development and exploitation of the Company's proprietary medical diagnostic and monitoring platform and processes, which remains the Company's primary focus.  

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”).  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that effect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Going Concern

The Company has incurred losses since inception resulting in an accumulated deficit of $37,629,610, and a working capital deficit of $8,865,971, and further losses are anticipated. The Company’s ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, which may not be available at commercially reasonable terms.  There can be no assurance that the Company will be able to continue to raise funds, in which case the Company may be unable to meet its obligations and the Company may cease operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.


6


The Company will require additional financing in order to proceed with its plan of operations, including approximately $3,000,000 over the next 12 months to pay for its ongoing expenses. These cash requirements include working capital, general and administrative expenses, the development of the Company’s product line, and the pursuit of acquisitions. These cash requirements are in excess of the Company’s current cash and working capital resources. Accordingly, the Company will require additional financing in order to continue operations and to repay its liabilities. There is no assurance that the financing will be completed as planned or at all. If the Company is unable to secure adequate capital to continue the Company’s planned operations, the Company’s shareholders may lose some or all of their investment and the Company’s business may fail.

 

The unaudited interim consolidated financial statements reflect all adjustments consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The unaudited interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue as a going concern.

 

NOTE: The following notes and any further reference made to “the Company”, "we", "us", "our" and "Parallax" shall mean Parallax Health Sciences, Inc., and its wholly-owned subsidiaries, Parallax Diagnostics, Inc., Parallax Health Management, Inc., Parallax Behavioral Health, Inc. and RoxSan Pharmacy, Inc., unless otherwise indicated.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

This summary of significant accounting policies is presented to assist in understanding the Company’s financial statements.  These accounting policies conform to accounting principles, generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.

 

The Company’s fiscal year-end is December 31.

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Fair Value Hierarchy

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

 

Level 1:  Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. 

 

Level 2:  Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. 

 

Level 3:  Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk. 

 

Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. As at March 31, 2018, and December 31, 2017, the Company had no cash equivalents.

 

Fair Value of Financial Instruments

As of March 31, 2018, and December 31, 2017, respectively, the carrying values of Company’s Level 1 financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value. The fair value of Level 3 instruments is calculated as the net present value of expected cash flows based on externally provided or obtained inputs. Certain Level 3 instruments may also be based on sales prices of similar assets. The Company’s fair value calculations take into consideration the credit risk of both the Company and its counterparties as of the date of valuation. See Note 8 for additional information about long-term debt.

 

There were no outstanding derivative financial instruments held by the Company as of March 31, 2018, and December 31, 2017.


7


Accounts Receivable

Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), as well as customers, vendors and manufacturers.  Charges to bad debt are based on both historical write-offs and specifically identified receivables.

 

The activity in the allowance for doubtful accounts receivable for the three months and the year ended March 31, 2018, and December 31, 2017, respectively, is as follows:

 

 

March 31, 2018

 

December 31, 2017

 

Beginning balance

$

30,000

 

$

50,000

 

Additions charged to bad debt expense

 

236

 

 

114,957

 

Write off of allowance for doubtful collections

 

(4,236

)

 

(134,957

)

 

 

 

 

 

 

 

Ending balance

$

26,000

 

$

30,000

 

 

During the three months and the year ended March 31, 2018, and December 31, 2017, the allowance for doubtful collections increased by $236 and $114,957, respectively.  

 

As of March 31, 2018, and December 31, 2017, the allowance for doubtful collections was $26,000 and $30,000, respectively.

 

Property and Equipment

Property and equipment is comprised of office and computer equipment and software, furniture and fixtures, leasehold improvements, and vehicles, recorded at cost and depreciated using the double declining balance method over the estimated useful lives of 5 to 7 years. Repairs and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Application development stage costs for significant internally developed software projects are capitalized and depreciated. See Note 5 for additional information about property and equipment.

 

Intangible Assets

Product processes, patents and customer lists are amortized on a straight-line basis over their estimated useful lives between 4 and 20 years. See Note 6 for additional information about intangible assets.

 

Goodwill and Other Indefinitely-Lived Assets

Goodwill and other indefinitely-lived assets are not amortized, but are subject to impairment reviews annually, or more frequently if necessary.

 

Impairment of Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable.  When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount.  Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.

 

The Company believes that future projected cash flows are sufficient for the recoverability of its long-lived assets, and no impairment exists.  There can be no assurance, however, that market conditions will not change or demand for the Company’s products and products under development will continue.  Either of these could result in future impairment losses.

 

Convertible Debt

The Company recognizes the advantageous value of conversion rights attached to convertible debt. Such rights give the debt holder the ability to convert debt into common stock at a price per share that is less than the trading price to the public on the date of the debt. The beneficial value is calculated as the intrinsic value (the market price of the stock at the commitment date in excess of the conversion rate) of the beneficial conversion feature of the debt, and is recorded as a discount to the related debt and an addition to additional paid in capital. The discount is amortized over the remaining outstanding period of related debt using the interest method.

 

Net Loss Per Common Share

Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible debt, convertible preferred shares and the exercise of the Company’s stock options and warrants.

 

Comprehensive Loss

As at March 31, 2018, and December 31, 2017, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.


8


Revenue Recognition

Revenue is recognized when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

 

The Retail Pharmacy recognizes revenue at the time the customer takes possession of the merchandise. Customer returns are not material. Sales taxes are not included in revenue.

 

Shipping and Handling Costs

The Company includes shipping and handling costs relating to the delivery of products to its locations (freight-in) as costs of sales. Shipping and handling costs, which include third-party shipment providers, postage, messenger and driver salaries and fees relating to the delivery of products to customers, are classified as Selling, Marketing and Pharmacy (“SM&P”) expense. Shipping and handling costs included in SM&P expense were:

 

 

For the three months ended

 

 

March 31, 2018

 

March 31, 2017

 

Shipping, postage & messenger

$

238

 

$

38,993

 

Drivers salaries and fees

 

––

 

 

20,479

 

Total shipping and handling costs

$

238

 

$

59,472

 

 

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.

 

The Company has net operating loss carryforwards available to reduce future taxable income. Future tax benefits for these net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. To the extent that the Company will not realize a future tax benefit, a valuation allowance is established.

 

As of March 31, 2018, the Company has not yet filed its 2012 through 2017 annual corporate income tax returns.  Due to the Company’s recurring losses and significant loss carryforward (Note 14), it is anticipated that no corporate income taxes are due for these periods.  

 

Stock-Based Compensation

The Company records stock-based compensation using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

 

Recently Adopted Accounting Standards 

The Company evaluates the pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the US Securities and Exchange Commission (“SEC”), and the Emerging Issues Task Force (“EITF”), to determine the impact of new pronouncements on US GAAP and the impact on the Company. The Company has recently adopted the following new accounting standards:

 

Adopted:

 

In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”), Business Combinations (Topic 805), Clarifying the Definition of a Business.  ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation.  ASU 2017-01 will be effective for the Company for annual periods beginning after December 15, 2017, and interim periods.  Early adoption is permitted under certain conditions.

 

In January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment.  ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for impairment. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  ASU 2017-04 will be effective for the Company for annual periods beginning after December 15, 2019, and interim periods.  Early adoption is permitted for testing performed after January 1, 2017.

 

In May 2017, the FASB issued ASU No. 2017-09 (“ASU 2017-09”), Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting.  ASU 2017-09 clarifies and reduces both the (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 will be effective for the Company for annual periods beginning after December 15, 2017, and interim periods.  Early adoption is permitted.

 

Recently Issued Accounting Standards Updates: 

There were other various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.


9


NOTE 3. ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net, consists of the following:

 

March 31, 2018

 

December 31, 2017

 

Insurance claims receivable

$

23,719

 

$

24,447

 

Workers compensation claims receivable

 

31,236

 

 

31,236

 

Customer receivables

 

11,323

 

 

18,418

 

Total accounts receivable

 

66,278

 

 

74,131

 

 

 

 

 

 

 

 

Less: allowance for doubtful accounts

 

(26,000

)

 

(30,000

)

 

 

 

 

 

 

 

Accounts receivable, net

$

40,278

 

$

44,131

 

 

As of March 31, 2018, and December 31, 2017, respectively, the Company was owed $40,278 and $44,131 in accounts receivable, consisting of $23,719 and $24,447 in insurance claims, $31,236 and $31,236 in workers compensation claims, and $11,323 and $18,418 in customer receivables.

 

As of March 31, 2018, and December 31, 2017, respectively, $11,323 and $18,418 was owed from customers, consisting of $180 and $7,275 in services revenue, and $11,143 and $11,143 in charges for prescriptions and other retail purchases made by certain preferred customers, for which the Company provides monthly invoices to.

 

During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, the allowance for doubtful collections increased by $236 and $114,957, respectively.  As of March 31, 2018, and December 31, 2017, the allowance for doubtful collection was $26,000 and $30,000 , respectively.

 

NOTE 4. LOANS RECEIVABLE

 

As of March 31, 2018, and December 31, 2017, loans receivable consists of $169,902 in monies owed to the Company from the former owner of RoxSan Pharmacy.  Included in this amount are monies collected by the former owner for revenues earned subsequent to the closing date of August 13, 2015, (the “Closing Date”), less monies collected by the Company for revenues earned prior the Closing Date; and monies advanced by the Company on behalf of the former owner for expenses incurred prior to the Closing Date, less monies advanced by the former owner on behalf of the Company for expenses incurred subsequent to the Closing Date.  

 

The amount owed to the Company is being disputed by the former owner and is part of the legal proceedings disclosed in Note 16. The Company is confident that it shall prevail in this matter.

 

NOTE 5. PROPERTY AND EQUIPMENT

 

The following are the components of property and equipment:

 

March 31, 2018

 

December 31, 2017

 

Appliances

$

4,486

 

$

4,486

 

Computer and office equipment

 

44,442

 

 

44,442

 

Furniture and fixtures

 

20,213

 

 

20,213

 

Leasehold improvements

 

18,731

 

 

18,731

 

Software

 

6,251

 

 

6,251

 

Medical devices and instruments

 

45,194

 

 

45,194

 

Sub-total

 

139,317

 

 

139,317

 

Less: accumulated depreciation

 

(129,317

)

 

(129,317

)

Property and equipment, net

$

10,000

 

$

10,000

 

 

Depreciation expense for the three months ended March 31, 2018 and 2017, was $0 and $7,338, respectively.

 

NOTE 6. INTANGIBLE ASSETS

 

The following are the components of finite-lived intangible assets:

 

March 31, 2018

 

December 31, 2017

 

Products and processes

$

12,500

 

$

12,500

 

Trademarks and patents / technology

 

377,000

 

 

377,000

 

Customer lists / relationships

 

280,000

 

 

280,000

 

Non-compete agreement

 

40,000

 

 

40,000

 

Marketing related

 

162,400

 

 

162,400

 

Software

 

1,985,600

 

 

1,985,600

 

Sub-total

 

2,857,500

 

 

2,857,500

 

Accumulated amortization

 

(669,063

)

 

(559,406

)

Intangible assets, net

$

2,188,437

 

$

2,298,094

 

 

Amortization expense for the three months ended March 31, 2018 and 2017, was $109,657 and $22,405, respectively.


10


NOTE 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of:

March 31, 2018

 

December 31, 2017

 

Accounts payable-vendors

$

2,306,804

[1]

$

2,021,472

[1]

Credit cards payable

 

445,521

 

 

443,830

 

Factors payable

 

84,632

 

 

85,268

 

State taxes payable

 

38,975

 

 

37,993

 

Payroll taxes payable

 

1,205,431

 

 

1,176,979

 

Accrued interest

 

2,230,440

 

 

1,906,516

 

Accrued payroll and payroll taxes

 

422,221

 

 

355,423

 

 

 

 

 

 

 

 

Total accounts payable and accrued expenses

$

6,734,025

 

$

6,027,480

 

 

[1]At March 31, 2018, and December 31, 2017, respectively, $165,353 and $105,746 in accrued compensation and expenses was reclassified from related party payables to accounts payable, resulting from a change in related parties (Note 9). 

 

Payroll taxes payable includes $314,435 and $300,534 in penalties, and $46,664 and $35,092 in interest, related to unpaid payroll taxes as of March 31, 2018, and December 31, 2017, respectively.

 

NOTE 8. NOTES AND LOANS PAYABLE

 

Notes and loans payable consists of the following:

 

March 31, 2018

 

December 31, 2017

 

Short-term:

 

 

 

 

 

 

Notes payable, convertible

$

966,000

 

$

741,000

 

Total short-term notes payable

 

966,000

 

 

741,000

 

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

Notes and loans payable, unsecured

 

 

 

 

 

 

Loans payable

 

11,900

 

 

11,900

 

Notes payable

 

266,975

[1]

 

84,075

 

Total notes and loans payable, unsecured

 

280,975

 

 

95,975

 

 

 

 

 

 

 

 

Note payable, convertible

 

720,154

[1]

 

144,000

 

 

 

 

 

 

 

 

Notes payable, secured, net of unamortized discount:

 

 

 

 

 

 

Note payable-merchant

 

974,826

 

 

974,826

 

 

 

 

 

 

 

 

Note payable-bank

 

34,604

 

 

38,240

 

 

 

 

 

 

 

 

Note payable

 

20,500,000

 

 

20,500,000

 

Less: unamortized discount

 

(1,870,000

)

 

(3,145,000

)

Note payable, net of unamortized discount

 

18,630,000

 

 

17,355,000

 

Total notes payable, secured, net of unamortized discount

 

19,639,430

 

 

18,368,066

 

Total long-term notes and loans payable

 

20,640,559

 

 

18,608,041

 

 

 

,

 

 

 

 

Total notes and loans payable

$

21,606,559

 

$

19,349,041

 

 

[1]At March 31, 2018, $185,000 in notes payable and related accrued interest of $11,823, and $576,154 in convertible notes payable and related accrued interest of $90,742, was reclassified from related party to non-related party, resulting from a change in related parties (Note 9). 

 

Non-related party convertible notes payable consist of the following:

Note Holder

 

Principal

 

APR

 

Accrued

Interest

 

Conversion

Price

 

Term/Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lender Group A

 

$

220,000

 

4%-12%

 

$

15,393

 

$0.10

 

05/2018

 

Investor Group A

 

 

746,000

 

10%

 

 

45,183

 

$0.10

 

07/2018-09/2018

 

The Kasper Group, Ltd.

 

 

144,000

 

7%

 

 

62,992

 

$0.10

[2]

10/01/2019

[2]

Joseph M. Redmond

 

 

576,154

[1]

5%

 

 

97,845

[1]

$0.10

 

07/31/2017

 

 

 

$

1,686,154

 

 

 

$

221,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[2]On July 31, 2018, the note was modified 1) to extend the note’s maturity to October 1, 2019, and 2) to change the conversion price from $0.25 to $0.10 per share. 


11


On January 25, 2018, as part of Investor Group A, the Company issued a convertible promissory note to an accredited investor for financing in the amount of $5,000.  The note includes interest at a rate of 10% per annum, matures in one (1) year, and is convertible into restricted shares of the Company’s common stock at a conversion rate of $0.10 per share.  The common shares were issued with 50% warrant coverage for a period of three (3) years at an exercise price of $0.25 per common share.

 

In February 2018, the Company issued senior secured convertible notes (the “CV Note(s)”) in the aggregate principal sum of $220,000 to two lenders (“Lender Group A”).  The CV Notes are convertible into restricted shares of the Company’s common stock at a conversion rate of $0.10 per share. Two (2) of the CV Notes in the aggregate principal sum of $145,000 bear interest at a rate of twelve percent (12%) for ninety (90) days, or $17,400. The CV Note in the principal sum of $75,000 bears interest at a rate of four percent (4%) for thirty (30) days, or $3,000.  In addition to interest, the note holders were issued an aggregate of 440,000 shares of the Company’s restricted common stock, valued at $44,000. The CV Notes have been extended to mature July 15, 2018.

 

As of March 31, 2018, and December 31, 2017, respectively, short-term non-related party convertible promissory notes in the amount of $966,000 and $741,000, are owed by the Company.  During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, interest in the amount of $33,736 and $26,840 was expensed.  As of March 31, 2018, and December 31, 2017, respectively, a total of $60,576 and $26,840 in interest has been accrued, and is included as an accrued expense on the accompanying consolidated balance sheet.

 

As of March 31, 2018, and December 31, 2017, respectively, long-term non-related party convertible promissory notes in the amount of $720,154 [1] and $144,000, are owed by the Company. During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, interest in the amount of $9,588 and $10,080 was expensed.  As of March 31, 2018, and December 31, 2017, respectively, a total of $160,837 [1] and $60,507 in interest has been accrued, and is included as an accrued expense on the accompanying consolidated balance sheet.

 

As of March 31, 2018, and December 31, 2017, respectively, long-term unsecured non-related party loans and promissory notes in the aggregate sum of $280,975 [1] and $95,975, are owed by the Company.  During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, interest in the amount of $4,081 and $1,800 was expensed.  As of March 31, 2018, and December 31, 2017, respectively, a total of $67,336 [1] and $51,432 in interest has been accrued and is included as an accrued expense on the accompanying consolidated balance sheet.

 

As of March 31, 2018, and December 31, 2017, respectively, long-term secured non-related party promissory notes in the amount of $19,639,430 and $18,386,066, , net of unamortized discount of $1,870,000 and $3,145,000, are owed by the Company.  During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, interest in the amount of $263,152 and $976,048 was expensed.  As of March 31, 2018, and December 31, 2017, respectively, a total of $1,848,360 and $1,585,714 in interest has been accrued, and is included as an accrued expense on the accompanying consolidated balance sheet.

 

At March 31, 2018, and December 31, 2017, respectively, the long-term secured non-related party promissory note in the principal sum of $20,500,000, the unamortized discount of $1,870,000 and $3,145,000, and the related accrued interest of $1,848,360 and $1,585,314, is held by the former owner of RoxSan with whom the Company is currently in litigation. The Company is also evaluating this liability in connection with RoxSan’s Chapter 7 petition filed in May 2018 (Note 16).

 

The future maturities of notes payable are summarized as follows:

 

 

Year

 

Principal

 

 

2018

 

$

22,320,055

[3]

 

2019

 

 

178,604

 

 

 

 

$

22,498,659

 

 

[3]Includes notes payable on demand in the amount of $84,075 and $974,826 owed to American Express, in default under the Company’s wholly-owned subsidiary RoxSan Pharmacy, Inc. currently pending discharge from a Chapter 7 filing in the US Bankruptcy Court. 

 

During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, interest on non-related party notes and loans payable in the amount of $310,557 and $920,434 has been expensed.  As at March 31, 2018, and December 31, 2017, respectively, a total of $2,137,109 [1] and $1,724,093 in interest has been accrued and is included as part of accrued expenses on the accompanying consolidated balance sheets.


12


NOTE 9. RELATED PARTY TRANSACTIONS

 

Related party transactions consist of the following:

 

March 31, 2018

 

December 31, 2017

 

Related party payables

 

 

 

 

 

 

Accrued compensation

$

1,041,174

[2]

$

927,144

[1]

Cash advances

 

154,291

[2]

 

171,630

[1]

Total related party payables

 

1,195,465

 

 

1,098,774

 

 

 

 

 

 

 

 

Note payable, related party

 

––

[2]

 

185,000

 

Notes payable, related party, convertible

 

591,100

[2]

 

1,167,254

 

Total notes payable

 

591,100

 

 

1,352,254

 

 

 

 

 

 

 

 

Total related party transactions

$

1,786,565

 

$

2,451,028

 

 

[1]As of January 1, 2017, Mr. Dave Engert, former Executive Chairman of the board of directors, is no longer a related party.  As a result, related party payables was reduced by $105,746, representing $105,000 in accrued compensation and $746 in cash advances. As of December 31, 2017, $105,746 is included as part of accounts payable (Note 7) on the accompanying consolidated balance sheets. See Note 16 for additional information and legal proceedings related to Mr. Engert.  

[2]As of January 1, 2018, Mr. Joseph M. Redmond, former President and member of the board of directors, is no longer a related party.  As a result, related party transactions was reduced by $926,507, representing $761,154 in promissory notes, of which $576,154 contain conversion features, $161,626 in accrued compensation, and $3,727 in expense advances. As of March 31, 2018, $185,000 is included as part of long-term unsecured notes and loans payable, $576,154 is included as part of long-term convertible notes payable (Note 8), and $165,353 is included as part of accounts payable (Note 7) on the accompanying consolidated balance sheets. In addition, accrued interest of $11,823 related to the promissory note, and accrued interest of $90,742, related to the convertible promissory notes was reclassified from related party to non-related party accrued interest. See Note 16 for additional information and legal proceedings related to Mr. Redmond.  

 

Related party convertible notes payable consist of the following:

 

Note Holder

 

Principal

 

APR

 

Accrued Interest

 

Conversion

Price

 

Term/Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Huntington Chase, Beneficial Owner

 

 

291,100

 

7%

 

 

58,707

 

$0.10

 

12/31/2015

 

AvantGarde, LLC, Beneficial Owner

 

 

250,000

 

12.5%

 

 

29,024

 

$0.20

 

04/26/2018

[3]

Hamburg Investment Co., Beneficial Owner

 

 

50,000

 

12.5%

 

 

5,599

 

$0.20

 

05/08/2018

[3]

Total

 

$

591,100

 

 

 

$

93,330

 

 

 

 

 

 

[3]Upon maturity, the note was extended and amended.  See Note 17 for additional information.  

 

As at March 31, 2018, and December 31, 2017, respectively, related parties are due a total of $1,786,565 and $2,451,028, consisting of $1,041,174 [2] and $927,144 in accrued compensation owed to officers; $154,291 [2] and $171,630 in cash advances from officers and beneficial owners to the Company for operating expenses; and $591,100 [2] and $1,352,254 in related party notes payable, of which $591,100 and $1,167,254 contain conversion features.

 

As of March 31, 2018, and December 31, 2017, respectively, convertible promissory notes in the aggregate sum of $591,100 [2] and $1,167,254, are owed by the Company.  During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, interest in the amount of $14,271 and $76,511 was expensed, of which $798 and $16,833 was paid to the note holders in cash.  As of March 31, 2018, and December 31, 2017, respectively, a total of $93,300 [2] and $170,600 in interest has been accrued and is included as part of accrued expenses on the accompanying consolidated balance sheets.

 

On January 31, 2017, the Company’s wholly-owned subsidiary, RoxSan Pharmacy, Inc. issued a secured promissory note to Parallax Health Sciences, Inc. along with a Pledge and Security Agreement and Note Agreement of the same date, for funding, up to $2,000,000, to be disbursed to RoxSan upon request (the “Principal”).  As of March 31, 2018, and December 31, 2017, respectively, Principal in the amount of $1,234,844 and $1,153,395 has been disbursed, and interest in the amount of $19,000 and $10,395 has been accrued.

 

On January 1, 2018, the Company entered into an Executive Agreement with its Chief Financial Officer.  The agreement replaces any other written agreement with the Company, is for a term of one (1) year, with the option to extend, and includes annual compensation of $216,000 in year 1, as well as a bonus plan and customary executive benefits.  In addition, the agreement provides for a non-refundable, fully-vested signing bonus of $100,000, as well as a grant of stock options to purchase 1,000,000 shares of the Company's common stock at an exercise price of $0.25 per share. The options are for a period of five (5) years, and vest quarterly over a one (1) year period.

 

On January 1, 2018, the Company entered into a Consulting Agreement with Huntington Chase Financial Group, LLC, whose principal is a related party. The agreement replaces any other written agreement with the Company, is for a term of three (3) years, and includes monthly compensation of $25,000 in year 1; $30,000 in year 2 and $35,000 in year 3, of which the year 2 and 3 increases are deferred until completion of certain development projects, as well as customary expense allowances.  In addition, the agreement provides for a grant of stock options to purchase 4,000,000 shares of the Company's common stock at an exercise price of $0.25 per share. The options are for a period of five (5) years, of which 25% vest immediately, and the remainder vest when certain market share prices of the Company’s common stock are met.

 

During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, interest on related party notes payable in the amount of $14,271 and $66,259 was expensed. As of March 31, 2018, and December 31, 2017, respectively, a total of $93,330 [2] and $182,422 in interest has been accrued and is included as part of accrued expenses on the accompanying consolidated balance sheets.


13


NOTE 10: CONVERTIBLE PREFERRED STOCK

 

The total number of authorized shares of preferred stock that may be issued by the Company is 10,000,000 with a par value of $0.001 per share.

 

As of March 31, 2018, and December 31, 2017, the Company had 863,691 shares of preferred stock issued and outstanding.

 

NOTE 11. COMMON STOCK

 

The total number of authorized shares of common stock that may be issued by the Company is 250,000,000 with a par value of $0.001 per share.  

 

On January 11, 2018, pursuant to a resolution of the Board of Directors, the Company issued 6,000,000 shares of its restricted common stock to certain officers and directors.  The shares were purchased at par, or $0.001 per share, for  $6,000, of which $1,000 was cash and $5,000 was stock compensation.

 

On January 19, 2018, in connection with an equity offering, the Company issued 1,000,000 shares of its restricted common stock at a price of $0.04 per share, for cash in the amount of $40,000.  As a result, $39,000 was recorded to paid in capital.

 

On January 29, 2018, in connection with a certain consulting agreement, the Company issued 250,000 shares of its restricted common stock to the consultant for services to be provided over a twelve (12) month period.  The shares were valued at $67,500, of which 25% vest immediately, and the remainder vest periodically over the term of the agreement.  As a result, $16,875 was expensed, $50,625 was deferred, to be amortized over the next twelve (12) months, and $67,250 was recorded to paid in capital.  

 

In February 2018, in connection with certain senior secured promissory notes, the Company issued 440,000 shares of its restricted common stock to the note holders as a form of interest.  The shares were valued at $44,000, of which $22,211 was expensed, $21,789 was deferred, to be amortized over the term of the notes, and $43,560 was recorded to paid in capital.

 

During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, a total of $111,500 and $2,838,500 in deferred stock compensation was recorded, and $1,960,150 and $1,028,498 was expensed. As of March 31, 2018, and December 31, 2017, respectively, there remains $1,771,354 and $1,810,002 in deferred stock compensation to be expensed over the next 30 months.

 

As of March 31, 2018, and December 31, 2017, respectively, the Company had 144,444,530 and 136,734,530 common shares issued and outstanding.

 

NOTE 12. WARRANTS AND OPTIONS

 

As of March 31, 2018, and December 31, 2017, respectively, the Company had 7,680,000 and 7,205,000 warrants, and 26,597,319 and 20,675,000 options, issued and outstanding.

 

On January 25, 2018, in connection with a certain convertible promissory note, 25,000 warrants were issued.  The warrants vest periodically over the term of the agreement, and are exercisable for a period of three (3) years at an exercise price of $0.25 per share.

 

On January 29, 2018, in connection with a certain consulting agreement, 250,000 warrants were issued.  The warrants vest periodically over the term of the agreement, and are exercisable for a period of three (3) years at an exercise price of $0.25 per share.

 

On February 13, 2018, in connection with a certain consulting agreement, 200,000 warrants were issued.  The warrants vest periodically over the term of the agreement, and are exercisable for a period of three (3) years at an exercise price of $0.25 per share.


14


Warrants Outstanding

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Remaining

 

Exercise Price

 

Weighted

 

 

 

Common

 

Contractual Life

 

Times Number

 

Average

 

Exercise Price

 

Shares

 

(in years)

 

Of Shares

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

$0.10

 

250,000

 

2.50

 

$

25,000

 

$0.29

 

$0.15

 

1,000,000

 

2.75

 

 

150,000

 

$0.26

 

$0.21

 

100,000

 

2.50

 

 

21,000

 

$0.31

 

$0.25

 

475,000

 

2.75

 

 

118,750

 

$0.26

 

$0.25

 

3,455,000

 

2.50

 

 

863,750

 

$0.29

 

$0.25

 

1,500,000

 

2.25

 

 

375,000

 

$0.34

 

$0.35

 

250,000

 

2.50

 

 

87,500

 

$0.29

 

$0.60

 

250,000

 

2.50

 

 

150,000

 

$0.31

 

$0.75

 

300,000

 

1.00

 

 

225,000

 

$0.29

 

$0.75

 

100,000

 

0.75

 

 

75,000

 

$0.28

 

 

 

7,680,000

 

 

 

$

2,091,000

 

$0.26

 

 

Warrant Activity

 

 

 

Weighted

 

 

Number of

 

Average

 

 

Shares

 

Exercise Price

 

Outstanding at December 31, 2017

 

7,205,000

 

$0.26

 

Issued

 

475,000

 

$0.26

 

Exercised

 

––

 

––

 

Expired / Forfeited

 

––

 

––

 

Outstanding at March 31, 2018

 

7,680,000

 

$0.26

 

 

On January 1, 2018, in connection with an executive employment agreement, the Company granted the executive 1,000,000 options to purchase common shares at $0.25 for a period of five (5) years.  The options vest annually over a one (1) year period, and were valued at $134,500 using the Black-Scholes method.  The assumptions used in valuing the options were: expected term 3.75 years, expected volatility 1.78, risk free interest rate 2.25%, and dividend yield 0%.

 

On January 1, 2018, in connection with a consulting agreement, the Company granted the consultant 4,000,000 options to purchase common shares at $0.25 for a period of five (5) years.  The options vest annually over a three (3) year period, and were valued at $539,200 using the Black-Scholes method.  The assumptions used in valuing the options were: expected term 3.5 years, expected volatility 1.86, risk free interest rate 2.25%, and dividend yield 0%.

 

Options Outstanding

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Remaining

 

Exercise Price

 

Weighted

 

 

 

Common

 

Contractual Life

 

Times Number

 

Average

 

Exercise Price

 

Shares

 

(in years)

 

Of Shares

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

$0.05

 

90,000

 

4.25

 

$

4,500

 

$0.14

 

$0.05

 

1,140,000

 

4.00

 

 

57,000

 

$0.09

 

$0.05

 

100,000

 

3.50

 

 

5,000

 

$0.08

 

$0.05

 

60,000

 

2.75

 

 

3,000

 

$0.06

 

$0.05

 

4,082,319

 

2.50

 

 

204,116

 

$0.10

 

$0.05

 

3,250,000

 

0.50

 

 

162,500

 

$0.07

 

$0.10

 

1,375,000

 

2.75

 

 

137,500

 

$0.10

 

$0.10

 

500,000

 

2.50

 

 

50,000

 

$0.14

 

$0.10

 

250,000

 

1.50

 

 

25,000

 

$0.06

 

$0.15

 

1,000,000

 

2.50

 

 

150,000

 

$0.14

 

$0.25

 

5,000,000

 

5.00

 

 

1,250,000

 

$0.16

 

$0.25

 

6,000,000

 

4.25

 

 

1,500,000

 

$0.14

 

$0.25

 

1,000,000

 

2.50

 

 

250,000

 

$0.15

 

$0.25

 

1,000,000

 

2.00

 

 

250,000

 

$0.10

 

$0.25

 

250,000

 

1.50

 

 

62,500

 

$0.06

 

$0.35

 

250,000

 

1.50

 

 

87,500

 

$0.07

 

$0.60

 

250,000

 

1.50

 

 

150,000

 

$0.08

 

 

 

25,597,319

 

 

 

$

4,348,616

 

$0.17

 


15


Options Activity

 

 

 

Weighted

 

 

Number of

 

Average

 

 

Shares

 

Exercise Price

 

Outstanding at December 31, 2017

 

20,675,000

 

$0.14

 

Issued

 

5,000,000

 

$0.15

 

Exercised

 

(77,681

)

$0.15

 

Expired / Forfeited

 

––

 

––

 

Outstanding at March 31, 2018

 

25,597,319

 

$0.17

 

 

During the three months and the year ended March 31, 2018, and December 31, 2017, respectively, 5,000,000 and 11,570,000 options were issued, 77,681 and 300,000 options were exercised, no options expired, and 0 and 1,730,000 options were forfeited. A total of $673,700 and $1,679,765 in deferred stock option compensation was recorded, and $193,484 and $589,679 was expensed during the three months and the year ended March 31, 2018, and December 31, 2017, respectively.  There remains $1,799,226 and $1,319,010 in deferred compensation as of March 31, 2018, and December 31, 2017, respectively, to be expensed over the next 30 months.

 

NOTE 13. LEASES

 

The Company sub-leases office space for its headquarters in Santa Monica, California, for $5,600 per month, on a month-to-month basis.

 

In 2017, the Company leased office space and commercial facilities in Beverly Hills, California, for its pharmacy operations.  The commercial facilities were leased at a base rent of $92,880 under agreements with original terms of twelve (12) years, expiring in September 2018, and contained base monthly rent for premises plus a proportionate share of common area maintenance cost (CAM).

 

The future minimum rental payments required under the lease agreements are summarized as follows:

 

Year

 

Base

 

CAM

 

Total

 

 

 

 

 

 

 

 

 

 

2018

 

$

207,958

 

$

53,549

 

$

261,508

 

 

$

207,958

 

$

53,549

 

$

261,508

 

On December 20, 2017, the Company ceased its pharmacy operations, and in January 2018, the Company vacated the pharmacy premises.  In May 2018, the pharmacy filed a Chapter 7 bankruptcy petition, and expects the Company to be relieved of any monies owed under the leases for the commercial facilities in Beverly Hills, California.

 

Rent expense for the three months and the year ended March 31, 2018, and December 31, 2017, was $90,451 and $390,452, respectively, including $14,604 and $58,442, respectively, of common area maintenance cost.


16


NOTE 14. INCOME TAXES

 

A reconciliation of the expected statutory federal and state taxes and the total income tax expense (benefit) at March 31, 2018, and December 31, 2017, was as follows:

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

Income (loss) before taxes

$

(3,856,469

)

$

(13,873,906

)

Statutory rate (Fed & State(s))

 

30%

 

 

30%

 

 

 

 

 

 

 

 

Computed expected tax payable (recovery)

 

(1,129,000

)

 

(4,254,200

)

 

 

 

 

 

 

 

Effect of the U.S. tax law change

 

––

 

 

2,503,600

 

 

 

 

 

 

 

 

Tax effect of non-deductible expenses:

 

 

 

 

 

 

Stock compensation/amortization of stock options

 

397,700

 

 

738,100

 

Discount amortization

 

398,400

 

 

1,626,300

 

Penalties

 

4,200

 

 

58,100

 

Other

 

––

 

 

5,300

 

Total tax effect of non-deductible expenses

 

800,300

 

 

2,427,800

 

 

 

 

 

 

 

 

Change in valuation allowance

 

(328,700

)

 

(674,600

 

 

 

 

 

 

 

 

Income tax expense

$

––

 

$

2,600

 

 

 

 

 

 

 

 

Reported income taxes:

 

 

 

 

 

 

Federal

$

––

 

$

––

 

State

 

––

 

 

2,600

 

Total

$

––

 

$

2,600

 

 

The significant components of deferred income tax assets and liabilities at March 31, 2018, and December 31, 2017, are as follows:

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

Net operating loss carried forward

$

6,986,400

 

$

6,675,700

 

Bad debt allowance

 

7,200

 

 

8,400

 

Officers’ accrued compensation

 

291,400

 

 

259,400

 

Accrued related party interest

 

38,200

 

 

51,000

 

Valuation allowance

 

(7,323,200

)

 

(6,994,500

)

 

 

 

 

 

 

 

Net deferred income tax asset

$

––

 

$

––

 

 

The Company’s net operating losses are as follows:

 

Tax Year

 

Net Operating Loss

 

Expires

 

 

 

 

 

 

2008

 

$

400

 

2028

2009

 

 

132,100

 

2029

2010

 

 

41,600

 

2030

2011

 

 

659,100

 

2031

2012

 

 

552,200

 

2032

2013

 

 

492,600

 

2033

2014

 

 

1,113,200

 

2034

2015

 

 

3,706,800

 

2035

2016

 

 

12,250,200

 

2036

2017

 

 

4,909,300

 

2037

2018 to date

 

 

1,110,200

 

2038

 

 

 

 

 

 

Total

 

$

24,967,700

 

 

 

As at March 31, 2018, and December 31, 2017, respectively, the Company had approximately $24,967,700 and $23,857,500 of federal net operating losses. The Company is open to examinations for the tax year 2011 through the current tax year.


17


NOTE 15. SEGMENT REPORTING

 

During 2018, the Company has the following business segments: Remote Care Services (RCS), Behavioral Health Services (BHS), and Corporate. In 2017, the Company’s operations also included Retail Pharmacy Services (RPS), for pharmacy services provided by RoxSan Pharmacy, Inc. (“RoxSan”). See Note 1 and 2 for a description of each segment and related significant accounting policies.

 

The following table is a reconciliation of the Company’s business segments to the consolidated financial statements:

.

 

Pharmacy [1]

Segment

 

Remote Care

Segment

 

Behavioral [2]

Health Segment

 

Corporate

Segment

 

Consolidated

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

––

 

$

4,440

 

$

450

 

$

––

 

$

4,890

 

Gross profit (loss)

 

––

 

 

(1,098

)

 

450

 

 

––

 

 

(648

)

Operating loss

 

(224,918

)

 

(72,258

)

 

(126,387

)

 

(1,753,165

)

 

(2,176,728

)

Depreciation and amortization

 

––

 

 

2,466

 

 

106,775

 

 

416

 

 

109,657

 

Interest expense

 

21,591

 

 

708

 

 

––

 

 

322,442

 

 

344,741

 

Impairment loss

 

––

 

 

––

 

 

––

 

 

––

 

 

––

 

Discount amortization

 

––

 

 

10,000

 

 

50,000

 

 

1,275,000

 

 

1,335,000

 

Total assets

 

242,454

 

 

931,060

 

 

2,030,841

 

 

13,133

 

 

3,217,488

 

Goodwill

 

––

 

 

785,060

 

 

––

 

 

––

 

 

785,060

 

Additions to property and equipment

 

––

 

 

––

 

 

––

 

 

––

 

 

––

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

1,946,698

 

$

14,262

 

$

––

 

$

––

 

$

1,960,960

 

Gross profit (loss)

 

373,734

 

 

(13,780

)

 

––

 

 

––

 

 

359,954

 

Operating loss

 

(520,125

)

 

(206,243

)

 

––

 

 

(305,603

)

 

(1,038,932

)

Depreciation and amortization

 

28,171

 

 

1,156

 

 

––

 

 

416

 

 

29,743

 

Interest expense

 

89,717

 

 

––

 

 

––

 

 

213,585

 

 

303,302

 

Discount amortization

 

––

 

 

30,000

 

 

––

 

 

1,275,000

 

 

1,305,000

 

Total assets

 

1,198,909

 

 

935,587

 

 

––

 

 

18,935

 

 

2,153,431

 

Goodwill

 

––

 

 

785,060

 

 

––

 

 

––

 

 

785,060

 

Additions to property and equipment

 

––

 

 

––

 

 

––

 

 

––

 

 

––

 

 

[1]Pharmacy operations ceased December 2017. The pharmacy expenses incurred in 2018 represent contractual obligations, legal fees and other costs to wind down operations. 

[2]Behavioral Health Segment commenced March 22, 2017. 

 

NOTE 16. LEGAL MATTERS

 

Dispute with Former Owner of RoxSan

 

In October 2015, shortly following the Company's acquisition of RoxSan, Shahla Melamed (“Melamed”), initiated two (2) legal actions against the Company in the Superior Court of the State of California, County of Los Angeles, West District, Shahla Melamed v. Parallax Health Sciences, Inc., action numbers SC 124873 and SC 125702.  

 

In the matter, action No. SC 124873, Melamed sought rescission of the August 13, 2015, Purchase Agreement. During the proceedings, Melamed also contended that the Company owed Melamed monies for, among other things, expenses paid by Melamed on behalf of the Company.  As a result, the Court split the action into two separate rulings: (1) Rescission Phase and (2) Accounting Phase.

 

Action No. SC 124873-Rescission Phase: 

In the Matter, action no. SC 124873, rescission was sought by Melamed on the basis that, allegedly, in order to acquire the Pharmacy, the Company and its principals had allegedly defrauded Melamed, there had allegedly been a complete failure of consideration, and a unilateral mistake was allegedly made on the part of Melamed.  Subsequently filed pleadings by the Company and RoxSan in action no. SC 124873 allege, among other things, that Melamed misrepresented the true earnings and source of income for the pharmacy business and had engaged in a fraudulent and illegal scheme to ship medications to states where her pharmacy was not licensed prior to the sale of the Pharmacy.

 

Final Ruling:  On March 17, 2017, the Court ruled in favor of the Company, and issued that Melamed is not entitled to rescission of the Purchase Agreement.  The ruling of the Court stated that no fraud on the part of the Company or its principals had been demonstrated.  The Court further ruled that there had been no failure of consideration, and that Melamed’s entry into the Agreement was not a result of a unilateral mistake on the part of Melamed.  The Minutes of the Ruling were entered by the County Clerk on March 17, 2017.


18


Action No. SC 124873-Accounting Phase: 

In the Matter, action No. SC 124873, Melamed contended that the Company owed Melamed monies for, among other things, expenses paid by Melamed post-Closing.  An accounting was presented by Melamed’s expert, BDO Seidman (“BDO”), alleging that the Company owed Melamed in excess of $500,000.  The Company disputed this vigorously and prepared a 400+ page analysis (the “Analysis Report”) of the BDO reconciliation report.  The Analysis Report identified errors in the BDO report in excess of $900,000 and found that Melamed owed the Company over $400,000.  Melamed argued the findings in the Analysis Report. Consequently, due to the complexities of the accountings, the Court ordered a third-party adjudicator with an accounting background to review both the BDO report and the Company’s Analysis Report.

 

Draft Ruling: On July 24, 2017, in the Matter, action No. SC124873, the Company was notified that the results of the reconciliation review performed by third-party adjudicator were in favor of the Company in the amount of $412,948.  Melamed objected to the adjudicator’s findings, and a final hearing was held in January 2018.  A final judgment is pending for the Court’s decision on the exact monies owed by Melamed to the Company.

 

Action No. SC125702: 

In the Matter, action No. SC125702, Melamed alleges that the Company is in default under the terms of the Purchase Agreement and Secured Note, and the Company’s termination of Melamed’s employment agreement.  The Company firmly believes that it had adequate grounds to justify the termination of the employment, that it acted within its rights, and shall prevail in these proceedings.  A trial date is currently set for December 2018.

 

Action No. SC 124898:  

The Company has initiated legal action against Melamed and filed a complaint, action number SC 124898, in the Superior Court of the State of California, County of Los Angeles, West District, Parallax Health Sciences, et al. v. Shahla Melamed, et al.  The Complaint in that action alleges that Melamed has breached several obligations under the Purchase Agreement, and the Company is seeking to reduce the Secured Note due to undisclosed material changes in the business. A trial date is currently set for December 2018.

 

As part of the Company’s pleadings to the courts, the Company has presented the following matters:

 

Purchase Price Dispute 

Included in the Acquisition Agreement for RoxSan Pharmacy, Inc., and as part of the negotiated purchase price, were representations and warranties made by the former owner involving certain primary revenue streams and related contracts. Shortly after the closing, however, management discovered that these representations were substantially inaccurate and/or completely false. These inaccuracies, and the improper disclosures and/or omissions made by the former owner during negotiations, would have significantly affected the purchase price and related note payable. As a result, among other things, management has initiated legal action against the former owner to seek a reduction in the purchase price.

 

Included in the false representations made by the former owner were prescription revenues in excess of $8 million (and approximately $16 million prior to the change in ownership) related to workers compensation claims that the former owner warranted as collectible.  The insurance claims related to these prescriptions, which originated from and were provided to the pharmacy by the former owner's direct family members, were investigated by a third-party expert retained by the Company, and the claims were substantially identified as fraudulent.  The former owner's family member has been indicted by the Department of Justice for among other things, insurance fraud.

 

In addition, management engaged a third-party to perform a valuation of the Pharmacy, utilizing revised inputs that more accurately reflected the Pharmacy's revenue streams as of the date of Acquisition. The valuation performed resulted in a fair market value of $4.7 to $5.2 million. After careful consideration, and based upon these significant differences, management has determined that the purchase price and related promissory note of $20.5 million does not fairly represent the fair market value at the date of purchase. The Company has, therefore, applied a discount to the note of $15.3 million, to reduce the purchase price and related note to its estimated fair market value of $5.2 million, utilizing the higher value on the range as a conservative measure. The discount is being amortized over the term of the promissory note.

 

The valuation performed does not include the effects of any liabilities the former owner omitted or damages caused to the Company as a result of the former owner and her immediate family members connected to the Pharmacy.

 

Control of Funds Dispute / US Postal Interference 

For a period of time immediately after the closing of the Acquisition, the Melamed would not relinquish control of the Pharmacy's bank accounts, and collected the Pharmacy's incoming cash revenues, refusing to transfer the funds to the new ownership. Furthermore, when the Company attempted to change the corporate records and signatories on the existing bank accounts, the former owner disputed the changes, resulting in approximately $180,000 in corporate funds being frozen and held for adjudication. During this period, the Company was forced to request that the former owner pay the Pharmacy's operating expenses. At no time after the Company opened new accounts did the former owner cooperate with the transference or willingly relinquish control of the Pharmacy's operating cash flow or incoming cash revenues.


19


The former owner continued to interfere in the transference of control of the Pharmacy by submitting change of address forms to the US Postal Service, wherein the former owner diverted the Pharmacy mail to her home address.  Once this was discovered and rectified with the post office, the former owner filed another change of address to divert mail to a post office box.  During these periods of time, the former owner received check payments and negotiated the checks by opening up a bank account utilizing a DBA, "Roxsan Pharmacy."  The Company was able to identify some of the checks the former owner negotiated by directly contacting the payer and receiving copies of the cancelled checks, with the former owner's signature endorsement and account number on the check.

 

Disputes with Former Executives

 

Action No. CV2017-052804 

On March 9, 2017, Dave Engert former Executive Chairman and director of the Company filed a lawsuit in Arizona and then on or about May 5, 2017, Mr. Engert, changed the venue and filed suit against the Company and RoxSan Pharmacy, Inc. in the United States District Court, Central District of California for an amount exceeding $75,000.  The Company intends to vigorously defend against this action, and on October 23, 2017, filed an answer and counterclaims against Mr. Engert for an amount exceeding $100,000.  The counterclaims include possible fraud and negligence committed by Mr. Engert and Mr. J. Michael Redmond, former successor Chairman of Mr. Engert, director, President and Chief Executive Officer of the Company and former President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy, Inc.

 

Action No. BC700070 

On March 28, 2018, Mr. J. Michael Redmond filed a lawsuit against the Company and RoxSan Pharmacy, Inc. in the United States District Court, Central District of California for an amount exceeding $75,000. The Company intends to vigorously defend against this action. There are counterclaims that include possible fraud and negligence committed by Mr. Redmond, former successor Chairman of Mr. Engert, director, President and Chief Executive Officer of the Company and former President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy, Inc.

 

Disputes with Creditors/Vendors

 

Action No. SC127712 

On or about June 20, 2017, American Express Bank, FSB filed suit against RoxSan Pharmacy, Inc. in the Superior Court of California, County of Los Angeles for an amount of $996,622 in connection with RoxSan’s merchant financing loan.  On or about June 27, 2017, American Express Travel Related Services Company, Inc. filed suit against RoxSan Pharmacy, Inc. in the Supreme Court of New York, County of New York in the amounts of $153,500 and $273,500 in connection with RoxSan’s credit card obligations.  On July 31, 2017, and August 16, 2017, the Company entered into stipulation and settlement agreements for these matters to make payments in lieu of further litigation.  On May 10, 2018, American Express received a final judgement for the credit card obligations from the Supreme Court of New York in the amount of $387,245 representing the $427,000 balance plus court costs of $245, less $40,000 in payments made by the Company under the 2017 stipulation and settlement agreements.

 

There are five (5) legal matters currently pending at this time.

 

NOTE 17. SUBSEQUENT EVENTS

 

The Company has evaluated the events and transactions for recognition or disclosure subsequent to March 31, 2018, through the date of the issuance of the financial statements, and has determined that there have been no events that would require disclosure, except for the following:

 

On April 5, 2018, in connection with a stock purchase agreement, the Company granted a key employee the right to purchase 1,000,000 shares of its restricted common stock at a price of $0.001 per share.  The shares, valued at $200,000, were issued for cash in the amount of $1,000.  As a result, $199,000 was recorded to paid in capital.

 

On April 8, 2018, in connection with certain convertible debt in the amount of $45,000 and accrued interest of $3,114, the Company issued 481,129 shares of its restricted common stock at a conversion rate of $0.10 per share.  As a result, $47,633 was recorded to paid in capital.

 

On April 26, 2018, the Company extended and amended the subordinate secured convertible promissory note dated April 26, 2017, in the principal sum of $250,000.  The amended note was issued for the principal sum of $281,500, to include accrued interest to date (the “Amended Note”). The Amended Note bears interest at rate of 12% per annum, matures October 26, 2018, or earlier, contingent upon certain financing conditions, and contains a repayment provision to convert the note into restricted shares of the Company’s common stock at a price of $0.10 per share.  The Amended Note is secured by all of the Company’s personal property, and includes warrant coverage for a period of three (3) years to purchase shares of the Company’s common stock at a purchase price of $0.20 per share, with a provision for the price to be reduced to $0.10 per share if certain conditions are not met by the Company.


20


On May 8, 2018, the Company extended and amended the subordinate secured convertible promissory note dated May 8, 2017, in the principal sum of $50,000. The amended note was issued for the principal sum of $56,250, to include accrued interest to date (the “Amended Note”). The Amended Note bears interest at rate of 12% per annum, matures November 8, 2018, or earlier, contingent upon certain financing conditions, and contains a repayment provision to convert the note into restricted shares of the Company’s common stock at a price of $0.10 per share.  The Amended Note is secured by all of the Company’s personal property, and includes warrant coverage for a period of three (3) years to purchase shares of the Company’s common stock at a purchase price of $0.20 per share, with a provision for the price to be reduced to $0.10 per share if certain conditions are not met by the Company.

 

On May 14, 2018, pursuant to a unanimous resolution of the Boards of Directors of RoxSan Pharmacy, Inc. and Parallax Health Sciences, Inc., RoxSan filed a Chapter 7 petition in the United States Bankruptcy Court for the Central District of California.  Mr. Timothy Yoo was appointed trustee on May 15, 2018.  In connection with this filing, RoxSan seeks to discharge approximately $5 million of liabilities owed to various parties including more than $1 million owed to the Company.

 

In June 2018, the Plan Sponsor terminated the RoxSan Pharmacy Inc. Profit Sharing Plan.  All contributions have been made by the Plan Sponsor, and no further financial obligations to the Plan exits.

 

On June 4, 2018, Mr. Anand Kumar resigned as a member of the Board of Directors.  This resignation did not involve any disagreement with the Company.  Mr. Nathaniel T. Bradley, currently serving as Chief Technology Officer, succeeds him; to serve as a member of the Board of Directors until the next annual meeting of the shareholders and/or until his successor is duly appointed.

 

Between April 24, 2018, and June 18, 2018, the Company issued senior secured convertible promissory notes (the “Notes”) to four accredited investors in the aggregate principal sum of $600,000.  The Notes bear interest at rate of 12% per annum, mature December 15, 2018, or earlier, contingent upon certain financing conditions, and contain a repayment provision to convert the Notes into restricted shares of the Company’s common stock at a price of $0.10 per share.  The Notes are secured by all of the Company’s personal property, and include warrant coverage for a period of three (3) years to purchase shares of the Company’s common stock at a purchase price of $0.20 per share, with a provision for the price to be reduced to $0.10 per share if certain conditions are not met by the Company.

 

On July 18, 2018, an amendment (the “Amendment”) was made to the Agreement to Purchase and Sell One Hundred Percent (100%) of the Issued and Outstanding Shares of Qolpom, Inc. and its Assets, Intellectual Property and Inventory dated August 31, 2016 (the “Agreement”). The Amendment modifies the Agreement’s Earn-Out consideration by basing any monies due under the Earn Out solely upon revenues generated, with no guaranteed minimum payment owed, thereby eliminating the $2,000,000 guaranteed payment previously owed by the Company.  The Amendment resulted in a change in the value of certain assets acquired and liabilities assumed as follows:

 

 

Originally Stated

 

Revised

 

Increase (Decrease)

 

Assets:

 

 

 

 

 

 

 

 

 

Non-Compete Agreement

$

40,000

 

$

30,000

 

$

(10,000

)

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

License fee

$

2,000,000

 

$

260,000

 

$

(1,740,000

)

License fee, unamortized discount

$

(1,460,000

)

$

––

 

$

1,460,000

 

 

 

 

 

 

 

 

 

 

 

Net Effect

 

 

 

 

 

 

$

(270,000

)

 

On July 31, 2018, the unsecured convertible promissory note in the principal sum of $144,000 (Note 7) was modified 1) to extend the note’s maturity to October 1, 2019 and 2) to change the conversion price from $0.25 to $0.10 per share.

 

On or about August 1, 2018, the Company established a private placement equity offering for the purchase of Series C preferred stock (the “Series C Shares”).  The offering provides for, among other thing, the purchase of Series C Shares at a price of $5.00 per share, with a minimum unit of 20,000 shares, or $100,000.  All Series C Shares are convertible into common stock under the following terms: if converted in the first year, the Series C Shares are convertible into common stock at a ratio (“Conversion Ratio”) of 33.33 shares of common stock for each Series C Share held (33.33:1); or at a ratio of 16.66:1 if converted in the second year; or at a ratio of 11.11:1 if converted in the third year.  The shares also include warrants to purchase common stock for a period of 3 years at an exercise price of $0.25 per share, the number of warrants of which is determined at 100% of the prevailing Conversion Ratio.

 

On August 10, 2018, in connection with the Series C Shares equity offering, an accredited investor was issued 20,000 Series C Shares at a price of $5.00 per share, for cash in the amount of $100,000.  As a result, $99,980 was recorded to preferred paid in capital.

 

On August 11, 2018, in connection with the Series C Shares equity offering, an accredited investor was issued 40,000 Series C Shares at a price of $5.00 per share, for cash in the amount of $200,000.  As a result, $199,960 was recorded to preferred paid in capital.  


21


On August 12, 2018, in connection with certain convertible debt in the amount of $10,000 and accrued interest of $1,000, the Company issued 110,000 shares of its restricted common stock at a conversion rate of $0.10 per share.  As a result, $10,890 was recorded to paid in capital.

 

On August 13, 2018, in connection with the exercise of certain employee stock options, the Company issued 1,071,430 shares of its restricted common stock at a conversion rate of $0.05 per share.  The shares were issued on a cashless basis, resulting in a net value of $187,500.  As a result, $186,429 was recorded to paid in capital. 

 

On August 20, 2018, in connection with certain convertible debt in the amount of $150,000 and accrued interest of $15,000, the Company issued 1,650,000 shares of its restricted common stock at a conversion rate of $0.10 per share.  As a result, $164,835 was recorded to paid in capital.

 

On August 28, 2018, in connection with certain convertible debt in the amount of $20,000 and accrued interest of $2,000, the Company issued 220,000 shares of its restricted common stock at a conversion rate of $0.10 per share.  As a result, $21,780 was recorded to paid in capital.

 

On September 15, 2018, in connection with the Series C Shares equity offering, three officers of the Company were issued an aggregate of 40,000 Series C Shares at a price of $5.00 per share, in exchange for debt in the principal sum of $200,000.  As a result, $199,960 was recorded to preferred paid in capital.  

 

 

*    *    *    *    *


22


ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This quarterly report contains forward-looking statements. These statements relate to future events or the Company’s future financial performance. In some cases, forward-looking statements can be identified by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause the Company’s or the Company’s industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

The Company’s unaudited interim consolidated financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. All references to "common shares" refer to the common shares in the Company’s capital stock. The following discussion should be read in conjunction with the Company’s financial statements and the related notes that appear elsewhere in this quarterly report.

 

NOTE: The following sections of this quarterly report and any further reference made to “the Company”, "we", "us", "our" and "Parallax " shall mean Parallax Health Sciences, Inc., and its wholly-owned subsidiaries, Parallax Diagnostics, Inc., Parallax Health Management, Inc., Parallax Behavioral Health, Inc., and RoxSan Pharmacy, Inc., unless otherwise indicated.

 

Corporate History

 

The Company was incorporated in the State of Nevada on July 6, 2005.  On November 1, 2012, the Company, formerly Endeavor Power Corporation, and its wholly-owned subsidiary Endeavor Holdings, Inc., a Nevada corporation, entered into an Agreement and Plan of Merger with Parallax Diagnostics, Inc., a Nevada corporation ("Parallax Diagnostics"), whereby Parallax Diagnostics became a wholly-owned subsidiary.  On January 9, 2014, the Company changed its name to Parallax Health Sciences, Inc. (“Parallax”).  (OTCQB.PRLX).

 

Parallax’s current family of companies that serve as the foundation for its cross-over business model of operations include:

 

Parallax Diagnostics, Inc. ("Parallax Diagnostics" or "PDI") is the Company’s point of care diagnostic testing company focused on the exploitation of a proprietary diagnostic immunoassay testing platform and test cartridges for the areas of infectious diseases, cardiac markers, drugs of abuse and various other medical conditions. Parallax’s primary focus is to commercialize the Target System worldwide.  Parallax Diagnostics is currently pre-revenue and continues to pursue viable opportunities for the commercialization of its product.   

 

The commercial and clinical proposition of Parallax Diagnostics’ Target System is based on:

 

The Target System will allow doctors to test patients in their office; and 

The Target System is one-time learning process to perform all of its tests; and 

The Target System delivers test results in 10 minutes or less providing patients with important information at the time of testing; and 

The Target System costs less than outside lab-based tests allowing payers to pay less, a reduction in patient co-pays; and 

Allows doctors to earn additional revenue that they cannot participate in with outside labs and testing not performed in their offices. 

 

The Company has sought to identify strategies that would make its proposition more valuable and competitive.  To this end, the Company has pursued the creation of patents around its foundational technology and developed a novel immune status test targeting the HIV/AIDS and TB markets. Since the inception of Parallax Diagnostics, the novel CD4-CD8 immune status test has been developed, and the Company has been issued patents on elements of its core technology and testing system.

 

Parallax Health Management, Inc. (“PHM”) a Tucson, Arizona based Remote Patient Monitoring (“RPM”) business is the Company’s most recent acquisition, and represents an opportunity to develop products and services, and commercialize them, on a proprietary platform, in the RPM and Telehealth market, that will allow for systems integration with a number of third party services and solutions. In 2016, PHM initiated the generation of revenue through the deployment of its services and products. 

 

The commercial and clinical proposition of PHM is based on the following propositions:

 

Improve digital connectivity among consumers, providers, health plans, and life sciences companies; and  

Facilitate self-managed care, with the help of technology-enabled solutions, in a secure environment that `protects consumer privacy; and  

Deliver care outside the traditional clinical setting, potentially providing better access to care at a lower cost.  

Assist chronic care management and improve population health outcomes; and 

PHM empowers patients by providing a cost-effective tool that connect them with their doctors; and 

PHM empowers doctors with improved patient scheduling flexibility and timely communications; and 

PHM provides hospitals with a tool to address the problem and economic hardship caused by readmissions; and 

PHM provides a virtual management tool for chronic disease management. 

 

Parallax Behavioral Health, Inc. (“PBH”), a Delaware corporation, was formed by the Company in March 2017, and acquired the intellectual property known as REBOOT, the acronym for Reliable Evidence-Based Outcomes Optimization Technologies.  In 2018, the Company rebranded the technology as Intrinsic Code (“Intrinsic Code”), a software platform specifically designed to improve health treatment outcomes through Internet-based and mobile behavioral technology systems that enable its users and user groups to more effectively achieve goals within a prescribed timeline. The Intrinsic Code technology and software platform can be used by an individual or an organization of any size, with the potential to transform the cost of treating and managing chronic illnesses such as pulmonary-COPD-asthma, diabetes, and cardiovascular disease by effecting the modification of behavior in patients being treated for these chronic diseases. 

 

The Company is currently implementing its development and marketing strategies to integrate the Intrinsic Code technology within the Parallax family of healthcare products and services.

 

RoxSan Pharmacy, Inc. (“RoxSan”), acquired in the 3rd quarter of 2015, is the Company’s 62-year-old, Beverly Hills, California based compound pharmacy that is licensed to operate in over 40 States.   

 

Acquisition of RoxSan Pharmacy, Inc.

 

In 2013, Parallax identified an opportunity to acquire RoxSan Pharmacy, Inc. ("RoxSan"), a California corporation, and began the due diligence process.  The Company's initial interest centered on utilizing the acquisition as a means of accelerating the commercialization of the Parallax Target System and diagnostic platform, as RoxSan had access to a nationwide network of doctors and sales representatives.  During the due diligence process, the Company became aware of the numerous opportunities that RoxSan and its markets represented.

 

On March 21, 2013, the Company entered into a Letter of Intent with Shahla Melamed, RoxSan's sole Shareholder, to acquire RoxSan.  Between 2013 and 2015, four (4) amendments were also executed.

 

As part of the acquisition, the Company was required to obtain licensure from the State of California, and on July 31, 2015, the Company received notice that its pharmacy and sterile compounding licenses were issued by the California State Board of Pharmacy.


23


On August 13, 2015, (the "Closing Date"), pursuant to a resolution of the board of directors (the "Board"), the Company entered into an Agreement to Purchase and Sell One Hundred Percent of the Issued and Outstanding Shares of RoxSan Pharmacy, Inc. ("RoxSan" or the "Pharmacy"), and its Assets and Inventory (the “Purchase Agreement”).  Pursuant to the Purchase Agreement between the Company, RoxSan and its sole shareholder, Shahla Melamed (the “Seller” or "Melamed"), in exchange for 100% of RoxSan's common stock, and its assets and inventory, the Company, among other things, issued the Seller a Secured Promissory Note (the "Note") dated August 13, 2015, in the amount of $20.5 million (the "Acquisition").  The Note bears interest at a rate of 6% per annum, and matures in three (3) years, or August 13, 2018 ("Maturity").  The Company is seeking a reduction in the Purchase Price and related promissory note (See Legal Proceedings).  As a result of the Acquisition, effective August 13, 2015, RoxSan became a wholly-owned subsidiary of the Company. No change in control of the Company occurred as a result of the Acquisition.

 

In connection with the Acquisition, the Company entered into an Employment Agreement (the "Employment Agreement") with the Seller.  Under the Employment Agreement, Melamed agreed to provide exclusive consulting services to the Company in the areas of public relations and marketing for a term of four (4) years. On March 4, 2016, the Company terminated the Employment Agreement in accordance with paragraph 3.2 Termination for Cause.  The termination was the result of, among other things, Melamed's breaches in the Agreement, which were substantiated by an investigation conducted by an employment law firm retained by RoxSan.  Under the terms of the Agreement, no financial obligation resulted in the termination. (see "Dispute with Former Owner" below).

 

Closure of RoxSan Pharmacy.

 

Since the Company’s acquisition of RoxSan, the deleterious actions against the pharmacy by the former owner, including, among other things, interference with management and operations, and attempts to damage and/or divert customer and vendor relationships, had a significant adverse impact on the pharmacy. Furthermore, the discovery of the former owner’s alleged involvement in suspected insurance fraud caused RoxSan’s contract with its primary IVF drug rebate program to be terminated in August 2016. As a result, RoxSan was no longer eligible to receive incentive rebates for the majority of its IVF drug purchases, which were key to the profitability of the IVF drug sales; and for which without the rebates, RoxSan was unable to provide its customers with comparably priced IVF drugs.  This, among other things, caused a precipitous drop in RoxSan’s IVF revenues, and ultimate exit from the IVF market in mid-2017.  Soon thereafter, in July 2017, RoxSan’s contract with its primary drug supplier was terminated for similar reasons connected to the former owner and alleged criminal activities associated with the Melamed family name, despite the Company’s new ownership and management. After careful consideration, the Company determined that RoxSan was unable to generate enough profits to sustain its pharmacy business, and in December 2017, the pharmacy ceased operations.

 

On May 14, 2018, pursuant to a unanimous resolution of the Boards of Directors of RoxSan Pharmacy, Inc. and Parallax Health Sciences, Inc., RoxSan filed a Chapter 7 petition in the United States Bankruptcy Court for the Central District of California.  Mr. Timothy Yoo was appointed trustee on May 15, 2018.  In connection with this filing, RoxSan seeks to discharge approximately $5 million of liabilities owed to various parties including more than $1 million owed to the Company.

 

Acquisition of Parallax Health Management, Inc.

 

As part of the Company’s strategic plan to obtain a platform to enhance its diagnostic tests, on August 31, 2016 (the “Execution Date”), the Company entered into an agreement with Qolpom, Inc., an Arizona corporation in the remote healthcare monitoring and telehealth business (“Qolpom”) and its shareholders (the “Seller”) to purchase 100% of the issued and outstanding shares of Qolpom’s common stock and its assets, inventory and intellectual property.  The Purchase Agreement was fully executed on September 20, 2016, and the transaction was completed (the “Closing Date”). The Qolpom name was later changed to Parallax Health Management, Inc. (“PHM”).

 

Pursuant to the Qolpom Agreement, in exchange for 100% of the Qolpom stock and 100% of Qolpom’s assets, inventory and intellectual property, among other things, consideration to the Seller included:

 

5,000,000 shares of the Company’s common stock; and 

2,500,000 options to purchase shares of the Company's common stock, to be granted one year from the Execution Date, and vesting over three (3) years, of which 500,000 are exercisable at $0.10, 1,000,000 are exercisable at $0.15, and 1,000,000 are exercisable at $0.25; and 

10% of revenues generated from PHM business segment, up to $1,000,000; and 7% thereafter, up to $2,000,000; and 

3% of revenues generated from the sale of Qolpom hardware and monitoring service fees. 


24


Formation of Parallax Behavioral Health, Inc.

 

On March 22, 2017, the Company formed a wholly-owned subsidiary, Parallax Behavioral Health, Inc. (“PBH”), a Delaware corporation.

 

On April 26, 2017, pursuant to a resolution of the board of directors, the Company and its wholly-owned subsidiary, Parallax Behavioral Health, Inc., completed the acquisition of 100% of certain intellectual property from ProEventa Inc., a Virginia Corporation (“ProEventa”), in accordance with the Intellectual Property Purchase Agreement between the Company, PBH and ProEventa (the “ProEventa Agreement”). ProEventa has an expertise in the development of behavioral health technologies, and is the wholly-owned subsidiary of Grafton Integrated Health Network, Inc., a non-profit Virginia corporation (“Grafton”), Pursuant to the ProEventa Agreement, in exchange for 100% of that certain intellectual property, among other things, consideration to ProEventa included:

 

a stock purchase agreement to purchase 2,500,000 shares of the Company’s common stock; and 

a revenue sharing agreement, providing for a cash earn-out to be paid to the ProEventa shareholders of up to $3,000,000, to be derived from certain net revenue generated by the Company, as defined in the agreement; and 

a royalty agreement, providing for a royalty of 3% of the revenues generated from the intellectual property, ending at such time as Parallax has paid ProEventa $25,000,000; and 

a limited license to ProEventa for the use of certain of the Intellectual Property's technology at Grafton Schools. 

 

On April 26, 2017, in conjunction with the ProEventa Agreement, the Company entered into a consulting agreement with James Gaynor that, among other things, provides for consideration to Mr. Gaynor as follows:

 

a stock purchase agreement to purchase 500,000 shares of the Company’s common stock at $0.001 per share; and 

a grant of options to purchase 1,000,000 shares of the Company's common stock at a price of $0.25 per share, vesting annually over a three (3) year period beginning September 1, 2017. 

 

Changes in Management

 

On December 29, 2016, Mr. John L. Ogden and Ms. Calli R. Bucci were elected to serve as members of the Company's board of directors.

 

On April 6, 2017, the Board elected Mr. J. Michael Redmond as Chairman, to serve until the Company’s next meeting, in accordance with the Company's bylaws, or a resignation is duly tendered.

 

Effective July 6, 2017, the Board of the Company caused the departure of Mr. Redmond from his position as President and Chief Executive Officer of the Company and its wholly-owned subsidiary, RoxSan Pharmacy, Inc. Pursuant to the Employment Agreement dated August 1, 2015, a resignation from the Board of the Company and its wholly-owned subsidiaries, RoxSan Pharmacy, Inc. and Parallax Health Management, Inc. was tendered automatically.

 

Effective July 7, 2017, pursuant to a unanimous Board resolution, Mr. Paul R. Arena was appointed as the Company’s President and Chief Executive Officer, and the Board caused Mr. Arena's election to the Company's Board and the Board of its wholly-owned subsidiaries, RoxSan Pharmacy, Inc. and Parallax Health Management, Inc.

 

On July 7, 2017, in connection with Mr. Arena’s appointment, the Company entered into an Executive Employment Agreement (the “Agreement”) with Mr. Arena dated July 7, 2017, wherein Mr. Arena will serve as President and Chief Executive Officer for a period of three (3) years.  As compensation for his services, Mr. Arena will receive a base compensation of $350,000 in year one, of which 30% shall be deferred until certain funding goals are met, $425,000 in year two, and $550,000 in year three, as well as annual bonus compensation equal to 2x base when certain Company earnings are reached.  In addition, the Agreement includes a grant to purchase 10,000,000 restricted common shares at $0.001 per share, of which 25% vests immediately; 25% vests in one year; 25% vests after two years; and 25% vests when certain funding goals have been met.  The shares were valued at $2,000,000, of which $500,000 was expensed, and $1,500,000 was deferred, to be amortized over the next thirty-six (36) months. The Agreement also includes the grant of 5,000,000 stock options at an exercise price of $0.25 per share.  The options are exercisable for a period of five years, and vest when certain market share prices of the Company’s common stock are met.

 

On July 26, 2017, Mr. Jorn Gorlach resigned as a member of the board of directors.  This resignation did not involve any disagreements with the Company.

 

On June 4, 2018, Mr. Anand Kumar resigned as a member of the board of directors.  This resignation did not involve any disagreement with the Company.  Mr. Nathaniel T. Bradley, currently serving as Chief Technology Officer, succeeds him; to serve as a member of the board of directors until the next annual meeting of the shareholders and/or until his successor is duly appointed.


25


Dispute with Former Owner of RoxSan

 

Shortly after the Closing, the Company's management and Melamed clashed over control of the RoxSan Pharmacy business operations and bank accounts.

 

Purchase Price Dispute 

Included in the Acquisition Agreement, and as part of the negotiated purchase price, were representations and warranties made by the former owner involving certain primary revenue streams and related contracts.  Shortly after the closing, however, management discovered that these representations were substantially inaccurate and/or completely false.  These inaccuracies, and the improper disclosures and/or omissions made by the former owner during negotiations, would have significantly affected the purchase price and related note payable.  As a result, among other things, management has initiated legal action against the former owner to seek a reduction in the purchase price.

 

In addition, management engaged a third-party to perform a valuation of the pharmacy, utilizing revised inputs that more accurately reflected the Pharmacy's revenue streams as of the date of Acquisition.  The valuation performed resulted in a fair market value of $4.7 to $5.2 million. After careful consideration, and based upon these significant differences, management has determined that the purchase price and related promissory note of $20.5 million does not fairly represent the fair market value at the date of purchase.  The Company has, therefore, applied a discount to the note of $15.3 million, to reduce the purchase price and related note to its estimated fair market value of $5.2 million, utilizing the higher value on the range of as a conservative measure.  The discount is being amortized over the term of the promissory note.

 

The valuation performed does not include the effects of any liabilities the former owner omitted or damages caused to the Company as a result of the former owner and her immediate family members connected to the Pharmacy.

 

Control of Funds Dispute / US Postal Service Interference 

For a period of time immediately after the closing of the Acquisition, the former owner would not relinquish control of the Pharmacy's bank accounts, and collected the Pharmacy's incoming cash revenues, refusing to transfer the funds to the new ownership. Furthermore, when the Company attempted to change the corporate records and signatories on the existing bank accounts, the former owner disputed the changes, resulting in approximately $180,000 in corporate funds being frozen and held for adjudication. During this period, the Company was forced to request that the former owner pay the Pharmacy's operating expenses.  At no time after the Company opened new accounts did the former owner cooperate with the transference or willingly relinquish control of the Pharmacy's operating cash flow or incoming cash revenues.

 

The former owner continued to interfere in the transference of control of the Pharmacy by submitting change of address forms to the US Postal Service, wherein the former owner diverted the Pharmacy mail to her home address.  Once this was discovered and rectified with the post office, the former owner filed another change of address to divert mail to a post office box.  During these periods of time, the former owner received check payments and negotiated the checks by opening up a bank account utilizing a DBA, "Roxsan Pharmacy."  The Company was able to identify some of the checks the former owner negotiated by directly contacting the payer and receiving copies of the cancelled checks, with the former owner's signature endorsement and account number on the check.

 

As a result, an extensive reconciliation was performed to determine what amounts were collected and paid by the former owner, and what amounts were due to the Company.  The reconciliation resulted in over $412,000 owed to the Company from the former owner.  The reconciliation and underlying documentation went under judicial review, and on July 24, 2017, the Company was notified that the results of the review were in favor of the Company in the amount of $412,948.  A final judgment is pending for the exact amount of monies owed to the Company from the former owner.

 

Faced with Melamed continuing to materially interfere with the Pharmacy’s operations to the detriment of its business, the Company retained the services of an employment law firm to investigate Melamed's actions and provide a report to the Company’s Board (the "Report").  The Company also placed Melamed on a paid leave of absence because of her actions. The Board, after reviewing the findings in the Report, found substantive cause for Melamed's termination, and immediately sent Melamed written notification of the Company's intent to dismiss her for cause.  Under the Employment Agreement, Melamed was provided with a thirty (30) day cure period.  However, the Company received no response of intent to cure from Melamed or her counsel, and no evidence of a cure was provided to the Company.  As a result, the Board authorized Melamed's termination for cause on March 3, 2016, and on March 6, 2016, Melamed was formally terminated in writing.

 

In the course of management’s operation of the RoxSan Pharmacy, and adherence to Financial Accounting Standards Board revenue recognition policies, management became concerned with the absence of the claim processing for over $16 million of pre-Close Workers Compensation prescription revenues, which Melamed represented to the Company prior to Closing as being the vast majority of the high margin compound revenue. In addition to the $16 million in pre-Close claims, the Pharmacy generated over $8 million after the change in ownership, until the CFO alerted management of a serious and dramatic change in the receivables collection timetable, the underpinning cash flow processes, and the potential illegitimacy of the Workers Compensation revenues. Further, the CFO was uncomfortable with recognizing the revenue as it was presented by Melamed's financial records, and, in the absence of any reasonable assurance of collectability of the Workers Compensation revenues, the Company established an allowance for doubtful receivables for the $8 million in post-Close claims for which collectability was highly unlikely.


26


The Company retained the services of a forensic Workers Compensation fraud specialist to determine the legitimacy of the pre-Close Workers Compensation revenues and related insurance claims.  As a result of this forensic review, it was determined that these claims were essentially valueless.  As a result of these findings and undisclosed changes to the cash flow and quality of earnings that represented a majority of the revenue of the Pharmacy, the Company’s Board deemed it necessary to demand a reduction in the terms of the Sale and Purchase Agreement to more accurately reflect the true valuation of the Company.  This was met with resistance on the part of the Seller.

 

Shortly thereafter, in October 2015, Melamed, initiated two (2) legal actions against the Company in the Superior Court of the State of California, County of Los Angeles, West District, Shahla Melamed v. Parallax Health Sciences, Inc., action numbers SC 124873 and SC 125702.

 

In the matter, action No. SC 124873, Melamed sought rescission of the August 13, 2015, Purchase Agreement. During the proceedings, Melamed also contended that the Company owed Melamed monies for, among other things, expenses paid by Melamed on behalf of the Company.  As a result, the Court split the action into two separate rulings: (1) Rescission Phase and (2) Accounting Phase.

 

Rescission Phase  -  Final Ruling:  On March 17, 2017, the Court ruled in favor of the Company, and issued that Melamed is not entitled to rescission of the Purchase Agreement.  The ruling of the Court stated that no fraud on the part of the Company or its principals had been demonstrated.  The Court further ruled that there had been no failure of consideration, and that Melamed’s entry into the Agreement was not a result of a unilateral mistake on the part of Melamed.  The Minutes of the Ruling were entered by the County Clerk on March 17, 2017. 

 

Accounting Phase  -  Draft Ruling: On July 24, 2017, in the Matter, action No. SC124873, the Company was notified that the results of the reconciliation review performed by third-party adjudicator were in favor of the Company in the amount of $412,948.  Melamed objected to the adjudicator’s findings, and a final hearing was held in January 2018.  A final judgment is pending for the Court’s decision on the exact monies owed by Melamed to the Company. 

 

In the Matter, action No. SC125702, Melamed alleges that the Company is in default under the terms of the Purchase Agreement and Secured Note and the Company’s termination of Melamed’s employment agreement.  The Company firmly believes that it had adequate grounds to justify the termination of the employment, that it acted within its rights, and shall prevail in these proceedings.

 

The Company has initiated legal action against Melamed and filed a complaint, action number SC 124898, in the Superior Court of the State of California, County of Los Angeles, West District, Parallax Health Sciences, Inc., et al. v. Shahla Melamed, et al.  The Complaint in that action alleges that Melamed has breached several obligations under the Purchase Agreement, and the Company is seeking to reduce the Secured Note due to undisclosed material changes in the business.

 

On May 14, 2018, pursuant to a unanimous resolution of the Boards of Directors of RoxSan Pharmacy, Inc. and Parallax Health Sciences, Inc., RoxSan filed a Chapter 7 petition in the United States Bankruptcy Court for the Central District of California.  Mr. Timothy Yoo was appointed trustee on May 15, 2018.  In connection with this filing, RoxSan seeks to discharge approximately $5 million of liabilities owed to various parties including more than $1 million owed to the Company.

 

Disputes with Former Executives

 

On March 9, 2017, Mr. Dave Engert filed a lawsuit in Arizona and then on or about May 5, 2017, Mr. Engert, changed the venue and filed suit against the Company and RoxSan Pharmacy, Inc. in the United States District Court, Central District of California for an amount exceeding $75,000.  The Company intends to vigorously defend against this action, and on October 23, 2017, filed an answer and counterclaims against Mr. Engert for an amount exceeding $100,000.  The counterclaims include possible fraud and negligence committed by Mr. Engert and Mr. J. Michael Redmond, former successor Chairman of Mr. Engert, director, President and Chief Executive Officer of the Company and former President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy, Inc.

 

On March 28, 2018, Mr. J. Michael Redmond filed a lawsuit against the Company and RoxSan Pharmacy, Inc. in the United States District Court, Central District of California for an amount exceeding $75,000.  The Company intends to vigorously defend against this action. There are counterclaims that include possible fraud and negligence committed by Mr. Redmond, former successor Chairman of Mr. Engert, director, President and Chief Executive Officer of the Company and former President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy, Inc.

 

For additional information on these proceedings, see “ITEM 1. LEGAL PROCEEDINGS” section contained in Part II within this quarterly report.


27


Description of Business  

 

Parallax Health Sciences, Inc. is an innovative biomedical health-care company headquartered in Santa Monica, California, which operates under three divisions: Medical Diagnostics, Remote Health Care Services, and Behavioral Health Services. Each of these divisions target a separate vertical market that are synergistic, compliment, and strengthen each other and the Parallax value proposition as a whole.

 

The Parallax Business Model

 

In the past 60 years, healthcare has transitioned from a direct relationship between doctor and patient, to one that has patients separated from their doctors by the introduction of a huge number of stakeholders, ranging from health insurers, employers, pharmacy benefit managers, imaging, diagnostic testing, lawyers, specialist and a plethora of others.  The patient and healthcare provider both want the same thing: information, quality of service, transparency, value for their hard-earned dollars, and more time in their day.

 

Parallax believes that its products and services can provide solutions that mitigate rising costs, reduce waste in spending through transparency, reduce the amount of unnecessary services, and increase the health and wellness of patients before they are sick.

 

Parallax has developed, acquired and licensed multiple platforms, proprietary and exclusive, that provide services and products, across the healthcare continuum.  These platforms are designed to allow for multiple points of reciprocal consideration, through innovative business models, that provide patients with increased quality of services and products, at reduced cost of time and money.  They also provide healthcare providers with increased access to their patients, the ability to deliver better and more efficient service and increase their income from the services they supply.

 

Although Parallax’s multiple operations are focused in separate vertical markets, Parallax has designed its business model to allow for cross-pollination and reciprocal transfer of value at multiple points in their respective economic food chains.

 

Management

 

Parallax is led by experienced veterans from the healthcare, technology, finance and management fields.  The Company's disciplined and organized approach is balanced by its optimism for the future, and the opportunities present in the current healthcare market. The Parallax team is grounded in a belief that success in business is built on a combination of research, planning and execution.

 

Operating Segments

 

The Company's business operations generated revenue through multiple economic models, ranging from cash payments, insurance reimbursements and pharmaceutical drug rebates derived from its compounding, retail and fertility business, to PHM’s initial remote patient monitoring activity, the deployment of its Good Health Outcomes Platform, integration of Intrinsic Code technology, and the sale of third-party vendor devices.

 

During 2018, the Company operated following business segments: Remote Care Services (RCS), Behavioral Health Services (BHS), and Corporate. In 2017, the Company’s operations also included Retail Pharmacy Services (RPS), for pharmacy services provided by RoxSan Pharmacy, Inc. (“RoxSan”) (see Closure of RoxSan Pharmacy, above).

 

Remote Patient Monitoring  

 

PHM provides a first-of-its-kind technology platform that provides for the complete remote patient care delivery system: the patent-pending Good Health Outcomes, which utilizes proprietary software and technology to bridge clinical behavioral science with technology and logistics for payers, providers and clinical professionals across a variety of wellness and clinical devices, including both fitness and clinical applications. PHM’s Good Health Outcomes is a secure and scalable platform for collecting, transmitting and analyzing biometric, pharmaceutical, and health data to healthcare providers, primarily hospitals, accredited nursing operations, and physicians.

 

PHM generates revenues through fees charged for the license and utilization of its proprietary system that provides software integrations of the Good Health Outcomes platform.  Additionally, PHM generates incremental revenues through the delivery of acute, post-acute and chronic health patient management software systems that enable PHM customers to bill for and collect payments from patients and third-party payers for telemonitoring and remote services that they deliver.

 

Behavioral Health Systems 

 

In April 2017, the Company, through its wholly-owned subsidiary, Parallax Behavioral Health, Inc., acquired the intellectual property known as REBOOT, the acronym for Reliable Evidence-Based Outcomes Optimization Technologies.  In 2018, the Company rebranded the technology as Intrinsic Code (“Intrinsic Code”), a software platform specifically designed to improve health treatment outcomes using proprietary behavioral technology systems, that enables its users and user groups to more effectively achieve goals within a prescribed timeline. Through a proprietary behavioral health technology, Intrinsic Code powers decision support that can also be delivered securely to any internet connected device. The software can be used by an individual or an organization of any size.

 

PBH generates revenues primarily through licensing and subscription of the Intrinsic Code software and systems. As of December 31, 2017, the BHS segment had not yet begun full operations, generating limited test market sales.

 

Pharmacy 

 

RoxSan provided a full range of pharmacy services including retail, compounding and fertility medications.  RoxSan generated net revenues primarily by dispensing prescription drugs, both through local channels by direct delivery as well as mail order. RoxSan also sold a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, seasonal merchandise and convenience foods, through the Company’s pharmacy. The pharmacy was fully licensed and qualified to conduct business in over 40 US States.

 

Since the Company’s acquisition of RoxSan, the deleterious actions against the pharmacy by the former owner, including, among other things, interference with management and operations, and attempts to damage and/or divert customer and vendor relationships, had a significant adverse impact on the pharmacy. Furthermore, the discovery of the former owner’s alleged involvement in suspected insurance fraud caused RoxSan’s contract with its primary IVF drug rebate program to be terminated in August 2016. As a result, RoxSan was no longer eligible to receive incentive rebates for the majority of its IVF drug purchases, which were key to the profitability of the IVF drug sales; and for which without the rebates, RoxSan was unable to provide its customers with comparably priced IVF drugs.  This, among other things, caused a precipitous drop in RoxSan’s IVF revenues, and ultimate exit from the IVF market in mid-2017.  Soon thereafter, in July 2017, RoxSan’s contract with its primary drug supplier was terminated for similar reasons connected to the former owner and alleged criminal activities associated with the Melamed family name, despite the Company’s new ownership and management. After careful consideration, the Company determined that RoxSan was unable to generate enough profits to sustain its pharmacy business, and in December 2017, the pharmacy ceased operations.

 

Corporate  

 

The Corporate Segment provides management and administrative services to support the Company and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, and corporate information technology and finance departments.  In addition, the Corporate Segment supports the costs and operating expenses related to the continued development and exploitation of the Company's proprietary medical diagnostic and monitoring platform and processes, which remains the Company's primary focus.


28


 

NOTE: The financial information of Parallax Health Sciences, Inc., and its wholly-owned subsidiaries, Parallax Diagnostics, Inc., Parallax Health Management, Inc., Parallax Behavioral Health, Inc., and RoxSan Pharmacy, Inc., is provided below on a consolidated basis, unless otherwise indicated. .  All significant intercompany accounts and transactions have been eliminated.  

 

Balance Sheet

 

As at March 31, 2018, the Company had total assets of $3,217,488, compared with total assets of $3,340,475 at December 31, 2017. The decrease in total assets of $122,987 is attributable to a decrease in cash of $1,242, a decrease in accounts receivable, net of allowance for doubtful accounts of $3,853, a decrease in employee advances of $1,800, a decrease in prepaid expenses of $6,435, and $109,657 of amortization related to intangible assets.

 

As at March 31, 2018, the Company had total liabilities of $33,089,719, compared with total liabilities of $30,730,119 at December 31, 2017. The increase in total liabilities of $2,359,600 is attributable to an increase in accounts payable and accrued expenses of $541,192, an increase in convertible notes payable of $225,000, an increase in related party payables of $262,044, a decrease in secured notes payable of $3,636, and a decrease in unamortized discount of $1,335,000.

 

Results of Operations

 

The three months ended March 31, 2018, compared to the three months ended March 31, 2017

 

 

For the three months ended

 

 

March 31, 2018

 

March 31, 2017

 

Revenue

$

4,890

 

$

1,960,960

 

Cost of sales

$

5,538

 

$

1,601,006

 

Gross profit (loss)

$

(648

)

$

359,954

 

Sales, marketing, and pharmacy expenses

$

125,335

 

$

300,785

 

General and administrative expenses

$

2,050,745

 

$

1,091,140

 

Operating (loss)

$

(2,176,728

)

$

(1,031,971

)

Discount amortization

$

(1,335,000

)

$

(1,305,000

)

Interest expense

$

(344,741

)

$

(303,302

)

Net loss

$

(3,856,469

)

$

(2,640,273

)

 

Revenue

 

Revenue in the amount of $4,890 for the three months ended March 31, 2018, consists contract fees and equipment sales related to the Company’s remote health care systems in the amount of $4,440, and subscription fees related to its behavioral health services in the amount of $450.

 

Revenue in the amount of $1,960,960 for the three months ended March 31, 2017, consists of pharmaceutical sales related to the Company's pharmacy operations in the amount of $1,946,698, and contract fees and equipment sales related to the Company’s remote health care systems in the amount of $14,261.

 

The Company’s behavioral health services segment had not yet begun full operations, generating limited test market sales.

 

The Company ceased its pharmacy operations in December 2017, and filed a Chapter 7 bankruptcy petition in May 2018.

 

The Company has not yet launched its major business activity, which is medical diagnostics and testing.

 

Cost of sales

 

Costs of sales in the amount of $5,538 for three months ended March 31, 2018, consists of equipment and other costs related to the Company’s remote health care systems.

 

Costs of sales in the amount of $1,601,006 for three months ended March 31, 2017, consists of pharmaceutical drug purchases, direct labor, and indirect pharmacy costs related to the Company's pharmacy operations in the amount of $1,572,964, and equipment and other costs related to the Company’s remote health care systems in the amount of $28,042.

 

The Company’s behavioral health services segment had not yet begun full operations, generating limited test market sales.

 

The Company ceased its pharmacy operations in December 2017, and filed a Chapter 7 bankruptcy petition in May 2018.

 

The Company has not yet launched its major business activity, which is medical diagnostics and testing.


29


 

General and Administrative Expenses

 

For the three months ended

 

Variance

 

 

March 31, 2018

 

March 31, 2017

 

3-month

 

Legal, accounting, and management services

$

442,330

 

$

307,480

 

$

134,850

 

Stock compensation/stock option amortization

 

1,332,884

 

 

11,862

 

 

1,321,022

 

Salaries and fees, and related taxes and benefits

 

105,870

 

 

440,065

 

 

(334,195

)

Depreciation and amortization

 

109,657

 

 

29,743

 

 

79,914

 

Rent expense-office

 

19,397

 

 

42,057

 

 

(22,660

)

Travel, meals and entertainment

 

1,532

 

 

43,059

 

 

(41,527

)

Publicity and promotion

 

1,484

 

 

20,187

 

 

(18,703

)

Office supplies and miscellaneous expenses

 

37,591

 

 

196,687

 

 

(159,096

)

Total general and administrative expenses

$

2,050,745

 

$

1,091,140

 

$

959,605

 

 

During the three months ended March 31, 2018, the Company incurred operating expenses totaling $2,050,745, compared with $1,091,140 for the three months ended March 31, 2017. The increase in operating expenses of $959,605 is attributable to:

 

an increase in legal, accounting and management fees of $134,850, due to an increase in legal fees of $28,580 resulting from a change in time spent for pending litigation matters during the current period compared to the same period in the prior year; a decrease in accounting and audit fees of $164,038 due to a change in auditors, resulting in 2016 and 2017 audit fees charged by the newly engaged audit firm in the prior year; and an increase in management fees of $302,716 resulting from changes in management; and a decrease in miscellaneous management fees of $32,408 resulting from a reduction in consultants; and 

an increase in stock compensation/stock option amortization of $1,321,022 primarily due to an increase in amortization expense of $150,528 resulting from stock options granted in the current period; an increase in in amortization expense of $25,927 resulting from stock options granted in prior years; deferred stock compensation amortization of $155,567 resulting from stock awards granted in prior years; and stock awards granted in the current year resulting in an increase in stock compensation expense of $989,000; and 

a decrease in salaries and fees, and related taxes and benefits of $334,195, primarily due to a decrease in officer compensation of $156,250, staff compensation of $34,362, and related payroll taxes of $37,417, and a decrease in employee benefits of $45,935, resulting from the close of the RoxSan pharmacy operations; and a decrease in penalties on unpaid payroll and state income taxes of $30,457; and a decrease in miscellaneous fees for outside services in the amount of $29,774 resulting from a change in service providers; and 

an increase in depreciation and amortization of $79,914, primarily due to fully depreciated assets, resulting in a decrease in depreciation of $7,338; and fully amortized intangible assets, resulting in a decrease in amortization of $20,833; and the acquisition of additional intangible assets, resulting in an increase in amortization expense of $108,085; and 

a decrease in rent expense of $22,660 due to office space vacated, resulting in a decrease in rent of $22,660; and 

a decrease in travel, meals and entertainment of $41,527, primarily due to a reduction in travel costs of $29,918, and meals and entertainment of $11,609 resulting from the close of the RoxSan pharmacy operations; and 

a decrease in publicity and promotion of $18,703 primarily due to the close of the RoxSan pharmacy operations; and 

a decrease in office supplies and miscellaneous expenses of $159,096, due to a decrease in automobile expense of $5,310, bad debt expense of $30,052, bank and wire fees of $6,038, computer and internet costs of $10,857, insurance expense of $25,201, office expense of $6,272, parking of $9,016, pension plan administrative fees of $18,000; pension plan contributions of $11,013, licenses and permits of $24,360, and communication costs of $10,236, and other general office expenses of $2,741, primarily due to the close of the RoxSan pharmacy operations. 

 

Net Loss

 

During the three ended March 31, 2018, the Company incurred a net loss of $3,856,469, compared with a net loss of $2,640,273 for the three months ended March 31, 2017. The increase in net loss of $1,216,196 is primarily attributable to a decrease in revenue of $1,956,070, a decrease in in cost of goods sold of $1,595,468, a decrease in in sales, marketing and pharmacy expenses of $175,450, an increase in general and administrative expenses of $959,605, an increase in discount amortization of $30,000; and an increase in interest expense of $41,439.


30


Liquidity and Capital Resources

 

Working Capital

 

 

 

 

Increase

 

 

At March 31, 2018

 

At December 31, 2017

 

(Decrease)

 

Current Assets

$

42,089

 

$

55,419

 

$

(13,330

)

Current Liabilities

 

8,908,060

 

 

8,064,824

 

 

843,236

 

Working Capital (Deficit)

$

(8,865,971

)

$

(8,009,405

)

$

(856,566

)

 

As at March 31, 2018, the Company had cash in the amount of $1,362 compared to $2,604 as of December 31, 2017.

 

The Company had a working capital deficit of $8,865,971 as of March 31, 2018, compared to a working capital deficit of $8,009,405 as of December 31, 2017. The increase in working capital deficit of $856,566 is primarily attributable to a decrease in cash of $1,242, a decrease in accounts receivable, net of allowance, of $3,853, a decrease in employee advances of $1,800, a decrease in prepaid expenses of $6,435, an increase in accounts payable and accrued expenses of $541,192, a transfer of note payable from short-term liability to long-term liability of $185,000, proceeds from convertible promissory notes of $225,000, and an increase in related party payables of $262,044.

 

Cash Flows

For the three months ended

 

Increase

 

 

March 31, 2018

 

March 31, 2017

 

(Decrease)

 

Net cash used by operating activities

$

(263,606

)

$

(31,603

)

$

(232,003

)

Net cash used by investing activities

 

––

 

 

––

 

 

––

 

Net cash used by financing activities

 

262,364

 

 

(1,961

)

 

264,325

 

Increase (decrease) in cash

$

(1,242

)

$

(33,564

)

$

32,322

 

 

Cash Flows from Operating Activities

 

During the three months ended March 31, 2018, the Company used $263,606 of cash flow for operating activities compared with $31,603 for the three months ended March 31, 2017. The increase in cash used by operating activities of $232,003 is primarily attributable to an increase in the net loss from operations of $1,216,196; an increase in depreciation and amortization of $79,914, stock compensation/stock option amortization of $1,321,020, and discount amortization of $30,000; a decrease in allowance for bad debt of $30,052; a decrease in the changes in accounts receivable of $224,167, inventories of $135,963, prepaid expenses of $4,983, and accounts payable and accrued expenses of $112,398; and an increase in the changes in pension plan contribution payable of $8,460, and related party payables of $52,362.

 

Cash Flows from Investing Activities

 

During the three months ended March 31, 2018, and March 31, 2017, the Company used no cash flow for investing activities.

 

Cash Flows from Financing Activities

 

During the three months ended March 31, 2018, the Company was provided with of cash flow from financing activities, compared with using $1,961 of cash flow for the three months ended March 31, 2017.  The increase in cash flows provided by financing activities of $264,325 is attributable to a decrease in repayments of notes payable of $149,325; an increase in proceeds from convertible notes payable of $225,000; a decrease in proceeds from the issuance of preferred stock of $150,000, and an increase in proceeds from the issuance of common stock of $40,000.

 

The Company’s principal sources of funds have been from the Company’s sales of its preferred and common stock, loans from related parties and third-party lenders, net revenues generated from the sale of prescription pharmaceuticals, and its remote healthcare sales and services.

 

During the three months ended March 31, 2018, the Company received $41,000 in funds from the issuance of common shares or other equity instruments, compared to $151,000 during the three months ended March 31, 2017.

 

As at March 31, 2018, related parties are due a total of $1,786,565, consisting of $1,041,174 in accrued compensation owed to officers; $154,291 in cash advances from officers and beneficial owners to the Company for operating expenses; and $591,100 in related party convertible notes payable.

 

As of March 31, 2018, convertible promissory notes in the aggregate sum of $591,100 are owed by the Company.  During the three months ended March 31, 2018, interest in the amount of $14,271 was expensed, of which $798 was paid to the note holders in cash.  As of March 31, 2018, a total of $93,300 in interest has been accrued.


31


Future Financings

 

The Company has suffered recurring losses from operations. The continuation of the Company’s operations is dependent upon the Company’s attaining and maintaining profitable operations and raising additional capital as needed. The Company anticipates that it will have to raise additional funds through private placements of the Company’s equity securities and/or debt financing to complete its business plan.

 

The Company will require additional financing in order to proceed with its plan of operations, including approximately $3,000,000 over the next 12 months to pay for its ongoing expenses. These cash requirements include working capital, general and administrative expenses, the development of the Company’s product line, and the pursuit of acquisitions. These cash requirements are in excess of the Company’s current cash and working capital resources. Accordingly, the Company will require additional financing in order to continue operations and to repay its liabilities. There is no assurance that the financing will be completed as planned or at all. If the Company is unable to secure adequate capital to continue the Company’s planned operations, the Company’s shareholders may lose some or all of their investment and the Company’s business may fail.

 

On or about August 1, 2018, the Company established a private placement equity offering for the purchase of Series C preferred stock (the “Series C Shares”).  The offering provides for, among other thing, the purchase of Series C Shares at a price of $5.00 per share, with a minimum unit of 20,000 shares, or $100,000.  All Series C Shares are convertible into common stock under the following terms: if converted in the first year, the Series C Shares are convertible into common stock at a ratio (“Conversion Ratio”) of 33.33 shares of common stock for each Series C Share held (33.33:1); or at a ratio of 16.66:1 if converted in the second year; or at a ratio of 11.11:1 if converted in the third year.  The shares also include warrants to purchase common stock for a period of 3 years at an exercise price of $0.25 per share, the number of warrants of which is determined at 100% of the prevailing Conversion Ratio.

 

The Company anticipates continuing to rely on equity sales of its common stock and preferred stock in order to continue to fund its business operations. Issuances of additional shares will result in dilution to the Company’s existing stockholders. There is no assurance that the Company will achieve any additional sales of its equity securities or arrange for debt or other financing to fund its planned business activities.

 

Contractual Obligations

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item.

 

Going Concern

 

The Company has incurred losses since inception resulting in an accumulated deficit of $37,629,610, and further losses are anticipated. The Company’s ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due, which may not be available at commercially reasonable terms  There can be no assurance that the Company will be able to continue to raise funds, in which case the Company may be unable to meet its obligations and the Company may cease operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

The unaudited interim consolidated financial statements included with this quarterly report have been prepared on the going concern basis which assumes that adequate sources of financing will be obtained as required and that the Company’s assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the unaudited interim consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

The Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.

 

Critical Accounting Policies

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s unaudited interim consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. The Company believes that understanding the basis and nature of the estimates and assumptions involved with the following aspects of the Company’s financial statements is critical to an understanding of its consolidated financial statements.

 

Included in the Acquisition Agreement for RoxSan Pharmacy, Inc., and as part of the negotiated purchase price, were representations and warranties made by the former owner involving certain primary revenue streams and related contracts.  Shortly after the closing, however, management discovered that these representations were substantially inaccurate and/or completely false. These inaccuracies, and the improper disclosures and/or omissions made by the former owner during negotiations, would have significantly affected the purchase price and related note payable issued under the Acquisition Agreement. Management engaged a third-party to perform a valuation of the Pharmacy, utilizing revised inputs that more accurately reflected the Pharmacy's revenue streams as of the date of Acquisition.  The valuation performed resulted in a fair market value of $4.7 to $5.2 million. After careful consideration, and based upon these significant differences, management has determined that the purchase price and related promissory note of $20,500,000 does not fairly represent the fair market value at the date of purchase.  The Company has, therefore, applied a discount to the note of $15.3 million, to reduce the purchase price and related note to its estimated fair market value of $5.2 million, utilizing the higher value on the range as a conservative measure.  The discount is being amortized over thirty-six (36) months.


32


 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Report on Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s president, chief executive officer and chief financial officer to allow for timely decisions regarding required disclosure. In designing and evaluating the Company’s disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company’s management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As of March 31, 2018, the end of the period covered by this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s president, chief executive officer and chief financial officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s president, chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal controls over financial reporting that occurred during the three-month period ended March 31, 2018, that have materially or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

Audit Committee

 

The Company established an audit committee of the board of directors comprised of John L. Ogden and E. William “Bill” Withrow Jr. The audit committee’s duties are to recommend to the Company’s board of directors the engagement of an independent registered public accounting firm to audit the Company’s financial statements and to review the Company’s accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls. The audit committee will at all times be composed exclusively of directors who are, in the opinion of the Company’s board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.


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PART II

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business.  The Company knows of no material, existing or pending legal proceedings against it, nor is the Company involved as a plaintiff in any material proceeding or pending litigation, beyond those defined below.  There are no proceedings in which any of its directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest that is adverse to the Company’s interests.

 

Dispute with Former Owner of RoxSan

 

In October 2015, shortly following the Company's acquisition of RoxSan, Shahla Melamed (“Melamed”), initiated two (2) legal actions against the Company in the Superior Court of the State of California, County of Los Angeles, West District, Shahla Melamed v. Parallax Health Sciences, Inc., action numbers SC 124873 and SC 125702.  

 

In the matter, action No. SC 124873, Melamed sought rescission of the August 13, 2015, Purchase Agreement. During the proceedings, Melamed also contended that the Company owed Melamed monies for, among other things, expenses paid by Melamed on behalf of the Company.  As a result, the Court split the action into two separate rulings: (1) Rescission Phase and (2) Accounting Phase.

 

Action No. SC 124873-Rescission Phase: 

 

In the Matter, action no. SC 124873, rescission was sought by Melamed on the basis that, allegedly, in order to acquire the Pharmacy, the Company and its principals had allegedly defrauded Melamed, there had allegedly been a complete failure of consideration, and a unilateral mistake was allegedly made on the part of Melamed.  Subsequently filed pleadings by the Company and RoxSan in action no. SC 124873 allege, among other things, that Melamed misrepresented the true earnings and source of income for the pharmacy business and had engaged in a fraudulent and illegal scheme to ship medications to states where her pharmacy was not licensed prior to the sale of the Pharmacy.

 

Final Ruling:  On March 17, 2017, the Court ruled in favor of the Company, and issued that Melamed is not entitled to rescission of the Purchase Agreement.  The ruling of the Court stated that no fraud on the part of the Company or its principals had been demonstrated.  The Court further ruled that there had been no failure of consideration, and that Melamed’s entry into the Agreement was not a result of a unilateral mistake on the part of Melamed.  The Minutes of the Ruling were entered by the County Clerk on March 17, 2017.

 

Action No. SC 124873-Accounting Phase: 

 

In the Matter, action No. SC 124873, Melamed contended that the Company owed Melamed monies for, among other things, expenses paid by Melamed post-Closing.  An accounting was presented by Melamed’s expert, BDO Seidman (“BDO”), alleging that the Company owed Melamed in excess of $500,000.  The Company disputed this vigorously and prepared a 400+ page analysis (the “Analysis Report”) of the BDO reconciliation report.  The Analysis Report identified errors in the BDO report in excess of $900,000 and found that Melamed owed the Company over $400,000.  Melamed argued the findings in the Analysis Report. Consequently, due to the complexities of the accountings, the Court ordered a third-party adjudicator with an accounting background to review both the BDO report and the Company’s Analysis Report.

 

Draft Ruling: On July 24, 2017, in the Matter, action No. SC124873, the Company was notified that the results of the reconciliation review performed by third-party adjudicator were in favor of the Company in the amount of $412,948.  Melamed objected to the adjudicator’s findings, and a final hearing was held in January 2018.  A final judgment is pending for the Court’s decision on the exact monies owed by Melamed to the Company.

 

Action No. SC125702: 

 

In the Matter, action No. SC125702, Melamed alleges that the Company is in default under the terms of the Purchase Agreement and Secured Note, and the Company’s termination of Melamed’s employment agreement.  The Company firmly believes that it had adequate grounds to justify the termination of the employment, that it acted within its rights, and shall prevail in these proceedings.  A trial date is currently set for July 2018.

 

Action No. SC 124898:  

 

The Company has initiated legal action against Melamed and filed a complaint, action number SC 124898, in the Superior Court of the State of California, County of Los Angeles, West District, Parallax Health Sciences, Inc., et al. v. Shahla Melamed, et al.  The Complaint in that action alleges that Melamed has breached several obligations under the Purchase Agreement, and the Company is seeking to reduce the Secured Note due to undisclosed material changes in the business. A trial date is currently set for July 2018.


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As part of the Company’s pleadings to the courts, the Company has presented the following matters:

 

Purchase Price Dispute 

 

Included in the Acquisition Agreement for RoxSan Pharmacy, Inc., and as part of the negotiated purchase price, were representations and warranties made by the former owner involving certain primary revenue streams and related contracts.  Shortly after the closing, however, management discovered that these representations were substantially inaccurate and/or completely false.  These inaccuracies, and the improper disclosures and/or omissions made by the former owner during negotiations, would have significantly affected the purchase price and related note payable.  As a result, among other things, management has initiated legal action against the former owner to seek a reduction in the purchase price.  

 

Included in the false representations made by the former owner were prescription revenues in excess of $8 million (and $16 million prior to the change in ownership) related to workers compensation claims that the former owner warranted as collectible.  The insurance claims related to these prescriptions, which originated from and were provided to the pharmacy by the former owner's direct family members, were investigated by a third-party expert retained by the Company, and the claims were substantially identified as fraudulent.  The former owner's family member has been indicted by the Department of Justice for among other things, insurance fraud.

 

In addition, management engaged a third-party to perform a valuation of the Pharmacy, utilizing revised inputs that more accurately reflected the Pharmacy's revenue streams as of the date of Acquisition.  The valuation performed resulted in a fair market value of $4.7 to $5.2 million. After careful consideration, and based upon these significant differences, management has determined that the purchase price and related promissory note of $20.5 million does not fairly represent the fair market value at the date of purchase.  The Company has, therefore, applied a discount to the note of $15.3 million, to reduce the purchase price and related note to its estimated fair market value of $5.2 million, utilizing the higher value on the range as a conservative measure.  The discount is being amortized over the term of the promissory note.

 

The valuation performed does not include the effects of any liabilities the former owner omitted or damages caused to the Company as a result of the former owner and her immediate family members connected to the Pharmacy.

 

Control of Funds Dispute / US Postal Interference 

 

For a period of time immediately after the closing of the Acquisition, the Melamed would not relinquish control of the Pharmacy's bank accounts, and collected the Pharmacy's incoming cash revenues, refusing to transfer the funds to the new ownership. Furthermore, when the Company attempted to change the corporate records and signatories on the existing bank accounts, the former owner disputed the changes, resulting in approximately $180,000 in corporate funds being frozen and held for adjudication. During this period, the Company was forced to request that the former owner pay the Pharmacy's operating expenses.  At no time after the Company opened new accounts did the former owner cooperate with the transference or willingly relinquish control of the Pharmacy's operating cash flow or incoming cash revenues.

 

The former owner continued to interfere in the transference of control of the Pharmacy by submitting change of address forms to the US Postal Service, wherein the former owner diverted the Pharmacy mail to her home address.  Once this was discovered and rectified with the post office, the former owner filed another change of address to divert mail to a post office box.  During these periods of time, the former owner received check payments and negotiated the checks by opening up a bank account utilizing a DBA, "Roxsan Pharmacy."  The Company was able to identify some of the checks the former owner negotiated by directly contacting the payer and receiving copies of the cancelled checks, with the former owner's signature endorsement and account number on the check.

 

On May 14, 2018, pursuant to a unanimous resolution of the Boards of Directors of RoxSan Pharmacy, Inc. and Parallax Health Sciences, Inc., RoxSan filed a Chapter 7 petition in the United States Bankruptcy Court for the Central District of California.  Mr. Timothy Yoo was appointed trustee on May 15, 2018.  In connection with this filing, RoxSan seeks to discharge approximately $5 million of liabilities owed to various parties including more than $1 million owed to the Company.

 

Disputes with Former Executives

 

Action No. CV2017-052804 

 

On March 9, 2017, Mr. Dave Engert filed a lawsuit in Arizona and then later changed the venue to Federal Court in Southern California claiming, among other issues, that monies are owed to him under his Consulting Agreement and that his termination was without cause.  The Company is in disagreement with the position and claims made by Mr. Engert, and as such has counter claimed against Mr. Engert asserting that the Company intends to vigorously defend its position.

 

On October 23, 2017, the Company filed a response and counterclaims against Mr. Engert for an amount exceeding $100,000.  The counterclaims include possible fraud and negligence committed by Mr. Engert and Mr. J. Michael Redmond, former successor Chairman of Mr. Engert, director, President and Chief Executive Officer of the Company and former President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy, Inc.


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Action No. BC700070 

 

On March 28, 2018, Mr. J. Michael Redmond filed a lawsuit against the Company and RoxSan Pharmacy, Inc. in the United States District Court, Central District of California for an amount exceeding $75,000.  The Company intends to vigorously defend against this action. There are counterclaims that include possible fraud and negligence committed by Mr. Redmond, former successor Chairman of Mr. Engert, director, President and Chief Executive Officer of the Company and former President, Chief Executive Officer, Chairman and director of RoxSan Pharmacy, Inc.

 

Disputes with Creditors/Vendors

 

Action No. SC127712 

 

On or about June 20, 2017, American Express Bank, FSB filed suit against RoxSan Pharmacy, Inc. in the Superior Court of California, County of Los Angeles for an amount of $996,622 in connection with RoxSan’s merchant financing loan.  On or about June 27, 2017, American Express Travel Related Services Company, Inc. filed suit against RoxSan Pharmacy, Inc. in the Supreme Court of New York, County of New York in the amounts of $153,500 and $273,500 in connection with RoxSan’s credit card obligations.  On July 31, 2017, and August 16, 2017, the Company entered into stipulation and settlement agreements for these matters to make payments in lieu of further litigation. On May 10, 2018, American Express received a final judgement for the credit card obligations from the Supreme Court of New York in the amount of $387,245 representing the $427,000 balance plus court costs of $245, less $40,000 in payments made by the Company under the 2017 stipulation and settlement agreements.

 

All five (5) legal matters are currently pending.

 

The Company knows of no other material existing or pending legal proceedings against it, nor is the Company involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of the Company’s directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to the Company.

 

ITEM 1A. RISK FACTORS

 

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On January 11, 2018, pursuant to a resolution of the Board of Directors, the Company issued 6,000,000 shares of its restricted common stock to certain officers and directors.  The shares were purchased at par, or $0.001 per share, for cash in the amount of $6,000.

 

On January 19, 2018, in connection with an equity offering, the Company issued 1,000,000 shares of its restricted common stock at a price of $0.04 per share, for cash in the amount of $40,000.

 

On January 29, 2018, in connection with a certain consulting agreement, the Company issued 250,000 shares of its restricted common stock to the consultant for services to be provided over a twelve (12) month period.  The shares were valued at $67,500, of which 25% vest immediately, and the remainder vest periodically over the term of the agreement.

 

In February 2018, in connection with certain senior secured promissory notes, the Company issued 440,000 shares of its restricted common stock to the note holders as a form of interest.  The shares were valued at $44,000, to be amortized over the term of the notes.

 

Exemption From Registration. The shares of Common Stock referenced herein were issued in reliance upon an exemption from registration afforded either under Section 4(2) of the Securities Act for transactions by an issuer not involving a public offering, or Regulation D promulgated thereunder, or Regulation S for offers and sales of securities outside the U.S.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY STANDARDS

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.


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ITEM 6. EXHIBITS

 

Exhibits required by Item 601 of Regulation S-B

 

Exhibit

Number

Description of Exhibit

Filing Reference

(2)

Plan of Purchase, Sale, Reorganization, Arrangement, Liquidation or Succession

2.1

Share Exchange Agreement between Endeavor Power Corporation, Endeavor Holdings, Inc. and Parallax Diagnostics, Inc. and the Parallax Shareholders dated October 1, 2012

Filed with the SEC on November 15, 2012, as part of the Company’s Current Report on Form 8-K.

2.2

Letter of Intent between Parallax Diagnostics, Inc. and Endeavor Power Corporation dated August 15, 2012

Filed with the SEC on November 15, 2012, as part of the Company’s Current Report on Form 8-K.

2.3

Agreement to Purchase and Sell 100% of RoxSan Pharmacy, and Its Assets and Inventory

Filed with the SEC on August 18, 2015, as part of the Company's Current Report on Form 8-K.

2.4

Agreement to Purchase and Sell 100% of Qolpom, Inc, and Its Assets, Intellectual Property and Inventory dated August 31, 2016

Filed with the SEC on September 23, 2016, as part of the Company's Current Report on Form 8-K

(3)

Articles of Incorporation and Bylaws

3.1

Articles of Incorporation

Filed with the SEC on March 5, 2007, as part of the Company’s Registration Statement on Form SB-2.

3.1(a)

Amended and Restated Articles of Incorporation

Filed with the SEC on May 17, 2010, as part of the Company’s Annual Report on Form 10-K.

3.2

Bylaws

Filed with the SEC on March 5, 2007, as part of the Company’s Registration Statement on Form SB-2.

3.2(a)

Amended Bylaws

Filed with the SEC on May 17, 2010, as part of the Company’s Annual Report on Form 10-K.

3.3

Articles of Merger between Endeavor Power Corporation and Parallax Diagnostics, Inc. filed with Secretary of State of Nevada on November 6, 2012

Filed with the SEC on November 15, 2012, as part of the Company’s Current Report on Form 8-K.

3.4

Certificate of Amendment filed with the Secretary of State of Nevada on January 9, 2014

Filed with the SEC on April 14, 2014, as part of the Company’s Annual Report on Form 10-K.

(31)

Section 302 Certifications

31.1*

Section 302 Certification of Paul R. Arena

Filed herewith.

31.2*

Section 302 Certification of Calli R. Bucci

Filed herewith.

(32)

Section 906 Certifications

32.1*

Section 906 Certification of Paul R. Arena

Filed herewith.

32.2*

Section 906 Certification of Calli R. Bucci

Filed herewith.

(100)

XBRL Related Documents

101.INS**

XBRL Instance Document

Filed herewith.

101.SCH**

XBRL Taxonomy Extension Schema Document

Filed herewith.

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith.

101.LAB**

XBRL Taxonomy Extension Labels Linkbase Document

Filed herewith.

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith.

 

 

 

*Filed herewith. 

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. 


37


 

 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

PARALLAX HEALTH SCIENCES, INC.

 

 

 

 

 

 

 

 

 

 

Dated: September 20, 2018

/s/ Paul R. Arena

 

 

 

Paul R. Arena

 

 

 

President, Chief Executive Officer, and Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dated: September 20, 2018

/s/ Calli R. Bucci

 

 

 

Calli R. Bucci

 

 

 

Chief Financial Officer

 

 

 

 

 


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