UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





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





For the fiscal year ended  December 31, 2013.


or





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





For the transition period from ____________ to ____________.





Commission File Number:  333-181361





Assured Pharmacy, Inc.


(Exact name of registrant as specified in its charter)





Nevada
98-0233878(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)





5600 Tennyson Parkway, Suite 390, Plano, TX 75024


(Address of principal executive offices) (Zip Code)





(972) 473-4033


(Registrant’s telephone number, including area code)





Securities registered pursuant to Section 12 (b) of the Exchange Act:





Title of Each Class
Name of Exchange of Which Registered





Securities registered pursuant to Section 12(g) of the Exchange Act:  None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   ̈    No  x





Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes   ̈    No  x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No   ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No   ̈





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x





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





Large accelerated filer  ̈
Accelerated filer                      ̈Non-accelerated filer    ̈

(Do not check if a smaller reporting company)
Smaller reporting company  x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ̈    No  x





The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $1,463,551 as of March 27, 2014, based on the last sale price of the registrant’s common stock as reported on the OTC Bulletin Board on such date.





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





Class

Outstanding at March 27, 2014Common Stock, $0.001 par value

10,476,387










Table of Contents








Form 10-k


Assured Pharmacy, Inc.


December 31, 2013





Table of Contents





Page(s)Part I.Item 1.
BUSINESS

4 - 13Item 1A.
RISK FACTORS

14 - 26Item 1B.
UNRESOLVED STAFF COMMENTS

26Item 2.
PROPERTIES

26Item 3.
LEGAL PROCEEDINGS

26 - 27Item 4.
MINE SAFETY DISCLOSURES

27EXECUTIVE OFFICERS OF THE REGISTRANT

27 - 28Part II.Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES

28 - 31Item 6.
SELECTED FINANCIAL DATA

31Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

31 - 41Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

41Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

42Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

43Item 9A.
CONTROLS AND PROCEDURES

43Item 9B.
OTHER INFORMATION

43Part III.Item 10.
DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

44 - 46Item 11.
EXECUTIVE COMPENSATION

46 - 49Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

50 - 53Item 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

54 - 56Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

56Part IV.Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

57 - 58EX-10.4
(FOURTH AMENDMENT TO PURCHASE AGREEMENT)

57EX-10.5
(AMENDMENT TO REVOLVING LINE OF CREDIT)

57EX-10.6
(LETTER AGREEMENT- DEBENTURE )

57EX-10.7
(AMENDED AND RESTATED CONVERTIBLE DEBENTURE)

57EX-10.8
(FORBEARANCE AGREEMENT)

57EX-10.9
(FORM OF 12% PROMISSORY NOTE)

57EX-10.10
(PROMISSORY NOTE – PINEWOOD)

57EX-21.1
(SUBSIDIARIES OF THE REGISTRANT)

58EX-31.1
(CERTIFICATION OF CHIEF EXECUTIVE OFFICER)

58EX-31.2
(CERTIFICATION OF CHIEF FINANCIAL OFFICER)

58EX-32.1
(CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER)

58












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FORWARD-LOOKING STATEMENTS





This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements.  These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control.  Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs.  There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.





These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements.  Some of the factors that we believe could affect our results include:





·
limitations on our ability to continue operations and implement our business plan;





·
our history of operating losses;





·
our inability to make timely payments to convertible debenture and secured debt holders;





·
the timing of and our ability to obtain financing on acceptable terms;





·
dependence one key supplier;





·
dependence on third-party payors;





·
the effects of changing economic conditions;





·
the loss of members of the management team or other key personnel;





·
changes in governmental laws and regulations, or the interpretation or enforcement thereof and related compliance costs; and/or





·
costs and other effects of legal and administrative proceedings, settlements, investigations and claims, which may not be covered by insurance.





There are likely other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. All forward-looking statements attributable to us in this document apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.





In this report, unless the context indicates otherwise: “Assured Pharmacy,” the “Company,” “we,” “our,” “ours” or “us” refer to Assured Pharmacy, Inc., a Nevada corporation, and its subsidiaries.









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PART I




ITEM 1.     BUSINESS





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





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





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





Location

Opening DateKirkland, Washington

August 11, 2004Leawood, Kansas

November 28, 2011





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





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











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





Market for Our Products and Services





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





Principal Suppliers





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





Customers and Third-Party Payors





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





Our Strategic Plan





Our plan is to develop a national footprint as a premier provider of pharmacy services to physicians and patients primarily in the treatment of chronic pain.  Our business model provides pharmacy serviceswhich are typically utilizedby physicians for the risk management benefits of our model in this increasingly regulated industry due to prescription drug abuse and diversion.  Chronic pain patients typically utilize our services for the convenience, safety and specialization benefits.





We have developed and refined what we believe is a unique pharmacy service model for chronic pain physicians and patients that is capable of being scaled into a national chain.  We currently have two operating pharmacies, and our plan is to develop up to four (4) additional pharmacies per year up to a total of twelve operating pharmacies subject to our ability to secure additional financing.  We currently have two pharmacies under development in the Denver, Colorado and Boston, Massachusetts markets.  Management plans to open the Denver pharmacy in the 2nd quarter of 2014 and open the Boston pharmacy in the 4th quarter of 2014 subject to financing availability.  We intend to finance this plan through a mix of equity and debt financing arrangements, increased sales and lower operating expenses, but there can be no assurance that such additional financing will be available to us on acceptable terms, or at all.





Beginning in August 2013, management has developed and implemented a plan to scale back operations in an attempt to avoid ceasing operations. As a result, management closed two pharmacies in order to reduce overall fixed pharmacy costs by 50% and concentrate our limited working capital to support the operations of the two remaining pharmacies we believe have the best prospects.   Management considered several factors in determining which two pharmacies to close, including historical financial performance, regulatory costs, current sales prospects, geographic and physical location and strength of existing physician relationships.  After consideration of these factors, management closed our Gresham, Oregon and Riverside, California pharmacies on August 5, 2013 and August 8, 2013, respectively.









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


In addition to the operational restructuring, we have also strengthened our financial position considerably by securing additional fnancing and restructuring our balance sheet over the past several months. A lead investor has provided us with $1.44 million of new financing from August 2013 to date, which enabled us to implement a plan to streamline our operations and target near-term profitability. The new financing was disbursed throughout our operations to meet increasing demand from physicians who wish to have greater precision in the management of their chronic patients. We have successfully restructured, approximately $7.9 million of our outstanding debt and accrued interest. The holders of the Company’s long-term debt, totaling approximately $5.5 million, have agreed to extend the maturity of their debt until 2016. In addition, the holders of the Company’s long-term debt, totaling approximately $1.6 million have converted their debt into common equity at a price of $0.60 per share. As part of these debt extensions and conversions, an aggregate total of approximately $800,000 in accrued interest has converted into common equity at a price of $0.60 per share.  All of these balance sheet adjustments have allowed us to focus the new capital on meeting the increasing demand for our services resulting in revenue growth.




Because our management believes that our current corporate infrastructure can efficiently support our existing pharmacies and develop up to four additional new pharmacies per year up to total of twelve operating pharmacies,  we believe that the implementation of our plan to open up to ten additional pharmacies will not require material additional corporate infrastructure.  Further, we target the opening of each new pharmacy to have a positive impact on our consolidated operating results within nine months from opening the new pharmacy, but there can be no assurance that such positive results will occur.





The success of future pharmacy locations is highly dependent on the location of that particular pharmacy.  Future pharmacy locations, when established, will be selected based on criteria which include: i) the proximity to physician and medical facilities; ii) convenience of the particular location; iii) size and growth rate of the surrounding metropolitan area; iv) state and local tax rates; v) competitive business environment and vi) access to qualified personnel and the associated cost.  Management believes that the success of new pharmacies will be positively impacted by its research process and diligence in selecting new locations.





The foundation for our plan to increase sales at our existing two operating pharmacies includes expanding our outreach program to physicians, more effectively communicating to them the risk management and service benefits that our business model provides and increasing our customer retention rate.   We believe that our customer retention rates can be strengthened by increasing our inventory levels and expanding our purchasing capacity with existing and new drug suppliers.Since the restructure of our operations in August 2013, our revenue per business day from the existing two pharmacies has increased approximately 112% from approximately $12,500 per day in July 2013 to approximately $26,500 in revenue per day in February 2014.  Since the majority of our pharmacies’ operating expenses are fixed expenses, we expect any increase in revenue to have a positive impacton our consolidated operating results.  Management believes that our existing pharmacies can increase prescription production volume by as much as an additional 75% - 100% without incurring any significant additional operating expenses, but there can be no assurances in this regard.








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The implementation of the foregoing plan to increase sales at our existing pharmacies and open additional pharmacies is dependent on our ability to obtain additional financing and improve our liquidity position.  If we are not able to secure additional financing, the implementation of our business plan will be delayed and our ability to expand and develop additional pharmacies will be impaired.   We are currently seeking up to $3.0 million in additional funding through debt and equity financing arrangements, but there can be no assurance that such additional financing will be available to us on acceptable terms, or at all.




In February 2013, the Company entered into a secured loan agreement with our primary wholesaler. Under the terms of this agreement, the Company received a one (1) year loan of $3,828,527 with an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements are $27,000 per month for four consecutive months, followed by four consecutive monthly principal reductions of $37,000, followed by three consecutive monthly in principal reductions of $42,000, with remaining principal and interest due February 1, 2014, which was subsequently amended.  The proceeds from the note were simultaneously exchanged for $3,534,793 in outstanding vendor invoices and $293,734 in outstanding secured note payable. The note is secured by all of the assets of the Company and its subsidiaries through UCC-1 filings in the states of Nevada and Louisiana.  As long as the Company is in compliance with the terms of the loan agreement, the Company will realize drug pricing improvements of 100 to 200 basis points in addition to the elimination of financing and interest fees associated with the trade payable. In July 2013, we entered into an Amendment To Promissory Note Agreement with H.D. Smith Wholesale Drug Co. to extend the maturity date of our Promissory Note Agreement dated February 1, 2013 by two years from February 1, 2014 to February 1, 2016.  The Company shall be required to make monthly payments of $42,000 per month for each of the twenty three months during the extension period. As of March 27, 2014, due to our current financial condition, we have not made principal and interest payments in the amount of $338,479 as required by the agreement.  In March 2014, we entered into a Forbearance Agreement with the lender that the lender forbears from accelerating the outstanding balance of the Note and from instituting collection efforts from the date of the agreement through July 1, 2014.





We currently have approximately $800,000 in gross receivables due from various workers’ compensation carriers in the State of California. These receivables are primarily related to worker’s compensation claims from insurance carriers for prescription medications dispensed to injured workers in the State of California by our discontinued operation.  The delay in payment typically arises due to monetary disputes between the claimant and the employer and/or the employer’s insurance carrier. The settlement period for such dispute cases can range from one year to ten years.  Management estimates the net realizable value of the other receivables to be approximately $141,000.  We engaged a collection firm that specializes in the collection of these type of receivables to aggressively collect these past due receivables. During the year ended December 31, 2013, our collection firm, collected approximately $167,000 in past due balances resulting in approximately $100,000 in bad debt recoveries.  We expect that any recovery of these outstanding receivables will improve our overall operating cash flow, but we can make no assurances in this regard.




Management believes that the foregoing plan and outlined steps to improve our liquidity position will have a positive impact on our efforts to generate earnings and positive cash flow, but the implementation of such plan is dependent on our ability to secure additional financing and restructure our outstanding debt.  We can make no assurances in this regard.  From January 1, 2014 through March 27, 2014, the Company has secured loans in the aggregate amount of $440,000 from Pinewood Trading Fund, LP, a related party, extended the maturity date of an aggregate total of $1,000,000 in convertible debentures from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest into common stock at $0.60 per share.  In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015.  The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced.  The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.









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Competition





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





Research and Development





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





Existing and Probable Governmental Regulation





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





Licensure Laws





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





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








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Drug Enforcement Laws





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





Federal Health Programs





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





The Federal Health Care Programs Anti-Kickback Act





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





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





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





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





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









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





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





Ethics in Patient Referrals Act





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





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





State Fraud and Abuse Laws





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





HIPAA





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





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





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





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








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





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





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





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





OBRA 1990





Our business is subject to various other federal and state regulations. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990 (“OBRA”) and comparable state regulations, our pharmacists are required to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists and may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effect.





2010 Health Care Reform Legislation





The Patient Protection and Affordable Care Act and the reconciliation law known as Health Care and Education Affordability Reconciliation Act (combined we refer to both Acts as the “2010 Health Care Reform Legislation”) were enacted in March 2010. State participation in the expansion of Medicaid under the 2010 Health Care Reform Legislation is voluntary. Three key provisions of the 2010 Health Care Reform Legislation that are relevant to the Corporation are: (i) the gradual modification to the calculation of the Federal Upper Limit (“FUL”) for drug prices and the definition of Average Manufacturer’s Price (“AMP”), (ii) the closure, over time, of the Medicare Part D coverage gap, which is otherwise known as the “Donut Hole,” and (iii) short cycle dispensing. Regulations under the 2010 Health Care Reform Legislation are expected to continue being drafted, released, and finalized throughout the next several years. Pending the promulgation of these regulations, the Company is unable to fully evaluate the impact of the 2010 Health Care Reform Legislation.









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FUL and AMP Changes





The 2010 Health Care Reform Legislation amended the Deficit Reduction Act of 2005 (the “DRA”) to change the definition of the Federal Upper Limit (“FUL”) by requiring the calculation of the FUL as no less than 175% of the weighted average, based on utilization, of the most recently reported monthly AMP for pharmaceutically and therapeutically equivalent multi-source drugs available through retail community pharmacies nationally.





In addition, the definition of AMP changed to reflect net sales only to drug wholesalers that distribute to retail community pharmacies and to retail community pharmacies that directly purchase from drug manufacturers. Further, the 2010 Health Care Reform Legislation continues the current statutory exclusion of prompt pay discounts offered to wholesalers and adds three other exclusions to the AMP definition: i) bona fide services fees; ii) reimbursement for unsalable returned goods (recalled, expired, damaged, etc.); and iii) payments from and rebates/discounts to certain entities not conducting business as a wholesaler or retail community pharmacy. In addition to reporting monthly, the manufacturers are required to report the total number of units used to calculate each monthly AMP. The Centers for Medicare and Medicaid Services (“CMS”) will use this information when it establishes FULs as a result of the new volume-weighted requirements pursuant to the 2010 Health Care Reform Legislation.





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





On February 2, 2012, CMS issued proposed regulations further clarifying the AMP and FUL changes described above and indicated that the final rule would be issued in July 2014.





Until CMS provides final guidance and the industry adapts to this now public available pricing information, the Company is unable to fully evaluate the impact of the changes in FUL and AMP to its business.





Part D Coverage Gap





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





Medicare Part D Proposed Changes





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









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





Reimbursement





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





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





Other Laws





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





Compliance with Environmental Laws





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





Employees





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





Additional Information





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










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ITEM 1A.      RISK FACTORS





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





Risks Related to Our Business and Industry





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





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





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





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












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





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





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





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





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





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












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





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





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





Pending and future litigation could subject us to significant monetary damages and/or require us to change our business practices.





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





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





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








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





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





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





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





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





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





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





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











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





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





Changes in Medicare Part D and current and future regulations promulgated thereunder could adversely affect our revenue and impose increased costs.





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





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





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





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





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









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





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





Federal and state medical privacy regulations may increase the costs of operations and expose us to civil and criminal sanctions.





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





Unexpected safety or efficacy concerns may arise from pharmaceutical products.





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








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





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





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





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





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





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





If competition increases, our ability to attract and retain customers or expand our business could be impaired.





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









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





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





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





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





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





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





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





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









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





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





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





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





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





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





Risk Factors Relating to Our Common Stock





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





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





We intend to secure additional funding in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.





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









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Our principal stockholder currently has the ability to elect a majority of our directors and may have different interests than us or other stockholders in the future.





As of March 27, 2014, Pinewood Trading Fund, LP (“Pinewood”) beneficially owns approximately 49.4% of our outstanding common stock and beneficially owns approximately 93.5% of our outstanding Series D Convertible Preferred Stock. As of March 2014, Pinewood is entitled to elect a majority of the Board of Directors, to be accomplished in any manner that the investor deems most expedient and in compliance with applicable laws and the Company’s charter documents.





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





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





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





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





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





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











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





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





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





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





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





·
actual or anticipated fluctuations in our operating results;





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





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





·
overall stock market fluctuations;





·
announcements concerning our business or those of our competitors;





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





·
conditions or trends in the industry;





·
litigation;





·
changes in market valuations of other similar companies;





·
future sales of common stock;





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





·
general market conditions.







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





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





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





Because our common stock is quoted on the OTC Markets and is subject to the “Penny Stock” rules, investors may have trouble reselling their shares.





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





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





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








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





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





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





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





ITEM 1B.         UNRESOLVED STAFF COMMENTS





None.





ITEM 2.            PROPERTIES





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





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





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





ITEM 3.            LEGAL PROCEEDINGS





From time to time, we may be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination or breach of contract actions incidental to the normal operations of the business.  Providing pharmacy services entails an inherent risk of medical and professional malpractice liability. We may be named as a defendant in such lawsuits and thus become subject to the attendant risk of substantial damage awards. We believe that we have adequate professional and medical malpractice liability insurance coverage. There can be no assurance, however, that we will not be sued, that any such lawsuit will not exceed our insurance coverage, or that we will be able to maintain such coverage at acceptable costs and on favorable terms.





On March 18, 2011, a lawsuit was filed by Tim Chandler, Jodi Marshall, Christie Garner, the Estate of Thomas Pike, Jr., and Angie Hernandez in the Circuit Court of the State of Oregon for Multnomah County against Payette Clinics, P.C., Scott Pecora, Kelly Bell, Penny Steers and our wholly-owned subsidiaries, Assured Pharmacies Northwest, Inc. and Assured Pharmacy Gresham, Inc. The lawsuit arises from allegations that nurse practitioners at Payette Clinics, P.C. prescribed the five plaintiffs controlled substances in amounts that were excessive under the appropriate medical standard of care.  Only one of the plaintiffs, Tim Chandler, brought claims against our subsidiaries.  Mr. Chandler’s claims against our subsidiaries were for negligence on the basis of allegations that our subsidiaries knew or had reason to know that the prescriptions fell below the standard of care applicable to the prescription of such controlled substances but nonetheless filled the prescriptions.  The plaintiffs, as a whole, submitted a prayer for $7,500,000 in damages.  Mr. Chandler only seeks “an amount to be proven at trial” for noneconomic damages and unnecessary expenses.  Management believes that the allegations against our subsidiaries are without merit and plans to vigorously defend this claim.  We have $2,000,000 in insurance coverage for claims relating to pharmacy negligence.  This lawsuit has been stayed as a result of a co-defendant in this lawsuit (Payette Clinics, P.C.) having filed for bankruptcy.  The bankruptcy has since been discharged and the automatic stay lifted.  The state court stay was also lifted.  On June 20, 2013, a Motion to Stay took place and the court granted the defendants’ motion.  All proceedings are now stayed until May 30, 2014. The Company has denied any liability and is vigorously defending this action.










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





a)
$50,000 payable on or before December 6, 2013; and


b)
$10,000 payable on or before the first day of each month starting January 1, 2014 and continuing thereafter until the obligation is paid.





On August 23, 2013, AQR Opportunistic Premium Offshore Fund, L.P. and CNH Diversified Opportunities Master Account, L.P. filed a lawsuit against Assured Pharmacy in the Supreme Court of the State of New York. Plaintiffs submitted a Motion for Summary Judgment in Lieu of Complaint against defendants to recover money allegedly owed by Assured Pharmacy, Inc. under two 16% Convertible Debentures totaling $300,000 issued in and around 2011 in a private placement. Assured removed the action to the Southern District of New York. Assured plans to vigorously defend the claim.





On October 25, 2013, a lawsuit was filed by Westlake Gresham North, LLC in the Circuit Court of the State of Oregon.  The lawsuit arises from allegations that Assured Pharmacy Gresham, Inc. and Assured Pharmacy, Inc. are in breach of contract of lease agreement and is claiming $123,234 in damages.  In December 2013, the parties entered into a Release and Settlement Agreement which included a Stipulated General Judgment with Money Award in the amount of $99,174.  As part of the settlement, the Company is required to make monthly rent payments of $3,064.73 beginning with December 2013 rent and continuing until the lease expires or another tenant leases that space.  The Company is also required to make a lump sum payment of $21,239.27 for past due rent by April 1, 2014.





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





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





ITEM 4.            MINE SAFETY DISCLOSURES
















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PART II





ITEM 5.            MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Market Information





Our common stock is currently quoted on the OTC Markets. The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids” and “asks”, as well as volume information. Our shares are quoted on the OTC Markets under the symbol “APHY.”





The following table sets forth the range of high and low closing bid quotations for our common stock for each of the periods indicated as reported by the OTC Markets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.





Fiscal Year Ended December 31, 2013High Bid
Low BidFiscal Quarter Ended:March 31, 2013
$0.92
$0.35June 30, 2013
$0.92
$0.51September 30, 2013
$0.73
$0.25December 31, 2013
$0.40
$0.10Fiscal Year Ended December 31, 2012High Bid
Low BidFiscal Quarter Ended:March 31, 2012
$0.80
$0.20June 30, 2012
$0.90
$0.34September 30, 2012
$0.61
$0.50December 31, 2012
$0.50
$0.20














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Holders of Common Stock





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





Dividends





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





Issuer Purchases of Equity Securities





None.





Recent Sales of Unregistered Securities





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





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





All of the common stock offerings and sales above were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(a) 2 of the Securities Act of 1933. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, our business associates or existing security holders, and transfers of the securities were restricted by us in accordance with the requirements of the Securities Act. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, were capable of analyzing the merits and risks of their investment, and understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with business and financial information concerning our company.





For each of the following common stock and warrant issuances, these securities were issued upon the exemption from the registration provisions of the Securities Act of 1933 provided for by Section 4(a)2 and 3(a)(9).  There were no underwriters or placement agents employed in connection with any of these transactions.




·
Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.  ·
The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities.





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












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





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





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





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





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





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





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









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





On February 13, 2014, we issued 420,694 common shares as payment of $252,417 in accrued interest on outstanding convertible debentures to a convertible debenture holder. The aggregate fair market value of the shares on the date of issuance was determined to be $34,100 or $0.15 per share.




On March 14, 2014, we issued 1,175,408 shares of restricted common stock to a debenture holder upon conversion of $500,000 in debentures and payment of $205,245 in accrued interest on outstanding convertible debentures.  As part of the transaction, we also issued 833,334 three year warrants to purchase common stock at an initial exercise price of $0.60 for twelve months and increasing to $0.75 for the remaining 24 months.





Preferred Stock





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






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





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





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





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





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





Between November 19, 2013 and December 3, 2013, we issued a total of 1,000 shares of Series D Convertible Preferred Stock for gross proceeds of $1,000,000 to Pinewood Trading Fund, LP, a related party, in accordance with the terms of that certain Purchase Agreement dated September 1, 2013.  As part of the transaction we also issued 1,000 Series A and 1,000 Series B five year warrants to purchase an aggregate total of 4,000,000 shares of common stock at an initial exercise price of $0.50.  Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).
 
 On December 17, 2013, we issued a total of 20 shares of Series D Convertible Preferred Stock for gross proceeds of $20,000 to Craig Eagle, a director on the Company’s Board, in accordance with the terms of that certain Purchase Agreement dated December 17, 2013.  As part of the transaction we also issued 20 Series A and 20 Series B  five year warrants to purchase an aggregate total of 80,000 shares of common stock at an initial exercise price of $0.50.  Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).
 
 On December 20, 2013, we issued a total of 50 shares of Series D Convertible Preferred Stock for gross proceeds of $50,000 to an individual accredited investor in accordance with the terms of that certain Purchase Agreement dated December 20, 2013.  As part of the transaction we also issued 50 Series A and 50 Series B five year warrants to purchase an aggregate total of 200,000 shares of common stock at an initial exercise price of $0.50.  Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).
 ITEM 6.            SELECTED FINANCIAL DATA





Not applicable.





ITEM 7.            MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION





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




Overview





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












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





Location

Opening DateKirkland, Washington

August 11, 2004Leawood, Kansas

November 28, 2011





The table set forth below summarizes the number of prescriptions dispensed and the number of patients serviced by our operating pharmacies during the year ended December 31, 2013 and 2012, respectively.





Year ended

Year endedDecember 31, 2013

December 31, 2012Total Number of Prescriptions1

48,139

49,759Total Number of Patients Serviced2

25,401

22,945





1
“Total Number of Prescriptions” equals the total number of prescriptions dispensed by our operating pharmacies and delivered to or picked up by the customer.





2
“Total Number of Patients Serviced” equals the total number of patients serviced measured on a monthly basis.





Recent Events





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





In February and March 2014, the Company entered into five short term promissory notes with Pinewood Trading Fund, LP., a related party for an aggregate total of $240,000.  The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.





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




In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015.  The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced.  The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.
  Our consolidated net revenues for the fiscal year ending December 31, 2013 were $7,463,113 which included $2,270,536 in revenues from discontinued operations.  Since the net revenues are below the Make-Whole Adjustment minimum threshold of $17,250,000 per our 2013 private placement agreement, the Company is required to issue an additional 826,907 shares of common stock to the eight investors that participated in the private placement by April 30, 2014.  A Make-Whole adjustment for the related warrants in not required due to the anti-dilution adjustment in November 2013 anti-dilutive adjustment.
 
 In March 2014, the Company did not meet the requirements of the Milestone Provision of the Series D Preferred of reaching positive net income on a Special Adjusted Basis (“SAB”) for the trailing two months ending February 2014.  As a result, the Company is required to issue an additional 856 shares of Series D Preferred stock and additional 3,424,000 warrants to purchase common stock at $0.40 to the Series D holders.  In addition, the exercise price on an aggregate total 4,280,000 warrants has been reduced to $0.40 per share.  Pinewood is also entitled to elect a majority of the Board of Directors, to be accomplished in any manner that the Initial Investor deems most expedient and in compliance with applicable laws and the Company’s charter documents.




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





December 31, 2013


Adjusting

effect


Post

Adjusted

effectCommon stock


10,255,693



826,907



11,082,600Warrants


15,244,914



4,418,504



19,663,418Stock options


1,840,556



-



1,840,556Convertible notes


2,333,333



250,000



2,583,333Series A Preferred


1,629,006



-



1,629,006Series B Preferred


5,693,344



-



5,693,344Series C Preferred


902,778



-



902,778Series D Preferred


2,140,000



1,712,000



3,852,00040,039,624



7,207,411



47,247,035





In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co.  in which the lender agreed to  forbear from accelerating the outstanding balance of the Note and form instituting collection efforts from the date of the agreement through July 1, 2014. The forbearance was required due to our inability to make payments required under the agreement of $338,479 and our inability to meet the $500,000 minimum monthly purchase requirement due to the closure of our two pharmacy locations.





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





Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended December 31, 2013 and 2012, represented as a percentage of total sales for each respective period:





Year Ended December 31,2013


2012Sales


100.0
%


100.0
%Cost of sales


78.4



76.4Gross profit


21.6



23.6Operating expensesSalaries and related expenses


36.4



33.8Selling, general and administrative


41.0



40.3Total operating expenses


77.4



74.1Loss from continuing operations


-55.8



-50.5Other expensesInterest expense, net


24.3



24.8(Gain) Loss on extinguishment of debt


-29.8



1.6Gain on change in forward contract liability


-2.3



-Loss on change in fair market value of derivative


1.4



-Gain on change in fair value of warrant liability


-2.8



-6.3Total other expenses and income


-9.2



20.1Net loss from continuing operations, before tax


-46.7



-70.6Income taxes


6.3



0.2Net loss from continuing operations, net of tax


-53.0



-70.8Net loss from discontinued operations, net of tax


-11.7



-0.3Net loss


-64.7



-71.1










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Sales





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





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





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





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





Cost of Sales





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





Gross Profit





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





Operating Expenses





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





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





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






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Year Ended December 31,2013


2012Stock-based compensation expenses


628,965



851,561Provision for accounts receivable doubtful accounts


32,426



12,968Selling expenses


41,045



60,383Professional fees


510,478



430,100Delivery expenses


192,802



161,629Facility related expenses


245,549



173,522Travel and related expenses


109,658



164,128Vendor late fee expenses


14,387



57,036Investor relations expense


24,000



10,089Other general and administrative expenses


328,889



349,125Total

$
2,128,199


$
2,270,541





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





Other (Income) and Expense





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





Year ended December 31,2013


2012Interest expense, net


1,261,843



1,399,903(Gain) loss on extinguishment of debt


(1,548,915
)


90,205Gain on change in fair value of forward contract


(117,364
)


-Loss on change in fair value of derivative


73,917Gain on change in fair value of warrants


(144,909
)


(357,194
)Total

$
(475,428
)

$
1,132,914





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





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








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Our total outstanding debt increased to $5,833,519 as of December 31, 2013 as compared to $3,960,293 at December 31, 2012.  The table below summarizes the components of interest expense for the year ended December 31, 2013 and 2012:





Year Ended December 31,2013


2012Interest expense at stated rates (6.25% - 20.00%)

$
892,457


$
593,313Amortization of deferred financing costs


36,131



121,963Amortization of debt discount


333,255



684,627Interest expense, net

$
1,261,843


$
1,399,903





The $1,548,915 gain on extinguishment of debt for the year ended December 31, 2013 resulted from troubled debt restructurings that met the requirements for extinguishment accounting treatment.  An aggregate of $1,662,107 in principal and $557,259 in accrued interest was converted into common stock at $0.60 per share.  The loss on extinguishment of debt of $90,205 in the year ended December 31, 2012 resulted from the modification and extension of seven convertible debenture agreements that met the requirements for extinguishment accounting treatment.





The gain on change in fair value of warrant liability represents the change in fair value calculated on warrants issued in connection with private placements in the fiscal years 2011through 2013 which grant the warrant holder certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.





The gain on change in fair value of forward contract liability represents the change in fair value calculated on forward contract issued in connection with our 2013 private placement of common stock. The Company also agreed that the 38,462 shares of common stock included in the units is subject to increase and the $0.65 per share value is subject to decrease, in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”).




The loss on change in fair value of derivative represents the change in fair value calculated on derivative issued in connection with our 2013 Series D Preferred stock issuances.  The derivative relates to the conversion feature into common stock at an initial rate of 2,000 common shares for each share of Series D Preferred stock, subject to adjustment for certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.


Loss from Discontinued Operations, net of tax





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





Net Loss





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





Our net loss per common share for the year ended December 31, 2013 was $0.91, compared to a net loss per common share of $0.96 for the year ended December 31, 2012.  The decrease to our net loss per common share was primarily attributable to an increase in the weighted average number of common shares outstanding to 6,126,838 for the year ended December 31, 2012, from 4,150,976 for the year ended December 31, 2012 which was partially offset by $1,548,595 increase in our net loss applicable to common  stock.




The increase in our loss applicable to common stock is primarily due to a $2,192,588 redemption feature on preferred stock in the year ended December 31, 2013.  The redemption feature on preferred stock relates the mandatory redemption feature on our Series D Preferred stock issuances and represents the adjustment to the carrying amount of the instrument to equal the redemption value of the instrument.  The redemption feature on preferred stock is a deemed dividend distribution for accounting purposes.











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Financial condition, Liquidity and Capital Resources





Liquidity and Capital Resources





As of December 31, 2013, we had a cash balance of $2,856, a minimal decrease from a balance of $21,298 at December 31, 2012.  At December 31, 2013, we had a working capital deficit of $1,746,832 a decrease from a working capital deficit of $6,312,121 as of December 31, 2012.  The decrease in our working capital deficit was primarily attributable to an decrease in current liabilities attributable to the conversion of approximately $3,534,793 in vendor payables into a long term secured note, the conversion of an aggregate total of $1,662,107 in debt principal and an aggregate total of $557,259 in accrued interest into common stock at a conversion price of $0.60, which was partially offset by a decrease in assets in discontinued operations of $562,751 due to the closure of our Riverside and Gresham pharmacies in August 2013.





Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities and cash made available under certain credit facilities.  In order for us to finance operations, continue our growth plan and service our existing debt, additional funding is required from external sources. We intend to fund operations through increased sales, lower operating expenses and debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements for the next twelve months. Our management is seeking financing and anticipates that its efforts will result in sufficient funds to finance our operations beyond the next twelve months.  However, there can be no assurance that the additional financing necessary to finance our operations for the next twelve months will be available to us on acceptable terms, or at all.




Our current cash on hand is insufficient for us to operate our two existing pharmacies at the current level for the next twelve months.  Our business plan calls for ongoing expenses in connection with salary expense and establishing additional pharmacies. These expenditures are anticipated to be approximately $2,400,000for the next twelve months.





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





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





In February and March 2014, the Company entered into five short term promissory notes with Pinewood Trading Fund, LP., a related party for an aggregate total of $240,000.  The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.





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









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In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co.  in which the lender agreed to  forbear from accelerating the outstanding balance of the Note and from instituting collection efforts from the date of the agreement through July 1, 2014. The forbearance was required due to our inability to make payments required under the agreement of $338,479 and our inability to meet the $500,000 minimum monthly purchase requirement due to the closure of our two pharmacy locations.




In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015.  The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced.  The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.





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





Related Party


Unrelated


TotalSecured Debt  (1)


-



3,804,111



3,804,111Revolving Credit facilities  (2)


477,000



-



477,000Other Notes and Debt  (3)


-



52,408



52,408Unsecured Convertible Debentures


-



1,500,000



1,500,000477,000



5,356,519



5,833,519Less: current portion


-



(783,943
)


(783,943
)$
477,000


$
4,572,576


$
5,049,576





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





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





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





Obligations and Commercial Commitments





Not required for smaller reporting companies





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





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





Cash Flows





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










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Cash Flows
 
 As of December 31, 2013, we had $2,856 in cash and total current assets in the amount of $830,281 and had current liabilities in the amount of $2,577,113, resulting in a working capital deficit of $1,746,832.
 The following discussion focuses on information in more detail on the main elements of the $18,442 and $2,018 net decrease in cash during the years ended December 31, 2013 and 2012, respectively included in the accompanying Consolidated Statements of Cash Flows. The table below sets forth a summary of the significant sources and uses of cash for the years ended December 31:
 
 2013


2012Cash used in operating activities

$
(1,876,728
)

$
(530,815
)Cash used in investing activities


(53,838
)


(21,285
)Cash provided by financing activities


1,912,124



550,082Decrease in cash

$
(18,442
)

$
(2,018
)
 
 Operating activities used $1,876,728 in cash for the year ended December 31, 2013 compared to $530,815 in cash used for the year ended December 31, 2012. Our net loss of $3,287,596 plus non-cash expenses of $92,467 was the primary reason for our negative operating cash flows which were partially offset by a $1,503,335 change in operating assets and liabilities.  Our net loss of $4,005,506, less non-cash expenses of $1,316,348 was the primary reason for our negative operation cash flows which were partially offset by a $2,158,343 change in operation assets and liabilities.  The table below summarizes the components of our cash used in operating activities for the year ended December 31, 2013 and 2012:
 
 Net loss from operations including non-controlling interest

$
(3,287,596
)

$
(4,005,506
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment


36,129



34,614Amortization of debt issuance costs


36,131



121,963Amortization of discount on debt


333,255



684,627Stock based compensation


628,964



847,561Issuance of  common stock in lieu of debenture interest


45,467



-(Gain) or Loss on extinguishment of debentures and notes


(1,548,915
)


30,610Provision for accounts receivable doubtful accounts


16,683



(136,038
)Recoveries of other receivable doubtful accounts


(100,708



-Provision for obsolete inventory


24,006



-Impairment of goodwill


697,766



90,205Loss on sale of property and equipment


1,028



-Gain on change in fair value of forward contract


(117,364
)


-Loss on change in fair value of derivative


73,917Gain on change in fair value of warrant liability


(144,909
)


(357,194
)(18,550
)


1,316,348Changes in operating assets and liabilities:


1,503,335



2,158,343Net cash used in operating activities

$
(1,876,728
)

$
(530,815
)
 
 Operating assets and liabilities reduced the overall cash deficit in the years ended December 31, 213 and 2012 primarily due to our increases in our accounts payable and accrued expenses, decreases in our accounts receivable and our other receivables related to worker's compensation claims and decreases in our inventories.
 
 Cash used in investing activities was $53,838 in the year ended December 31, 2013, compared to $21,285 in the year ended December 31, 2012.  Investing activities in the year ended December 31, 2013 and 2012 consisted entirely of purchases and sales of property and equipment.
 
 Cash provided by financing activities during the year ended December 31, 2013 was $1,912,124 compared to $550,082 in the year ended December 31, 2012. Over the last several years, our operations have been funded primarily through the sale of debt securities and advances from revolving credit facilities made available to us.  During the year ended December 31, 2013 we received net proceeds from the issuance of preferred stock of $1,097,395, net proceeds from the issuance of common stock of $814,190 and net proceeds on revolving credit facilities of $30,000, which was partially offset by net principal repayments of $29,461 on notes payable.  During the year ended December 31, 2012 we received net proceeds from the issuance of convertible debentures of $307,502 and net proceeds on revolving credit facilities of $288,680, which was partially offset by net principal repayments of $46,100 on notes payable.









- 39 -
 Table of Contents








Registration Statement





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





Off Balance Sheet Arrangements





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





Going Concern Assumption





The consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of December 31, 2013, we had an accumulated deficit of approximately $48.6 million, recurring losses from operations and negative cash flow from operating activities for the year ended December 31, 2013, of approximately $1,900,000. We also had negative working capital of approximately $1.7 million and debt with maturities within one year in the amount of approximately $800,000 as of December 31, 2013.





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





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





●    We are seeking investment capital.


●    We are aggressively targeting new physicians.


●    We are aggressively seeking to renegotiate past due existing debentures.





Critical Accounting Policies and Estimates





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








- 40 -
 Table of Contents











Revenue Recognition





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





Accounts Receivable and Allowances





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





Inventories





Inventories are located at our pharmacy locations. Inventory consists solely of finished products (primarily prescription drugs) and is valued at the lower of first-in, first-out cost (FIFO) or market. Our inventories are maintained on a periodic basis through the performance of physical inventory counts.  Our cost of sales is recorded based upon the actual results of the physical inventory counts, and is estimated when a physical inventory is not performed in a particular month. Historically, no significant adjustments have resulted from reconciliations with the physical inventories.





Inventories are comprised of brand and generic pharmaceutical drugs. Our pharmacies maintain a wide variety of different drug classes, known as Schedule II, Schedule III, and Schedule IV drugs, which vary in degrees of addictiveness.  Schedule II drugs, considered narcotics by the DEA, are the most addictive; hence, they are highly regulated by the DEA and are required to be segregated and secured in a separate cabinet. Schedule III and Schedule IV drugs are less addictive and are not regulated. Because our business model focuses on servicing pain management doctors and chronic pain patients, we carry in inventory a larger amount of Schedule II drugs than most other pharmacies.





Stock-based Compensation





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





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





ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.










- 41 -
 Table of Contents











ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Index to Financial Statements
Page No.Report of Independent Registered Public Accounting Firm
F - 1Consolidated Balance Sheets as of December 31, 2013 and 2012
F - 2Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
F - 3Consolidated Statement of Stockholders’ Deficit for the years ended December 31, 2013 and 2012
F - 4Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
F - 5Notes to Consolidated Financial Statements
F - 6 to F - 39




















- 42 -
 Table of Contents














Report of Independent Registered Public Accounting Firm








Board of Directors and Stockholders


Assured Pharmacy, Inc.


Plano, Texas





We have audited the accompanying consolidated balance sheets of Assured Pharmacy, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Assured Pharmacy, Inc. at December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.





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










/s/  BDO USA, LLPBDO USA, LLPDallas, TexasMarch 31, 2014

















F - 1
 Table of Contents





ASSURED PHARMACY, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012








December 31,


December 31,2013


2012ASSETSCurrent AssetsCash

$
2,856


$
21,298Accounts receivable, net


323,965



333,687Inventories


273,195



198,778Prepaid and other current assets


226,217



135,021Assets of discontinued operations, net


4,048



566,799Total current assets


830,281



1,255,583Property and equipment, net


78,094



45,743Assets of discontinued operations, net


140,563



920,172TOTAL ASSETS

$
1,048,938


$
2,221,498LIABILITIES AND STOCKHOLDERS' DEFICITCurrent LiabilitiesAccounts payable and accrued expenses


1,642,518



2,194,377Liabilities of discontinued operations


150,652



2,655,303Unsecured convertible debentures, net of discount


357,528



1,661,408Unsecured convertible debentures, related party, net of discount


-



509,106Notes payable


426,415



547,510Total current liabilities


2,577,113



7,567,704Notes payable, net of current portion


3,430,104



-Notes payable to related parties, net of current portion


477,000



447,000Unsecured convertible debentures, net of current portion and discount


1,142,472



388,339Unsecured, convertible debentures, related party, net of current portion and discount


-



30,923Derivative liability


312,088



-Warrant liability


1,060,353



274,605TOTAL LIABILITIES


8,999,130



8,708,571Commitments and Contingencies (see Note 8)Series D redeemable convertible preferred stock; par value $0.001 per share;

15,000 shares authorized, 1,070 and 0 issued and outstanding, respectively


2,515,469



-Assured Pharmacy, Inc.'s Stockholders' DeficitPreferred stock; par value $0.001 per share; 5,000,000 shares authorized, 2,830shares designated to Series A convertible, 7,745 shares designated to Series Bconvertible, 813 shares designated to Series C convertibleSeries A convertible preferred stock; par value $0.001 per share; 2,830shares authorized, 1,466 and 1,556 issued and outstanding, respectively


1



1Series C convertible preferred stock; par value $0.001 per share; 813shares authorized, 813 and 813 issued and outstanding, respectively


1



1Series B convertible preferred stock; par value $0.001 per share; 7,745shares authorized, 5,124 and 5,409 issued and  outstanding, respectively


5



5Common stock; par value $0.001 per share; 100,000,000 shares authorized,10,255,693 and 3,818,707 issued and outstanding, respectively


10,256



4,477Additional paid-in capital, net


38,142,048



36,572,314Accumulated deficit


(48,617,972
)


(43,063,871
)Stockholders' deficit


(10,465,661
)


(6,487,073
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
1,048,938


$
2,221,498








See accompanying notes to these consolidated financial statements.






F - 2
 Table of Contents







ASSURED PHARMACY, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012







Year Ended December 31,2013


2012Sales

$
5,192,577


$
5,636,195Cost of sales


4,072,085



4,308,710Gross profit


1,120,492



1,327,485Operating expensesSalaries and related expenses


1,891,862



1,903,475Selling, general and administrative


2,128,199



2,270,541Total operating expenses


4,020,061



4,174,016Loss from continuing operations


(2,899,569
)


(2,846,531
)Other expensesInterest expense, net


1,261,843



1,399,903(Gain) or Loss on extinguishment of debt


(1,548,915
)


90,205Gain of change in fair value of forward contract liability


(117,364)



-Loss on change in fair market value of derivative


73,917



-Gain on change in fair value of warrant liability


(144,909
)


(357,194
)Total other expenses and income


(475,428
)


1,132,914Loss  from continuing operations before income tax


(2,424,141
)


(3,979,445
)Income tax expense


328,080



9,121Loss from continuing operations, net of tax.


(2,752,221
)


(3,988,566
)Discontinued operations:Loss from operations of discontinued pharmacies, net of tax benefit


(609,292
)


(16,940
)Net loss

$
(3,361,513
)

$
(4,005,506
)Redemption feature on preferred stock


(2,192,588
)


-Net loss applicable to common stock

$
(5,554,101
)

$
(4,005,506
)Basic and diluted loss per common shareNet loss to common stockholders from continuing operations

$
(0.81
)

$
(0.96
)Loss from discontinued operations, net of tax expense (benefit)

$
(0.10
)

$
(0.00
)Net loss per common share - basic and diluted

$
(0.91
)

$
(0.96
)Basic and diluted weighted average number of common shares outstanding


6,126,838



4,150,976











See accompanying notes to these consolidated financial statements.








F - 3
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT


FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012








ASSURED PHARMACY, Inc. StockholdersCommon Stock


Series A

Preferred Stock


Series C

Preferred Stock


Series B

Preferred Stock


Additional

Paid In


Accumulated


Total

Stockholders'Shares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Capital


Deficit


DeficitBalance December 31, 2011


3,818,707


$
3,818



1,556


$
2



813


$
1



5,409


$
5


$
35,725,411


$
(39,058,365
)

$
(3,329,128
)Stock based compensation for services


540,000


$
540



























847,021







847,561Conversion of series A preferred stock into common


104,250


$
105



(150
)

$
(1
)


















(104
)






-Conversion of series B preferred stock into common


13,889


$
14



















(25
)






(14
)






-Net Loss






































(4,005,506
)


(4,005,506Balance December 31, 2012


4,476,846


$
4,477



1,406


$
1



813


$
1



5,384


$
5


$
36,572,314


$
(43,063,871
)

$
(6,487,073
)Stock based compensation for services


545,000


$
545



























728,356







728,901Issuance of series A preferred stock










60



-



















60,000







60,000Conversion of series B preferred stock into common


288,890


$
289



















(260)


$
-



(289
)






-Issuance of common stock in lieu of interest


1,049,152


$
1,049



























159,473







160,522Issuance of common stock in conversion of convertible debentures


2,442,975


$
2,443



























286,313







288,756Issuance of common stock in conversion of note payable


129,737


$
130



























18,033







18,163Issuance of common stock warrants in conversion of convertible debenture


































14,012







14,012Issuance of common stock in private placement


1,323,093


$
1,323



























303,836







305,159Redemption feature on preferred stock






































(2,192,588
)


(2,192,588
)Net Loss






































(3,361,513
)


(3,,361,513
)Balance December 31, 2013


10,255,693


$
10,256



1,466


$
1



813


$
1



5,124


$
5


$
38,142,048


$
(48,617,972
)

$
(10,465,661
)




















See accompanying notes to these consolidated financial statements.







F - 4
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012








YEAR ENDED DECEMBER 31,2013


2012CASH FLOWS USED IN OPERATING ACTIVITIES:Net loss

$
(3,361,513
)

$
(4,005,506
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment


36,129



34,614Amortization of debt issuance costs


36,131



121,963Amortization of discount on debt


333,255



684,627Stock based compensation


628,964



847,561Issuance of common stock in lieu of debenture interest


45,467



-(Gain) or loss on extinguishment of debentures and notes


(1,548,915
)


90,205Provision for accounts receivable doubtful accounts


16,683



30,610Provision (recoveries) for other receivables doubtful accounts


(100,708
)


(136,038
)Provision for obsolete inventory


24,006



-Impairment of goodwill


697,766



-Loss on sale of property and equipment


1,028



-Gain on change in fair value of forward contract liability


(117,364
)


-Loss on change in fair market value of derivative


73,917



-Gain on change in fair value of warrant liability


(144,909
)


(357,194
)Changes in operating assets and liabilities:Accounts receivable


332,251



131,773Inventories


113,004



288,568Prepaid expenses and other current assets


(68,537
)


20,190Other receivables


166,881



229,306Accounts payable and accrued liabilities


959,736



1,488,507
)Net cash used in operating activities


(1,876,728
)


(530,815
)CASH FLOWS USED IN INVESTING ACTIVITIES:Purchases of property and equipment


(54,838
)


(21,285
)Sale of property and equipment


1,000



-Net cash used in investing activities


(53,838
)


(21,285
)CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of notes payable


(29,461
)


(46,100
)Payment of issuance cost for convertible debentures and notes


-



(42,898
)Proceeds from issuance of convertible debentures


-



350,400Payment of issuance cost for common stock


(45,810
)


-Payment of issuance cost for preferred stock


(32,605
)


-Proceeds from issuance of Series A preferred stock


60,000



-Proceeds from issuance of Series D preferred stock


1,070,000



-Proceeds from issuance of common stock


860,000



-Proceeds from advances on shareholder revolving note


270,500



336,500Repayment of advances on shareholder revolving note


(240,500
)


(47,820
)Net cash provided by financing activities


1,912,124



550,082Net decrease in cash


(18,442
)


(2,018
)Cash at beginning of period


21,298



23,316Cash at end of period

$
2,856


$
21,298











See accompanying notes to these consolidated financial statements.







F - 5
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








1.     BASIS OF PRESENTATION AND PLAN OF OPERATIONS





Organization





Assured Pharmacy, Inc. (“Assured Pharmacy” or the “Company”) was organized as a Nevada corporation on October 22, 1999, under the name Surforama.com, Inc. The Company is engaged in the business of providing pharmacy services to physicians and patients primarily in the treatment of chronic pain. The Company derives its revenue primarily from the sale of prescription drugs and primarily dispenses highly regulated pain medications and does not offer non-prescription drugs or health and beauty related products inventoried at traditional pharmacies. The majority of the Company's business is derived from repeat business from its customers.





The Company had two operating pharmacies as of the year ended December 31, 2013 and four operating pharmacies as of the year ended December 31, 2012.  The pharmacies are located in Kirkland, Washington and Leawood, Kansas.  In August 2013, as a result of our financial condition and inability to secure additional fundingor significantly improve our liquidity position, management reevaluated its strategic plan.  Management developed and implemented a plan to scale back operations as we could not continue to support the working capital needs of four pharmacies.  As a result, management decided to close two pharmacies in order to reduce overall fixed pharmacy costs by 50% and concentrate our limited working capital to support the operations of the two remaining pharmacies we believe have the best prospects.   Management considered several factors in determining which two pharmacies to close, including historical financial performance, regulatory costs, current sales prospects, geographic and physical location and strength of existing physician relationships.  After consideration of these factors, management closed our Gresham and Riverside pharmacies on August 5, 2013 and August 8, 2013, respectively.





The Company’s common stock is traded on the OTC Market’s OTC:QB quotations system under the ticker symbol APHY.





In June 2009, the Company filed a Certificate of Designation with the state of Nevada to designate 2,830 preferred shares as Series A Convertible Preferred Stock (“Series A Preferred”) and 7,745 shares as Series B Convertible Preferred Stock (“Series B Preferred”) from the 5,000,000 preferred shares authorized (see Note 5 for further details).  In May 2010, the Company filed a Certificate of Designation with the state of Nevada to designate 813 preferred shares as Series C Convertible Preferred Stock (“Series C Preferred”). In November 2013, the Company filed a Certificate of Designation with the state of Nevada to designate 15,000 preferred shares as Series D Redeemable Convertible Preferred Stock.





In January 2010, the Company filed a Certificate of Amendment to Articles of Incorporation with the State of Nevada to increase the number of authorized common shares from 833,333 shares to 16,666,667 shares.





In May 2012, the Company’s Board of Directors (“the Board”) and a majority of the Company’s shareholders approved an amended and restated articles of incorporation effectuating an increase in the number of authorized common shares of the Company from 16,666,667 to 35,000,000.  As required, a consent and waiver was obtained from the majority of the Series A and Series C Preferred holders in accordance with the certificate of designation.





In October 2013, we filed a Proxy Statement on Schedule 14A with the Securities and Exchange Commission. The Board of Directors has submitted several actions to be taken by consent in lieu of a meeting in order to facilitate future financings.








F - 6
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








1.
Amend and restate the Articles of Incorporation of the Company to increase the authorized number of shares of Common stock available for issuance from 35,000,000 to 100,000,000.


2.
Create and designate a class of Preferred Stock called the “Series D Preferred Stock,” consisting of 15,000 shares of stock, par value $0.001 per share, and designate to such class of stock those rights as described in that certain Certificate of Designation.





In November 2013, the Board of Directors increased the Company’s authorized Common Stock from 35,000,000 to 100,000,000 to provide greater flexibility with respect to future transactions, including joint ventures, raising capital, acquisitions and other general corporate purposes.  Each additional share of Common Stock authorized by the amendment to the Articles of Incorporation will have the same rights and privileges as each share of Common Stock currently authorized or outstanding. If this proposal is rejected, the Company may have insufficient authorized and unissued outstanding shares of Common Stock to take advantage of potential business opportunities.





The Company does not currently have any plans for the potential increase in the number of authorized shares available for issuance. The Series D Preferred Stock described below, designates that any one share of Series D Preferred Stock may, at the option of the holder, be converted at any time into 2,000 fully-paid and non-assessable shares of Common Stock.





The Board of Directors believes it to be in the best interest of the Company to create and designate a class of Preferred Stock called the “Series D Preferred Stock,” consisting of 15,000 shares of stock, par value $0.001 per share, and designate to such class of stock those rights and preferences as described in that certain Certificate of Designation, attached hereto at Exhibit B.


The designation of the Series D Preferred Stock adversely alters and affects the rights of our Common Stockholders. Pursuant to the terms of the Series D Preferred Stock, the initial investor must approve certain corporate actions of the Company, regardless of the total Common Stock votes for or against such actions. Such actions include, but are not limited to: any increase or decrease in the authorized number of shares of Common Stock or Preferred Stock; the delisting of any of the Company’s securities from the OTCQB or any national securities exchange; any redemption or repurchase with respect to the Common Stock or Preferred Stock; any liquidation, dissolution or winding-up of the business and affairs of the Company; any material modification or deviation from the Company’s annual business plan and operating budget; any payment or declaration of a dividend or other distribution on any shares of Common Stock or Preferred Stock made by the Board of Directors; and any change in the principal business of the Company. In addition to the foregoing, holders of the Series D Preferred Stock have the right to elect one director of the Company so long as at least 35% of the Series D Preferred Stock is issued and outstanding.





Registration Statement





On November 13, 2012, we completed the registration of 2,292,067 shares of common stock, par value $0.001 per share, issuable upon exercise of warrants on Form S-1, as amended.  We became a public company on November 14, 2012 and are subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  The Company’s common stock began trading on the OTC Market’s OTC:QB quotation system under the ticker symbol “APHY”.





Reverse Stock Split





In March 2011, the Company’s Board approved an amended and restated certificate of incorporation effecting a 1 for 180 reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of April 15, 2011. As required, a consent and waiver was obtained from the majority of the Series A Preferred holders in accordance with the certificate of designation.










F - 7
 Table of Contents











ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Going Concern Considerations





The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of December 31, 2013, the Company had an accumulated deficit of approximately $46.4 million and, recurring losses from operations. The Company also had negative working capital of approximately $1.7 million and debt with maturities within one year in the amount of approximately $800,000 as of December 31, 2013.





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





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





·
The Company is seeking to renegotiate existing debt.





·
The Company is seeking investment capital.





·
The Company is aggressively targeting new physicians.





2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The summary of significant accounting policies presented below is designed to assist in understanding the Company's consolidated financial statements. Such financial statements and accompanying notes are the representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States (“U.S. GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.





Principles of Consolidation





The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.










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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Use of Estimates





The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Significant estimates and assumptions involved include the collectability of accounts receivable, accounting for stock based compensation and other stock based payments, convertible debt issuances, the valuation of the deferred tax asset, inventory, warrant liability and long-lived assets valuation (including goodwill).  Actual results could materially differ from these estimates.





Risks and Uncertainties





The Company operates in a highly competitive industry that is subject to intense competition. The Company faces risks and uncertainties relating to its ability to successfully implement its business strategy. Among other things, these risks include the ability to develop and sustain revenue growth; managing and expanding operations; competition; attracting, retaining and motivating qualified personnel; maintaining and developing new strategic relationships; and the ability to anticipate and adapt to the changing markets and any changes in government regulations.





As a result, the Company may be subject to the risk of delays in obtaining (or failing to obtain) regulatory clearance and other uncertainties, including financial, operational, technological, regulatory and other risks associated with an emerging business, including the risk of business failure.





The Company's pharmacies are subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining or maintaining the required licensing and/or approvals could prevent the continued operations of such pharmacies. Management believes that the Company is operating in compliance with all applicable laws and regulations.





Concentration of Credit Risk





During the year ended December 31, 2013 and 2012, the Company purchased approximately $5.3 million and $10.1 million, respectively, or 91% and 92%, respectively, of its prescription drug inventory from one primary wholesale vendor. At December 31, 2013 and 2012, accounts payable to the vendor were approximately $0 and $3.6 million, respectively.  The Company had a vendor note payable with the aforementioned vendor totaling $3.8 million and $305,000 as of December 31, 2013 and 2012, respectively.  (In February 2013, the amounts payable to vendor were converted into a note (See Note 4 Secured Debt for further details).)  During the year ended December 31, 2013 and 2012, the Company purchased approximately $539,000 and $858,000, respectively, or 9% and 8%, respectively, of its prescription drug inventory from another secondary wholesale vendor. At December 31, 2013 and 2012, accounts payable to the vendor were approximately $132,000 and $113,000, respectively. During the year ended December 31, 2013 and 2012 management believes that the wholesale pharmaceutical and non-pharmaceutical distribution industry is highly competitive because of consolidation in the retail pharmacy industry and the practice of certain large pharmacy chains to purchase directly from product manufacturers. Although management believes it could obtain the majority of its inventory from other distributors at competitive prices and with competitive payment terms, if its relationship with its primary wholesale drug vendor was terminated, there can be no assurance that the termination of such relationship would not adversely affect the Company.


Governmental Regulations





The pharmacy business is subject to extensive and often changing federal, state and local regulations, and the Company’s pharmacies are required to be licensed in the states in which they are located or do business. While management continuously monitors the effects of regulatory activity on the Company's operations and it currently has a pharmacy license for each pharmacy the Company operates, the failure to obtain or renew any regulatory approvals or licenses could adversely affect the continued operations of the Company's business.





The Company is also subject to federal and state laws that prohibit certain types of direct and indirect payments between healthcare providers. These laws, commonly known as the fraud and abuse laws, prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of products and/or services. Violation of these laws can result in a loss of licensure, civil and criminal penalties and exclusion from various federal and state healthcare programs. The Company expends considerable resources in connection with compliance efforts. Management believes that the Company is in compliance with federal and state regulations applicable to its business.










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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The Company is also impacted by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which mandates, among other things, the adoption of standards to enhance the efficiency and simplify the administration of the healthcare system. HIPAA requires the Department of Health and Human Services to adopt standards for electronic transactions and code sets for basic healthcare transactions such as payment and remittance advice (“transaction standards”); privacy of individually identifiable healthcare information (“privacy standards”); security and electronic signatures (“security standards”), as wells as unique identifiers for providers, employers, health plans and individuals; and enforcement. The Company is required to comply with these standards and is subject to significant civil and criminal penalties for failure to do so. Management believes the Company is in compliance with these standards. There can be no assurance, however, that future changes will not occur which the Company may not be, or may have to incur significant costs to be in compliance with new standards or regulations. Management anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for pharmacies. Given the continuous debate regarding the cost of healthcare services, management cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on the Company.





Cash





The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. The Company deposits its cash with federally insured financial institutions, which at times may have balances that exceed Federal Deposit Insurance Corp insurance limitations. Management believes the risk of loss related to the excess balances is minimal.





Accounts Receivable and Allowances





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





The Company’s accounts receivables are detailed as follows:





2013


2012Accounts receivableThird party medical insurance and other

$
324,095


$
334,484Allowance for doubtful accounts


(130
)


(797
)Total accounts receivable, net

$
323,965


$
333,687





The provision for bad debts for the years ended December 31, 2013 and 2012 was $32,426 and $12,968, respectively. The Company also wrote off $33,093 and $22,480 in doubtful accounts in the years ended December 31, 2013 and 2012, respectively.





Inventories





Inventories are located at the Company’s pharmacy locations. Inventory consists solely of finished products (primarily prescription drugs) and is valued at the lower of first-in, first-out cost (FIFO) or market. Our inventories are maintained on a periodic basis through the performance of physical inventory counts.  Our cost of sales is recorded based upon the actual results of the physical inventory counts, and is estimated when a physical inventory is not performed in a particular month. Historically, no significant adjustments have resulted from reconciliations with the physical inventories. We also maintain inventory reserves for excess and obsolete inventory based on analysis of our inventory and sales activity.












F - 10
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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Inventories are comprised of brand and generic pharmaceutical drugs. The Company's pharmacies maintain a wide variety of different drug classes, known as Schedule II, Schedule III, and Schedule IV drugs, which vary in degrees of addictiveness.  Schedule II drugs, considered narcotics by the DEA, are the most addictive; hence, they are highly regulated by the Drug Enforcement Administration (“DEA”) and are required to be segregated and secured in a separate cabinet. Schedule III and Schedule IV drugs are less addictive and are not regulated. Because the Company's business model focuses on servicing pain management physicians and chronic pain patients, the Company carries a larger amount of Schedule II drugs in inventory than most other pharmacies.





Property and Equipment





Property and equipment are stated at cost, and are being depreciated using the straight-line method over the estimated useful lives of the related assets, which generally range between three and ten years. Company’s property and equipment consist of computers, software, office furniture and equipment, store fixtures, and leasehold improvements on pharmacy build-outs. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease terms, typically five years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement, other disposition of property and equipment or termination of a lease, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in results of operations.  During the years ended December 31, 2013 and 2012, no impairments of property and equipment were recognized.





Deferred Loan Costs





During the years ended December 31, 2013 and 2012, the Company incurred loan origination and other professional fees that were associated with closing certain loans.  These fees are included in prepaid and other assets on the consolidated balance sheet, net of amortization.  Such fees have been deferred and are being amortized to interest expense over the life of the loan on a straight line basis, which approximates the effective interest method.  Interest expense recorded on these fees was $36,131 and $121,963 for the years ended December 31, 2013 and 2012, respectively, and was reflected in interest expense, net on the consolidated statements of operations.





Revenue Recognition





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





Advertising





Advertising costs for marketing and promotions are included in selling expenses, when incurred. Advertising costs for the years ended December 31, 2013 and 2012 were $0 and $9,708, respectively. Such expenses are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.











F - 11
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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Delivery expenses





The Company incurred expenses totaling $192,802 and $161,629 for the years ended December 31, 2013 and 2012, respectively, to deliver products sold to its customers. Delivery expenses are reported as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations.





Stock-based Compensation





The Company issues options and restricted shares of common stock to employees and consultants.  Stock option and restricted share awards are granted at the fair market value of the Company's common stock on the date of grant.





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





For the years ended December 31, 2013 and 2012, the Company recognized $628,964 and $847,561, respectively, in compensation expense which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.





Basic and Diluted Loss per Common Share





The Company computes loss per common share using ASC 260 “Earnings Per Share.” Basic loss per share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts, such as stock options and warrants to issue common stock, were exercised or converted into common stock. Because the Company has incurred net losses and there are no dilutive potential common shares, basic and diluted loss per common share are the same.





Income Taxes





The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with FASB ASC 740-10, “ Accounting for Income Taxes” (“ASC 740-10”).  These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled.  ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized.  The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the Company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the Company’s income tax provision or benefit.





The recognition and measurement of benefits related to the Company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the Company’s assumptions or changes in the Company’s assumptions in future periods are recorded in the period they become known.  Under ASC 740 we determined that all of our income tax positions meet the more-likely-than-not recognition threshold and, therefore, required no reserve. In the event of future uncertain tax positions, additional interest and penalty charges associated with tax positions would be classified as income tax expense in the Consolidated Financial Statements.




Fair Values of Financial Instruments
 
 Management believes that the carrying amounts of the Company's financial instruments, consisting primarily of cash, accounts receivable, accounts payable and accrued expenses approximated their fair values at December 31, 2013 and 2012, due to their short-term nature.





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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The Company measures certain financial liabilities (warrant liability) at fair value on a recurring basis. The Company follows a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:





Level 1     Measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date.





Level 2     Measurements are inputs other than quoted prices included in Level 1 that are observable either directly or indirectly.





Level 3     Measurements are unobservable inputs.





The fair value of the warrant liability of $1,060,353 and $274,605 as of December 31, 2013 and 2012, respectively, was measured using Level 3 measurements.





Management also believes that the December 31, 2013 and 2012 interest rates associated with the notes payable approximates the market interest rates for these types of debt instruments and as such, the carrying amount of the notes payable approximates their fair value.





Common Stock Warrant Liability





The Company accounts for its common stock warrants under ASC 480, “Distinguishing Liabilities from Equity,” which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and it requires or may require the issuer to settle the obligation by transferring assets, would qualify for classification as a liability. The guidance required the Company’s outstanding warrants from convertible debenture private placements in the years ended December 31, 2013, 2012 and 2011 to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as a change in fair value of warranty liability in the Company’s consolidated statements of operations. Specifically, the warrants issued in connection with convertible debenture private placements in throughout the years ended December 31, 2013, 2012 and 2011, grant the warrant holder certain anti-dilution protection which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Upon exercise or expiration of the warrant, the fair value of the warrant at that time will be reclassified to equity from a liability.  The following table is a summary of the warrant liability activity measured at fair value using Level 3 inputs:





Warrant LiabilityBalance at December 31, 2011

$
208,570Granted


511,765Cancelled, forfeited or expired


(88,536
)Change in fair value of common stock warrants


(357,194
)Balance at December 31, 2012

$
274,605Granted


949,407Cancelled, forfeited or expired


(18,750
)Change in fair value of common stock warrants


(144,909
)Balance at December 31, 2013

$
1,060,353









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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Forward contracts





As part of the 2013 private placement of common stock, the Company also agreed that the 38,462 shares of common stock included in the units is subject to increase and the $0.65 per share value is subject to decrease, in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”) (see Note 6 Common Stock for further details).  The Company separately valued the forward contracts using Level 3 inputs.  The fair value of the forward contracts of $115,767 was recorded as a liability and is included in accounts payable and accrued expenses on the Consolidated Balance Sheet as of December 31, 2013.   The following table is a summary of the forward contract liability activity measured at fair value using Level 3 inputs:





Forward

Contract

LiabilityBalance at December 31, 2012

$
-Granted


233,131Cancelled, forfeited or expiredChange in fair value


(117,364
)Balance at December 31, 2013

$
115,767




Derivative Liability
 
 The derivative relates to the conversion feature into common stock at an initial rate of 2,000 common shares for each share of Series D Preferred stock, subject to adjustment for certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share (see Note 5 Redeemable Preferred Stock for further details).  Management analyzed the terms of the conversion option and concluded that the conversion feature was derivative since it met the definition of a derivative and did qualify for any of the exceptions. The Company therefore separately valued the derivative contracts using Level 3 inputs.  The fair value of the derivatives of $312,088 was recorded as a derivative liability on the Consolidated Balance Sheet as of December 31, 2013.   The following table is a summary of the derivative liability activity measured at fair value using Level 3 inputs:
 
 Derivative

LiabilityBalance at December 31, 2012

$
-Granted


238,171Cancelled, forfeited or expiredChange in fair value


73,917Balance at December 31, 2013

$
312,088
 Recent Accounting Pronouncements





In July 2013, the 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 Exist , which is included in ASC Topic 740 (Income Taxes).  ASU 2013-11 requires an entity to net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law.  The provisions of this new guidance are effective for reporting periods beginning after December 15, 2013.  The guidance is not expected to have a material impact on our statement of operations, financial position, or cash flows.





3.     PROPERTY AND EQUIPMENT





Property and equipment consisted of the following at December 31, 2013 and 2012:





2013


2012Furniture and equipment

$
18,167


$
18,167Computer equipment and information systems


488,613



471,240Leasehold improvements


136,536



84,294643,316



573,701Less: accumulated depreciation and amortization


(565,222
)


(527,928
)$
78,094


$
45,753












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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Depreciation and amortization expense for the years ended December 31, 2013 and 2012 was $25,569 and $23,440, respectively.  Depreciation and amortization expenses are included in selling, general and administrative expenses on the consolidated statements of operations.





4.      NOTES PAYABLE AND UNSECURED CONVERTIBLE DEBENTURES





The table below summarizes the Company’s notes payable and unsecured convertible debentures as of December 31, 2013:
 
 Related Party


Unrelated


TotalSecured debt

$
-


$
3,804,111


$
3,804,111Revolving credit facilities


477,000



-



477,000Other notes and debt


-



52,408



52,408Total notes payable

$
477,000


$
3,856,519


$
4,333,519Unsecured convertibledebentures, net of discount

$
-


$
1,500,000


$
1,500,000Total debt

$
477,000


$
5,356,519


$
5,833,519
 
 Maturities of debt at December 31, 2013 are as follows:
 
 Secured Debt


Revolving

Credit Facilities


Other notes

and debt


Unsecured

convertible

debentures


Total2014


399,889



-



26,526



357,528



783,9432015


300,863



-



25,882



104,659



431,4042016


3,103,359



477,000



-



1,037,813



4,618,172Total

$
3,804,111


$
477,000


$
52,408


$
1,500,000


$
5,833,519
 
 2013 Debt Restructuring
 
 Our current financial condition and inability to secure additional fundingor significantly improve our liquidity position resulted in management’s reevaluation of its strategic plan in August 2013. A key objective of the restructuring plan was to renegotiate terms with our existing debt holders.  Below is a summary of the restructuring actions taken:
 
 Tender Offer
 
 In October 2013, we filed a tender offer on Form SC TO-I.  The tender offer statement relates to the offer to holders of unsecured debentures to tender their 16% Senior Convertible Debentures in an issuer tender offer to exchange them for one of two options which are:
 
 Option #1: The issuance of restricted shares of common stock for the settlement of the balance of the Eligible Debenture, which shall consist of principal plus the currently outstanding unpaid interest as of September 30, 2013, at $0.60 per share with the issuance of new warrants to purchase common stock (the “New Warrants”) at an exercise price of $0.60 per share for the first twelve (12) months following the closing date of the issuer tender offer (the “Tender Offer”) and $0.75 thereafter for the remainder of the New Warrant’s term, with such term to be an extension of the term of the Eligible  Warrant by an additional three (3) years; or






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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Option #2: The issuance of amended and restated debentures (the “New Debentures”) which include the principal balance plus all accrued and unpaid interest as of September 30, 2013 of the Eligible Debentures with a reduction of the interest rate from sixteen percent (16%) to ten percent (10%), the extension of the maturity date for an additional three (3) years past the Eligible Debenture’s maturity date, reduction of the conversion price to $0.75 per share, and execution of a subordination agreement pursuant to which the Company will make no further payments to the debt holders until such time as the redemption of certain Series D Preferred Stock (to be designated) has been made in full (“Subordination Agreement”) and the issuance of New Warrants, the expiration date of which shall be 3 years past the expiration date set forth in the Eligible Warrants and a reduction of the conversion price to $0.75 per share.
 
 The tender offer was submitted to holders of an aggregate of $2,465,784 in debentures.  The tender offer expired on December 31, 2013 with an aggregate total of $965,784 of the original debentures tendered by the tender offer.  As a result, an aggregate total of $965,784 in convertible debentures to eight holders was exchanged for 1,609,641 shares of the Company’s common stock.  In addition, an aggregate total of $245,689 in accrued but unpaid interest was exchanged for 409,482 shares of the Company’s common stock.  In addition, the Company granted an additional aggregate total of 772,625 warrants to the debenture holders that tendered. The  warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Accordingly, the fair value of the stock warrants is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 (see Note 6 Stock Warrants for further details).
 
 Since the Company is experiencing financial difficulties and the debenture holders have granted a concession, the transaction met the requirement for troubled debt accounting treatment.  The Company recorded the transactions by first allocating the fair value of the warrants to warrant liability (see Note 6 Stock Warrants for further details) with remaining amount being applied to common stock and accrued interest.  Management then compared the allocated value of the common stock to the fair value of the common stock resulting in a gain on extinguishment of debt of $747,591 or $0.12 per common share.
 
 Convertible Debenture Exchange
 
 In November 2013, Joseph McDevitt, a related party investor and holder of $500,000 convertible debenture due in July 2013 exchanged $500,000 debenture and $205,245 in accrued interest for a total of 1,175,408 common shares at a conversion rate of $0.60 per share.  As consideration for the conversion, the Company issued 833,334 three year warrants to purchase common shares at an exercise price of $0.60 for the first twelve months following the closing date and $0.75 thereafter for the remainder of the new warrant term.
 
 Since the Company is experiencing financial difficulties and the debenture holder has granted a concession, the transaction met the requirement for troubled debt accounting treatment.  Management compared the value of the common stock and accrued interest to the fair value of the common stock resulting in a gain on extinguishment of debt of $526,676 or $0.09 per common share.
 
 TPG, L.L.C. Amendment
 
 In December 2013, the parties entered into a Fourth Amendment to the Share Agreement between Assured Pharmacy, Inc. (“Buyer”) and TPG, LLC (‘Seller”). The maturity date of the note was extended from July 2013 to September 1, 2015.  We issued 200,000 shares of the Company’s common stock and agreed to pay the remaining outstanding balance of $60,000 together with accrued interest at the rate of prime plus 2% per annum commencing from December 19, 2013.
 
 Since the Company is experiencing financial difficulties and the debt holder has granted a concession, the transaction met the requirement for troubled debt accounting treatment.  Management compared the value of the common stock and accrued interest to the fair value of the common stock resulting in a gain on extinguishment of debt of $274,648 or $0.04 per common share.
 
 In total, the Company issued an aggregate total of 3,394,531 common shares in exchange for a total aggregate amount of debt and accrued interest of $2,219,366 as a result of the 2013 Debt Restructuring.  In addition, management negotiated repayment extensions of an aggregate of $4,535,519 in principal outstanding during the year ended December 31, 2013.  Subsequent to the reporting period, management also negotiated a repayment extension of an additional $1,000,000 in convertible debentures and exchanged 420,694 shares of common stock for payment of accrued interest of $252,417 on these debentures (See Note 14 HCI Debenture Extension for further details).







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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Unsecured Convertible Debentures
 
 The Company completed various sales through private placements of senior convertible debentures to accredited investors.  The debentures were convertible into shares of the Company’s common stock at an initial conversion price of $1.26 per share on an as converted basis, subject to adjustment.  A consent and waiver was obtained from the majority of the Series A and C Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders as required in the certificate of designation.  From September 2012 through February 2013, all of the investors in 2011 private placements consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants.  In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for a total of 2,072,654 common shares on an as converted basis, subject to adjustment for stock dividends, stock splits and related distributions
 
 As part of the private placements, the investors received warrants to purchase shares of the Company’s common stock.  The warrants were initially exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment (see Note 6 Stock Warrants for further details). The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.  The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Accordingly, the fair value of the stock warrants is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 and 2012.
 As of December 31, 2013, we have the following unsecured convertible debentures outstanding to the following:
 
 $


Maturity Date


Interest Rate


# of WarrantsHCI


1,000,000



June 30, 2016



16.0%



1,600,007AQR


200,000



December 1, 2012



20.0%



576,002CNH


100,000



December 1, 2012



20.0%



288,003Coventry


200,000



April 1, 2016



16.0%



575,999Total

$
1,500,000











3,040,011
 
 HCI
 
 The Company issued an aggregate total of $1,000,000 in senior convertible debentures to Hillair Capital Investment, Inc. (“HCI”) during the years ended December 31, 2012 and 2011.  As of December 31, 2013, the debentures and related interest were past due.  The Company and HCI subsequently agreed to a modification and extension of the maturity date to June 30, 2016 with HCI as described in further detail in Note 14 HCI Debenture Extension.
 
 AQR & CNH
 
 In August 2011, the Company issued an aggregate total of $300,000 in senior convertible debentures to AQR Opportunistic Premium Offshore Fund, LP. (“AQR”) and CNH Diversified Opportunities Master Account, LP.  Due to our current financial condition, we did not make the periodic redemption payments of $75,000 due on June 1, 2012 and September 1, 2012 and the final payment due of $150,000 on or before December 1, 2012 to two convertible debenture holders that did not extend.  Upon default, amounts owed become immediately payable to the debenture holder upon issuance of a notice of default.  The debenture holders have issued a notice of default relating to our failure to make the periodic redemption payments on June 1, 2012 or September 1, 2012 or the final payment of $250,000 due on December 1, 2012 under the debenture agreement.  in August 2013, the two holders filed a lawsuit against the Company for payment of past due amounts (See Note 8 Legal Matters for furter details).  In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the convertible debenture.  No waivers were obtained from the two debenture holders that were holding an aggregate total of $300,000 debentures.  The anti-dilution adjustment reduced the conversion  price from $0.90 to $0.50 per share.  Management is pursuing the renegotiation of the terms of the debentures, but no assurances can be provided at this time.  The amounts due on the debentures are classified as current at December 31, 2013 and 2012.




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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







Coventry
 
 On December 6, 2013, the Company settled a lawsuit with Coventry Enterprises, LLC, (“Coventry”) a holder of $200,000 in convertible debentures issued in 2011.  The terms of the settlement were before any application of any payments, we owe Coventry $280,679, which includes unpaid principal of $200,000, unpaid interest of $53,679 and unreimbursed attorney’s fees and costs of $27,000.  The Company shall pay Coventry $280,679, plus interest at the rate of 16.0% per annum on the following schedule:
 
 a)
$50,000 payable on or before December 6, 2013; and
 b)
$10,000 payable on or before the first day of each month starting January 1, 2014 and continuing thereafter until the obligation is paid.
 
 Based on the payment terms above, the obligation will be paid in full on Apri1 1, 2016. In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the convertible debenture.  No waivers were obtained from Coventry debenture holders that were holding an aggregate total of $200,000 debentures.  The anti-dilution adjustment reduced the conversion  price on the debenture from $0.90 to $0.50 per share.
 
 Interest expense related to the unsecured convertible debentures for the years ended December 31, 2013 and 2012 was $929,908 and $1,306,791, respectively.  Interest expense for the years ended December 31, 2013 and 2012 included $560,522 and $500,781 at the stated rate, $333,255 and $684,627 in amortization of debt discount and $36,131 and $121,963 in amortization of deferred financing cost, respectively.  The effective interest rate on convertible debentures was calculated as 32.0% and 46.2% for the years ending December 31, 2013 and 2012, respectively.
 
 As of December 31, 2013, the outstanding balance on unsecured convertible debentures is $1,500,000 with $357,528 classified as current.  The outstanding debentures are convertible into an aggregate total of 2,333,333 common shares.
 
 Secured Debt
 
 In February 2013, the Company entered into a secured loan agreement with our primary wholesaler. Under the terms of this agreement, the Company received a one (1) year loan of $3,828,527 with an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements are $27,000 per month for four consecutive months, followed by four consecutive monthly payments of $37,000, followed by three consecutive monthly payments of $42,000, with remaining principal and interest due February 1, 2014. The proceeds from the note were simultaneously exchanged for $3,534,793 in outstanding vendor invoices and $293,734 in a secured note payable with the same primary wholesaler. The note is secured by all of the assets of the Company and its subsidiaries through UCC-1 filings.  As part of the agreement, the Company is required to purchase a minimum of $500,000 in monthly purchases each month.  The secured loan was subsequently extended with monthly payment requirements of $42,000, with remaining principal and interest due February 1, 2016.
 
 As of December 31, 2013, the outstanding principal balance on the note was $3,804,111. Due to our current financial condition, we have not made principal and interest payments in the amount of $228,940 as required by the agreement.  In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co. in which the lender agreed to forbear from accelerating the outstanding balance of the Note and form instituting collection efforts from the date of the agreement through July 1, 2014 provided certain conditions are met (See Note 14 H.D. Smith Forbearance for further details).  Interest expense for the year ended December 31, 2013 on these notes were $219,050.
 
 Revolving Credit Facilities
 
 Brockington Securities, Inc. - Revolver
  In March 2009, the Company entered into a Revolving Line of Credit Agreement with Brockington Securities Inc., a related party, for a credit limit of $300,000 with a term of one year bearing interest of 12.0% per annum. Under the terms of the agreement, the Company could request for advance from time to time, provided, however, any requested advance will not, when added to the outstanding principal advanced of all previous advances, exceed the credit limit. The Company could repay accrued interest and principal at any time, however no partial repayment would relieve the Company of the obligation of the entire unpaid principal together with any accrued interest and other unpaid charges.  There are no financial covenants that the Company is required to maintain.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The agreement has been subsequently extended. In November 2012, the Modification Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the credit limit was modified and increased from $300,000 to $500,000.  The latest extension occurred in December 23, 2013, pursuant to a Modification and Extension Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the term of the loan was modified and the maturity date of the loan was extended to June 30, 2016 by mutual consent.  All additional terms of the loan remain unchanged and the Company was not in violation of any provisions of the loan agreement.


As of December 31, 2013, the outstanding balance on the revolver was $477,000 with remaining availability of $23,000.


Third Coast Bank – Revolver
 
 In December 2013, the Company entered into a revolving Promissory Note with Third Coast Bank SSB, for a credit limit of $30,000 with a term of one year bearing a variable interest rate of prime plus .500 percentage points with an interest rate floor of 5.00% per annum.  The Promissory Note was guaranteed by Pinewood Trading, Fund, LP., a related party.
 
 As of December 31, 2013, the Company had not drawn on the facility.


5.  REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
 On September 1, 2013, the Company entered into a Stock Purchase Agreement (“SPA”) with Pinewood Trading Fund, LP, (“initial investor”) an existing shareholder (related party) to purchase up to 3,000 shares of Series D Convertible Preferred Stock at $1,000 per share.
 
 In November 2013, the Company designated 15,000 shares to Series D Preferred Stock.  The Series D Preferred rank senior to the Series A Preferred, Series C and Series B Preferred which ranks senior to the Company’s common stock with respect to the payment of any dividends and amounts upon liquidation or dissolution.
 
 The initial investor must approve certain corporate actions of the Company, regardless of the total Common Stock votes for or against such actions. Such actions include, but are not limited to: any increase or decrease in the authorized number of shares of Common Stock or Preferred Stock; the delisting of any of the Company’s securities from the OTCQB or any national securities exchange; any redemption or repurchase with respect to the Common Stock or Preferred Stock; any liquidation, dissolution or winding-up of the business and affairs of the Company; any material modification or deviation from the Company’s annual business plan and operating budget; any payment or declaration of a dividend or other distribution on any shares of Common Stock or Preferred Stock made by the Board of Directors; and any change in the principal business of the Company. In addition to the foregoing, holders of the Series D Preferred Stock have the right to elect one director of the Company so long as at least 35% of the Series D Preferred Stock are issued and outstanding.  Each share of Series D Preferred Stock is convertible into 2,000 shares of the Company’s common stock.
 
 In addition, Pinewood may, but is not obligated to, nominate one (1) Director to add to the Company’s existing Board currently comprised of four (4) people (for a total of five (5) directors).  The Company is further restricted, precluded, and prohibited from increasing the number of directors beyond 4 (or 5 should Pinewood elect to nominate a director) without the consent of Pinewood.  This gives Pinewood the ability without restriction or notice to install a board member at any time, subject to applicable law, at the Pinewoods’ sole discretion.






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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Preferred Stock Private Placements
 
 In November 2013, the Company issued 800 shares of Series D Preferred Stock to Pinewood Trading Fund, LP., a related party,  for $1,000 per share for an aggregate purchase price of $800,000. For each share of Series D Preferred Stock purchased, two five-year warrants were issued as follows: (i) a Series A Warrant to purchase 2,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) and (ii) a Series B Warrant to purchase 2,000 shares of Common Stock.
 
 In December 2013, the Company issued 200 shares of Series D Preferred Stock to Pinewood Trading Fund, LP., a related party for $1,000 per share for an aggregate purchase price of $200,000. For each share of Series D Preferred Stock purchased, two five-year warrants were issued as follows: (i) a Series A Warrant to purchase 2,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) and (ii) a Series B Warrant to purchase 2,000 shares of Common Stock.
 
 In December 2013, the Company issued 20 shares of Series D Preferred Stock to Craig Eagle, a director of the Company, for $1,000 per share for an aggregate purchase price of $20,000. For each share of Series D Preferred Stock purchased, two five-year warrants were issued as follows: (i) a Series A Warrant to purchase 2,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) and (ii) a Series B Warrant to purchase 2,000 shares of Common Stock.
 
 In December 2013, the Company issued 50 shares of Series D Preferred Stock to an existing investor for $1,000 per share for an aggregate purchase price of $500,000. For each share of Series D Preferred Stock purchased, two five-year warrants were issued as follows: (i) a Series A Warrant to purchase 2,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) and (ii) a Series B Warrant to purchase 2,000 shares of Common Stock.
 
 As part of the private placements, the investors received warrant to purchase an aggregate of 4,280,000 shares of the Company’s common stock.  The warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $0.50, subject to adjustment.  The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.  The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheet as of December 31, 2013.
 
 The Securities Purchase Agreement (“SPA”) contains a Milestone Adjustment provision.  The Company believed that it could achieve this goal by March 1, 2014.  If by March 1, 2014, the Company’s income, on a Special Adjustment Basis ("SAB") for the period beginning on January 1, 2014 and ending on February 28, 2014 (the “Measurement Period”) is not positive, on a SAB, then the Company will immediately issue (after the cash-flow on SAB calculation is final) to Investors, pro rata based on their ownership of Series D Preferred Stock, an aggregate additional (i) 2,400 shares of Series D Preferred Stock and (ii) for each share of Series D Preferred Stock issued above, one Series A Warrant and one Series B Warrant; and the exercise price of all warrants then held by the Investors (including the Warrants and any previously issued warrants of the Company then held by Investors) shall be reduced to $0.40 (forty cents), which number shall be subject to adjustment for issuances or circumstances following the Closing Date that would otherwise result in an adjustment to the exercise price of any such warrantIn addition, if the milestone adjustment is required, the Initial Investor shall be entitled thereafter to elect a majority of the Board of Directors, to be accomplished in any manner that the Initial Investor deems most expedient and in compliance with applicable laws and the Company’s charter documents. The SAB shall be based on the trailing two month net income of the Company, excluding stock based compensation and non-cash other (non-operating) expenses.  The milestone adjustment feature is not free standing from the Series D preferred stock and will not be separately classified from the preferred security.  The fair value of the milestone adjustment will be recorded if the milestone adjustment is required.
 
 The SPA also contains a Mandatory Redemption provision. If, as of January 1, 2016, (1) the Common Stock shall have traded on the 20 trading days prior to January 1, 2016 at an average closing price of less than $1.00; or (2) the Common Stock shall have had during the 30 trading days prior to January 1, 2016 an average daily trading volume of less than 70,000 shares, then the Company shall immediately, to the extent it may lawfully do so, redeem all outstanding shares of Series D Preferred Stock at a purchase price of $2,000 per share, plus a cumulative preference of 8% per annum compounded annually. Such redemption shall have preference over redemption of any other class of shares.
 
 If the mandatory redemption does not occur within 10 business days, then payments to the Convertible Debt holders shall be subordinated, pursuant to that certain Subordination Agreement executed by the Convertible Debt holders, until the shares of Series D Preferred Stock are redeemed.  If the mandatory redemption does not occur within 60 business days, the Initial Investor shall have the right to elect a majority of the Company’s Board of Directors, and may seek a sale of the Company, subject to the determination of the Board of Directors.






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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Failure to immediately redeem the Series D preferred shares will, at the Initial Investor’s election, result in the Company immediately issuing to the Initial Investor an additional (i) 2,400 shares of Series D preferred stock and (ii) for each share of Series D Preferred Stock issued above, one Series A Warrant and one Series B Warrant, and the exercise price of all warrants then held by the Initial Investor (including the Warrants and any previously issued warrants of the Company then held by Investor) shall be reduced to $0.10(ten cents) (which number shall be subject to adjustment for issuances of circumstances following the Closing that would otherwise result in an adjustment to the exercise price of any such warrant).
 The mandatory redemption feature is not freestanding from the Series D preferred stock and will not be separately classified from the preferred security.  Since the mandatory redemption is conditioned upon the Company’s stock price and volume which are note solely within the control of the issuer and the priced and date are fixed, the Series D Preferred are classified as temporary equity on the consolidated balance sheets as of December 31, 2013.  Management analyzed the terms of the mandatory redemption feature and evaluated whether it was probable that the instruments will become redeemable and concluded that it was probable that the instruments will become redeemable.  Management elected to recognized changes in the redemption value immediately as they occur and adjusted the redemption value as if it were also the redemption date for the instrument.  As a result, management increased the carrying value of the preferred instrument by $2,192,588 for the redemption feature on preferred stock in the year ended December 31, 2013.  The redemption feature on preferred stock is a deemed dividend distribution for accounting purposes.


The Series D Preferred stock includes a conversion feature in which each share of Series D Preferred Stock is initially convertible into 2,000 shares of the Company’s common stock. Management analyzed the terms of the conversion option and concluded that the conversion feature was derivative since it met the definition of a derivative and did qualify for any of the exceptions.The initial aggregate fair value of the derivatives was determined to be $238,171 which was recorded as a derivative liability on the Consolidated Balance Sheet as of December 31, 2013 (See Derivative Liability Note 2 for further details).
 
 The Company allocated the proceeds of these preferred issuances, by first allocating the proceeds to warrant liability and derivative liability based on fair value and then allocated the remaining residual proceeds, net of closing costs to the preferred stock security.
 
 As of December 31, 2013, an aggregate total of 1,070 Series D Shares had been issued for at total purchase price of $1,070,000, which is convertible into 2,140,000 shares of common stock.
 
 Subsequent to the reporting period, the Company did not meet the requirements of the Milestone Provision of the Series D Preferred of reaching positive net income on a SAB for the trailing two months ending February 2014 (See Note 14 Series D Preferred – Milestone Provisionfor further details).
 6.  EQUITY TRANSACTIONS





Convertible Preferred Stock Series – A, B & C
 The Company has authorized 5,000,000 shares of preferred stock, with 2,830 shares designated to Series A Preferred and 7,745 shares designated to Series B Preferred and 813 shares designated to Series C Preferred.


The Series A Preferred and Series C Preferred rank senior to the Series B Preferred which ranks senior to the Company’s common stock with respect to the payment of any dividends and amounts upon liquidation or dissolution. Except as required by law, the shares of preferred stock shall be voted together with the shares of common stock and not as a separate class.  In addition, so long as 35% of the aggregate amount of the shares of Series A Preferred and Series C Preferred are outstanding, the holders of the outstanding shares voting together as a separate class are entitled to elect up to four directors to the Board and separately vote on a number of defined material actions typically requiring Board approval. Respectively, holders of shares of Series A, B and C Preferred have anti-dilution protections for sale of stock below conversion rate and stock splits and other similar pro rata events.











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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Series A and Series B
 
 In June 2009, in a private placement pursuant to the Purchase Agreement dated February 9, 2009, with Mosaic, a related party (see Note 9 for further details), the Company agreed to sell 1,330 shares of its Series A Preferred and common stock purchase warrants to purchase an aggregate of 1,083,334 shares of its common stock for an aggregate purchase price of $1.3 million, of which $750,000 was paid by the cancellation of secured indebtedness of the Company owed to MFS, with the remaining $580,000 to be paid in cash.   As a condition of closing of this transaction, the outstanding principal balance related to Short Term Notes and Unsecured Debentures of $7.7 million was exchanged for 7,720 shares of Series B Preferred.
 
 In February and March 2013, the Company issued a total of 60 shares of Series A Preferred at $1,000 per share for a total of $60,000 to Mosaic under the existing 2009 Securities Purchase agreement.  The net proceeds of the sales were used for general working capital purposes.
 
 As of December 31, 2013, the Company issued a total of 559 shares of Series A Preferred for $558,500 to Mosaic under this Purchase agreement. Each share of Series A Preferred is convertible into 695 shares of common stock.  As of December 31, 2013, no shares of Series A Preferred issued to Mosaic have been converted into common stock.
 
 During the year ended December 31, 2012, 150 Series A Preferred shares were converted into 104,250 shares of common stock.  During the year ended December 31, 2013 and 2012, 260 and 25 Series B Preferred shares were converted into 288,890 and 13,889 shares of common stock.
 
 Series C
 
 In May 2010, we filed a Certificate of Designation to designate 813 shares of the Company’s preferred stock in Series C Preferred. The rights of the Series C Preferred are identical to Series A Preferred and each share of Series C Preferred is convertible into 556 shares of the Company’s common stock.  A consent and waiver was obtained from the majority of the Series A Preferred holders and the majority of the Series B Preferred holders as required in the certificate of designation. Subsequently, the Company issued 813 shares of the Company’s Series C Preferred at a price of $1,000 per share to an existing vendor in exchange for extinguishment of $300,000 in vendor’s secured payable and additional consideration in the form of a modification in vendor terms that are favorable to the Company and additional debt financing at terms that are significantly below market for the Company.
 
 In September 2012, the holders of the majority of Series A, B and C Preferred stock consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants.  In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for the Series A, B and C Preferred holders.




In August 2013, the holders of the majority of Series A, B and C Preferred stock consented to the Certificate of Designation of Series D preferred stock, the Series D Preferred Stock agreement with Pinewood Trading Fund, LP, and the increase in authorized common shares from 35,000,000 to 100,000,000.
 
 The table below summarizes the Company’s outstanding convertible preferred stock as of December 31, 2013 and 2012:
 
 December 31, 2013

December 31, 2012Convertible Preferred Stock

Number of

Preferred Shares

Number of

Common Shares

if Converted

Weighted

Average

Conversion Price

Number of

Preferred Shares

Number of

Common Shares

if Converted

Weighted

Average

Conversion PriceSeries A Preferred


1,466


1,629,006

$
0.90


1,406


1,292,492

$
1.09Series B Preferred


5,124


5,693,344

$
0.90


5,384


2,993,504

$
1.80Series C Preferred


813


902,778

$
0.90


813


451,750

$
1.80Total


7,403


8,225,128

$
0.90


7,603


4,737,746

$
1.60






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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Common Stock
 
 In January 2010, the Company increased the number of authorized shares of its’ common stock to 16,666,667 in order to meet the reserve requirements of the convertible and other dilutive securities issued, as well as additional capacity for future equity transactions.
 
 In March 2011, the Company’s Board approved an amended and restated certificate of incorporation affecting a 1 for 180 reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of April 15, 2011, (see Note 1 – Reverse Stock Splitfor further details).
 
 In May 2012, the Company’s Board and a majority of the Company’s shareholders approved an amended and restated articles of incorporation effectuating an increase in the number of authorized common shares of the Company from 16,666,667 to 35,000,000.  As required, a consent and waiver was obtained from the majority of the Series A and Series C Preferred holders in accordance with the certificate of designation.


In January 2013, we initiated a securities offering through a private placement for a minimum of 10 units of securities for a minimum of $250,000 and a maximum of 80 units for a maximum of $2,000,000 (subject to increase as much as 100 units for $2,500,000 to cover  over-allotments, if any).  Each unit consists of (a) 38,462 shares of common stock, valued at $0.65 for $25,000 and (b) 38,462 warrants with an initial exercise price of $0.90 per share.    If the maximum offering of 80 units is sold, Assured would have issued an aggregate of 3,076,960 shares of common stock and 3,076,960 warrants in such units.  The Company shall have paid the placement agent cash commissions equal to 10% of the gross proceeds received by the Company in this offering and three year warrants to purchase that number of shares of common stock equal to 10% of the aggregate number of shares of common stock and warrant shares included in the units sold in the offering (615,392) shares if all 80 units are sold and 769,240 shares if the over-allotment is exercised in full).   The outstanding common stock related to the private placement is subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  The Company also agreed that the 38,462 shares of common stock and the 38,462 warrants included in the units are subject to increase, and the $0.65 per share value and the $0.90 warrant exercise prices are subject to decrease, in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”).  Such Make-Whole Adjustments are as follows:





Share Price
Warrant Exercise Price
Adjusted Shares per Unit
Adjusted Warrants per Unit
Consolidated 2013 Revenues$0.65
$0.90
None
None
$21,850,000 or above$0.60
$0.85
41,667
41,667
From $20,700,000 to $21,849,999$0.55
$0.80
45,455
45,455
From $19,550,000 to $20,699,999$0.50
$0.75
50,000
50,000
From $18,400,000 to $19,549,999$0.45
$0.70
55,556
55,556
From $17,250,000 to $18,399,999$0.40
$0.65
62,500
62,500
Less than $17,250,000





Each warrant has a term of three years and may be exercised at an initial exercise price of $0.90 per warrant share; which exercise price is, in addition to the potential Make-Whole Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheet as of December 31, 2013.





The warrants may only be exercised for cash.  However, as provided in the Registration Rights Agreement, after a date which shall be 180 days following the Final Closing Date, there will be a cashless exercise option available to the warrant holders at any time during which a registration statement providing for the resale of the warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to an exemption from the registration requirements under the Securities Act.





A consent and waiver was obtained from the majority of the Series A and C preferred holders and a waiver was obtained from a majority of the Series B preferred holders as required in the certificate of designation and a waiver was obtained from all convertible debenture holders that were required.  As part of the waiver, the Series A, B, and C preferred holders and 100 percent of the applicable convertible debenture holders agreed to waive anti-dilution adjustments which the consenting holder may be entitled under their respective agreements and accept a partial ratchet anti-dilution adjustment with a decrease in the conversion price of $0.90 per share of the Company securities for this private placement if the minimum unit threshold is met.











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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








From February 2013 to the closing of the private placement in May 2013, the Company completed sales in a private placement to accredited investors for thirty-four and four tenths (34.4) common stock units for a total of 1,323,093 shares of common stock at an aggregate purchase price of $860,000 (before deducting expenses and fees related to the private placement).  The Company paid cash fees of $32,800 to the placement agents and issued 50,462 warrants with an exercise price of $0.90 and 50,462 warrants with an exercise price of $0.65 to the placement agent per the agreement.  In addition, the Company paid $13,010 in legal and the closing costs on this transaction.  The net proceeds of the private placement were used to pay down our outstanding balance with our primary wholesaler and general working capital purposes.  As part of the private placement, the investors also received warrants to purchase an aggregate of 1,323,093 shares of the Company’s common stock at an exercise price of $0.90 per share.





In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant.  No waivers were obtained from the investors regarding the dilutive issuance.  The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and results in the issuance of an additional 1,058,475 warrants to the investors and the issuance of an additional 55,508 issued to the placement agents.





Our consolidated net revenues for the fiscal year ending December 31, 2013 were $7,463,113 which included $2,270,536 in revenues from discontinued operations.  Since the net revenues are below the Make-Whole Adjustment minimum threshold of $17,250,000, the Company is required to issue an additional 826,907 shares of common stock to the eight investors that participated in the private placement by April 30, 2014.  A Make-Whole adjustment for the related warrants is not required due to the anti-dilution adjustment in November 2013, noted above.





In November 2013, the Company’s Board and a majority of the Company’s shareholders approved an Amended and Restated Articles of Incorporation effectuating an increase in the number of authorized common shares of the Company from 35,000,000 to 100,000,000.  As required, a consent and waiver was obtained from the majority of the Series A and Series C Preferred holders in accordance with the certificate of designation.





Stock Warrants





2009 Issuances





In connection with the issuance of shares of Series A Preferred to Mosaic in 2009, the Company also issued warrants to purchase shares of common stock. The holder has the right to purchase up to 1,083,334 shares of our common stock at an exercise price equal to $0.09 per share, subject to certain adjustments for stock splits and other similar pro rata events.  The warrants may be exercised on a cashless basis at any time until June 30, 2019.  As of December 31, 2013, no warrants have been exercised.





The gross value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions on the issuance date: expected stock price volatility of 441.2%, risk free rate of return of 3.5%; dividend yield of 0%, and a ten (10) year term.  The net value of the warrant was recorded based on its relative value of $420,487, net of related offering costs on a pro rata basis for all shares involved.





2011 Issuances





As part of the private placements of convertible debentures in 2011, the investors received warrants to purchase an aggregate total of 2,014,655 shares of the Company’s common stock (see Note 4 for further details).  The warrants are initially exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment.  The estimated fair value of these warrants was determined to be $639,189 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free interest rate range of (0.33% - 0.93%), and an expected stock volatility range of (65.3% - 82.1%). The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.  On November 13, 2012, the Company’s registration on Form S-1 became effective for 2,014,655 shares of the Company’s common stock underlying warrants.








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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 and 2012.  From September 2012 to February 2013, all of the investors in 2011 private placements consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants.  In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 2,984,625 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions.





As part of the modification and extensions to the 2011 convertible debentures in June, July and September 2012, the exercise period of warrants to purchase an aggregate total of 1,300,368 shares of the Company’s common stock (see Note 4 for further details) were extended from three to five years from the date of issuance at an initial exercise price of $1.512, subject to adjustment.  The modifications also resulted in accounting extinguishment treatment resulting in the cancellation and reissuance of warrants to purchase an aggregate total of 1,205,129 shares of the Company’s common stock.





As part of the private placements of convertible debentures in November 2011, the placement agents received warrants to purchase an aggregate total of 129,412 shares of the Company’s common stock (see Note 4 for further details).  The warrants are exercisable for a period of three years from the date of issuance at an initial exercise price of $1.26 and $1.52 for 58,824 and 70,588 shares, respectively, subject to adjustment.  The estimated fair value of these warrants was determined to be $10,755 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free interest rate of 0.41%, and an expected volatility of 65.3%.  The placement agent may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.  On November 13, 2012, the Company’s registration on Form S-1 became effective for 129,412 shares of the Company’s common stock underlying warrants.





The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012.  In September 2012 the placement agents consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants.  In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 201,571 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions





In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant.  No waivers were obtained from the three debenture holders that were holding an aggregate total of 800,004 warrants regarding the dilutive issuance.  The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and requires the issuance of an additional 640,000 warrants to the three investors.





On December 31, 2013, an aggregate total of 772,625 additional warrants were issued to seven warrant holders as part of the 2013 Tender Offer (See Note 4 2013 Debt Restructuringfor further details). Subsequent to the reporting period, an additional 224,000 warrants were issued to a holder of 1,120,005 warrants as part of the modification and extension transaction (See Note 14 for further details).








F - 25
 Table of Contents







ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








2012 Issuances





As part of the private placement of convertible debentures in January 2012, the investor received warrants to purchase a total of 48,000 shares of the Company’s common stock (see Note 4 for further details).  The warrants are exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment.  The estimated fair value of these warrants was determined to be $6,741 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 0.62%, and an expected stock volatility of 84.7%. As part of the June 2012 amendment to the debenture agreement, the exercise period of the warrants were extended from three years to five years.  The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.





The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012.  In September 2012, the investor consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants.  In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 80.640 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions.





As part of the private placement of convertible debentures in July 2012, the investor received warrants to purchase a total of 285,716 shares of the Company’s common stock (see Note 4 for further details).  The warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $1.512, subject to adjustment.  The estimated fair value of these warrants was determined to be $108,838 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 0.62%, and an expected stock volatility of 94.9%. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.





The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012. From September 2012 through February 2013, the investor consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants.  In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 480,002 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions.





On December 31, 2013, 40,320 additional warrants were issued to a holder of 48,000 warrants as part of the 2013 Tender Offer (See Note 4 2013Debt Restructuring Tender Offer for further details).  Subsequent to the reporting period, an additional 96,000 warrants were issued to Hillair Capital Investments, LP a holder of 480,002 warrants as part of the modification and extension transaction (See Note 14 Hillair Debenture Extensionfor further details).





2013 Issuances





In conjunction with the 2013 private placement of common stock, all of the Company's convertible debenture holders consented to the acceptance of a partial ratchet anti-dilution adjustment of $0.90 per common share.  In February 2013, the Company achieved the minimum offering required in the private placement resulting in an increase of an aggregate total of 1,669,056 warrants to our convertible debenture holders and placement agent.








F - 26
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








As part of the 2013 private placement of common stock ending in May 2013, the investors also received warrants to purchase an aggregate of 1,323,093 shares of the Company’s common stock.   Each warrant has a term of three years and may be exercised at an initial exercise price of $0.90 per warrant share; which exercise price is, in addition to the potential Make-Whole Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant.  The warrants may only be exercised for cash.  However, as provided in the Registration Rights Agreement, after a date which shall be 180 days following the Final Closing Date, there will be a cashless exercise option available to the warrant holders at any time during which a registration statement providing for the resale of the warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to an exemption from the registration requirements under the Securities Act. The estimated fair value of these warrants was determined to be $243,055 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return range of 0.30% - 0.40% , and an expected stock volatility range  of 56.05-60.10%. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.  The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant.  No waivers were obtained from the investors regarding the dilutive issuance.  The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and the issuance of an additional 1,058,475 warrants to the investors.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013.





As part of the 2013 private placement of common stock ending in May 2013, the placement agent received warrants to purchase an aggregate of 100,924 shares of the Company’s common stock.   Each warrant has a term of five years and may be exercised at initial exercise prices of $0.65 and $0.90 per warrant share; which exercise price is, in addition to the potential Make-Whole Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant.  The warrants may only be exercised for cash.  However, as provided in the Registration Rights Agreement, after a date which shall be 180 days following the Final Closing Date, there will be a cashless exercise option available to the warrant holders at any time during which a registration statement providing for the resale of the warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to an exemption from the registration requirements under the Securities Act. The estimated fair value of these warrants was determined to be $32,845 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 1.41%, and an expected stock volatility of 81.2%. The investors may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.  The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.  In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant.  No waivers were obtained from the investors regarding the dilutive issuance.  The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and the issuance of an additional 55,508 warrants to the placement agents.  Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013.





As part of the exchange of $500,000 in convertible debentures in and related accrued interest in November 2013, the investor received warrants to purchase a total of 833,334 shares of the Company’s common stock (see Note 4 for further details).  The warrants are exercisable for a period of three years from the date of issuance at an initial exercise price of $0.60 per share for the first twelve months and $0.75 for the remaining twenty four months of the exercise period, subject to adjustment for stock splits, etc.  The estimated fair value of these warrants was determined to be $14,416 using the Black Scholes stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 0.58%, and an expected stock volatility of 75.08%. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.











F - 27
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








As part of the issuances of Series D Preferred stock in November and December 2013, the investors also received an aggregate of 1,070 Series A Warrants which are exercisable into 2,140,000 common shares and an aggregate of 1,070 Series B Warrants which are exercisable into 2,140,000 common shares.   Each warrant has a term of five years and may be exercised at an initial exercise price of $0.50 per warrant share; which exercise price is, in addition to the potential Milestone Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant.  The Series A Warrants may only be exercised for cash. The Series B Warrants  may be exercised on a cashless basis at the investor’s election.  The estimated fair value of these warrants was determined to be $476,343 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return range of 1.76%, and an expected stock volatility of 94.5%. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.   Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013.





Subsequent to the reporting period, an additional 1,712,000 Series A warrants and 1,712,000 Series B warrants were issued as part of the Milestone Provision Adjustment and the exercise price on the previously issued 4,280,000 warrants was adjusted from $0.50 to $0.40 (See Note 14 Milestone Provision Adjustment for further details).





Expected Stock Volatility





Volatility is a measure of the tendency of investment returns to vary around a long-term average rate. Historical volatility is an appropriate starting point for setting this assumption. Companies should also consider how future experience may differ from the past. This may require using other factors to adjust historical volatility, such as implied volatility, peer-group volatility and the range and mean-reversion of volatility estimates over various historical periods. The peer-group utilized consisted of six companies in 2013 and in 2012, in the same or similar industries as the Company. In addition, if a best estimate cannot be made, management should use the mid-point in the range of reasonable estimates for volatility. The Company estimates the volatility of its common stock in conjunction with the Company’s issuance of financing instruments and volatility is calculated utilizing the historical and estimated future volatility of the Company and its peer-group.





Risk-Free Rate of Return





The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option/warrant.





Expected Dividends





The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, it uses an expected dividend yield of zero.





Expected Term





The Company uses the related exercise period of the warrant or option as the expected term.





A summary of the warrants issued in connection with financing transactions is presented in the table below:





Number of 
Shares


Weighted 
Average

Exercise PriceOutstanding and Exercisable at December 31, 2011


3,227,401


$
1.03Granted


1,538,844


$
1.51Exercised


-


$
-Cancelled, forfeited or expired


(1,205,129
)

$
1.51Outstanding and Exercisable at December 31, 2012


3,561,116


$
1.08Granted


6,537,351


$
0.60Exercised


-


$
-Cancelled, forfeited or expired


-


$
-Anti-dilution adjustments:Initial grant


(3,901,799
)

$
1.28Initial grant repricing


3,901,799


$
0.77Additional warrants granted


4,296,447


$
0.60Outstanding and Exercisable at December 31, 2013


14,394,914


$
0.58
















F - 28
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The following table summarizes information about warrants outstanding and exercisable as of December 31, 2013:





Outstanding

ExercisableExercise Price

Number

of Shares

Weighted

Average

Exercise

Price

Weighted

Average

Remaining Life

(Years)

Number

of Shares

Weighted

Average

Exercise

Price

Weighted

Average

Remaining Life

(Years)$
0.09



1,083,334

$
0.09


5.49


1,083,334

$
0.09


5.49$
0.50



8,963,337

$
0.50


3.68


8,963,337

$
0.50


3.68$
0.60



2,620,235

$
0.60


5.67


2,620,235

$
0.60


5.67$
0.90



1,728,008

$
0.90


2.79


1,728,008

$
0.90


2.79





7.     STOCK BASED COMPENSATION





Restricted Shares of Common Stock





During the years ended December 31, 2013 and 2012, the Company issued 650,000 and 540,000 restricted share grants to consultants and directors as compensation for services, respectively.   A summary of the activity of restricted shares of common stock for the years ended December 31, 2013 and 2012 is as follows:





Shares


Weighted

Average

Grant Date

Fair ValueNon-vested on Dec 31, 2011


-


$
-Granted


540,000



0.61Vested


(540,000
)


0.61Forfeited


-



-Nonvested on Dec 31, 2012


-


$
-Granted


650,000



0.84Vested


(545,000
)


0.83Forfeited


(105,000
)


0.90Non-vested on Dec 31, 2013


-


$
-





During the years ended December 31, 2013 and 2012, 545,000 and 540,000 of restricted shares of common stock with a fair value of approximately $449,750 and $485,391 respectively, became fully vested. The aggregate market value of the share grants for 2013 and 2012 was $544,250 and $330,650, respectively, at the date of grant, which is amortized to expense ratably over the related service period.









F - 29
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The Company recognized $349,812 and $485,391 in stock compensation expense related to restricted share grants and is included in selling, general and administrative expenses in the consolidated statement of operations for the years ended December 31, 2013, and 2012, respectively.  As of December 31, 2013, there was approximately $99,937 in unrecognized compensation cost related to restricted share awards and the related weighted-average period over which it is to be amortized is approximately six  (6) months.





Stock Warrants





Historically, the Company issued warrants to purchase common stock to employees and consultants as compensation for services.  For the year ended December 31, 2013, the Company issued warrants to purchase an aggregate of 1,200,000 common shares to consultants as compensation for services.  The Company did not issue warrants as compensation for services in the year ended December 31, 2012.  The stock warrants have an exercise price of $0.65 per share.  Such stock warrants are exercisable for a period that varies from 3 to 5 years from the date of issuance. The estimated fair value of these warrants was determined to be $428,427 based on the Black-Scholes option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free interest rate range of (0.38% - 0.70%) and an expected volatility range of (55.7% - 58.2%) based on the historical and estimated future volatility of the Corporation and its peer-group.  The Company amortizes the fair value of the stock warrants to expense ratably over the related service period.





The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of December 31, 2013 and 2012 and the changes therein during the years then ended:





Employees


ServicesShares


Weighted

Average

Exercise Price


Shares


Weighted

Average

Exercise PriceOutstanding and Exercisable at December 31, 2011


-


$
-



250,000


$
1.69Warrants granted


-



-



-



-Warrants exercised


-



-



-



-Warrants expired/cancelled


-



-



-



-Outstanding and Exercisable at December 31, 2012


-


$
-



250,000


$
1.69Warrants granted


-



-



1,200,000



0.65Warrants exercised


-



-



-



-Warrants expired/cancelled


-



-



(600,000
)


0.65Outstanding and Exercisable at December 31, 2013


-


$
-



850,000


$
0.96
















F - 30
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The following table summarizes information about stock warrants outstanding and exercisable as of December 31, 2013:





Outstanding

ExercisableRange of

Exercise Price

Number

of Shares

Weighted

verage

Exercise

Price

Weighted

Average

Remaining Life

(Years)

Number

of Shares

Weighted

Average

Exercise

Price

Weighted

Average

Remaining Life

(Years)$0.65


600,000

$
0.65


4.31


600,000

$
0.65


4.31$1.52 - $1.80


250,000

$
1.69


2.47


250,000

$
1.69


2.47





The weighted average fair value of the warrants granted was $0.36 per share for the year ended December 31, 2013.  Stock compensation expense related to stock warrants for the years ended December 31, 2013 and 2012 was $163,690 and $27,475, respectively. As of December 31, 2013, there was no unrecognized compensation cost related to stock warrant awards.





Stock Options





In May 2012, we adopted the Assured Pharmacy, Inc. 2012 Incentive Compensation Plan (the “2012 Incentive Plan”). The 2012 Incentive Plan is intended to provide incentives that will attract and retain the best available directors, employees and appropriate third parties who can provide us with valuable services.  These purposes may be achieved through the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance stock awards and phantom stock awards.





The 2012 Incentive Plan permits the grant of awards that may deliver up to an aggregate of 1,667,667 shares of common stock, further subject to limits on the number of shares that may be delivered pursuant to incentive stock options, on the shares that may be delivered on the awards to any individual in a single year and on the number of shares that may be delivered on certain awards that are performance-based awards, within the meaning of Section 162(m) of the Internal Revenue Code.  Awards may vest, in time, upon the occurrence of one or more events or by the satisfaction of performance criteria, or any combination. To the extent that awards are performance based, they may be based on one or more criteria, including (without limitation) earnings, cash flow, revenues, operating income, capital reissues, or other quantifiable company, customer satisfaction or market data, or any combination. In addition to common stock, awards may also be made in similar securities whose value is derived from our common stock.





Awards with respect to which grant, vesting, exercisability or payment depend on the achievement of performance goals and awards that are options or stock appreciation rights granted to officers and employees will be intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Internal Revenue Code.  The 2012 Incentive Plan will be administered by the board of directors.





In May 2012, the Company awarded 525,000 options to purchase common stock under the 2012 Incentive Compensation Plan to three executives.  The options vest immediately and are exercisable for a period of 10 years from the date of issuance. The Company calculated the estimated fair value of these options using the Black-Scholes option pricing model assuming that there will be no dividends, using a 5 year estimated exercise period, a risk-free interest rate of 0.77%, and an expected volatility of 90.1% based upon the historical and expected volatility of the Company and its peer group.








F - 31
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








At December 31, 2013, all options outstanding and exercisable are out of the money and accordingly, their intrinsic value is zero.





The following table summarizes the stock options outstanding and the number of shares of common stock subject to exercise as of December 31, 2013 and 2012 and the changes therein during the years then ended:





Options Outstanding


Options ExercisableShares


Weighted Average Exercise Price


Shares


Weighted Average Exercise PriceOutstanding at December 31, 2011


1,315,556


$
0.69



787,778


$
0.69Options granted


525,000



0.60



525,000



0.60Options vested


-



-



263,889



0.68Options exercised


-



-



-



-Options expired/cancelled


-



-



-



-Outstanding at December 31, 2012


1,840,556


$
0.66



1,576,667


$
0.66Options granted


-



-



-



-Options vested


-



-



263,889



0.68Options exercised


-



-



-



-Options expired/cancelled


-



-



-



-Outstanding at December 31, 2012


1,840,556


$
0.66



1,840,556


$
0.66





The following table summarizes information about stock options outstanding and exercisable as of December 31, 2013:





Outstanding


ExercisableExercise Price


Stock Options

Outstanding


Weighted

Average Exercise

Price Per Share


Weighted

Average Remaining Contractual Term

in Years


Stock Options

Exercisable


Weighted

Average Exercise

Price Per Share


Weighted

Average Remaining Contractual Term

in Years$
0.60



525,000


$
0.60



8.35



525,000


$
0.60



8.35$
0.68



1,305,556


$
0.68



7.24



1,305,556


$
0.68



7.24$
1.26



10,000


$
1.26



6.20



10,000


$
1.26



6.20













F - 32
 Table of Contents


ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The weighted average fair value of options granted was $0.60 for the year ended December 31, 2012.The Company recorded stock based compensation expense related to stock options for the years ended December 31, 2013 and 2012 of $115,462 and $334,695, respectively, which is reflected in selling, general and administrative expense in the consolidated statement of operations.  As of December 31, 2013, there was no unrecognized compensation cost related to stock option awards.





The Company has reserved at total of 2,690,556 shares of its common stock for incentive stock option and warrant awards outstanding to employees and consultants and an additional 1,142,667 shares of common stock for unissued options per the 2012 Incentive Plan.  The Company does not expect to repurchase shares during the year 2014.





8.     RELATED PARTY TRANSACTIONS





Transactions with related parties and their affiliates are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other unaffiliated third parties, and do not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.  For the years ended December 31, 2013 and 2012, related parties include the following:





·
Robert DelVecchio, an officer and a member of the board of directors of the Company and his affiliate Brockington Securities, Inc. (collectively, "DelVecchio").





·
Mosaic Capital Advisors, LLC, directly appointed directors and owner of approximately 96%  of the Company’s Series A Preferred as December 31, 2013, respectively, and its affiliated entities Mosaic Financial Services (“MFS”), LLC, Mosaic Private Equity Fund, L.P., Mosaic Capital Management, Ltd. and its affiliated accredited investor (collectively, “Mosaic”).





·
Pinewood Trading Company, owner of approximately 93.5% of the Company’s Series D Preferred Stock and 11% of the Company’s Series B Preferred as December 31, 2013, and its managing partner Jack E. Brooks.





Outstanding debt to related parties consisted of the following at December 31, 2013 and 2012:





2013DelVecchio


Mosaic


Pinewood


TotalNotes payable - revolving

$
477,000


$
-


$
-


$
477,000Unsecured convertible debentures, net


-



-



-



-Accrued interest


23,170



-



16,200



39,370$
500,170


$
-


$
16,200


$
516,3702012DelVecchio


Mosaic


Pinewood


TotalNotes payable - revolving

$
447,000


$
-


$
-


$
447,000Unsecured convertible debentures, net


-



498,798



46,876



545,674Accrued interest


27,392



134,520



5,376



167,288$
474,392


$
633,318


$
52,252


$
1,159,962





On July 9, 2012, we entered into a consulting agreement with Jack E. Brooks, managing partner of Pinewood Trading Company.  We issued 65,000 restricted common shares as payment in full for financial advisory services rendered to us.  The market value of the stock on July 9, 2012, the date of issuance, was $0.51 per common share.











F - 33
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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








9.     COMMITMENTS AND CONTINGENCIES





Operating Leases





The Company occupies buildings and retail space under operating lease agreements expiring on various dates through March 31, 2020, with monthly payments ranging from approximately $1,300 to $3,700. Certain leases include future rental escalations and renewal options. The Company recognizes rent expense on a straight-line basis for leases with rental escalation clauses.





For the years ending December 31,2014

$
222,4282015


136,7242016


85,0242017


68,1772018 and thereafter


65,214$
577,567






Legal Matters





Providing pharmacy services entails an inherent risk of medical and professional malpractice liability. The Company may be named as a defendant in such lawsuits and become subject to the attendant risk of substantial damage awards. The Company believes it possesses adequate professional and medical malpractice liability insurance coverage. There can be no assurance that the Company will not be sued, that any such lawsuit will not exceed our insurance coverage, or that it will be able to maintain such coverage at acceptable costs and on favorable terms.





From time to time, the Company may be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination or breach of contract actions incidental to the normal operations of the business. In the opinion of management, the Company is not currently involved in any litigation which it believes could have a material adverse effect on the Company's financial position or results of operations.





On May 9, 2013, a lawsuit was filed by Coventry Enterprises, LLC (“Coventry”) in the United States District Court Southern District of York.  The lawsuit arises from allegations that Assured Pharmacy breached its obligations under the $200,000 16% Senior Convertible Debenture due December 1, 2013 with Coventry Enterprises, LLC.  Due to the Company’s financial condition, we have been unable to repay the $200,000 in principal and accrued interest due under the agreement.  In November 2013, the parties entered into a Settlement Agreement and General Release which included a forbearance re stipulated judgment.  The parties agree that as of December 6, 2013, before any application of any payments, we owe Coventry $280,679, which includes unpaid principal of $200,000, unpaid interest of $53,679 and unreimbursed attorney’s fees and costs of $27,000.  The Company shall pay Coventry $280,679, plus interest at the rate of 16.0% per annum on the following schedule:





a)
$50,000 payable on or before December 6, 2013; and


b)
$10,000 payable on or before the first day of each month starting January 1, 2014 and continuing thereafter until the obligation is paid.





On August 23, 2013, AQR Opportunistic Premium Offshore Fund, L.P. and CNH Diversified Opportunities Master Account, L.P. filed a lawsuit against Assured Pharmacy in the Supreme Court of the State of New York. Plaintiffs submitted a Motion for Summary Judgment in Lieu of Complaint against defendants to recover money allegedly owed by Assured Pharmacy, Inc. under two 16% Convertible Debentures totaling $300,000 issued in and around 2011 in a private placement. Assured removed the action to the Southern District of New York. Assured plans to vigorously defend the claim.





On October 25, 2013, a lawsuit was filed by Westlake Gresham North, LLC in the Circuit Court of the State of Oregon.  The lawsuit arises from allegations that Assured Pharmacy Gresham, Inc. and Assured Pharmacy, Inc. breach of contract of lease agreement and is claiming $123,234 in damages.  In December 2013, the parties entered into a Release and Settlement Agreement which included a Stipulated General Judgment with Money Award in the amount of $99,173.72 As part of the settlement, the Company is required to make month rent payments of $3,064.73 beginning with December 2013 rent and continuing until the lease expires or another tenant leases that space.  The Company is also required to make a lump sum payment of $21,239.27 for past due rent by April 1, 2014.











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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








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





10.   SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION





The supplemental disclosure requirements for the statements of cash flows are as follows:





Year EndedDecember 31,2013


2012Cash paid during the period for:Interest

$
232,654


$
368,057Non-cash investing and financing activities during the period:Conversion of Series A preferred into common stock

$
-


$
150,000Conversion of Series B preferred into common stock

$
260,000


$
25,000Cancellation of convertible debentures in refinancing

$
(1,465,784
)

$
(1,315,784
)Reissuance of convertible debenture in refinancing

$
-


$
1,315,784Reissuance of stock warrants in refinancing

$
211,187


$
396,186Cancellation of stock warrants in refinancing

$
(18,750
)

$
(88,536
)Common stock warrants issued with convertible debentures

$
-


$
511,765Conversion of vendor payable into secured note payable

$
3,534,793


$
-Cancellation of secured notes payable in refinancing

$
293,734


$
-Common stock warrants issued with common stock

$
243,055


$
-Common stock warrants issued in conversion of notes payable

$
18,163


$
-Common stock warrants issued for placement fees

$
32,845


$
-Common stock warrants issued for Series D preferred stock

$
476,343


$
-Forward contract issued with common stock

$
233,131


$
-Common stock issued for convertible debentures in refinancing

$
435,985


$
-Redemption feature on preferred stock

$
2,192,588



-Common stock issued for payment of interest in refinancing

$
597,221


$
-





11.     LOSS PER COMMON SHARE





The following is a reconciliation of the numerators and denominators of the basic and diluted loss per common share computations for the years ended:





December 31,2013


2012Numerator for basic and diluted loss per common share:Net loss to common stockholders from continuing operations

$
(4,944,809
)

$
(3,988,566
)Net loss from discontinued operations

$
(609,292
)

$
(16,940
)Net loss to common stockholders

$
(5,554,101
)

$
(4,005,506
)Denominator for basic and diluted loss per common share:Weighted Average Number of Shares Outstanding


6,126,838



4,150,976Basic and diluted loss per common share from continuing operations

$
(0.81
)

$
(0.96
)Basic and diluted loss per common share from discontinued operations

$
(0.10
)

$
(0.00
)Basic and diluted loss per common share

$
(0.91
)

$
(0.96
)











F - 35
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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Due to their anti-dilutive effect, the potential common shares have been excluded from the computation of diluted loss per share:





December 31,2013


2012Warrants


15,244,914



3,811,116Stock options


1,840,556



1,840,556Convertible notes


2,333,333



2,304,478Series A Preferred


1,629,006



1,292,492Series B Preferred


5,693,344



2,993,504Series C Preferred


902,778



451,750Series D Preferred


2,140,000



-29,783,931



12,693,896





12.  DISCONTINUED OPERATIONS:





As a result of our financial condition and inability to secure additional fundingor significantly improve our liquidity position management reevaluated its strategic plan.  Management developed and implemented a plan to scale back operations.  We cannot continue to support the working capital needs of four pharmacies.  As a result, management has decided to close two pharmacies in order to reduce overall fixed pharmacy costs by 50% and concentrate our limited working capital to support the operations of the two remaining pharmacies we believe have the best prospects.   Management considered several factors in determining which two pharmacies to close, including historical financial performance, regulatory costs, current sales prospects, geographic and physical location and strength of existing physician relationships.  After consideration of these factors, management closed our Gresham and Riverside pharmacies on August 5, 2013 and August 8, 2013, respectively.





We recorded approximately $743,317 in expenses related to the closing of the facilities which included lease costs, asset impairment and goodwill impairment in the year ended December 31, 2013.  These closures met the discontinued operations criteria, and according is included in discontinued operations for all periods presented.  The Company’s Gain or (loss) from operations of discontinued pharmacies, net of tax benefit for the year ended December 31, 2013 and 2012, respectively are detailed as follows:





Year Ended December 31,2013


2012Sales

$
2,270,536


$
8,509,338Cost of sales


1,740,863



6,769,696Gross profit


529,673



1,739,642Operating expenses


755,128



1,690,248Impairment of goodwill


697,766



-Loss from discontinued operations


(923,221
)


49,394Other expensesInterest expense, net


14,151



75,455Income tax benefit


(328,080
)


(9,121
)Gain or (loss) from operations of discontinued pharmacies, net of tax benefit

$
(609,292
)

$
(16,940)












F - 36
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








The Company’s assets and liabilities for discontinued operations included in the consolidated balance sheet as of December 31, 2013 and 2012 are detailed as follows:





December 31,


December 31,2013


2012ASSETSCurrent AssetsAccounts receivable, net

$
4,048


$
343,259Inventories


-



211,427Prepaid and other current assets


-



12,113Assets of discontinued operations

$
4,048


$
566,799Other receivables, net


140,563



206,736Property and equipment, net


-



15,670Goodwill


-



697,766Assets of discontinued operations, non-current, net

$
140,563


$
920,172LIABILITIESCurrent LiabilitiesAccounts payable and accrued expenses


150,652



2,655,303Liabilities of discontinued operations

$
150,652


$
2,655,303





13.     INCOME TAXES





A reconciliation of the provision (benefit) for income taxes with amounts determined by applying statutory U.S. income tax rate of 34% to income taxes is as follows:





December 31,2013


2012U.S. Federal Statutory tax at 34%

$
(1,221,531
)

$
(1,361,872
)State Taxes, net of federal benefit


299,640



(119,482
)Permanent differences


124,993



(82,877
)Valuation Allowance


796,898



1,564,231Provision for income taxes

$
-


$
-





Due to losses incurred for the years ended December 31, 2013 and 2012, there is no current provision for income taxes.  The Company's discontinued operations incurred a tax benefit of $328,080 and $9,121 for the years ended December 31, 2013 and 2012, respectively.





Deferred tax assets consist as follows:





December 31,2013


2012Net operating loss carried forward

$
15,048,936


$
14,271,799Depreciable assets


22,993



(1,040
)Intangibles


-



(29,301
)Allowance for doubtful accounts


220,214



283,252Other


37,454



7,98815,329,187



14,532,698Valuation Allowance


(15,329,187
)


(14,532,698
)$
-


$
-












F - 37
 Table of Contents








ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Based upon the net operating losses incurred since inception, management has determined that it is more likely than not that the deferred tax assets as of December 31, 2013 and 2012 will not be recognized. Consequently, the Company has established a valuation allowance against the entire deferred tax assets.





As of December 31, 2013, the Company has federal net operating losses of approximately $39.9 million that expire from 2022 to 2032, and state net operating losses of approximately of $26.4 million.  The state net operating losses relate to the states of California and Oregon.  Since the Company discontinued operations in those states in 2013, the expected recoverability of those net operating losses as of December 31, 2013 are $0.





The utilization of some or all of the Company’s net operating losses may be restricted in the future by a significant change in ownership as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended. In addition, by California law, only a percentage of the Company’s pre-2008 net operating losses may be carried forward.  Furthermore, California net operating losses for the years prior to 2008 may only be carried forward ten (10) years under State law. The Company’s estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time, pursuant to ASC 740 Accounting for Income Tax. ASC 740 requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. At January 1, 2007, (adoption date), and at December 31, 2013, there were no unrecognized tax benefits.





The federal statute of limitations remains open for tax years 2010 through 2013. State jurisdictions generally have statutes of limitations ranging from three to five years. The Company is no longer subject to state income tax examinations by tax authorities for years before 2009.





Any interest and penalties associated with tax positions taken by the Company would be recorded as a component of other expenses in the consolidated statement of operations.  For the years ended December 31, 2013, and 2012, there were no amounts recorded for interest and penalties.





14.     SUBSEQUENT EVENTS:





The Company has performed a review of events subsequent to the financial condition date of December 31, 2013 through March 31, 2014, the date the financial statements were available to be issued.





Pinewood Notes





In January 2014, we entered into a $200,000 note agreement with Pinewood with a maturity date of January 28, 2016. The note bears an interest rate of 16.0% per annum payable on July 1 and January 1 of each calendar year.  Unless otherwise instructed by Pinewood, the accrued and unpaid interest shall be paid in duly authorized, validly issued, fully paid and non-assessable shares of the Company’s common stock.





In February and March 2014, the Company entered into short term promissory notes with Pinewood Trading Fund, LP., a related party for an aggregate total of $240,000.  The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.





HCI Debenture Extension





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








F - 38
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ASSURED PHARMACY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Series D Preferred – Milestone Provision





In March 2014, the Company did not meet the requirements of the Milestone Provision of the Series D Preferred of reaching positive net income on a Special Adjusted Basis (“SAB”) for the trailing two months ending February 2014.  As a result, the Company is required to issue an additional 856 shares of Series D Preferred stock and additional 3,424,000 warrants to purchase common stock at $0.40 to the Series D holders.  In addition, the exercise price on warrants to purchase an aggregate total of 4,280,000 common shares has been reduced to $0.40 per share.  Pinewood is also entitled to elect a majority of the Board of Directors, to be accomplished in any manner that the Initial Investor deems most expedient and in compliance with applicable laws and the Company’s charter documents (See Note 5 for further details).





The Milestone Provision adjustment reduction of the exercise price to $0.40 also met the requirement for anti-dilution for certain warrants and convertible debentures in which a waiver was not obtained.   The adjustment results in a conversion price decrease from $0.50 to $0.40 on an aggregate total of $500,000 in debentures, and increase of 250,000 shares on an as converted basis.  The adjustment results in an additional warrants to purchase 994,504 shares of common stock and an exercise price of $0.40 and an exercise price adjustment from $0.50 to $0.40 on warrant to purchase an aggregate total of 3,978,004 shares of common stock. (See Note 4 and Note 6 for further details).





Litigation





On February 19, 2014, a lawsuit was filed by JS Barkats PLLC, in the Supreme Court of The State of New York for County of New York against Assured Pharmacy, Inc. and Robert DelVecchio, our Chief Executive Officer.  The lawsuit arises from allegations of failing to remit legal fees due under written retainer agreements of $134,299.50 and failing to deliver 500,000 freely traded shares of the Company’s commons stock pursuant to one of the retainer agreements. Management believes that the allegations against the Company are without merit and plans to vigorously defend this claim and is pursuing counter claims asking for compensation and punitive damages.





H.D Smith Forbearance





In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co.  in which the lender agreed to  forbear from accelerating the outstanding balance of the Note and from instituting collection efforts from the date of the agreement through July 1, 2014. The forbearance was required due to our inability to make payments required under the agreement of $338,479 and our inability to meet the $500,000 minimum monthly purchase requirement due to the closure of our two pharmacy locations.




Revolving Line of Credit




In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015.  The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced.  The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.













F - 39
 Table of Contents










ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE










ITEM 9A.     CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures




The Company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) performed an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2013. Based upon that evaluation, the CEO and CFO concluded that, as a result of the material weaknesses in internal control over financial reporting that are described below in Management's Report on Internal Control Over Financial Reporting, the Company's disclosure controls and procedures were not effective as of December 31, 2013.




Management's Report on Internal Control Over Financial Reporting




Management is responsible for establishing and maintaining adequate internal controlover financial reporting. The Company's internal control over financial reporting is a process, under the supervision of the CEO and CFO, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with generally accepted accounting principles.




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.




Our management, has conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2013 based on the criteria established inInternal Control - Integrated Framework  (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 COSO Framework). Based on the assessment, management has concluded that, as of December 31, 2013, the Company's internal control over financial reporting was not effective due to the material weaknesses described below.




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 the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has failed to remediate the material weaknesses in the internal control over financial reporting as of December 31, 2013 as follows:




•           The Company did not maintain effective controls over its quarterly and annual financial statements and disclosures.





•            The Company did not maintain effective controls over accounting for complex transactions.




•




ITEM 9B.       OTHER INFORMATION





None.















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PART III








ITEM 10.       DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Directors and Executive Officers





The following table lists our executive officers and directors and their respective ages and positions as of the date of this report:





Name

Age

Position(s)Robert DelVecchio

49

Chief Executive Officer & DirectorMike Schneidereit

40

Chief Operating OfficerBrett Cormier

46

Chief Financial OfficerThomas Bilodeau III

45

DirectorCraig Eagle

47

DirectorDarshan Sheth

38

Director





Board of Directors





The following is information about the experience and attributes of the members of our board of directors as of the date of this report.  The experience and attributes discussed below provide the reasons that these individuals were selected for board membership, as well as why they continue to serve on the board.





Robert DelVecchio.Mr. DelVecchio has been our Chief Executive Officer and a director since February 2005.  In addition to leading our organization, Mr. DelVecchio’s responsibilities also include sales, investor relations, business development and fund raising. Since 1995, Mr. DelVecchio has acted as Chief Executive Officer and President of Brockington Securities, Inc., a broker-dealer and member of FINRA from May 1995 to June 2010.  Mr. DelVecchio is also a member of the board of directors of IGHL Foundation, a charitable organization that provides programs, services and support for people with developmental disabilities in the New York tri-state region.  Mr. DelVecchio’s broad experience in capital markets, experience in leading start-up businesses, and his knowledge of our Company as our longest serving director, led to the Company’s conclusion he should serve as a director of our Company.





Thomas Bilodeau, III. Mr. Bilodeau became a director in June 2009.  Mr. Bilodeau is a member/shareholder of Rich May, P.C., Attorneys and Counselors at Law, where he concentrates on corporate, commercial, and securities law. Mr. Bilodeau also chairs the firm’s Investment Management Practice.  Mr. Bilodeau has been with the firm full time as a lawyer since September of 1996.  Mr. Bilodeau sits on the board of directors of Astonfield Renewable Resources, Ltd., a Malta company and is actively involved as a member of the Board of Medicines for Humanity, a 501(c)(3) charity combating child-mortality internationally.  He is a member of the American, Massachusetts and Boston Bar Associations.   Mr. Bilodeau’s extensive and broad experience in corporate and securities law, led to the Company’s conclusion he should serve as a director of our Company.





Craig Eagle. M. D.Dr. Craig Eagle became a director in June 2009.  Dr. Craig Eagle has served as vice president of Strategic Alliances and partnerships for the Global Oncology business unit at Pfizer since January 2009where he is involved in nurturing business to business interactions and partnerships. As part of that role, he has been leading the integration of the Pfizer/Wyeth oncology businesses and combining the oncology portfolios. From 2007 to 2008, Dr. Eagle headed up the global oncology medical and outcomes research group for Pfizer. In this position, he oversaw the medical and outcomes programs of Pfizer’s oncology business. Dr. Eagle is a member of the oncology business unit leadership team. Dr. Eagle initially joined Pfizer Australia in 2001 as part of the medical group. In Australia, his role involved leading and participating in scientific research, regulatory and pricing and reimbursement negotiations for several compounds.  Dr. Eagle’s background as a medical doctor, his extensive experience in healthcare, pharmaceuticals, and insurance reimbursement, particularly his experience in pain management and developing new businesses, led to the Company’s conclusion he should serve as a director of our Company.












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Darshan Sheth.Mr. Sheth became a director in June 2009.  Mr. Sheth has served as Chief Financial Officer for Mosaic Capital Advisors, the Mosaic Private Equity family of funds and the Astonfield Group of Companies, Inc. since 2007.  Mr. Sheth’s previous position was the head of Finance and Treasurer at CBay Systems, Ltd. (now listed as MModal) one the largest transcription service providers in the United States.  Mr. Sheth joined CBay in 1999 as a startup company and played an integral role in growing the Company both organically and through acquisitions to annual revenues in excess of $60M.  Mr. Sheth has successfully cleared the Uniform Certified Public Accountant examination in the United States and is also a Chartered Accountant (A.C.A.).   Mr. Sheth’s extensive experience inaccounting, finance, and capital markets, particularly his experience in start up businesses in the healthcare industry, led to the Company’s conclusion he should serve as a director of our Company.





Executive Officers





The following is information about our executive officers as of the date of this report.





Robert DelVecchio.Mr. DelVecchio has been our Chief Executive Officer and a director since February 2005. See “Board of Directors” above.





Mike Schneidereit.Mr. Schneidereit joined us in October 2008 and became our Chief Operating Officer in May 2009.   Mr. Schneidereit’s responsibilities include pharmacy operations, sales, purchasing and information technology. From March 2006 to 2008, Mr. Schneidereit was the Director of Operations for SureHealth, LLC where he was responsible for the management of their specialty pharmacy line of business and corporate information technology.





Brett Cormier, C.P.A.Mr. Cormier joined us in September 2008 and became our Chief Financial Officer in May 2009.  Mr. Cormier is responsible for the management of the finance, accounting, human resources functions and our overall corporate administration. From February 2007 to August 2008, Mr. Cormier served as Chief Financial Officer of Sleep Holdings, Inc. and previously served as Vice President of Finance and Corporate Controller for First Broadcasting, LLC from August 2006 to January 2007.  From February 2003 to July 2007, Mr. Cormier served as Vice President of Finance for Holigan Investment Group, Ltd.


Involvement in Certain Legal Proceedings





Mr. DelVecchio and Brockington Securities, Inc. (“Brockington”) have each within the last ten years been the subject of sanctions imposed by Financial Industry Regulatory Authority (“FINRA”).  Brockington previously operated as a broker-dealer and during this time Mr. DelVecchio acted as a broker at Brockington and also served as Brockington’s President and Chief Executive Officer.  On April 29, 2011, Mr. DelVecchio consented to sanctions permanently barring him from association with any FINRA member based on allegations that he failed to appear for an on-the-record interview requested by FINRA.  On July 28, 2009, Mr. DelVecchio was censured, fined an undisclosed amount and ordered to undergo further training related to allegations that Brockington, through Mr. DelVecchio, failed to detect, investigate and report suspicious activity in trading accounts, prepare reports related thereto and conduct an anti-money laundering (“AML”) audit for 2007.





On January 14, 2010, Brockington was censured, fined $24,000 and ordered to have all of its employees undergo further training related to allegations that it failed to implement an AML program, detect, investigate and report suspicious activity in trading accounts and conduct an AML audit in one year.  Brockington’s failure to pay the foregoing fine resulted in its expulsion from FINRA membership on July 8, 2010.  On May 5, 2006, Brockington was censured, fined $15,000 and ordered to revise its written supervisory procedures related to allegations that it failed to transmit last sale reports in accordance with applicable rules.  On August 29, 2005, Brockington was censured and fined $7,500 related to allegations that an escrow agreement, in connection with a private offering, did not adequately ensure procedures regarding the transmittal and/or return of funds received from such offering.





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who are the beneficial owners of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock.  Officers, directors and beneficial owners of more than 10% of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of the Forms 3, 4 and 5 that we received with respect to transactions during 2013, we believe that all such forms were filed on a timely basis, except for:  (1) Pinewood Trading Fund, L.P. purchase of 800 shares of Series D Preferred stock on November 19, 2013 and 200 shares of Series D Preferred stock on December 3, 2013; and (2) Craig Eagle, director, purchase of 200 shares of Series D Prefered stock.  Management is working with related parties to resolve these delequent filings.












- 45 -
 Table of Contents








Code of Ethics





Our Board of Directors has adopted a Code of Ethics and Conduct that is applicable to all of employees, including our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions.  Our Code of Ethics and Conduct is intended to ensure that our employees act in accordance with the highest ethical standards.  The Code of Ethics and Conduct is filed as an exhibit hereto.





Audit Committee





Not applicable





ITEM 11.      EXECUTIVE COMPENSATION





Executive Compensation





The following summary compensation table reflects cash and non-cash compensation for the 2013 and 2012 fiscal years awarded to or earned by (i) each individual serving as our principal executive officer during the fiscal year ended December 31, 2013; (ii) each individual that served as an executive officer at the end of the fiscal year ended December 31, 2013 and who received in excess of $100,000 in total compensation during such fiscal year; and (iii) up to two additional individuals who received in excess of $100,000 in total compensation during such fiscal year but was not serving as an executive officer during the fiscal year.  We refer to these individuals as our “named executive officers.”





Summary Compensation Table


As of December 31, 2013





Name and Principal Position
Year
Salary

($)
Bonus ($)
Stock

Awards

($) (1)
Option

Awards

($) (1)
All Other

Compensation

($)
Total

($)Robert DelVecchio

Chief Executive Officer
2013

2012
201,923

247,115
-

-
-

-
-

72,796
3,080

3,080
205,003

322,991Mike Schneidereit

Chief Operating Officer
2013

2012
191,539

175,000
-

-
-

-
-

72,796
-

-
191,539

247,796Brett Cormier

Chief Financial Officer
2013

2012
186,539

175,000
-

-
-

-
-

72,796
3,080

3,080
189,619

250,876
  (1)
The amounts in the table reflect the grant date fair value of options and stock awards to the named executive officer in accordance with Accounting Standards Codification Topic 718.  The ultimate values of the options and stock awards to the executives generally will depend on the future market price of our common stock, which cannot be forecasted with reasonable accuracy. The actual value, if any, that an optionee will realize upon exercise of an option will depend on the excess of the market value of the common stock over the exercise price on the date the option is exercised.  Refer to the assumptions used in applying the Black-Scholes option pricing model to determine the fair value of awards granted in Note 7, “Stock Based Compensation” to financial statements for years ended December 31, 2013 and 2012.












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Compensation Components





Salary.We compensate our executive officers for their service by payment of salary, which is set in each of the named executive officer’s employment agreement discussed below.





Discretionary Bonuses.Our board of directors has the authority and discretion to award performance-based compensation to our executives if it determined that a particular executive has exceeded his objectives and goals or made a unique contribution to us during the year, or other circumstances warrant. There were no discretionary bonuses paid to our Named Executive Officers during fiscal yearsn  2013 or 2012.





Stock and Stock Option Awards.  Stock and stock option awards are determined by the board of directors based on numerous factors, some of which include responsibilities incumbent with the role of each executive and tenure with us.





At no time during the last fiscal year was any outstanding option repriced or otherwise modified.  There was no tandem feature, reload feature, or tax-reimbursement feature associated with any of the stock options we granted to our executive officers or otherwise.




Compensation Committee
 
 The Company’s board of directors does not have a standing compensation committee at this time due to the Company’s size and lack of compensation changes over the past three years.  Our three non-management directors on the board, Craig Eagle, Thomas Bilodeau and Darshan Sheth participate in the consideration of executive officer compensation and all members of the Company’s board of directors participate in the consideration of director compensation.





Employment Agreements; Termination of Employment and Change-in-Control Arrangements





Employment Agreements





In 2009, we entered into employment agreements with the Named Executive Officers. Each of these agreements was replaced by new employment agreements with the Named Executive Officers in May 2012. Under these agreements, Mr. DelVecchio receives a base salary of $250,000 and Messrs. Cormier and Schneidereit each receive a base salary of $225,000.  In addition, Messrs. DelVecchio, Cormier and Schneidereit each are eligible for a cash performance bonus up to 75% of their annual base salary. In addition, Messrs. DelVecchio, Cormier and Schneidereit each were granted 175,000 stock options under the 2012 Incentive Compensation Plan.  These stock options vest immediately and have a strike price of $0.60 with an exercise period of ten (10) years.  Termination benefits under the agreements are triggered if we terminate an agreement without cause or if a covered employee terminates his employment after the employee’s base salary is reduced by 5% or more, in each instance, if the employee notifies us in writing within 30 days of the change that he objects to the change and we do not rescind the change within 30 days of receiving the employee’s notice. This trigger event was chosen to help retain these executive officers and to assure these executive officers that they could apply their full attention to our business. The employment agreements were designed to promote stability and continuity of senior management.





Termination benefits under the employment agreements include: (i) any earned but unpaid salary; (ii) one year base salary; (iii) 150% of target bonus; (iv) one year company contributions to deferred compensation plans; and (v) up to one year COBRA premiums. Except for any earned but unpaid salary at the time of termination, benefits under the employment agreements would be paid out monthly over a one-year period.  Payment of termination benefits is contingent on the employee executing a release and complying with non-disclosure, non-competition and non-solicitation covenants for a period of one year following termination of employment











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Outstanding Equity Awards





Fiscal Year-Ended December 31, 2013





The following table presents information concerning the outstanding equity awards for the Named Executive Officers as of December 31, 2013:





Option AwardsName
Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable
Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable
Equity Incentive

Plan Awards:

Number of Securities

Underlying

Unexercised

Unearned Options

(#)
Option

Exercise

Price

($)
Option

Expiration

DateRobert DelVecchio

Chief Executive Officer
500,000

175,000
-

-
-

-
$0.68

$0.60
04/01/2021

05/08/2022Mike Schneidereit

Chief Operating Officer
277,778

175,000
-

-
-

-
$0.68

$0.60
04/01/2021

05/08/2022Brett Cormier

Chief Financial Officer
277,778

175,000
-

-
-

-
$0.68

$0.60
04/01/2021

05/08/2022





Stock Option Plan





Historically, our board of directors granted stock options to management primarily as part of the hiring and recruitment process.  The issuance of these stock options is intended to provide incentives that will attract and retain the best available employees.  These purposes may be achieved through the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance stock awards and phantom stock awards.





Awards may vest, in time, upon the occurrence of one or more events or by the satisfaction of performance criteria, or any combination. To the extent that awards are performance based, they may be based on one or more criteria, including (without limitation) earnings, cash flow, revenues, operating income, capital reissues, or other quantifiable company, customer satisfaction or market data, or any combination.









2012 Incentive Compensation Plan





InMay 2012, we adopted the Assured Pharmacy, Inc. 2012 Incentive Compensation Plan (the “2012 Incentive Plan”). The 2012 Incentive Plan is intended to provide incentives that will attract and retain the best available directors, employees and appropriate third parties who can provide us with valuable services.  These purposes may be achieved through the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance stock awards and phantom stock awards.












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The 2012 Incentive Plan permits the grant of awards that may deliver up to an aggregate of 1,667,667shares of common stock, further subject to limits on the number of shares that may be delivered pursuant to incentive stock options, on the shares that may be delivered on the awards to any individual in a single year and on the number of shares that may be delivered on certain awards that are performance-based awards, within the meaning of Section 162(m) of the Internal Revenue Code.  Awards may vest, in time, upon the occurrence of one or more events or by the satisfaction of performance criteria, or any combination. To the extent that awards are performance based, they may be based on one or more criteria, including (without limitation) earnings, cash flow, revenues, operating income, capital reissues, or other quantifiable company, customer satisfaction or market data, or any combination. In addition to common stock, awards may also be made in similar securities whose value is derived from our common stock.





Awards with respect to which grant, vesting, exercisability or payment depend on the achievement of performance goals and awards that are options or stock appreciation rights granted to officers and employees will be intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Internal Revenue Code. The 2012 Incentive Plan will be administered by the board of directors.





Option Exercises and Stock Vested





No options were exercised by Named Executive Officers or stock that vested in fiscal 2013 or 2012.





Pension Benefits





None of our Named Executive Officers participated in any qualified or nonqualified defined-benefit pension plans as of December 31, 2013.





Compensation of Directors





In May 2012, our board of directors approved the following compensation to be paid to non-employee directors:





·
$1,500 for each board meeting attended in person and $500 for each board meeting attended by telephone; and·
$1,500 for each committee meeting attended in person and $500 for each committee meeting attended by telephone.





For the fiscal year ended December 31, 2013, no compensation was paid to the Company’s non-employee directors.













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ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 Security Ownership of Certain Beneficial Owners and Management
 
 Transactions with related parties and their affiliates are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other unaffiliated third parties, and do not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.
 
 The following table sets forth information as of March 27, 2014 as to the beneficial ownership of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock  by: any person known to us to own beneficially more than 5% of any class; each of our directors; the individuals named in the “Summary Compensation Table” contained in this annual report (collectively, the “Named Executive Officers”); and all of our current executive officers and directors as a group. Except as otherwise indicated below, each stockholder listed below has sole voting and investment power with respect to the shares beneficially owned by such person. The rules of the Securities and Exchange Commission consider a person to be the “beneficial owner” of any securities over which the person has or shares voting power or investment power, or any securities as to which the person has the right to acquire, within sixty days, such sole or shared power.
 
 
 Name of

Beneficial Owner (a)
Number of Shares Owned

Percentage of Beneficial OwnershipCommon

(b)
Series A

Preferred
Series B

Preferred
Series C

Preferred
Series D
Preferred

Common

(c)
Series A

Preferred
Series B

Preferred
Series C

Preferred
Series D
Preferred
Percent of

Total

Votes 
(d) (e)Directors and Executive Officers:Robert DelVecchio
1,147,551(1)
-
393
-
-

9.9%
-
7.6%
-
-
2.0%Mike Schneidereit
452,778 (2)
-
-
-
-

4.1%
-
-
-
-
*Brett Cormier
452,778 (3)
-
-
-
-

4.1%
-
-
-
-
*Craig Eagle
195,001 (4)
30
-
-
20

1.8%
2.0%
-
-
1.9%
*Darshan Sheth
100,000 (5)
-
-
-
-

1.0%
-
-
-
-
*Thomas Bilodeau, III
50,000
-
-
-
-

*
-
-
-
-
*All  Directors and Executive Officers

as a group (6 persons)
2,398,108
30
393
-
36

21.5%
2.0%
7.6%
-
1.9%
3.5%5% Beneficial Holders:Mosaic Capital Advisors, LLC (6)
9,344,476 (7)
1,411
3,921
-
-

51.0%
96.2%
75.4%
-

35.5%Haresh Sheth (8)
854,523 (9)
-
-
-
-

8.0%
-
-
-

2.9%Pinewood Trading Company (10)
9,209,776 (11)
-
600
-
1,000

49.4%
-
11.5%
-
93.5%
17.7%H.D. Smith Wholesale Drug Co. (12)
902,778 (13)
-
-
813


7.9%
-
-
100.0%

4.3%Hillair Capital Investments, LP  (14)
3,674.034 (15)
-
-
-


26.8%
-
-
-

2.0%Baruch Halpern Revocable Trust (16)
1,137,499 (17)
-
-
-


10.3%




2.6%Coventry Enterprises, LLC (18)
975,999 (19)





8.5%
-
-
-

-AQR Opportunistic Premium Offshore Fund, LP (20)
976,002 (21)
-
-
-


8.5%
-
-
-

-Jonathan Green(22)
912,800 (23)
-
-
-


8.3%
-
-
-

2.1%Carl W. Grover(24)
1,111,041 (25)
-
-
-


10.0%
-
-
-

2.4%
 
 *
Indicates less than 1%





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(a)
Except as otherwise noted below, the address of each of the persons in the table is c/o Assured Pharmacy, Inc., 5600 Tennyson Parkway, Suite 390, Plano, Texas 75024
 
 (b)
Each share of Series A, Series B, Series C and Series D Preferred Stock may be converted into shares of the Company’s common stock at the option of the holder.  The number of shares of common stock issuable upon conversion of any shares of Series A, Series B, Series C or Series D Preferred Stock is equal to the product obtained by multiplying the applicable Conversion Rate by the number of shares of Preferred Stock being converted.  The Conversion Rate is equal to the quotient obtained by dividing the Stated Value per share of Preferred Stock, which is an amount equal to $1,000, by the applicable conversion price for each share of Series A ($0.90), Series B ($0.90),Series C Preferred Stock ($0.90) or Series D Preferred Stock ($0.50).  This column includes the shares of common stock issuable upon conversion of each share of Series A, Series B, Series C and Series D Preferred Stock together will all other shares of common stock which the person has the right to acquire within sixty days.
 
 
 (c)
Excluding those shares of common stock which the person has the right to acquire within sixty days and based solely ontheshares of common stock issued and outstanding, the percent of ownership of common stock is as follows: Robert DelVecchio (0.3%); Mike Schneidereit (0%); Brett Cormier (0%); Craig Eagle (0.4%); Darshan Sheth (1.0%); Thomas Bilodeau, III (0.5%); Mosaic Capital Advisors, LLC (14.4%); Haresh Sheth (6.0%); Pinewood Trading Company (9.9%); H.D. Smith Wholesale Drug Co. (0%); Hillair Capital Investments, LP (4.0%), Baruch Halpern Revocable Trust (5.1%); Coventry Enterprises, LLC (0%); AQR Opportunistic Premium Offshore Fund, LP (0%); Jonathan Green (4.0%); and Carl W. Grover (4.9%).
 
 (d)
Each holder of shares of Series A, Series B, Series C and Series D Preferred Stock are entitled to such number of votes as shall be equal to the whole number of shares of Common Stock into which such holder’s aggregate number of such shares of Series A, Series B, Series C and Series D Preferred Stock are convertible.
 
 (e)
Based on a total of 10,476,387 shares of common stock outstanding,1,406 shares of Series A Preferred Stock outstanding, 5,124shares of Series B Preferred Stock outstanding, 813 shares of Series C Preferred Stock and  1,070 Series D Preferred Stock outstanding on March 27, 2013 and prior to any exercise of warrants into shares of common stock.
 
 (1)
Includes 675,000 shares underlying stock options and 277,778 shares issuable upon conversion of Series B Preferred Stock.  Also includes 18,015 shares owned by Brockington Securities, Inc. (“Brockington”) and 158,889 common shares issuable upon conversion of Series B Preferred Stock owned by Brockington. Mr. DelVecchio exercises voting control and control over the disposition of all securities held Brockington.
 
 (2)
Includes 452,778 shares underlying stock options.
 
 (3)
Includes 452,778 shares underlying stock options.
 
 (4)
Includes 41,668 shares owned by CJE Holdings, LLC (“CJE”), 33,333 shares issuable upon conversion of Series A Preferred Stock and 40,000 shares issuable upon conversion of Series D Preferred Stock.  Dr. Eagle exercises voting control and control over the disposition of all securities held CJE.
 
 (5)
Includes 100,000 shares owned by Concorde Investment Corporation, Mr. Sheth disclaims beneficial ownership of Concorde Investment Corporation.
  (6)
The address of Mosaic Capital Advisors, LLC is 400 Madison Avenue, Suite 6B, New York, New York 10017.







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(7)
Mosaic Capital Advisors LLC (“MCA”) is (a) the investment manager of Mosaic Private Equity Fund (US) LP (“MPEF US”), (b) the 100% owner (member) of Mosaic Financial Services LLC (“MFS”), (c) affiliated by interlocking ownership with Mosaic Capital Management Limited (“MCML”), which directs the voting and disposition of securities owned by Mosaic Private Equity III Ltd. (“MPE III”), and (d) affiliated with Joseph McDevitt, an individual (“McDevitt”).  As a result, MCA may be deemed the beneficial owner of (i) 327,834 shares of common stock of the Company held directly by  MPEF US (144,063 shares), MFS (26,996 shares), MPE III (110,301 shares) and 1,221,882 shares of common stock held directly by McDevitt; (ii) 1,567,895 shares of common stock of the Company issuable upon the conversion of Series A Preferred Stock of the Company held directly by  MPEF US (503,889 shares of common stock) and MFS (1,064,006 shares); (iii) 4,356,671 shares of common stock of the Company issuable upon the conversion of Series B Preferred Stock of the Company held directly by  MPEF US (2,382,224 shares of common stock) and MPE III (1,974,447 shares); and (iv) 1,083,334 shares of common stock of the Company issuable pursuant to currently-exercisable warrants held by MCA (36,389 shares), MPEF US (211,111 shares), MFS (383,333 shares), MPE III (399,723 shares), MCML (52,778 shares) and 833,334 shares of common stock of the Company issuable pursuant to currently-exercisable warrants held by McDevitt);  MCA disclaims beneficial ownership of the shares held by McDevitt or the above-referenced entities other than MCA, except to the extent of its pecuniary interest therein. Excludes shares held by Messrs. Sheth, Bilodeau and Eagle.
 
 (8)
The address of Haresh Sheth is Galaxy Towers II, #37C, 7002 Boulevard East, Guttenberg, New Jersey 07093.  (9)
Includes: (i) 27,778 shares owned by Janus Finance Corporation (“Janus Finance”); (ii) 281,953 shares owned by Woodfield Capital Services, Inc. (“Woodfield”); and (iii) 250,000 shares underlying stock options.   Mr. Sheth exercises voting control and control over the disposition of all securities held by Janus Finance and Woodfield.
 
 (10)
The address of Pinewood Trading Fund, LP is 1029 East Drive, Beaumont, Texas 77706.
 
 (11)
Includes (i) 9,051,750 common shares issuable under warrants; (i) 2,000,000 common shares issuable upon conversion of Series D Preferred Stock; and  (iii) 666,668 common shares issuable upon conversion of Series B Preferred Stock.
 
 (12)
The address of H.D. Smith Wholesale Drug Co. is 3063 Fiat Avenue, Springfield, IL 62703.
 
 (13)
Includes 902,778 common shares issuable upon conversion of Series C Preferred Stock.
 
 (14)
The address of Hillair Capital Investments, LP is 330 Primrose Road, Suite 660, Burlingame, CA 94010.
 
 (15)
Includes: (i) 1,920,007 common shares issuable under warrants; and (ii) 1,333,333 common shares issuable upon conversion of unsecured convertible debentures.
 
 (16)
The address of Baruch Halpern Revocable Trust is 9601 Collins Avenue PH 303, Bal Harbor, FL, 33154.
 
 (17)
Includes: (i) 599,999 common shares issuable under warrants.
 
 (18)
The address of Coventry Enterprises, LLC is 80 S.W. 8th Street, Suite 2000, Miami, FL 33130.





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(19)
Includes: (i) 575,999 common shares issuable under warrants; and (ii) 400,000 common shares issuable upon conversion of unsecured convertible debentures.
 
 (20)
The address of AQR Opportunistic Premium Offshore Fund, L.P. is Two Greenwich Plaza, 1st Floor, Two Greenwich, CT 06830.
 
 (21)
Includes: (i) 576,002 common shares issuable under warrants; and (ii) 400,000 common shares issuable upon conversion of unsecured convertible debentures.
 
 (22)
The address of Jonathan Green is 7 Rumsen Trace, Carmel, CA 93923.
 
 (23)
Includes: 483,840 common shares issuable under warrants
 
 (24)
The address of Carl W. Grover is 1010 S. Ocean Boulevard, Apt 1017, Pompano Beach, FL 33062.
 
 (25)
Includes 599,962 common shares issuable under warrants
 
 Equity Compensation Plan Information





Securities Authorized for Issuance Under Equity Compensation Plans





The following table, provides information about our compensation plans under which shares of common stock may be issued upon the exercise of options and warrants as of December 31, 2013:





Plan category

Number of securities

to be issued upon

exercise of outstanding

options, warrants

and rights

(a)

Weighted-average

exercise price of

outstanding options,

warrants and rights

(b)

Number of securities

remaining available for

future issuance under

equity compensation plans

(excluding securities

reflected in column (a))

(c)Equity compensation plans approved by stockholders

525,000

$0.60

1,142,667Equity compensation plans not approved by stockholders

2,165,556

$0.80

-Tota

2,690,556

$0.76

1,142,667














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ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Certain Relationships and Related Transactions





Transactions with related parties and their affiliates are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other unaffiliated third parties, and do not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.





Pinewood Trading Fund, LP





Pinewood Trading Fund, LP (“Pinewood”) is the beneficial owner of approximately 49.4%, 11.5% and 93.5% of our common stock and Series B Convertible Preferred Stock and Series D Convertible Preferred Stock, respectively as of March 27, 2014. Pinewood may, but is not obligated to, nominate one (1) Director to add to the Company’s existing Board currently comprised of four (4) people (for a total of five (5) directors).  The Company is further restricted, precluded, and prohibited from increasing the number of directors beyond 4 (or 5 should Pinewood elect to nominate a director) without the consent of Pinewood.  This gives Pinewood the ability without restriction or notice to install a board member at any time, subject to applicable law, at the Pinewoods’ sole discretion.





On July 9, 2012, we entered into a consulting agreement with Jack E. Brooks, managing partner of Pinewood Trading Company.  We issued 65,000 restricted common shares as payment in full for financial advisory services rendered to us.  The market value of the stock on July 9, 2012, the date of issuance, was $0.51 per common share.





In November and December 2013, Pinewood purchased an aggregate total of 1,000 shares of Series D preferred stock for an aggregate purchase price of $1,000,000.





In March 2014, the Company did not meet the requirements of the Milestone Provision of the Series D Preferred of reaching positive net income on a Special Adjusted Basis (“SAB”) for the trailing two months ending February 2014.  As a result, the Company is required to issue an additional 800 shares of Series D Preferred stock and an additional 3,200,000 warrants to purchase common stock at $0.40 to the Series D holders.  In addition, the exercise price on an aggregate total 4,000,000 warrants has been reduced to $0.40 per share.  Pinewood is also entitled to elect a majority of the Board of Directors, to be accomplished in any manner that the Initial Investor deems most expedient and in compliance with applicable laws and the Company’s charter documents.





In January 2014, we entered into a $200,000 note agreement with Pinewood with a maturity date of January 28, 2016. The note bears an interest rate of 16.0% per annum payable on July 1 and January 1 of each calendar year.  Unless otherwise instructed by Pinewood, the accrued and unpaid interest shall be paid in duly authorized, validly issued, fully paid and non-assessable shares of the Company’s common stock.





In February and March 2014, the Company entered into a series of short term promissory notes with Pinewood, for an aggregate total of $240,000.  The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.





Mosaic Group





Mosaic Capital Advisors, LLC, together with its affiliated entities Mosaic Financial Services (“MFS”), LLC, Mosaic Private Equity Fund, L.P., Mosaic Capital Management, Ltd. and its affiliated accredited investor, Joseph McDevitt (collectively, “Mosaic”), are the beneficial owners of approximately 51.0%, 96.2%, and 75.4% of our common stock, Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, respectively as of March 15, 2014.  Under the terms of our Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock and Series B Convertible Preferred Stock, Mosaic, due to its ownership interest of our Series A Convertible Preferred Stock, has the right to elect four directors to our Board and partially exercised this right by appointing Messrs. Sheth, Bilodeau and Eagle to serve as directors.  Mr. Bilodeau is a member/shareholder of Rich May, P.C., Attorneys and Counselors at Law, which provides legal services to Mosaic.











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In July 2010, we completed a sale in a private transaction to Joseph McDevitt, an accredited investor affiliated with Mosaic, for a 10.0% convertible debenture for an aggregate principal amount of $500,000 (before deducting expenses and fees related to the private transaction) due in July 2012.  The debenture is convertible into shares of the our Series A Convertible Preferred Stock at an initial conversion price of $1,000 per share and subject to adjustments, and each share of Series A Preferred is convertible into 695 shares of our common stock for a total of 347,500 common shares on an as converted basis (subject to adjustment for certain dilutive transactions).  Interest on the debenture is payable quarterly in shares and is calculated based on the higher of the average stock price for the five (5) prior trading days or $1.80 per common share.  In March 2014, the investor exchanged the $500,000 debenture and $205,245 in accrued interest for 1,175,408 common shares at a conversion rate of $0.60 per share.  As consideration for the conversion, the Company issued 833,334 three year warrants to purchase common shares at an initial exercise price of $0.60 for the first twelve months following the closing date and $0.75 thereafter for the remainder of the new warrant term.





Robert DelVecchio





Robert DelVecchio, our Chief Executive Officer and a member of our board of directors, also serves as President and Chief Executive Officer of Brockington Securities, Inc. (“Brockington”).





In March 2009, we entered into a Revolving Line of Credit Agreement with Brockington for a credit limit of $300,000 with a term of one year bearing interest of 12.0% per annum. Under the terms of the line of credit, we could request for advance from time to time, provided, however, any requested advance will not, when added to the outstanding principal advanced of all previous advances, exceed the credit limit. We could repay accrued interest and principal at any time, however no partial repayment would relieve us of the obligation of the entire unpaid principal together with any accrued interest and other unpaid charges.  There are no financial covenants that we are required to maintain.





The line of credit was been subsequently extended.  The latest extension occurred on December 23, 2013, pursuant to a Modification and Extension Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the term of the loan was modified and the maturity date of the loan was extended to August 30,, 2016 by mutual consent.  In November 2012, the Modification Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the credit limit was modified the credit limit was increased from $300,000 to $500,000.





As of March 27, 2014, the outstanding balance on the revolving line of credit was $477,000 with remaining availability of $23,000 and the largest aggregate amount of principal outstanding on the loan to date was $488,000. Interest paid on the loan for the year ending December 31, 2013 was $64,723.





Hillair Capital Investments, LP





Hillair Capital Investments, LP (“HCI”) is the beneficial owner of approximately 26.8% of our common stock as of March 27, 2014.





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





In February 2014, the Company entered into and Amended and Restated 10% Senior Convertible Debenture due June 30, 2016 with Hillair Capital Investments, LP. in the amount of  $1,150,000. The amendment relates to convertible debentures originally issued on May 16, 2011, August 22, 2011, November 30, 2011 and July 19, 2012 for an aggregate total of $1,000,000 in debentures.  In addition to the extension of the maturity date, the interest rate was reduced form 16.0% to 10.0% per annum and the conversion price was decreased from $0.90 to $0.75. As part of the agreement, the Company agreed to increase the principal amount of the debenture by $150,000 which represents eighteen months of interest at the stated rate of 10%.  In addition, the Company issued 420,694 shares of common stock as payment of accrued interest of $242,272 at a rate of $0.60 per share.  As part of the agreement, all interest accruable and payable between February 7, 2014 and August 7, 2015 has been added to this debenture at a rate of 10% per annum and is considered paid in full and satisfied.  Further interest will not begin accruing until August 8, 2015.  As part of the amendment, the exercise price of the related warrants was reduced from $0.90 to $0.75 resulting in the issuance of an additional 320,000 warrants per the warrant agreement terms.











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During the year ended December 31, 2013, $5,000 in interest payments were made on the debenture and interest payable on the debenture as of December 31, 2013 was $229,283.





Director Independence





Our Board of Directors, after reviewing all relevant transactions or relationships between each director, or any of his family members, and Assured, its senior management and its independent registered public accounting firm, has determined that none of our current directors are “independent” directors within the meaning of all relevant securities and other laws and regulations regarding the definition of “independent”.





ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES





Fees Billed to the Company by Its Independent Registered Public Accounting Firm





The following is a summary of the fees billed to us by BDO USA, LLP, our independent registered public accounting firm for professional services rendered for fiscal years ended December 31, 2013:





Fee Category

2013 FeesAudit Fees

$
117,666Audit-Related Fees (1)


42,612Tax Fees (2)


-All Other Fees (3)


-Total Fees

$
160,278









(1)
Audit-Related Fees consist principally of assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements but not reported under the caption “Audit Fees.”(2)
Tax Fees consist of fees for tax compliance, tax advice and tax planning.(3)
All Other Fees consist of aggregate fees billed for products and services provided by the independent registered public accounting firm, other than those disclosed above.












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PART IV





ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)(1)    Financial Statements





See Item 8 in Part II of this annual report on Form 10-K, “Financial Statements and Supplementary Data,” for an index to the financial statements filed in this annual report, which information is incorporated herein by reference.





(2)       Financial Statement Schedules





Certain schedules are omitted because they are not applicable, or not required by smaller reporting companies.





(3)       Exhibits





The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as part of this annual report.





Exhibit No.

Title3.1

Amended and Restated Articles of Incorporation of Assured Pharmacy, Inc. including preferred stock designations, effective November 19, 2013 (1)3.2

Amended Bylaws (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form SB-2 of Assured Pharmacy, Inc. filed dated December 15, 2004)10.1

Promissory Note with Pinewood Trading Fund, L.P., dated August 6, 2013 (2)10.2

Amendment to Promissory Note Agreement with H.D Smith Wholesale Drug Co., dated July 1, 2013 (2)10.3

Promissory Note with Pinewood Trading Fund, L.P., dated  August 27, 2013 (3)10.4

Fourth  Amendment to Purchase Agreement for Ownership Interests in Assured Pharmacies, Inc., a Louisiana corporation, dated as of December, by and between TPG LLC and Assured Pharmacy, Inc. dated December 19, 2013**10.5

Amendment to Revolving Line of Credit Agreement dated December 23, 2013 by and between Brockington Securities, Inc. and Assured Pharmacy, Inc. **10.6

Letter Agreement – Debenture Modification with Joseph McDevitt*dated August 22, 2013**10.7

Amended and Restated Convertible Debenture with Hillair Capital Investments, Inc. dated February 6, 2014**10.8

Forbearance Agreement with HD Smith Wholesale Drug Co. dated March 26, 2014**10.9

Form of 10% Promissory Note with Pinewood Trading Fund, LP – 2014**10.10

Promissory Note with Pinewood Trading Fund, LP dated January 28, 2014**10.11

Promissory Note Agreement dated February 1, 2013 by and between Assured Pharmacy, Inc. and H.D. Smith Wholesale Drug Co. (5)10.12

Form of Subscription Agreement for common stock (5)10.13

Form of Securities Purchase Agreement for common stock (5)10.14

Form of Common Stock Purchase Warrant (5)10.15

Form of Registration Rights Agreement (5)












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Exhibit No.

Title21.1

Subsidiaries of Assured Pharmacy, Inc.(5)24.1

Power of Attorney (4)31.1

Sarbanes-Oxley Act Section 302 Certification of Robert J. DelVecchio**31.2

Sarbanes-Oxley Act Section 302 Certification of Brett P. Cormier**32.2

Sarbanes-Oxley Act Section 906 Certification of Robert J. DelVecchio and Brett P.  Cormier**





(1)
Previously filed as Exhibit to the Company’s Proxy Statement on Form DEF 14A filed on October 29, 2013.


(2)
Previously filed as Exhibit to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated by reference herein  (3)
Previously filed as Exhibit to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated by reference herein


(4)
Previously filed as Exhibit to the Company’s Registration Statement on Form S-1 filed on May 11, 2012 and incorporated by reference herein.


(5)
Previously filed as Exhibit to the Company’s Annual Report on Form 10-K filed on April 1, 2013 and incorporated by reference herein. **   Filed herewith













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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 on March 31, 2014.




Assured Pharmacy, Inc.,

a Nevada corporationBy:
/s/  Robert DelVecchioName:
Robert DelVecchioTitle:
Chief Executive Officer and Director





Power of Attorney





Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement was signed by the following persons in the capacities and on the date stated:





Signature and Title

Date/s/  Robert DelVecchio

March 31, 2014Robert DelVecchio, President, Chief Executive Officer (Principal Executive Officer) and Director*

March 31, 2014Mike Schneidereit, Chief Operating Officer/s/  Brett Cormier

March 31, 2014Brett Cormier, Chief Financial Officer (Principal Financial Officer) and Principal Accounting Officer*

March 31, 2014Thomas Bilodeau III, Director*

March 31, 2014Craig Eagle, Director*

March 31, 2014Darshan Sheth, Director*    By  /s/  Robert DelVecchioAttorney-in-fact












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