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RX SAFES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements." These forward-looking statements generally are identified by the words "believes," "project," "expects," "anticipates," "estimates," "intends," "strategy," "plan," "may," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Company Overview We design, develop, engineer and market fingerprint medical security storage solutions for consumers and healthcare professionals. Our CEO and director, Ms. Yarde, has years of experience designing, developing and marketing consumer based security fingerprint products including garage door openers, front door locks, thermostats and mail boxes through multiple distribution channels, in prior companies. Founded in 2010, we are a pioneer in a new targeted sector in Prescription (Rx) and over-the-counter (OTC) drug security, providing real solutions to address Rx and OTC drug abuse. The Rx DrugSAFE™ product line of medical safes and prescription drug products offers consumers security products specifically designed to safely and securely store medications in the home. These secure storage products also offer healthcare professionals a secure and convenient means by which to control access to medications, addressing both loss prevention and safety concerns within a variety of healthcare settings. Our Rx DrugSAFE™ products are easy to set up and operate, convenient and competitively priced. We have spent over a year redesigning the core electronics technology and mechanical locking mechanisms of our products in order to provide further security and convenience for our customers. We have taken our experience in safe and security product design and fingerprint technology and our understanding of consumer's wants and needs and developed a product line that we believe canhelp save thousands of lives. In the next 12 months, we intend to continue with our research and product development, implement on several areas of our marketing and distribution plan, purchase inventory of our existing product and new product designs and use working capital to secure office space, hire sales and support personnel, secure necessary business insurances and continue to establish business relationships to generate awareness, increase sales and comply with all necessary reporting requirements. We will need to raise capital to meet our objectives. We have registered an offering to sell up to $2,460,000 in net proceeds. If we are able to raise capital, we plan to use $246,000 for Research and Development and will use this capital to develop additional products to add to our product line. To date we have funded our Research and Development through the sale of unregistered securities. The majority of the product development work was conducted under our agreement with Axius Consulting Group, Inc. whose principals have extensive experience in designing and developing consumer biometrics products. Based on our needs which were identified from feedback we received from customers as well as from a security specialist who evaluated our product, Axius worked with our sourcing company in China, providing them with the specifications for the product changes that were needed and then assisting them in conjunction with Rx Safes, Inc. to facilitate the prototyping and testing of these various changes to the product. Although we can continue to use this newly designed core technology, if we are able to raise capital we will further re-design our core electronic fingerprint and mechanical locking systems to incorporate the latest improvements in technology and cost reduction. As part of our product roadmap, we presently have two additional products at various stages of design. Firstly, we have a hand manufactured model of a larger version of the Rx DrugSAFE, the Rx DrugSAFE Pro, which can still be used in the home but is primarily designed to accommodate larger and a greater number of prescription pill bottles to support the needs of a variety of healthcare environments including assisted living facilities, nursing homes and emergency service vehicles. In order to commercialize these products, there are various steps we must take. The second product is the Rx DrugSAFE IC. 4 Table of Contents The fingerprint technology we plan on using in the Rx Drug SAFE Pro is identical to that of our current product. However, we will need to recreate CAD drawings for the assembly and then manufacture tooling for all the parts that make up the metal box. We anticipate that this will take approximately 2 months. We will then need to manufacture several samples of these parts, known as "first shots" from the tooling to test the integrity of the tools. This sampling is expected to take one month. Once we have verified that the tools are sufficient, we will then need to hand-assemble and test approximately 20 samples of the Rx DrugSAFE PRO with the new electronics, mechanical lock and other new design features that were incorporated into the new Rx DrugSAFE. At this point we will need to design in stronger mechanical locking components to support the larger size and greater weight of the Rx DrugSAFE Pro. This step is anticipated to take an additional 2 months. We will work with our manufacturing and development partner in China, Good Promotions, to source the necessary components, make the mold and prototype the Rx DrugSAFE Pro so that we can test the product prior to mass manufacturing. Once these samples are properly tested we will then be able to place an order for production. We anticipate that this will occur at the end of December so we will have units of the Rx DrugSAFE PRO available for resale in April 2015. Many of the healthcare facilities we have spoken with to date have requested additional features be available with our products to make them more applicable for their use. As part of the development of the Rx DrugSAFE PRO, we will also evaluate the cost of adding audit tracking capabilities to the safe, which will require additional flash memory, newly developed software and a time clock be added to the Printed Circuit Board. We may consider engaging the services of a US based engineering partner to perform this evaluation and deliver a report on the feasibility and cost differential for adding these additional features. This evaluation is anticipated to take 2 months and will be designed into the electronics over time. All of the steps needed for the development of the Rx DrugSAFE PRO will be taken with the Rx DrugSAFE IC. This product is an insert designed to be installed inside of most standard medicine cabinets to allow seamless introduction of our secure technology in a place most households are familiar with keeping their medications. Because we do not intend to change the fingerprint module we use in the IC, we will simply focus on the industrial and mechanical design for this product and will work with our manufacturing and development partner, Good Promotions, to complete these designs and create the mold. We anticipate we will begin the process of developing this product in January 2015 and that the CAD drawing and tooling for this will be completed at the end of February. Sampling of the parts will take place in March 2015 and then testing of the finished sample units will be conducted in April and May 2015. The IC will need to be tested in various standard medicine cabinets offered for sale in the US prior to launching in the market. We should be able to place or first order for this product for availability in the Fall of 2015. As with the Pro, we have already received a number of enquiries for the IC version of our product. If we are only able to raise the minimum amount in our public offering ($585,000) necessary to continue our business operations we will have to scale back the number of samples of the Rx DrugSAFE PRO that we produce for testing although the schedule will stay the same. We will not be able to afford evaluation for adding new technology but anticipate the timeline to bring the basic RxDrugSAFE PRO to market will remain the same. However, we anticipate that the development of the Rx DrugSAFE IC will be delayed until additional funds are available that can be further dedicated to Research and Development. In order to create a market for our current and future products we recognize the importance of having a strong sales and marketing plan. We have budgeted $369,000 in any capital we are able to raise to be spent on sales and marketing over the next 12 months of operations. We have already taken steps to establish sales channels for our products and intend to re-engage with the large distributors McKesson, Cardinal Health and Amerisource Bergen and invest in the participation of their various marketing programs to provide exposure for our products within their channels of distribution, which are the national pharmacy chains as well as the many independently owned or franchised neighborhood pharmacies. With McKesson and Cardinal Health, we already have established distribution agreements in place and anticipate it will take about one month to re-establish parameters for these two accounts. We have yet to establish a distribution agreement with Amerisource Bergen and anticipate that this will take approximately 3 months to develop the necessary relationships and establish an agreement. We will be able to accomplish these two prior goals even if we are only able to raise the minimum necessary to continue operations. However, a key to making these relationships successful is participating in their various "pay to play" programs where each company's sales force is incentivized to sell particular products based on our participation in such programs. These programs include but are not limited to providing targeted sales material to the reps to help market our product, attending and exhibiting at various trade shows hosted by each respective distributor, offering special discounted pricing and providing special financial incentives to the sales reps to encourage them to sell our products. The participation in such programs is an ongoing effort and if we are only able to raise the minimum necessary to continue our business operations, we will not have the adequate financial resources in place to participate and will therefore have to rely on traditional grass roots efforts, i.e. establishing our own demand at the end user level, in order to make these relationships a success. 5 Table of Contents We have retained an investor/public relations firm to work with the company to gain exposure and build brand awareness in various television, print an online media. A critical part of any business success is a strong web and social media presence. To facilitate this, we intend to immediately hire a company to manage our social media presence as well as revamp and optimize our own website with SEO and SEM with an ultimate goal to be in the top 3 of browser searches for our products and related products. The goal would be to increase our ranking over a period of 6 months. This is a top priority for us to be able to increase consumer awareness of our business and we will execute this even if we are only able to raise the minimum amount required to continue operations as this is considered a critical component of our ongoing sales and marketing efforts. To support this we will also need to create strong visual branding and have already identified a graphics design consultant we will engage to strengthen our visual presence across the web, promotional material and in any media campaigns. Even if we are only able to raise the minimum amount needed to continue operations, we will still set aside the necessary resource to engage a graphics person although we will scale down the amount of time spent on visual branding to only address the web based needs of the company, An effective way to reach our targeted consumer audience is through the use of an infomercial. We will set aside approximately $100,000 of our sales and marketing budget to produce both a short form and long form infomercial and buy media time in select target markets to test the success of this for our current product. If successful we will dedicate additional resources from an intended subsequent capital raise to launch a full blown infomercial campaign and will engage with a third party fulfillment company to handle the incoming calls and product fulfillment. We will be able to fund an infomercial at this level if we are able to sell $1,835,000 in our offering. If we are not able to raise that, we will not have sufficient funds to develop an infomercial or purchase media time and therefore will not be able to execute on this part of our plan. Our ultimate goal for the consumer version of our product is to make it widely attainable to the public through medical reimbursement. To this end, we will once again pursue FDA registration, set aside approximately $10,000 to pay the necessary product and facility registration fees and will then hire a consultant to assist us in the process of navigating CMS and private health insurance companies to recognize the product as a medical device and offer reimbursement of the majority of the purchase price through their plans so that the customer will only have to pay a small co-payment to purchase the product. Our goal is to have the Rx DrugSAFE product be reimbursable by January 2015. However, if we are only able to raise the minimum amount required to continue operations we will still look to immediately obtain the necessary registrations and pay the corresponding fees but will not be in a position to hire a consultant to assist us in establishing the product as a reimbursable medical device and will instead need to navigate this effort without the assistance of an industry expert. Without the guidance of an industry specialist, we anticipate that the January 2015 goal would be too aggressive and we would likely push back our targeted date to Summer2015. We have also found trade shows to be an effective way to reach a large number of potential customers for a small investment of capital a plan on attending 5 in the next 12 month period. To support our intended growth in facilities within the healthcare industry, we will invest approximately $50,000 of our sales and marketing budget to attend and exhibit at a number of industry trade shows, securing booth space, and creating a small trade show display for the company and products. If we are only able to raise the minimum amount required to continue operations we will significantly reduce our trade show budget to $10,000 and will select only one event to attend in the initial 12 month period. 6 Table of Contents Also, it is our intention to sign up immediately with PR Newswire as we will need to regularly inform our customers and the market on our business progress as well as provide updated information on trends in our industry. Our goal would be to issue a Press Release a minimum of once every two weeks as the business continues to achieve its milestones and the industry landscape changes. However, with limited resources should we only raise the minimum amount required to continue operations, we will have to significantly decrease our commitment to this effort limiting the issuing of a Press Release to once every two months. Finally, we have identified a number of not for profit organizations with whom we would like to partner. These organizations have access to targeted audiences of potential consumers of our product and would advertise our product on their website, at various events and as part of targeted campaigns. All of these organizations require financial sponsorship in order to take advantage of the wide reach they enjoy and this outreach could be key in creating awareness of our product by qualified potential customers who are already taking the time to investigate the issue of prescription drug abuse by visiting the organizations site or attending an event. We will need to raise at least $1,210,000 of our targeted amount to in order to participate with at least one of these organizations. If we only raise the minimum amount, we will not be able to afford the sponsorship fees and will therefore not be able to pursue this avenue to potential customers. With our multifaceted effort to create a market for our product it is essential to ensure we have adequate product to meet the potential demand and will therefore budget $615,000 raised through the offering to place an immediate inventory order from our manufacturing partner Good Promotions and have it shipped and housed at Exxtra Express with whom we have already established a warehousing and distribution relationship. These units will have a lead time of approximately 90 days to arrive at our warehousing facility from the time of order. We find it effective to invest in a third party warehouse to fulfill our orders as we benefit from their fast turn around and discounted shipping rates and overall believe the company will save a substantial amount of money using them as a partner. We plan to order approximately 7,500 units of our current product and set aside any remaining balance to place a small order for each of the Pro and IC products once we have completed their product design so that we can do a pilot test of those products in select markets. Through our manufacturing sourcing partner we have access to multiple factories should our capacity outgrow the capabilities of our present facility. Thus, we believe 7,500 units will not be a problem. If we are only able to raise the minimum amount needed through our offering, we will have to significantly reduce the amount of units of the Rx DrugSAFE to 2,000 pieces and will likely only be able to afford to order approximately 300 units of the Rx DrugSAFE PRO product. This will have a negative impact on our pricing as the less units we order, the higher the cost. This will also clearly impact our revenue potential and will mean that the release of the Rx DrugSAFE IC will need to be postponed until we have adequate capital to order the necessary inventory. We have budgeted $1,205,000 of the money raised through the offering for general working capital. Up to February 2014 we had been operating the business from a home office but recently identified suitable office/design space to relocate the company to. The space we have secured is in an executive office and although we have presently secured one small office, we have the ability to easily expand the space needed as we bring on additional personnel.. We expect to incur additional office expense for telephone/internet, office furniture and equipment postage and utilities and have budgeted another $50,000 to cover these expenses. We will then look to hire targeted human capital to help support the company's intended growth and execute on our business plan. These resources will include three executive personnel, a CEO, CFO and COO, two senior sales executives, one to focus on developing our market in the consumer space and the other focusing on the healthcare industry in general, each with their respective sales support administrator, an in-house bookkeeper, and a receptionist/office administrator. This hiring effort will begin immediately and we are budgeting approximately $750,000 within the next 12 months of operations for payroll costs and benefits. The remaining $380,000 of working capital will be used as needed to continue to support our business and will be spent in the areas of T&E, consulting and professional fees (we will re-engage with Axius Consulting Group, Inc. to continue providing business and professional consulting to the company and will place our securities counsel, Clark Corporate Law Group, LLP our audit firm ZBS Group, LLP and our accountants, Tichy and Ioanides, CPA on monthly retainers), inventory management and distribution (Exxtra Express), and to build on our intellectual property portfolio through the filing of design patents for each of our products and other day to day operating expenses. If we are only able to raise the minimum amount through the offering it will force us to significantly scale back our proposed operations. We will still need to maintain suitable office space but will simply keep 1- 2 small offices in the Executive Suite and reduce the monthly budget to approx. $1,000 per month, including phones and internet. We will also then eliminate the need to purchase costly office furniture and equipment. Regarding Human Capital, we will only be able to hire one sales professional and one person in a sales support and administrative role. The current acting CEO, Lorraine Yarde will become our only full timeexecutive staff member. 7 Table of Contents A tabular presentation of our plan of operations for the next 12 months follows: Needed Capital to Achieve Milestone Assuming 25%, 50%, 75%, and 100% of the Shares Are Sold Estimated Month of Completion Step (Milestone) (A) 25% 50% 75% 100% 1. Product Development: a. Rx DrugSAFE Pro January 2015 $ 58,500 $ 61,500 $ 61,500 $ 61,500 b. Rx Drug SAFE IC May 2015 - 59,500 61,500 61,500 c. Other - - 60,500 123,000 Total product development 58,500 121,000 183,500 246,000 2. Inventory: April 2015 119,375 218,750 375,000 375,000 a. Rx DrugSAFE Pro April 2015 26,875 41,875 41,875 120,000 September b. Rx DrugSAFE IC 2015 - 41,875 41,875 120,000 Total inventory 146,250 302,500 458,750 615,000 3. Sales and Marketing: a. Finalization of 3 distribution February agreements 2015 18,000 25,000 25,000 52,000 b. Website development March 2015 12,000 12,000 12,000 12,000 c. Infomercial June 2015 - - 75,000 100,000 d. FDA registration for medical reimbursement April 2015 10,000 50,000 50,000 50,000 e. Industry trade shows June 2015 10,000 25,000 35,000 50,000 f. Sponsorship fees for partnerships with non-profit Organizations June 2015 - 25,000 25,000 25,000 g. Social media June 2015 20,000 20,000 20,000 20,000 g. Other 17,750 24,500 33,250 60,000 Total sales and marketing 87,750 181,500 275,250 369,000 4. Working Capital a. Office space and September equipment 2015 25,000 37,500 75,000 75,000 b. Employment costs for up to 3 executive personnel, 2 senior sales executives, and 2 clerical September Persons 2015 200,000 475,000 750,000 750,000 c. Other 42,500 67,500 67,500 380,000 Total working capital 367,500 580,000 892,500 1,205,000 5. Legal and Accounting 25,000 25,000 25,000 25,000 Total capital $ 585,000 $ 1,210,000 $ 1,835,000 $ 2,460,000 (A) Assumes completion of the first stage of the offering in September 2014. 8 Table of Contents Results of Operations for the three and six months ended June 30, 2014 and 2013 Revenues Our total revenue reported for the three months ended June 30, 2014 was $36, an increase from $0 for the same period ended 2013. Our total revenue reported for the six months ended June 30, 2014 was $1,101, an increase from $0 for the same period ended 2013. The revenues we had for the three and six months ended June 30, 2014 were from online sales. We had a gross loss for the three months ended June 30, 2014 and an insignificant gross profit for the six months ended June 30, 2014. We hope to achieve increased revenues once we establish sales channels for our products and implement our business strategies as described above. If we are unable to obtain financing, however, the implementation of our business strategies will be frustrated and we could go out of business. Operating Expenses Operating expenses decreased to $43,217 for the three months ended June 30, 2014 from $80,252 for the three months ended June 30, 2013. Our operating expenses for the three months ended June 30, 2014 consisted mainly of professional fees in the amount of $28,073, consulting fees of $0 for both three and six months ended June 30, 2014., and travel expenses of $6,985. In comparison, our operating expenses for the three months ended June 30, 2013 consisted mainly of professional fees in the amount of $17,300, consulting fees of $60,000, and travel expenses of $1,478. Operating expenses decreased to $56,147 for the six months ended June 30, 2014 from $142,107 for the six months ended June 30, 2013. Our operating expenses for the six months ended June 30, 2014 consisted mainly of professional fees in the amount of $36,498, and travel expenses of $6,985. In comparison, our operating expenses for the six months ended June 30, 2013 consisted mainly of professional fees in the amount of $18,900, consulting fees of $120,000, and travel expenses of $1,478. We anticipate our operating expenses will increase as we undertake our plan of operations. The increase will be attributable to administrative and operating costs associated with our business activities and the professional fees associated with our reporting obligations under the Securities Exchange Actof 1934. Net Loss We incurred a net loss of $44,384 for the three months ended June 30, 2014, compared to a net loss of $80,252 for the three months ended June 30, 2013. We incurred a net loss of $57,297 for the six months ended June 30, 2014, compared to a net loss of $142,107 for the six months ended June 30, 2013. 9 Table of Contents Liquidity and Capital Resources As of June 30, 2014, we had total current assets of $32,024 and total current liabilities of $313,862. We had a working capital deficit of $281,838 as ofJune 30, 2014. Operating activities used $69,488 in cash for the six months ended June 30, 2014. Our net loss of $57,297 offset by an advance to a consultant of $20,000 was the main component of our negative operating cash flow. Cash flows provided by financing activities during the six months ended June 30, 2014 amounted to $76,000 from related party loan advances of $56,000 and loan advances of $20,000. We have $8,233 in cash available as of June 30, 2014. Management believes that the amount of our current registered offering, $2,500,000, is sufficient to implement and fully carry out our business plan and no further funding will be required. However, we must raise at least $585,000 in net proceeds in the next two to twelve months otherwise we may temporarily or permanently have to cease operations. For purposes of short term capital, we have entered into three Master Promissory Notes: one on May 1, 2013 and the other two on January 1, 2014. The first Master Promissory Note is with Axius and allows us to borrow up to $50,000 at 4% interest per annum that matures on December 31, 2014. At June 30, 2014 we have a balance of $35,774. There was total accrued interest of $1,320 as of June 30, 2014. The second Master Promissory Note is with Lorraine Yarde and allows us to borrow up to $100,000, at Ms. Yarde's sole discretion, bearing simple interest in the amount of 4% per annum with a maturity date of December 31, 2014. To date, we have borrowed the amount of $55,000 under this Master Promissory Note. There was total accrued interest of $1,000 as of June 30, 2014. The third Master Promissory Note is with a majority shareholder, Naples Trust, and allows us to borrow up to $100,000, at the trust's sole discretion, bearing simple interest in the amount of 4% per annum with a maturity date of December 31, 2014. To date, we have borrowed the amount of $20,000 under this Master Promissory Note. There was total accrued interest of $200 as of June 30, 2014. Based upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that such additional financing will be available to us on acceptable terms or at all. Going Concern The accompanying financial statements have been prepared in conformity with generally accepted accounting principle, which contemplate continuation of our company as a going concern. However, we had minimal revenues for the six months ending June 30, 2014 and year ended December 31, 2013, respectively. We currently have limited working capital, and have not completed our efforts to establish a stabilized source of revenues sufficient to cover operating costs over an extended period of time. Management anticipates that we will be dependent, for the near future, on additional investment capital to fund operating expenses. We intend to position our company so that we may be able to raise additional funds through the capital markets. In light of management's efforts, there are no assurances that we will be successful in this or any of our endeavors or become financially viableand continue as a going concern. Critical Accounting Policies In December 2001, the SEC requested that all registrants list their most "critical accounting polices" in the Management Discussion and Analysis. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of a company's financial condition and results, and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We do not believe that any accounting policies currently fit this definition. Recently Issued Accounting Pronouncements On June 10, 2014, the Financial Accounting Standards Board ("FASB") issued update ASU 2014-10, Development Stage Entities (Topic 915). Amongst other things, the amendments in this update removed the definition of development stage entity from Topic 915, thereby removing the distinction between development stage entities and other reporting entities from US GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information on the statements of income, cash flows and shareholder's equity, (2) label the financial statements as those of a development stage entity; (3) disclose a description of the development stage activities in which the entity is engaged and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. The amendments are effective for annual reporting periods beginning after December 31, 2014 and interim reporting periods beginning after December 15, 2015, however entities are permitted to early adopt for any annual or interim reporting period for which the financial statements have yet to be issued. We have elected to early adopt these amendments and accordingly have not labeled the financial statements as those of a development stage entity and have not presented inception-to-date information on the respective financial statements. Off Balance Sheet Arrangements As of June 30, 2014, there were no off balance sheet arrangements. 10 Table of Contents |