1 Siddharth Rajeev, B.Tech, MBA, CFA Analyst November 5, 2015 Trxade Group, Inc. (TCQB: TRXD): Record Revenues in Q3 Sector/Industry: E-commerce Market Data (as of November 5, 2015) Current Price $1.15 Fair Value $2.66 Rating* BUY Risk* 4 (Speculative) 52 Week Range $ $1.85 Shares O/S 31,269,160 Market Cap $35.96 mm Current Yield N/A P/E (forward) N/A P/B 94.6x YoY Return -34.3% YoY TSXV -27.8% *see back of report for rating and risk definitions (All the figures in this report are in US$) Highlights In Q (quarter ended September 30, 2015), Trxade Group, Inc. ( company, TRXD, Trxade ) reported record revenues of $1.64 million, up 40% from Q2 s $1.17 million, and beat our estimate. The company added 675 new independent pharmacies to the Trxade.com platform in Q3. The platform currently has 4,600 pharmacies as members. With approximately 19% of the total independent pharmacies in the U.S. as members, we believe Trxade has a significant first mover advantage. We are raising our 2015 revenue forecast from $4.76 million to $5.22 million. Gross margins dropped in Q because of the increase in revenues from the wholesale division, which has lower gross margins. In October 2015, the company announced a $1.50 million financing by issuing convertible promissory notes (term 3 years; conversion price - $2.50 per share). The financing will be completed in three tranches - $0.45 million (completed), $0.55 million (December 2015), and $0.50 million (February 2016). We are maintaining our BUY rating and fair value estimate at $2.66 per share. Key Financial Data (FYE- Dec 31) (US $) E 2016E Cash 84, ,602 1,589, ,823 Working Capital 122, ,639 1,295, ,543 Total Assets 403,867 1,222,118 2,282,790 3,730,610 LT Debt to Capital 0.0% 0.0% 61.6% 51.7% Revenues 955,881 1,496,227 5,057,184 7,200,000 Net Income (2,091,285) (2,012,043) (790,138) 680,445 EPS
2 Page 2 Q3 Revenues up by 40% QOQ Trxade reported record revenues of $1.64 million in Q3-2015, up from $0.37 million in Q3-2014, reflecting an increase of 339% YOY. Q revenues were also up 40% QOQ from Q2 s $1.17 million. Nine month revenues were up by 287% YOY to $3.50 million. The company has not yet started to report segmented revenues, but the company did disclose that revenues from both its Trxade.com platform, and the wholesaling division, increased. The company s platform currently has 4,600 independent pharmacies as members, up from the 4,400 reported at the time of our initiating report on September 24, In Q3, the company added 675 new pharmacies, up from 620 in Q2. Trxade has already gained a market share of 19%, as there are approximately 24,000 independent pharmacies in the U.S. Management s goal is to reach 5,000 by the year-end, and 7,500 by end of According to management, of the 4,500 members on the platform, currently about 50% of the members are active buyers. The rest of the members are either new, or under implementation. Currently, the average utilization rate per member is approximately 1%. In Q3-2015, the company generated $1.64 million in revenues. If approximately 75% of the revenues came from transaction fees generated by Trxade.com, we estimate that, in Q3, approximately $20 - $25 million worth of products were purchased through the platform. The table below shows our estimate of the potential revenues based on the number of members and varying utilization rates. Number of Members 2,000 4,000 8,000 16,000 24,000 1% $4,000,000 $8,000,000 $16,000,000 $32,000,000 $48,000,000 3% $12,000,000 $24,000,000 $48,000,000 $96,000,000 $144,000,000 5% $20,000,000 $40,000,000 $80,000,000 $160,000,000 $240,000,000 Utilization Rates 8% $32,000,000 $64,000,000 $128,000,000 $256,000,000 $384,000,000 10% $40,000,000 $80,000,000 $160,000,000 $320,000,000 $480,000,000 15% $60,000,000 $120,000,000 $240,000,000 $480,000,000 $720,000,000 20% $80,000,000 $160,000,000 $320,000,000 $640,000,000 $960,000,000 25% $100,000,000 $200,000,000 $400,000,000 $800,000,000 $1,200,000,000 30% $120,000,000 $240,000,000 $480,000,000 $960,000,000 $1,440,000,000 The following chart shows our revenue estimates. We are raising our 2015 revenue forecast from $4.76 million to $5.06 million, while maintaining our 2016 estimate at $7.20 million.
3 Page 3 Revenues Margins Drop The following tables show the margins. Gross margins dropped in Q (Q gross margin was 67%) because of the increase in revenues from the wholesale division, which has lower gross margins. Management indicates that they estimate gross margins of the platform to be approximately 70%, and the wholesale division to be approximately 25%. We are lowering our 2015 gross margin estimate from 69% to 61%. Margins Q Q (9M) 2015 (9M) Gross 79.30% 57.22% 69.59% 62.50% EBITDA % -4.67% % % Net % -7.56% % % Expenses / Sales Q Q (9M) 2015 (9M) General and Administrative 173.2% 61.9% 179.5% 78.1% General and Administrative ( G&A ) expenses were up by 57% YOY to $1.01 million in Q3 due to increased staffing. For the nine month period, G&A expenses were up by 68% YOY to $2.73 million. We are raising our G&A expense estimate for 2015 from $3.34 million to $3.77 million. Management estimates G&A expenses to be approximately $3.50 million in the next 12 months. EPS Estimates Trxade reported an operating loss (EBITDA) of $0.08 million in Q3, and $0.55 million in the first nine months of Net loss was $0.12 million (EPS: -$0.00) in Q , versus $0.35 million (EPS: -$0.01) in Q In the nine month period in 2015, net loss was $0.62 million (EPS: -$0.02) versus $1.57 million (EPS: -$0.05) in the comparable period in Our net loss forecast for 2015 is $0.79 million (EPS: -$0.02) versus our previous forecast of $0.08 million (EPS: -$0.00). Our forecast for 2016 has been slightly lowered to $0.7 million (EPS: $0.02), from $0.8 million (EPS: $0.03).
4 Page 4 The following chart shows our projections: The following table shows a summary of the company's cash flows: S ummary of Cash Flows 2014 (9M) 2015 (9M) Cash Flows from Operations (699,330) (785,980) Cash Flows from Investing - - Cash Flows from Financing 885, ,000 Net Change 186,531 (380,980) Free Cash Flows (699,330) (785,980) The company reported -$0.79 million in cash flow from operations, with nil CAPEX in the first nine months of In our discussions, management indicated that they would need to spend approximately $2.5 million in the coming 12 months to build up inventory for its private label products. Convertible Promissory Note Financing At the end of Q3-2015, the company had $0.32 million in cash. Working capital and the current ratio were $0.38 million, and 1.4x, respectively.
5 Page 5 Liquidity Analysis Q Q Industry Cash $3,378 $84,317 $705,602 $414,167 $324,622 Working Capital $15,883 $122,263 $664,639 $445,932 $380,233 Current Ratio Debt / Capital 0.0% 35.7% 0.0% 41.9% 48.7% 14.40% LT Debt / Capital 0.0% 0.0% 0.0% 0.0% 0.0% 4.80% EBIT Interest Coverage Ratio (286.2) (344.6) (0.9) (1.6) 10.5 Activity Analysis Q Q Days Accounts Receivable Days Inventory Days Accouts Payable Cash Conversion Cycle (2.06) 7.75 (95.30) (11.83) The company held the following debt on its balance sheet at the end of Q3: One-year 10% convertible promissory notes (conversion price - $1.50 per share) for $0.20 million, issued in April/May One-year promissory notes for $0.25 million issued in May The note had an original issuance discount of $45k. Subsequent to the quarter end, in October 2015, the company announced a $1.50 million financing by issuing convertible promissory notes (term 3 years; conversion price - $2.50 per share) to a previous investor and a current shareholder. The financing will be completed in three tranches - $0.45 million (completed), $0.55 million (December 2015), and $0.50 million (February 2016). Interest payments on the notes (payable quarterly) are based on a percentage of net profit (7.5% to 25%) from the wholesale division s private label sales. This implies, if the private label business generates $1 million in revenues and a net profit of $0.25 million, a 25% share implies $62.5k. In order to sweeten the deal, the company also granted 150,000 share purchase warrants (exercise price - $0.01; term 5 years) for the first tranche investors. In total, Trxade will issue up to 500,000 share purchase warrants for the entire financing, all of which will have an exercise price of $0.01. Stock options and warrants: At the end of Q3, the company had 1 million stock options (weighted average exercise price of $1.16), and 0.69 million warrants (weighted average exercise price of $0.75) outstanding. Valuation First mover advantage, and the ability to gain traction, and grow the membership base, we believe, will be the key success drivers. With 19% of the market as members, we believe Trxade has a significant first mover advantage. Our forecasts for 2016, and beyond, only accounts for potential revenues from the Trxade platform, as it is too early at this point to quantify the upside potential of the company s wholesale business and other initiatives. The following table shows our assumptions.
6 Page E 2017E 2018E 2019E 2020E Trxade's Fee 5% 5% 5% 5% 5% No. of Members (year-end) 6,000 7,200 8,400 9,600 10,800 Percentage of Active Members 30% 35% 40% 45% 50% Average Utilization Rate 2.0% 3.00% 4.00% 5.00% 6.00% Average Annual Revenue of a Member $4,000,000 $4,000,000 $4,000,000 $4,000,000 $4,000,000 Trxade's Revenue $7,200,000 $15,120,000 $26,880,000 $43,200,000 $64,800,000 We are maintaining our fair value estimate at $2.66 per share. Risks The following risks, though not exhaustive, may cause our estimates to differ from actual results: The liquidity of TRXD s shares is low as 85% of the outstanding shares are held by management. The company has yet to achieve profitability. Long-term success depends on the ability to attract members and increase utilization rates. Regulatory risks are high in the pharmaceutical space. The sector is relatively competitive with quite a few direct competitors. However, Trxade clearly seems to have a first mover advantage. Only 50% of the board members are independent. Future equity financings may dilute current shareholders. Too early to determine the success of the company s efforts to sell private label products. Interest rate risk associated with debt. We assign a risk rating of 4 (Speculative).
7 Page 7 APPENDIX E 2016E Revenues $806,047 $955,881 $1,496,227 $5,057,184 $7,200,000 Cost of Sales 689, , ,047 1,982,176 2,520,000 Gross Profit (Loss) 116,239 11,811 1,056,180 3,075,008 4,680,000 General and Administrative 266,952 2,095,815 2,487,652 3,772,907 3,867,230 EBITDA (150,713) (2,084,004) (1,431,472) (697,899) 812,770 Depreciation Debt Conversion 576,417 Interest Expense 7,281 4,154 92, ,326 Tax Net Loss ($150,713) ($2,091,285) ($2,012,043) ($790,138) $680,445 EPS ($0.15) ($0.07) ($0.03) $0.02
8 Page 8 YE - Dec E 2016E Cash $3,378 $84,317 $705,602 $1,589,784 $270,823 Accounts Receivable 113, , , , ,000 Inventory 43,373 46,429 50,572 72,000 Prepaid Assets 1,712 57,676 73, ,400 Other Current Assets 0 59,584 59,584 59,585 Subscription Receivable - Preferred 160,000 Total Current Assets 117, ,265 1,218,316 2,278,988 1,226,808 Property and Equipment (net) 1,600 8,602 3,802 3,802 2,503,802 Total Assets $118,676 $403,867 $1,222,118 $2,282,790 $3,730,610 Accounts Payable $101,193 $162,314 $291,059 $396,435 $504,000 Accrued Liabilities 37, , , ,000 Other Liabilities 0 64,264 64,264 64,265 Deferred Income 0 22,568 50,572 72,000 Promissory Note 212,500 0 Short Term Debt 19, ,756 0 Short Term Debt Related Parties 53,389 Total Current Liabilities 101, , , , ,265 Convertible Promissory Notes 1,000,000 1,500,000 Shareholder s Equity Share Capital Additional Paid-in Capital 445,943 2,650,315 5,199,917 5,621,213 6,042,513 Retained Earnings (Deficit) (428,460) (2,519,745) (4,531,788) (5,321,926) (4,641,481) Total Shareholder s Equity 17, , , ,599 1,401,345 Total Liabilities and Shareholder s Equity $118,676 $403,867 $1,222,118 $2,282,790 $3,730,610
9 Page E 2016E Operating Activities: Net Loss ($2,012,043) ($790,138) $680,445 Adjustments Depreciation 4,800 Bad debt expense 11,905 Contributed Officers Salary 0 Loss from Debt Conversion 576,417 Shares Issued for services 0 339,552 68,044 Warrants and Options expense 374,619 Changes in operating assets and liabilities: Accounts Receivable (255,067) (156,693) (214,282) Prepaid Assets (55,964) (15,653) (31,071) Other Current Assets (59,584) Inventory (3,056) (4,143) (21,428) Accounts Payable 128, , ,565 Deferred Income 22,568 28,004 21,428 Other Liabilities 64,264 Accrued Liabilities 137,820 (27,123) 40,337 Net Cash used in operating activities (1,064,576) (520,818) 651,038 Investing Activities: Property Acquisition 0 (2,500,000) Net Cash used in investing activities 0 0 (2,500,000) Financing Activities: Repayments of Short Term Debt Related Parties (105,639) Proceeds from Short Term Debt Related Parties 52,250 Repayments of Short Term Debt (10,000) 200,000 (220,000) Proceeds from Short Term Debt 10, ,000 (250,000) Convertible Promissory Notes 1,000, ,000 Capital Contributions Proceeds from Issuance of Common Stock 1,204, ,000 Proceeds from Issuance of Subscription 160,000 Receivable Proceeds from issuance of Preferred Stock 375,000 Net Cash provided by financing activities 1,685,861 1,405, ,000 Net increase or (Decrease) in Cash 621, ,182 (1,318,962) Cash at Beginning of the Year 84, ,602 1,589,784 Cash at End of the Year $705,602 $1,589,784 $270,823
10 Page 10 Fundamental Research Corp. Equity Rating Scale: Buy Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold Annual expected rate of return is between 5% and 12% Sell Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative. Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any forward looking statements are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. 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