ITEM 1 - BUSINESS.
History
Pharmagen, Inc. was formed in the State of Nevada on June 25, 2009 as Sunpeaks Ventures, Inc.
On February 13, 2012, we entered into a Share Exchange Agreement with Healthcare Distribution Specialists, LLC (now known as Pharmagen Distribution, LLC or Pharmagen Distribution) and its members. Pursuant to the agreement, we acquired one hundred percent (100%) of Pharmagen Distribution in exchange for (i) two hundred million (200,000,000) newly-issued restricted shares of our common stock, and (ii) three million (3,000,000) newly-issued restricted shares of our Class A Preferred Stock.
For financial accounting purposes, the acquisition of HDS by the Company (referred to as the “Merger”) was a reverse acquisition of the Company by HDS and was treated as a recapitalization. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on February 13, 2012, and represent the operations of HDS prior to the Merger.
Prior to the Merger, on August 1, 2011, pursuant to an Amended and Restated Asset Acquisition Agreement (the “Agreement”) between HDS and Global Nutritional Research, LLC (“GNR”), HDS acquired certain assets of GNR in exchange for assumption of debt and financial obligations of GNR. Prior to the acquisition, HDS and GNR were considered entities under common control and common ownership, as control and ownership of each entity resided with HDS’s president and an immediate family member. As entities under common control, in accordance with accounting principles generally accepted in the United States (“GAAP”), the acquired assets and liabilities of GNR were recognized in the accompanying financial statements at their carrying amounts.
On December 13, 2012, we acquired Bryce Rx Laboratories (“Bryce”) through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce. Bryce specializes in the formulation of drugs that are not commercially available, require alternate delivery systems, and/or dosing changes. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000), payable (i) One Hundred Thousand Dollars ($100,000) at Closing, and (b) Two Hundred Fifty Thousand Dollars ($250,000) on December 31 of each of the following four (4) years beginning in 2013 (See Note 5).
Bryce changed its name to Pharmagen Laboratories, Inc. effective on March 4, 2013.
Recent Name Change
Effective on January 15, 2013, we changed our name from Sunpeaks Ventures, Inc. to Pharmagen, Inc. This change was to more accurately highlight the pharmaceutical aspect of our business.
Overview
We strive to meet the demands of the health provider market through dynamic, independent wholesale, compounding/admix, and IT solutions. We are a distributor of specialty drugs, compounding and admix pharmacy, and producer of OTC branded multivitamins to the healthcare provider market. The Food and Drug Administration continues to see an increasing number of shortages, especially those involving older sterile injectable drugs. We currently function as a solution provider to hospitals through sterile compounding/admix pharmacy and just-in-time source of supply of products that are hard-to-find due to drug manufacturers’ production shortages. Our long term goal is to become an FDA approved manufacturer of habitually short supply, sterile pharmaceuticals. Through an industry changing, cGMP + ® process, utilizing single-use, modular systems, we intend to set the standard for sterile production in the United States.
In addition to pharmaceuticals, we manufacture and distribute OTC branded health supplements. Our approach to the OTC market is to create suites of products that are designed to work in conjunction with prescription medications to alleviate side effects or prevent drug interactions. With an aging population, more Americans than ever are on prescription medication. We are currently analyzing several OTC products.
All of our operations are conducted through our wholly-owned subsidiaries, Pharmagen Distribution, LLC (formerly known as Healthcare Distribution Specialists, LLC), and Pharmagen Laboratories, Inc. (formerly known as Bryce Rx Laboratories, Inc.). We have a third wholly-owned subsidiary, Pharmagen Nutriceuticals, Inc., that is not active at this time.
The U.S. Drug Wholesaling Industry
The U.S. drug wholesaling industry is a $300 billion industry1. In the U.S., the three largest drug wholesalers distribute more than 85% of all prescription drugs2. The remaining 15% of the market represents a $45 billion distribution market for hard-to-find and specialty pharmaceuticals primarily in the biopharmaceutical arena. “Hard-to-find” drugs is an industry term for drugs that are in short or limited supply and “specialty” drugs are injectable pharmaceuticals that are used for specific purposes, generally cancer, fertility, and antibiotics. Hospitals and other facilities that need these hard-to-find and specialty drugs represent the target customer for our drug wholesaling business.
Principal Services and Products
Specialty drugs are difficult and expensive to manufacturer, and there are typically no generic alternatives. We are a wholesale distributor of over 6,000 of these specialty drugs. Our Pharmagen Distribution subsidiary currently provides three primary distribution services and owns one OTC product.
Distribution Services
As a distributor, we provide pharmaceuticals to hospitals, acute care facilities, surgery centers and other healthcare practitioners. These facilities generally have agreements with primary pharmaceutical providers that provide them with the majority of the drugs they need. However, at times the primary suppliers are either out of a drug or do not carry a particular drug. When this occurs, the facility typically issues a purchase order to companies like us, who then enter the secondary wholesale pharmaceutical market seeking the sought after drug. When we receive a purchase order from a customer, we immediately contact our vendors in the secondary wholesale market to attempt to acquire the drug. When we are successful, we purchase the drugs from the vendors in the secondary wholesale market and then sell the drugs to the facility to fill the purchase order. We do not have formal agreements with the vendors in the secondary wholesale market; instead the transactions are completed on a “one-time” basis through the use of purchase orders.
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1 2011-12 Economic Report on Pharmaceutical Wholesalers by Adam J. Fein, Ph.D., September 2011.
2 Statement of Adam J. Fein, President, Pembroke Consulting, Inc. to the U.S. House of Representatives Committee on the Judiciary Subcommittee on Intellectual Property, Competition, and the Internet; The Proposed Merger between Express Scripts and Medco, September 20, 2011.
We also occasionally source and distribute more traditional drugs to our customers, but this does not constitute a material part of our business.
Sourcing and Distribution of Hard-To-Find Pharmaceuticals
Pharmagen Distribution plays the role of special purchasing agent and procurement expediter for its customers. Pharmagen Distribution contacts various suppliers within the industry supply chain in order to find certain hard-to-find pharmaceuticals and facilitates rapid delivery of such pharmaceuticals, usually within 24 to 48 hours.
We believe that the hard-to-find segment will grow significantly due to the high projected demand, manufacturing shortages, regional shortages, and the increasing off-label use of biopharmaceutical drugs and their quota-like system of allocation based on equal distribution and not need, which is the way many hard-to-find drugs are allocated to facilities such as hospitals, surgery centers, and acute care facilities. This quota system creates an imbalance in the market and is the reason many facilities that need hard to find drugs contact Pharmagen Distribution or companies like Pharmagen Distribution.
Additionally, many hospitals carry a small inventory of hard to find drugs because of the high purchase and carrying costs. This tight supply chain results in the frequent need by providers to access the hard-to-find market to rebalance supply with demand. When this happens, hospitals are under timing pressure to obtain the products quickly, often regardless of pricing.
During our fiscal years ended December 31, 2013 and 2012, revenues from sourcing and distribution of hard-to-find pharmaceuticals represented approximately 60% and 92%, respectively, of our total net revenue for those periods.
Pharmagen Laboratories, Inc.
On December 13, 2012, we acquired Bryce Laboratories, Inc., and subsequently changed its name to Pharmagen Laboratories, Inc. Pharmagen Laboratories specializes in the formulation of drugs that are not otherwise commercially available, require specialized delivery systems, or require dosing changes. Through Pharmagen Laboratories, we can fill some of our existing customer orders in-house as well as orders from third parties.
Healthrite Pharmaceuticals
Historically, one of our providers of pharmaceuticals was Healthrite Pharmaceuticals, an entity controlled by Mackie Barch, our President and one of our directors. Healthrite is a “waiver” pharmacy that purchased certain drugs, which it could sell to our subsidiary, Pharmagen Distribution, for Pharmagen Distribution to resell. A “waiver” pharmacy is a pharmacy that has a specific purpose and is non-retail (does not sell to the public). Healthrite was intended for long term care, acute care and other institutional purposes. During the years ended December 31, 2013 and 2012, Pharmagen Distribution purchased $0 and $114,000, respectively, of inventory from HealthRite. Based on these purchases and the subsequent sales of the drugs, during the years ended December 31, 2013 and 2012, Pharmagen Distribution recognized net revenue of $0 and $80,758, respectively based on gross sales of $0 and $188,710, respectively. In early 2012, Healthrite notified us that due to the cost and effort to maintain a pharmaceutical license it had surrendered its pharmaceutical license and will no longer sell pharmaceuticals, effective April 10, 2012. This has not had a material impact on our business since we now have our own direct relationship with suppliers and resellers of hard-to-find drugs, but it does allow us to recognize all the revenue from our product sales rather than having a disparity between our gross sales and the net revenue we recognize since we would no longer be sourcing the drugs from a related party.
Sourcing and Distribution of Blood Plasma Derivatives, Specialty Products, Vaccines, and Anti-Infectives
We believe that worldwide demand for plasma derivative products (made from bio-engineered proteins and blood derivatives), such as Intravenous Immunoglobulin (IVIG), coagulation factors, and albumin is and will continue to grow strongly due to increased use and emerging medical applications for these drugs. Historically, IVIG was targeted at treatment of auto-immune diseases, but therapies such as treatment for Alzheimer’s and other immune deficiencies are contributing to a significant increase in demand for IVIG. Manufacturers have historically not been able to increase production in time to meet increased demand. Many of these disorders have no cure, and as a result, patients often receive treatment for the symptoms for decades, thereby creating long use cycles for these products.
We distribute products such as plasma derivatives, specialty products, and anti-infectives. Plasma derivatives are used to treat complex and serious medical conditions such as cancer, hemophilia, rheumatoid arthritis, multiple scleroses, blood disorders, hepatitis, and HIV. Specialty products include a wide variety of drugs used to treat respiratory, oncology, cardiovascular, and hormonal syndromes. These specialty products are highly differentiated from traditional pharmaceuticals (oral solids) because they are significantly more costly than traditional pharmaceuticals and often require specialized handling such as refrigeration and tight cold-chain management.
Healthcare providers, despite having primary sources of distribution for these products, routinely encounter shortages that can put patients at risk. Despite a growing need for these products, hospitals are often unable to increase supply allocations, resulting in market disequilibrium and the need to purchase in the hard-to-find market.
During our fiscal years ended December 31, 2013 and 2012, revenues from sourcing and distribution of blood plasma derivatives, specialty products, vaccines, and anti-infectives represented less than 1% of our total revenue for those periods
Sourcing and Distribution of Select Traditional Pharmaceuticals
Pharmagen Distribution also offers sales of traditional pharmaceutical products to its distribution customers. These products include antibiotics, vaccines, and other oral and injectable pharmaceuticals. These product sales opportunities arise when vendors offer Pharmagen Distribution special pricing or exclusivity on certain product lines.
During our fiscal years ended December 31, 2013 and 2012, revenues from sourcing and distribution of select traditional pharmaceuticals represented less than 1% of our total revenue for those periods.
Clients for our Distribution Services
The primary customers for the pharmaceuticals we distribute are hospitals, acute care facilities, surgery centers and other health practitioners. We distribute these drugs through common carriers, such as UPS and Federal Express.
Vendors
We purchase our hard-to-find drugs from a wide variety of small vendors depending on the particular hard-to-find drug that is being sought. Our current vendors are small, regional pharmaceutical wholesalers. No one vendor or hard-to-find drug represents a material amount of our revenue or business. Approximately 70% of our purchase orders are for under $1,000 each, so our business is a volume business and not reliant on one or even a few vendors or drugs. The transactions with our vendors work as follows: when we need a hard-to-find drug we issue a purchase order that contains the drug name and quantity sought for the particular hard-to-find drug we are seeking. We typically hear back from vendors regarding the availability, timing and pricing within one day and we may hear from more than one vendor in response to our purchase order request. We typically receive the drugs from the vendor the same day or the next day with payment terms typically anywhere from net 5 days to net 20 days, and averaging about net 15 days. We then sell the drugs to the purchaser (typically a hospital, but could be other type of medical clinic) within one to two days, and on payment terms that are normally net 30 days. There are no other terms regarding our transactions with vendors other than the name, amount and purchase price for the drugs. If one vendor cannot perform as expected we can normally find a replacement vendor for the purchase order on the same day or the next day.
Clotamin - a Multivitamin for Patients on Blood Thinners
Pharmagen Distribution owns 100% of the rights, title, and interest to Clotamin, an OTC multivitamin for patients on Warfarin. Pharmagen Distribution, through its predecessor, introduced Clotamin in early 2008 to answer an unmet need for patients on anticoagulants (popularly referred to as “blood thinners”), such as Warfarin and related 4-hydroxycoumarin-containing molecules.
Patients on such blood thinners are primarily impacted by their Potassium (K+) level, and to a lesser degree their vitamin A, D, and E levels, and are therefore cautioned to monitor their intake of these vitamins. The patient’s International Normalized Ratio (INR) can be raised or lowered based upon the amount of available Potassium (vitamin K), which can cause either excessive bleeding or clotting, respectively.
Clotamin is the first multivitamin in the commercial market that is manufactured without vitamin K and with reduced amounts of A, D, and E, specifically to respond to the multivitamin needs of patients on Warfarin.
On August 1, 2011, Pharmagen Distribution acquired the rights to Clotamin through a purchase agreement with Global Nutritional Research, LLC (GNR), an entity controlled by Mr. Justin Barch, the brother of Mackie Barch, our President and one of our directors.
Clotamin is manufactured for us by a third party manufacturer. We do not have a written agreement with the manufacturer, but instead issue purchase orders when we need product and the manufacturer fills the order. During the years ended December 31, 2013 and 2012 we purchased approximately $0 and $188,000, respectively, of Clotamin from this manufacturer. Our Clotamin product inventory is housed at a third-party warehouse facility located in Maryland that is a logistics company and stores the packaged product for us and then ships to the purchaser when requested by us. When we receive orders for Clotamin, the warehouse facility we utilize ships the product directly to the customer.
During our fiscal years ended December 31, 2013 and 2012, revenues from sales of Clotamin represented approximately 13% and 5%, respectively, of our total revenue for those periods.
Competition
Sourcing and Distribution Services
We have a range of competitors including specialized subsidiaries of the traditional distributors and other independent specialty distributors. Most of this competition comes in the form of other independent distributors such as Novis, Atlantic, and Jace. These companies compete on the basis of the states in which they are licensed or certified to conduct business, their access to specialty products, their customer care and service, the product distribution agreements they have secured, and the cost of specialty products. There are many barriers to enter the independent specialist market, including obtaining federal and state licenses and various accreditations, establishing credibility with customers, building a network of manufacturers and vendors, having a high level of operational and logistic expertise, as well as the specialized information technology required. Many of our competitors are more established then we are and have greater financial resources than we do.
The primary sales process is outbound telemarketing, and is aimed at generating repeat business from customers while becoming their “go-to” resource for hard-to-find biopharmaceuticals. The sales model is based on low costs and high productivity and has successfully driven new account acquisition and repeat business. Since June 2011, Pharmagen Distribution has distributed products to a rapidly growing customer base of more than 150 unique customers.
Our sales representatives typically make an average of 100 calls per day to assess the needs of current and prospective customers. Each sales rep is accountable for building and maintaining individual relationships with customers. Product knowledge and high-touch customer service is required to gain customer trust and maintain customer satisfaction. Due to our systematic approach to order fulfillment, management estimates a 99% on-time delivery success rate.
Currently, Pharmagen Distribution is several steps removed from the manufacturers in the value chain, resulting in higher costs and the inability to carry certain products. To limit this effect, we have begun establishing direct sourcing relationships with manufacturers. These relationships will enable us to significantly reduce our sourcing costs and have access to a wider line of products. Further, we believe that developing direct sourcing will provide reduced sourcing costs and improved margins for our main product lines, and an increase in the size of the product portfolio. We may be able to direct source our products by partnering with specialty pharmacies and purchasing product directly from them. We believe that by adding specialty pharmacy capabilities to the business model, we will be in a superior cost position with stronger access to new product lines.
Clotamin
Since 2008, Clotamin has attracted retail customers through its website, www.clotamin.com, and is offered for sale in pharmacies nationwide. In terms of distribution, Clotamin is available from all the major regional wholesalers, including: Walgreens, Dik Drug Co., H.D. Smith, Miami-Luken, N.C. Mutual Wholesale Drug Co, Prescription Supply, Inc., Rochester Drug Cooperative, Smith Drug Company, Valley Wholesale Drug Company, and Value Drug Company. Pharmagen Distribution plans on leveraging its sales staff to grow the brand in hospitals and pharmacies.
While we are the only seller of Clotamin in the industry, there are other drug manufacturers and wholesalers with similar products (although to our knowledge, there is not another product specifically designed for people on blood thinners). Many of these competitors are more established then we are and have greater financial resources than we do.
Government Approvals and Regulations
Sourcing and Distribution Services
Pharmagen Distribution is currently licensed to distribute pharmaceuticals in 42 states. We currently do not have any federal licenses for our sourcing and distribution services, but at some point we may apply for a license from the Drug Enforcement Agency in order to source and distribute controlled substances.
Clotamin
FDA
Clotamin is an Over-the-Counter Dietary Supplement, and as a result the U.S. Food and Drug Administration (FDA) does not need to provide regulatory approval before it can be sold and marketed. Unlike drug products, there are no provisions in the law for the FDA to “approve” dietary supplements for safety or effectiveness before they reach the consumer. Once a dietary supplement is marketed, the FDA has to prove that the product is not safe in order to restrict its use or remove it from the market.
The FDA is also responsible for safety and labeling of dietary supplements. According to FDA guidelines, ingredients that were sold in the US prior to October 15, 1994 are not required to be reviewed for safety by the FDA before being marketed. All the ingredients in Clotamin were sold prior to this date, and therefore do not require FDA review.
According to FDA guidelines, any health claims or nutrient content claims for products require FDA approval. Structure-function claims do not require FDA approval, but must be accompanied by the following disclaimer on the label: “This statement has not been evaluated by the FDA. This product is not intended to diagnose, treat, cure or prevent disease.” All of the claims made for Clotamin are structure-function claims and therefore do not require FDA approval, and the Clotamin label has the appropriate disclaimer.
FTC
The Federal Trade Commission (FTC) requires Dietary Supplement claims of safety and efficacy to be supported by, “competent and reliable scientific evidence.” Clotamin does not make any safety or efficacy claims.
DEA
The Drug Enforcement Agency (DEA) regulates controlled substances. Currently we do not deal in drugs that are considered controlled substances, but we may at some in the future.
HHS
The United States Department of Health and Human Services (HHS) is the United States government’s principal agency for protecting the health of all Americans and provides essential human services, especially for those who are least able to help themselves. One of the purposes of HHS is to get involved in the pharmaceutical marketplace in the event of a drug shortage or to require drug stockpiling. If the HHS were to take this type of action with respect to products that we distribute, it could affect the market and negatively impact our business.
CMS
The Centers for Medicare and Medicaid Services (CMS) provide health coverage for qualified individuals through Medicare, Medicaid and the Children’s Health Insurance Program. As a result, CMS plays a role in companies getting reimbursed under the programs it monitors. For any interactions by us that deal with these programs we would likely have interactions with CMS. Currently, all drugs we sell are sold in cash transactions, but in the future we could deal with groups using insurance, at which time our ability to get reimbursed from such insurance carriers and/or Medicare, Medicaid, etc., could impact when and how much we get paid for the drugs.
Insurance
We have product liability insurance for all of our OTC and pharmaceutical products. Pharmagen Distribution, our wholly-owned subsidiary, currently maintains general liability insurance.
Intellectual Property
Our intellectual property portfolio is an important part of our business. We currently have one trademark, with two others pending. We use a combination of trademark, copyright, trade secret and other intellectual property laws, and confidentiality agreements to protect our intellectual property. Despite our precautions, it may be possible for third parties to obtain and use without consent intellectual property that we own. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our product and service offerings do not infringe the intellectual property rights of any third party, we cannot assure you that we will prevail in any intellectual property dispute. If we do not prevail in such disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of the applications determined to infringe the rights of others, and/or be forced to pay substantial royalties to a third party.
We have the following trademarks:
MARK
REG./APP. NO
REG./ APP. DATE
JURISDICTION
Clotamin
July 15, 2008
United States
Pharmagen
85/794,504 (pending)
December 4, 2012
United States
cGMP+
85/824,724 (pending)
January 17, 2013
United States
Research and Development
During the years ended December 31, 2013 and 2012, we did not spend any money on company-sponsored research and development activities.
Employees
We currently have two full-time employees, our officers Mackie Barch and Eric Clarke. Our wholly-owned subsidiaries, Pharmagen Distribution and Pharmagen Laboratories, currently have 10 and 12 employees, respectively.
ITEM 1A.
ITEM 1A. - RISK FACTORS.
As a smaller reporting company we are not required to provide a statement of risk factors. Nonetheless, we are voluntarily providing risk factors herein.
Any investment in our common stock involves a high degree of risk. You should consider carefully the following information, together with the other information contained in this annual report, before you decide to buy our common stock. If one or more of the following events actually occurs, our business will suffer, and as a result our financial condition or results of operations will be adversely affected. In this case, the market price, if any, of our common stock could decline, and you could lose all or part of your investment in our common stock.
We face risks in developing our products and services and eventually bringing them to market. We also face risks that we will lose some, or all, of our market share in existing businesses to competition, or we risk that our business model becomes obsolete. The following risks are material risks that we face. If any of these risks occur, our business, our ability to achieve revenues, our operating results and our financial condition could be seriously harmed.
Risk Factors Related to the Business of the Company
Regulation of our distribution business could impose increased costs or delay the introduction of new products, which could negatively affect our profit margins or prevent us from introducing new products and impact our business.
The healthcare industry is highly regulated. As a result, we and our suppliers and distributors are subject to various local, state and federal laws and regulations, which include the operating and security standards of the Drug Enforcement Administration (DEA), the Food and Drug Administration (FDA), various state boards of pharmacy, state health departments, the United States Department of Health and Human Services (HHS), Centers for Medicare & Medicaid Services (CMS), and other comparable agencies. The process and costs of maintaining compliance with such operating and security standards could impose increased costs, delay the introduction of new products and negatively impact our business. For example, there have been increasing efforts by various levels of government agencies, including state boards of pharmacy and comparable government agencies, to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated and/or mislabeled drugs into the pharmaceutical distribution system. Certain states have adopted or are considering laws and regulations that are intended to protect the integrity of the pharmaceutical distribution system, while other government agencies are currently evaluating their recommendations. In addition, the U.S. Food and Drug Administration Amendments Act of 2007, which went into effect on October 1, 2007, requires the FDA to establish standards and identify and validate effective technologies for the purpose of securing the pharmaceutical supply chain against counterfeit drugs. These standards may include any track-and-trace or authentication technologies, such as radio frequency identification devices and other similar technologies. These tracking laws and regulations could increase the overall regulatory burden and costs associated with our pharmaceutical distribution business, and would have a material adverse impact on our operating expenses and our results of operations.
Our commercial success relating to the sale of Clotamin will depend on our ability to develop and commercialize Clotamin, or any other products developed or acquired by us, without infringing the intellectual property rights of third parties.
Our commercial success will depend, in part, on not infringing the patents or proprietary rights of third parties. Third parties that believe we are infringing on their rights could bring actions against us claiming damages and seeking to enjoin clinical testing, distribution and marketing of the affected product or products. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If any of these actions are successful, we could be required, in addition to any potential liability for damages, to obtain a license to continue to distribute or market the affected product. Any such license may not be available on acceptable terms or at all. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of patent infringement claims, which would harm our business. We may enter into licensing agreements with third party intellectual property owners for use of their property in connection with our potential products in order to ensure that such third party’s rights are not infringed.
Although we are not aware that any of our intended potential products would materially infringe the rights of others, a claim of infringement may be asserted against us and any such assertion may result in costly litigation or may require us to obtain a license in order to distribute, use, or sell our products. Third parties may assert infringement claims against us in the future with respect to current or future products. Any such claims or litigation, with or without merit, could be costly and a diversion of management’s attention, which could have a material adverse effect on our business, operating results and financial condition. Adverse determinations in such claims or litigation could harm our business, operating results and financial condition.
If competitors develop and market products that offer advantages as compared to our product, our commercial opportunities will be limited.
Other companies may have products in development that will compete directly with Clotamin. If these competitors are able to develop products that are more effective, have fewer side effects, are less expensive or offer other advantages as compared to our product, our commercial opportunities will be limited. Furthermore, if our competitors commercialize competing products before we do, then our ability to penetrate the market and sell our products may be impaired. Our competitors also include fully integrated pharmaceutical companies and biotechnology companies, universities and public and private research institutions. Many of the organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, greater experience in drug development and in obtaining regulatory approvals, and greater manufacturing and marketing capabilities than we do.
We may engage in new partnerships and other strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.
From time to time we consider strategic transactions, such as out-licensing or in-licensing of compounds or technologies, acquisitions of companies and asset purchases. Additional potential transactions we may consider include a variety of different business arrangements, including strategic partnerships, joint ventures, spin-offs, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near- and long-term expenditures and may pose significant integration challenges, require additional expertise or disrupt our management or business, which could harm our operations and financial results.
As part of an effort to enter into significant transactions, we conduct business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in the transaction. Despite our efforts, we ultimately may be unsuccessful in ascertaining or evaluating all such risks, and as a result, might not realize the intended advantages of the transaction. If we fail to realize the expected benefits from any transaction we may consummate, whether as a result of unidentified risks, integration difficulties, regulatory setbacks or other events, our business, results of operations and financial condition could be adversely affected.
Collaborative relationships may lead to disputes and delays in drug development and commercialization.
We may in the future have conflicts with our prospective collaborators, such as conflicts concerning the interpretation of preclinical or clinical data, the achievement of milestones, or the ownership of intellectual property. If any conflicts arise with prospective collaborators, such collaborators may act in a manner that is adverse to our interests. Any such disagreement could result in one or more of the following, each of which could delay, or lead to termination of, development or commercialization of our partnered drug candidates, and in turn prevent us from generating revenues:
·
unwillingness on the part of a collaborator to pay us research funding, milestone payments or royalties that we believe are due to us under a collaboration;
·
uncertainty regarding ownership of intellectual property rights arising from our collaborative activities, which could prevent us from entering into additional collaborations;
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unwillingness on the part of a collaborator to keep us informed regarding the progress of its development and commercialization activities or to permit public disclosure of the results of those activities;
·
slowing or cessation of a collaborator’s development or commercialization efforts with respect to our drug candidates; or
·
litigation or arbitration.
Disruptions in our supply chain or among other companies providing services to us could adversely affect our ability to fill purchase orders, which would have a negative impact on our financial performance.
The failure of a single source in the supply chain would cause only minor delays in our ability to fill purchase orders. In the event of a supply gap, we would either procure product in the market, if available at a reasonable cost, or work with other sources to formulate the drug in question. Such fixes to the supply gap would cause delay of shipment and increase costs, both of which would have negative impact on our profitability and our results of operations.
Competition from horizontal and vertical markets involved in pharmaceutical distribution business may erode our profit.
Our distribution arm faces competition, both in price and service, from national, regional, and local full-line, short-line, and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution, and large payor organizations. In addition, competition exists from various other service providers and from pharmaceutical and other healthcare manufacturers (as well as other potential customers) which may from time to time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by us. Price, quality of service and in some cases, convenience to the customer, are generally the principal competitive elements in this segment.
We could suffer reputational and financial damage in the event of product recalls.
In recent years, the U.S. healthcare industry has changed significantly in an effort to reduce costs. These changes include increased use of managed care, cuts in Medicare and Medicaid reimbursement levels, consolidation of pharmaceutical and medical-surgical supply distributors, and the development of large, sophisticated purchasing groups. Some of these changes, such as adverse changes in government funding of healthcare services, legislation or regulations governing the delivery or pricing of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to reduce the amount of our products and services they purchase or the price they are willing to pay for our products and services. Changes in the healthcare industry’s or our pharmaceutical suppliers’ pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our revenues and net income. Healthcare and public policy trends indicate that the number of generic drugs will increase over the next few years as a result of the expiration of certain drug patents. While this is expected to be a positive development for us, changes in pricing of certain generic drugs could have a material adverse impact on our revenues and our results of operations.
We have a limited operating history and limited historical financial information upon which you may evaluate our performance.
You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of operations. We may not successfully address all of the risks and uncertainties or successfully implement our existing and new products and services. If we fail to do so, it could materially harm our business and impair the value of our common stock, resulting in a loss to shareholders. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate. Although we were incorporated in Nevada in 2009, the vast majority of the business that we conduct now was started or acquired in 2012. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, the inability to employ or retain talent, inadequate sales and marketing, and regulatory concerns. The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce, curtail, or discontinue operations. No assurance can be given that we can or will ever be successful in our operations and operate profitably.
Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our financial statements as of December 31, 2013 and 2012 have been prepared under the assumption that we will continue as a going concern for the next twelve months. Our independent registered public accounting firm has issued a report that included an explanatory paragraph referring to our need to obtain additional financing and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity financing or other capital, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We are continually evaluating opportunities to raise additional funds through public or private equity financings, as well as evaluating prospective business partners, and will continue to do so. However, if adequate funds are not available to us when we need it, and we are unable to enter into some form of strategic relationship that will give us access to additional cash resources, we will be required to even further curtail our operations which would, in turn, further raise substantial doubt about our ability to continue as a going concern.
If we are unable to meet our future capital needs, we may be required to reduce or curtail operations, or shut down completely.
To date we have relied on cash flow from operations and funding from a small group of investors to fund operations. We have limited cash liquidity and capital resources. Our cash on hand as of December 31, 2013 was approximately $225,000. For the year ended December 31, 2013, our total revenue was approximately $4,800,000 our operating loss was nearly $2,500,000, and our net loss was approximately $6,000,000.
Our future capital requirements will depend on many factors, including our ability to market our products successfully, cash flow from operations, locating and retaining talent, and competing market developments. Our business model requires that we spend money (primarily on advertising and marketing) in order to generate revenue. Based on our current financial situation we may have difficulty continuing our operations at their current level, or at all, if we do not raise additional financing in the near future. Additionally, we would like to continue to acquire assets and operating businesses, which will likely require additional cash. Although we currently have no specific plans or arrangements for acquisitions or financing, we intend to raise funds through private placements, public offerings or other financings. Any equity financings would result in dilution to our then-existing stockholders. Sources of debt financing may result in higher interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we may be required to reduce, curtail, or discontinue operations. There is no assurance that our existing cash flow will be adequate to satisfy our existing operating expenses and capital requirements.
If we are unable to attract and retain key personnel, we may not be able to compete effectively in our market.
Our success will depend, in part, on our ability to attract and retain key management, including primarily Mackie Barch, but also our sales and marketing personnel. We attempt to enhance our management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas. Our inability to retain employees and attract and retain sufficient additional employees, and sale and marketing resources, could have a material adverse effect on our business, financial condition, results of operations and cash flows. The loss of key personnel could limit our ability to develop and market our products.
We hold a limited amount of insurance coverage, and if we were found liable for an uninsured claim, or claim in excess of our insurance limits, we may be forced to expend significant capital to resolve the uninsured claim.
We contract for a limited amount of general liability insurance to cover potential risks and liabilities. If we decide to obtain additional insurance coverage in the future, it is possible that: (1) we may not be able to get enough insurance to meet our needs; (2) we may have to pay very high premiums for the additional coverage; (3) we may not be able to acquire any insurance for certain types of business risk; or (4) we may have gaps in coverage for certain risks. This could leave us exposed to potential uninsured claims for which we could have to expend significant amounts of capital resources. Consequently, if we were found liable for a significant uninsured claim in the future, we may be forced to expend a significant amount of our operating capital to resolve the uninsured claim.
We may suffer losses from product liability claims.
We may be susceptible to product liability lawsuits from events arising out of the use of Clotamin or the distribution of any other product or products. If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product. If we are unable to protect against potential product liability claims, we may be unable to market Clotamin. A successful product liability claim brought against us may cause us to incur substantial liabilities and, as a result, our business may fail.
Because our officers and directors control a large percentage of our common stock, they have the ability to influence matters affecting our shareholders.
Mackie Barch, one of our officers and directors, beneficially controls nearly 40% of our outstanding voting securities through Old Line Partners, LLC, (after giving effect to the conversion of our Class B Preferred Stock and assuming a March 11, 2014, conversion date). As a result, he has the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because he controls such shares, investors may find it difficult to replace our directors and management if they disagree with the way our business is being operated. Because the influence by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock. See “Principal Shareholders.”
We may not be able to effectively manage our growth and operations, which could materially and adversely affect our business.
We have, and may in the future, experience rapid growth and development in a relatively short period of time. The management of this growth will require, among other things, continued development of our financial and management controls and management information systems, stringent control of costs, increased marketing activities, the ability to attract and retain qualified management personnel and the training of new personnel. We intend to utilize outsourced resources, and hire additional personnel, in order to manage our expected growth and expansion. Failure to successfully manage our possible growth and development could have a material adverse effect on our business and the value of our common stock.
Our industry is characterized by rapid growth and consolidation that may cause us to lose key relationships and intensify competition.
The pharmaceutical industry in general, and the specialty pharmaceutical industry in particular, are constantly undergoing rapid growth and substantial change. This includes new and frequently changing regulations. This has resulted in increasing consolidation and formation of strategic relationships. For example, we recently acquired a lab business. A cancellation of our relationship with other labs or lab groups that we form a relationship with in the future may have a negative impact on the company because it could limit our exposure or the number of vendors or customers with which we come into contact. We make no assurance that any relationship we have established will continue.
Acquisitions or other consolidating transactions that don’t involve us could nevertheless harm us in a number of ways, including:
•
we could lose strategic relationships if our strategic partners are acquired by or enter into relationships with a competitor (which could cause us to lose access to distribution, content, technology and other resources);
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the relationship between us and the strategic partner may deteriorate and cause an adverse effect on our business;
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we could lose customers if competitors or users of competing technologies consolidate with our current or potential customers; and
•
our current competitors could become stronger, or new competitors could form, from consolidations.
Any of these events could put us at a competitive disadvantage, which could cause us to lose customers, revenue and market share. Consolidation could also force us to expend greater resources to meet new or additional competitive threats, which could also harm our operating results.
We may be unable to adequately protect our proprietary rights.
Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology, including both internally developed technology and technology licensed from third parties. To the extent we are able to do so, in order to protect our proprietary rights, we will rely on a combination of trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:
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our applications for trademarks and copyrights relating to our business may not be granted and, if granted, may be challenged or invalidated;
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issued trademarks and registered copyrights may not provide us with any competitive advantages;
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our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
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our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or
•
another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products.
We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.
We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
Risks Related To Our Common Stock
Our common stock is listed for quotation on the Over the Counter Bulletin Board and the OTCQB Tier of the marketplace maintained by OTC Markets Group, Inc., which may make it more difficult for investors to resell their shares due to suitability requirements.
Our common stock is currently quoted on the Over the Counter Bulletin Board and the OTCQB tier of the marketplace maintained by OTC Markets Group, Inc. Broker-dealers often decline to trade in over the counter stocks given the market for such securities are often limited, the stocks are more volatile, and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.
We are not eligible with the Depository Trust Company to have our common stock traded electronically, which could negatively affect the trading volume in our stock and make it more difficult for investors to resell their shares.
We do not currently have eligibility for our common stock to be electronically transferred between brokerage accounts. While our shares can still trade manually, clearance for such transactions could take days, which, based on the realities of the marketplace as it exists today, means that manual trades are not a realistic option for companies relying on broker dealers for stock transactions. If our stock remains non-DTC-eligible, trading volume in our shares may remain very low and prices for our shares may be adversely affected. There are no assurances that our shares will ever become DTC-eligible or, if they do, how long it will take.
If we are unable to pay the costs associated with being a public, reporting company, we may not be able to continue trading on the OTCQB and/or we may be forced to discontinue operations.
We expect to have significant costs associated with being a public, reporting company, which may raise substantial doubt about our ability to continue trading on the Over the Counter Bulletin Board and/or continue as a going concern. These costs include compliance with the Sarbanes-Oxley Act of 2002, which will be difficult given the limited size of our management, and we will have to rely on outside consultants. Accounting controls, in particular, are difficult and can be expensive to comply with.
Our ability to continue trading on the OTCQB and/or continue as a going concern will depend on positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing. If we are unable to achieve the necessary product sales or raise or obtain needed funding to cover the costs of operating as a public, reporting company, our common stock may be deleted from the OTCQB and/or we may be forced to discontinue operations.
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any dividends in the foreseeable future. We do not plan on making any cash distributions in the manner of a dividend or otherwise. Our Board of Directors presently intends to follow a policy of retaining earnings, if any.
We have the right to issue additional common stock and preferred stock without consent of stockholders. This would have the effect of diluting investors’ ownership and could decrease the value of their investment.
We have additional authorized, but unissued shares of our common stock that may be issued by us for any purpose without the consent or vote of our stockholders and doing so would dilute stockholders’ percentage ownership of our company.
In addition, our certificate of incorporation authorizes the issuance of shares of preferred stock, the rights, preferences, designations and limitations of which may be set by the Board of Directors. Our certificate of incorporation has authorized the issuance of up to 50,000,000 shares of preferred stock in the discretion of our Board. The shares of authorized but undesignated preferred stock may be issued upon filing of an amended certificate of incorporation and the payment of required fees; no further stockholder action is required. If issued, the rights, preferences, designations and limitations of such preferred stock would be set by our Board and could operate to the disadvantage of the outstanding common stock. Such terms could include, among others, preferences as to dividends and distributions on liquidation.
Our Majority Shareholder is permitted to sell some of its stock, which may have a negative effect on our stock price and ability to raise additional capital, and may make it difficult for investors to sell their stock at any price.
Mackie Barch, our Chief Executive Officer, through Old Line Partners, LLC, has dispositive power over 211 million shares of our common stock (after giving effect to the conversion of our Class B Preferred Stock and assuming a March 11, 2014, conversion date). They may be able to sell up to a combined 1% of our outstanding stock (currently approximately 4.9 million shares) every 90 days in the open market pursuant to Rule 144, which may have a negative effect on our stock price and may prevent us from obtaining additional capital. In addition, if either of them is selling their stock into the open market, it may make it difficult or impossible for investors to sell their stock at any price.
Our common stock is governed under The Securities Enforcement and Penny Stock Reform Act of 1990.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on NASDAQ and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
The forward looking statements contained in this annual report may prove incorrect.
This annual report contains certain forward-looking statements, including among others: (i) anticipated trends in our financial condition and results of operations; (ii) our business strategy for expanding distribution; and (iii) our ability to distinguish ourselves from our current and future competitors. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the pharmaceutical industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this annual report will, in fact, transpire.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this annual report, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation, and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. These statements are only predictions and involve known and unknown risks and uncertainties, including the risks outlined under “Risk Factors” and elsewhere in this annual report.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We are not under any duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results, unless required by law.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS.
This Item is not applicable to us as we are not an accelerated filer, a large accelerated filer, or a well-seasoned issuer; however, we are voluntarily disclosing that all written comments from the Commission staff regarding our periodic or current reports under the Securities Exchange Act of 1934 received within the last 180 days before the end of our last fiscal year have been resolved.
ITEM 2
ITEM 2 - PROPERTIES.
Our executive offices are currently located at 9337 Fraser Ave, Silver Spring, MD 20910. We currently share office space with our wholly-owned subsidiary, Pharmagen Distribution, pursuant to a one year lease that ends on March 31, 2014 at a rate of $1,883 per month. This lease was renewed on March 11, 2014, for an additional six month period at a rate of $1,939 per month. The office space is approximately 2,000 square feet of industrial/office space. The space is utilized for general office purposes and it is our belief that the space we currently occupy is adequate for our immediate needs. Additional space may be required as we expand our operations. We do not foresee any significant difficulties in obtaining any required additional space. We currently do not own any real property.
Our sales offices are currently located at 2413 Linden Lane, Silver Spring, MD 20910. We lease approximately 1,500 square feet pursuant to a lease that expires on March 31, 2014 at a rate of $1,878 per month. This lease was renewed on February 9, 2014, for an additional six month period at a rate of $1,931 per month.
Pharmagen Laboratories leases approximately 3,700 square feet of office/warehouse space at 30 Buxton Farms Road, Stamford, CT 06905, pursuant to a lease that expires on March 24, 2017, at a rate ranging from $7,213 to $7,980 per month.
Our Clotamin product inventory is housed at a third-party warehouse facility located in Maryland that is a logistics company and stores the packaged product for us and then ships to the purchaser when requested by us.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS.
On May 13, 2013, George Sharp, a private citizen, filed a civil lawsuit against the publishers of penny stock newsletters, as well as the companies they promote. The case is titled, George Sharp v. Xumanni, et al., Case Number 37-2013-00048310, and is pending in the Superior Court of California, County of Los Angeles, Central Division. In addition to us, the complaint names the following entities as defendants: Degroupa Tenner Morales Media Corporation, Centro Azteca S.A., Victory Mark Corporation, Ltd., Xumanni, Harbor Island Development Corporation, Red Giant Entertainment, Inc., VuMee, Inc., Pub Crawl Holdings, Inc., PacWest Equities, Inc., Amwest Imaging, Inc., Goff Corporation, Swingplane Ventures, Inc., World Moto, Inc., and Taglikeme Corporation. The complaint alleges that the defendants disseminated spam emails in order to artificially create a marketplace for the stocks of companies at artificially high prices in violation of California’s Restrictions on Unsolicited Commercial E-Mail Advisers. Under the California Business and Professions Code, the violations alleged in the complaint could expose the defendants to damages of up to $1,000 for each spam email sent to each recipient. Mr. Sharp alleges that he received at least 1,204 emails from the defendants. We have filed a motion to quash the summons and compliant.
On June 13, 2013, American Express Bank (“American Express”) filed a civil lawsuit in the Supreme Court of the State of New York, County of Westchester, against Robert Giuliano and Bryce RX Laboratories, Inc., for damages in the amount of $136,065. The complaint alleges that the defendants breached a credit agreement with American Express. Mr. Giuliano impleaded, in a third-party action, both us and Pharmagen Laboratories, Inc., f/k/a Bryce RX Laboratories, Inc. In the third-party action, Mr. Giuliano asserts various claims, including breach of contract, unjust enrichment and conversion, and seeks to recover damages of $2,112,000, indemnification of the claims by American Express Bank, and attorneys’ fees. We have filed a motion to dismiss the lawsuit because the dispute must be decided in arbitration. Our motion to dismiss is currently pending.
On August 14, 2013, we filed a lawsuit in the Circuit Court of the 17th Judicial Circuit of Florida in Broward County against TCA Global Credit Master Fund, L.P. (“TCA”) alleging breach of contract, breach of the implied duty of good faith and fair dealing, declaratory judgment, and conversion. In 2012, we entered into a loan agreement with TCA in order to obtain funds to grow and sustain our business. TCA loaned us $2.05 million under the loan agreement. The complaint alleges that TCA violated the agreement by denying funds to us and falsely alleging, including without having initiated any legal proceeding, that we have defaulted on our loan obligations. Our complaint seeks to recover damages based on TCA’s breach of contract and conduct and asks the court to declare that we have not defaulted on our loan obligations because TCA consented to our conduct and TCA waived its rights.
On March 14, 2014, we entered into a Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA pursuant to which we agreed to pay Two Million Four Hundred Thirty Three Thousand One Hundred Eighty Two and 68/100 Dollars ($2,433,182.68) pursuant to one of two alternative payment schedules as set forth in the Settlement Agreement. Under payment Schedule 1, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, $1,700,000 on September 30, 2014, and approximately $23,975 on each of twelve (12) consecutive months beginning on October 31, 2014. In the alternative, under payment Schedule 2, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, and approximately $675,675 on each of September 30, 2014, December 31, 2014, and March 31, 2015. The election between payment Schedule 1 and Schedule 2 will be made by us on or before September 30, 2014. In addition, TCA will return to us for cancellation all of the approximately 17,291,205 shares of our common stock previously issued to it.
ITEM 4
ITEM 4 - MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock trades on the OTCQB tier of the marketplace maintained by OTC Markets, Inc. (the “OTCQB”) under the symbol “PHRX.” Our stock began trading on the Over the Counter Bulletin Board (“OTCBB”) on October 25, 2011, and has been traded on the OTCQB since October 1, 2013. Our common stock only trades on a limited or sporadic basis and should not be deemed to constitute an established public trading market. There is no assurance that there will be liquidity in the common stock.
The following table sets forth the high and low transaction price for each quarter within the fiscal years ended December 31, 2013 and 2012, as provided by OTC Markets Group, Inc., and the Nasdaq Stock Markets, Inc. The information reflects prices between dealers, and does not include retail markup, markdown, or commission, and may not represent actual transactions.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to a few exceptions which we do not meet. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith.
Holders
As of March 11, 2014, there were 498,575,954 shares of our common stock issued and outstanding and held by 155 holders of record and over 34,000 beneficial owners.
Dividend Policy
We have not paid any dividends on our common stock and do not expect to do so in the foreseeable future. We intend to apply our earnings, if any, in expanding our operations and related activities. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, our financial condition and other factors deemed relevant by the Board of Directors.
Securities Authorized for Issuance under Equity Compensation Plans
On June 18, 2012, our Board of Directors approved the Sunpeaks Ventures, Inc. 2012 Omnibus Stock Grant and Option Plan and set aside 40,000,000 shares of our common stock for issuance thereunder. Pursuant to the plan, officers, directors, key employees and certain consultants may be granted stock options (including incentive stock options and non-qualified stock options), restricted stock awards, unrestricted stock awards, or performance stock awards. As of December 31, 2013, we have not made any awards under the Plan.
As of December 31, 2013, we had the following options outstanding:
(1)
As consideration under a Consulting Agreement entered into with Bagel Boy Equity Group, II, LLC (“Bagel Boy”), we issued Bagel Boy a warrant to acquire up to three percent (3%) of our issued and outstanding shares of common stock, calculated at the time of exercise, at an exercise price of $0.0065 per share. The warrant vests in two equal parts, one-half immediately and one-half upon completion of the acquisition of two (2) Acquisition Targets, as defined in the Consulting Agreement. The warrant may be exercised at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to the vesting set forth above and a 9.9% ownership limitations set forth therein. For purposes of illustration only, we have assumed that the entire warrant was exercised as of March 11, 2014.
Recent Sales of Unregistered Securities
The following sales of equity securities by the Company occurred during the three month period ended December 31, 2013:
On December 12 and 13, 2013, we entered into a Securities Purchase Agreement with two investors for the sale of one hundred twenty five thousand (125,000) shares of our newly created Series C Convertible Preferred Stock at $1.00 per share, for total consideration of $125,000. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the shareholder was accredited, familiar with our operations, and there was no solicitation in connection with the issuance. Our Board of Directors approved an offering of up to five hundred thousand (500,000) shares of Series C Convertible Preferred Stock at $1.00 per share.
The shares of Series C Convertible Preferred Stock have one (1) vote per share, are redeemable by us on ten (10) trading days advance notice at two hundred percent (200%) of the purchase price, and are convertible into common stock on either a fixed percentage basis or a variable conversion basis.
On a fixed conversion basis, the holders of the Series C Convertible Preferred Stock can acquire upon conversion, in the aggregate, fifteen percent (15%) of the then-outstanding shares of common stock of the Company. On a variable conversion basis, the shares are convertible at 33.33% of the lowest five (5) closing bid prices of our common stock during the ten (10) trading days prior to conversion. In no event can any single shareholder convert the Series C Convertible Preferred Stock if it will result in their ownership exceeding 9.99% of our then issued and outstanding shares.
On December 20, 2013, we received a signed version of a Securities Exchange Agreement from Old Line Partners, LLC, a Nevada limited liability company, whose manager is Mackie Barch, one of our officers and directors. Pursuant to the terms of the Exchange Agreement, Old Line exchanged all three million (3,000,000) shares of our Class A Preferred Stock that are currently issued and outstanding for five million one hundred thousand (5,100,000) shares of our newly created Series B Convertible Preferred Stock. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the shareholder was accredited, familiar with our operations, and there was no solicitation in connection with the issuance.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA.
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 7
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
Introduction
Our wholly-owned subsidiary, Pharmagen Distribution LLC (“PDS”), was formed in the State of Delaware on September 24, 2008, as Healthcare Distribution Specialists, LLC. As a result of a Share Exchange Agreement between us and PDS on February 13, 2012, PDS became our wholly-owned subsidiary, but the transaction was accounted for as a reverse merger with PDS being the accounting acquirer. In connection with this transaction we appointed new management and directors, and changed our business focus to that of PDS, which is a value-added distributor of hard-to-find and specialty drugs to the healthcare provider market, while functioning as an aggregator of real-time market demand for these products. In addition to our distribution business, we also own and sell a specialized over-the-counter multivitamin product called Clotamin.
On December 13, 2012, we acquired Bryce Laboratories, Inc., and subsequently changed its name to Pharmagen Laboratories, Inc. Pharmagen Laboratories specializes in the formulation of drugs that are not otherwise commercially available, require specialized delivery systems, or require dosing changes. Through Pharmagen Laboratories, we can fill some of our existing customer orders in-house as well as orders from third parties.
Going Concern
As a result of our financial condition, our auditors have indicated in a footnote to our financial statements as of December 31, 2013 their uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and begin to generate sufficient revenue to fund our operations. If we are not able to do this we may not be able to continue as an operating company. At our current revenue and burn rate, our cash on hand will not cover our operating expenses for even the next sixty days. There is no assurance that our existing cash flow will ever be adequate to satisfy our existing operating expenses and capital requirements.
Results of Operations for the Year Ended December 31, 2013 compared to Year Ended December 31, 2012
Introduction
Our revenues, including related party revenues, for the year ended December 31, 2013 were $4,813,048, compared to $4,260,610 for the year ended December 31, 2012. Our revenues are generated from the wholesale distribution of hard-to-find drugs, and sales from our pharmaceutical product Clotamin.
Revenues and Net Operating (Income) Loss
Our revenues (including revenues from related party), cost of sales, gross profit, operating expenses, operating loss, other expenses, and net loss for the year ended December 31, 2013, as compared to the year ended December 31, 2012, are as follows:
Revenue
Our revenue for the year ended December 31, 2013 increased by $875,814 as compared to the year ended December 31, 2012. This increase is a result of an increase in our sales of hard-to-find drugs and an approximately $400,000 increase in sales of our Clotamin product, which increased because our marketing efforts and the increased number of states in which we hold licenses. On January 1, 2011, we had licenses to sell drugs in 10 states. Currently, we are licensed to sell drugs is 42 states. The more states we can sell into the greater number of purchasers, such as clinics, hospitals, etc. that we can access.
In 2011, we did not recognize a portion of our gross sales because we received it from Healthrite Pharmaceuticals and Healthrite was owned and controlled by Mackie Barch, one of our officers and directors, and Healthrite bore most of the risk for the purchasing and selling of the drugs, with us acting more as a sales agent for Healthrite due to licensing restrictions. In early 2012, Healthrite notified us that due to the cost and effort to maintain a pharmaceutical license it has surrendered its pharmaceutical license and will no longer be selling pharmaceuticals, effective April 10, 2012. We do not expect this action to have a material impact on our business since we now have our own direct relationship with suppliers and resellers of hard-to-find drugs, but it will allow us to recognize all the revenue from our product sales rather than having a disparity between our gross sales and the net revenue we recognize since we will no longer be sourcing the drugs from a related party.
We report revenues from sales of our hard-to-find drugs and Clotamin in one business segment. Related party revenues are sales to Healthrite Pharmaceuticals, a company wholly-owned and controlled by Mackie Barch, one of our officers and directors.
Of our total revenues of $4,260,610 for the year ended December 31, 2012, $323,376, or 7.6% of it, was revenue generated from the markup of the drugs we purchased from Healthrite. There were no related party revenues for the year ended December 31, 2013.
We purchase our hard-to-find drugs from a wide variety of small vendors depending on the particular hard-to-find drug that is being sought. Our current vendors are small, regional pharmaceutical wholesalers. No one vendor or hard-to-find drug represents a material amount of our revenue or business. Approximately 70% of our purchase orders are for under $1,000 each, so our business is a volume business and not reliant on one or even a few vendors or drugs.
Cost of Sales
Our cost of sales represents the direct costs attributable to the production of the operations that produce our revenues. For the year ended December 31, 2013, our cost of sales was $1,767,836, or 37% of our non-related party revenue, as compared to $2,996,106, or 76% of non-related party revenue for the year ended December 31, 2012. During 2012, sales primarily consisted of our distribution revenue, which was for hard to find drugs sourced from third party labs and for which margins were much lower; approximately 25%. Upon acquisition of Pharmagen Laboratories, Inc., many of these drugs were able to be sourced directly from our lab. Anything sourced from our lab has an approximately 80% margin, resulting in the blended margin of approximately 65% for 2013.
General and Administrative Expenses
General and administrative expenses increased by $433,783, or 26% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Because our general and administrative expenses consist primarily of shipping costs, costs for human resources, depreciation expense, costs of business licenses and permits, merchant services and bank fees, rent expense, and other general expenses, we expect them to increase as our operations and revenues increase.
Salaries and Commissions
Our salaries and commissions increased by $921,943, or 102% for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase primarily related to salaries of Pharmagen Laboratories, Inc., which was acquired on December 12, 2012. Salaries for Pharmagen Laboratories, Inc., totaled $711,863 for the year ended December 31, 2013.
Professional Fees
Our professional fees increased by $487,755, or 62%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. This was a result of increased costs for legal, accounting, and consulting services related to being a fully-reporting public company and the overall increase in business operations.
Interest Expense
Our interest expense increased by $2,242,683, or 293%, for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The majority of the increase for 2013 related to amortization of discounts on convertible debt, which totaled $2,217,637 for the year ended December 31, 2013, as compared to $533,916 for the year ended December 31, 2012. The remainder of the increase was attributable to the acquisition of additional debt to fund acquisitions and continuing operations.
Operating Loss; Net Loss
Our operating loss increased by $1,515,415, or 72% for the year ended December 31, 2013, as compared to the year ended December 31, 2012. Our net loss increased by $3,229,346 or 117%, from ($2,771,268) to ($6,000,614), for the year ended December 31, 2013 as compared to the year ended December 31, 2012. Our losses increased even though our revenues increased by $875,814, or 22%, during the same periods. The increase in operating loss is a result of our increase in expenses, as our general and administrative expenses increased by $505,902, or 30%, our salaries and commissions increased by $921,943, or 102%, and our professional fees increased by $487,755, or 62%, as well as a loss resulting from an impairment of goodwill totaling $1,195,881. The increase in net loss resulted from the changes in operating expenses and the increase in interest expense, partially offset by the increase in the gain on derivatives of $543,017.
Liquidity and Capital Resources
Introduction
Our principal needs for liquidity have been to fund operating losses, working capital requirements, and debt service. Our principal source of liquidity as of December 31, 2013 consisted of cash of $225,983, and available credit on our revolving credit facility. We expect that working capital requirements and debt service will continue to be our principal needs for liquidity over the near term. Working capital requirements are expected to increase as a result of our anticipated growth.
We have not yet established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we could be forced to cease operations. Management’s plan to meet our operating expenses in the short term is through equity and/or debt financing, and we anticipate that our revenues will be sufficient to meet our operating expenses by December 31, 2014. However, management cannot provide any assurances that we will be successful in accomplishing any of our plans.
Our cash, current assets, total assets, current liabilities, and total liabilities as of December 31, 2013 and December 31, 2012, respectively, are as follows:
Our cash decreased by $96,573 as of December 31, 2013 compared to December 31, 2012 as a result of decreased borrowing on our revolving credit facility. Total current assets decreased by $706,502 for those same periods as a result of a decrease in accounts receivable of $267,751, inventory of $10,404, prepaid expenses and other current assets of $224,211, and deferred financing costs of $107,563. Prepaid expenses are primarily advertising contracts to promote our Clotamin product.
In addition to the decrease in our current assets, our total assets decreased by $1,615,197 as a result of the above mentioned changes as well as a loss resulting from impairment of goodwill totaling $1,195,881.
Cash Requirements
We had cash available as of December 31, 2013 of $225,983. Based on our current revenues, cash on hand, and our current net monthly burn rate of approximately $150,000, we will need to continue to raise money from the issuance of equity and/or from our revolving credit facility to fund short term operations.
Sources and Uses of Cash
Operations
Our net cash used in operating activities was $692,071 for the year ended December 31, 2013, compared to net cash used in operating activities of $2,181,638 for the year ended December 31, 2012. For 2013, our net cash used in operating activities consisted of our net loss of $6,000,614, increased primarily by a change in fair value of derivative liability of $633,022, offset primarily by amortization of debt discount of $2,217,636, accounts payable and accrued liabilities of $945,061, and impairment of goodwill of $1,195,881.
Investments
Our net cash used in investing activities was $56,701 for the year ended December 31, 2013, compared to $173,995 for the year ended December 31, 2012. For 2013, our net cash used in investing activities consisted of purchase of property and equipment of $56,701.
Financing
Our net cash provided by financing activities was $652,199 for the year ended December 31, 2013, compared to $2,639,531 for the year ended December 31, 2012. For 2013, our net cash provided by financing activities consisted primarily of net proceeds from convertible debt of $755,500 and net proceeds from preferred stock of $125,000, offset in part by net proceeds from convertible line of credit of $125,174.
Off-balance sheet arrangements
As of December 31, 2013, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources that are material to investors.
Critical accounting policies and estimates
Our critical accounting policies are set forth in Note 3 - Summary of Significant Accounting Policies, to our financial statement footnotes.
Recent accounting pronouncements
We have evaluated recent pronouncements and do not expect their adoption to have a material impact on our financial position or statements.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company we are not required to provide the information required by this Item.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Pharmagen, Inc. (formerly Sunpeaks Ventures, Inc.)
We have audited the accompanying balance sheets of Pharmagen, Inc. (formerly Sunpeaks Ventures, Inc.) as of December 31, 2013 and 2012, and the related statements of operations, changes in shareholders' equity (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 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 audit 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 Pharmagen, Inc. as of December 31, 2013 and 2012, and the results of its operations and cash flows for the periods described above 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 2 to the financial statement, the Company has a history of incurring net losses and has an accumulated net loss, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
March 31, 2014
PHARMAGEN, INC.
(Formerly SUNPEAKS VENTURES, INC.)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
PHARMAGEN, INC.
(Formerly SUNPEAKS VENTURES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
PHARMAGEN, INC.
(Formerly SUNPEAKS VENTURES, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
The accompanying notes are an integral part of these consolidated financial statements.
PHARMAGEN, INC.
(Formerly SUNPEAKS VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
PHARMAGEN, INC.
(Formerly SUNPEAKS VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Organization and Description of Business
Sunpeaks Ventures, Inc. (“Sunpeaks” or the “Company”) was incorporated in the State of Nevada on June 25, 2009. On February 13, 2012, pursuant to a Share Exchange Agreement (“Exchange Agreement”), the Company acquired 100% ownership interest in Healthcare Distribution Specialists LLC (“HDS”), a Delaware limited liability company, in exchange for the issuance of 200,000,000 newly-issued restricted shares of the Companies’ common stock and 3,000,000 newly-issued restricted shares of the Companies’ Class A Preferred Stock (the “Exchange Shares”), to the former owner of HDS, resulting in HDS becoming a wholly-owned subsidiary of the Company. Additionally, pursuant to the Exchange Agreement, 200,000,000 shares of the Companies’ common stock held by the Companies’ former controlling owner were cancelled. As a result of the acquisition, the former owners of HDS hold majority ownership of the Company.
For financial accounting purposes, the acquisition of HDS by the Company (referred to as the “Merger”) was a reverse acquisition of the Company by HDS and was treated as a recapitalization. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on February 13, 2012, and represent the operations of HDS prior to the Merger.
HDS changed its name to Pharmagen Distribution, LLC effective January 23, 2013.
As of the time of the Merger, the Company held minimal assets and was considered a non-operating public shell in the development stage. Following the Merger, the Company is no longer considered development stage and operates through one operating segment which distributes hard-to-find and specialty drugs to the healthcare provider market throughout the United States, while functioning as an aggregator of real-time market demand for these products. The Company also owns and sells a specialized over-the-counter multivitamin product called Clotamin. Clotamin is specifically designed for use by patients on Warfarin, a blood thinner that has a known interaction with the vitamin K present in standard over-the-counter multivitamins.
Prior to the Merger, on August 1, 2011, pursuant to an Amended and Restated Asset Acquisition Agreement (the “Agreement”) between HDS and Global Nutritional Research, LLC (“GNR”), HDS acquired certain assets of GNR in exchange for assumption of debt and financial obligations of GNR. Prior to the acquisition, HDS and GNR were considered entities under common control and common ownership, as control and ownership of each entity resided with HDS’s President and an immediate family member. As entities under common control, in accordance with accounting principles generally accepted in the United States (“GAAP”), the acquired assets and liabilities of GNR were recognized in the accompanying financial statements at their carrying amounts.
The Company changed its name from Sunpeaks Ventures, Inc. to Pharmagen, Inc. (trading symbol PHRX) effective January 15, 2013.
On December 13, 2012, the Company acquired Bryce Rx Laboratories (“Bryce”) through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce. Bryce specializes in the formulation of drugs that are not commercially available, require alternate delivery systems, and or dosing changes. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000), payable (i) One Hundred Thousand Dollars ($100,000) at Closing, and (b) Two Hundred Fifty Thousand Dollars ($250,000) on December 31 of each of the four (4) years beginning in 2013 (See Note 5).
Bryce changed its name to Pharmagen Laboratories, Inc. effective on March 4, 2013.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern. The Company has a history of incurring net losses and at December 31, 2013 has an accumulated net loss totaling $9,148,497 At December 31, 2013, the Company held cash of $225,983. These conditions give rise to substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance its operations primarily through its existing cash and future financings. However, there exists substantial doubt about the Company’s ability to continue as a going concern because it will be required to obtain additional capital in the future to continue its operations and there is no assurance that the Company will be able to obtain such capital, through equity or debt financings, or any combination thereof, whether on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support its growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations would be materially negatively impacted. The Company’s ability to complete additional offerings is dependent on the state of the debt and equity markets at the time of any proposed offering, and such market’s reception of the Company and the offering terms. In addition, the Company’s ability to complete an offering may be dependent on the status of the Company’s business activities, which cannot be predicted.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Pharmagen Distribution, LLC and Pharmagen Laboratories, Inc. As discussed above, for accounting purposes the acquisition of HDS by the Company was considered a reverse acquisition of the Company by HDS and was treated as a recapitalization. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on February 13, 2012, and represent the operations of HDS prior to the Merger. All material intercompany accounts and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Revenue Recognition
The Company’s revenue consists of revenue from sales of pharmaceutical products. Revenue is recognized at the time when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service has been provided, and collectability is assured.
Sales of Product: The Company earns product revenue from selling pharmaceutical products at the time of delivery, which is the time at which title to the product is transferred.
Sourcing and Distribution of Products, as an agent: In accordance with ASC Section 605-45-45, revenue is recognized from agent distribution sales for the net amount retained when all criteria for revenue recognition have been met. Determining whether an entity functions as an agent or a principal is a matter of judgment. The Company considers multiple indicators in the determination of whether it acts as an agent in sales transactions.
The Company acts as an agent for sales of products on behalf of HealthRite Pharmaceuticals (“HealthRite”), a company wholly owned and controlled by the President and a Director of the Company. HealthRite is a pharmacy and is therefore prohibited from distributing pharmaceuticals across state lines. During April 2012, HealthRite notified us that due to the cost and effort to maintain a pharmaceutical license it has surrendered its pharmaceutical license and would no longer be selling pharmaceuticals, therefore the relationship ceased effective April 10, 2012. During the years ended December 31, 2013 and 2012, the Company recognized net revenue from sales to HealthRite of $0 and $80,758 based on gross sales of $0 and $188,710, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less at the time of issuance to be cash equivalents. These investments are carried at cost which approximates fair value. At December 31, 2013 and December 31, 2012, there were no cash equivalents.
The Company had cash of $225,983 and $322,556 at December 31, 2013 and December 31, 2012, respectively.
Accounts Receivable
The Company’s accounts receivable are composed of trade receivables from customers for sales of products. Trade receivables include accounts receivable for sales of product and sourcing and distribution of product for which the Company acts as an agent, which are based on gross sales to customers.
Accounts receivable are stated at their principal balances and are non-interest bearing and unsecured. The Company maintains an allowance for doubtful accounts for the estimated probable losses on uncollectible accounts receivable.
Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding historical balance or when we determine that it is highly unlikely the balance will be collected. At December 31, 2013 and 2012, the Company’s allowance for doubtful accounts was $319,085 and $0, respectively.
Inventory
Inventory is comprised of Clotamin and non-Clotamin and is recorded at lower of cost or market on a first-in, first-out (“FIFO”) method. The non-Clotamin is a collection of several raw materials that are used in combinations to make pharmaceutical drugs, some of which is stored in a warehouse and handled by a third party. The Company establishes inventory reserves for estimated obsolete or unmarketable inventory equal to the differences between the cost of inventory and the estimated realizable value based upon assumptions about future and market conditions. If obsolete or unmarketable inventory are identified and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value in the period that the impairment is first recognized. At December 31, 2013 and December 31, 2012, the allowance for obsolete or unmarketable inventory was $0, and during the twelve month periods ended December 31, 2013 and 2012, the Company recognized $0 and $39,129 of inventory impairments respectively.
Property and Equipment
Property and equipment are stated at cost at date of acquisition. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized.
Amortization of leasehold improvements is included in depreciation expense. The Company records operating lease expense on a straight-line basis. The Company amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.
The estimated useful life of each asset is as follows:
Depreciation expense for the years ended December 31, 2013 and 2012 was $94,376 and $32,816, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. Factors that might indicate a potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset, a significant change in the long-lived asset’s physical condition, a change in industry conditions or a reduction in cash flows associated with the use of the long-lived asset.
If these or other factors indicate the carrying amount of the asset may not be recoverable, we determine whether impairment has occurred through analysis of undiscounted cash flow of the asset at the lowest level that has an identifiable cash flow. If impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. We measure the fair value of the asset using market prices or, in the absence of market prices, based on an estimate of discounted cash flows. Cash flows are generally discounted using an interest rate commensurate with a weighted average cost of capital for a similar asset. No impairments were identified as of December 31, 2013 and 2012 or during the twelve month periods ended December 31, 2013 and 2012.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill is assessed for impairment by applying fair value based tests annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit to its carrying value, including goodwill. The Company uses un-discounted cash flow models to determine the fair value of a reporting unit. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. For the year ended December 31, 2013, the Company determined that the carrying amount of goodwill was impaired and recorded an impairment loss of $1,195,881.
At December 31, 2013 and 2012, the Company’s intangible assets consisted of Customer Relations. Amortization expense on Customer Relations during the years ended December 31, 2013 and 2012 was $4,971 and $0, respectively.
Deferred financing costs
Deferred financing costs include fees paid in conjunction with obtaining the convertible line of credit and are amortized over the contractual term of the related financial instrument using effective interest method.
Derivative Liability
We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 "Derivatives and Hedging Activities" which requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
Beneficial Conversion Features
We evaluate and account for embedded beneficial conversion features in accordance with Emerging Issues Task Force 98-5. A beneficial conversion feature exists on the date a convertible instrument is issued when the fair value of the underlying common stock to which the instrument is convertible into is in excess of the remaining unallocated proceeds of the instrument. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount (for convertible notes) and a dividend (for convertible preferred stock) with a corresponding amount to additional paid in capital. When a debt discount is recorded, the debt discount is amortized to interest expense over the life of the note using the effective interest method.
Debt Discount
Costs incurred with parties who are providing long-term financing, which include the fair value of an embedded derivative conversion feature are reflected as a debt discount and are amortized over the life of the related debt using the effective interest method. When the debt is settled, the related debt discount is recorded as interest expense and the related derivative liability is relieved into additional paid in capital.
The Company valued the embedded derivative conversion liability using Black-Scholes method. The Company recorded debt discounts attributable to the embedded conversion derivative liabilities related to the convertible debt and convertible lines of credit issued during the twelve months ended December 31, 2013 and 2012 totaling $1,290,307 and $2,071,304, respectively.
Financial Instruments and Fair Value Measures
The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities, line of credit, convertible debt and amounts due to related parties. We believe the recorded values of our financial instruments approximate their fair values because of their nature and respective maturity dates or durations.
The Company measures fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are as follows:
Level 1 - Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs for which there is little or no market data and which we make our own assumptions about how market participants would price the assets and liabilities.
Derivative instruments are recognized as either assets or liabilities and are measured at fair value using the Black Scholes model. The changes in the fair value of derivatives are recognized in earnings.
Shipping and Handling Costs
Shipping and handling costs incurred for inventory purchases and product shipments are included in general and administrative expenses for all periods presented.
Advertising Expenses
Advertising costs are expensed as incurred and are included in general and administrative expenses for all periods presented. Advertising expenses for the twelve month periods ended December 31, 2013 and 2012, were $193,109 and $425,860, respectively.
Sales Commission
The Company accrues sales commission to sales representatives when sales are made and pays it when cash is reasonably collectible from customers according to its performance based model for commission valuing. Depending on the experience of the sales representative, and whether monthly targets are met, the commission percentage range from 8-25% of the sales generated.
Concentration of Risk
The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC) and at times, balances may exceed government insured limits. All of the Company’s non-interest bearing cash balances were fully insured at December 31, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there was no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage reverted to $250,000 per depositor at each financial institution, and non-interest bearing cash balances may again exceed federally insured limits. At December 31, 2013, the amounts held in the banks did not exceed the federally insured limit. The Company has never experienced any losses related to these balances.
During the twelve months ended December 31, 2013, three vendors accounted for 34%, 22% and 12% of purchases at Pharmagen. During the twelve months ended December 31, 2012, three vendors accounted for 29%, 16% and 12% of purchases at Pharmagen.
During the twelve months ended December 31, 2013, two customers accounted for 26% of Pharmagen sales. During the twelve months ended December 31, 2012, one customer accounted for 46% of Pharmagen sales. At December 31, 2013, no customers accounted for more than 10% of Pharmagen accounts receivable. At December 31, 2012, one customer accounted for 58% of Pharmagen accounts receivable.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more-likely-than-not that the deferred tax assets will not be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made. The Company’s policy is to recognize interest and penalties related to the estimated obligations for tax positions as a component of income tax expense.
The Company records liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not believe any such uncertain tax positions currently pending will have a material adverse effect on its financial statements, although an adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.
Income (Loss) per Share
We have presented basic loss per share, computed on the basis of the weighted average number of common shares outstanding during the year, and diluted loss per share, computed on the basis of the weighted average number of common shares and all dilutive potential common shares outstanding during the year. Potential common shares result from convertible debts and convertible line of credit. However, for all years presented, all outstanding convertible notes are anti-dilutive due to the losses for the years. Anti-dilutive common stock equivalents of 125,825,110 were excluded from the loss per share computation for the year ended December 31, 2013. Anti-dilutive common stock equivalents of 106,645,929 were excluded from the loss per share computation for the year ended December 31, 2012.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). For the years ended December 31, 2013 and 2012, the Company had no items representing other comprehensive income or loss.
Stock Based Payments
We account for share-based awards to employees in accordance with ASC 718 “Stock Compensation”. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50 “Equity”, wherein such awards are expensed over the period in which the related services are rendered at their fair value.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
In July 2013, FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on our financial position or results of operations.
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
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Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
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Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a material impact on our financial position or results of operations.
In October 2012, the FASB issued Accounting Standards Update ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.
In December 2011, the FASB issued ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement of income where net income is presented and the statement where other comprehensive income is presented. The adoption of ASU 2011-12 is not expected to have a material impact on our financial position or results of operations.
In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet: Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). This Update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of ASU 2011-11 is not expected to have a material impact on our financial position or results of operations.
Reclassifications
Certain reclassifications were made to the financial statements for the year ended December 31, 2012 in order to conform with the 2013 presentation.
Subsequent Events
The Company evaluated material events occurring between December 31, 2013 and through the date when the consolidated financial statements were issued.
NOTE 4 - MERGER
For financial accounting purposes, the Merger is accounted for as a reverse recapitalization. Reverse recapitalization accounting is attributable to a long-held position of the staff of the Securities and Exchange Commission as the acquisition of a non-operating public shell company does not qualify as a business for business combination purposes, as described in ASC Topic 805, Business Combinations. Reverse recapitalization accounting applies when a non-operating public shell company acquires a private operating company and the owners and management of the private operating company have actual or effective voting and operating control of the combined company. In the Merger transaction, The Company qualifies as a non-operating public shell company because as of the Merger date, the Company held nominal net monetary assets, consisting of cash.
A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the public shell corporation accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Under recapitalization accounting, the equity of the accounting acquirer, HDS, is presented as the equity of the combined enterprise and the capital stock account of HDS is adjusted to reflect the par value of the outstanding stock of the legal acquirer (the Company) after giving effect to the number of shares issued in the business combination. Shares retained by the Company are reflected as an issuance as of the merger date for the historical amount of the net assets of the acquired entity, which in this case is zero, on the accompanying condensed consolidated statement of stockholders’ deficit of 220,500,750 shares, which consists of the Companies shares outstanding at December 31, 2011 of 370,500,750 plus 50,000,000 shares issued by the Company immediately prior and conjunction with the Merger to settle the Companies’ debt outstanding prior to the Merger date, less 200,000,000 shares cancelled which were held by the former controlling owner of the Company.
Following the Merger, the financial statements of the Company give retroactive effect of the reverse recapitalization and represent the historical operations of HDS.
NOTE 5 - ACQUISITION
Bryce Rx Laboratories
On December 13, 2012 (“Acquisition Date”), the Company acquired Bryce Rx Laboratories (“Bryce”) through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce Rx Laboratories, Inc. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000), payable (i) One Hundred Thousand Dollars ($100,000) at Closing, and (b) Two Hundred Fifty Thousand Dollars ($250,000) on December 31 of each of the four (4) years beginning in 2013. The closing date was December 13, 2012.
The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition, December 13, 2012. The estimates of the fair value of the assets acquired, liabilities assumed and the stock issued for the acquisition were prepared with the assistance of an independent valuations consultant. The following is a summary of the purchase price allocation:
Amortization expense on Customer Relations during the years ended December 31, 2013 and 2012 was $4,971 and $0, respectively.
NOTE 6 - DEBT
Lines of Credit
The Company has a $200,000 line of credit agreement with a financial institution which bears interest at US prime rate plus 1% per annum, but in no event less than 5.5% (5.5% at December 31, 2013 and 2012), is due on demand, and is secured by all assets of the Company. As of December 31, 2013 and 2012, the Company had outstanding balances on the line of credit of $200,000. The Company is currently in good standing and was in good standing at December 31, 2013 and 2012. There are no outstanding debt covenants.
On December 13, 2012, upon the acquisition of Bryce, the Company assumed two lines of credit from Bryce, an overdraft line of credit and a business line of credit which at that time had an outstanding balance of $22,410 and $195,050, respectively. The overdraft line of credit agreement has a maximum credit line of $25,000 and bears interest at 9.25%, and the business line of credit has a maximum credit line of $200,000, bears interest rate at 4.5% and expires in 2016. As of December 31, 2013 and 2012, the Company had outstanding balances on the overdraft line of credit and business line of credit of $159,340 and $214,900, respectively.
Capital lease obligation
During the year ended December 31, 2013, the Company acquired assets with a cost of $324,862, included in furniture and equipment, under a capital lease. The lease has a term of seven years, has payments of $4,881 including interest at 6%, and contains a bargain purchase option.
Future minimum lease payments as of December 31, 2013 are:
Non-interest bearing note payable
In connection with the acquisition of Bryce, the Company issued a note payable in the amount $1,000,000 to the seller. The note payable is payable in four installments at $250,000 each on December 31 beginning in 2013. Accrued imputed interest for the year ended December 31, 2013 was $55,000. As of December 31, 2013, the note is in default.
TCA Global Credit Master Fund, LP
2012 Convertible line of credit
On October 11, 2012 (“Closing Date”), the Company entered into a Senior Secured Revolving Credit Facility Agreement (the “Revolving Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. Pursuant to the Agreement, TCA agreed to loan up to $5 million to the Company for working capital purposes. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Promissory Note (the “Revolving Note”), the repayment of which is secured by a Security Agreement executed by the Company and its wholly-owned subsidiary, Healthcare Distribution Specialists, LLC. Pursuant to the Security Agreements, the repayment of the Revolving Note is secured by a security interest in substantially all of the Company’s assets in favor of TCA.
On October 11, 2012, the Company advanced a total of $700,000 from the Credit Agreement and paid a commitment fee of $128,963 by issuing 3,048,781 common shares valued at then current trading price of $0.042 per share. The Company recorded the commitment fee as deferred financing costs. The deferred financing cost is amortized over the life of the Credit Agreement. During the years ended December 31, 2013 and 2012, the Company amortized $71,724 and $57,239, respectively, of the deferred financing costs. The Credit Agreement carries interest at the rate of 12% per annum, increasing to 18% per annum upon the occurrence of an event of default and expires in nine months following the Closing Date.
On December 12, 2012, the Company advanced another $750,000 from the Credit Agreement which matures in six months after December 12, 2012 and amended the terms. According to the amended Credit Agreement, the Company is to issue a variable number of shares that equal $150,000 and if TCA is not able to realize at least $150,000 upon sale of the shares, the Company shall issue additional common shares to TCA to make up for the shortfall (“Make-Whole Provision”) or settle any deficit in cash.
On December 12, 2012, the Company issued 4,545,454 common shares as a commitment fee for the fixed amount of $150,000. Those shares were fair valued at $140,909 at the then current trading price of $0.031 per share and recorded as deferred financing costs. The deferred financing cost is amortized over the life of the amended Credit Agreement. During the years ended December 31, 2013 and 2012, the Company amortized $126,239 and $14,670, respectively, of the deferred financing costs.
As of December 31, 2012, the 4,545,454 shares were revalued at $136,364 using the then current trading price of the Company, and in accordance with the Make-Whole Provision, the Company recorded a stock payable of $13,636 as a liability.
During the year ended December 31, 2013, the Company entered into a Senior Secured Credit Facility Agreement with TCA which includes a mandatory redemption feature applicable to all previous commitment fees, accordingly the Company recorded an indemnification liability of $300,000 related to the $700,000 and $750,000 advances in 2012 and recorded $286,364 as shares held in escrow and reversed the $13,636 stock payable.
In addition, TCA has the right, in its sole discretion, to convert the outstanding principal and any accrued interest, fees or expenses due into shares of the Company’s Common Stock at the conversion price per share equal to the converted amount divided by 85% of the lowest daily volume weighted average price of the Company’s common stock during the five trading days immediately prior to the conversion date. The Company has evaluated the embedded conversion feature under ASC 815 and determined the embedded conversion feature to be a derivative and recorded an initial derivative liability of $415,515 for the $700,000 advance and $463,661 for the $750,000 advance as a debt discount. (See Note 7) The debt discount is amortized over six months using the effective interest method.
During the year ended December 31, 2013, the Company made advances of $912,650, repaid $1,120,881 and relieved $94,269 of related derivative liability into paid-in-capital. During the year ended December 31, 2012, the Company repaid $131,026 and relieved $79,455 of related derivative liability into paid-in-capital.
As of December 31, 2013 and 2012, the Revolving Note had a balance of $1,110,743 and $1,318,974, respectively.
As of December 31, 2012, the accrued interest and unamortized discount was $22,325 and $590,136, respectively. Interest expense on the line of credit for the year ended December 31, 2013 totaled $145,783, which included $83,057 which was added to the line of credit balance. As of December 31, 2013, accrued interest which was not added to the line of credit balance was $62,726 and unamortized discount was $0. Discount amortization for the year ended December 31, 2013 was $590,136, which included $23,207 of additional amortization which was accelerated due to repayments for the year ended December 31, 2013.
During the year ended December 31, 2013, the maturity date of the Convertible Line of Credit was extended to December 12, 2013, in accordance with the terms of the Revolving Credit Agreement.
The derivatives for all convertible lines of credit were valued using the Black-Scholes option pricing model with the following assumptions:
2013 Convertible promissory note
On March 29, 2013 (“Closing Date”), the Company entered into a Senior Secured Credit Facility Agreement (the “Secured Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. Pursuant to the Agreement, TCA agreed to loan up to $2 million to the Company for working capital purposes. A total of $600,000 was funded by TCA in connection with the closing. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Convertible Promissory Note (the “Note”), the repayment of which is secured by a Security Agreement and each of the Company’s wholly-owned subsidiaries. Pursuant to the Security Agreements, the repayment of the Note is secured by a security interest in substantially all of the Company’s assets in favor of TCA.
The initial Note in the amount of $600,000 is due and payable along with interest thereon on June 14, 2014, and bears interest at the rate of 12% per annum, increasing to 18% per annum upon the occurrence of an event of default. The Note is convertible into the Company’s common stock at eighty five percent (85%) of the lowest VWAP during the five (5) business days immediately prior to the conversion date, subject to TCA not being able to beneficially own more than 4.99% of the Company’s outstanding common stock upon any conversion.
The Company has the right to prepay the Note, in whole or in part, provided, that the Company pays TCA an amount equal to the then outstanding amount of the Note plus 5% for repayments up until 180 days following the Closing and the then outstanding amount of the Revolving Note plus 2.5% for repayments subsequent to 180 days following the Closing.
The Company also agreed to pay TCA an investment banking fee of $100,000, payable in the form of 6,666,667 shares of common stock (the “Commitment Shares”).
The Commitment Shares are mandatorily redeemable six months after March 29, 2013 for cash in an amount equal to the $100,000 minus the amount realized by TCA as of such date. Accordingly the Company recorded an indemnification liability of $100,000 and offset to shares in escrow.
The Commitment Shares were granted on March 29, 2013. The fair value of those shares on the grant date was $206,667 valued at the then current trading price of $0.031 per share and was recorded as deferred financing cost. The deferred financing cost is amortized over the life of the Secured Credit Agreement. During the year ended December 31, 2013, the Company amortized $151,765 of the deferred financing costs.
Under the initial accounting, the Company allocated $511,548 of the $600,000 proceeds to the embedded conversion derivative liability. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt.
The debt discount is accreted to interest expense over the life of the convertible debentures using the effective interest method. During the year ended December 31, 2013, the Company recorded interest accretion expense of $407,376, which is included in interest expense on the accompanying consolidated statement of operations.
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid- in capital.
The derivatives for convertible promissory note were valued using the Black-Scholes option pricing model with the following assumptions:
TCA Settlement and Release Agreement
On March 14, 2014, the Company entered into a Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA pursuant to which the Company agreed to pay $2,433,183 pursuant to one of two alternative payment schedules as set forth in the Settlement Agreement in full settlement of all outstanding amounts due to TCA. Under payment Schedule 1, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, $1,700,000 on September 30, 2014, and approximately $23,975 on each of twelve (12) consecutive months beginning on October 31, 2014. In the alternative, under payment Schedule 2, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, and approximately $675,675 on each of September 30, 2014, December 31, 2014, and March 31, 2015. The election between payment Schedule 1 and Schedule 2 will be made by us on or before September 30, 2014. In addition, TCA will return to us for cancellation all of the approximately 17,291,205 shares of our common stock previously issued to it. For further discussion, see note 8.
Convertible debt
2012 Convertible Debentures
During the year ended December 31, 2012, the Company issued a total $1,450,000 of convertible debentures to an investor, with various maturities from March 1, 2014 through May 16, 2014. Interest accrues at the rate of ten percent per annum and is payable at the respective maturity date in cash.
The investor is entitled to convert the accrued interest and principal of the convertible debentures into common stock of the Company at a conversion price equal to 80% of the Average Closing Price of the common stock. The Average Closing Price is set forth in the convertible debt agreements as follows: average closing price during the ten consecutive trading days immediately prior to conversion for $400,000 of convertible debt issued during the first quarter of 2012 and average closing price during the three consecutive trading days immediately prior to conversion for $1,050,000 of convertible debt issued during the second quarter of 2012. In the event the common stock of the Company trades at or above $0.30 at any time during the day for a period of ten consecutive trading days, the Company may at its option convert all or part of the convertible debt into common stock at the applicable conversion price.
Accounting for Convertible Debt
Under the initial accounting, the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the value of the convertible debt at the issuance date for $575,000 of the convertible debt issuance. For the remaining $875,000 of debt issuances, the Company allocated $617,127 of the proceeds to the embedded conversion derivative liability. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. The Company recorded aggregate debt discounts of $1,192,127 related to the conversion rights and recorded $161,100 of expense related to the excess value of the derivative value over the value of the convertible debt.
The debt discount is accreted to interest expense over the life of the convertible debentures using the effective interest method. During the years ended December 31, 2013 and 2012, The Company recorded interest accretion expense of $594,904 and $244,877, respectively, which is included in interest expense on the accompanying consolidated statement of operations.
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid-in capital.
The derivatives for 2012 convertible debentures were valued using the Black-Scholes option pricing model with the following assumptions:
2013 Convertible Debentures
On June 5, 2013, the Company issued a total $63,000 of convertible debentures to an investor. The Debenture has a maturity date of March 7, 2014, and is convertible after 180 days into common stock of the Company at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance - 120% of the principal amount; (b) between 61 and 90 days after issuance - 125% of the principal amount; (c) between 91 and 120 days after issuance - 130% of the principal amount; (d) between 121 and 180 days after issuance - 135% of the principal amount.
On August 1, 2013, the Company issued a total $42,500 of convertible debentures to the same investor. The Debenture has a maturity date of May 5, 2014, and is convertible after 180 days into common stock of the Company at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance - 120% of the principal amount; (b) between 61 and 90 days after issuance - 125% of the principal amount; (c) between 91 and 120 days after issuance - 130% of the principal amount; (d) between 121 and 180 days after issuance - 135% of the principal amount.
On July 10, 2013, the Company issued a $50,000 convertible debenture to an investor. The Debenture has a maturity date of March 7, 2014 and the note is convertible into the Company's common stock at a conversion price which is the lesser of $0.03 or 60% of the lowest trade price in the 25 trading days prior to the conversion.
Accounting for Convertible Debt
Under the initial accounting, the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the value of the convertible debt at the issuance date. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. The Company recorded aggregate debt discounts of $155,000 related to the conversion rights and recorded $55,294 of expense related to the excess value of the derivative value over the value of the convertible debt.
The debt discount is accreted to interest expense over the life of the convertible debentures using the straight-line method. During the year ended December 31, 2013, the Company recorded interest accretion expense of $103,552, including $8,745 related to conversion of debt, which is included in interest expense on the accompanying consolidated statement of operations.
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid-in capital.
During the year ended December 31, 2013, the Company issued shares totaling 13,714,286 in settlement of $40,000 of the outstanding balance and relieved $31,260 of related derivative liability into paid-in-capital. These settlements were in accordance with the original agreement and therefore debt extinguishment accounting did not apply. These settlements were made on December 19, 2013 and December 30, 2013 for $20,000 each. As of December 31, 2013, 2013 convertible debentures had a remaining balance of $115,500.
The derivatives for 2013 convertible debentures were valued using the Black-Scholes option pricing model with the following assumptions:
Convertible Settlement Agreement
On August 30, 2013, the Circuit Court in the Twelfth Judicial Circuit in and for Sarasota County, Florida (the “Court”), entered an Order Granting Approval of Settlement Agreement (the “Order”) approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”), in accordance with a Settlement Agreement (the “Settlement Agreement”) between the Company and IBC Funds, LLC, a Nevada limited liability company (“IBC”), in the matter entitled IBC Funds, LLC, vs. Pharmagen, Inc., Case No. 2013 CA 6471 NC (the “Action”). IBC commenced the Action against us to recover an aggregate of $623,759 of past-due accounts payable, which IBC had purchased from certain of our vendors pursuant to the terms of separate claim purchase agreements between IBC and each of the respective vendors (the “Assigned Accounts), plus fees and costs (the “Claim”). The Assigned Accounts relate to certain research, technical, development and legal services. The Order provides for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding on September 5, 2013.
In settlement of the Claims, the Company shall initially issue and deliver to IBC, in one or more tranches as necessary, shares of Common Stock (the “Initial Issuance”), subject to adjustment and ownership limitations as set forth below, sufficient to satisfy the compromised amount at a forty-five percent (45%) discount to market (the total amount of the claims multiplied by 55%) based on the market price during the valuation period as defined herein through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Securities Act (the “settlement shares”). The Company shall also issue to IBC, on the issuance date(s), 400,000 shares as a settlement fee.
During the Valuation Period, the Company shall deliver to IBC, through the Initial Issuance and any required Additional Issuance, that number of shares (the “Final Amount”) with an aggregate value equal to (A) the sum of the Claim Amount, divided by (B) the Purchase Price. If at any time during the Valuation Period the Bid Price is below 90% of the Bid Price on the day before the Issuance Date, Company will immediately cause to be issued and delivered to IBC such additional shares as may be required to effect the purposes of this Settlement Agreement (each, an “Additional Issuance”). At the end of the Valuation Period, if the sum of the Initial Issuance and any Additional Issuance is greater than the Final Amount, IBC shall promptly deliver any remaining shares to Company or its transfer agent for cancellation.
The Valuation Period is calculated as the twenty (20) day trading period preceding the share request (the “Trading Period”); provided that the Valuation Period shall be extended as necessary in the event that (1) the Initial Issuance is delivered in more than one tranche, and/or (2) one or more Additional Issuances is required to be, in which case the Valuation Period for each issuance shall be extended to include additional trading days pursuant to such issuance. The Valuation Period shall begin on the first trading following the Issuance Date, but shall be suspended to the extent that any subsequent Initial Issuance tranche and/or Additional Issuance is due to be made until such date as such Initial Issuance tranche and/or Additional Issuance is delivered to IBC. Any period of suspension of the Valuation Period shall be established by means of a written notice from ITB to the Company.
Accounting for Convertible Debt
Under the initial accounting, the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the value of the convertible debt at the issuance date. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. As of December 31, 2013, the Company recorded aggregate debt discounts of $623,759 related to the conversion rights and recorded $248,641 of expense related to the excess value of the derivative value over the value of the convertible debt, which were accounted for as a loss on settlement of accounts payable.
The debt discount is accreted to interest expense over the life of the convertible debentures using the straight-line method. During the year ended December 31, 2013, the Company recorded interest accretion expense of $521,667, including $227,110 related to conversion of debt, which is included in interest expense on the accompanying consolidated statement of operations.
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid-in capital.
During the year ended December 31, 2013, the Company issued shares totaling 78,742,433 in settlement of $290,810 of the outstanding balance and relieved $569,208 of related derivative liability into paid-in-capital. These settlements were in accordance with the original agreement and therefore debt extinguishment accounting did not apply. As of December 31, 2013 the Convertible Settlement Agreement had a balance of $332,949.
The derivatives for 2013 convertible debentures were valued using the Black-Scholes option pricing model with the following assumptions:
NOTE 7 - FAIR VALUE MEASUREMENTS
Fair Value on a Recurring Basis
The following table presents the Company’s financial liabilities measured and recorded on a recurring basis at fair value on the Company’s consolidated balance sheets and their level within the fair value hierarchy as of December 31, 2013.
The following table presents the Company’s financial liabilities measured and recorded on a recurring basis at fair value on the Company’s consolidated balance sheets and their level within the fair value hierarchy as of December 31, 2012.
Fair Value on Non Recurring Basis
There were no assets measured at fair value on a nonrecurring basis as of December 31, 2013. The Company’s assets measured at fair value on a nonrecurring basis as of December 31, 2012 were as follows:
The following table reconciles, for the year ended December 31, 2013, the beginning and ending balances for embedded conversion derivatives that are recognized at fair value in the consolidated financial statements:
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to additional paid in capital.
When the fair value of the embedded conversion derivative liability exceeds the carrying value of the convertible debentures on the issuance date, the convertible debentures is recorded at a full discount and the excess amount of the embedded derivative liability over the carrying value of the convertible debenture is recognized as a loss on derivative upon issuance. The Company has considered the provisions of ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the stated note principal being converted to a variable number of the Company’s common shares.
The Company believes the recorded values of its other financial instruments (consisting of cash, accounts receivable, accounts payable, accrued liabilities, line of credit and due to related parties) approximate their fair values because of their nature and respective maturity dates or durations.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases executive offices located at 9337 Fraser Ave, Silver Spring, MD 20910 and shares office space with its wholly-owned subsidiary, Healthcare Distribution Specialists LLC, pursuant to a one year lease that ends on March 31, 2014 at a rate of $1,883 per month. The office space is approximately 2,000 square feet of industrial/office space. This lease was renewed on March 11, 2014 for an additional six month period at a rate of $1,939 per month.
In addition, the Company also leases sales offices located at 2413 Linden Lane, Silver Spring, MD 20910. We lease approximately 1,500 square feet pursuant to a lease that expires on March 31, 2014 at a rate of $1,878 per month. This lease was renewed on February 9, 2014 for an additional six month period at a rate of $1,931 per month.
The Company’s wholly owned subsidiary, Bryce Rx Laboratories, leases approximately 3,700 square feet of office/warehouse space at 30 Buxton Farms Road, Stamford, CT 06905, pursuant to a lease that expires on April 30, 2017 at a rate ranging from $7,213 to $7,980 per month. The difference between the escalating rent payment and straight line expense was determined to be immaterial for the year ended December 31, 2013.
Our Clotamin product inventory is housed at a third-party warehouse facility located in Maryland that is a logistics company and stores the packaged product for us and then ships to the purchaser when requested by us.
On March 14, 2014, the Company entered into a Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA pursuant to which the Company agreed to pay $2,433,183 pursuant to one of two alternative payment schedules as set forth in the Settlement Agreement in full settlement of all outstanding amounts due to TCA. Under payment Schedule 1, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, $1,700,000 on September 30, 2014, and approximately $23,975 on each of twelve (12) consecutive months beginning on October 31, 2014. In the alternative, under payment Schedule 2, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, and approximately $675,675 on each of September 30, 2014, December 31, 2014, and March 31, 2015. The election between payment Schedule 1 and Schedule 2 will be made by us on or before September 30, 2014. In addition, TCA will return to us for cancellation all of the approximately 17,291,205 shares of our common stock previously issued to it. In connection with this agreement, the Company has recorded a loss contingency equal to the difference between the amount per the Settlement Agreement and the outstanding debt per the Company’s records at December 31, 2013, net of the effect of the return of the Company’s common stock. The loss contingency totaled $172,296.
On May 13, 2013, George Sharp, a private citizen, filed a civil lawsuit against the publishers of penny stock newsletters, as well as the companies they promote. The case is titled, George Sharp v. Xumanni, et al., Case Number 37-2013-00048310, and is pending in the Superior Court of California, County of Los Angeles, Central Division. In addition to us, the complaint names the following entities as defendants: Degroupa Tenner Morales Media Corporation, Centro Azteca S.A., Victory Mark Corporation, Ltd., Xumanni, Harbor Island Development Corporation, Red Giant Entertainment, Inc., VuMee, Inc., Pub Crawl Holdings, Inc., PacWest Equities, Inc., Amwest Imaging, Inc., Goff Corporation, Swingplane Ventures, Inc., World Moto, Inc., and Taglikeme Corporation. The complaint alleges that the defendants disseminated spam emails in order to artificially create a marketplace for the stocks of companies at artificially high prices in violation of California’s Restrictions on Unsolicited Commercial E-Mail Advisers. Under the California Business and Professions Code, the violations alleged in the complaint could expose the defendants to damages of up to $1,000 for each spam email sent to each recipient. Mr. Sharp alleges that he received at least 1,204 emails from the defendants. We have filed a motion to quash the summons and compliant.
On June 13, 2013, American Express Bank (“American Express”) filed a civil lawsuit in the Supreme Court of the State of New York, County of Westchester, against Robert Giuliano and Bryce RX Laboratories, Inc., for damages in the amount of $136,065. The complaint alleges that the defendants breached a credit agreement with American Express. Mr. Giuliano impleaded, in a third-party action, both us and Pharmagen Laboratories, Inc., f/k/a Bryce RX Laboratories, Inc. In the third-party action, Mr. Giuliano asserts various claims, including breach of contract, unjust enrichment and conversion, and seeks to recover damages of $2,112,000, indemnification of the claims by American Express Bank, and attorneys’ fees. We have filed a motion to dismiss the lawsuit because the dispute must be decided in arbitration. Our motion to dismiss is currently pending.
NOTE 9 - EQUITY
Merger with Healthcare Distribution Specialist LLC
On February 13, 2012, Sunpeaks Ventures, Inc. (“Sunpeak”), acquired all of the membership interests of Healthcare Distribution Specialists LLC (“HDS”), a Delaware limited liability company, in exchange for the issuance of 200,000,000 newly-issued restricted shares of Sunpeaks’ common stock and 3,000,000 newly-issued restricted shares of Sunpeaks’ Class A Preferred Stock (the “Exchange Shares”), to the former owner of HDS. Following the acquisition, Sunpeak cancelled 200,000,000 shares of common stock owned by its former shareholders. As a result of the acquisition, the former owners of HDS hold majority ownership of the Company and the acquisition was treated as a recapitalization.
A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the public shell corporation accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Under recapitalization accounting, the equity of the accounting acquirer, HDS, is presented as the equity of the combined enterprise and the capital stock account of HDS is adjusted to reflect the par value of the outstanding stock of the legal acquirer (Sunpeaks) after giving effect to the number of shares issued in the business combination. Shares retained by Sunpeaks are reflected as an issuance as of the merger date for the historical amount of the net assets of the acquired entity, which in this case is zero, on the accompanying consolidated statement of stockholders’ deficit of 220,500,750 shares, which consists of Sunpeaks shares outstanding at December 31, 2011 of 370,500,750 plus 50,000,000 shares issued by Sunpeaks immediately prior and conjunction with the Merger to settle Sunpeaks’ debt outstanding prior to the Merger date, less 200,000,000 shares cancelled which were held by the former controlling owner of Sunpeaks.
Common stock
TCA Global Credit Master Fund, LP (“TCA”)
On October 11, 2012, the Company issued 3,048,781 common shares to TCA pursuant to the Credit Agreement as commitment fees (see Note 6). The Company fair valued those shares at the then current trading price of $0.042 per share for a total of $128,963.
On December 12, 2012, the Company entered into a Committed Equity Facility Agreement (“TCA Equity Agreement”) with TCA. Pursuant to the terms of the TCA Equity Agreement, TCA shall commit to purchase up to Seven Million Five Hundred Thousand Dollars ($7,500,000) of the Company’s common stock, par value $0.001 per share for a period of twenty-four (24) months commencing on the effective date of a registration statement on Form S-1. The purchase price of the shares is equal to ninety-five percent (95%) of the net aggregate sales proceeds received by TCA from the sale of the shares during the five (5) consecutive trading days after TCA is able to deposit and clear the shares TCA’s brokerage account.
According to the TCA Equity Agreement, the Company shall repurchase from TCA any unsold shares twelve months after December 12, 2012 and pay to TCA in cash an amount equal to the $100,000 minus the amount realized by TCA as of such date. Accordingly the Company recorded an indemnification liability of $100,000.
On December 12, 2012, the Company issued 3,030,302 common shares as a commitment shares, the fair value of those on the issuance date was $93,939 valued at the then current trading price of $0.031 per share and were considered held in escrow due to the indemnification liability.
In addition, the Company also issued 4,545,455 shares of common stock as commitment fee in connection with the Amended Credit Agreement (see Note 6), the Company valued those shares at the then current trading price of $0.03 per share for a total of $140,909.
As of December 31, 2012, the 4,545,454 shares were revalued at $136,364 using the then current trading price of the Company, and in accordance with the Make-Whole Provision (see Note 6), the Company recorded a stock payable of $13,636 as a liability.
During the nine months ended September 30, 2013, the Company entered into a Senior Secured Credit Facility Agreement (see below) with TCA which includes a mandatorily redemption feature applicable to all previous advances, accordingly the Company recorded indemnification liability of $300,000 related to the $700,000 and $750,000 advances in 2012 and recorded $286,364 as shares held in escrow and reversed the $13,636 stock payable.
On March 29, 2013 (“Closing Date”), the Company entered into a Senior Secured Credit Facility Agreement (the “Secured Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. According to the Secured Credit Agreement, the Company agreed to pay TCA an investment banking fee of $100,000, payable in the form of 6,666,667 shares of common stock (the “Commitment Shares”).
The Commitment Shares are mandatorily redeemable six months after March 29, 2013 for cash in an amount equal to the $100,000 minus the amount realized by TCA as of such date. Accordingly the Company recorded an indemnification liability of $100,000 and offset to shares in escrow.
The Commitment Shares were granted on March 29, 2013. The fair value of those shares on the grant date was $206,667 valued at the then current trading price of $0.031 per share and was recorded as deferred financing cost.
On March 14, 2014, the Company entered into a Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA pursuant to which the Company agreed to pay $2,433,183 pursuant to one of two alternative payment schedules as set forth in the Settlement Agreement in full settlement of all outstanding amounts due to TCA. Under payment Schedule 1, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, $1,700,000 on September 30, 2014, and approximately $23,975 on each of twelve (12) consecutive months beginning on October 31, 2014. In the alternative, under payment Schedule 2, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, and approximately $675,675 on each of September 30, 2014, December 31, 2014, and March 31, 2015. The election between payment Schedule 1 and Schedule 2 will be made by us on or before September 30, 2014. In addition, TCA will return to us for cancellation all of the approximately 17,291,205 shares of our common stock previously issued to it.
Settlement Agreement
As noted in Note 6, the Company entered into convertible settlement agreement with IBC whereby the Company would issue shares in several tranches to satisfy the outstanding debt. During the year ended December 31, 2013, the Company settled $290,810 of the outstanding debt in exchange for the issuance of 78,742,433 shares of the Company’s common stock. In addition, the Company agreed to issue 400,000 commitment shares, valued at $8,120.
Conversion of Debt
As noted in Note 6, the Company entered into a convertible debt agreement with an investor. During the year ended December 31, 2013, the Company settled $40,000 of the outstanding debt in exchange for 13,714,286 shares of the Company’s common stock.
Shares issued for services
During the year ended December 31, 2013, the Company issued 3,759,398 shares for legal services totaling $75,000 in connection with an equity financing agreement. The equity financing agreement was not finalized.
Cancellation of shares
In the nine months ended September 30, 2013, the 50,000,000 shares issued immediately prior to the Merger were cancelled as the Company determined that no consideration had been exchanged for the shares.
Preferred Stock
Series A
On November 3, 2011, we designated twenty five million (25,000,000) shares of the Preferred Stock as Class A Preferred Stock. Our Class A Preferred Stock has liquidation preference over our common stock, voting rights of one hundred (100) votes per share, with each share convertible into five (5) shares of our common stock.
On December 16, 2013, the shareholder of the 3,000,000 Preferred Stock A shares exchanged the shares for the 5,100,000 shares of the Company’s newly created Preferred Stock B shares. For more information see disclosure regarding Series B shares.
As of December 31, 2013, we have 0 shares of Preferred Stock A issued and outstanding.
Liquidation Preference
In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Class A Preferred Shares shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus of any nature, an amount equal to the stated par value less the aggregate amount of all prior distributions to its preferred shareholders made to holders of all classes of preferred shares, plus any accrued previously declared but unpaid dividends (the amount so determined being hereinafter referred to as the “Liquidation Preference”). No distribution shall be made to the holders of the common shares upon liquidation, dissolution, or winding up until after the full amount of the Liquidation Preference has been distributed or provided to the holders of the preferred shares.
If, upon such liquidation, dissolution or winding up the assets thus distributed among the preferred shareholders shall be insufficient to permit payment to such shareholders of the full amount of the liquidation preference, the entire assets of the Company shall be distributed ratably among the holders of all classes of preferred shares.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, when the Company has completed distribution of the full Liquidating Preference to the holders of the Class A preferred shares, the Class A Preferred shares shall be considered to have been redeemed, and thereafter, the remaining assets of the Company shall be paid in equal amounts on all outstanding shares of common stock.
Conversion Rights
At any time holders of the Class A Preferred Shares who endorse the share certificates and deliver them together with a written notice of their intent to convert to the corporation at its principal office, shall be entitled to convert such shares and receive five (5) shares of common stock for each share being converted. Such conversion is subject to the following adjustments, terms, and conditions:
1)
If the number of outstanding shares of common stock has been decreased since the initial issuance of the Class A Preferred Shares (or series having conversion rights (by reason of any split, stock dividend, merger, consolidation or other capital change or reorganization affecting the number of outstanding shares of common stock), the number of shares of common stock to be issued on conversion to the holders, or Class A Preferred Shares shall not be adjusted unless by appropriate amendment of this article. If the number of outstanding shares of common stock has been increased since the initial issuance of the Class A Preferred Shares (or series having conversion rights (by reason of any split, stock dividend, merger, consolidation or other capital change or reorganization affecting the number of outstanding shares of common Stock), the number of shares of common stock to be issued on conversion to the holders, or Class A Preferred Shares shall equitably be adjusted by appropriate amendment of this article, and other articles as applicable.
2)
Shares converted under this article shall not be reissued. The corporation shall at all times reserve and keep available a sufficient number of authorized but unissued common shares, and shall obtain and keep in effect any required permits to enable it to issue and deliver all common shares required to implement the conversion rights granted herein.
3)
No fractional shares shall be issued upon conversion, but the corporation shall pay cash for any fractional shares of common stock to which shareholders may be entitled at the fair value of such shares at the time of conversion. The board of directors shall determine such fair value.
Voting Rights
With respect to each matter submitted to a vote of stockholders of the Corporation, each holder of Class A Preferred Shares shall be entitled to cast that number of votes which is equivalent to the number of shares of Class A Preferred Shares owned by such holder times one hundred (100). The Company shall not, without the affirmative vote or written consent of the holders of at least a majority of the outstanding Class A Preferred Shares (i) authorize or create any additional class or series of stock ranking prior to or on a parity with the Class A Preferred Shares as to the dividends or the distribution of assets upon liquidation, or (ii) change any of the rights, privileges or preferences of the Class A Preferred Shares.
Series B
On December 16, 2013, we designated five million one hundred thousand (5,100,000) shares of the Preferred Stock as Class B Preferred Stock. Our Class B Preferred Stock has liquidation preference over our common stock, voting rights of 1% of the number of votes of all shareholders for each 100,000 shares, with each 680,000 shares convertible into 1% of the outstanding shares of our common stock, after giving effect to the shares issued as a result of the conversion.
On December 20, 2013, we received a signed version of a Securities Exchange Agreement December 16, 2013 with Old Line Partners, LLC, a Nevada limited liability company, whose manager is Mackie Barch, one of our officers and directors. Pursuant to the terms of the Exchange Agreement, Old Line exchanged all three million (3,000,000) shares of our Class A Preferred Stock that were issued and outstanding for five million one hundred thousand (5,100,000) shares of our newly created Series B Convertible Preferred Stock. The exchange was accounted for as an extinguishment of stock and the Company recorded the difference between the fair value of the Preferred A and the Preferred B stock as of the exchange date of $332,000 as an increase to APIC and a deemed dividend.
As of December 31, 2013, we have 5,100,000 shares of Preferred Stock B issued and outstanding.
Dividend Rights
2.1 In each calendar year, the holders of the then outstanding Series B Convertible Preferred Stock shall be entitled to receive, when, as and if declared by the Board, out of any funds and assets of the Corporation legally available therefore, noncumulative dividends in an amount equal to any dividends or other Distribution on the Common Stock in such calendar year (other than a Common Stock Dividend). No dividends (other than a Common Stock Dividend) shall be paid, and no Distribution shall be made, with respect to the Common Stock unless dividends in such amount shall have been paid or declared and set apart for payment to the holders of the Series B Convertible Preferred Stock simultaneously. Dividends on the Series B Convertible Preferred Stock shall not be mandatory or cumulative, and no rights or interest shall accrue to the holders of the Series B Convertible Preferred Stock by reason of the fact that the Corporation shall fail to declare or pay dividends on the Series B Convertible Preferred Stock, except for such rights or interest that may arise as a result of the Corporation paying a dividend or making a Distribution on the Common Stock in violation of the terms of this Section 2.
2.2 Participation Rights. Dividends shall be declared pro rata on the Common Stock and the Series B Convertible Preferred Stock on a pari passu basis according to the number of shares of Common Stock held by such holders, where each holder of shares of Series B Preferred Stock is to be treated for this purpose as holding the number of shares of Common Stock to which the holders thereof would be entitled if they converted their shares of Series B Convertible Preferred Stock at the time of such dividend in accordance with Section 4 hereof.
2.3 Non-Cash Dividends. Whenever a dividend or Distribution provided for in this Section 2 shall be payable in property other than cash (other than a Common Stock Dividend), the value of such dividend or Distribution shall be deemed to be the fair market value of such property as determined in good faith by the Board.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of the Corporation; whether voluntary or involuntary, the funds and assets of the Corporation that may be legally distributed to the Corporation's shareholders (the “Available Funds and Assets”) shall be distributed to shareholders in the following manner:
3.1 Series B Convertible Preferred Stock. The holders of each share of Series B Preferred Stock then outstanding shall be entitled to be paid, out of the Available Funds and Assets, and prior and in preference to any payment or distribution (or any setting apart of any payment or distribution) of any Available Funds and Assets on any shares of Common Stock or subsequent series of preferred stock, an amount per share equal to the Original Issue Price of the Series B Convertible Preferred Stock plus all declared but unpaid dividends on the Series B Convertible Preferred Stock. If upon any liquidation, dissolution or winding up of the Corporation, the Available Funds and Assets shall be insufficient to permit the payment to holders of the Series B Convertible Preferred Stock of their full preferential amount as described in this subsection, then all of the remaining Available Funds and Assets shall be distributed among the holders of the then outstanding Series B Convertible Preferred Stock pro rata, according to the number of outstanding shares of Series B Convertible Preferred Stock held by each holder thereof.
3.2 Participation Rights. If there are any Available Funds and Assets remaining after the payment or distribution (or the setting aside for payment or distribution) to the holders of the Series B Convertible Preferred Stock of their full preferential amounts described above in this Section 3, then all such remaining Available Funds and Assets shall be distributed among the holders of the then outstanding Common Stock and Preferred Stock pro rata according to the number and preferences of the shares of Common Stock and Preferred Stock (as converted to Common Stock) held by such holders.
3.3 Merger or Sale of Assets. A reorganization or any other consolidation or merger of the Corporation with or into any other corporation, or any other sale of all or substantially all of the assets of the Corporation, shall not be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 3, and the Series B Convertible Preferred Stock shall be entitled only to (i) the right provided in any agreement or plan governing the reorganization or other consolidation, merger or sale of assets transaction, (ii) the rights contained in the General Corporation Law of the State of Nevada and (iii) the rights contained in other Sections hereof.
3.4 Non-Cash Consideration. If any assets of the Corporation distributed to shareholders in connection with any liquidation, dissolution or winding up of the Corporation are other than cash, then the value of such assets shall be their fair market value as determined by the Board.
Conversion Rights
(a) Conversion of Preferred Stock. Each Six Hundred Eighty Thousand (680,000) shares of Series B Convertible Preferred Stock, as a group (a “Conversion Group”), shall be convertible, at the option of the holder thereof, at any time after the issuance of such shares, into that number of fully paid and nonassessable shares of Common Stock of the Company equal to one percent (1%) of the outstanding shares of Common Stock of the Company then outstanding, after giving effect to the shares issued as a result of the conversion. The effect of this Section 4 is that the holders of the Series B Convertible Preferred Stock can acquire upon conversion, in the aggregate, seven and one-half percent (7.5%) of the then-outstanding shares of common stock of the Company.
(b) Procedures for Exercise of Conversion Rights. The holders of shares of Series B Convertible Preferred Stock constituting a Conversion Group may exercise their conversion rights as to such shares by delivering to the Company during regular business hours, at the office of any transfer agent of the Company for the Series B Convertible Preferred Stock, or at the principal office of the Company or at such other place as may be designated by the Company, the certificate or certificates for the shares to be converted, duly endorsed for transfer to the Company (if required by the Company), accompanied by written notice stating that the holder elects to convert such shares. Conversion shall be deemed to have been effected on the date when such delivery is made, and such date is referred to herein as the “Conversion Date.” As promptly as practicable after the Conversion Date, but not later than ten (10) business days thereafter, the Company shall issue and deliver to or upon the written order of such holder, at such office or other place designated by the Company, a certificate or certificates for the number of full shares of Common Stock to which such holder is entitled and a check for cash with respect to any fractional interest in a share of Common Stock as provided in section 4(c) below. The holder shall be deemed to have become a shareholder of record on the Conversion Date. Upon conversion of only a portion of the number of shares of Series B Convertible Preferred Stock represented by a certificate surrendered for conversion, the Company shall issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, at the expense of the Company, a new certificate covering the number of shares of Series B Convertible Preferred Stock representing the unconverted portion of the certificate so surrendered.
(c) No Fractional Shares. No fractional shares of Common Stock or scrip shall be issued upon conversion of shares of Series B Convertible Preferred Stock. If more than one share of Series B Convertible Preferred Stock shall be surrendered for conversion at any one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series B Convertible Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series B Convertible Preferred Stock, the Company shall pay a cash adjustment in respect of such fractional interest equal to the fair market value of such fractional interest as determined by the Company’s Board of Directors.
Voting Rights
Each One Hundred Thousand (100,000) shares of Series B Convertible Preferred Stock, or pro-rata portion thereof, shall be entitled to one percent (1%) of the number of votes of all shareholders, after giving consideration to the votes available to the holders of Series B Convertible Preferred Stock, on all matters to come before the shareholders. The effect of this Section 6 is that the holders of the Series B Convertible Preferred Stock will hold, in the aggregate, fifty one percent (51%) of the voting power of the Company in all matters to come before the shareholders.
Series C
On December 16, 2013, we designated five hundred thousand (500,000) shares of the Preferred Stock as Class C Preferred Stock. Our Class C Preferred Stock has liquidation preference over our common stock, voting rights of one (1) vote per share, with each 50,000 shares convertible into fifty thousand (50,000) shares of our common stock.
During the year ended December 31, 2013, the Company issued 125,000 Preferred Stock C for $125,000. The conversion feature of the Preferred Stock was evaluated and it was determined that a beneficial conversion feature exists. The Company recorded $125,000 as a deemed dividend. As the Company had a negative retained earnings balance at the date of issuance, the dividends were accounted for as a debit and credit to additional paid-in capital.
Preferred C has been evaluated and it has been determined that it contains a substantive redemption feature and therefore it has been classified as temporary equity under commitments and contingencies in the accompanying consolidated balance sheet.
As of September 30, 2013, we have 125,000 shares of Preferred Stock C issued and outstanding.
Dividend Rights
2.1 In each calendar year, the holders of the then outstanding Series C Convertible Preferred Stock shall be entitled to receive, when, as and if declared by the Board, out of any funds and assets of the Corporation legally available therefore, noncumulative dividends in an amount equal to any dividends or other Distribution on the Common Stock in such calendar year (other than a Common Stock Dividend). No dividends (other than a Common Stock Dividend) shall be paid, and no Distribution shall be made, with respect to the Common Stock unless dividends in such amount shall have been paid or declared and set apart for payment to the holders of the Series C Convertible Preferred Stock simultaneously. Dividends on the Series C Convertible Preferred Stock shall not be mandatory or cumulative, and no rights or interest shall accrue to the holders of the Series C Convertible Preferred Stock by reason of the fact that the Corporation shall fail to declare or pay dividends on the Series C Convertible Preferred Stock, except for such rights or interest that may arise as a result of the Corporation paying a dividend or making a Distribution on the Common Stock in violation of the terms of this Section 2.
2.2 Participation Rights. Dividends shall be declared pro rata on the Common Stock and the Series C Convertible Preferred Stock on a pari passu basis according to the number of shares of Common Stock held by such holders, where each holder of shares of Series C Preferred Stock is to be treated for this purpose as holding the number of shares of Common Stock to which the holders thereof would be entitled if they converted their shares of Series C Convertible Preferred Stock at the time of such dividend in accordance with Section 4 hereof.
2.3 Non-Cash Dividends. Whenever a dividend or Distribution provided for in this Section 2 shall be payable in property other than cash (other than a Common Stock Dividend), the value of such dividend or Distribution shall be deemed to be the fair market value of such property as determined in good faith by the Board.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Corporation; whether voluntary or involuntary, the funds and assets of the Corporation that may be legally distributed to the Corporation's shareholders (the “Available Funds and Assets”) shall be distributed to shareholders in the following manner:
3.1 Series C Convertible Preferred Stock. The holders of each share of Series C Preferred Stock then outstanding shall be entitled to be paid, out of the Available Funds and Assets, and prior and in preference to any payment or distribution (or any setting apart of any payment or distribution) of any Available Funds and Assets on any shares of Common Stock or subsequent series of preferred stock, an amount per share equal to the Original Issue Price of the Series C Convertible Preferred Stock plus all declared but unpaid dividends on the Series C Convertible Preferred Stock. If upon any liquidation, dissolution or winding up of the Corporation, the Available Funds and Assets shall be insufficient to permit the payment to holders of the Series C Convertible Preferred Stock of their full preferential amount as described in this subsection, then all of the remaining Available Funds and Assets shall be distributed among the holders of the then outstanding Series C Convertible Preferred Stock pro rata, according to the number of outstanding shares of Series C Convertible Preferred Stock held by each holder thereof.
3.2 Participation Rights. If there are any Available Funds and Assets remaining after the payment or distribution (or the setting aside for payment or distribution) to the holders of the Series C Convertible Preferred Stock of their full preferential amounts described above in this Section 3, then all such remaining Available Funds and Assets shall be distributed among the holders of the then outstanding Common Stock and Preferred Stock pro rata according to the number and preferences of the shares of Common Stock and Preferred Stock (as converted to Common Stock) held by such holders.
3.3 Merger or Sale of Assets. A reorganization or any other consolidation or merger of the Corporation with or into any other corporation, or any other sale of all or substantially all of the assets of the Corporation, shall not be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 3, and the Series C Convertible Preferred Stock shall be entitled only to (i) the right provided in any agreement or plan governing the reorganization or other consolidation, merger or sale of assets transaction, (ii) the rights contained in the General Corporation Law of the State of Nevada and (iii) the rights contained in other Sections hereof.
3.4 Non-Cash Consideration. If any assets of the Corporation distributed to shareholders in connection with any liquidation, dissolution or winding up of the Corporation are other than cash, then the value of such assets shall be their fair market value as determined by the Board.
Conversion Rights
The holders of Series C Convertible Preferred Stock shall have the right, but not the obligation, from time to time and in whole or in part, to convert the Series C Convertible Preferred Stock into shares of Common Stock based on one of the formulas set forth in Section 4(a) or 4(b) hereof (the selection of which formula to be used to be at the sole discretion of the holder, made at the time of each applicable conversion):
(a) Fixed Percentage Conversion of Preferred Stock. Each Fifty Thousand (50,000) shares of Series C Convertible Preferred Stock, or pro-rata portion thereof, shall be convertible into that number of fully paid and nonassessable shares of Common Stock of the Company equal to one and one one-half percent (1.5%) of the outstanding shares of Common Stock of the Company then outstanding after giving effect to the shares issued as a result of the conversion. The effect of this Section 4(a) is that the holders of the Series C Convertible Preferred Stock can acquire upon conversion, in the aggregate, fifteen percent (15%) of the then-outstanding shares of common stock of the Company.
(b) Variable Conversion of Preferred Stock. Each share of Series C Convertible Preferred Stock shall be convertible into that number of shares of Common Stock determined by dividing the Original Issue Price by the Conversion Price. The “Conversion Price” shall mean 33.33% multiplied by the Market Price (defined below). “Market Price” means the average of the lowest five (5) Trading Prices (defined below) for the Company’s common stock during the ten (10) Trading Day period ending on the last complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the closing bid price on the Over-the-Counter Bulletin Board, or applicable trading market (the “OTCBB”) as reported by a reliable reporting service (“Reporting Service”) designated by the Company or, if the OTCBB is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the “pink sheets” by OTC Markets Group, Inc. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Company and holder. “Trading Day” shall mean any day on which the Company’s common stock is tradable for any period on the OTCBB, or on the principal securities exchange or other securities market on which the common stock is then being traded.
Voting rights
Each outstanding share of Series C Convertible Preferred Stock shall be entitled to one (1) vote per share on all matters to which the shareholders of the Company are entitled or required to vote.
Further, the holders of the outstanding Series C Convertible Preferred Stock shall have the right to appoint one (1) member to the Company’s Board of Directors, the determination of which shall be made by the holders of a majority of the outstanding shares of Series C Convertible Preferred Stock.
Contributed capital for debt forgiveness
During June 2012, HealthRite, a related party (see Note 9) agreed to forgive the remaining balance of $90,582 owed. The forgiveness of this debt was recorded as a contribution of capital.
Contributed capital for imputed interest on advances from related party
At December 31, 2013 and 2012, the Company owed $115,815 and $148,215, respectively, to its President for repayment of advances. The advances are unsecured, non-interest bearing, and due on demand. The Company imputed interest expense of $6,362 and $9,357 on these advances owed during the years ended December 31, 2013 and 2012, respectively.
Stock Compensation - Warrants
On December 9, 2013, the Company executed a Consulting Services Agreement with Bagel Boy Equity Group II, LLC, a private family office, whereby its managing partner, Richard A. Wolpow, will become Chairman of the Board of Directors and interim Chief Operating Officer. Bagel Boy Equity Group will lead the Company’s efforts to deploy a roll-up consolidation plan in the hard-to-find secondary wholesale and sterile compounding market.
As consideration under the Consulting Agreement, the Company issued to Bagel Boy a warrant to acquire up to three percent (3%) of the Company’s issued and outstanding shares of common stock, calculated at the time of exercise, at an exercise price of $0.0065 per share (the “Commencement Warrant”). The warrant vests in two equal parts, one-half immediately upon vesting and one-half upon completion of the acquisition of two (2) Acquisition Targets, as defined in the Consulting Agreement. The warrant may be exercised at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to the vesting set forth above and a 9.9% ownership limitation set forth therein. The warrants were valued as of the date of issuance using the Black-Scholes option pricing model with the following assumptions:
The value of the warrant was determined to be $80,318. The Company recorded $42,850 in stock compensation for the year ended December 31, 2013. Unvested stock compensation totaling $37,739 will be recorded as the remaining vesting requirements are met.
As further consideration under the Consulting Agreement, we agreed to pay to Bagel Boy a consulting fee of $15,000 per month, payable in the form of cash (at a 25% discount) or in the form of a cashless exercise warrant exercisable at fifty percent (50%) of the lowest five (5) closing bid prices during the ten (10) trading days prior to exercise (the “Consulting Warrant”). The warrant may be exercised at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to a 9.9% ownership limitation set forth therein. The warrants were valued as of the date of issuance using the Black-Scholes option pricing model with the following assumptions:
The value of the warrant was determined to be $5,559. The Company recorded $2,947 in stock compensation for the year ended December 31, 2013. Unvested stock compensation totaling $2,612 will be recorded as the remaining vesting requirements are met.
NOTE 10 - RELATED PARTY TRANSACTIONS
As discussed in NOTE 3, the Company had a sales arrangement with HealthRite, a specialty pharmacy wholly owned by the Company’s President and one of its directors. Pursuant to the arrangement, HealthRite would purchase pharmaceutical products directly from manufacturers and resells the products to the Company, who then sells the products to customers. The Company acts as an agent in the sales of HealthRite product to customers and recognizes revenue for the net amount retained.
During the year ended December 31, 2013, the Company had $0 gross sales and $0 net revenue from sales to HealthRite. During the year ended December 31, 2012, the Company recognized net revenue from sales to HealthRite $80,758 based on gross sales of $188,710.
At December 31, 2013 and 2012, the Company owed $115,815 and $148,215, respectively, to its President for repayment of advances. The advances are unsecured, non-interest bearing, and due on demand. The Company imputed interest expense of $6,362 and $9,357 on these advances owed during the years ended December 31, 2013 and 2012, respectively.
On February 19, 2013, the Company received an advance from a related party in the amount of $75,000, and this amount was outstanding as of December 31, 2013. The advance is unsecured, bears interest at 6% and is due on November 19, 2014.
NOTE 11 - INCOME TAXES
The Company files a U.S. Federal income tax return. The components of the consolidated net loss before income tax benefit for the years ended December 31, 2013 and 2012 are as follows:
The components of the Company’s deferred tax assets at December 31, 2013 and 2012 are as follows:
As of December 31, 2013, the Company had generated US net operating loss carry-forwards of approximately $4,688,585 which expires in 2029 through 2033, but may be limited in their use due to significant changes in the Company’s ownership.
At December 31, 2013 and December 31, 2012, the Company has no uncertain tax positions.
NOTE 12 - SUBSEQUENT EVENTS
The Company has evaluated through the filing date of these consolidated financial statements and noted the following subsequent events:
The Company had the following subsequent issuances of common stock:
·
The Company issued 79,834,550 shares of common stock in settlement of convertible debt and accrued interest approximating $150,000.
·
On March 26, 2014, the Company issued 7,500,000 shares with a value of approximately $28,000 for services.
On February 21, 2014, Richard A. Wolpow was appointed as a member of our Board of Directors, and further appointed as Chairman of the Board of Directors, to serve for an initial term of three (3) years or until such time as he is re-elected for an additional term or until his success or duly nominated and elected, in accordance with the Bylaws. We do not have any committees of our Board of Directors at this time. There are no family relationships between Mr. Wolpow and any of our other officers or directors.
Also on February 21, 2014, Mr. Wolpow was appointed as our Interim-Chief Operating Officer, to serve until his resignation or until his replacement is appointed.
On February 24, 2014, the shareholders approved the following at their annual shareholders’ meeting:
1.
To elect two (2) directors to serve until the next Annual Meeting of Shareholders and thereafter until their successor(s) are elected and qualified;
2.
To amend to the Articles of Incorporation of the Company to increase the authorized common stock to one billion (1,000,000,000) shares;
3.
To approve an amendment to the Articles of Incorporation of the Company to effectuate a reverse split of the Company’s common stock, in an amount to be determined at a future date by the Board of Directors of the Company up to 1-for-30, and to simultaneously decrease the authorized common stock to one hundred million (100,000,000) shares, all to be effectuated at a future date as determined by the Board of Directors of the Company;
4.
To approve the Pharmagen, Inc. 2014 Employee Securities Plan;
5.
To approve the Pharmagen, Inc. 2014 Officer and Director Securities Plan;
6.
To ratify the appointment of M&K CPAS, PLLC, as independent auditors of the Company’s financial statements for the fiscal year ended December 31, 2013; and
7.
To transact such other business as may properly come before the meeting or any adjournments thereof.
On March 14, 2014, the Company entered into a Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA pursuant to which the Company agreed to pay $2,433,183 pursuant to one of two alternative payment schedules as set forth in the Settlement Agreement in full settlement of all outstanding amounts due to TCA. Under payment Schedule 1, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, $1,700,000 on September 30, 2014, and approximately $23,975 on each of twelve (12) consecutive months beginning on October 31, 2014. In the alternative, under payment Schedule 2, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, and approximately $675,675 on each of September 30, 2014, December 31, 2014, and March 31, 2015. The election between payment Schedule 1 and Schedule 2 will be made by us on or before September 30, 2014. In addition, TCA will return to us for cancellation all of the approximately 17,291,205 shares of our common stock previously issued to it. In connection with this agreement, the Company has recorded a loss contingency equal to the difference between the amount per the Settlement Agreement and the outstanding debt per the Company’s records at December 31, 2013, net of the effect of the return of the Company’s common stock. The loss contingency totaled $172,296.
On March 24, 2014, we received a fully executed copy of a Consulting Services Agreement dated March 24, 2014, with Stylinz Industries, Inc., a Wyoming corporation, pursuant to which Stylinz Industries will provide consulting services to us, including but not limited to, assistance with due diligence analysis and review of potential acquisition targets and computer system integration support of acquired companies. The Consulting Agreement became effective on March 24, 2014, and will remain effective until either party terminates the agreement upon 30-days written notice or at any time when a segment of work is considered complete. We also have the right to terminate the Consulting Agreement at any time for “Cause,” as defined in the agreement.
Under the Consulting Agreement, Stylinz Industries has committed to provide up to ten (10) hours of services per week, with additional hours contingent upon the parties’ mutual agreement. As consideration for the services provided, we will pay Stylinz Industries One Hundred and Twenty Five Dollars ($125.00) per billed hour. In addition, consideration equal to Fifty Dollars ($50.00) per billed hour, and Seventy Five Dollars ($75.00) per hour for travel time, will be paid on a quarterly basis by executing and delivering a Warrant Agreement to Stylinz Industries. The Warrant Agreement shall provide Stylinz Industries with cashless warrants exercisable into our common stock. The number of shares issued shall be based on any Consulting Fee (as defined in the Consulting Agreement) then due and owing and calculated using the Conversion Price on the date the warrants are exercised.
The “Conversion Price” shall be the greater of: (i) fifty percent (50%) of the average of the lowest five (5) closing bid prices during the ten (10) trading days prior to exercise; or (ii) $0.05. The warrants may be exercised at any time beginning on August 27, 2014, subject to a 9.9% ownership limitation set forth therein.
On March 19, 2014, we entered into a Securities Purchase Agreement with three investors pursuant to which we sold an aggregate of one hundred and seventy-five thousand (175,000) shares of our newly created Series C Convertible Preferred Stock at $1.00 per share, for total consideration of $175,000. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as the investors were familiar with our operations and there was no solicitation in connection with the issuance. Our Board of Directors approved an offering of up to five hundred thousand (500,000) shares of Series C Convertible Preferred Stock at $1.00 per share, and to date, we have sold four hundred thousand (400,000) of the shares.
The shares of Series C Convertible Preferred Stock have one (1) vote per share, are redeemable by us on ten (10) trading days advance notice at two hundred percent (200%) of the purchase price, and are convertible into common stock on either a fixed percentage basis or a variable conversion basis.
On a fixed conversion basis, the holders of the Series C Convertible Preferred Stock can acquire upon conversion, in the aggregate, fifteen percent (15%) of the then-outstanding shares of common stock of the Company. On a variable conversion basis, the shares are convertible at 33.33% of the lowest five (5) closing bid prices of our common stock during the ten (10) trading days prior to conversion. In no event can any single shareholder convert the Series C Convertible Preferred Stock if it will result in their ownership exceeding 9.99% of our then issued and outstanding shares.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There are no events required to be disclosed under this Item.
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2013, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2013, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 4(b).
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, Management identified the following two material weaknesses that have caused management to conclude that, as of December 31, 2013, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the year ending December 31, 2013. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
(c) Remediation of Material Weaknesses
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.
We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.
(d) Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report, the fiscal year ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B
ITEM 9B - OTHER INFORMATION.
There are no events required to be disclosed by the Item.
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers, and the positions with us held by each person, and the date such person became a director or executive officer. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Family relationships among any of the directors and officers are described below.
Mackie Barch, age 38, is our President, Chief Executive Officer, Secretary, a director, and co-founder of Healthcare Distribution Specialists, now known as Pharmagen Distribution, LLC, which is our wholly-owned subsidiary. Before launching Pharmagen Distribution, Mr. Barch co-founded Global Nutritional Research LLC (GNR) in July 2007, which manufactures OTC products for a specific disease based on Rx/OTC interaction, and continues to work with GNR but GNR currently has de minis assets and operations. We have, in the past, purchased products from GNR, and may continue to do so in the future. Prior to founding Pharmagen Distribution and GNR, from late 2006 to 2007, Mr. Barch was involved in numerous financial and operational aspects of Global Pharmaceutical Sourcing (GPS). Prior to working for GPS, Mr. Barch was employed as Assistant Vice President in institutional equities at Friedman, Billings, & Ramsey (FBR), an investment bank and broker-dealer, from 2001 to 2006. During his career, Mr. Barch has participated in numerous equity offerings. Mr. Barch graduated the University of Colorado-Boulder with a BA in Economics. Mr. Barch is currently an elected official in the State of Maryland, serving as a City Council Member in Kensington, MD, and has been since his election in 2009. The Company determined that Mr. Barch’s background with Pharmagen Distribution and in the pharmaceutical and finance industries made him the ideal candidate for appointment to the board of directors and as an officer of the Company. Mr. Barch was also President of the National Blood Clot Alliance Chapter in Washington, D.C., hosting charity events to raise awareness about the prevalence of Thrombophilia and clot prevention.
Eric Clarke, age 39, has served as our Chief Financial Officer since December 31, 2012. Mr. Clarke brings over 17 years of extensive health care and financial expertise. From January through August 2012, Mr. Clarke was pursuing personal opportunities. Beginning in September 2012 and until his appointment as the CFO, Mr. Clarke provided consulting services to us regarding our financial reporting requirements. From 2008 through 2011, Mr. Clarke served as an Assistant Vice President at MedStar Health, a $4 billion diversified health system in the Washington D.C. region. As the leader in charge of the Internal Audit function, Mr. Clarke oversaw all financial and operational audits, was instrumental in building an effective internal audit function, and reported to the Audit and Compliance Committee of Medstar Health. Prior to MedStar, from 2006 to 2008, Mr. Clarke served as the Managing Director in charge of the Washington D.C. Risk Management Practice for Accume Partners, a national professional services firm, providing expert advice and service in forensic accounting, SEC reporting, and Sarbanes-Oxley Compliance. Mr. Clarke has authored numerous presentations and articles in the accounting and compliance arena, as well as been featured in several publications, such as Compliance Week and Practical Accountant. Mr. Clarke is a member of the Virginia Society of Certified Public Accountants, holds a Master’s Degree in Accounting from George Washington University and a Bachelor’s Degree from Wheaton College.
Richard A. Wolpow, age 50, is our Interim-Chief Operating Officer and a director. Mr. Wolpow has been advising and operating small to mid-size private and public companies for 20 years. Most recently, beginning in 2007, Mr. Wolpow a founder, Secretary, and Director of POC Network Technologies, Inc., a provider of billing and reimbursement for vaccines and other pharmaceutical products. Previously, from 2001 to 2010, Mr. Wolpow was founder, COO and Vice Chairman of Dispensing Solutions, Inc. (DSI), a Pharmaceutical Manufacturer operating a state-of-the-art repackaging facility in Santa Ana, California, which he sold to PSS World Medical (NASDAQ: PSSI). Prior to DSI, Mr. Wolpow, through his holding company, Ocean View Investment Holdings Ltd., was the primary investor and principal shareholder of Trinity Health Ventures. In 2000 Trinity, being a primary entity in a Goldman Sachs roll-up, became Odyssey Health Care Inc. (NASDAQ: ODSY), later selling in June 2010, to Gentiva Health Services (NASDAQ: GTIV) for over a billion dollars. Richard was also one of the principals with Freedom Health, Inc., a developer of an intelligent debit health card in association with Buck Consultants, Mellon Bank and MasterCard. Mr. Wolpow’s first health related company started in 1995 when he was recruited to run TheHealthChannel.com. Other entrepreneurial successes include ventures in the Internet, resort ownership, music/audio, construction and apparel industries.
Family Relationships
There are no family relationships among any of our officers, directors, or greater-than-10% shareholders.
Other Directorships; Director Independence
Other than as set forth above, none of our officers and directors is a director of any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCQB on which our shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Officer” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
According to the NASDAQ definition, we do not have any independent directors.
Committees
We do not currently have an audit committee or an audit committee financial expert, nor do we have any other committees of the Board of Directors.
Involvement in Certain Legal Proceedings
None of our officers or directors has, in the past ten years, filed bankruptcy, been convicted in a criminal proceeding or is named in a pending criminal proceeding, been the subject of any order, judgment, or decree of any court permanently or temporarily enjoining him from any securities activities, or any other disclosable event required by Item 401(f) of Regulation S-K.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, the following is a list of individuals that have not filed, or filed late, a report reflecting a change in ownership as required pursuant to Section 16(a) of the Securities Act of 1934:
Board Meetings
During the fiscal year ended December 31, 2013, only one person was a member of our Board of Directors. As such, our Board of Directors did not hold any formal meetings; rather, in lieu of formal meetings, our Board took action by unanimous written consent on several occasions.
Code of Ethics
We have not adopted a written code of ethics, primarily because we believe and understand that our officers and directors adhere to and follow ethical standards without the necessity of a written policy.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION.
Narrative Disclosure of Executive Compensation
On October 9, 2012, we entered into an employment agreement with Mackie Barch, one of our officers and directors. Pursuant to the agreement, Mr. Barch will continue to serve as our Chief Executive Officer and Chairman of the Board. The agreement has a three (3) year term and will automatically renew for one (1) year periods unless we or Mr. Barch provide notice to the other at least ninety (90) days prior to the expiration of any term of the intention not to renew. Mr. Barch will be compensated in the amount of $170,000 per year for the duration of the agreement. In the event Mr. Barch is terminated without cause or resigns for good reason, he shall be entitled to receive payment of one (1) year of his salary to be made in accordance with our normal payroll cycle.
All of our executives are at-will employees.
Summary Compensation Table
The following table sets forth information with respect to compensation earned by our Chief Executive Officer, President, and Chief Financial Officer for the fiscal years ended December 31, 2013 and 2012.
(1)
On February 13, 2012, Mr. Barch was appointed as our President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director. As compensation for such services, Mr. Barch was to receive a monthly fee of $1,000.
Compensation for Mr. Barch prior to February 13, 2012 includes amounts paid to Mr. Barch by Pharmagen Distribution, our wholly-owned subsidiary. Pharmagen Distribution has no formal agreement with Mr. Barch and during 2011 it paid Mr. Barch what it could afford at various times up through October 1, 2011, including $4,000 in June 2011, $5,000 in July 2011, $7,000 in August 2011,and $6,000 in September 2011, for a total of $22,000 through October 1, 2011. Starting on October 1, 2011, Pharmagen Distribution paid Mr. Barch $9,000 per month for each of October 2011, November 2011 and December 2011. Beginning on January 1, 2012, Pharmagen Distribution began paying Mr. Barch $7,000 every two weeks, but there is no agreement to cover this payment.
On October 9, 2012, we entered into an employment agreement with Mr. Barch to pay him a salary of $170,000 per year. During 2013, Mr. Barch received $150,000 in salary, with the remainder waived.
(2)
Mr. Clarke was appointed as our Chief Financial Officer on December 31, 2012. Mr. Clarke does not have a written employment agreement, but is paid a salary of $150,000 per year. During 2013, Mr. Charke received $140,000 in salary, with the remainder waived.
(3)
Mr. Wolpow became our Interim-Chief Operating Officer on February 21, 2014.
Director Compensation
For the years ended December 31, 2013 and 2012, none of the members of our Board of Directors received compensation for his or her service as a director. We do not currently have an established policy to provide compensation to members of our Board of Directors for their services in that capacity. We intend to develop such a policy in the near future.
Outstanding Equity Awards at Fiscal Year-End
On June 18, 2012, our Board of Directors approved the Sunpeaks Ventures, Inc. 2012 Omnibus Stock Grant and Option Plan and set aside 40,000,000 shares of our common stock for issuance thereunder. Pursuant to the plan, officers, directors, key employees and certain consultants may be granted stock options (including incentive stock options and non-qualified stock options), restricted stock awards, unrestricted stock awards, or performance stock awards. As of December 31, 2012, we have not made any awards under the Plan.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of March 11, 2014, certain information with respect to the Company’s equity securities owned of record or beneficially by (i) each Officer and Director of the Company; (ii) each person who owns beneficially more than 5% of each class of the Company’s outstanding equity securities; and (iii) all Directors and Executive Officers as a group.
Common Stock Ownership Table
Preferred Stock Ownership Table(7)
(1)
The number and percentage of shares beneficially owned is determined under rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table.
(2)
Based on 498,575,954 shares of common stock issued and outstanding as of March 11, 2014.
(3)
Based on 0 shares of Class A Preferred Stock issued and outstanding as of March 11, 2014.
(4)
Based on 5,100,000 shares of Class B Convertible Preferred Stock issued and outstanding as of March 11, 2014.
(5)
Based on 125,000 shares of Class C Convertible Preferred Stock issued and outstanding as of March 11, 2014.
(6)
Includes shares of common stock and Class B Convertible Preferred Stock held of record by Old Line Partners, LLC. Bethesda Holdings, LLC is the manager of Old Line Partners, LLC and has sole voting power over the shares. Mackie Barch is the sole member and manager of Bethesda Holdings, LLC. Subject to contractual restrictions, Bethesda may instruct Old Line to sell no more than 1% of the outstanding securities of Pharmagen, Inc. in a 90-day period and deliver the proceeds to Bethesda.
(7)
Class A Preferred Shares have 100:1 voting rights and 5:1 conversion rights to common stock. Class B Preferred Shares have voting rights equal to 51% of the votes on all matters to come before the shareholders, and is convertible into 7.5% of the issued and outstanding shares of common stock calculated on the date of conversion. Class C Preferred Shares have 1:1 voting rights and are convertible to common stock on either a fixed percentage basis or a variable conversion basis. On a fixed conversion basis, the holders of the Series C Preferred Shares can acquire upon conversion, in the aggregate, fifteen percent (15%) of the then-outstanding shares of common stock of the Company. On a variable conversion basis, the shares are convertible at 33.33% of the lowest five (5) closing bid prices of our common stock during the ten (10) trading days prior to conversion. In no event can any single shareholder convert the Series C Preferred Shares if it will result in their ownership exceeding 9.99% of our then issued and outstanding shares.
(8)
Eric Clarke is the sole member and manager of Beauchamp Capital Holdings, LLC, which is a member of Old Line Partners, LLC. Beauchamp does not have any voting control over the shares held by Old Line Partners. Subject to contractual restrictions, Beauchamp may instruct Old Line to sell no more than 1% of the outstanding securities of Pharmagen, Inc. in a 90-day period and deliver the proceeds to Beauchamp.
(9)
Old Line Partners, LLC’s address is: 201 South Main Street, 13th Floor, Salt Lake City, UT 84111.
(10)
Bagel Boy Equity Group, II, LLC’s address is: 408 40th Street, Newport Beach, CA 92663.
(11)
Includes shares of our Series C Convertible Preferred Stock held of record by Bagel Boy Equity Group, II, LLC. Richard A. Wolpow is the managing member of Bagel Boy Equity Group, II, LLC (“Bagel Boy”) and has voting power over the shares.
(12)
Includes 37,393,197 shares of common stock which may be acquired upon conversion of 5,100,000 shares of Series B Convertible Preferred Stock. Our Series B Convertible Preferred Stock is convertible into 7.5% of the issued and outstanding shares of common stock calculated on the date of conversion.
(13)
Includes 29,914,557 shares of common stock which may be acquired upon conversion of 200,000 shares of Series C Convertible Preferred Stock. Our Series C Convertible Preferred Stock is convertible, in the aggregate, into 15% of our issued and outstanding shares of common stock, or into shares of our common stock based on 33.3% of the market price at the time of conversion. In no event can any single shareholder convert the Series C Convertible Preferred Stock if it will result in their ownership exceeding 9.99% of our then issued and outstanding shares. The 29,914,557 shares represents the total number of shares of our common stock that Bagel Boy Equity Group II, LLC, could acquire if it converted all of its Series C Convertible Preferred Stock on March 11, 2014. This figure does not include shares of common stock that Bagel Boy may acquire upon the exercise of warrants that will allow it to acquire up to three percent (3%) of our issued and outstanding shares of common stock because the warrants are not exercisable within the next 60 days.
(14)
Unless noted otherwise, the address is c/o Pharmagen, Inc., 9337 Fraser Ave., Silver Spring, MD 20910.
(15)
Includes shares of Series B Convertible Preferred Stock held of record by Old Line Partners, LLC. Bethesda Holdings, LLC is the manager of Old Line Partners, LLC and has sole voting power over the shares. Mackie Barch is the sole member and manager of Bethesda Holdings, LLC. Bethesda may instruct Old Line to sell no more than 1% of the outstanding securities of Pharmagen, Inc. in a 90-day period and deliver the proceeds to Bethesda.
(16)
Gary Kartchner’s address is: 28202 Cabot Road, Suite 520, Laguna Niguel, CA 92677.
The issuer is not aware of any person who owns of record, or is known to own beneficially, five percent or more of the outstanding securities of any class of the issuer, other than as set forth above. There are no classes of stock other than as set forth above.
There are no current arrangements which will result in a change in control.
Securities Authorized for Issuance under Equity Compensation Plans
On June 18, 2012, our Board of Directors approved the Sunpeaks Ventures, Inc. 2012 Omnibus Stock Grant and Option Plan and set aside 40,000,000 shares of our common stock for issuance thereunder. Pursuant to the plan, officers, directors, key employees and certain consultants may be granted stock options (including incentive stock options and non-qualified stock options), restricted stock awards, unrestricted stock awards, or performance stock awards. As of December 31, 2013, we have not made any awards under the Plan.
As of December 31, 2013, we had the following options outstanding:
As consideration under a Consulting Agreement entered into with Bagel Boy Equity Group, II, LLC (“Bagel Boy”), we issued Bagel Boy a warrant to acquire up to three percent (3%) of our issued and outstanding shares of common stock, calculated at the time of exercise, at an exercise price of $0.0065 per share. The warrant vests in two equal parts, one-half immediately upon vesting and one-half upon completion of the acquisition of two (2) Acquisition Targets, as defined in the Consulting Agreement. The warrant may be exercise at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to the vesting set forth above and a 9.9% ownership limitations set forth therein. For purposes of illustration only, we have assumed that the entire warrant was exercised as of March 11, 2014.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Our wholly-owned subsidiary, Pharmagen Distribution, had an arrangement with Healthrite Pharmaceuticals, a specialty pharmacy owned by one of our officers and directors, Mr. Barch. Pursuant to the arrangement Healthrite would purchase pharmaceutical products directly from manufacturers and then resell them to Pharmagen Distribution. During the quarter ended June 2012, Healthrite notified us that due to the cost and effort to maintain a pharmaceutical license it has surrendered its pharmaceutical license and will no longer be buying and selling pharmaceuticals. During the years ended December 31, 2012 and 2011, Pharmagen Distribution purchased $114,000 and $1.1 million, respectively, of inventory from Healthrite, which was then resold to customers. We do not expect Healthrite’s decision to surrender its pharmaceutical license to have a material impact on our business.
At December 31, 2013 and 2012, we owed $115,815 and $148,215, respectively, to Mackie Barch, one of our officers and directors, for repayment of advances. The advances are unsecured, non-interest bearing, and due on demand. We imputed interest expense of $6,362 and $9,357 on these advances owed during the years ended December 31, 2013 and 2012, respectively.
During the year ended December 31, 2011, Justin Barch, the brother of Mackie Barch, one of our officers and director, loaned us $75,000, which was used to fund our operations. The $75,000 is proceeds Justin Barch received through a loan from Eagle Bank. Justin Barch charged us the interest Eagle Bank charged Justin Barch for the loan, which was $3,213 for 2013 and $3,791 for 2012, based on an interest rate of 6.5% per annum. Justin Barch did not charge us any additional interest on the loan other than what was charged to Justin Barch by Eagle Bank. There is no agreement between us and Justin Barch to evidence this loan. For the years ended December 31, 2013 and 2012, (a) the largest aggregate amount of principal outstanding was $75,000 and $75,000, respectively, (b) the outstanding principal balance as of December 31, 2013 and 2012 was $75,000 and $75,000, respectively, (c) we paid an aggregate of $0 and $0, respectively, toward the outstanding principal amount, and (d) we paid interest of $3,213 and $3,791, respectively, at an interest rate of 6.5% per annum.
For 2013, the $115,815 owed to Mackie Barch and the $75,000 owed on the loan from Justin Barch equals the $190,815 noted on our balance sheet as due to related party.
For 2012, the $145,215 owed to Mackie Barch and the $75,000 owed on the loan from Justin Barch equals the $223,215 noted on our balance sheet as due to related party.
During 2012, Mackie Barch, one of our officers and director, was paid by Pharmagen Distribution, our wholly-owned subsidiary, for the services he provided to Pharmagen Distribution. Pharmagen Distribution has no formal agreement with Mr. Barch but began paying Mr. Barch $7,000 every two weeks starting on January 1, 2012. During the year ended December 31, 2012, Pharmagen Distribution paid Mr. Barch a total of $150,500.
On October 9, 2012, we entered into an employment agreement with Mackie Barch, one of our officers and directors. Pursuant to the agreement, Mr. Barch will continue to serve as our Chief Executive Officer and Chairman of the Board. The agreement has a three (3) year term and will automatically renew for one (1) year periods unless we or Mr. Barch provide notice to the other at least ninety (90) days prior to the expiration of any term of the intention not to renew. Mr. Barch will be compensated in the amount of $170,000 per year for the duration of the agreement. In the event Mr. Barch is terminated without cause or resigns for good reason, he shall be entitled to receive payment of one (1) year of his salary to be made in accordance with our normal payroll cycle.
Mr. Clarke was appointed as our Chief Financial Officer on December 31, 2012. Mr. Clarke does not have a written employment agreement, but is paid a salary of $150,000 per year.
Effective on December 31, 2012, Mackie Barch, in fulfillment of prior obligations to certain key employees and founders of Pharmagen Distribution, transferred all of his equity interest in us to Old Line Partners, LLC. The sole manager of Old Line is Bethesda Holdings, LLC, of which Mr. Barch is the sole member and manager. Bethesda has all voting control over the securities owned by Old Line, and with certain minor exceptions, all power of disposition as well. See Security Ownership of Certain Beneficial Owner and Management.
On December 12, 2013, we received a fully executed copy of a Consulting Services Agreement dated December 9, 2013 with Bagel Boy Equity Group II, LLC, a private family office, whereby its managing partner, Richard A. Wolpow, became our Chairman of the Board of Directors and interim Chief Operating Officer. As consideration under the Consulting Agreement, we issued to Bagel Boy a warrant to acquire up to three percent (3%) of our issued and outstanding shares of common stock, calculated at the time of exercise, at an exercise price of $0.0065 per share (the “Commencement Warrant”). The warrant vests in two equal parts, one-half immediately upon vesting and one-half upon completion of the acquisition of two (2) Acquisition Targets, as defined in the Consulting Agreement. The warrant may be exercised at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to the vesting set forth above and a 9.9% ownership limitation set forth therein. As further consideration under the Consulting Agreement, we agreed to pay to Bagel Boy a consulting fee of $15,000 per month, payable in the form of cash (at a 25% discount) or in the form of a cashless exercise warrant exercisable at fifty percent (50%) of the lowest five (5) closing bid prices during the ten (10) trading days prior to exercise (the “Consulting Warrant”). The warrant may be exercised at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to a 9.9% ownership limitation set forth therein.
Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCQB on which our shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Officer” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
According to the NASDAQ definition, we do not have any independent directors.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billed for the years ended December 31, 2013 and 2012 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $32,000 and $30,000, respectively.
Audit - Related Fees
The aggregate fees billed in the fiscal years ended December 31, 2013 and 2012 for professional services rendered by the principal accountant for the review of the financial statements for the quarterly periods ended March 31, June 30, and September 30, of each year, and for the issuance of consents, were $19,500 and $21,000, respectively.
Tax Fees
For the fiscal years ended December 31, 2013 and 2012, our principal accountants did not render any services for tax compliance, tax advice, and tax planning work.
All Other Fees
None.
Of the fees described above for the years ended December 31, 2013 and 2012, all were approved by the entire Board of Directors.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
(a)(2) Financial Statement Schedules
We do not have any financial statement schedules required to be supplied under this Item.
(a)(3) Exhibits
Refer to (b) below.
(b) Exhibits
(1)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 4, 2011.
(2)
Incorporated by reference from our Registration Statement on Form S-1 filed with the Commission on September 18, 2009.
(3)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 14, 2013.
(4)
Incorporated by reference from Exhibit 10.7 to our Current Report on Form 8-K filed with the Commission on February 17, 2012.
(4)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 17, 2012.
(4)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 17, 2012.
(4)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 17, 2012.
(4)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 17, 2012.
(4)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 17, 2012.
(5)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 6, 2012.
(5)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 6, 2012.
(6)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 11, 2012.
(6)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 11, 2012.
(7)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 18, 2012.
(7)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 18, 2012.
(8)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 24, 2012.
(9)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 25, 2012.
(10)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 2, 2012.
(11)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 4, 2012.
(12)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 11, 2012.
(13)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on May 16, 2012.
(14)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 27, 2012.
(14)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 27, 2012.
(14)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 27, 2012.
(15)
Incorporated by reference from our Current Report on Form 8-K/A filed with the commission on August 3, 2012.
(15)
Incorporated by reference from our Registration Statement on Form S-8 filed with the commission on August 3, 2012.
(15)
Incorporated by reference from our Registration Statement on Form S-8 filed with the commission on August 3, 2012.
(16)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 12, 2012.
(17)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 17, 2012.
(17)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 17, 2012.
(17)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 17, 2012.
(17)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on October 17, 2012.
(18)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 17, 2012.
(18)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 17, 2012.
(18)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 17, 2012.
(18)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 17, 2012.
(18)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 17, 2012.
(19)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 19, 2012.
(19)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 19, 2012.
(19)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 19, 2012.
(20)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on January 3, 2013.
(21)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on April 12, 2013.
(22)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on June 25, 2013.
(23)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on July 12, 2013.
(24)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on August 15, 2013.
(25)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on September 10, 2013.
(26)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 16, 2013.
(27)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 20, 2013.
**
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 31, 2014
/s/ Mackie Barch
By:
Mackie Barch
Its:
Chief Executive Officer and Director
Dated: March 31, 2014
/s/ Eric Clarke
By:
Eric Clarke
Its:
Chief Financial Officer and Principal Accounting Officer