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EX-32.1 - EXHIBIT321 - ASSURED PHARMACY, INC.exhibit321.htm
EX-31.2 - EXHIBIT312 - ASSURED PHARMACY, INC.exhibit312.htm
EX-31.1 - EXHIBIT311 - ASSURED PHARMACY, INC.exhibit311.htm
EX-10.10 - EXHIBIT1010 - ASSURED PHARMACY, INC.exhibit1010.htm
EX-10.9 - EXHIBIT109 - ASSURED PHARMACY, INC.exhibit109.htm
EX-10.8 - EXHIBIT108 - ASSURED PHARMACY, INC.exhibit108.htm
EX-10.7 - EXHIBIT107 - ASSURED PHARMACY, INC.exhibit107.htm
EX-10.6 - EXHIBIT106 - ASSURED PHARMACY, INC.exhibit106.htm
EX-10.5 - EXHIBIT105 - ASSURED PHARMACY, INC.exhibit105.htm
EX-10.4 - EXHIBIT104 - ASSURED PHARMACY, INC.exhibit104.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended  December 31, 2013.
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from ____________ to ____________.
 
Commission File Number:  333-181361
 
Assured Pharmacy, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
98-0233878
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
5600 Tennyson Parkway, Suite 390, Plano, TX 75024
(Address of principal executive offices) (Zip Code)
 
(972) 473-4033
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12 (b) of the Exchange Act:
 
Title of Each Class
Name of Exchange of Which Registered
 
Securities registered pursuant to Section 12(g) of the Exchange Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨    No  x
 
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes  ¨    No  x
 
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 past 90 days.  Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 registrant was required to submit and post such files).     Yes  x    No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
 
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 the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of Exchange Act.
 
Large accelerated filer ¨
Accelerated filer                     ¨
Non-accelerated filer   ¨
(Do not check if a smaller reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
 
The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $1,463,551 as of March 27, 2014, based on the last sale price of the registrant’s common stock as reported on the OTC Bulletin Board on such date.
 
 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at March 27, 2014
     
Common Stock, $0.001 par value
 
10,476,387
 
 

 



Form 10-k
Assured Pharmacy, Inc.
December 31, 2013
 
 
     
Page(s)
       
Part I.
     
       
Item 1.
 
4 - 13
Item 1A.
 
14 - 26
Item 1B.
 
26
Item 2.
 
26
Item 3.
 
26 - 27
Item 4.
 
27
   
27 - 28
       
Part II.
     
       
Item 5.
 
28 - 31
Item 6.
 
31
Item 7.
 
31 - 41
Item 7A.
 
41
Item 8.
 
42
Item 9.
 
43
Item 9A.
 
43
Item 9B.
 
43
       
Part III.
     
       
Item 10.
 
44 - 46
Item 11.
 
46 - 49
Item 12.
 
50 - 53
Item 13.
 
54 - 56
Item 14.
 
56
       
Part IV.
     
       
Item 15.
 
57 - 58
EX-10.4
 
57
EX-10.5
 
57
EX-10.6
 
57
EX-10.7
 
57
EX-10.8
 
57
EX-10.9
 
57
    EX-10.10
 
57
EX-21.1
 
58
EX-31.1
 
58
EX-31.2
 
58
EX-32.1
 
58

 
 

 



FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements.  These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control.  Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs.  There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
 
These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements.  Some of the factors that we believe could affect our results include:
 
·  
limitations on our ability to continue operations and implement our business plan;
 
·  
our history of operating losses;
 
·  
our inability to make timely payments to convertible debenture and secured debt holders;
 
·  
the timing of and our ability to obtain financing on acceptable terms;
 
·  
dependence one key supplier;
 
·  
dependence on third-party payors;
 
·  
the effects of changing economic conditions;
 
·  
the loss of members of the management team or other key personnel;
 
·  
changes in governmental laws and regulations, or the interpretation or enforcement thereof and related compliance costs; and/or
 
·  
costs and other effects of legal and administrative proceedings, settlements, investigations and claims, which may not be covered by insurance.
 
There are likely other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. All forward-looking statements attributable to us in this document apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.
 
In this report, unless the context indicates otherwise: “Assured Pharmacy,” the “Company,” “we,” “our,” “ours” or “us” refer to Assured Pharmacy, Inc., a Nevada corporation, and its subsidiaries.
 
 

 



PART I
 

We were organized as a Nevada corporation on October 22, 1999 under the name Surforama.com, Inc. and previously operated under the name eRXSYS, Inc.  We changed our name to Assured Pharmacy, Inc. in October 2005.  Since May 2003, we have been engaged in the business of establishing and operating pharmacies that specialize in dispensing highly regulated pain medication for chronic pain management.  Because our focus is on dispensing medication, we typically do not keep in inventory non-prescription drugs, or health and beauty related products, such as walking canes, bandages and shampoo. We primarily derive our revenue from the sale of prescription medications.   The majority of our business is derived from repeat business from our customers.

Our pharmacies maintain a variety of different drug classes, known as Schedule II, Schedule III, and Schedule IV drugs, which vary in degrees of addictiveness.  Schedule II drugs are considered narcotics by the United States Drug Enforcement Administration (“DEA”), and are the most addictive; hence, they are highly regulated by the DEA and are required to be segregated and secured in a separate cabinet.  Schedule III and Schedule IV drugs are less addictive and are less regulated.  Because our business model focuses on servicing pain management physicians and their chronic pain patients, we carry in inventory a larger amount of Schedule II drugs than most other pharmacies.

We currently have two operating pharmacies and two pharmacies under development in Greewood Village, Colorado and Waltham, Massachusetts, each of which are wholly owned through a subsidiary. The opening date and locations of our pharmacies are as follows:

Location
 
Opening Date
     
Kirkland, Washington
 
August 11, 2004
Leawood, Kansas
 
November 28, 2011

In February 2004, we entered into an agreement with TAPG, L.L.C., a Louisiana limited liability company (“TAPG”), for the purpose of operating up to five pharmacies and incorporated Assured Pharmacies Northwest, Inc. (“APN”), formerly known as Safescript Northwest, Inc., to operate these pharmacies.    APN operates the pharmacy in Kirkland, Washington.   In June 2011, we acquired all of the outstanding capital stock of APN held by TAPG pursuant to the terms of a Stock Purchase Agreement dated as of June 30, 2011.  Pursuant to this agreement, we issued TAPG 300,000 restricted shares of our common stock and TAPG agreed to cancel $17,758 in principal and interest we owed to TAPG.  As a result of this transaction, APN became our wholly owned subsidiary.

In April 2003, we entered into an agreement with TPG, L.L.C., a Louisiana limited liability company (“TPG”), for the purpose of funding the establishment of and operating up to fifty pharmacies and incorporated Assured Pharmacies, Inc. (“API”) to operate these pharmacies.   We owned 51% of API’s outstanding capital stock and TPG owned the remaining 49%.  API operated the pharmacies in Santa Ana and Riverside, California.  We entered into a Purchase Agreement with TPG and acquired all of the outstanding capital stock of API held by TPG for the purchase price of $460,000 in cash and the issuance of 278 restricted shares of our common stock.  As a result of this transaction, API also became our wholly owned subsidiary.  The cash component of the purchase price is payable in monthly installments over time.  In December 2012, we consolidated the operations of the Santa Ana pharmacy into our Riverside pharmacy. In August 2013, we closed the operations of our Riverside pharmacy.  The Purchase Agreement has been subsequently amended, the latest amendment was the Fourth Amendment to Purchase Agreement which was completed on December 19, 2013.  Under the terms of the amendment, the Company issued 200,000 restricted shares of the Company’s common stock and agreed to repay the remaining $60,000 due in six consecutive monthly payments of $2,000 followed by sixteen consecutive monthly payments of $3,000.  Under the agreement TPG holds a security interest in the shares of API capital stock acquired by us under the Purchase Agreement.  
 
 
 

 

 

 
Our pharmacy in Leawood, Kansas is operated by Assured Pharmacy Kansas, Inc., which is a wholly owned subsidiary.

Market for Our Products and Services

We primarily dispense pharmaceutical drugs to patients who require medication for chronic pain management. Our pharmacies maintain an inventory of highly regulated medication that is specifically tailored to the needs of our recurring customers. This practice frequently enables our pharmacies to fill customers’ prescriptions from its existing inventory and decreases the wait time required to fill these prescriptions. We believe our focus and familiarity with dispensing highly regulated medications better positions our pharmacists to understand the needs of our customers.

Principal Suppliers

We obtain pharmaceutical products primarily from H.D. Smith Wholesale Drug Co. (“HDS”) and other secondary suppliers.  Management believes that the wholesale pharmaceutical distribution industry is highly competitive due to the consolidation of the pharmacy industry and the practice of certain large pharmacy chains to purchase directly from product manufacturers. While the loss of a key supplier could adversely affect or business if alternative suppliers are unavailable, management believes we could obtain the majority of our inventory through other distributors at competitive prices and upon competitive payment terms if our relationship with our primary wholesale drug supplier was terminated.

Customers and Third-Party Payors

In fiscal 2013, over 94 percent of our pharmacy sales were made to customers covered by health care insurance plans, which typically contract with a third-party payor such as an insurance company, a prescription benefit management company, a governmental agency, workers’ compensation, a private employer, a health maintenance organization or other managed care provider.  The plan agrees to pay for all or a portion of a customer’s eligible prescription purchases sometimes at reduced reimbursement levels. Any significant loss of third-party payor business could have a material adverse effect on our business and results of operations.

Our Strategic Plan
 
Our plan is to develop a national footprint as a premier provider of pharmacy services to physicians and patients primarily in the treatment of chronic pain.  Our business model provides pharmacy services which are typically utilized by physicians for the risk management benefits of our model in this increasingly regulated industry due to prescription drug abuse and diversion.  Chronic pain patients typically utilize our services for the convenience, safety and specialization benefits.
 
We have developed and refined what we believe is a unique pharmacy service model for chronic pain physicians and patients that is capable of being scaled into a national chain.  We currently have two operating pharmacies, and our plan is to develop up to four (4) additional pharmacies per year up to a total of twelve operating pharmacies subject to our ability to secure additional financing.  We currently have two pharmacies under development in the Denver, Colorado and Boston, Massachusetts markets.  Management plans to open the Denver pharmacy in the 2nd quarter of 2014 and open the Boston pharmacy in the 4th quarter of 2014 subject to financing availability.  We intend to finance this plan through a mix of equity and debt financing arrangements, increased sales and lower operating expenses, but there can be no assurance that such additional financing will be available to us on acceptable terms, or at all.
 
Beginning in August 2013, management has developed and implemented a plan to scale back operations in an attempt to avoid ceasing operations. As a result, management closed two pharmacies in order to reduce overall fixed pharmacy costs by 50% and concentrate our limited working capital to support the operations of the two remaining pharmacies we believe have the best prospects.   Management considered several factors in determining which two pharmacies to close, including historical financial performance, regulatory costs, current sales prospects, geographic and physical location and strength of existing physician relationships.  After consideration of these factors, management closed our Gresham, Oregon and Riverside, California pharmacies on August 5, 2013 and August 8, 2013, respectively.
 
 

 


 
 
Management believes that our current corporate infrastructure can efficiently support up to total of twelve operating pharmacies.  Corporate infrastructure includes executive management, centralized support services, accounting, finance, information systems, human resources, payroll and compliance to support each pharmacy's operations.  In light of these actions to scale back our operations, the costs to support our existing corporate infrastructure remain significant when allocated over the operations of two remaining pharmacies.  In order to align the costs of our current corporate infrastructure with our scaled back operations, management has implemented cost reduction initiatives including staffing reductions, deferral of senior management compensation by approximately fifty percent and reduced operating costs at our two remaining pharmacies.

In addition to the operational restructuring, we have also strengthened our financial position considerably by securing additional fnancing and restructuring our balance sheet over the past several months. A lead investor has provided us with $1.44 million of new financing from August 2013 to date, which enabled us to implement a plan to streamline our operations and target near-term profitability. The new financing was disbursed throughout our operations to meet increasing demand from physicians who wish to have greater precision in the management of their chronic patients. We have successfully restructured, approximately $7.9 million of our outstanding debt and accrued interest. The holders of the Company’s long-term debt, totaling approximately $5.5 million, have agreed to extend the maturity of their debt until 2016. In addition, the holders of the Company’s long-term debt, totaling approximately $1.6 million have converted their debt into common equity at a price of $0.60 per share. As part of these debt extensions and conversions, an aggregate total of approximately $800,000 in accrued interest has converted into common equity at a price of $0.60 per share.  All of these balance sheet adjustments have allowed us to focus the new capital on meeting the increasing demand for our services resulting in revenue growth.
 
Because our management believes that our current corporate infrastructure can efficiently support our existing pharmacies and develop up to four additional new pharmacies per year up to total of twelve operating pharmacies,  we believe that the implementation of our plan to open up to ten additional pharmacies will not require material additional corporate infrastructure.  Further, we target the opening of each new pharmacy to have a positive impact on our consolidated operating results within nine months from opening the new pharmacy, but there can be no assurance that such positive results will occur.
 
The success of future pharmacy locations is highly dependent on the location of that particular pharmacy.  Future pharmacy locations, when established, will be selected based on criteria which include: i) the proximity to physician and medical facilities; ii) convenience of the particular location; iii) size and growth rate of the surrounding metropolitan area; iv) state and local tax rates; v) competitive business environment and vi) access to qualified personnel and the associated cost.  Management believes that the success of new pharmacies will be positively impacted by its research process and diligence in selecting new locations.
 
The foundation for our plan to increase sales at our existing two operating pharmacies includes expanding our outreach program to physicians, more effectively communicating to them the risk management and service benefits that our business model provides and increasing our customer retention rate.   We believe that our customer retention rates can be strengthened by increasing our inventory levels and expanding our purchasing capacity with existing and new drug suppliers. Since the restructure of our operations in August 2013, our revenue per business day from the existing two pharmacies has increased approximately 112% from approximately $12,500 per day in July 2013 to approximately $26,500 in revenue per day in February 2014.  Since the majority of our pharmacies’ operating expenses are fixed expenses, we expect any increase in revenue to have a positive impacton our consolidated operating results.  Management believes that our existing pharmacies can increase prescription production volume by as much as an additional 75% - 100% without incurring any significant additional operating expenses, but there can be no assurances in this regard.
 
 
 



 
 
The implementation of the foregoing plan to increase sales at our existing pharmacies and open additional pharmacies is dependent on our ability to obtain additional financing and improve our liquidity position.  If we are not able to secure additional financing, the implementation of our business plan will be delayed and our ability to expand and develop additional pharmacies will be impaired.   We are currently seeking up to $3.0 million in additional funding through debt and equity financing arrangements, but there can be no assurance that such additional financing will be available to us on acceptable terms, or at all.
 
In February 2013, the Company entered into a secured loan agreement with our primary wholesaler. Under the terms of this agreement, the Company received a one (1) year loan of $3,828,527 with an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements are $27,000 per month for four consecutive months, followed by four consecutive monthly principal reductions of $37,000, followed by three consecutive monthly in principal reductions of $42,000, with remaining principal and interest due February 1, 2014, which was subsequently amended.  The proceeds from the note were simultaneously exchanged for $3,534,793 in outstanding vendor invoices and $293,734 in outstanding secured note payable. The note is secured by all of the assets of the Company and its subsidiaries through UCC-1 filings in the states of Nevada and Louisiana.  As long as the Company is in compliance with the terms of the loan agreement, the Company will realize drug pricing improvements of 100 to 200 basis points in addition to the elimination of financing and interest fees associated with the trade payable. In July 2013, we entered into an Amendment To Promissory Note Agreement with H.D. Smith Wholesale Drug Co. to extend the maturity date of our Promissory Note Agreement dated February 1, 2013 by two years from February 1, 2014 to February 1, 2016.  The Company shall be required to make monthly payments of $42,000 per month for each of the twenty three months during the extension period.  As of March 27, 2014, due to our current financial condition, we have not made principal and interest payments in the amount of $338,479 as required by the agreement.  In March 2014, we entered into a Forbearance Agreement with the lender that the lender forbears from accelerating the outstanding balance of the Note and from instituting collection efforts from the date of the agreement through July 1, 2014.

We currently have approximately $800,000 in gross receivables due from various workers’ compensation carriers in the State of California. These receivables are primarily related to worker’s compensation claims from insurance carriers for prescription medications dispensed to injured workers in the State of California by our discontinued operation.  The delay in payment typically arises due to monetary disputes between the claimant and the employer and/or the employer’s insurance carrier. The settlement period for such dispute cases can range from one year to ten years.  Management estimates the net realizable value of the other receivables to be approximately $141,000.  We engaged a collection firm that specializes in the collection of these type of receivables to aggressively collect these past due receivables.  During the year ended December 31, 2013, our collection firm, collected approximately $167,000 in past due balances resulting in approximately $100,000 in bad debt recoveries.  We expect that any recovery of these outstanding receivables will improve our overall operating cash flow, but we can make no assurances in this regard.
 
Management believes that the foregoing plan and outlined steps to improve our liquidity position will have a positive impact on our efforts to generate earnings and positive cash flow, but the implementation of such plan is dependent on our ability to secure additional financing and restructure our outstanding debt.  We can make no assurances in this regard.  From January 1, 2014 through March 27, 2014, the Company has secured loans in the aggregate amount of $440,000 from Pinewood Trading Fund, LP, a related party, extended the maturity date of an aggregate total of $1,000,000 in convertible debentures from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest into common stock at $0.60 per share.  In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015.  The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced.  The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.
 
 

 

 

 
Competition
 
We face competition with local, regional and national companies, including other drugstore chains, independently owned drugstores and mail order pharmacies.  Competition in this industry is intense primarily because national pharmacies including Walgreens and CVS Pharmacy have expanded significantly and prescription drugs are now offered at a variety of retail establishments when traditionally prescription drugs were only provided at local pharmacies. Supermarkets and discount stores now maintain retail pharmacies onsite as a part of a business plan to provide consumers with all of their retail needs at one location. Many of these retail pharmacies rely substantially on the sale of non-prescription drugs or health and beauty related products to generate revenue.  The business model of retail pharmacies is generally not focused or dedicated to physicians practicing in pain management. These retail pharmacies traditionally keep in inventory non-prescription drugs, or health and beauty related products such as walking canes, bandages and shampoo. Consumers are able to have their prescriptions filled at these retail pharmacies, but typical retail pharmacies either do not keep in inventory or keep limited amounts of Class II drugs in inventory. As a result, the time it takes for traditional retail pharmacies to fill a prescription for Class II drug is extended. Because of our pain management focus, we maintain an appropriate inventory level of Class II drugs to meet the needs of the patients of physicians that send prescriptions to our pharmacies. We view our ability to fill a prescription for Class II drugs without any period of delay as one of our competitive strengths.

Research and Development

We did not incur any research and development expenditures in either the fiscal year ended December 31, 2013 or 2012.

Existing and Probable Governmental Regulation
 
Pharmacy operations are subject to significant governmental regulation on the federal and state level. Compliance with governmental regulation is essential to continued operations. We believe that we are in compliance with each of the laws, rules, and regulations set forth below and have not experienced any incidents of noncompliance.

 Licensure Laws

Each state’s board of pharmacy enforces laws and regulations governing pharmacists and pharmacies. Each of our pharmacies applied and received a license. In addition, each pharmacy must employ a licensed pharmacist to serve as the Pharmacist in Charge (“PIC”). The PIC oversees personnel and reports on the operations at a specific pharmacy. State law regulates the number of employees and clerks that can work under the supervision of one PIC.  Licensure requires strict compliance with state pharmacy standards.

Although we believe our pharmacies are compliant, changes in pharmacy laws and differing interpretations regarding such laws could impact our level of compliance. A pharmacy’s failure to comply with applicable laws and regulations could result in licensure revocation as well as the imposition of fines and penalties.
 
 
 

 

 

Drug Enforcement Laws

The United States Department of Justice enforces the Drug Enforcement Act through the DEA. The DEA strictly enforces regulations governing controlled substances. In addition to regulation by the DEA, we are subject to significant state regulation regarding controlled substances. Because our pharmacies’ operations focus on highly regulated pain medications, failure to adhere to DEA and state controlled substance requirements could jeopardize our ability to operate. While we believe we are in compliance with current DEA requirements, such requirements and interpretation of these requirements do change over time.

Federal Health Programs

As we grow, we believe that a significant amount of our revenues will be derived from governmental programs such as Medicaid. With the passage of the Medicare Modernization and Prescription Drug Act of 2003, we also believe that Medicare will become a significant source of funding.

The Federal Health Care Programs Anti-Kickback Act

Federal law prohibits the solicitation or receipt of remuneration in return for referrals and the offer or payment of remuneration to induce the referral of patients or the purchasing, leasing, ordering or arranging for any good, facility, service or item for which payment may be made under a “federal health care program” (defined as “any plan or program that provides health benefits, whether directly, through insurance, or otherwise, which is funded directly, in whole or in part, by the United States Government other than the Federal Employees Health Benefit Program”).

Because our business and operations involve providing health care services, we are subject to the Federal Health Care Programs Anti-Kickback Act (the “Act”). The Anti-Kickback Statute, codified in 42 U.S.C. § 1320a-7b(b), prohibits individuals and entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration to other individuals and entities (directly or indirectly, overtly or covertly, in cash or in kind):

·   
In return for referring an individual to a person for the furnishing or arranging of any item or service for which payment may be made under a federal or state healthcare program; or
·   
In return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing or ordering any good, facility, service or item from which payment may be made under a federal or state health care program.

There are both criminal and civil penalties for violating the Act. Criminal sanctions include a fine not to exceed $25,000 or imprisonment up to five years or both, for each offense.  Civil penalties include fines of up to $50,000 for each violation, monetary damages up to three times the amount paid for referrals and/or exclusion from the Medicare program. Courts have broadly construed the Anti-Kickback Statute to include virtually anything of value given to an individual or entity if one purpose of the remuneration is to influence the recipient’s reason or judgment relating to referrals.

The Department of Health and Human Service’s Office of Inspector General (“OIG”) promulgated safe harbor regulations specifying payment practices that will not be considered to violate the statute. If a payment practice falls within one of the safe harbors, it will be immune from criminal prosecution and civil exclusion under the Act even if it fails to fall within another potentially applicable safe harbor. Significantly, failure to fall within any safe harbor does not necessarily mean that the payment arrangement violates the statute. Failure to comply with a safe harbor can mean one of three things: (1) the arrangement does not fall within the broad scope of the anti-fraud and abuse rules so there is no risk of prosecution; (2) the arrangement is a clear statutory violation and is subject to prosecution; or (3) the arrangement may violate the anti-fraud and abuse rules in a less serious manner, in which case there is no way to predict the degree of risk.
 
 

 
 

 

Because our pharmacies maintain relationships with referring physicians, our operations are subject to scrutiny under the Act.

If our operations fail to comply with the Act, we could be criminally sanctioned. In addition, the right of any of our pharmacies to participate in governmental health plans could be terminated.  We have a compliance program to ensure that we are in compliance with the Act.

Ethics in Patient Referrals Act

The Ethics in Patient Referrals Act, 42 U.S.C. §1395nn, commonly referred to as Stark II (“Stark II”), prohibits physicians from referring or ordering certain Medicare or Medicaid reimbursable “designated health services” from any entity with which the physician or any immediate family member of the physician has a financial relationship. A financial relationship is generally defined as a compensation or ownership/investment interest. The purpose of the prohibition is to assure that physicians base their treatment decisions upon the needs of the patients and not upon any financial benefit that would inure to the physician as a result of the referral.

Prescription medications are classified as “designated health services” under Stark II. Physicians owning stock in our company are not allowed to refer any Medicare or Medicaid patient to any of our pharmacies until and unless our company’s capitalization exceeds $75,000,000. A referral made in violation of Stark II results in non-payment to the pharmacy and could result in the imposition of fines and penalties as well as termination of our participation in Medicare and Medicaid.

State Fraud and Abuse Laws

Certain of the states in which we operate have adopted their own laws similar to the Act and Stark II. However, in some instances, state laws apply to all health care services, regardless of whether such services are payable by a government health plan. For example, in California, physicians and other practitioners are not permitted to own more than 10% of any entity that owns a pharmacy.

HIPAA

The Federal Health Insurance Portability and Accountability Act of 1996, commonly known as “HIPAA,” mandates the adoption of regulations aimed at standardizing transaction formats and billing codes for documenting medical services, dealing with claims submissions and protecting the privacy and security of individually identifiable health information. HIPAA regulations that standardize transactions and code sets require standard formatting for healthcare providers, like us, that submit claims electronically.

The HIPAA privacy regulations apply to “protected health information,” or “PHI,” which is defined generally as individually identifiable health information transmitted or maintained in any form or medium, excluding certain education records and student medical records. The privacy regulations seek to limit the use and disclosure of most paper and oral communications, as well as those in electronic form, regarding an individual’s past, present or future physical or mental health or condition, or relating to the provision of healthcare to the individual or payment for that healthcare, if the individual can or may be identified by such information. HIPAA provides for the imposition of civil or criminal penalties if PHI is improperly disclosed.

HIPAA’s security regulations require us to ensure the confidentiality, integrity and availability of all electronic protected health information that we create, receive, maintain or transmit. We must protect against reasonably anticipated threats or hazards to the security of such information and the unauthorized use or disclosure of such information.

In addition to HIPAA, we are subject to state privacy laws and other state privacy or health information requirements not preempted by HIPAA, including those which may furnish greater privacy protection for individuals than HIPAA.
 
 
 

 
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The scope of our operations involving health information is broad and the nature of those operations is complex. Although we believe that our contract arrangements with healthcare payers and providers and our business practices are in compliance with applicable federal and state electronic transmissions, privacy and security of health information laws, the requirements of these laws, including HIPAA, are complicated and are subject to interpretation. In addition, state regulation of matters also covered by HIPAA, especially the privacy standards, is increasing, and determining which state laws are preempted by HIPAA is a matter of interpretation. Failure to comply with HIPAA or similar state laws could subject us to loss of customers, denial of the right to conduct business, civil damages, fines, criminal penalties and other enforcement actions.

The Health Information Technology for Economic and Clinical Health Act (“HITECH”), part of the American Recovery and Reinvestment Act of 2009, changed several aspects of HIPAA including, without limitation, the following: (i) applies HIPAA security provisions and penalties directly to business associates of covered entities; (ii) requires certain notifications in the event of a security breach involving PHI; (iii) restricts certain unauthorized disclosures; (iv) changes the treatment of certain marketing activities; and (v) strengthens enforcement activities. In addition, the Secretary issued an interim final rule on August 24, 2009 that requires notifications for certain unpermitted disclosures of PHI. The final rule was issued on January 17, 2013.

Management believes that we are in material compliance with these standards. However, HIPAA’s privacy and transaction standards only recently became effective, and the security standards are mandatory as of April 21, 2005. Considering HIPAA’s complexity, there can be no assurance that future changes will not occur. Changes in standards as well as changes in the interpretation of those standards could require us to incur significant costs to ensure compliance.

Management anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for pharmacies. Given the continuous debate regarding the cost of healthcare services, management cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect that any future legislation or regulation may have on us.

 OBRA 1990

Our business is subject to various other federal and state regulations. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990 (“OBRA”) and comparable state regulations, our pharmacists are required to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists and may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effect.
 
2010 Health Care Reform Legislation
 
The Patient Protection and Affordable Care Act and the reconciliation law known as Health Care and Education Affordability Reconciliation Act (combined we refer to both Acts as the “2010 Health Care Reform Legislation”) were enacted in March 2010. State participation in the expansion of Medicaid under the 2010 Health Care Reform Legislation is voluntary. Three key provisions of the 2010 Health Care Reform Legislation that are relevant to the Corporation are: (i) the gradual modification to the calculation of the Federal Upper Limit (“FUL”) for drug prices and the definition of Average Manufacturer’s Price (“AMP”), (ii) the closure, over time, of the Medicare Part D coverage gap, which is otherwise known as the “Donut Hole,” and (iii) short cycle dispensing. Regulations under the 2010 Health Care Reform Legislation are expected to continue being drafted, released, and finalized throughout the next several years. Pending the promulgation of these regulations, the Company is unable to fully evaluate the impact of the 2010 Health Care Reform Legislation.
 
 

 
 
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FUL and AMP Changes
 
The 2010 Health Care Reform Legislation amended the Deficit Reduction Act of 2005 (the “DRA”) to change the definition of the Federal Upper Limit (“FUL”) by requiring the calculation of the FUL as no less than 175% of the weighted average, based on utilization, of the most recently reported monthly AMP for pharmaceutically and therapeutically equivalent multi-source drugs available through retail community pharmacies nationally.
 
In addition, the definition of AMP changed to reflect net sales only to drug wholesalers that distribute to retail community pharmacies and to retail community pharmacies that directly purchase from drug manufacturers. Further, the 2010 Health Care Reform Legislation continues the current statutory exclusion of prompt pay discounts offered to wholesalers and adds three other exclusions to the AMP definition: i) bona fide services fees; ii) reimbursement for unsalable returned goods (recalled, expired, damaged, etc.); and iii) payments from and rebates/discounts to certain entities not conducting business as a wholesaler or retail community pharmacy. In addition to reporting monthly, the manufacturers are required to report the total number of units used to calculate each monthly AMP. The Centers for Medicare and Medicaid Services (“CMS”) will use this information when it establishes FULs as a result of the new volume-weighted requirements pursuant to the 2010 Health Care Reform Legislation.

In September 2011, CMS issued the first draft FUL reimbursement files for multiple source drugs, including the draft methodology used to calculate the FULs in accordance with the Health Care Legislation. These draft FUL prices are based on the manufacturer reported and certified July 2011 monthly AMP and AMP unit data. CMS continues to release this data monthly and is expected to do so going forward. CMS has not posted monthly AMPs for individual drugs, but only posted the weighted average of monthly AMPs in a FUL group and the calculation methodology.

On February 2, 2012, CMS issued proposed regulations further clarifying the AMP and FUL changes described above and indicated that the final rule would be issued in July 2014.
 
Until CMS provides final guidance and the industry adapts to this now public available pricing information, the Company is unable to fully evaluate the impact of the changes in FUL and AMP to its business.

Part D Coverage Gap

Starting on January 1, 2011, the Medicare Coverage Gap Discount Program (the “Program”) requires drug manufacturers to provide a 50% discount on the negotiated ingredient cost to certain Part D beneficiaries for certain drugs and biologics purchased during the coverage gap (this is exclusive of the pharmacy dispensing fee). In addition, the 2010 Health Care Legislation includes a requirement that closes or eliminates the coverage gap entirely by fiscal year 2020. The coverage gap will be eliminated by gradually reducing the coinsurance percentage for both drugs covered and not covered by the Program for each applicable beneficiary. At this time, we are unable to fully evaluate the impact of the changes to the coverage gap to our business.

Medicare Part D Proposed Changes

In the Proposed Rule, CMS clarifies the meaning of drug categories and classes of clinical concern for which all Part D drugs therein must be included on Part D sponsor formularies, subject to certain exceptions. CMS establishes criteria for determining which categories or classes of drugs are protected and states that anticonvulsants, antineoplastics, and antiretrovirals meet the criteria, while antidepressants, antipsychotics, and immunosuppressants do not. However, CMS defers any change in formulary requirements for the antipsychotic class and continues to require all drugs from within that class to be on Part D formularies in 2015.
 
 

 
 
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In the Proposed Rule, CMS also proposes to require physicians and eligible professionals to enroll in the Medicare program in order to prescribe covered Part D drugs. CMS proposes that a prescriber or eligible professional of Part D drugs must have either an approved enrollment record in the Medicare fee-for-service program or a valid opt-out affidavit on file with a Part A or Part B Medicare Administrative Contractor for a prescription written by a prescriber to be eligible for coverage under the Part D program. Until CMS issues final guidance, the Corporation is unable to evaluate the full impact of these proposed changes to drug categories and classes and prescriber enrollment requirements on its business.

Reimbursement

Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over and to certain disabled persons. Medicaid is a medical assistance program administered by each state that provides healthcare benefits to certain indigent patients. Within the Medicare and Medicaid statutory framework, there are substantial areas subject to administrative rulings, interpretations, and discretion that may affect payments made under Medicare and Medicaid.

We receive payment for our services from commercial Medicare Part D Plans, third party payors government reimbursement programs such as Medicare and Medicaid, and other non-government sources such as commercial insurance companies, health maintenance organizations, preferred provider organizations, and contracted providers.

Other Laws

In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would affect major changes in the healthcare system, either nationally or at the state level. The legislative initiatives include prescription drug benefit proposals for Medicare participants. Although we believe we are well positioned to respond to these developments, we cannot predict the outcome or effect of legislation resulting from these reform efforts.

Compliance with Environmental Laws

We did not incur any costs in connection with the compliance of any federal, state, or local environmental laws.

Employees

We currently have 18 employees, of which 16 are full-time employees. Our employees are not represented by labor unions or collective bargaining agreements.

Additional Information
 
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available free of charge via our website (www.assuredrxservices.com) as soon as reasonably practicable after they are filed with, or furnished to, the SEC.
 
 

 
 
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Investment in our common stock involves a number of substantial risks.  Investors should not purchase our stock unless they are able to bear the complete loss of the investment. In addition to the risks and investment considerations discussed elsewhere in this Form 10-K, the following factors should be carefully considered before making an investment decision regarding our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline and investors could lose all or a part of the money paid to buy our securities.

Risks Related to Our Business and Industry

If we do not obtain additional financing, we could be forced to discontinue operations.

As of December 31, 2013, we had cash in the amount of $2,856 and total liabilities in the amount of $8,999,130.  During fiscal year 2013, we received $1,990,000 in financing in equity offerings exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). However, we still require additional financing to implement our business plan for the next twelve months and open any additional pharmacies.  We also had a working capital deficit of $1,746,832 as of December 31, 2013.  Our current cash on hand is insufficient for us to operate our two existing pharmacies at the current level for the next twelve months.  Our business plan calls for ongoing expenses in connection with salary expense and establishing additional pharmacies. These expenditures are anticipated to be approximately $2,400,000 for the next twelve months. In order to continue to pursue our business plan to establish and operate additional pharmacies, we will require additional funding.  However if we are not able to secure additional funding, the implementation of our business plan will be delayed and our ability to expand and develop additional pharmacies will be impaired and we could be forced to cease operations.  We intend to secure additional funding through additional debt or equity financing arrangements, and increased sales generated by our operations. There can be no assurance that we will be successful in raising all of the additional funding that we are seeking

If we are unable to support our current debt service and liabilities as they come due, we will probably be required to discontinue operations.

Our business is highly leveraged, and had total debt and other liabilities in the amount of $8,999,130 at December 31, 2013. This debt includes the $1,500,000 of unsecured convertible notes and $3,804,111 in a secured note to our primary wholesaler.  If we are unable to meet our debt service obligations or default on our obligations in any other way, even if we are otherwise generating earnings and positive cash flow, we could lose substantially all of our business assets as well as being held liable for any deficiency in payment. The net result of such a failure would likely be the end of our business operations and a complete loss of your investment.

 
 

 
 
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There is substantial doubt regarding our ability to continue as a going concern.

As noted in our consolidated financial statements, we had an accumulated stockholders’ deficit of approximately $48.6 million and recurring losses from operations as of December 31, 2013.  We also had a working capital deficit of approximately $1.7 million as of December 31, 2013 and debt with maturities within one year in the amount of approximately $800,000.  From January 1, 2014 through March 15, 2014, the Company has secured loans in the amount of $440,000 with Pinewood Trading Fund, LP, a related party and extended the maturity date of an aggregate total of $1,000,000 in convertible debentures from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest into common stock at $0.60 per share.  We intend to fund operations through raising additional capital through debt financing and equity issuances, increased sales, and reduced expenses, which may be insufficient to fund our capital expenditures, working capital or other cash requirements for the year ending December 31, 2014. We are continuing to seek additional funds to finance our immediate and long term operations. The successful outcome of future financing activities cannot be determined at this time and there is no assurance that if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results. These factors, among others, raise substantial doubt about our ability to continue as a going concern.  The audit reports of BDO USA, LLP for the fiscal years ended December 31, 2013 and 2012, respectively contain a paragraph that emphasizes the substantial doubt as to our continuance as a going concern.  There is a significant risk that we may not be able to remain operational for an indefinite period of time.

If we are unable to generate significant net revenues from our operations, our business will fail.

As we pursue our business plan, we are incurring significant expenses. We incurred operating expenses for the year ended December 31, 2013 in the amount of $3,334,131 (excluding non-cash operating expenses of $685,930) and had gross profit of $1,120,492 on sales of $5,192,577 for the same period.  We incurred operating expenses for the year ended December 31, 2012 in the amount of $4,174,014 (excluding non-cash operating expenses of $912,785) and had gross profit of $1,327,485 on sales of $5,636,195 for the same period. We have a history of operating losses and cannot guarantee profitable operations in the future.  The success and viability of our business is contingent upon generating significant net revenues from the operations of our pharmacies such that we are able to pay our operating expenses and operate our business at a profit. Currently, we are unable to generate sufficient revenues from our existing business to pay our operating expenses and operate at a profit. In the event that we remain unable to generate sufficient revenues from our pharmacies to pay our operating expenses, we will not be able to achieve profitability or continue operations. In such circumstance, you may lose all of your investment.

Failure to maintain optimal inventory levels could increase our inventory holding costs or cause us to lose sales, either of which could have a material adverse effect on our business, financial condition and results of operations.

We need to maintain sufficient inventory levels to operate our business successfully as well as meet our customers’ expectations. However, we must also guard against the risk of accumulating excess inventory. We are exposed to inventory risks as a result of our growth, changes in physician prescriptions writing practices, manufacturer backorders and other vendor-related problems.  An additional risk to our ability to maintain optimal inventory levels is that our financial condition may inhibit us from securing vendor financing which is a necessity in maintaining proper inventory levels. Carrying too much inventory would increase our inventory holding costs, and failure to have inventory in stock when a prescription is presented for fulfillment could cause us to lose that prescription, lose that customer, or lose the referring physician, any of which could have a material adverse effect on our business, financial condition and results of operations.
 
 
 
 
 

 
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If we are unable to hire, retain and motivate qualified personnel, we may not be able to grow effectively and execute our business plan.

We depend on the services of our senior management. We have retained the services of Robert DelVecchio to serve as our Chief Executive Officer, Mike Schneidereit to serve as our Chief Operating Officer and Brett Cormier to serve as our Chief Financial Officer. Our success depends on the continued efforts of Messrs. DelVecchio, Schneidereit and Cormier. The loss of the services of any of these individuals could have an adverse effect on our business, prospects, financial condition, and results of operations.

As our business develops, our success is largely dependent on our ability to hire and retain additional highly qualified managerial, sales and technical personnel. These managerial, technical and sales personnel are generally in high demand and we may not be able to attract the staff we need at a cost that is within our operating budget. In addition, we may lose employees or consultants that we hire due to higher salaries and fees being offered by other businesses. If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively and implement our business plan.

Pending and future litigation could subject us to significant monetary damages and/or require us to change our business practices.
 
We are subject to risks relating to litigation and other proceedings in connection with the dispensing of pharmaceutical products by our pharmacies. See the subsection entitled “Legal Proceedings” for a description of legal proceedings pending against us. While we believe that the disclosed suit is without merit and intend to contest it vigorously, we can give no assurance that an adverse outcome in this suit or others that may occur in the future would not have a material adverse effect on our consolidated results of operations, consolidated financial position and/or consolidated cash flow from operations, or would not require us to make material changes to our business practices. We periodically respond to subpoenas and requests for information from governmental agencies. To our knowledge, we are not a target or a potential subject of a criminal investigation. We cannot predict with certainty what the outcome of any of the foregoing might be or whether we may in the future become a target or potential target of an investigation or the subject of further inquiries or ultimately settlements with respect to the subject matter of these subpoenas. In addition to potential monetary liability arising from these suits and proceedings, from time to time we incur costs in providing documents to government agencies. Current pending claims and associated costs may be covered by our insurance, but certain other costs are not insured. There can be no assurance that such costs will not increase and/or continue to be material to our performance in the future.

We are largely dependent on one wholesale drug supplier and our results of operations could be materially adversely affected if we are not able to supply our pharmacies with adequate inventory for any reason, including the termination of our relationship with this key supplier.

In the event that we are unable to maintain adequate inventory in any of our pharmacies, we could experience an interruption in our ability to service customers. During the year ended December 31, 2013, we purchased approximately 91% of our inventory of prescription drugs from one wholesale drug supplier (H.D. Smith Wholesale Drug Co.). Although management believes we could obtain a majority of our inventory though another supplier at competitive prices and upon competitive payment terms if our relationship with this wholesale drug supplier is terminated, the termination of our relationship would be likely to adversely affect our business, prospects, financial condition and results of operations.
 
 
 

 
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Because we are dependent on third-party payors, our business is volatile and there is an increased risk of loss of your investment.

Nearly all of our pharmacy sales are to customers whose medications were covered by health benefit plans and other third party payors. Health benefit plans include insurance companies, governmental health programs, workers’ compensation, self-funded ERISA plans, health maintenance organizations, health indemnity insurance, and other similar plans. In general, a health benefit plan agrees to pay for all or a portion of a customer’s eligible prescription purchases. Any significant loss of third-party payor business for any reason could have a material adverse effect on our business and results of operations. These third-party payors could change how they reimburse us, without our prior approval, for the prescription drugs that we provide to their members. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act granted a prescription drug benefit to participants, which has resulted in us being reimbursed for some prescription drugs at prices lower than our current reimbursement levels. There have been a number of recent proposals and enactments by various states to reduce Medicaid reimbursement levels in response to budget problems, some of which propose to reduce reimbursement levels in the applicable states significantly, and we expect other similar proposals in the future. If third-party payors reduce their reimbursement levels or if Medicare or Medicaid programs cover prescription drugs at lower reimbursement levels, our margins on these sales would be reduced, and the profitability of our business and our results of operations, financial condition or cash flows would be adversely affected. Additionally, there are no guarantees that health benefit plans will contract with our pharmacies.

Continuing government and private efforts to contain healthcare costs may reduce our future revenue.

We could be adversely affected by the continuing efforts of government and private payors to contain healthcare costs. To reduce healthcare costs, payors seek to lower reimbursement rates, limit the scope of covered services and negotiate reduced or capped pricing arrangements. While many of the proposed policy changes would require congressional approval to implement, we cannot assure you that reimbursement payments under governmental and private third party payer programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement under these programs. Any changes that lower reimbursement rates under Medicare, Medicaid or private pay programs could result in a substantial reduction in our net operating revenues. Our operating margins may continue to be under pressure because of deterioration in reimbursement, changes in payer mix and growth in operating expenses in excess of increases, if any, in payments by third party payors.

The changing U.S. healthcare industry and increasing enforcement environment may negatively impact our business.

In recent years, the healthcare industry has undergone significant changes in an effort to reduce costs and government spending. These changes include an increased reliance on managed care and cuts in Medicare funding.

We expect the healthcare industry to continue to change significantly in the future. Some of these potential changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing prescription drug pricing or mandated benefits may cause healthcare payors to reduce the price they are willing to pay for pharmaceutical drugs. If we are unable to adjust to changes in the healthcare environment, it could have a material adverse effect on our financial position, results of operations and liquidity.

Further, both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare area. The OIG and the U.S. Department of Justice have, from time to time, established national enforcement initiatives, targeting all providers of a particular type, that focus on specific billing practices or other suspected areas of abuse. In addition, under the federal False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. A number of states have adopted similar state whistleblower and false claims provisions.
 
 
 

 
 
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We are subject to increased costs and regulatory scrutiny relating to us carrying a larger amount of Schedule II drugs in inventory than most other pharmacies.

Because our business model focuses on servicing pain management doctors and chronic pain patients, we carry a larger amount of Schedule II drugs in inventory than most other pharmacies.  Schedule II drugs, considered narcotics by the United States Drug Enforcement Administration (“DEA”), are the most addictive and considered to present the highest risk of abuse.  For this reason, Schedule II drugs are highly regulated by the DEA.  Such regulations are more stringent that regulations impacting Schedule III and IV drugs.  The manufacture, shipment, storage, sale and use of controlled substances are subject to a high degree of regulation, including security, record-keeping and reporting obligations enforced by the DEA. This high degree of regulation associated with our sale of Schedule II drugs can result in significant regulatory costs in order to comply with the required regulations and also result in increased acquisition costs, which may reduce our profit margin and have a material adverse effect on our business, operating results and financial condition.

Changes in Medicare Part D and current and future regulations promulgated thereunder could adversely affect our revenue and impose increased costs.
 
The Medicare Prescription Drug Improvement and Modernization Act of 2003 ("MMA") included a major expansion of the Medicare program with the addition of a prescription drug benefit under the new Medicare Part D program. The continued impact of these regulations depends upon a variety of factors, including our ongoing relationships with the Part D Plans and the patient mix of our customers. Future modifications to the Medicare Part D program may reduce revenue and impose additional costs to our industry. In addition, we cannot assure you that Medicare Part D and the current and future regulations promulgated under Medicare Part D will not have a material adverse effect on our institutional pharmacy business.

If we fail to comply with complex and rapidly evolving laws and regulations, we could suffer penalties or be unable to operate our business.

We are subject to numerous federal and state regulations. Each of our pharmacy locations must be licensed by the state government. The licensing requirements vary from state to state. An additional registration certificate must be granted by the DEA, and, in some states, a separate controlled substance license must be obtained to dispense Class II drugs. In addition, pharmacies selling Class II drugs are required to maintain extensive records and often report information to state agencies. If we fail to comply with existing or future laws and regulations, we could suffer substantial civil or criminal penalties, including the loss of our licenses to operate our pharmacies and our ability to participate in federal and state healthcare programs. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations. Although we believe that we are substantially compliant with all existing statutes and regulations applicable to our business, different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.

If we fail to comply with Medicare and Medicaid regulations, including the federal anti-kickback statute, we may be subjected to penalties or loss of eligibility to participate in these programs.

The Medicare and Medicaid programs are highly regulated. These programs are also subject to frequent and substantial changes. If we fail to comply with applicable reimbursement laws and regulations, whether purposely or inadvertently, our reimbursement under these programs could be curtailed or reduced or we could become ineligible to continue to participate in these programs. Federal or state governments may also impose other penalties on us for failure to comply with the applicable reimbursement regulations.
 
 

 
 
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Among these laws is the federal anti-kickback statute. This statute prohibits anyone from knowingly and willfully soliciting, receiving, offering or paying any remuneration with the intent to induce a referral, or to arrange for the referral or order of, services or items payable under a federal healthcare program. Courts have interpreted this statute broadly. Violations of the anti-kickback statute may be punished by a criminal fine of up to $25,000 for each violation or imprisonment, civil money penalties of up to $50,000 per violation and damages of up to three times the total amount of the remuneration and/or exclusion from participation in federal health care programs, including Medicare and Medicaid. This law impacts the relationships that we may have with potential referral sources. We have relationships with a variety of potential referral sources, including physicians. The Office of Inspector General (“OIG”) at the U.S. Department of Health and Human Services (“HHS”), or OIG, among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse or waste. The OIG carries out this responsibility through a nationwide program of audits, investigations and inspections. The OIG has promulgated safe harbor regulations that outline practices that are deemed protected from prosecution under the anti-kickback statute. While we endeavor to comply with the applicable safe harbors, certain of our current arrangements may not qualify for safe harbor protection. Failure to meet a safe harbor does not mean that the arrangement necessarily violates the anti-kickback statute, but may subject the arrangement to greater scrutiny. It cannot be assured that practices outside of a safe harbor will not be found to violate the anti-kickback statute.

The anti-kickback statute and similar state laws and regulations are expansive. We do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality, or could require us to make changes in our pharmacies, personnel, services and operating expenses. A determination that we have violated these laws, or the public disclosure that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly. If we fail to comply with the anti-kickback statute or other applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more pharmacies), and exclusion of one or more pharmacies from participation in the Medicare, Medicaid and other federal and state health care programs. In addition, we are unable to predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation or regulations may take or their impact.
 
Federal and state medical privacy regulations may increase the costs of operations and expose us to civil and criminal sanctions.

We must comply with extensive federal and state requirements regarding the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, referred to as HIPAA, was enacted to ensure that employees can retain and at times transfer their health insurance when they change jobs, to enhance the privacy and security of personal health information and to simplify healthcare administrative processes. HIPAA requires the adoption of standards for the exchange of electronic health information. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on our results of operations, financial condition, and liquidity.

Unexpected safety or efficacy concerns may arise from pharmaceutical products.

Unexpected safety or efficacy concerns can arise with respect to pharmaceutical drugs dispensed at our pharmacies, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales. If we fail to or do not promptly withdraw pharmaceutical drugs upon a recall by a drug manufacturer, our business and results of operations could be negatively impacted.
 
 
 

 
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Prescription volumes may decline, and our net revenues and ability to generate earnings may be negatively impacted, if products are withdrawn from the market or if increased safety risk profiles of specific drugs result in utilization decreases.

We dispense significant volumes of drugs from our pharmacies. These volumes are the basis for our net revenues. When increased safety risk profiles of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or reduce the numbers of prescriptions written for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced consumer demand for such drugs. On occasion, products are withdrawn by their manufacturers. In cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.

Certain risks are inherent in providing pharmacy services; our insurance may not be adequate to cover any claims against us.

Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceutical products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. In addition, federal and state laws that require our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or eliminate these effects. Although we maintain professional liability insurance and an umbrella policy, from time to time, claims may result in the payment of significant amounts, some portions of which may not be funded by insurance.  Our current professional liability insurance coverage is $2 million per occurrence and $4 million in annual aggregate.  In addition, we carry an additional umbrella policy for coverage up to an aggregate of $4 million annually.  We cannot assure you that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future. Our results of operations, financial condition or cash flows may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liability for which we self-insure or we suffer reputational harm.

Legal and regulatory changes reducing reimbursement rates for pharmaceuticals may reduce our gross profit.

Our own gross profit margins may be adversely affected by laws and regulations reducing reimbursement rates and charges. Our revenues are determined by a number of factors, including the mix of pharmaceuticals dispensed, whether the drugs are brand or generic and the rates of reimbursement among payors. Changes in the payor mix among private pay, Medicare and Medicaid can also significantly affect our earnings and cash flow.

If competition increases, our ability to attract and retain customers or expand our business could be impaired.
 
We face competition with local, regional and national companies, including other drugstore chains, independently owned drugstores and mail order pharmacies.  Competition in this industry is intense primarily because national pharmacies including Walgreens and CVS Pharmacy have expanded significantly.  Prescription drugs are now offered at a variety of retail establishments. Supermarkets and discount stores now maintain retail pharmacies onsite as a part of a business plan to provide consumers with all of their retail needs at one location. Many of these retail pharmacies rely substantially on the sale of non-prescription drugs or health and beauty related products to generate revenue. Our management is unaware of any company that operates pharmacies in the United States that exclusively dispense pharmaceutical products to patients who require medication for chronic pain management. Our business, prospects, financial condition, and results of operations could be negatively impacted if chain retail pharmacies revise their business model to focus on dispensing pharmaceutical products to patients who require medication for chronic pain management. We may not be able to effectively compete against them because our existing and potential competitors may have financial and other resources that are superior to ours. We cannot assure you that we will be able to continue to compete effectively in our market or increase our sales volume in response to further increased competition. In addition, we may be at a competitive disadvantage because we are more highly leveraged than our competitors. If we are unable to compete effectively with our competition, we will not be able to attract and retain business resulting in a loss of business and potential discontinuation of operations.
 
 

 
 
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A significant disruption in our computer systems or a cyber security breach could adversely affect our operations.

We rely extensively on our computer systems to manage our ordering, pricing, point-of-sale, inventory replenishment and other processes. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism, severe weather conditions, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations. Any compromise of our security could also result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business.

Our ability to conduct operations depends on the security and stability of our technology infrastructure as well as the effectiveness of, and our ability to execute, business continuity plans across our operations. A failure in the security of our technology infrastructure or a significant disruption in service within our operations could materially adversely affect our business, the results of our operations and our financial position.

We maintain, and are dependent on, a technology infrastructure platform that is essential for many aspects of our business operations. It is imperative that we securely store and transmit confidential data, including personal health information, while maintaining the integrity of our confidential information. We have designed our technology infrastructure platform to protect against failures in security and service disruption. However, any failure to protect against a security breach or a disruption in service could materially adversely impact our business operations and our financial results. Our technology infrastructure platform requires an ongoing commitment of significant resources to maintain and enhance systems in order to keep pace with continuing changes as well as evolving industry and regulatory standards. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties’ failure to adequately perform. In the event we or our vendors experience malfunctions in business processes, breaches of information systems, failure to maintain effective and up-to-date information systems or unauthorized or non-compliant actions by any individual, this could disrupt our business operations or impact patient safety, result in customer and member disputes, damage our reputation, expose us to risk of loss, litigation or regulatory violations, increase administrative expenses or lead to other adverse consequences.

We operate dispensing pharmacies and corporate facilities that depend on the security and stability of technology infrastructure. Any service disruption at any of these facilities due to failure or disruption of technology, malfunction of business process, disaster or catastrophic event could, temporarily or indefinitely, significantly reduce, or partially or totally eliminate our ability to process and dispense prescriptions and provide products and services to our clients and members. Any such service disruption at these facilities or to this infrastructure could have a material adverse effect on our business operations and our financial results.

Our failure to effectively manage new pharmacy openings could lower our sales and profitability.

Our strategic plan is largely dependent upon securing additional financing and opening new pharmacies and operating them profitably. Our ability to open new pharmacies and operate them profitably depends upon a number of factors, some of which may be beyond our control. These factors include:

·   
the ability to identify new pharmacies locations, negotiate suitable leases and build out the pharmacies in a timely and cost efficient manner;
·   
the ability to hire and train skilled pharmacists and other employees;
 
 

 

 
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·   
the ability to integrate new pharmacies into our existing operations and leverage existing infrastructure; and
·   
the ability to increase sales at new pharmacylocations.

A failure to manage new pharmacy openings in a timely and cost efficient manner would adversely affect our results of operations, financial condition and cash flows.

We will not be able to compete effectively if we are unable to attract, hire and retain qualified pharmacists.

There is a nationwide shortage of qualified pharmacists. We currently employ four pharmacists, one pharmacist at each operating pharmacy. Although we have not experienced any difficulty recruiting pharmacists in the past, we may experience difficulty attracting, hiring and retaining qualified pharmacists in the future. If we are unable to attract, hire and retain enough qualified pharmacists, our business, prospects, financial condition, and results of operations could be adversely affected.

The health of the economy in general and in the markets we serve could adversely affect our business and our financial results.

Our business is affected by the economy in general, including changes that could affect drug utilization trends, resulting in an adverse effect on our business and financial results. Although a recovery might be underway, it is possible that a worsening of the economic environment will cause decline in drug utilization, and dampen demand for pharmaceutical drugs. If this were to occur, our business and financial results could be adversely affected.

Risk Factors Relating to Our Common Stock
 
Our debenture holders and preferred stockholders would have priority in distributions over our common stockholders following a liquidation event affecting the company. As a result, in the event of a liquidation event, our common stockholders would receive distributions only after priority distributions are paid and may receive nothing in liquidation.

In the event of any Liquidation (as such term is defined in our Certificate of Designation of Series A, B, C and D Convertible Preferred Stock, as herein incorporated by reference), the holders of our outstanding Series A, Series B, Series C and Series D Convertible Preferred Stock (collectively, “Preferred Stock”) would be entitled to a liquidation preference payment of in preference to any payment to holders of the Common Stock.  The liquidation preference for our outstanding debentures ranks senior to our Preferred Stock and Common Stock.  As such, holders of Common Stock might receive nothing in liquidation, or receive much less than they would if there were no Preferred Stock outstanding.

We intend to secure additional funding in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.
 
We intend to secure additional funding in the future to help establish pharmacies and fund our operations through sales of shares of our common or preferred stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuances of shares of our common or preferred stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.
 
 

 
 
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Our principal stockholder currently has the ability to elect a majority of our directors and may have different interests than us or other stockholders in the future.
 
As of March 27, 2014, Pinewood Trading Fund, LP (“Pinewood”) beneficially owns approximately 49.4% of our outstanding common stock and beneficially owns approximately 93.5% of our outstanding Series D Convertible Preferred Stock. As of March 2014, Pinewood is entitled to elect a majority of the Board of Directors, to be accomplished in any manner that the investor deems most expedient and in compliance with applicable laws and the Company’s charter documents.

We have issued and may issue additional shares of preferred stock with superior rights to our common stock, which could result in a decrease in the value of our common stock and further delay or prevent a change in control of us.

Our board of directors is authorized to issue up to 5,000,000 shares of preferred stock.  As of March 27, 2014, there were (i) 1,466 shares of Series A Preferred Stock issued and outstanding, which are convertible into 1,629,006 shares of common stock; (ii) 5,124 shares of Series B Preferred Stock issued and outstanding, which are convertible into 5,693,344 shares of common stock;  (iii) 813 shares of Series C Preferred Stock issued and outstanding, which are convertible into 902,778 shares of common stock ; and (iv) 1,070 shares of Series D Preferred Stock issued and outstanding which are convertible into 2,140,000 shares of common stock.  Our board of directors has the power to establish the dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges with respect to any series of preferred stock. The issuance of any shares of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock. Holders of preferred stock may have the right to receive dividends, preferences in liquidation and conversion rights. The issuance of preferred stock could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of us without further vote or action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

If we issue common stock at a price below the effective common stock price of previous issuances, we may be required to issue additional common stock purchases, and common stock warrants resulting in additional dilution to our stockholders.

All of the Company’s convertible notes and related warrants, preferred stock, and the common stock and related warrants issued in the 2013 private placement contain anti-dilution provisions that give the investors the right to equal price adjustments in the event of the issuance of stock below the current price of the existing investor.   The investors also have the right to waive their respective anti-dilution rights.  In the event that the Company is required to issue shares below the effective price and is unable to obtain waivers, the issuance of additional common stock and warrants will be required resulting in additional dilution to existing stockholders.

Trading on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.

Our common stock is quoted on the OTC Markets.  Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business prospects.  This volatility could depress the market price of our common stock for reasons unrelated to operating performance.  Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like NYSE or Amex.  These factors may result in investors having difficulty reselling any shares of our common stock.
 
 
 

 
 
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Because our common stock is quoted and traded on the OTC Markets, short selling could increase the volatility of our stock price.

Short selling occurs when a person sells shares of stock which the person does not yet own and promises to buy stock in the future to cover the sale.  The general objective of the person selling the shares short is to make a profit by buying the shares later, at a lower price, to cover the sale.  Significant amounts of short selling, or the perception that a significant amount of short sales could occur, could depress the market price of our common stock. In contrast, purchases to cover a short position may have the effect of preventing or retarding a decline in the market price of our common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock.  As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market.  If these activities are commenced, they may be discontinued at any time.  These transactions may be effected on the OTC Markets or any other available markets or exchanges.  Such short selling if it were to occur could impact the value of our stock in an extreme and volatile manner to the detriment of our shareholders.

Our stock price is likely to be highly volatile because of several factors, including a limited public float.

The market price of our common stock has been volatile in the past and is likely to be highly volatile in the future because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price.  Our stockholders may not be able to resell shares of our common stock following periods of volatility because of the market’s adverse reaction to volatility.

Other factors that could cause such volatility may include, among other things:

·  
actual or anticipated fluctuations in our operating results;

·  
the absence of securities analysts covering us and distributing research and recommendations about us;

·  
we may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;

·  
overall stock market fluctuations;

·  
announcements concerning our business or those of our competitors;

·  
actual or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;

·  
conditions or trends in the industry;

·  
litigation;

·  
changes in market valuations of other similar companies;

·  
future sales of common stock;

·  
departure of key personnel or failure to hire key personnel; and

·  
general market conditions.
 

 

 
- 24 -



 
Any of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.

FINRA (“Financial Industry Regulatory Authority”) sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity and liquidity of our common stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker-dealers may be willing to make a market in our common stock, which may limit your ability to buy and sell our stock.

Because our common stock is quoted on the OTC Markets and is subject to the “Penny Stock” rules, investors may have trouble reselling their shares.
 
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on the over-the-counter markets). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.   Should a broker-dealer be required to provide the above disclosures or fail to deliver such disclosures on the execution of any transaction involving a penny stock in violation of federal or state securities laws, an investor may be able to cancel his or her purchase and get the money back.  In addition, if the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. If an investor has signed an arbitration agreement, however, the investor may have to pursue the claim through arbitration.  Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud resulting in current and potential stockholders losing confidence in our financial reporting.

The Company reported three material weaknesses in our internal controls as of December 31, 2013. We are working to remediate the remaining three material weaknesses, which are (1) the Company did not maintain effective controls over its quarterly and annual financial statements and disclosure; (2) the Company did not maintain effective controls over the recording of complex transactions as a result of the aggregation of deficiencies; and (3) inadequate oversight over key corporate governace activities:  The roles and responsibilities of the board of directors are not adequately defined to take sufficient oversight role of certain corporate goverance activities (compensation, audit, etc.).  We will continue to implement measures we believe have effectively addressed, or will effectively address, all of our reported material weaknesses.  Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
 
 
 

 
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We have never paid dividends and have no plans to in the future.

Holders of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our common stock may have will be in the form of appreciation, if any, in the market value of their shares of common stock. See “Dividend Policy.”

We provide indemnification of our officers and directors and we may have limited recourse against these individuals.

Our Amended and Restated Articles of Incorporation and Bylaws contain broad indemnification and liability limiting provisions regarding our officers and directors, including the limitation of liability for certain violations of fiduciary duties. We therefore will have only limited recourse against these individuals.


None.
 

We are currently leasing our executive offices and pharmacy locations. Our executive offices are located at 5600 Tennyson Parkway, Suite 390, Plano, Texas 75024 and consist of approximately 1,400 square feet.  Monthly rent under the lease for our executive offices is approximately $3,200.

As discussed in Item 1, we currently operate two retail pharmacies, located in Kirkland, Washington; and Leawood, Kansas and have leases on two additional pharmacies, located in Greenwood Village, Colorado and Waltham, Massachusetts that are under development.   Each of our retail pharmacies are approximately 1,500 square feet and are leased from various property management companies for approximately five years.  Monthly rent under each of the leases for our pharmacies ranges from $1,300 to $3,800.

Future store locations, when established, will be selected based on the following criteria: i) the proximity to physician and medical facilities; ii) convenience of the particular location; iii) size and growth rate of the surrounding metropolitan area; iv) state and local tax rates; v) competitive business environment and vi) access to qualified personnel and the associated cost.


From time to time, we may be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination or breach of contract actions incidental to the normal operations of the business.  Providing pharmacy services entails an inherent risk of medical and professional malpractice liability. We may be named as a defendant in such lawsuits and thus become subject to the attendant risk of substantial damage awards. We believe that we have adequate professional and medical malpractice liability insurance coverage. There can be no assurance, however, that we will not be sued, that any such lawsuit will not exceed our insurance coverage, or that we will be able to maintain such coverage at acceptable costs and on favorable terms.
 
On March 18, 2011, a lawsuit was filed by Tim Chandler, Jodi Marshall, Christie Garner, the Estate of Thomas Pike, Jr., and Angie Hernandez in the Circuit Court of the State of Oregon for Multnomah County against Payette Clinics, P.C., Scott Pecora, Kelly Bell, Penny Steers and our wholly-owned subsidiaries, Assured Pharmacies Northwest, Inc. and Assured Pharmacy Gresham, Inc. The lawsuit arises from allegations that nurse practitioners at Payette Clinics, P.C. prescribed the five plaintiffs controlled substances in amounts that were excessive under the appropriate medical standard of care.  Only one of the plaintiffs, Tim Chandler, brought claims against our subsidiaries.  Mr. Chandler’s claims against our subsidiaries were for negligence on the basis of allegations that our subsidiaries knew or had reason to know that the prescriptions fell below the standard of care applicable to the prescription of such controlled substances but nonetheless filled the prescriptions.  The plaintiffs, as a whole, submitted a prayer for $7,500,000 in damages.  Mr. Chandler only seeks “an amount to be proven at trial” for noneconomic damages and unnecessary expenses.  Management believes that the allegations against our subsidiaries are without merit and plans to vigorously defend this claim.  We have $2,000,000 in insurance coverage for claims relating to pharmacy negligence.  This lawsuit has been stayed as a result of a co-defendant in this lawsuit (Payette Clinics, P.C.) having filed for bankruptcy.  The bankruptcy has since been discharged and the automatic stay lifted.  The state court stay was also lifted.  On June 20, 2013, a Motion to Stay took place and the court granted the defendants’ motion.  All proceedings are now stayed until May 30, 2014. The Company has denied any liability and is vigorously defending this action.
 
 
 
 

 
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On May 9, 2013, a lawsuit was filed by Coventry Enterprises, LLC (“Coventry”) in the United States District Court Southern District of New York.  The lawsuit arises from allegations that Assured Pharmacy breached its obligations under the $200,000 16% Senior Convertible Debenture due December 1, 2013 with Coventry Enterprises, LLC.  Due to the Company’s financial condition, we have been unable to repay the $200,000 in principal and accrued interest due under the agreement.  In November 2013, the parties entered into a Settlement Agreement and General Release which included a forbearance re stipulated judgment.  The parties agree that as of December 6, 2013, before any application of any payments, we owe Coventry $280,678.82, which includes unpaid principal of $200,000, unpaid interest of $53,678.82 and unreimbursed attorney’s fees and costs of $27,000.  The agreement establishes that the Company shall pay Coventry $280,678.82, plus interest at the rate of 16.0% per annum on the following schedule:

a)  
$50,000 payable on or before December 6, 2013; and
b)  
$10,000 payable on or before the first day of each month starting January 1, 2014 and continuing thereafter until the obligation is paid.
 
On August 23, 2013, AQR Opportunistic Premium Offshore Fund, L.P. and CNH Diversified Opportunities Master Account, L.P. filed a lawsuit against Assured Pharmacy in the Supreme Court of the State of New York. Plaintiffs submitted a Motion for Summary Judgment in Lieu of Complaint against defendants to recover money allegedly owed by Assured Pharmacy, Inc. under two 16% Convertible Debentures totaling $300,000 issued in and around 2011 in a private placement. Assured removed the action to the Southern District of New York. Assured plans to vigorously defend the claim.
 
On October 25, 2013, a lawsuit was filed by Westlake Gresham North, LLC in the Circuit Court of the State of Oregon.  The lawsuit arises from allegations that Assured Pharmacy Gresham, Inc. and Assured Pharmacy, Inc. are in breach of contract of lease agreement and is claiming $123,234 in damages.  In December 2013, the parties entered into a Release and Settlement Agreement which included a Stipulated General Judgment with Money Award in the amount of $99,174.  As part of the settlement, the Company is required to make monthly rent payments of $3,064.73 beginning with December 2013 rent and continuing until the lease expires or another tenant leases that space.  The Company is also required to make a lump sum payment of $21,239.27 for past due rent by April 1, 2014.

On December 16, 2013 a lawsuit was filed by Ann Raffaele, in the Circuit Court of the State of Oregon for Multnomah County against Assured Pharmacy, Inc and our wholly-owned subsidiaries, Assured Pharmacies Northwest, Inc. and Assured Pharmacy Gresham, Inc. The lawsuit arises from allegations of medical negligence by Dr. Edward Goering, D.O. and Assured Pharmacy.  The plaintiff submitted a prayer for $1,500,000 in damages.  Management believes that the allegations against the Company are without merit and plans to vigorously defend this claim.  We have $2,000,000 in insurance coverage for claims relating to pharmacy negligence.  

On February 19, 2014, a lawsuit was filed by JS Barkats PLLC, in the Supreme Court of The State of New York for County of New York against Assured Pharmacy, Inc. and Robert DelVecchio, our Chief Executive Officer.  The lawsuit arises from allegations of failing to remit legal fees due under written retainer agreements of $134,300 and failing to deliver 500,000 freely traded shares of the Company’s common stock pursuant to one of the retainer agreements. Management believes that the allegations against the Company are without merit and plans to vigorously defend this claim and is pursuing counter claims asking compensatory and punitive damages.


Not applicable.
 
 
 

 
 
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PART II
 

Market Information

Our common stock is currently quoted on the OTC Markets. The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids” and “asks”, as well as volume information. Our shares are quoted on the OTC Markets under the symbol “APHY.”
 
The following table sets forth the range of high and low closing bid quotations for our common stock for each of the periods indicated as reported by the OTC Markets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  
 
 
Fiscal Year Ended December 31, 2013
 
High Bid
Low Bid
Fiscal Quarter Ended:
   
March 31, 2013
$0.92
$0.35
    June 30, 2013
$0.92
$0.51
    September 30, 2013
$0.73
$0.25
    December 31, 2013
$0.40
$0.10
     
Fiscal Year Ended December 31, 2012
 
High Bid
Low Bid
 Fiscal Quarter Ended:
   
March 31, 2012
$0.80
$0.20
    June 30, 2012
$0.90
$0.34
    September 30, 2012
$0.61
$0.50
    December 31, 2012
$0.50
$0.20

 
 
 

 
 
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Holders of Common Stock

As of March 14, 2014, there were approximately 164 record holders of our common stock.  This number does not include stockholders whose shares are held in securities position listings.

Dividends

We have not paid or declared any dividends on our common stock and we do not anticipate paying dividends on our common stock in the foreseeable future.
 
Issuer Purchases of Equity Securities

None.

Recent Sales of Unregistered Securities

The following is a summary of recent sales of our securities that were not registered under the Securities Act.

Between February 4, 2013 and May 30, 2013, we entered into subscription agreements with eight investors pursuant to which we sold an aggregate of 1,323,093 shares of restricted common stock at $0.65 and warrants to purchase 1,923,093 common shares with an exercise price of $0.90.  We received gross proceeds of $860,000, which were used to reduce our outstanding amount due to our primary wholesaler and general working capital purposes. The net cash proceeds from this private transaction were $814,190, net of closing fees of $45,810 which include $32,800 in placement agent fees paid to TriPoint Global Equities, LLC (“TriPoint”).  In addition, TriPoint also received warrants to purchase a total of 100,924 common shares of which 50,462 warrants and 50,462 warrants have an exercise price of $0.65 and $0.90, respectively.  The warrants were fully vested on the date of issuance and expire on May 30, 2018.

All of the common stock offerings and sales above were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(a) 2 of the Securities Act of 1933. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, our business associates or existing security holders, and transfers of the securities were restricted by us in accordance with the requirements of the Securities Act. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, were capable of analyzing the merits and risks of their investment, and understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with business and financial information concerning our company.
 
For each of the following common stock and warrant issuances, these securities were issued upon the exemption from the registration provisions of the Securities Act of 1933 provided for by Section 4(a)2 and 3(a)(9).  There were no underwriters or placement agents employed in connection with any of these transactions.  
 
·  
Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.
 
·  
The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities.

·  
The recipients had access to business and financial information concerning our company.
 
·  
All securities issued were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from registration in compliance with federal and state securities laws.

 
 

 
 
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On February 22, 2013, we issued 227,333 common shares as payment for $45,667 in accrued interest on outstanding convertible debentures to a convertible debenture holder. The aggregate fair market value of the shares on the date of issuance was determined to be $102,300 or $0.45 per share.

On May 28, 2013, we issued 205,556 shares of common stock upon conversion of 185 shares of Series B Convertible Preferred Stock to one holder. The shares of common stock were issued pursuant to the provisions of Section 3(a)(9) of the Securities Act of 1933. We did not receive any proceeds upon conversion of such preferred shares and such issuances involved the issuance of shares to existing security holders in exchange for other securities.

On May 28, 2013, we issued 80,000 shares of restricted common stock to a consultant for financial consulting services provided.   We determined that the aggregate amount of consideration we received in exchange for these services to be $72,000 or $0.90 per share.

On August 28, 2013, we issued 25,000 shares of restricted common stock to a consultant for financial consulting services provided.   We determined that the aggregate amount of consideration we received in exchange for these services to be $7,750 or $0.31 per share.

On September 10, 2013, we issued 40,000 shares of restricted common stock to a consultant for financial consulting services provided.   We determined that the aggregate amount of consideration we received in exchange for these services to be $36,000 or $0.90 per share.

On September 26, 2013, we issued 83,334 shares of common stock upon conversion of 75 shares of Series B Convertible Preferred Stock to one holder. The shares of common stock were issued pursuant to the provisions of Section 3(a)(9) of the Securities Act of 1933. We did not receive any proceeds upon conversion of such preferred shares and such issuances involved the issuance of shares to existing security holders in exchange for other securities

On September 30, 2013, we issued 325,000 shares of restricted common stock to a consultant for financial consulting services provided.   We determined that the aggregate amount of consideration we received in exchange for these services to be $266,500 or $0.82 per share.
 
On November 20, 2013, we issued 75,000 shares of restricted common stock to a consultant for financial consulting services provided.  We determined the aggregate amount of consideration we received in exchange for these services to be $67,500 or $0.90 per share.

On January 3, 2014, we issued an aggregate total of  2,019,123 shares of restricted common stock to eight debenture holders upon conversion of $965,784 in debentures and payment of $245,689 in accrued interest on outstanding convertible debentures at the conclusion of our Tender Offer.

On February 13, 2014, we issued 420,694 common shares as payment of $252,417 in accrued interest on outstanding convertible debentures to a convertible debenture holder. The aggregate fair market value of the shares on the date of issuance was determined to be $34,100 or $0.15 per share.
 
On March 14, 2014, we issued 1,175,408 shares of restricted common stock to a debenture holder upon conversion of $500,000 in debentures and payment of $205,245 in accrued interest on outstanding convertible debentures.  As part of the transaction, we also issued 833,334 three year warrants to purchase common stock at an initial exercise price of $0.60 for twelve months and increasing to $0.75 for the remaining 24 months.

Preferred Stock

For each of the following preferred stock issuances, these securities were issued in reliance upon the exemption from the registration provisions of the Securities Act of 1933 provided for by Section 4(2) thereof for transactions not involving a public offering. There were no underwriters or placement agents employed in connection with any of these transactions.  Use of this exemption is based on the following facts:
 
 

 
- 30 -

 
 
 

 

·  
Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.

·  
The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities.

·  
The recipients had access to business and financial information concerning our company.

·  
All securities issued were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from registration in compliance with federal and state securities laws.

Between January 10, 2013 and March 4, 2013, we issued a total of 60 shares of Series A Convertible Preferred Stock for gross proceeds of $60,000 to Mosaic Private Equity Fund US, LP. a related party, in accordance with the terms of that certain Purchase Agreement dated February 9, 2009.  Each share of Series A Convertible Preferred Stock is convertible into 1,111 shares of common stock (subject to adjustment for certain dilutive transactions).  

Between November 19, 2013 and December 3, 2013, we issued a total of 1,000 shares of Series D Convertible Preferred Stock for gross proceeds of $1,000,000 to Pinewood Trading Fund, LP, a related party, in accordance with the terms of that certain Purchase Agreement dated September 1, 2013.  As part of the transaction we also issued 1,000 Series A and 1,000 Series B five year warrants to purchase an aggregate total of 4,000,000 shares of common stock at an initial exercise price of $0.50.  Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).

On December 17, 2013, we issued a total of 20 shares of Series D Convertible Preferred Stock for gross proceeds of $20,000 to Craig Eagle, a director on the Company’s Board, in accordance with the terms of that certain Purchase Agreement dated December 17, 2013.  As part of the transaction we also issued 20 Series A and 20 Series B  five year warrants to purchase an aggregate total of 80,000 shares of common stock at an initial exercise price of $0.50.  Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).

On December 20, 2013, we issued a total of 50 shares of Series D Convertible Preferred Stock for gross proceeds of $50,000 to an individual accredited investor in accordance with the terms of that certain Purchase Agreement dated December 20, 2013.  As part of the transaction we also issued 50 Series A and 50 Series B five year warrants to purchase an aggregate total of 200,000 shares of common stock at an initial exercise price of $0.50.  Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).

Not applicable.

  
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Forward-Looking Statements” and “Risk Factors” in Item 1A of this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Overview

We are engaged in the business of establishing and operating pharmacies that specialize in dispensing highly regulated pain medication for chronic pain management.  Because our focus is on dispensing medication, we typically do not keep in inventory non-prescription drugs, or health and beauty related products, such as walking canes, bandages and shampoo. We primarily derive our revenue from the sale of prescription medications.   The majority of our business is derived from repeat business from our customers and we have limited “walk-in” prescriptions.

 
 

 
 
- 31 -



 
 
We currently have two operating pharmacies and two pharmacies that are under development, each of which are wholly owned through subsidiaries. The opening date and locations of our pharmacies are as follows:

Location
 
Opening Date
     
 Kirkland, Washington
 
August 11, 2004
 Leawood, Kansas
 
November 28, 2011
 
The table set forth below summarizes the number of prescriptions dispensed and the number of patients serviced by our operating pharmacies during the year ended December 31, 2013 and 2012, respectively.

   
Year ended
 
Year ended
   
December 31, 2013
 
December 31, 2012
         
Total Number of Prescriptions1
 
48,139
 
49,759
         
Total Number of Patients Serviced2
 
25,401
 
22,945
 
 
1
“Total Number of Prescriptions” equals the total number of prescriptions dispensed by our operating pharmacies and delivered to or picked up by the customer.
 
 
2
“Total Number of Patients Serviced” equals the total number of patients serviced measured on a monthly basis.
 
Recent Events

In January 2014, the Company entered into a $200,000 promissory note with Pinewood Trading Fund, LP., a related party.  The note bears an interest rate of 16.00% per annum payable in the Company’s common stock payable on July 1st and January 1st of each calendar year and matures on January 28, 2016.

In February and March 2014, the Company entered into five short term promissory notes with Pinewood Trading Fund, LP., a related party for an aggregate total of $240,000.  The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.
 
In February 2014, the Company entered into an Amended and Restated 10% Senior Convertible Debenture due June 30, 2016 with Hillair Capital Investments, LP. in the amount of  $1,150,000. The amendment relates to convertible debentures originally issued on May 16, 2011, August 22, 2011, November 30, 2011 and July 19, 2012 for an aggregate total of $1,000,000 in debentures.  In addition to the extension of the maturity date, the interest rate was reduced from 16.0% to 10.0% per annum and the conversion price was decreased from $0.90 to $0.75. In addition, the Company issued 420,694 shares of common stock as payment of accrued interest of $252,417 at a rate of $0.60 per share.  As part of the agreement, all interest accruable and payable between February 7, 2014 and August 7, 2015 has been added to this debenture at a rate of 10% per annum and is considered paid in full and satisfied.  Further interest will not begin accruing until August 8, 2015.  As part of the amendment, the exercise price of the related warrants was reduced from $0.90 to $0.75 resulting in the issuance of an additional 320,000 warrants per the warrant agreement terms.
 
In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015.  The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced.  The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.
 
Our consolidated net revenues for the fiscal year ending December 31, 2013 were $7,463,113 which included $2,270,536 in revenues from discontinued operations.  Since the net revenues are below the Make-Whole Adjustment minimum threshold of $17,250,000 per our 2013 private placement agreement, the Company is required to issue an additional 826,907 shares of common stock to the eight investors that participated in the private placement by April 30, 2014.  A Make-Whole adjustment for the related warrants in not required due to the anti-dilution adjustment in November 2013 anti-dilutive adjustment.

In March 2014, the Company did not meet the requirements of the Milestone Provision of the Series D Preferred of reaching positive net income on a Special Adjusted Basis (“SAB”) for the trailing two months ending February 2014.  As a result, the Company is required to issue an additional 856 shares of Series D Preferred stock and additional 3,424,000 warrants to purchase common stock at $0.40 to the Series D holders.  In addition, the exercise price on an aggregate total 4,280,000 warrants has been reduced to $0.40 per share.  Pinewood is also entitled to elect a majority of the Board of Directors, to be accomplished in any manner that the Initial Investor deems most expedient and in compliance with applicable laws and the Company’s charter documents.

 

 
- 32 -



 
 
The Milestone Provision adjustment reduction of the exercise price to $0.40 also met the requirement for anti-dilution for certain warrants and convertible debentures in which a waiver was not obtained.   The adjustment results in a conversion price decrease from $0.50 to $0.40 on an aggregate total of $500,000 in debentures, and increase of 250,000 shares on an as converted basis.  The adjustment results in an additional 994,504 warrants to be issued at an exercise price of $0.40 and an exercise price adjustment from $0.50 to $0.40 on an aggregate total of 3,978,004 warrants.
 
The table below summarizes the impact of the 2013 Private Placement Make-Whole Adjustment and the 2013 Series D Preferred Milestone Adjustment by security as converted into common shares:

   
December 31, 2013
   
Adjusting
effect
   
Post
Adjusted
effect
 
                   
Common stock
   
10,255,693
     
826,907
     
11,082,600
 
Warrants
   
15,244,914
     
4,418,504
     
19,663,418
 
Stock options
   
1,840,556
     
-
     
1,840,556
 
Convertible notes
   
2,333,333
     
250,000
     
2,583,333
 
Series A Preferred
   
1,629,006
     
-
     
1,629,006
 
Series B Preferred
   
5,693,344
     
-
     
5,693,344
 
Series C Preferred
   
902,778
     
-
     
902,778
 
Series D Preferred
   
2,140,000
     
1,712,000
     
3,852,000
 
     
40,039,624
     
7,207,411
     
47,247,035
 
 
In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co.  in which the lender agreed to  forbear from accelerating the outstanding balance of the Note and form instituting collection efforts from the date of the agreement through July 1, 2014. The forbearance was required due to our inability to make payments required under the agreement of $338,479 and our inability to meet the $500,000 minimum monthly purchase requirement due to the closure of our two pharmacy locations.

Results of Operations for the Years Ended December 31, 2013 and 2012

Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended December 31, 2013 and 2012, represented as a percentage of total sales for each respective period:
 
   
Year Ended December 31,
 
   
2013
   
2012
 
             
Sales
   
100.0
%
   
100.0
%
Cost of sales
   
78.4
     
76.4
 
Gross profit
   
21.6
     
23.6
 
Operating expenses
               
Salaries and related expenses
   
36.4
     
33.8
 
Selling, general and administrative
   
41.0
     
40.3
 
   Total operating expenses
   
77.4
     
74.1
 
Loss from continuing operations
   
-55.8
     
-50.5
 
Other expenses
               
Interest expense, net
   
24.3
     
24.8
 
(Gain) Loss on extinguishment of debt
   
-29.8
     
1.6
 
Gain on change in forward contract liability
   
-2.3
     
-
 
            Loss on change in fair market value of derivative     1.4       -  
Gain on change in fair value of warrant liability
   
-2.8
     
-6.3
 
    Total other expenses and income
   
-9.2
     
20.1
 
Net loss from continuing operations, before tax
   
-46.7
     
-70.6
 
Income taxes
   
6.3
     
0.2
 
Net loss from continuing operations, net of tax
   
-53.0
     
-70.8
 
Net loss from discontinued operations, net of tax
   
-11.7
     
-0.3
 
Net loss
   
-64.7
     
-71.1
 

 

 
 
- 33 -



 
 
Sales

Our total sales reported for the year ended December 31, 2013 was $5,192,577, a 7.9% decrease from $5,636,195 for the year ended December 31, 2012. Our sales for the year ended December 31, 2013 and 2012 was generated primarily from the sale of prescription drugs through our pharmacy operations and to a much lesser extent fees from management services provided. Our total sales from pharmacy operations for the year ended December 31, 2013 was $5,173,395, a 7.0% decrease from $5,564,624 for the year ended December 31, 2012.  Our total sales from management services for the year ended December 31, 2013 was $19,183, a 73.2% decrease from $71,571 for the year ended December 31, 2012.

Sales per prescription dispensed by our pharmacies was approximately $107 per prescription for the year ended December 31, 2013, a 3.9% decrease from approximately $112 per prescription for the year ended December 31, 2012.  The decrease in sales per prescription dispensed is primarily attributable to a shift in prescription mix from higher priced brand medications to lower priced generic medications. Management attributes this shift in prescription mix primarily to inventory constraints due to working capital limitations.  

The number of prescriptions dispensed by our pharmacies was 48,139 for the year ended December 31, 2013 compared to 49,759 for the year ended December 31, 2012. Management attributes the decrease in prescription volumes primarily to inventory purchasing constraints due to working capital limitations.

The number of patients serviced by our pharmacies was 25,401 for the year ended December 31, 2013 compared to 22,945 patients for the year ended December 31, 2012.

Cost of Sales

The total cost of sales for the year ended December 31, 2013 was $4,072,085, a 5.5% decrease from $4,308,710 for the year ended December 31, 2012. The cost of sales consists primarily of direct cost of prescription drugs. The decrease in cost of sales is primarily attributable to decreased sales in the reporting period.

Gross Profit

Our total gross profit decreased to $1,120,492, or approximately 21.6% of sales, for the year ended December 31, 2013. This is a decrease from a gross profit of $1,327,485, or approximately 23.6% of sales for the year ended December 31, 2012.  Our gross profit from pharmacy sales decreased to $1,101,310, or approximately 21.3% of pharmacy revenues, for the year ended December 31, 2013.  This is a decrease from a gross profit of $1,255,914, or approximately 22.6% of pharmacy sales, for the year ended December 31, 2012. The decrease in the gross profit percentage for the year ended December 31, 2013, when compared to the prior fiscal year, is primarily attributable to shift in prescription mix.

Operating Expenses

Operating expense for the year ended December 31, 2013 was $4,020,061, a 3.7% decrease from $4,174,016 for the year ended December 31, 2012. Our operating expenses for the year ended December 31, 2013 consisted of salaries and related expenses of $1,891,862 and selling, general and administrative expenses of $2,128,199. Our operating expenses for the year ended December 31, 2012 consisted of salaries and related expenses of $1,903,475 and selling, general and administrative expenses of $2,270,541.

Salaries and related expenses decreased $11,613 in the year ended December 31, 2013, when compared to the previous fiscal year.

Selling, general and administrative expenses decreased $142,342 in the year ended December 31, 2013 when compared to the previous fiscal year.  The significant components of selling, general and administrative expenses are as follows:
 
 

 
- 34 -


 

 

   
Year Ended December 31,
 
   
2013
   
2012
 
             
Stock-based compensation expenses
   
628,965
     
851,561
 
Provision for accounts receivable doubtful accounts
   
32,426
     
12,968
 
Selling expenses
   
41,045
     
60,383
 
Professional fees
   
510,478
     
430,100
 
Delivery expenses
   
192,802
     
161,629
 
Facility related expenses
   
245,549
     
173,522
 
Travel and related expenses
   
109,658
     
164,128
 
Vendor late fee expenses
   
14,387
     
57,036
 
Investor relations expense
   
24,000
     
10,089
 
Other general and administrative expenses
   
328,889
     
 349,125
 
Total
 
$
2,128,199
   
$
2,270,541
 

The decrease in selling, general and administrative expenses is primarily due to a decrease in stock based compensation of $222,596 and to a lesser decreases in travel and related expenses, vendor late fee expenses, selling expenses and other general and administrative expenses which were partially offset by increases in professional fees, delivery expenses, facility related expenses, provision for accounts receivable doubtful accounts and investor relations expenses. The decrease in vendor late fees is primarily attributable to reduced late fees to our primary wholesaler as a result of our February 2013 refinancing.  The increase in professional fees is primarily related to securing additional financing and expenses associated with our public filings. The increase in delivery expenses are primarily due to an increase in the number of patients serviced by our operating pharmacies.   The increases in facility related expenses primarily relate to our Denver and Boston pharmacy locations that are under development.

Other (Income) and Expense

Total other expenses and income for the year ended December 31, 2013 was $475,428 in other income, a $1,608,342 decrease from $1,132,914 in other expense for the year ended December 31, 2012.  The significant components of other income and expenses are as follows:

   
Year ended December 31,
 
   
2013
   
2012
 
             
Interest expense, net
   
1,261,843
     
1,399,903
 
(Gain) loss on extinguishment of debt
   
(1,548,915
)    
90,205
 
Gain on change in fair value of forward contract
   
(117,364
)    
-
 
Loss on change in fair value of derivative     73,917          
Gain on change in fair value of warrants
   
(144,909
)
   
(357,194
)
Total
 
$
(475,428
)  
$
1,132,914
 

The decrease was primarily attributable to a gain on extinguishment of debt of $1,548,915 compared to a loss on extinguishment of debt of $90,205 in the prior year and to a lesser extent a decrease of $138,060 in interest expense, an $144,909 gain on change in fair value of derivative and an $117,364 gain on change in fair value of forward contract which was partially offset by a decrease of $73,917 in the change in fair value of derivative.

The decrease in interest expense is primarily due to a decrease in amortization of debt discount of $351,372 and to a lesser extent an $85,832 decrease in amortization of deferred financing costs which was partially offset by a $299,144 increase in interest expense at the stated rates due to an increase in the average debt outstanding the year ended December 31, 2013 compared to the year ended December 31, 2012.  The increase in the average debt outstanding is primarily attributable to the conversion of approximately $3.5 million in vendor payables into a secured note payable in February 2013.
 
 
 

 
- 35 -




 
Our total outstanding debt increased to $5,833,519 as of December 31, 2013 as compared to $3,960,293 at December 31, 2012.  The table below summarizes the components of interest expense for the year ended December 31, 2013 and 2012:
 
   
Year Ended December 31,
 
   
2013
   
2012
 
                 
Interest expense at stated rates (6.25% - 20.00%)
 
$
892,457
   
$
593,313
 
Amortization of deferred financing costs
   
36,131
     
121,963
 
Amortization of debt discount
   
333,255
     
684,627
 
Interest expense, net
 
$
1,261,843
   
$
1,399,903
 

The $1,548,915 gain on extinguishment of debt for the year ended December 31, 2013 resulted from troubled debt restructurings that met the requirements for extinguishment accounting treatment.  An aggregate of $1,662,107 in principal and $557,259 in accrued interest was converted into common stock at $0.60 per share.  The loss on extinguishment of debt of $90,205 in the year ended December 31, 2012 resulted from the modification and extension of seven convertible debenture agreements that met the requirements for extinguishment accounting treatment.
 
The gain on change in fair value of warrant liability represents the change in fair value calculated on warrants issued in connection with private placements in the fiscal years 2011through 2013 which grant the warrant holder certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.

The gain on change in fair value of forward contract liability represents the change in fair value calculated on forward contract issued in connection with our 2013 private placement of common stock. The Company also agreed that the 38,462 shares of common stock included in the units is subject to increase and the $0.65 per share value is subject to decrease, in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”).
 
The loss on change in fair value of derivative represents the change in fair value calculated on derivative issued in connection with our 2013 Series D Preferred stock issuances.  The derivative relates to the conversion feature into common stock at an initial rate of 2,000 common shares for each share of Series D Preferred stock, subject to adjustment for certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.

Loss from Discontinued Operations, net of tax
 
Discontinued operations include the operations of our Riverside, California and Gresham, Oregon pharmacies that were closed in August 2013.  Our net loss from discontinued operations for the year ended December 31, 2013 was $609,292, compared to a net loss of $16,940 for the year ended December 31, 2012. The increase in our net loss was primarily attributable to impairment of goodwill of $697,766 and to a lesser extent decreasing sales, and a decrease in gross profits which were partially offset by an increase in the tax benefit and a decrease in operating expenses and other expenses and income.

Net Loss

Our net loss for the year ended December 31, 2013 was $3,361,513, compared to a net loss of $4,005,506 for the year ended December 31, 2012.  The decrease in our net loss was primarily attributable to an decrease in other expenses of $1,682,259 and to a lesser extent, a decrease in operating expenses of $153,955 which was partially offset by an increase in the loss on discontinued operations, net of tax of $592,352 and to a lesser extent a decrease in gross profit of $206,993.

Our net loss per common share for the year ended December 31, 2013 was $0.91, compared to a net loss per common share of $0.96 for the year ended December 31, 2012.  The decrease to our net loss per common share was primarily attributable to an increase in the weighted average number of common shares outstanding to 6,126,838 for the year ended December 31, 2012, from 4,150,976 for the year ended December 31, 2012 which was partially offset by $1,548,595 increase in our net loss applicable to common  stock.
 
The increase in our loss applicable to common stock is primarily due to a $2,192,588 redemption feature on preferred stock in the year ended December 31, 2013.  The redemption feature on preferred stock relates the mandatory redemption feature on our Series D Preferred stock issuances and represents the adjustment to the carrying amount of the instrument to equal the redemption value of the instrument.  The redemption feature on preferred stock is a deemed dividend distribution for accounting purposes.
 
 
 

 
 
- 36 -



 
Financial condition, Liquidity and Capital Resources

Liquidity and Capital Resources

As of December 31, 2013, we had a cash balance of $2,856, a minimal decrease from a balance of $21,298 at December 31, 2012.  At December 31, 2013, we had a working capital deficit of $1,746,832 a decrease from a working capital deficit of $6,312,121 as of December 31, 2012.  The decrease in our working capital deficit was primarily attributable to an decrease in current liabilities attributable to the conversion of approximately $3,534,793 in vendor payables into a long term secured note, the conversion of an aggregate total of $1,662,107 in debt principal and an aggregate total of $557,259 in accrued interest into common stock at a conversion price of $0.60, which was partially offset by a decrease in assets in discontinued operations of $562,751 due to the closure of our Riverside and Gresham pharmacies in August 2013.
 
Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities and cash made available under certain credit facilities.  In order for us to finance operations, continue our growth plan and service our existing debt, additional funding is required from external sources. We intend to fund operations through increased sales, lower operating expenses and debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements for the next twelve months. Our management is seeking financing and anticipates that its efforts will result in sufficient funds to finance our operations beyond the next twelve months.  However, there can be no assurance that the additional financing necessary to finance our operations for the next twelve months will be available to us on acceptable terms, or at all.
 
Our current cash on hand is insufficient for us to operate our two existing pharmacies at the current level for the next twelve months.  Our business plan calls for ongoing expenses in connection with salary expense and establishing additional pharmacies. These expenditures are anticipated to be approximately $2,400,000 for the next twelve months.

As of December 31, 2013, we have $300,000 in debt securities which were due in the year 2012 and $483,943 in debt securities which come due in the year 2014.  We are attempting to extend the maturity date of these debt securities, but can provide no assurance that the holders of such securities will agree to extend the maturity date on these securities on acceptable terms.  If our debt holders choose not to convert certain of these securities into equity, we will need to repay such debt, or reach an agreement with the debt holders to extend the terms thereof.  If we are forced to repay the debt, this need for funds would have a material adverse impact on our business operations, financial condition and prospects, including our ability to operate as a going concern.  If we are forced to repay the debt, our current and forecasted levels of cash flows and available cash on hand will not be sufficient to fund our operations for the year 2014.  Accordingly, we will be required to obtain additional financing in order to repay the debt, cover operating losses and fund working capital needs.  We cannot provide any assurances of the availability of future financing or the terms on which it might be available. In the absence of such financing, we may be forced to scale back or cease operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures.

In January 2014, the Company entered into a $200,000 promissory note with Pinewood Trading Fund, LP., a related party.  The note bears an interest rate of 16.00% per annum payable in the Company’s common stock payable on July 1st and January 1st of each calendar year and matures on January 28, 2016.

In February and March 2014, the Company entered into five short term promissory notes with Pinewood Trading Fund, LP., a related party for an aggregate total of $240,000.  The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.
 
In February 2014, the Company entered into an Amended and Restated 10% Senior Convertible Debenture due June 30, 2016 with Hillair Capital Investments, LP. in the amount of  $1,150,000. The amendment relates to convertible debentures originally issued on May 16, 2011, August 22, 2011, November 30, 2011 and July 19, 2012 for an aggregate total of $1,000,000 in debentures.  In addition to the extension of the maturity date, the interest rate was also reduced from 16.0% to 10.0% per annum and the conversion price was decreased from $0.90 to $0.75. As part of the agreement, the Company agreed to increase the principal amount of the debenture by $150,000 which represents eighteen months of interest at the stated rate of 10%.  As a result, all interest accruable and payable between February 7, 2014 and August 8, 2015 is considered paid in full and satisfied.   In addition, the Company issued 420,694 shares of common stock as payment of accrued interest of $252,417 at a rate of $0.60 per share.  As part of the agreement, all interest accruable and payable between February 7, 2014 and August 7, 2015 has been added to this debenture at a rate of 10% per annum and is considered paid in full and satisfied.  Further interest will not begin accruing until August 8, 2015.  As part of the amendment, the exercise price of the related warrants was reduced from $0.90 to $0.75 resulting in the issuance of an additional 320,000 warrants per the warrant agreement terms.
 
 

 
 
- 37 -



 
 
In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co.  in which the lender agreed to  forbear from accelerating the outstanding balance of the Note and from instituting collection efforts from the date of the agreement through July 1, 2014. The forbearance was required due to our inability to make payments required under the agreement of $338,479 and our inability to meet the $500,000 minimum monthly purchase requirement due to the closure of our two pharmacy locations.
 
In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015.  The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced.  The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.

The table below lists our obligations under outstanding notes payable and unsecured convertible debentures, as of December 31, 2013:

   
Related Party
   
Unrelated
   
Total
 
                   
Secured Debt  (1)
   
-
     
3,804,111
     
3,804,111
 
Revolving Credit facilities  (2)
   
477,000
     
-
     
477,000
 
Other Notes and Debt  (3)
   
-
     
52,408
     
52,408
 
Unsecured Convertible Debentures
   
-
     
1,500,000
     
1,500,000
 
     
477,000
     
5,356,519
     
5,833,519
 
Less: current portion
   
-
     
(783,943
)
   
(783,943
)
   
$
477,000
   
$
4,572,576
   
$
5,049,576
 

1)  
In February 2013, we received a one year loan of $3,828,527 from our primary wholesaler upon conversion of trade payables of $3,534,793 and cancellation of secured loan with a remaining balance of $293,734.  The note bears an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements were $27,000 per month for the first four consecutive months, followed by four consecutive monthly principal reductions of $37,000, followed by three consecutive monthly principal reductions of $42,000, with remaining principal and interest due February 1, 2014. In July 2013, the secured loan was amended and the maturity date was extended to February 1, 2016 with monthly payment requirements of $42,000.

2)  
As of December 31, 2013, revolving credit facilities consisted of an outstanding balance of $477,000 on a line of credit we entered into with Brockington Securities, Inc., a company under the control of our Chief Executive Officer.

3)  
As of December 31, 2013, other notes and debt consisted of the outstanding principal balance of $52,408 due to TPG in connection with our acquisition of their ownership interest in API, which operated our discontinued pharmacy in Riverside, California.

Obligations and Commercial Commitments

Not required for smaller reporting companies

Outstanding Trade Balance.  At December 31, 2013, we did not have an outstanding balance with our primary wholesaler.

Capital Expenditures.  At March 27, 2014, we had no material commitments for capital expenditures.

Cash Flows

As of December 31, 2013, we had $2,856 in cash and total current assets in the amount of $830,281 and had current liabilities in the amount of $2,577,113, resulting in a working capital deficit of $1,746,832.
 
 
 
 

 
- 38 -



 
 
Cash Flows

As of December 31, 2013, we had $2,856 in cash and total current assets in the amount of $830,281 and had current liabilities in the amount of $2,577,113, resulting in a working capital deficit of $1,746,832.

The following discussion focuses on information in more detail on the main elements of the $18,442 and $2,018 net decrease in cash during the years ended December 31, 2013 and 2012, respectively included in the accompanying Consolidated Statements of Cash Flows. The table below sets forth a summary of the significant sources and uses of cash for the years ended December 31:

   
2013
   
2012
 
             
Cash used in operating activities
 
$
(1,876,728
)
 
$
(530,815
)
Cash used in investing activities
   
(53,838
)
   
(21,285
)
Cash provided by financing activities
   
1,912,124
     
550,082
 
                 
Decrease in cash
 
$
(18,442
)
 
$
(2,018
)

Operating activities used $1,876,728 in cash for the year ended December 31, 2013 compared to $530,815 in cash used for the year ended December 31, 2012. Our net loss of $3,287,596 plus non-cash expenses of $92,467 was the primary reason for our negative operating cash flows which were partially offset by a $1,503,335 change in operating assets and liabilities.  Our net loss of $4,005,506, less non-cash expenses of $1,316,348 was the primary reason for our negative operation cash flows which were partially offset by a $2,158,343 change in operation assets and liabilities.  The table below summarizes the components of our cash used in operating activities for the year ended December 31, 2013 and 2012:

Net loss from operations including non-controlling interest
  $ (3,287,596 )   $ (4,005,506 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization of property and equipment
    36,129       34,614  
Amortization of debt issuance costs
    36,131       121,963  
Amortization of discount on debt
    333,255       684,627  
Stock based compensation
    628,964       847,561  
Issuance of  common stock in lieu of debenture interest
    45,467       -  
(Gain) or Loss on extinguishment of debentures and notes
    (1,548,915 )     30,610  
Provision for accounts receivable doubtful accounts
    16,683       (136,038 )
Recoveries of other receivable doubtful accounts
    (100,708       -  
Provision for obsolete inventory
    24,006       -  
Impairment of goodwill
    697,766       90,205  
Loss on sale of property and equipment
    1,028       -  
Gain on change in fair value of forward contract
    (117,364 )     -  
Loss on change in fair value of derivative
    73,917          
Gain on change in fair value of warrant liability
    (144,909 )     (357,194 )
      (18,550 )     1,316,348  
                 
Changes in operating assets and liabilities:
    1,503,335       2,158,343  
                 
Net cash used in operating activities
  $ (1,876,728 )   $ (530,815 )

Operating assets and liabilities reduced the overall cash deficit in the years ended December 31, 213 and 2012 primarily due to our increases in our accounts payable and accrued expenses, decreases in our accounts receivable and our other receivables related to worker's compensation claims and decreases in our inventories.

Cash used in investing activities was $53,838 in the year ended December 31, 2013, compared to $21,285 in the year ended December 31, 2012.  Investing activities in the year ended December 31, 2013 and 2012 consisted entirely of purchases and sales of property and equipment.

Cash provided by financing activities during the year ended December 31, 2013 was $1,912,124 compared to $550,082 in the year ended December 31, 2012. Over the last several years, our operations have been funded primarily through the sale of debt securities and advances from revolving credit facilities made available to us.  During the year ended December 31, 2013 we received net proceeds from the issuance of preferred stock of $1,097,395, net proceeds from the issuance of common stock of $814,190 and net proceeds on revolving credit facilities of $30,000, which was partially offset by net principal repayments of $29,461 on notes payable.  During the year ended December 31, 2012 we received net proceeds from the issuance of convertible debentures of $307,502 and net proceeds on revolving credit facilities of $288,680, which was partially offset by net principal repayments of $46,100 on notes payable.
 

 
 
 
- 39 -



 
Registration Statement

We filed an initial registration statement that was effective on November 14, 2012 for the offer and sale or other disposition of 2,292,067 shares of our common stock issuable on exercise of warrants by the selling shareholders.

Off Balance Sheet Arrangements

As of December 31, 2013, there were no off balance sheet arrangements.

Going Concern Assumption

The consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of December 31, 2013, we had an accumulated deficit of approximately $48.6 million, recurring losses from operations and negative cash flow from operating activities for the year ended December 31, 2013, of approximately $1,900,000. We also had negative working capital of approximately $1.7 million and debt with maturities within one year in the amount of approximately $800,000 as of December 31, 2013.
 
From January 1, 2014 through March 27, 2014, the Company has secured loans in the amount of $440,000 with Pinewood Trading Fund, LP, a related party, extended the maturity date of an aggregate total of $1,000,000 in convertible debentures from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest into common stock at $0.60 per share and secured a Revolving Line of Credit for $600,000 from Third Coast Bank.   The Company intends to fund operations through raising additional capital through debt financing and equity issuances, increased sales, increased collection activity on past due other receivable balances and reduced expenses, which may be insufficient to fund its capital expenditures, working capital or other cash requirements for the year ending December 31, 2014. The Company is in negotiations with current debt holders to restructure and extend payment terms of the existing short term debt.  The Company is seeking additional funds to finance its immediate and long-term operations. The successful outcome of future financing activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

In response to these financial issues, management has taken the following actions:

●    We are seeking investment capital.
●    We are aggressively targeting new physicians.
●    We are aggressively seeking to renegotiate past due existing debentures.

Critical Accounting Policies and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We have chosen accounting policies within GAAP that we believe are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. We regularly assess these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 2 to the Consolidated Financial Statements included elsewhere in this annual report on Form 10K.  We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
 
 
 

 
- 40 -



 
 
Revenue Recognition

We recognize revenue from prescriptions dispensed on an accrual basis when the product is delivered to or picked up by the customer. Payments are received directly from the customer at the point of sale, or the customers' insurance provider is billed electronically. For third party medical insurance and other claims, authorization to ensure payment is obtained from the customer’s insurance provider before the medication is dispensed to the customer. Authorization is obtained for these sales electronically and a corresponding authorization number is issued by the customers' insurance provider.

Accounts Receivable and Allowances

Our accounts receivable consist of amounts due from third party medical insurance carriers, pharmacy benefit management companies, patients and credit card processors. Management periodically reviews the accounts receivable to assess collectability and estimate and potential doubtful accounts.  Accounts receivable are written off after collection efforts have been completed in accordance with our policies.  The doubtful accounts allowance reduces the carrying value of the account receivable.

Inventories

Inventories are located at our pharmacy locations. Inventory consists solely of finished products (primarily prescription drugs) and is valued at the lower of first-in, first-out cost (FIFO) or market. Our inventories are maintained on a periodic basis through the performance of physical inventory counts.  Our cost of sales is recorded based upon the actual results of the physical inventory counts, and is estimated when a physical inventory is not performed in a particular month. Historically, no significant adjustments have resulted from reconciliations with the physical inventories.
 
Inventories are comprised of brand and generic pharmaceutical drugs. Our pharmacies maintain a wide variety of different drug classes, known as Schedule II, Schedule III, and Schedule IV drugs, which vary in degrees of addictiveness.  Schedule II drugs, considered narcotics by the DEA, are the most addictive; hence, they are highly regulated by the DEA and are required to be segregated and secured in a separate cabinet. Schedule III and Schedule IV drugs are less addictive and are not regulated. Because our business model focuses on servicing pain management doctors and chronic pain patients, we carry in inventory a larger amount of Schedule II drugs than most other pharmacies.
 
Stock-based Compensation

We issue options and restricted shares of common stock to employees and consultants.  Stock option and restricted share awards are granted at the fair market value of our common stock on the date of grant.

The Company records all share-based payments at fair value.  The total applicable compensation cost is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.


Not applicable.

 

 
 
- 41 -



 
 


 
 
 
 
 
 
 

 
- 42 -


 

 
 
 
 
Board of Directors and Stockholders
Assured Pharmacy, Inc.
Plano, Texas
 
We have audited the accompanying consolidated balance sheets of Assured Pharmacy, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Assured Pharmacy, Inc. at December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

 
  /s/  BDO USA, LLP                                                                         
        BDO USA, LLP
 
Dallas, Texas
March 31, 2014
 

 
 





ASSURED PHARMACY, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

 
   
December 31,
   
December 31,
 
   
2013
   
2012
 
             
             
ASSETS
           
             
Current Assets
           
 Cash
 
$
2,856
   
$
21,298
 
 Accounts receivable, net
   
323,965
     
333,687
 
 Inventories
   
273,195
     
198,778
 
 Prepaid and other current assets
   
226,217
     
135,021
 
Assets of discontinued operations, net
   
4,048
     
566,799
 
     Total current assets
   
830,281
     
1,255,583
 
                 
Property and equipment, net
   
78,094
     
45,743
 
Assets of discontinued operations, net
   
140,563
     
920,172
 
                 
 TOTAL ASSETS
 
$
1,048,938
   
$
2,221,498
 
                 
 LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
Current Liabilities
               
 Accounts payable and accrued expenses
   
1,642,518
     
2,194,377
 
 Liabilities of discontinued operations
   
150,652
     
2,655,303
 
 Unsecured convertible debentures, net of discount
   
357,528
     
1,661,408
 
 Unsecured convertible debentures, related party, net of discount
   
-
     
509,106
 
 Notes payable
   
426,415
     
547,510
 
       Total current liabilities
   
2,577,113
     
7,567,704
 
                 
Notes payable, net of current portion
   
3,430,104
     
-
 
Notes payable to related parties, net of current portion
   
477,000
     
447,000
 
Unsecured convertible debentures, net of current portion and discount
   
1,142,472
     
388,339
 
Unsecured, convertible debentures, related party, net of current portion and discount
   
-
     
30,923
 
Derivative liability     312,088       -  
Warrant liability
   
1,060,353
     
274,605
 
 TOTAL LIABILITIES
   
8,999,130
     
8,708,571
 
                 
Commitments and Contingencies (see Note 8)
               
                 
Series D redeemable convertible preferred stock; par value $0.001 per share;
15,000 shares authorized, 1,070 and 0 issued and outstanding, respectively
   
2,515,469
     
-
 
                 
 Assured Pharmacy, Inc.'s Stockholders' Deficit
               
 Preferred stock; par value $0.001 per share; 5,000,000 shares authorized, 2,830
               
 shares designated to Series A convertible, 7,745 shares designated to Series B
               
 convertible, 813 shares designated to Series C convertible
               
                 
 Series A convertible preferred stock; par value $0.001 per share; 2,830
               
 shares authorized, 1,466 and 1,556 issued and outstanding, respectively
   
1
     
1
 
                 
 Series C convertible preferred stock; par value $0.001 per share; 813
               
 shares authorized, 813 and 813 issued and outstanding, respectively
   
1
     
1
 
                 
 Series B convertible preferred stock; par value $0.001 per share; 7,745
               
 shares authorized, 5,124 and 5,409 issued and  outstanding, respectively
   
5
     
5
 
                 
 Common stock; par value $0.001 per share; 100,000,000 shares authorized,
               
10,255,693 and 3,818,707 issued and outstanding, respectively
   
10,256
     
4,477
 
                 
 Additional paid-in capital, net
   
38,142,048
     
36,572,314
 
                 
 Accumulated deficit
   
(48,617,972
)
   
(43,063,871
)
                 
 Stockholders' deficit
   
(10,465,661
)
   
(6,487,073
)
                 
 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
1,048,938
   
$
2,221,498
 
 
 
See accompanying notes to these consolidated financial statements.
 
 


 
 
ASSURED PHARMACY, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
 
 
   
Year Ended December 31,
 
   
2013
   
2012
 
             
Sales
 
$
5,192,577
   
$
5,636,195
 
                 
Cost of sales
   
4,072,085
     
4,308,710
 
                 
Gross profit
   
1,120,492
     
1,327,485
 
                 
Operating expenses
               
Salaries and related expenses
   
1,891,862
     
1,903,475
 
Selling, general and administrative
   
2,128,199
     
2,270,541
 
   Total operating expenses
   
4,020,061
     
4,174,016
 
                 
Loss from continuing operations
   
(2,899,569
)
   
(2,846,531
)
                 
Other expenses
               
Interest expense, net
   
1,261,843
     
1,399,903
 
(Gain) or Loss on extinguishment of debt
   
(1,548,915
)    
90,205
 
Gain of change in fair value of forward contract liability
   
(117,364)
     
-
 
        Loss on change in fair market value of derivative     73,917       -  
Gain on change in fair value of warrant liability
   
(144,909
)
   
(357,194
)
    Total other expenses and income
   
(475,428
)    
1,132,914
 
                 
Loss  from continuing operations before income tax
   
(2,424,141
)
   
(3,979,445
)
Income tax expense
   
328,080
     
9,121
 
                 
Loss from continuing operations, net of tax.
   
(2,752,221
)
   
(3,988,566
)
                 
Discontinued operations:
               
Loss from operations of discontinued pharmacies, net of tax benefit
   
(609,292
)    
(16,940
)
Net loss
 
$
(3,361,513
)  
$
(4,005,506
)
                 
Redemption feature on preferred stock     (2,192,588 )     -  
                 
Net loss applicable to common stock   $ (5,554,101 )   $ (4,005,506 )
                 
Basic and diluted loss per common share                
        Net loss to common stockholders from continuing operations   $ (0.81 )   $ (0.96 )
        Loss from discontinued operations, net of tax expense (benefit)   $ (0.10 )   $ (0.00 )
        Net loss per common share - basic and diluted   $ (0.91 )   $ (0.96 )
                 
                 
Basic and diluted weighted average number of common shares outstanding     6,126,838       4,150,976  
 
 

See accompanying notes to these consolidated financial statements.
 
 




ASSURED PHARMACY, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
 
 
   
ASSURED PHARMACY, Inc. Stockholders
       
                                                 
   
Common Stock
   
Series A
Preferred Stock
   
Series C
Preferred Stock
   
Series B
Preferred Stock
   
Additional
Paid In
   
Accumulated
   
Total
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Deficit
 
                                                                   
                                                                   
Balance December 31, 2011
   
3,818,707
   
$
3,818
     
1,556
   
$
2
     
813
   
$
1
     
5,409
   
$
5
   
$
35,725,411
   
$
(39,058,365
)
 
$
(3,329,128
)
                                                                                         
Stock based compensation for services
   
540,000
   
$
540
                                                     
847,021
             
847,561
 
                                                                                         
Conversion of series A preferred stock into common
   
104,250
   
$
105
     
(150
)
 
$
(1
)
                                   
(104
)
           
-
 
                                                                                         
Conversion of series B preferred stock into common
   
13,889
   
$
14
                                     
(25
)
           
(14
)
           
-
 
                                                                                         
Net Loss
                                                                           
(4,005,506
)
   
(4,005,506
 
                                                                                         
Balance December 31, 2012
   
4,476,846
   
$
4,477
     
1,406
   
$
1
     
813
   
$
1
     
5,384
   
$
5
   
$
36,572,314
   
$
(43,063,871
)
 
$
(6,487,073
)
                                                                                         
Stock based compensation for services
   
545,000
   
$
545
                                                     
728,356
             
728,901
 
                                                                                         
Issuance of series A preferred stock
                   
60
     
-
                                     
60,000
             
60,000
 
                                                                                         
Conversion of series B preferred stock into common
   
288,890
   
$
289
                                     
(260)
   
$
-
     
(289
 )            
-
 
                                                                                         
Issuance of common stock in lieu of interest
   
1,049,152
 
 
$
1,049
                                                     
159,473
             
160,522
 
                                                                                         
Issuance of common stock in conversion of convertible debentures
   
2,442,975
   
$
2,443
                                                     
286,313
             
288,756
 
                                                                                         
Issuance of common stock in conversion of note payable
   
129,737
   
$
130
                                                     
18,033
             
18,163
 
                                                                                         
Issuance of common stock warrants in conversion of convertible debenture
                                                                   
14,012
             
14,012
 
                                                                                         
Issuance of common stock in private placement
   
1,323,093
   
$
1,323
                                                     
303,836
             
305,159
 
                                                                                         
Redemption feature on preferred stock                                                                              (2,192,588 )     (2,192,588 )
                                                                                         
Net Loss
                                                                           
(3,361,513
)
   
(3,,361,513
)
                                              &#