UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
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[X]
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December
31, 2005
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[
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
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For
the transition period from _________ to ________
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Commission
file number 000-33165
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Assured
Pharmacy, Inc.
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(Name
of small business issuer in its
charter)
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Nevada
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98-0233878
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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17935
Sky Park Circle, Suite F, Irvine, California
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92614
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone number: 949-222-9971
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Securities
registered under Section 12(b) of the Exchange Act:
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Title
of each class
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Name
of each exchange on which registered
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None
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Not
Applicable
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Securities
registered under Section 12(g) of the Exchange Act:
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Common
Stock, par value $0.001
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(Title
of class)
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Check
whether the Issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act [ ]
Check
whether the Issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Securities Exchange Act during the past 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 [
]
Check
if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is
not
contained in this form, and no disclosure will 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-KSB or any amendment
to
this Form 10-KSB [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
State
issuer’s revenue for its most recent fiscal year. $3,836,737
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of
such
common equity, as of a specified date within the past 60 days. $21,726,962
as of
March 13, 2006.
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date. 44,665,740
Common
Shares as of March 16, 2006
Transitional
Small Business Disclosure Format (Check One): Yes: __; No X
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Page
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PART
I
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PART
II
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PART
III
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PART
I
Business
of Issuer
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. We offer physicians
the ability to reduce or eliminate the need for paper prescriptions by accessing
our web-based technology to transmit prescriptions to our pharmacies from a
wireless hand-held device or desktop computer. We do not provide physicians
with
any equipment because our technology is web-based. We
do
provide physicians with training on how to utilize our web portal to
electronically transmit prescriptions to our pharmacies. Physicians are not
charged any fees or costs for transmitting prescriptions to our pharmacies
or
for any training they may receive on how to utilize our web portal. We generate
revenue from the sale of prescription drugs.
We
typically will not keep in inventory non-prescription drugs or health and beauty
related products commonly available at retail pharmacies. The focus of our
business is on dispensing highly regulated pain medication to patients for
chronic pain management. We seek to establish and maintain relationships with
physicians whose practice necessitates that they frequently prescribe medication
to manage their patients’ chronic pain. We do not intend to sell
over-the-counter medication or fill prescriptions unrelated to chronic pain
management at our pharmacies. We will fill prescriptions that address any side
effects experienced by individuals who have health conditions that require
treatment for chronic pain.
Subsequent
to the reporting period, we partnered with AnazaoHeath Corporation, a specialty
compounding pharmacy, which will enable physicians to prescribe custom
compounded drugs and have those prescriptions filled at our pharmacies.
Pharmaceutical
compounding is the combining, mixing, or altering of ingredients to create
a
customized medication for an individual patient in response to a licensed
physician’s prescription. Physicians often prescribe compounded medications for
reasons that include situations where there is not presently a commercially
available drug to treat the unique health condition of an individual patient
or
to combine several medications the patient is taking to increase compliance.
Custom
compounded drugs can offer additional means of treating
chronic pain. Our ability to fill prescriptions for custom
compounded drugs will enable us to better service patients who require treatment
for chronic pain management.
The
majority of our business is derived from physicians who send prescriptions
directly to our store electronically. We have limited “walk-in” prescriptions.
Within the previous 90 days, 169 physicians have transmitted prescriptions
to
our pharmacies through our web portal. Currently, we generate reoccurring
business from approximately 50 physicians and 22 of those physicians account
for
approximately 80% of all prescriptions filled at our pharmacies. The number
of
physicians that send reoccurring business to our pharmacies has increased from
December 2004 when at that time we generated reoccurring business from
approximately 41 physicians, but at
that
time
10 physicians accounted for approximately 81% of all prescriptions.
On
an
ongoing basis, our management is evaluating our operations and seeking
additional opportunities to expand our business. Our management determined
that
we could expand our business through developing arrangements with third party
health plan providers to accept traditional co-payments and fill prescriptions
for their members who rely upon overnight courier for delivery of their
prescription. Our management believes that such arrangements will broaden our
consumer base and enable us to access a particular niche of consumer that
receives their prescriptions exclusively via courier as opposed to patronizing
traditional retail pharmacy locations.
On
January 3, 2006, we incorporated Assured Pharmacy Plus, Corp. (“Plus Corp.”) as
a wholly-owned subsidiary to develop this opportunity. Subsequent to the
reporting period, we entered into an arrangement with Affiliated Healthcare
Administrators (“AHA”), a third party health plan administrator, to provide
prescription service to their members. Under the arrangement with AHA, our
pharmacies will provide prescription service to AHA members upon receipt of
a
traditional co-payment. Thereafter, we will process the prescription claim
with
AHA and receive the remaining balances due for their member’s prescription
purchases. Plus Corp. will process claims relating to the prescription filled
at
our pharmacies for AHA members in exchange for an administration fee. Our
management is contemplating expanding the operations of Plus Corp. by licensing
the entity as a pharmacy that exclusively focuses on servicing the niche of
consumers that are members of third party health plan administrators and receive
their prescriptions exclusively via courier.
Also
on
January 3, 2006, we incorporated Assured Pharmacy DME, Corp. (“DME”) as a
wholly-owned subsidiary for the purpose of facilitating and making available
specialized medical equipment to our consumers. Our consumers who require
treatment for chronic pain commonly require specialized medical equipment and/or
rehabilitative equipment. As a result, our management has sought to develop
referral relationships with suppliers of medical equipment in exchange for
a
referral fee. Subsequent to the reporting period, DME entered into an agreement
with a supplier of specialized medical equipment to receive a referral fee
based
on the revenues generated by the supplier from the referrals of DME. In an
attempt to strengthen this relationship and develop other referral
relationships, DME intends to disseminate information to our pharmacies’
consumers making them aware of suppliers that can provide medical equipment
for
their specific needs.
Safescript
Pharmacies, Inc. (formerly known as RTIN Holdings, Inc.)
License
Our
former CEO, Mr. David Parker, founded RxSystems, Inc. (“RxSystems”) in March
2002. In March 2002, RxSystems acquired from Safescript Pharmacies, Inc. (the
“Licensor”) the exclusive licensing rights to establish and operate pharmacies
under the name “Safescript Pharmacies” throughout California, Oregon, Washington
and Alaska. In May 2003, RxSystems assigned to us all of their rights under
this
exclusive license (the “License”). In exchange, we agreed to indemnify RxSystems
for any claims with respect to the License against RxSystems in any amount
now
or in the future. Subsequent to this assignment, RxSystems, Inc. filed articles
of dissolution with the Nevada Secretary of State. We also agreed to reimburse
the former CEO
$370,000
for personal funds advanced to the Licensor to secure the License. These funds
plus 5% interest per annum were due and payable in full to Mr. Parker on
December 31, 2007. In a termination and settlement agreement entered into with
Mr. Parker on February 1, 2005, Mr. Parker agreed to accept $10,000 cash,
494,000 shares of our common stock, and warrants to purchase 1,300,000 shares
of
our common stock and release and discharge us from all liability associated
with
this debt.
At
the
time of the assignment we assumed a note payable to the Licensor of $3,176,615
with monthly payments of $25,000 through December 1, 2004, with the remaining
principal and accrued interest due on December 31, 2004. On June 30, 2003,
the
Licensor agreed to convert $2,000,000 of the note payable into 100,000 shares
of
convertible preferred stock which was then converted into 4,444,444 shares
of
our restricted common stock with an estimated fair value of $1,393,000. Due
to
the conversion of all of our issued and outstanding preferred shares, there
are
currently no preferred shares issued or outstanding. We remained obligated
to
make payments of $25,000 per month through December 1, 2004, with the remaining
principal and interest due on December 31, 2004. As of June 30, 2005, monthly
installments of $25,000 for the note payable to the Licensor were seventeen
months in arrears and the last monthly installment was paid in January 2004.
As
of June 30, 2005, the current balance of the note payable to the Licensor was
approximately $1,013,000.
The
Licensor failed to provide us with essential services as set forth in the
license agreement and this has forced us to terminate our use of all technology
granted by the Licensor. On March 17, 2004, we filed a lawsuit in Nevada State
Court against the Licensor seeking damages, declaratory relief, to rescind
the
License and to recover the consideration paid. On March 19, 2004, the Licensor
filed for Chapter 11 bankruptcy protection. The litigation in Nevada State
Court
was stayed as a result of the Licensor filing for bankruptcy. We refiled
substantially the same claim as an adversary proceeding in the Licensor’s
bankruptcy case in the U.S. Bankruptcy court located in Tyler, Texas. In July
2004, this case was transferred to the U.S. District Court for the Eastern
District of Texas.
In
February 2004, the Licensor announced that it had been notified that the
Securities and Exchange Commission (the “SEC”) may commence an enforcement
action against the Licensor and certain executive officers of the Licensor
for
alleged violation of the Securities Act of 1933, as amended (the “Securities
Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
On October 5, 2004, the SEC announced that it filed a civil action in the United
States District Court for the Eastern District of Texas against the Licensor
and
its former officers and directors.
As
of the
reporting period ended March 31, 2004, management determined that the License
was 100% impaired based on (a) the uncertainty of the Licensor’s ability to
continue as a going concern, which creates substantial doubt about the
Licensor’s ability to continue to support their e-prescribing technology,
(b) our dispute with the Licensor, and (c) our implementation of other
technologies at our first two pharmacies.
On
June
30, 2005, the United States Bankruptcy Court for the Eastern District of Texas
approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
between the
Licensor
and
us.
Under the terms of the Settlement Agreement, the
Licensor
retained
100,000 shares of our common stock and returned the remaining 4,344,444 shares
of common stock for cancellation. In addition, we issued to the Licensor 500,000
additional shares of our common stock and agreed to dismiss the lawsuit pending
in the U.S. District Court for the Eastern District of Texas located in with
prejudice. The Settlement Agreement contained a mutual release which resulted
in
the
Licensor
releasing us from any liability with respect to the note payable to the
Licensor
in the
amount of approximately $1,013,000.
On
July
11, 2005, a creditor of Safescript filed a motion with the District Court for
reconsideration of its approval of the Settlement Agreement. On October 14,
2005, the District Court denied the creditor’s motion. The creditor appealed the
District Court’s approval of the Settlement Agreement. Due to a settlement
between the Licensor and the creditor, the appeal was withdrawn finalizing
our
Settlement Agreement with the Licensor.
License
Agreement with Network Technology, Inc. ("RxNT")
As
a
result of Safescript Pharmacies, Inc.’s failure to provide us with essential
services as contracted, we entered into a technology license agreement
(“Technology License”) with Network Technology, Inc. (“RxNT”) on March 15, 2004.
The Technology License grants us the right to use RxNT’s e-prescribing
technology under the brand name “Assured Script.” Upon execution of the
Technology License agreement, we paid RxNT a licensing fee of $100,000 and
are
also responsible for paying RxNT a royalty equal to twenty five percent (25%)
of
the gross profit from sales of the “Assured Script” product, which refers to the
licensed products and technology set forth in the Technology License and not
prescription drug sales. Given that we are in the business of owning and
operating pharmacies, management does not anticipate that we would make any
sales of the “Assured Script” product resulting in a royalty payment to
RxNT.
Agreement
with TPG Partners, L.L.C.
On
April
24, 2003, we entered into an agreement with TPG Partners, L.L.C. (“TPG”) for the
purpose of funding the establishment and operations of pharmacies. Under this
agreement, TPG holds the right to fund on a joint venture basis fifty pharmacies
that we establish. In exchange for contributing financing of $230,000 per
pharmacy location, TPG will acquire a 49% ownership interest in each pharmacy
established under this agreement and we will own the remaining 51%. Under the
terms of the agreement with TPG, our contribution to establish pharmacies
primarily consisted of the right to utilize our intellectual property rights
and
to provide sales and marketing services.
In
June
2003, Safescript of California, Inc. was incorporated to own and operate
pharmacies that the parties may jointly establish under the agreement. In
accordance with the terms of the agreement with TPG, we own 51% of Safescript
and TPG owns the remaining 49%. Effective September 8, 2004, Safescript of
California, Inc. filed amended articles of incorporation and changed its name
to
Assured Pharmacies, Inc. (“API”).
TPG
has
advanced a total of $448,000 for the establishment of our first pharmacy located
in Santa Ana, California and our second pharmacy located in Riverside,
California. No additional
funds
have been received from TPG since 2003. TPG is obligated to contribute an
additional $12,000 to satisfy their full capital contribution. TPG is also
obligated to contribute their proportionate share of the start-up costs in
excess of their initial capital contribution of $230,000 per pharmacy. The
parties’ agreement defined start-up costs as any costs associated with the
opening of any open pharmacy location that accrue within ninety days following
the opening of that particular pharmacy. TPG is obligated to contribute an
additional $40,816 to satisfy its proportionate share of the start-up costs
in
excess of their initial capital contribution. Currently, only these two
pharmacies are operated under the agreement with TPG.
Agreement
with TAPG, L.L.C.
In
February 2004, we entered into a joint venture agreement (the “Agreement”) with
TAPG, L.L.C. ("TAPG"), a Louisiana limited liability company, and formed
Safescript Northwest, Inc. ("Safescript Northwest"), a Louisiana corporation,
for the purpose of establishing and operating up to five pharmacies. Effective
August 19, 2004, Safescript Northwest changed its name to Assured Pharmacies
Northwest, Inc. ("APN"). Since its inception, we have owned 75% of APN, while
TAPG has owned the remaining 25%. The terms of the Agreement provide that TAPG
will contribute start-up costs of $335,000 per pharmacy location established
not
to exceed five pharmacies. Under the terms of the agreement with TAPG, our
contribution under the Agreement consists of the right to utilize our
intellectual property rights and to provide sales and marketing
services.
Between
March and October 2004, we received from TAPG initial capital contributions
of
$854,213 for three pharmacies. This capital contribution funded the opening
of a
pharmacy in Kirkland, Washington in August 2004 and Portland, Oregon in
September 2004. Currently, only these two pharmacies are opened and operated
under the Agreement with TAPG. Included in these monies was a partial capital
contribution of $190,000 for the establishment of another pharmacy located
in
Portland, Oregon. TAPG is obligated to contribute an additional $150,787 to
satisfy their full capital contribution for this pharmacy. APN and we requested
that TAPG provide the $150,787 balance of its full capital contribution. TAPG
is
also obligated to contribute their proportionate share of the start-up costs
in
excess of their initial capital contribution of $335,000 per pharmacy. The
parties’ agreement defined start-up costs as any costs associated with the
opening of any open pharmacy location that accrue within one hundred eighty
days
following the opening of that particular pharmacy. As of December 31, 2005,
TAPG
is obligated to contribute an additional $34,994 together with interest of
$5,778 to satisfy its proportionate share of the start-up costs in excess of
their initial capital contribution.
As
of
December 31, 2005, we advanced APN a total of $351,857 as an interest-free
loan
to sustain operations at both pharmacies held and operated by APN. On March
6,
2006, our interest-free loan of $351,857 was converted into 378 shares of APN
capital stock. Following the conversion of this debt into equity, we maintain
a
94.8% ownership interest in APN and TAPG owns the remaining 5.2%
interest.
Industry
Overview
According
to the National Institute for Health Management, the $200 billion prescription
drug market is the fastest-growing segment of the health care industry today,
rising 17% or more a year since 1998. At the same time, the market has been
plagued by several chronic and growing problems that underscore the need to
modernize the way medications are prescribed and dispensed in the United States.
These problems include, but are not limited to:
| · |
Deaths
and injuries due to illegible prescriptions. According to the Institute
of
Medicine, errors in reading hand-written drug prescriptions are reportedly
responsible for over 7,000 deaths a year in the U.S., $77 billion
in
additional medical expenses, and rapidly escalating medical malpractice
insurance costs. As a result, the Institute for Safe Medical Practices
(ISMP), a non-profit medical research group, has called for the complete
elimination of handwritten
prescriptions.
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A
study by the American Pain Society and the American Academy of Pain
Management determined that an estimated 48 million suffer from chronic
pain in the U.S. and this number is projected to continue
growing.
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Too
few qualified pharmacists. A recent study conducted by the United
States
Department of Health and Human Services confirmed that there is a
growing
shortage of trained and licensed
pharmacists.
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Handwritten
prescriptions are prone to counterfeiting. Unscrupulous patients
can alter
prescriptions in dose and/or quantity. Many patients falsely report
lost
prescriptions or just forge the prescription to visit multiple
pharmacies.
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Market
for Our Products and Services
The
target market we will serve in dispensing pharmaceutical products is patients
who require medication for chronic pain management. Patients in this
category are likely to require prescription medications more frequently and
for
longer periods of time than patients in most other medical categories. In
order to access this target market, we will seek to establish and maintain
relationships with physicians whose practice necessitates that they frequently
prescribe medication to manage their patients’ chronic pain. We do not pay
physicians to transmit prescriptions to our pharmacies and physicians do not
pay
us to transmit prescriptions to our pharmacies. We generate our revenue from
the
sale of prescription drugs at our pharmacies.
Within
the previous 90 days, approximately 169 physicians have transmitted
prescriptions to our pharmacies through our web portal. Currently, we generate
reoccurring business from approximately 50 physicians and 22 of those physicians
account for approximately 80% of all prescriptions filled at our pharmacies.
The
number of physicians that send reoccurring business to our pharmacies has
increased from December 2004 when at that time we generated reoccurring business
from approximately 41 physicians, but at that time 10 of those physicians
accounted for approximately 81% of all prescriptions. One physician’s practice
accounted for greater than 10% of all prescription we received in
2005.
Principal
Suppliers
We
purchased 97% of our inventory of prescription drugs from one wholesale drug
vendor during the year ended December 2005. During the same period of time,
we
purchased the remaining 3% of our inventory from 3 different wholesale drug
vendors. Our management believes that the wholesale pharmaceutical and
non-pharmaceutical distribution industry is highly competitive because of the
consolidation of the pharmacy industry and the practice of certain large
pharmacy chains to purchase directly from product manufacturers. Although
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 vendor was terminated, there can
be
no assurance that the termination of such a relationship would not adversely
affect us.
Customers
and Third-Party Payors
In
fiscal
2005, nearly all of our pharmacy sales were 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 that agrees to pay for all or a
portion of a customer's eligible prescription purchases. Any significant
loss of third-party payor business could have a material adverse effect on
our
business and results of operations.
Competition
We
face
intense competition with local, regional and national companies, including
other
drugstore chains, independently owned drugstores, supermarkets, mass
merchandisers, discount stores, dollar stores, mail order pharmacies and drug
importation. 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. Retail pharmacies such as Walgreens, CVS Pharmacy, and Rite Aid use
proprietary and/or commercialized paperless prescription technology in their
pharmacy operations. However, these pharmacies are 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 2 drugs in
inventory. As a result, the time it takes for traditional retail pharmacies
to
fill a prescription for Class 2 drug is extended. Because of our pain management
focus, we maintain an appropriate inventory level of Class 2 drugs to meet
the
needs of physicians that transmit prescription to our pharmacies and do not
keep
in inventory non-prescription drugs or health and beauty related products.
We do
not intend to sell over-the-counter medication or fill prescriptions unrelated
to chronic pain management at our pharmacies. We will fill prescriptions that
address any side effects experienced by individuals who have health
conditions
that require them to be treated for chronic pain.
Currently,
Safescript Pharmacies, Inc. is the only company that our management is aware
of
that operates pharmacies in the United States that exclusively dispense
pharmaceutical products to patients who require medication for chronic pain
management while also providing technological support to physicians to enable
them to e-prescribe medication for their patients to the pharmacy.
There
are
companies that are in the business of developing and manufacturing proprietary
software and hardware that facilitate e-scripting. We are not in this business.
We constantly seek and evaluate available technologies to integrate into our
business model; as such, we do not consider ourselves a technology company
because we do not develop, program, or manufacture proprietary hardware and/or
software used by our pharmacies or by physicians that transmit prescriptions
to
our pharmacies.
Patents,
Licenses, Trademarks, Franchises, Concessions, Royalty Agreements, or Labor
Contracts
On
March
15, 2004, we entered into a technology license agreement (“Technology License”)
with Network Technology, Inc. (“RxNT”). The Technology License grants us the
right to use RxNT’s e-prescribing technology under the brand name “Assured
Script.”
On
November 9, 2004, we received trademark approval (registration number 2901258)
by the United States Patent and Trademark Office for the “eRXSYS”
company
logo. We changed our name to Assured Pharmacy, Inc. in October 2005 and no
longer utilize the trademarked “eRXSYS”
logo.
State
law
requires pharmacies to apply to the State Board of Pharmacy to receive a license
to operate. The application process to operate a pharmacy is substantially
similar among different states. The application process for a license on average
takes sixty days in the state of California. 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. Currently, we are licensed to operate four
pharmacies.
Research
and Development
We
did
not incur any research and development expenditures in the fiscal years ended
December 31, 2005 or 2004.
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. Set forth below is a summary of the applicable federal and state
governmental regulations impacting our operations.
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. 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 law and regulation could result in
licensure revocation as well as the imposition of fines and
penalties.
Drug
Enforcement Laws
The
United States Department of Justice enforces the Drug Enforcement Act through
the Drug Enforcement Agency (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.
Medicare
Medicare
reimbursement is determined by the Centers for Medicare and Medicaid Services
(“CMS”), an agency of the United States Department of Health and Human Services.
CMS establishes reimbursement policy for services provided to Medicare
beneficiaries in a manner consistent with the Social Security Act, as amended
by
Congress. CMS has not yet established the reimbursement methodology
pursuant to which it will reimburse prescription drugs.
In
order
to participate in the Medicare program, each pharmacy must enroll as a
participating supplier. There can be no assurance that our pharmacies will
be
able to obtain the necessary approvals to participate in the Medicare program,
which could have a material adverse financial impact on us, our operations,
and
our investors.
Medicaid
Medicaid
is a federal/state program that provides health coverage (including prescription
drug coverage) to the needy. In order to participate in the Medicaid program,
each pharmacy must enroll as a participating supplier. There can be no assurance
that our pharmacies will be able to obtain the necessary approvals to
participate in the Medicaid program, which could have a material adverse
financial impact on us, our operations, and our investors. Each state’s Medicaid
program
is different, and some states impose limitations on the pharmacies that may
serve the Medicaid population. We currently participate in Medicaid in Oregon
and Washington. We submitted an application to participate in California’s
Medicaid program, known as Medi-Cal and received a notice of approval on August
22, 2005. We were assigned a unique provider identification number to enable
our
pharmacy in Riverside, California and other California locations that we may
establish in the future, exclusive of locations in Orange County, to process
claims through Medi-Cal.
The
Medicaid program is administered and all benefits are processed by CalOptima
exclusively in Orange County, California. All applications to participate in
the
Medicaid programs for pharmacies located in Orange County are processed by
CalOptima. In 2002, CalOptima placed a moratorium on additional pharmacies
in
Orange County enrolling as a supplier of prescription drugs to customers who
rely solely on Medicaid for health coverage. This moratorium remains in effect
and impacts our location in Santa Ana, California. There can be no assurance
that the moratorium will be lifted and we will be able to obtain the necessary
approvals to participate in California’s Medicaid program in any respect in
Orange County, California.
Medicare
and Medicaid Participation
We
received notice that CalOptima was accepting applications for pharmacies to
participate in CalOptima specifically for claims by customers who rely on health
coverage through both Medicaid and Medicare. We submitted an application to
CalOptima for approval to participate in Orange County, California during the
fourth quarter of the year ended December 31, 2005. We have not received a
response to our application as of the filing date of this Annual Report and
do
not know when we will receive a response to our application.
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):
| i. |
In
return for referring an individual to a person for the furnishing
or
arranging for the furnishing of any item or service for which payment
may
be made under a federal or state health care program;
or
|
| ii. |
In
return for purchasing, leasing, ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service or item
for
which payment may be made under a federal or state health care
program.
|
There
are
both criminal and civil penalties for violating the Federal statute. Criminal
sanctions include a fine not to exceed $25,000 or imprisonment up to five years
or both, for each offense. In addition, monetary penalties for each offense
may
be increased to $250,000 for individuals and up to $500,000 for organizations.
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 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.
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.
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
States
have generally 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
We
are
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 well as unique identifiers
for providers, employers, health plans and individuals; and enforcement. We
are
required to comply with these standards and are subject to significant civil
and
criminal penalties for failure to do so.
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 became mandatory on 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.
California
Senate Bill #151 was chaptered by the California Secretary of State on September
17, 2003. This legislation tightens the regulations on prescribing prescription
medication. The legislation allows for electronic prescribing of all
prescription medication except Class 2 substances. Generally, Class 2 substances
are drugs that exhibit a high potential for abuse or diversion. Class 2
substances are required to be dispensed only against a hard copy prescription.
This will not pose any operational problem for us because we currently generate
a hard copy of
the
electronic prescription for all Class 2 prescriptions issued. Management
believes that this legislation will create no undue burden or competitive
disadvantage for us.
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 effect 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 with any federal, state,
or local environmental laws.
Employees
We
currently have nineteen full-time employees in addition to three consultants.
Our employees are not represented by labor unions or collective bargaining
agreements. The classification of our full-time employees and consultant
positions are broken down as follows:
|
Characterization
of
Employee’s
Duties
|
Number
of
Employees
|
Number
of
Consultants
|
|
Corporate
Management / Officer
|
3
|
1
|
|
Sales
|
2
|
2
|
|
Technology
|
1
|
0
|
|
Accounting
|
3
|
0
|
|
Pharmacist
|
4
|
0
|
|
Technicians
/ Pharmacy Support
|
6
|
0
|
We
currently lease our executive offices and pharmacy locations. Our executive
offices are located at 17935 Sky Park Circle, Suite F, Irvine, California 92614,
2040 square feet.
We
currently have four operating pharmacies. Our first pharmacy was opened on
October 13, 2003 in Santa Ana, California. On June 10, 2004, we opened our
second pharmacy in Riverside, California. These pharmacies were opened pursuant
to a joint venture agreement entered into with TPG Partners, LLC. We
opened our third pharmacy in Kirkland, Washington on August 11, 2004. Our fourth
pharmacy was opened in Portland, Oregon on September 21, 2004. The pharmacies
located in Kirkland and Portland were opened pursuant to a joint venture
agreement with TAPG LLC. The locations of our pharmacies are as
follows:
| · |
2431
N. Tustin Ave., Unit L, Santa Ana, California, 92705, 1,380 square
feet
|
| · |
7000
Indiana, Ave., Suite 112, Riverside, California, 92506, 1,500 square
feet
|
| · |
12071
124th Avenue NE, Kirkland, Washington, 98034, 1,400 square feet
and
|
| · |
3822
S.E. Powell Blvd, Portland, Oregon, 97202, 1,585 square
feet.
|
During
the fiscal year ended December 31, 2004, we entered into leases relating to
retail property located at 10196 SW Park Way, Portland, Oregon, 97225. Following
our management’s decision to suspend the development of new pharmacies in the
fourth quarter of 2004, we were unable to terminate our leases on this property
and remain liable under the terms of the lease. There was a construction lien
placed on this property in the amount of $38,950 as a result of our failure
to
compensate the builder that constructed the pharmacy on the premises. Our
management negotiated a settlement to resolve this dispute. In accordance with
the settlement, we paid the lessor approximately $23,000 in 2005 and will make
additional payments to the lessor of approximately $16,000 by the end of the
first quarter of 2006 to satisfy our obligations under the settlement.
Future
store locations, when established, will be selected based on the following
criteria: 1) proximity to the physician offices and medical facilities, 2)
convenience of location, and 3) fast growing metropolitan areas with a
population of at least 500,000. Retail pharmacies average approximately 1,500
square feet and are leased from various property management companies.
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.
Other
than as disclosed below, we are not currently involved in any litigation which
we believe could have a material adverse effect on our financial position or
results of operations.
Safescript
Pharmacies, Inc., a Texas corporation f/k/a RTIN Holdings,
Inc.
Safescript
Pharmacies, Inc. (the “Licensor”), formerly known as RTIN Holdings, Inc., failed
to provide us with essential services as set forth in the license agreement
and
this forced us to terminate our use of all technology granted by the Licensor.
On March 17, 2004, we filed a lawsuit in Nevada State Court against the Licensor
seeking damages, declaratory relief, to rescind
the
License and to recover the consideration paid. On March 19, 2004, the Licensor
filed for Chapter 11 bankruptcy protection. The litigation in Nevada State
Court
was stayed as a result of the Licensor filing for bankruptcy. We refiled
substantially the same claim as an adversary proceeding in the Licensor’s
bankruptcy case in the U.S. Bankruptcy court located in Tyler, Texas. In July
2004, this case was transferred to the U.S. District Court for the Eastern
District of Texas located in Tyler, Texas.
On
June
30, 2005, the United States Bankruptcy Court for the Eastern District of Texas
approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
between the
Licensor
and us.
Under the Terms of the Settlement Agreement, the
Licensor
retained
100,000 shares of our common stock and returned the remaining 4,344,444 shares
of common stock for cancellation. In addition, we issued to the Licensor 500,000
additional shares of our common stock and agreed to dismiss the lawsuit pending
in the U.S. District Court for the Eastern District of Texas with prejudice.
The
Settlement Agreement contained a mutual release which resulted in the
Licensor
releasing us from any liability with respect to the note payable due to
the
Licensor
of
approximately $1,013,000.
On
July
11, 2005, a creditor of Safescript filed a motion with the District Court for
reconsideration of its approval of the Settlement Agreement. On October 14,
2005, the District Court denied the creditor’s motion. The creditor appealed the
District Court’s approval of the Settlement Agreement. Due to a settlement
between the Licensor and the creditor, the appeal was withdrawn finalizing
our
Settlement Agreement with the Licensor.
Sixth
and Sprague Retail, LLC
On
or
about May 16, 2005, a complaint was filed against us in the Superior Court
of
the State of Washington in and for the County of Pierce by Sixth
and
Sprague Retail, LLC (“Plaintiff”) as a result of our alleged breach of a lease
agreement relating to property located at 2024
6th
Avenue,
Suite 13, Tacoma, Pierce County, Washington 98405. On August 4, 2005, a partial
judgment was entered against us in the sum of $22,316 plus attorney’s fees in
the sum of $650 and costs in the sum of $315, plus post-judgment interest at
the
rate of 12% per annum. It was further ordered that the Plaintiff was reserved
the right to seek additional judgment amounts upon further application to the
court. We are negotiating with the Plaintiff to resolve this
dispute.
Hahn
& Bolson, LLP
On
August
24, 2005, a complaint was filed against us in the Superior Court of California,
County of Los Angeles by Hahn & Bolson, LLP (“Plaintiff”) seeking relief in
the amount of $28,096 for non-payment of legal fees. On December 19, 2005,
the
parties settled this dispute and a Notice of Settlement and Stipulation for
Entry of Judgment was filed with the court. Under the terms of the Stipulation
for Entry of Judgment, we agreed to pay the total sum of $20,000 in monthly
installments. The final monthly payment was made on March 15, 2006. In
accordance with the terms set forth in the Stipulation for Entry of Judgment,
Plaintiff will dismiss the complaint with prejudice.
Sheraton
Operating Corporation d.b.a. The St. Regis Monarch Beach
Report
On
December 2, 2005, Sheraton Operating Corporation d.b.a. The St. Regis Monarch
Beach Report and Spa (“Plaintiff”) filed a complaint against us in the Superior
Court of the State of California for the County of Orange, Limited Jurisdiction
Harbor Justice Center, Laguna Hills Facility alleging breach of contract. The
Plaintiff was seeking relief in the amount of $14,863 plus prejudgment interest
at the rate of ten percent per annum from October 3, 2004. On January 23, 2006,
the parties settled this dispute and a Stipulation for Entry of Judgment was
executed. Under the terms of the Stipulation for Entry of Judgment, we paid
$4,000 on February 6, 2006 and $4,000 on March 1, 2006. We have agreed to make
two additional payments of $2,000 on or before April 1, 2006 and $2,000 on
or
before May 1, 2006. Plaintiff has agreed to dismiss this complaint and file
notice of settlement no later than July 1, 2006.
Jeffrey
M. Howard d.b.a. Howard & Associates
On
January 19, 2006, a complaint was filed against us in the Superior Court of
the
State of California, County of Orange, Central Justice Center by Jeffrey M.
Howard d.b.a. Howard & Associates and Edward C. Fisch (“Plaintiffs”)
alleging breach of contract and related claims with regard to an attorney-client
retainer agreement. The Plaintiffs were seeking damages in the amount of $37,004
plus interest from December 6, 2005. On January 27, 2006, the parties settled
this dispute and a Stipulation for Entry of Judgment was executed. Under the
terms of the Stipulation for Entry of Judgment, we agreed to pay the principal
sum of $35,000 in four monthly installments of $7,500 and a final monthly
payment of $5,000 by May 30, 2006. Following our satisfaction of the terms
set
forth in the Stipulation for Entry of Judgment, the Plaintiffs will dismiss
the
complaint with prejudice.
On
October 21, 2005, we held the annual meeting of our security holders. The
meeting was called for the purpose of electing four directors, approving a
name
change to Assured Pharmacy, Inc., to confirm the appointment of Squar, Milner,
Reehl & Williamson, LLP as auditor to examine our financial statements for
the year ended December 31, 2005, and to transact any other items of business
that may properly come before the meeting. The total number of shares of common
stock outstanding at the record date, August 23, 2005, was 36,972,150 shares.
The number of votes represented at this meeting was 19,998,756 shares, or 54.3%
of shares eligible to vote.
Richard
Falcone, James Manfredonia, Robert DelVecchio, and Haresh Sheth were elected
as
directors and the results were as follows:
|
Votes
Cast For
|
Votes
Cast Against
|
Abstentions
|
|
19,998,756
|
0
|
0
|
The
proposal to change our name to Assured Pharmacy, Inc. was approved by the
security holders and the results were as follows:
|
Votes
Cast For
|
Votes
Cast Against
|
Abstentions
|
|
19,998,756
|
0
|
0
|
The
security holders confirmed the appointment of Squar, Milner, Reehl &
Williamson, LLP as auditor to examine our financial statements for the year
ended December 31, 2005 and the results were as follows:
|
Votes
Cast For
|
Votes
Cast Against
|
Abstentions
|
|
19,998,756
|
0
|
0
|
No
other
matters were acted upon by our security holders at our annual meeting.
PART
II
Market
Information
Our
common stock is currently quoted on the OTC Bulletin Board (“OTCBB”), which is
sponsored by the NASD. The OTCBB 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 OTCBB under the symbol “APHY.”
The
following table sets forth the range of high and low bid quotations for our
common stock for each of the periods indicated as reported by the OTCBB. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
|
Fiscal
Year Ending December 31, 2005
|
|
Quarter
Ended
|
|
High
$
|
|
Low
$
|
|
March
31, 2005
|
|
0.50
|
|
0.28
|
|
June
30, 2005
|
|
0.42
|
|
0.28
|
|
September
30, 2005
|
|
0.48
|
|
0.33
|
|
December
31, 2005
|
|
0.48
|
|
0.34
|
| |
|
Fiscal
Year Ended December 31, 2004
|
|
Quarter
Ended
|
|
High
$
|
|
Low
$
|
|
March
31, 2004
|
|
0.64
|
|
0.46
|
|
June
30, 2004
|
|
0.65
|
|
0.52
|
|
September
30, 2004
|
|
0.599
|
|
0.43
|
|
December
31, 2004
|
|
0.60
|
|
0.25
|
On
March
27, 2006, the last sales price of our common stock was $0.45
Penny
Stock
The
SEC
has adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. Penny stocks are generally equity securities
with
a market price of less than $5.00, other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system. The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock, to deliver a
standardized risk disclosure document prepared by the SEC, that: (a) contains
a
description of the nature and level of risk in the market for penny stocks
in
both public offerings and secondary trading; (b) contains a description of
the
broker's or dealer's duties to the customer and of the rights and remedies
available to the customer with respect to a violation of such duties or other
requirements of the
securities
laws; (c) contains a brief, clear, narrative description of a dealer market,
including bid and ask prices for penny stocks and the significance of the spread
between the bid and ask price; (d) contains a toll-free telephone number for
inquiries on disciplinary actions; (e) defines significant terms in the
disclosure document or in the conduct of trading in penny stocks; and (f)
contains such other information and is in such form, including language, type
size and format, as the SEC shall require by rule or regulation.
The
broker-dealer also must provide, prior to effecting any transaction in a penny
stock, the customer with (a) bid and offer quotations for the penny stock;
(b)
the compensation of the broker-dealer and its salesperson in the transaction;
(c) the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market for
such stock; and (d) a monthly account statement showing the market value of
each
penny stock held in the customer's account.
In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment
for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement as to transactions involving
penny stocks, and a signed and dated copy of a written suitability
statement.
These
disclosure requirements may have the effect of reducing the trading activity
for
our common stock. Therefore, stockholders may have difficulty selling our
securities.
Holders
of Our Common Stock
As
of
December 31, 2005, we had approximately one hundred forty-four (144) holders
of
record of our common stock and several other stockholders hold shares in street
name.
Dividends
There
are
no restrictions in our articles of incorporation or bylaws that restrict us
from
declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends where, after giving effect to the distribution of the
dividend:
| |
1.
|
We
would not be able to pay our debts as they become due in the usual
course
of business; or
|
| |
2.
|
Our
total assets would be less than the sum of our total liabilities,
plus the
amount that would be needed to satisfy the rights of shareholders
who have
preferential rights superior to those receiving the
distribution.
|
Recent
Sales of Unregistered Securities
The
information set forth below relates to our issuances of securities without
registration under the Securities Act during the reporting period which were
not
previously included in a Quarterly
Report
on
Form 10-QSB or Current Report on Form 8-K during the reporting
period.
During
the fourth quarter of the fiscal year ended December 31, 2005, we issued 449,090
shares of restricted common stock to four consultants for services rendered,
valued at $175,872 (estimated to be the fair value based on the trading price
on
the issuance date). These shares were issued pursuant to Section 4(2) of the
Securities Act. We did not engage in any general solicitation or advertising.
We
issued the stock certificates and affixed the appropriate legends to the
restricted stock.
During
the fourth quarter of the fiscal year ended December 31, 2005, we granted
warrants to purchase 125,000 shares of our common stock, exercisable at $0.60
per share for a period of two years from the date of issuance, to two
consultants in exchange for services rendered. These warrants were issued
pursuant to Section 4(2) of the Securities Act. We did not engage in any general
solicitation or advertising.
During
the fourth quarter of the fiscal year ended December 31, 2005, we granted
options to purchase 1,700,000 shares of our common stock, exercisable at $0.60
per share to a consultant in exchange for services rendered. These warrants
become fully vested over three years (566,667 warrants fully vested on September
29, 2005; 566,667 become fully vested on September 29, 2006; 566,666 become
fully vested on September 29, 2007). These securities were issued pursuant
to
Section 4(2) of the Securities Act. We did not engage in any general
solicitation or advertising.
During
the fourth quarter of the fiscal year ended December 31, 2005, we issued options
to purchase 10,000 shares of our common stock, exercisable at $0.45 per share
to
an employee in exchange for services rendered and we issued options to purchase
10,000 shares of our common stock, exercisable at $0.39 per share to an employee
in exchange for services rendered. These options become fully vested over three
years (10,000 fully vested on October 25, 2005; 10,000 become fully vested
on
October 25, 2006; 10,000 become fully vested on October 25, 2007). These
securities were issued pursuant to Section 4(2) of the Securities Act of 1933.
We did not engage in any general solicitation or advertising.
During
the three months ended December 31, 2005, we sold 143,750 units at $0.80 per
unit, or an aggregate of $115,000 in proceeds, to accredited investors in a
private equity offering. Each unit is priced at $0.80 and consists of two shares
of restricted common stock and one warrant to purchase one (1) share of
restricted common stock at an exercise price of $0.60 exercisable for thirty
six
months after the close of the offering. These securities were issued pursuant
to
Rule 506 of Regulation D. We did not engage in any general solicitation or
advertising.
Subsequent
to the reporting period, we issued 200,000 shares of restricted common stock
to
one consultant for services rendered, valued at $90,000 (estimated to be the
fair value based on the trading price on the issuance date). These shares were
issued pursuant to Section 4(2) of the Securities Act of 1933. We did not engage
in any general solicitation or advertising. We issued the stock certificates
and
affixed the appropriate legends to the restricted stock.
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 warrants or options
as
of December 31, 2005.
Equity
Compensation Plans as of December 31, 2005
| |
A
|
B
|
C
|
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(A))
|
|
Equity
compensation plans
approved
by security
holders
|
55,000
|
$0.50
|
5,465,613
|
|
Equity
compensation plans
not
approved by security
holders
|
7,820,000
|
$0.60
|
-
|
|
Total
|
7,875,000
|
$0.60
|
5,465,613
|
Purchases
of Equity Securities
Neither
we nor any of our “affiliated purchasers” purchased any of our equity securities
during the reporting period.
On
February 1, 2005, we entered into a Termination and Settlement Agreements with
our former Chief Executive Officer, Mr. David Parker, and our former President,
Mr. A.J. LaSota. Messrs. Parker and LaSota resigned from their positions as
officers and directors. In accordance with the terms of these agreements,
Messrs. Parker and LaSota returned to the corporate treasury 5,400,000 and
429,353 shares of our common stock, respectively. Also on February 1, 2005,
we
entered into a Settlement Agreement with Ron Folse, our former Executive Vice
President. In accordance with the terms of this agreement, Mr. Folse returned
to
the corporate treasury 429,353 shares of our common stock.
Forward-Looking
Statements
Historical
results and trends should not be taken as indicative of future operations.
Management’s statements contained in this report that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Actual
results may differ materially from those included in the forward-looking
statements. The Company intends such forward-looking statements to be covered
by
the safe-harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of complying with those safe-harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of management are generally
identifiable by use of the words “believe,” “expect,” “intend,”
“anticipate,” “estimate,” “project,” “prospects,” or similar expressions. The
Company’s ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors
which could have a material adverse affect on the operations and future
prospects of the Company on a consolidated basis include, but are not limited
to: changes in economic conditions, legislative/regulatory changes, availability
of capital, interest rates, competition, significant restructuring activities,
and generally accepted accounting principles. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company’s financial results, is
included herein and in the Company’s other filings with the SEC.
Overview
We
currently have four operating pharmacies. Our first pharmacy was opened on
October 13, 2003 in Orange County, California in the city of Santa Ana. On
June
10, 2004, we opened our second pharmacy location in Riverside, California.
We
opened our third pharmacy in Kirkland, Washington on August 11, 2004. Our fourth
pharmacy was opened in Portland, Oregon on September 21, 2004.
We
announced in our report for the quarter ended September 30, 2004 that we were
suspending the development of new pharmacies for a period of sixty to ninety
days in order to evaluate and potentially improve the operations of our four
existing pharmacies. It was the belief of our board of directors and executive
management that none of our four stores were operating at their full potential.
The basis for this belief was primarily the reluctance of physicians to adopt
our technology for electronically transmitting prescriptions and our failure
to
implement a successful marketing strategy to attract business. Since this
announcement, management postponed activity related to the development of new
locations. At the present time and following this period of evaluation, our
management decided not to close any of our existing pharmacy locations. We
are
hopeful that we will resume the development of new pharmacies in the second
quarter of 2006.
The
primary catalyst for the decision to suspend the development of new pharmacies
was substantially attributable to a lack of sufficient cash to fund the expenses
associated with the
development
of new pharmacies. We have incurred significant expenditures in connection
with
purchases of inventory for our existing pharmacies. As sales increased, a time
gap developed between inventory replenishing and collecting our accounts
receivable. Nearly all of our pharmacy sales are to customers whose medications
were covered by health benefit plans and other third party payors. As a result,
we typically do not receive cash for our sales at the time of transactions
and
are dependent on health benefit plans to pay for all or a portion of our
customers’ prescription purchases. There is a significant delay from the time of
a customer’s purchase of medication to when we receive payment for the
customer’s purchase from a health benefit plan or other third party payor. The
delay from the point of a customer’s purchase to our receipt of payment has
ranged between 60 and 20 days when calculated for a specific quarterly period.
Management
evaluated various alternatives as it related to financing future inventory
purchases in the early stages of our planned principal operations. Our
management was successful in securing financing for inventory purposes on an
interim basis. On or about December 21, 2004, we received a loan evidenced
by a
promissory note from Robert James, Inc., a company under the control of our
current CEO Mr. Robert DelVecchio, for the purpose of purchasing inventory
for
our pharmacies. The promissory note was for a maximum of $150,000 and matured
on
the earlier of March 6, 2005 or the date that we were able to consummate an
accounts receivable financing arrangement for our working capital. The
outstanding principal amount of this promissory note bears interest at three
percent (3%) per month. In consideration for this promissory note, we agreed
to
pay the lender an administrative fee of $1,500 and a financing fee of $2,100.
In
addition to these fees, we agreed to pay the lender by the fifth day of every
month from January 2005 until the principal amount is repaid plus an
administrative fee of $1,875 and a financing fee of $2,675. We paid the
loan evidenced by the promissory note from Robert James, Inc. in full on
February 21, 2005.
On
February 23, 2005, we entered into an accounts receivable servicing agreement
and line of credit agreement with Mosaic Financial Services, LLC (“Mosaic”). The
monthly interest rate under this agreement is one and one quarter percent of
the
then LOC limit. These agreements enabled us to successfully secure financing
for
inventory purchases over an extended period of time. Under the terms of the
line
of credit agreement, the maximum amount that we could draw to purchase inventory
was originally $500,000 and increased to $700,000. These agreements were for
a
term of one year with a provision to automatically renew for another one year
period unless either party provided notice to the other of termination within
180 days prior to the end of the effective term.
Mosaic
provided notice to us of its intent to exercise its right under the line of
credit agreement to convert the $700,000 previously advanced into shares of
our
common stock. On October 24, 2005, our board of directors authorized the
issuance of 2,500,000 restricted shares of our common stock to Mosaic in
accordance with the conversion right provided in the line of credit agreement.
The issuance of these shares to Mosaic satisfied our obligations in full under
the accounts receivable servicing agreement and the line of credit
agreement.
On
October 31, 2005, we entered into another one year line of credit agreement
(“LOC”) with Mosaic enabling us to draw a maximum of $1,000,000 to purchase
inventory. This LOC has a
one
time
commitment fee equal to three percent of the initial amount of the LOC which
has
a monthly interest rate of 1.5% of the then LOC limit. These accrued
finance charges will be deducted prior to any advances. Under the terms of
the
LOC, Mosaic has a right to convert all or a portion of the outstanding advances
into shares of our common stock where the conversion price is based on the
weighted average closing bid price for our common stock on the OTCBB (or such
other equivalent market on which our common stock is quoted) as for the seven
trading days immediately preceding the date the conversion right is exercised.
The conversion price per share shall not be less than $0.40 or more than
$0.80. This LOC is secured by substantially all of our
assets.
Management
previously cited our marketing practice as an area for improvement. Beginning
in
the first quarter of 2005, our management successfully implemented a new
marketing strategy to dramatically expand our efforts to attract business.
Our
current marketing strategy has targeted physicians, new customers, and existing
customers. With respect to new customers, we are offering a $10 coupon to be
applied toward the customers first prescription filled at any of our pharmacies
and a $5 gift card at any Starbucks location. With respect to our current
customers, we commenced a promotion through direct mailing. We are offering
our
current customers a $10 coupon to be applied toward the purchase of prescription
drugs for any prescription that is transferred to one of our pharmacies. In
addition, we will hold a monthly drawing at each pharmacy for those customers
that transferred a prescription and the winner will receive a $150 gift card.
We
also send notices to physicians informing them of our pharmacy operations.
In an
attempt to build more name recognition, we have created brochures and posters
that are available in physicians’ waiting rooms.
The
following table summarizes the number of prescriptions filled by our four
pharmacies on a quarterly basis for the year ended December 31,
2005:
|
Quarterly
Period
|
Total
Number
of
Prescriptions
|
Average
Prescriptions
Per
Week
|
|
Three
months ended March 31, 2005
|
4,823
|
371
|
|
Three
months ended June 30, 2005
|
6,864
|
528
|
|
Three
months ended September 30, 2005
|
8,450
|
650
|
|
Three
months ended December 31, 2005
|
9,646
|
742
|
|
Totals
|
29,783
|
|
We
opened
our third and fourth pharmacies in August and September of 2004. As a result,
the fourth quarter for the fiscal years ended December 31, 2005 and 2004 are
the
only reporting periods for which we can compare the performance of all four
of
our pharmacies. For the three months ended December 31, 2005, our four
pharmacies filled a total of 9,646 prescriptions for an average of 742
prescriptions per week. For the three months ended December 31, 2004, our four
pharmacies filled a total of 4,121 prescriptions for an average of 317
prescriptions per week. Our management attributes this increase in our business
primarily to our successful marketing efforts.
In
an
attempt to further expand our business and improve our marketing plan, we
retained the marketing firm of Rainmaker & Sun Integrated Marketing, Inc.
(“Rainmaker”). Rainmaker will assist us with marketing efforts including
advertising, promotions, and the development of a fully
integrated
marketing plan. We anticipate that we will revamp our current marketing plan
and
implement new marketing efforts during the quarter ending June 30, 2006.
Additionally,
our two pharmacy locations in California previously experienced difficulty
in
qualifying to participate in California’s Medicaid program, known as Medi-Cal.
Medicaid is a federal/state program that provides health coverage, including
prescription drug coverage to the needy. Each state’s Medicaid program is
different, and some states impose limitations on the number of pharmacies that
may serve the Medicaid population. In order to participate in Medicaid programs,
each pharmacy must enroll as a participating provider. We submitted an
application to the California Department of Health Services on December 14,
2004. On June 8, 2005, the Medi-Cal Provider Relations Department rejected
our
application and issued a list of deficiencies to be addressed. On July 11,
2005,
we addressed all cited deficiencies and re-submitted our Medi-Cal application.
We received a notice of approval on August 22, 2005. We were assigned a unique
provider identification number to enable our pharmacy in Riverside, California
and other California locations that we may establish in the future, exclusive
of
locations in Orange County, to process claims through Medi-Cal. We anticipate
that this approval and our ability to process claims through Medi-Cal will
increase sales at our California pharmacy located in Riverside.
The
Medicaid program is administered and all benefits are processed by CalOptima
exclusively in Orange County, California. All applications to participate in
the
Medicaid programs for pharmacies located in Orange County are processed by
CalOptima. In 2002, CalOptima placed a moratorium on additional pharmacies
in
Orange County enrolling as a supplier of prescription drugs to customers who
rely solely on Medicaid for health coverage. This moratorium remains in effect
and impacts our location in Santa Ana, California.
During
the quarter ended September 30, 2005, we received notice that CalOptima was
accepting applications for pharmacies to participate in CalOptima specifically
for claims by customers who rely on health coverage through both Medicaid and
Medicare. Medicare is a health insurance program for people over the age of
65
or those under 65 with certain disabilities. We submitted an application to
CalOptima for approval to supply customers who rely on health coverage through
both Medicaid and Medicare in Orange County, California during the quarter
ended
September 30, 2005. We have not received a response to our application as of
the
filing date of this Annual Report and do not know when we will receive a
response to our application.
Approval
to participate as a supplier to CalOptima would increase the customer base
at
our California pharmacy location in Santa Ana even if such approval was limited
to a classification of individuals that rely on both Medicaid and Medicare
for
health insurance coverage. There can be no assurance that the moratorium will
be
lifted and our pharmacies will be able to obtain the necessary approvals to
participate in California’s Medicaid program in any respect in Orange County,
California.
Similarly,
some third party payors such as Health Net in California have also placed a
moratorium on additional pharmacies which they will sanction as a supplier
of
medication to participants enrolled in the health benefit plans that they
administer. The failure of government plans and other third party payors to
approve additional pharmacies as suppliers of medication to
participants
enrolled in their health benefit plans could have a material adverse financial
impact on us, and our operations.
Results
of Operations for the Years Ended December 31, 2005 and
2004
Revenues
On
the
accrual basis of accounting, our total revenue for the year ended December
31,
2005 was $3,836,736, as compared to $1,346,995 for the year ended December
31,
2004. Our revenues generated during the fiscal year ended December 31, 2005
increased over each quarterly period. We generated revenue in the amount of
$648,402 for the quarter ended March 31, 2005, $789,404 for quarter ended June
30, 2005, $980,181 for the quarter ended September 30, 2005, and $1,418,750
for
the quarter ended December 31, 2005. We generated more revenue in the year
ended
December 31, 2005 than in any other fiscal year since our inception. Our
management anticipates that our revenues generated will increase based upon
future marketing efforts and the establishment of additional pharmacies in
the
current year.
During
the year ended December 31, 2004, we established three additional
pharmacies and had established a total of four pharmacies by the end of the
fiscal year. Since this time, we have not established any additional pharmacies.
The significant increase in our revenue from the prior fiscal year is primary
attributable to generating revenue from four pharmacies for the entire reporting
period.
Cost
of Sales
The
total
cost of sales for the year ended December 31, 2005 was $3,120,958, as compared
to $1,411,163 for the year ended December 31, 2004. The cost of sales consists
primarily of the pharmaceuticals. During the year ended December 31, 2004,
we
established three additional pharmacies and had operations at a total of four
pharmacies by the end of the fiscal year. Purchasing and replenishing our
inventory supply for an increased number of pharmacies over the prior fiscal
year resulting in a significant increase in our total cost of sales.
During
the fiscal year ended December 31, 2005, we negotiated cost reductions and
more
favorable credit terms with our primary drug supplier. As a result, we incurred
lower costs of sales on a per unit basis.
Gross
Profit
Gross
profit increased to $715,779, or approximately 19% of total revenue for the
year
ended December 31, 2005, as compared to a gross loss of $64,168, or
approximately a gross loss of 37%of total revenue for the same reporting period
in the prior year. We reported gross profit in each quarterly period during
the
fiscal year ended December 31, 2005 and our reported gross profits for the
year
ended December 31, 2005 is the highest amount and percentage of gross sales
reported during any reporting period since our inception. The growth in gross
profit is primarily attributable to increased sales of generic type drugs which
have a lower cost and higher gross margin.
Operating
Expenses
We
incurred total operating expenses of $6,633,595 for the year ended December
31,
2005, as compared to $8,197,168 for the year ended December 31, 2004. Our
operating expenses for the year ended December 31, 2005 primarily consisted
of
salaries and related expenses of $3,574,137, consulting and other compensation
of $1,579,524, and selling, general and administrative expenses of $1,286,053,
and restructuring charges of $193,881. Our operating expenses for the
year ended December 31, 2004 consisted of salaries and related expenses of
$1,401,017, consulting and other compensation of $2,206,171, selling, general
and administrative expenses of $1,564,855, and $2,977,448 for the impairment
of
an intangible asset.
Our
operating expenses incurred during the year ended December 31, 2004 were
exclusively attributable to establishing our corporate infrastructure and
establishing additional pharmacies. Our operating expenses incurred during
the
year ended December 31, 2005 were exclusively attributable to maintaining our
corporate infrastructure and sustaining operations at our pharmacies. During
the
year ended December 31, 2004, we established three additional pharmacies and
had
operations at a total of four pharmacies by the end of the fiscal year. In
the
first quarter of 2004, we expensed $2,977,448 for the impairment of a license.
The impairment of the license in the first quarter of 2004 was the primarily
reason why our operating expenses were substantially higher in the year ended
December 31, 2004 when compared to the fiscal year ended December 31,
2005.
Other
Income and Expense
As
part
of our ongoing business activities, our sales have continued to increase and
we
are now able to access financing for purchases of inventory through financing
agreements entered into with Mosaic Financial Services, LLC (“Mosaic”) during
the reporting period. We incurred interest expense of $131,539 during the year
ended December 31, 2005 primarily as a result of the financing we received
from
Mosaic.
On
June
30, 2005, the United Stated Bankruptcy Court for the Eastern District of Texas
approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
between Safescript Pharmacies, Inc., a Texas corporation f/k/a RTIN Holdings,
Inc. and Safe Med Systems, Inc., a Texas corporation (collectively,
“Safescript”), and us. The Settlement Agreement contained a mutual release which
resulted in Safescript releasing us from any liability with respect to a note
payable to Safescript of approximately $1,011,500. This amount is included
in
the forgiveness of debt reported in the year ended December 31, 2005.
Net
Loss
Our
net
loss for the year ended December 31, 2005 was $4,797,092 and the loss for the
year ended December 31, 2004 was $7,903,706. We previously projected that each
store would be cash flow positive by the ninth month of operation; however,
none
of our operating pharmacies currently is or ever has been cash flow positive.
Decreased net losses in 2005, as compared to the prior year, are primarily
attributable to significant expenses related to the impairment of a license
and
establishment of additional pharmacies incurred during the fiscal year ended
December 31,
2004
that
were not incurred during the fiscal year ended December 31, 2005.
Our
basic
and diluted loss per common share for the year ended December 31, 2005 was
$(0.11) and $(0.19) for the year ended December 31, 2004.
Liquidity
and Capital Resources
As
of
December 31, 2005, we maintained $356,641 in cash which primarily resulted
from
funds raised in the private offering of common stock and receivables financing.
As of December 31, 2005, we had current assets of $1,180,386 and current
liabilities of $1,922,298. As a result, we had a working capital deficit of
$741,912 as of December 31, 2005.
Our
current liabilities as of December 31, 2005 consisted of accounts payable and
accrued liabilities of $1,067,298, a line of credit in the amount of $200,000,
notes payable of $425,000, and notes payable to related parties and stockholders
of $230,000. Our line of credit was provided by Mosaic for the purpose of
servicing our accounts receivable.
Operating
activities used $2,733,677 in cash for the year ended December 31, 2005. Our
net
loss of $4,797,902 was the primary component of our negative operating cash
flow; along with the forgiveness of debt of $1,011,522; and the joint venture
minority interest in net loss of $275,835; offset by depreciation and
amortization expenses of $108,136; the impairment of property and equipment
related to restructuring of $193,881; and the issuance of common stock for
services in the amount of $2,387,364, including options granted to our CEO
valued at $1,950,000.
There
were no investing activities during the year ended December 31,
2005.
Cash
flows provided by financing activities during the year ended December 31, 2005
consisted of $1,511,784 of proceeds from the issuance of common stock; $900,000
net advanced on the line of credit, ($700,000 of which was converted to our
common stock in October 2005); and $170,000 of net advances by certain
related parties and stockholders: proceeds from issuance of short term loans
$425,000.
We
primarily relied on equity capital and loan proceeds to fund our operations
during the year ended December 31, 2005. During the reporting period,
we
sold
securities to accredited investors. During the year
ended December 31, 2005,
we
received proceeds of $1,511,784 from accredited investors and issued a total
of
3,820,000 shares of our common stock.
The
underlying drivers that resulted in material changes and the specific inflows
and outflows of cash in the year
ended December 31, 2005 are
as
follows:
| a. |
Our
inventory level increased with the addition of more physicians. We
continually track inventory usage and adjust inventory levels to
market
requirements.
|
| b. |
We
recorded a gain on forgiveness of debt related to a settlement agreement
entered into with Safescript releasing us from of any liability with
respect to a note payable due to Safescript of approximately $1,013,000.
|
| c. |
We
fully utilized a $700,000 line of credit with Mosaic Financial Services,
LLC (“Mosaic”) during the year ended December 31, 2005 and issued
2,500,000 restricted shares of our common stock to Mosaic to retire
the
line of credit. On October 31, 2005, we entered into another line
of
credit agreement with Mosaic enabling us to draw a maximum of $1,000,000
to purchase inventory.
|
| d. |
We
obtained financing from the issuance of common stock. Our management
believes that additional issuance of stock and/or debt financing
will be
required to provide us with working capital and a positive cash flow
in
2006.
|
In
order
for us to finance operations and continue our growth plan, additional funding
will be required from external sources. We intend to fund operations through
increased sales and debt and/or equity financing arrangements, which may be
insufficient to fund our capital expenditures, working capital, or other cash
requirements for the year ending December 31, 2006. There can be no assurance
that such additional financing will be available to us on acceptable terms,
or
at all.
Off
Balance Sheet Arrangements
As
of
December 31, 2005, there were no off balance sheet arrangements.
Going
Concern
The
consolidated financial statements included elsewhere herein 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 normal
course of business. As of December 31, 2005, we had an accumulated deficit
of
$15,233,538 largely due the establishing and sustaining operations at of our
pharmacies.
We
intend
to fund operations through increased sales and debt and/or equity financing
arrangements, which may be insufficient to fund our capital expenditures,
working capital, or other cash requirements for the year ending December 31,
2006. We plan to seek additional financing in a private equity offering to
secure funding for our operations. There can be no assurance that such
additional financing will be available to us on acceptable terms or at
all.
These
factors, among others, raise substantial doubt about our ability to continue
as
a going concern. The consolidated financial statements included elsewhere herein
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 we be unable to continue as a going concern.
In
response to these problems, management in coordination with our board of
directors has taken the following actions:
| · |
We
suspended the
development of new pharmacies
as
a part of the restructuring activities that took place in the fourth
calendar quarter of 2004 and the first quarter of 2005.
|
| · |
We
are aggressively signing up new
physicians.
|
| · |
We
retained
a marketing firm to implement a new marketing strategy to attract
business.
|
| · |
We
are seeking investment capital through the public
markets.
|
Inflation
Since
the
opening of our first pharmacy in October 2003, management believes that
inflation has not had a material effect on our results of
operations.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants list their three to five
most “critical accounting polices” in the Management Discussion and Analysis.
The SEC indicated that a “critical accounting policy” is one which is both
important to the portrayal of a company’s financial condition and results, and
requires management’s most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. We believe that the following accounting policies fit
this
definition.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or estimated market,
and
consist primarily of pharmaceutical drugs. Market is determined by comparison
with recent sales or net realizable value. Net realizable value is based on
management’s forecast for sales of our products or services in the ensuing years
and/or consideration and analysis of changes in customer base, product mix,
payor mix, third party insurance reimbursement levels or other issues that
may
impact the estimated net realizable value. Management regularly reviews
inventory quantities on hand and records a reserve for shrinkage and
slow-moving, damaged and expired inventory, which is measured as the difference
between the inventory cost and the estimated market value based on management’s
assumptions about market conditions and future demand for our products. Such
reserve was insignificant to the accompanying consolidated financial statements.
Should the demand for our products prove to be less than anticipated, the
ultimate net realizable value of our inventories could be substantially less
than reflected in the accompanying consolidated balance sheet.
Inventories
are comprised of brand and generic pharmaceutical drugs. Brand drugs are
purchased primarily from one wholesale vendor and generic drugs are purchased
primarily from another wholesale vendor. 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 our inventory a larger amount of Schedule
II
drugs than most other pharmacies. The cost in acquiring Schedule II drugs is
higher than Schedule III and IV drugs.
Long-Lived
Assets
In
July
2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
144,"Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS
No.
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. If the cost basis of a long-lived asset
is greater than the projected future undiscounted net cash flows from such
asset, an impairment loss is recognized. Impairment losses are calculated as
the
difference between the cost basis of an asset and its estimated fair value.
SFAS
No. 144 also requires companies to separately report discontinued operations,
and extends that reporting to a component of an entity that either has been
disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or the estimated fair value less costs to
sell.
Our
long-lived assets consist of computers, software, office furniture and
equipment, and leasehold improvements on pharmacy build-outs which are
depreciated with useful lives varying from 3 to 10 years. Leasehold improvements
are depreciated over the shorter of the useful life or the remaining lease
term,
typically 5 years. We assess the impairment of these long-lived assets at least
annually and make adjustment accordingly.
Intangible
Assets
Statement
of Financial Accounting standard (“SFAS”) No. 142,"Goodwill
and Other Intangible Assets", which
is
effective for fiscal years beginning after December 15, 2001, addresses how
intangible assets that are acquired individually or with a group of other assets
should be accounted for upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and identifiable intangible assets that have indefinite lives not
be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their estimated useful
lives.
SFAS
No.
142 provides specific guidance for testing goodwill and intangible assets that
will not be amortized for impairment. In addition, SFAS No. 142 expands the
disclosure requirements about intangible assets in the years subsequent to
their
acquisition. Impairment losses for goodwill and indefinite-life intangible
assets that arise due to the initial application of SFAS No. 142 are to be
reported as a change in accounting principle.
Revenue
Recognition
Through
the end of the third quarter of 2005, we recognized revenue on a cash basis
when
we received payments from third-party insurance carriers or government agencies.
The prices that we were paid for prescription drugs are agreed upon upfront;
however, insurance carriers and/or governmental agencies can adjust the
contractual price. As a result, we did not have a fixed price at the time of
sale. For this reason, we recognized revenue on a cash basis.
Commencing
retroactive to the fourth quarter of 2004, we began to recognize revenue on
the
accrual basis of accounting. Management determined that revenue met the
recognition criteria
for
collectibility and determinable price primarily because the mix of business
changed from green liens to conventional scripts. The price is determined in
advance via software link with the provider and collectibility from providers,
which are typically large insurance companies, is now reasonably assured. Prices
will vary from provider to provider but in accordance with a contract. There
might also be nominal “co-pay” for the script which is collected at time of
delivery of the script (generally cash, check, or credit card). The co-pay
also
appears to meet revenue recognition criteria.
Recently
Issued Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, and
supersedes APB Opinion No. 25. Small Business Issuers are required to apply
SFAS
No. 123-R in the first reporting period or fiscal years that begin after
December 15, 2005. Thus, our consolidated financial statements will reflect
an
expense for (a) all share-based compensation arrangements granted after December
31, 2005 and for any such arrangements that are modified, cancelled, or
repurchased after that date, and (b) the portion of previous share-based awards
for which the requisite service has not been rendered as of that date, based
on
the grant-date estimated fair value.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections,"
which replaces APB Opinion No. 20 and FASB Statement No. 3. This pronouncement
applies to all voluntary changes in accounting principle, and revises the
requirements for accounting for and reporting a change in accounting principle.
SFAS No. 154 requires retrospective application to prior periods' financial
statements of a voluntary change in accounting principle, unless it is
impracticable to do so. This pronouncement also requires that a change in the
method of depreciation, amortization, or depletion for long-lived, non-financial
assets be accounted for as a change in accounting estimate that is affected
by a
change in accounting principle. SFAS No. 154 retains many provisions of APB
Opinion 20 without change, including those related to reporting a change in
accounting estimate, a change in the reporting entity, and correction of an
error. The pronouncement also carries forward the provisions of SFAS No. 3
which
govern reporting accounting changes in interim financial statements. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements, including
those
that are in a transition phase as of the effective date of SFAS No.
154.
In
February 2006, the FASB issued SFAS No. 155 entitled “Accounting
for Certain Hybrid Financial Instruments,”
an
amendment of SFAS No. 133 (“Accounting
for Derivative Instruments and Hedging Activities”)
and
SFAS No. 140 (“Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”).
In
this context, a hybrid financial instrument refers to certain derivatives
embedded in other financial instruments. SFAS No. 155 permits fair value
re-measurement of any hybrid financial instrument which contains an
embedded
derivative that otherwise would require bifurcation under SFAS No. 133. SFAS
No.
155 also establishes a requirement to evaluate interests in securitized
financial assets in order to identify interests that are either freestanding
derivatives or “hybrids” which contain an embedded derivative requiring
bifurcation. In addition, SFAS No. 155 clarifies which interest/principal strips
are subject to SFAS No. 133, and provides that concentrations of credit risk
in
the form of subordination are not embedded derivatives. SFAS No. 155 amends
SFAS
No. 140 to eliminate the prohibition on a qualifying special-purpose entity
from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative. When SFAS No. 155 is adopted, any difference
between the total carrying amount of the components of a bifurcated hybrid
financial instrument and the fair value of the combined “hybrid” must be
recognized as a cumulative-effect adjustment of beginning deficit/retained
earnings.
SFAS
No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
Earlier adoption is permitted only as of the beginning of a fiscal year,
provided that the entity has not yet issued any annual or interim financial
statements for such year. Restatement of prior periods is prohibited.
Management
does not believe that SFAS No. 154 and No. 155 will have an impact on our
consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants,
and
the SEC did not or are not believed by management to have a material impact
on
our present or future consolidated financial statements
included
elsewhere herein.
Index
to
Financial Statements:
|
Audited
Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTING
FIRM
To
the
Board of Directors and Stockholders
Assured
Pharmacy, Inc. (formerly known as eRXSYS, Inc.) and Subsidiaries
We
have
audited the accompanying consolidated balance sheets as of December 31, 2005
and
2004 and the related consolidated statements of operations, stockholders’ equity
(deficit) and cash flows of Assured Pharmacy, Inc. and Subsidiaries
(collectively the “Company”), for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated 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. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Assured Pharmacy, Inc.
and
Subsidiaries as of December 31, 2005 and 2004, 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.
As
discussed in Note 1, the accompanying 2004 financial statements have been
restated to reflect adoption (in the fourth quarter of 2004) of the accrual
basis of accounting for revenue. The Company previously reported revenue on
the
cash basis of accounting. Effective October 1, 2004, the Company recorded
accounts receivable of approximately $182,000 with a corresponding increase
in
2004 sales. Net loss for the year ended December 31, 2004 decreased by
approximately $108,000 with no significant change in basic and diluted loss
per
common share.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company had negative cash flow from
operations of approximately $2.7 million in 2005, an accumulated deficit
of
approximately $15.2 million at December 31, 2005 and recurring losses from
operations. These factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans regarding
these matters are also described in Note 1. The accompanying consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
/s/
SQUAR, MILNER, REEHL & WILLIAMSON, LLP
March
20,
2006
Newport
Beach, California
CONSOLIDATED
BALANCE
SHEETS
December
31, 2005 and December 31,
2004
|
|
|
2005
|
|
2004
(As
Restated)
|
|
ASSETS
|
|
|
|
|
| |
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
|
$
|
356,641
|
$
|
86,325
|
|
Accounts
receivable
|
|
530,730
|
|
182,427
|
|
Inventories
|
|
261,770
|
|
158,009
|
|
Prepaid
expenses and other assets
|
|
31,245
|
|
34,812
|
|
|
|
1,180,386
|
|
461,573
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
440,970
|
|
740,194
|
|
|
|
|
|
|
|
|
$
|
1,621,356
|
$
|
1,201,767
|
| |
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$
|
1,067,298
|
$
|
830,692
|
|
Line
of credit from a related party
|
|
200,000
|
|
-
|
|
Notes
payable
|
|
425,000
|
|
-
|
|
Notes
payable to related parties and stockholders
|
|
230,000
|
|
1,063,465
|
| |
|
1,922,298
|
|
1,894,157
|
| |
|
|
|
|
|
Notes
Payable to Related Party and Stockholders, net of current
portion
|
|
-
|
|
370,000
|
|
|
|
|
|
|
|
Minority
Interest
|
|
492,418
|
|
768,254
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit
|
|
|
|
|
|
Preferred
shares; par value $0.001 per share;
authorized
5,000,000 shares; no preferred shares issued
or
outstanding
|
|
- |
|
- |
|
|
|
|
|
|
Common
shares; par value $0.001 per share;
70,000,000
shares authorized; 55,199,398 and 44,977,899
common
shares issued and outstanding at December 31, 2005 and 2004,
respectively
|
|
55,199
|
|
44,978
|
|
|
|
|
|
|
|
Treasury
stock
|
|
(10,858)
|
|
-
|
|
|
|
|
|
|
|
Additional
paid-in capital, net
|
|
14,949,423
|
|
8,778,024
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
(553,587)
|
|
(217,200)
|
| |
|
|
|
|
|
Accumulated
deficit
|
|
(15,233,538)
|
|
(10,436,446)
|
|
|
|
|
|
|
|
Stockholders'
deficit
|
|
(793,361)
|
|
(1,830,644)
|
|
|
|
|
|
|
|
|
$
|
1,621,355
|
$
|
1,201,767
|
F-2 The
accompanying
notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF
OPERATIONS
For
the Years Ended December 31, 2005
and December 31, 2004
|
|
|
Years
Ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
(As
Restated)
|
| |
|
|
|
|
|
GROSS
SALES
|
$
|
3,836,737
|
$
|
1,346,995
|
| |
|
|
|
|
|
COST
OF SALES
|
|
(3,120,958)
|
|
(1,411,163)
|
| |
|
|
|
|
|
GROSS
PROFIT
|
|
715,779
|
|
(64,168)
|
| |
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
Salaries
and related
|
|
3,574,137
|
|
1,401,017
|
|
Consulting
and other compensation
|
|
1,579,524
|
|
2,206,171
|
|
Selling,
general and administrative
|
|
1,286,053
|
|
1,564,855
|
|
Impairment
of intangible asset
|
|
-
|
|
2,977,448
|
|
Restructuring
charges
|
|
193,881
|
|
47,677
|
|
TOTAL
OPERATING EXPENSES
|
|
6,633,595
|
|
8,197,168
|
| |
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
(5,917,816)
|
|
(8,261,336)
|
| |
|
|
|
|
|
OTHER
(EXPENSE) INCOME
|
|
|
|
|
|
Interest
expense
|
|
(131,539)
|
|
(92,468)
|
|
Other
expense
|
|
(35,094)
|
|
(12,289)
|
|
Gain
on forgiveness of debt
|
|
1,011,522
|
|
-
|
|
TOTAL
OTHER INCOME (EXPENSE)
|
|
844,889
|
|
(104,757)
|
| |
|
|
|
|
|
LOSS
BEFORE MINORITY INTEREST
|
|
(5,072,927)
|
|
(8,366,093)
|
|
MINORITY
INTEREST
|
|
275,835
|
|
462,387
|
| |
|
|
|
|
|
NET
LOSS
|
$
|
(4,797,092)
|
$
|
(7,903,706)
|
| |
|
|
|
|
|
Basic
and diluted loss per common share
|
$ |
(0.12)
|
$ |
(0.19) |
| |
|
|
|
|
|
Basic
and diluted weighted average number of common
shares
outstanding
|
|
40,961,989
|
|
41,112,800
|
F-3 The
accompanying
notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
For
the Years Ended
December 31, 2005 and December
31,
2004
|
|
Common
Stock
|
|
Treasury
Stock
|
|
Additional
|
|
|
|
|
|
|
| |
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid
In
Capital
|
|
Deferred
Compensation
|
|
|
|
(Deficit)
Equity
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003
|
|
35,974,521
|
|
$
|
35,975
|
|
|
-
|
|
|
-
|
|
$
|
5,195,097
|
|
$
|
(792,400)
|
|
$
|
(2,532,740)
|
|
$
|
1,905,933
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with a private placement
|
|
7,391,750
|
|
|
7,392
|
|
|
-
|
|
|
-
|
|
|
2,642,760
|
|
|
-
|
|
|
-
|
|
|
2,650,152
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services rendered
|
|
1,611,628
|
|
|
1,611
|
|
|
-
|
|
|
-
|
|
|
706,167
|
|
|
-
|
|
|
-
|
|
|
707,778
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of warrants issued to consultants
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
234,000
|
|
|
-
|
|
|
-
|
|
|
234,000
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred consulting fees
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
575,200
|
|
|
-
|
|
|
575,200
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss (as restated)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,903,706)
|
|
|
(7,903,706)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004 (As Restated)
|
|
44,977,899
|
|
|
44,978
|
|
|
-
|
|
|
-
|
|
|
8,778,024
|
|
|
(217,200)
|
|
|
(10,436,446)
|
|
|
(1,830,644)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with a private placement
|
|
3,820,000
|
|
|
3,820
|
|
|
-
|
|
|
-
|
|
|
1,507,964
|
|
|
-
|
|
|
-
|
|
|
1,511,784
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services rendered
|
|
2,907,499
|
|
|
2,907
|
|
|
-
|
|
|
-
|
|
|
883,955
|
|
|
(449,498)
|
|
|
-
|
|
|
437,364
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of warrants & options for deferred compensation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
530,000
|
|
|
(530,000)
|
|
|
-
|
|
|
-
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for debt conversion
|
|
2,500,000
|
|
|
2,500
|
|
|
-
|
|
|
-
|
|
|
697,500
|
|
|
-
|
|
|
-
|
|
|
700,000
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock to former CEO for debt settlement
|
|
494,000
|
|
|
494
|
|
|
-
|
|
|
-
|
|
|
118,466
|
|
|
-
|
|
|
-
|
|
|
118,960
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants to former CEO for debt settlement
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
329,000
|
|
|
-
|
|
|
-
|
|
|
329,000
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock options for services to CEO
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,950,000
|
|
|
-
|
|
|
-
|
|
|
1,950,000
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to RTIN in connection with debt settlement
|
|
500,000
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
148,000
|
|
|
-
|
|
|
-
|
|
|
148,500
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
returned to the Company by RTIN and former officer and directors
|
|
-
|
|
|
-
|
|
|
(10,858,658)
|
|
|
(10,858)
|
|
|
6,514
|
|
|
-
|
|
|
-
|
|
|
(4,344)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred consulting fees
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
643,111
|
|
|
-
|
|
|
643,111
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,797,092)
|
|
|
(4,797,092)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
55,199,398
|
|
$
|
55,199
|
|
|
(10,858,658)
|
|
$
|
(10,858)
|
|
$
|
14,949,423
|
|
$
|
(553,587)
|
|
$
|
(15,233,538)
|
|
|
(793,361)
|
F-4 The
accompanying
notes are an integral part of the consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
For
the Years Ended December 31, 2005 and
December 31, 2004
| |
Years
Ended
|
| |
2005
|
|
2004
(As
Restated)
|
| |
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
(loss)
|
$
|
(4,797,092)
|
|
$
|
(7,903,706)
|
|
Adjustments
to reconcile net loss to net cash
used
in operating activities:
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
108,136
|
|
|
50,448
|
|
Impairment
of property and equipment related to restructuring
|
|
193,881
|
|
|
-
|
|
Amortization
of deferred consulting fee
|
|
643,111
|
|
|
575,200
|
|
Loss
on settlement of debt
|
|
87,960
|
|
|
-
|
|
Gain
on forgiveness of debt
|
|
(1,011,522)
|
|
|
-
|
|
Impairment
of intangible asset
|
|
-
|
|
|
2,977,448
|
|
Minority
interest in net loss of Joint Venture
|
|
(275,835)
|
|
|
(462,387)
|
|
Issuance
of common stock for services and options to CEO
|
|
2,387,364
|
|
|
932,401
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts
receivable
|
|
(348,303)
|
|
|
(182,427)
|
|
Inventories
|
|
(103,761)
|
|
|
(119,961)
|
|
Prepaid
expenses and other current assets
|
|
3,567
|
|
|
(3,136
|
|
Accounts
payable and accrued liabilities
|
|
378,817
|
|
|
718,651
|
|
Related
party payable
|
|
-
|
|
|
(14,797)
|
|
Net
cash used in operating activities
|
|
(2,733,677)
|
|
|
(3,432,266)
|
| |
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
(2,791)
|
|
|
(719,872)
|
|
Net
cash used in investing activities
|
|
(2,791)
|
|
|
(719,872)
|
| |
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds
from line of credit
|
|
2,035,365
|
|
|
-
|
|
Proceeds
from the issuance of notes payable to related parties and
shareholders
|
|
305,000
|
|
|
159,409
|
|
Proceeds
from the issuance of short term loans
|
|
425,000
|
|
|
|
|
Principal
repayments on line of credit
|
|
(1,135,365)
|
|
|
-
|
|
Principal
repayments on notes payable
|
|
-
|
|
|
(15,000)
|
|
Principal
repayments on notes payable to related parties and
shareholders
|
|
(135,000)
|
|
|
(130,131)
|
|
Proceeds
from issuance of common stock for cash
|
|
1,511,784
|
|
|
2,650,030
|
|
Issuance
of common stock in connection with issuance of notes
payable
|
|
-
|
|
|
9,500
|
|
Minority
interest
|
|
-
|
|
|
854,213
|
|
Net
cash provided by financing activities
|
|
3,006,784
|
|
|
3,528,021
|
| |
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
270,316
|
|
|
(624,117)
|
| |
|
|
|
|
|
|
Cash
at beginning of year
|
|
86,325
|
|
|
710,442
|
| |
|
|
|
|
|
|
Cash
at end of year
|
$
|
356,641
|
|
$
|
86,325
|
| |
|
|
|
|
|
Supplemental
disclosure of cash flow information-
Cash
paid during the year for:
|
|
|
|
|
|
| |
|
|
|
|
|
|
Interest
|
$
|
131,539
|
|
$
|
92,468
|
| |
|
|
|
|
|
|
Income
taxes
|
$
|
-
|
|
$
|
4,912
|
See
the accompanying notes for disclosures about
non-cash investing and financing activities.
F-5 The
accompanying
notes are an integral part of the consolidated financial
statements.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
1. ORGANIZATION
AND BASIS OF PRESENTATION
Business
Assured
Pharmacy, Inc. was organized as a Nevada corporation on October 22, 1999 under
the name Surforama.com, Inc. and previously operated under the name eRXSYS,
Inc.
In August 2002, Assured Pharmacy, Inc. reorganized its operations and became
engaged
in
the
business of operating pharmacies that specialize in dispensing highly regulated
pain medication. Assured Pharmacy, Inc. offers physicians the ability to reduce
or eliminate the need for paper prescriptions by accessing web-based technology
to transmit prescriptions to its pharmacies from a wireless hand-held device
or
desktop computer. Because the focus is on physicians whose practice necessitates
that they frequently prescribe medication to manage their patients’ chronic
pain, non-prescription drugs, or health and beauty related products such as
walking canes, bandages and shampoo are not typically kept in inventory.
Revenues during the fiscal year ended December 31, 2005 were generated
exclusively from the sale of prescription drugs. The majority of the business
is
derived from physicians who transmit prescriptions directly to our store
electronically. “Walk-in” prescriptions from other physicians are
limited.
In
April
2003, Assured Pharmacy, Inc. entered into a joint venture agreement (“Joint
Venture”) with TPG Partners, L.L.C. (“TPG”) to establish and operate pharmacies.
In June 2003, Safescript of California, Inc. (“Safescript”) was incorporated to
own and operate pharmacies that the parties may jointly establish under the
Joint Venture. Assured Pharmacy Inc. owns 51% of the Joint Venture with TPG
owning the remaining 49%. Effective September 8, 2004, Safescript filed amended
articles of incorporation and changed its name to Assured Pharmacies, Inc.
(“API”).
Pursuant
to the terms of the Joint Venture, TPG is obligated to contribute start-up
costs
of $230,000 per pharmacy location to establish up to fifty pharmacies. In June
and July 2003, TPG advanced $230,000 and $218,000, respectively, for a total
of
$448,000. This capital contribution funded the opening of our first two
pharmacies in Santa Ana, California in October 2003 and in Riverside, California
in June 2004. No additional funds have been received from TPG since 2003. TPG
remains obligated to contribute an additional $12,000 to satisfy their full
capital contribution. TPG is also obligated to contribute their proportionate
share of the start-up costs in excess of their initial capital contribution
of
$230,000 per pharmacy. The Joint Venture defines start-up costs as any costs
associated with the opening of any open pharmacy location that accrue within
the
ninety-day period following the opening of that particular pharmacy. TPG is
obligated to contribute an additional $44,572 to satisfy its proportionate
share
of the start-up costs in excess of their initial capital contribution.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
1. ORGANIZATION
AND BASIS OF PRESENTATION (continued)
Business
(continued)
In
February 2004, Assured Pharmacy, Inc. entered into an agreement (the
“Agreement”) with TAPG, L.L.C. ("TAPG"), a Louisiana limited liability company,
and formed Safescript Northwest, Inc., a Louisiana corporation. Effective August
19, 2004, Safescript Northwest, Inc. changed its name to Assured Pharmacies
Northwest, Inc. ("APN"). Since its inception, Assured Pharmacy, Inc. has owned
75% of APN, while TAPG has owned the remaining 25%.
The
Agreement provides that TAPG will contribute start-up costs in the amount of
$335,000 per pharmacy location established not to exceed five pharmacies.
Assured Pharmacy, Inc.’s contribution under the Agreement consists of granting
the right to utilize its intellectual property rights and to provide sales
and
marketing services. Between March and October 2004, APN received from TAPG
start-up funds in the amount of $854,213 as its capital contribution for three
pharmacies. This capital contribution funded the opening of two pharmacies
in
Kirkland, Washington in August 2004 and Portland, Oregon in September 2004.
Included in these monies was a partial capital contribution in the amount of
$190,000 for the establishment of another pharmacy located in Portland, Oregon.
TAPG remains obligated to contribute an additional $145,000 to satisfy their
full contribution. Assured Pharmacy, Inc. and APN requested that TAPG provide
the $150,787 balance of its full capital contribution. TAPG is also obligated
to
contribute their proportionate share of the start-up costs in excess of their
initial capital contribution of $335,000 per pharmacy. The Agreement defines
start-up costs as any costs associated with the opening of any open pharmacy
location that accrue within one hundred eighty days following the opening of
that particular pharmacy. As of December 31, 2005, TAPG is obligated to
contribute an additional $34,994 together with interest in the amount of $5,778
to satisfy its proportionate share of the start-up costs in excess of their
initial capital contribution.
As
of
December 31, 2005, Assured Pharmacy, Inc. had advanced APN $351,857 as an
interest-free loan to sustain operations at both pharmacies operated by APN.
On
March 6, 2006, such loan was converted into 378 shares of APN capital stock.
Following the conversion of this debt into equity, Assured Pharmacy, Inc.
increased their ownership interest in APN to 94.8%. TAPG owns the remaining
5.2%
interest.
On
October 21, 2005, eRXSYS, Inc. held its annual meeting of shareholders. The
shareholders approved an amendment to the articles of incorporation to complete
a name change from eRXSYS, Inc. to Assured Pharmacy, Inc. Assured Pharmacy,
Inc., API and APN are hereinafter collectively referred to as the “Company”. The
Company’s common stock is quoted on the Over-the-Counter Bulletin Board (the
“OTCBB”) under the symbol “APHY.”
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
1. ORGANIZATION
AND BASIS OF PRESENTATION (continued)
Restatement
The
accompanying financial statements for the year ended December 31, 2004 have
been
restated to reflect a change (retroactive to the fourth quarter of 2004) in
revenue recognition from cash basis of accounting to the accrual basis of
accounting. The Company previously reported revenue on the cash basis because
sales (prescriptions) were filled for workers compensation related claims
(commonly called “green liens”), and had to undergo an adjudication process.
There was no fixed determinable price for the prescription nor was
collectibility assured. During the fourth quarter of 2004, new management
abandoned the green lien line of business in favor of conventional prescription
sales to patients covered by large health insurance providers, with
predetermined prices under contractual arrangements and assured collectibility.
After further review, management determined that the Company met revenue
recognition criteria during the fourth quarter of 2004, and accordingly, the
Company has restated its December 31, 2004 financial statements to reflect
accounts receivable of approximately $182,000 and a corresponding increase
in
sales for the year then ended. The quarters ended March 31, 2005, June 30,
2005,
and September 30, 2005 were also affected by such change in revenue recognition
(see Note 13 for significant 2005 fourth quarter adjustments impacting those
quarters). The net loss for the year ended December 31, 2004 decreased by
approximately $108,000 with no significant change in basic and diluted loss
per
common share.
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, 2005, the Company had an accumulated deficit of approximately
$15.2 million, recurring losses from operations and negative cash flow from
operating activities of approximately $2.7 million for the year then ended.
The
Company intends to fund operations through increased sales and debt and/or
equity financing arrangements, which may be insufficient to fund its capital
expenditures, working capital or other cash requirements for the year ending
December 31, 2006. The Company will be required to seek 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.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
1. ORGANIZATION
AND BASIS OF PRESENTATION (continued)
Going
Concern Consideration (continued)
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 problems, management has taken the following actions:
| · |
The
Company suspended the development of new pharmacies as part of the
restructuring activities that took place in the fourth quarter of
2004 and
the first quarter of 2005 (See Note 9 for additional
information)
|
| · |
The
Company is aggressively signing up new
physicians.
|
| · |
The
Company is seeking investment capital through the public
markets.
|
| · |
The
Company retained a marketing firm to implement a new marketing strategy
to
attract business.
|
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, who is responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in
the
United States of America (“GAAP") in all material respects, and have been
consistently applied in preparing the accompanying consolidated financial
statements.
Principles
of Consolidation
The
consolidated financial statements for the year ended December 31, 2005 include
the accounts of Assured Pharmacy, Inc., the Company’s 75% ownership interest in
APN, and the Company’s 51% ownership interest in API. In accordance with the
respective joint venture agreements, the minority partners do not have
participation rights that allow them to block decisions proposed by the Company.
The minority joint venturers have given the Company the ability to control
all
daily operations and management of the joint venture; therefore, the Company
has
consolidated the joint ventures in its financial statements with distributions
made proportionately to the minority joint venturers. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use
of Estimates
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 and the 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. Significant estimates made by management include
revenue recognition, current and deferred income taxes, the deferred tax asset
valuation allowance, and realization of inventories and long-lived assets.
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 has a limited operating history since it has finished
only its third year of operations and has not yet generated significant gross
profit. As a new operating entity, 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 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.
Therefore,
the Company may be subject to the risks 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 leased 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 operation
of
such pharmacies. Management believes that the Company is operating in compliance
with all applicable laws and regulations.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Risks
and Uncertainties (continued)
The
Company purchased 97% of its inventory of prescription drugs from one wholesale
vendor during the year ended December 31, 2005. Management believes that the
wholesale pharmaceutical and non-pharmaceutical distribution industry is highly
competitive because of consolidation in the industry and the practice of certain
large pharmacy chains to purchase directly from product manufacturers. Although
management believes we could obtain the majority of our inventory from other
distributors at competitive prices and upon competitive payment terms if our
relationship with our primary wholesale drug vendor was terminated, there can
be
no assurance that the termination of such relationship would not adversely
affect us.
Governmental
Regulations
The
pharmacy business is subject to extensive and often changing federal, state
and
local regulations, and our 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 we currently
have 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.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Governmental
Regulations (continued)
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
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less, when purchased, to be cash equivalents.
Concentrations
The
financial instrument that potentially exposes the Company to a concentration
of
credit risk principally consists of cash. The Company deposits its cash with
high credit financial institutions. The Company had approximately $231,000
in
excess of the Federal Deposit Insurance Corporation insured limit of $100,000
as
of December 31, 2005.
During
the year ended December 31, 2005, substantially all of the Company's inventory
was purchased from one wholesale drug vendor.
Allowance
for Doubtful Accounts Receivable
The
Company’s receivables are from reputable insurance companies. However,
management periodically reviews the collectibility of accounts receivable and
provides an allowance for doubtful accounts receivable as management deems
necessary. Management concluded that there was no need for such an allowance
as
of December 31, 2005 or 2004.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or estimated market,
and
consist primarily of pharmaceutical drugs. Market is determined by comparison
with recent sales or net realizable value. Net realizable value is based on
management’s forecasts for sales of the Company’s products or services in the
ensuing years and/or consideration and analysis of changes in customer base,
product mix, payor mix, third party insurance reimbursement levels or other
issues that may impact the estimated net realizable value. Management regularly
reviews inventory quantities on hand and records a reserve for shrinkage and
slow-moving, damaged and expired inventory, which is measured as the difference
between the inventory cost and the estimated market value based on management’s
assumptions about market conditions and future demand for the Company’s
products. Such reserve was insignificant to the accompanying consolidated
financial statements. In the event that demand for the Company’s products proves
to be significantly less than anticipated, the ultimate net realizable value
of
the Company’s inventories could be substantially less than reflected in the
accompanying consolidated balance sheet.
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 five years. 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. 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.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
and Intangible Assets
Statement
of Financial Accounting standard (“SFAS”) No. 142, "Goodwill
and Other Intangible Assets",
which is
effective for fiscal years beginning after December 15, 2001, addresses how
intangible assets that are acquired individually or with a group of other assets
should be accounted for upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and identifiable intangible assets that have indefinite lives not
be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their estimated useful
lives. SFAS No. 142 provides specific guidance for testing intangible assets
that will not be amortized for impairment. In addition, SFAS No. 142 expands
the
disclosure requirements about intangible assets in the years subsequent to
their
acquisition.
For
additional information, see the discussion in
“Long-Lived Assets” immediately below.
Long-Lived
Assets
In
July
2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144,
"Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
SFAS No.
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. If the cost basis of a long-lived asset
is greater than the projected future undiscounted net cash flows from such
asset, an impairment loss is recognized. Impairment losses are calculated as
the
difference between the cost basis of an asset and its estimated fair value.
SFAS
No. 144 also requires companies to separately report discontinued operations,
and extends that reporting to a component of an entity that either has been
disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or the estimated fair value less costs to sell.
In
March
2004, management determined that the license underlying the license agreement
entered into with Safescript Pharmacies, Inc. was 100% impaired (see Note
4).
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business
Combinations
SFAS
No.
141, "Business
Combinations,"
which is
effective for transactions initiated after June 30, 2001, eliminates the pooling
of interest method of accounting for business combinations and requires that
all
business combinations occurring after July 1, 2001 be accounted for using the
purchase method. The adoption of SFAS No. 141 did not have an impact on the
Company’s consolidated financial statements.
Emerging
Issues Task Force ("EITF") No. 98-3, "Determining
Whether a Nonmonetary Transaction Involves Receipt of a Productive Asset or
of a
Business,"
defines
the elements necessary to evaluate whether a business has been received in
a
nonmonetary exchange transaction. EITF 98-3 defines a business as a
self-sustaining integrated set of activities and assets conducted and managed
for the purpose of providing a return to investors. A business consists of
(a)
inputs, (b) processing applied to those inputs, and (c) resulting outputs that
are used to generate revenues. Pursuant to EITF 98-3, since the acquisition
of
certain assets (See Note 4) did not have all the required elements to be
considered the purchase of a business, the Company recorded the transaction
as
an asset purchase.
Revenue
Recognition
The
Company generates revenue from prescription drug sales which primarily are
reimbursed by healthcare insurance carriers and government agencies. As more
fully explained in Note 1, the Company previously reported revenue on the cash
basis of accounting because sales (prescriptions) were filled for workers
compensation related claims (commonly called “green liens”) and had to undergo
an adjudication process. There was no fixed determinable price for the
prescription nor was collectibility assured. During the fourth quarter of 2004,
new management abandoned the green lien line of business in favor of
conventional prescription sales to patients covered by large health insurance
providers, with predetermined prices under contractual arrangements and assured
collectibility. Accordingly, the Company recognizes revenue at the time the
prescription is filled and picked up by the customer. Customer returns are
immaterial.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising
The
Company expenses the cost of advertising when incurred. Advertising costs for
the years ended December 31, 2005 and December 31, 2004 were immaterial to
the
consolidated financial statements, and are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
Exit
and Disposal Activities
The
Company accounts for expenses related to non-discretionary restructuring
activities (including workforce reductions) in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit and Disposal Activities.” GAAP
prohibits the recognition of an exit-activity liability until (a) certain
criteria (which demonstrate that it is reasonably probable that a present
obligation to others has been incurred) are met, and (b) the fair value of
such
liability can be reasonably estimated. The Company recorded a
restructuring charge of approximately $194,000 and $48,000 for the years ended
December 31, 2005 and 2004, respectively. See Note 9 for additional
information.
Stock-Based
Compensation
The
Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
(“APB”) Opinion No. 25, "Accounting
for Stock issued to Employees" and
related interpretations. Under the intrinsic value based method, compensation
expense is the excess, if any, of the fair value of the stock at the grant
date
or other measurement date over the amount an employee must pay to acquire the
stock. Compensation expense is recognized over the applicable service period,
which is usually the vesting period.
SFAS
No.
123, "Accounting
for Stock-Based Compensation,"
if fully
adopted, changes the method of accounting for employee stock-based compensation
to the fair value based method. For stock options and warrants, fair value
is
estimated using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the
expected
life of the option or warrant, stock volatility and the annual rate of quarterly
dividends. Compensation expense is recognized over the applicable service
period, which is usually the vesting period.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based
Compensation (continued)
The
adoption of the accounting methodology of SFAS No. 123 is optional and the
Company has elected to account for stock-based compensation issued to employees
using APB No. 25; however, pro forma disclosures, as if the Company had adopted
the cost recognition requirement of SFAS No. 123, are required to be presented.
For stock-based compensation issued to non-employees, the Company uses the
fair
value method of accounting under the provisions of SFAS No. 123.
FASB
Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of
APB
25," clarifies
the application of APB No. 25 for (a) the definition of employee for purpose
of
applying APB No. 25, (b) the criteria for determining whether a stock option
plan qualifies as a non-compensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. Management believes that the Company accounts for
transactions involving stock compensation in accordance with FIN
44.
SFAS
No.
148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
No. 123,"
was
issued in December 2002 and is effective for fiscal years ended after December
15, 2002. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual
and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
At
December 31, 2004 the Company has one stock-based employee compensation plan
which is described more fully in Note 8. The following table illustrates the
effect on net loss and loss per common share for the years ended December 31,
2005 and 2004, as if the Company had applied the fair value recognition
provisions of SFAS No. 123 for all of its stock-based employee compensation
plans.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based
Compensation (continued)
| |
2005
|
|
2004
(As
Restated)
|
|
Net
(loss) as reported
|
$
|
(4,797,092)
|
|
$
|
(7,903,706)
|
|
Stock
based compensation, net of tax
|
|
(2,600)
|
|
|
(8,550)
|
|
Pro
forma net (loss)
|
$
|
(4,799,692)
|
|
$
|
(7,912,256)
|
|
Basic
and diluted (loss) per common share:
|
|
|
|
|
|
|
As
reported
|
$
|
(0.12)
|
|
$
|
(0.19)
|
|
Pro
forma
|
$
|
(0.12)
|
|
$
|
(0.19)
|
The
assumptions used in the Black Scholes option
pricing
model for the years ended December 31, 2005 and 2004 were as
follows:
| |
2005
|
|
2004
|
| |
|
|
|
|
Discount
rate
|
|
4.1%
|
|
|
5%
|
|
Volatility
|
|
140%
|
|
|
130%
|
|
Expected
life (years)
|
|
3.0
|
|
|
3.0
|
|
Expected
dividend yield
|
|
-
|
|
|
-
|
The
above
proforma effects of applying SFAS 123 are not necessarily representative of
the
impact on the results of operations for future years.
Basic
and Diluted Loss per Common Share
The
Company computes loss per common share using SFAS No. 128 “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. There were
14,780,875 warrants and options convertible into one share of the Company’s
common stock issued and outstanding as of December 31, 2005.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income
Taxes
The
Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting
for Income Taxes".
SFAS No. 109 requires recognition of deferred tax liabilities and assets for
the
expected future tax consequences of events that have been included in the
financial statements or income tax returns. Under this method deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates for the year in which the differences are expected to reverse (See Note
10).
Fair
Values of Financial Instruments
SFAS
No.
107 “Disclosures
About Fair Value of Financial Instruments”
requires disclosure of fair value information about financial instruments when
it is practicable to estimate that value. Management believes that the carrying
amounts of the Company’s financial instruments, consisting primarily of cash,
accounts receivable, and accounts payable and accrued liabilities approximated
their fair values at December 31, 2005 and 2005, due to their short-term nature.
Management
also believes that
the
December 31, 2005 and 2004 interest rate associated with the notes payable
approximates the market interest rate for this type of debt instrument and
as
such, the carrying amount of the notes payable approximates its fair
value.
In
the
opinion of management, the fair value of transactions with related parties
can
not be estimated without incurring excessive costs; for that reason, the
company
has not provided such disclosure. However, other information about related-party
liabilities (such as the carrying amount, the interest rate, and the maturity
date) is provided where applicable elsewhere in these notes to the consolidated
financial statements.
Reclassifications
Certain
amounts presented in the 2004 consolidated financial statements have been
reclassified to conform to the current year’s presentation. Such
reclassifications have no effect on previously reported results of
operations.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant
Recently Issued Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123-R, "Share-Based
Payment,"
which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123, and
supersedes APB Opinion No. 25. Small Business Issuers are required to apply
SFAS
No. 123-R in the first interim or annual reporting period that begins on or
after December 15, 2005. Thus, the Company's consolidated financial statements
will reflect an expense for (a) all share-based compensation arrangements
granted after December 31, 2005 and for any such arrangements that are modified,
cancelled, or repurchased after that date, and (b) the portion of previous
share-based awards for which the requisite service has not been rendered as
of
that date, based on the grant-date estimated fair value. Management is
evaluating the effect 123-R will have on its future consolidated financial
statements.
In
May
2005, the FASB issued SFAS No. 154, "Accounting
Changes and Error Corrections,"
which
replaces APB Opinion No. 20 and FASB Statement No. 3. This pronouncement applies
to all voluntary changes in accounting principle, and revises the requirements
for accounting for and reporting a change in accounting principle. SFAS No.
154
requires retrospective application to prior periods' financial statements of
a
voluntary change in accounting principle, unless it is impracticable to do
so.
This pronouncement also requires that a change in the method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted
for
as a change in accounting estimate that is affected by a change in accounting
principle.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant
Recently Issued Accounting Pronouncements (continued)
SFAS
No.
154 retains many provisions of APB Opinion 20 without change, including those
related to reporting a change in accounting estimate, a change in the reporting
entity, and correction of an error. The pronouncement also carries forward
the
provisions of SFAS No. 3 which govern reporting accounting changes in interim
financial statements. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Statement does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as
of
the effective date of SFAS No. 154.
In
February 2006, the FASB issued SFAS No. 155 entitled “Accounting
for Certain Hybrid Financial Instruments,”
an
amendment of SFAS No. 133 (“Accounting
for Derivative Instruments and Hedging Activities”)
and
SFAS No. 140 (“Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”).
In
this context, a hybrid financial instrument refers to certain derivatives
embedded in other financial instruments. SFAS No. 155 permits fair value
re-measurement of any hybrid financial instrument which contains an embedded
derivative that otherwise would require bifurcation under SFAS No. 133. SFAS
No.
155 also establishes a requirement to evaluate interests in securitized
financial assets in order to identify interests that are either freestanding
derivatives or “hybrids” which contain an embedded derivative requiring
bifurcation. In addition, SFAS No. 155 clarifies which interest/principal strips
are subject to SFAS No. 133, and provides that concentrations of credit risk
in
the form of subordination are not embedded derivatives. SFAS No. 155 amends
SFAS
No. 140 to eliminate the prohibition on a qualifying special-purpose entity
from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative. When SFAS No. 155 is adopted, any difference
between the total carrying amount of the components of a bifurcated hybrid
financial instrument and the fair value of the combined “hybrid” must be
recognized as a cumulative-effect adjustment of beginning deficit/retained
earnings.
SFAS
No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
Earlier adoption is permitted only as of the beginning of a fiscal year,
provided that the entity has not yet issued any annual or interim financial
statements for such year. Restatement of prior periods is prohibited.
Management
does not believe that SFAS No. 154 and No. 155 will have an impact on its
consolidated financial statements.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently
Issued Accounting Pronouncements (continued)
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants,
and
the Securities and Exchange Commission (the “SEC”) did not or are not believed
by management to have a material impact on the Company's present or future
consolidated financial statements.
3. PROPERTY
AND EQUIPMENT
Property
and equipment consisted of the following as of December 31:
| |
2005
|
|
2004
|
|
Furniture
and equipment
|
$
|
17,212
|
|
$
|
41,961
|
|
Computer
equipment and information systems
|
|
299,099
|
|
|
296,816
|
|
Leasehold
improvements
|
|
285,344
|
|
|
454,475
|
| |
|
601,655
|
|
|
793,252
|
|
Less
accumulated depreciation and amortization
|
|
(160,685)
|
|
|
(53,058)
|
| |
|
|
|
|
|
| |
$
|
440,970
|
|
$
|
740,194
|
4. INTANGIBLE
ASSETS
In
2003,
the Company acquired the rights to an exclusive license ("License") to operate
Safescript Pharmacies in California, Oregon, Washington, and Alaska from
Safescript Pharmacies, Inc., formerly known as RTIN Holdings, Inc., (the
"Licensor"). In connection with this transaction, the Company assumed a note
payable to the Licensor (see Note 7), executed a new note payable with its
former Chief Executive Officer (see Note 7) and paid $37,000 in
cash.
As
of
March 31, 2004, management determined that the License was 100% impaired based
on (a) the uncertainty of the Licensor’s ability to continue as a going concern,
which created substantial doubt about the Licensor’s ability to support their
e-prescribing technology; (the Licensor eventually filed for bankruptcy - see
Note 12); (b) the Company’s dispute with the Licensor, and (c) the Company’s
implementation of new technology at its first two pharmacies. Accordingly,
the
Company impaired the entire intangible asset of approximately $3 million in
the
accompanying consolidated statements of operations.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
4. INTANGIBLE
ASSETS (continued)
On
March
12, 2004,
the
Company entered into a technology license agreement ("Technology License")
with
Network Technology, Inc. ("RxNT"). The Technology License grants the Company
the
right to use RxNT’s e-prescribing technology under the Company’s brand name
"Assured Script". Pursuant to the Technology License agreement, the Company
paid
RxNT $50,000 at the execution of the agreement and $50,000 at the launch of
the
Company’s branded pharmacy. As of December 31, 2004, the Company paid $100,000
which was recorded in property and equipment.
5. LINE
OF CREDIT FROM A RELATED PARTY
In
February 2005, the Company entered into an accounts receivable servicing
agreement and a line of credit agreement with Mosaic Financial Services, Inc.
(the “Lender” or “Mosaic”). This agreement provided the Company financing for
inventory purchases over an extended period of time. Under the terms of the
line
of credit agreement, the Company was able to draw a maximum of $500,000 to
purchase inventory. On July 1, 2005, the line of credit limit was increased
to
$700,000. These agreements were for a one-year term with a provision to
automatically renew unless either party provided notice of termination within
180 days prior to the end of the term. The line of credit had a monthly interest
rate of 1.25% of the then line of credit limit. The line of credit was secured
by substantially all of the Company's existing and future assets.
Pursuant
to the above agreement, the Lender had a continuing right during the term to
convert all or a portion of the outstanding obligations into a number of shares
of the Company’s common stock determined at a conversion price equal to 80% of
the volume weighted average price of the Company’s common stock as quoted by
Bloomberg, LP for the seven trading day weighted average closing bid price
for
the common stock on the OTCBB (or such other equivalent market on which the
common stock is then quoted) calculated as of the trading day immediately
preceding the date the conversion right is exercised. The conversion price
per
share shall not be less than $0.25 or more than $0.75. The Lender is only
entitled to piggyback registration rights upon exercise of this conversion
right, and the Company is not contractually liable for any registration rights
penalties.
On
October 24, 2005, the Company authorized the issuance of 2,500,000 restricted
common shares at $0.28 per share to Mosaic in order to convert their entire
outstanding balance of $700,000 into common stock in accordance with the
conversion right in the line of credit agreement. The issuance of these shares
to Mosaic satisfied in full the Company’s obligations under such agreement.
These shares were issued pursuant to Section 4(2) of the Securities Act of
1933,
as amended (the “Securities Act”).
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
5. LINE
OF CREDIT (continued)
On
October 31, 2005, the Company entered into a new line of credit agreement for
$1,000,000 with Mosaic. This line has a one-time commitment fee equal to 3%
of
the initial amount of the line of credit. The agreement has a monthly interest
rate of 1.5% of the then line of credit limit. The line of credit is secured
by
the Company’s open accounts receivable due from all customers and substantially
all other assets of the Company. The outstanding balance under this line of
credit was $200,000 as of December 31, 2005.
Pursuant
to the October 2005 agreement, Mosaic has a continuing right during the term
to
convert all or a portion of the outstanding obligations into a number of shares
of the Company’s common stock determined at a conversion price equal to the
rolling seven trading day weighted average closing bid price for the common
stock on the OTCBB (or such other equivalent market on which the common stock
is
then quoted) calculated as of the trading day immediately preceding the date
the
conversion right is exercised. The conversion price per share shall not be
less
than $0.40 or more than $0.80. Mosaic is only entitled to piggyback registration
rights upon exercise of this conversion right, and the Company is not
contractually liable for any registration rights penalties.
The
group
financial officer of Mosaic Capital Advisors, LLC which is the parent company
of
Mosaic has been a member of the Company’s board of directors since September
2005.
6. NOTES
PAYABLE
On
October 25, 2005, the Company entered into a loan agreement with Malaton
Investment Corporation S.A. (“Malaton”). Under the terms of the agreement, the
Company received $250,000 for a twelve month term which can be extended for
an
additional twelve months by mutual consent. On the date of funding, the Company
paid the lender a one time commitment fee equal to 3% of the initial loan
amount. The loan has an interest rate of 15% per annum to be paid in monthly
installments. The outstanding balance under this loan was $250,000 as of
December 31, 2005.
Pursuant
to the terms of this agreement, Malaton has a continuing right during the term
to convert all or a portion of the then outstanding obligation into a number
of
shares of the Company’s common stock determined at a conversion price equal to
the rolling seven trading day weighted average closing bid price for the common
stock on the OTCBB (or such other equivalent market on which the common stock
is
then quoted) calculated as of the trading day immediately preceding the date
the
conversion right is exercised. The conversion price per share shall not be
less
than $0.40 or more than $0.80. Malaton is only entitled to piggyback
registration rights upon exercise of this conversion right, and the Company
is
not contractually liable for any registration rights penalties.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
6. NOTES
PAYABLE (continued)
On
December 21, 2005, the Company entered into a loan agreement with Kenido
Holdings, Inc. (“Kenido”). Under the terms of the agreement, the Company
received $175,000 for a twelve month term which can be extended for an
additional twelve months by mutual consent. On the date of funding, the Company
paid the lender a one time commitment fee equal to 3% of the initial loan
amount. The loan has an interest rate of 15% per annum to be paid in monthly
installments. The outstanding balance under this loan was $175,000 as of
December 31, 2005.
Pursuant
to the terms of this agreement, the Kenido has a continuing right during the
term to convert all or a portion of the then outstanding obligation into a
number of shares of the Company’s common stock determined at a conversion price
equal to the rolling seven trading day weighted average closing bid price for
the common stock on the OTCBB (or such other equivalent market on which the
common stock is then quoted) calculated as of the trading day immediately
preceding the date the conversion right is exercised. The conversion price
per
share shall not be less than $0.40 or more than $0.80. Kenido is only entitled
to piggyback registration rights upon exercise of this conversion right, and
the
Company is not contractually liable for any registration rights
penalties.
7. NOTES
PAYABLE TO RELATED PARTIES AND STOCKHOLDERS
Licensor
Note
In
May
2003, the Company assumed a note payable from Safescript Pharmacies, Inc. (the
“Licensor”) of approximately $3,177,000 in connection with acquisition of a
License (see Note 4), of which $2,000,000 was converted into 4,444,444 shares
of
the Company’s restricted common stock at $0.45 per share. The remaining balance
of approximately $1,177,000 was payable in monthly installments of $25,000
including interest at 5% per annum with a balloon payment of approximately
$802,000 due in December 2004. This note was secured by the License.
Due
to
the Company’s dispute with the Licensor (see Note 12), the Company ceased making
monthly installment payments. The outstanding balance of the note was
approximately $1,013,000 as of December 31, 2004. On
June
30, 2005, the United States Bankruptcy Court for the Eastern District of Texas
approved a Settlement Agreement and Mutual Release (the “Settlement Agreement”)
between the Company and the Licensor. Under the terms of the Settlement
Agreement, the Licensor retained 100,000 shares of the Company’s common stock
and returned the remaining 4,344,444 shares of common stock for cancellation.
In
addition, we issued the Licensor 500,000 additional shares of Company common
stock and agreed to dismiss the lawsuit then pending in the U.S. District Court
for the Eastern District of Texas with prejudice.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
7. NOTES
PAYABLE TO RELATED PARTIES AND STOCKHOLDERS (continued)
Licensor
Note (continued)
The
Settlement Agreement contained a mutual release which resulted in the Licensor
releasing the Company from any liability with respect to the note payable due
to
the Licensor in the amount of approximately $1,013,000. For financial reporting
purposes, the Company has treated the 500,000 shares to the Licensor as
constructively issued as of June 30, 2005. Accordingly,
the Company recorded for the quarter ended June 30, 2005, a credit to common
stock for $500; a credit to additional paid in capital for $148,000 (the
estimated fair value of the stock based on the trading price on the settlement
date); and a gain on settlement of debt of approximately $1,012,000 in the
accompanying consolidated statements of operations. Based on FASB No. 145 and
APB No. 30, management concluded that such gain is not considered extraordinary
and is presented as a component of loss from continuing operations.
Parker
Note
In
December 2003, the Company entered into a note payable with Mr. Parker, its
former Chief Executive Officer (“former CEO”) for $370,000 in connection with
the acquisition of the License (see Note 4). This note accrued interest at
a
fixed rate of 5% per annum. The note was secured by the License and was to
mature on December 31, 2007. The outstanding balance of the note was $370,000
as
of December 31, 2005.
In
a
termination and settlement agreement entered into with the former CEO on
February 1, 2005, the former CEO agreed to accept $10,000 cash, 494,000 shares
of restricted common stock and warrants (fully vested and immediately
exercisable, five year life, at a price range of $0.75 to $1.25 per share)
to
purchase 1,300,000 shares of the Company’s common stock and discharge the
Company from all liability associated with this debt. During the quarter ended
September 30, 2005, the Company paid the $10,000. Accordingly, the Company
recorded a credit to common stock for $494; a credit to additional paid in
capital for $118,006 (the estimated fair value of the stock based on the trading
price on the settlement date); a credit to additional paid in capital for
$329,000 (the estimated fair value of the warrants based on the Black-Scholes
pricing model on the settlement date), and a $87,960 loss on settlement of
debt,
thereby extinguishing this liability.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
7.
NOTES
PAYABLE TO RELATED PARTIES AND STOCKHOLDERS (continued)
TAPG
Note
In
January 2005, the Company entered into an agreement with TAPG to advance
$270,000 to the Company in connection with establishing pharmacies in the
Northwestern United States (see Note 1). The note was to be funded by TAPG
in
monthly installments of $45,000 up to a maximum of $270,000. The note accrues
interest at a fixed rate of 7% per annum, and is secured by the assets of the
Northwestern pharmacies of APN. However, the Company received only $40,000
during the year ended December 31, 2005. The note matured in January 2006 and
was not extended. The Company repaid $10,000 in March 2005 and management
intends to repay the remaining balance in 2006. As of December 31, 2005, the
remaining balance due to TAPG for monies advanced under this agreement and
accrued interest amounted to $40,000 and 1,901, respectively.
Robert
James, Inc. Note
In
December 2004, the Company received a loan evidenced by a promissory note from
Robert James, Inc., an entity under the control of our current CEO Mr. Robert
DelVecchio, for the purpose of purchasing inventory for our pharmacies. The
promissory note was for a maximum of $150,000, and matured on the earlier of
March 6, 2005 or the date that we were able to consummate an accounts receivable
factoring arrangement for our working capital. The outstanding principal amount
of this promissory note bore interest at 3% per month, with monthly financing
and administrative fees until repaid. The outstanding balance of this note
was
$50,000 as of December 31, 2004. The Company drew an additional $75,000 in
early
2005. On February 21, 2005, the Company paid the outstanding balance of $125,000
in full including all accrued interest and related fees.
Other
Stockholders’ Notes
During
the first quarter of 2005, the Company entered into four ninety-day
notes payable to three stockholders. Three of the notes totaling $190,000 are
unsecured and have a fixed interest rate of 3% per annum. The remaining note
in
the amount of $50,000 is unsecured and has a fixed interest rate of 7.5% per
annum. On August 15, 2005, the Company repaid the balance of the $50,000 note
together with accrued interest of $1,350. Also, during the quarter ended
September 30, 2005, the Company extended the maturity date of the remaining
three notes payable to January 31, 2006. The Company was able to further extend
the maturity date of these three notes from January 31, 2006 to January 31,
2007
(see Note 14). These notes accrued interest in the amount of approximately
$6,700 through December 31, 2005.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS
Common
Stock
During
the one-month transition period ended December 31, 2003, the Company issued
1,544,149 shares of restricted common stock to consultants for services rendered
valued at approximately $664,000 (estimated to be the fair value based on the
trading price on the issuance date).
During
the year ended December 31, 2004, the Company issued 500,000 shares of
restricted common stock to an investment banker for services
valued at approximately $280,000 (estimated to be the fair value
based on the trading price on the issuance date) included in consulting and
other compensation in the accompanying consolidated statement of operations.
During
the year ended December 31, 2004, in connection with the extension of a
consulting agreement with the investment banker, the Company issued 150,000
shares of restricted common stock, with warrants to purchase 350,000 shares
of
the Company’s common stock, exercisable at $0.60 per share for a period of five
years from the date of issuance, to the investment banker for services
rendered. The 150,000 shares of restricted common stock were valued at
approximately $70,500 (estimated to be the fair value based on the trading
price
on the issuance date) and the 350,000 warrants were valued at approximately
$196,000 (estimated to be the fair value based on the Black-Scholes pricing
model on the issuance date). Such expense was included in consulting and other
compensation in the accompanying consolidated statement of operations.
Subsequent to December 31, 2004, the investment banking firm’s president was
appointed as the Company’s CEO.
During
the year ended December 31, 2004, the Company issued 716,625 shares of
restricted common stock to consultants for services rendered valued at
approximately $268,400 (estimated to be the fair value based on the trading
price on the issuance date).
During
the year ended December 31, 2004, the Company issued 20,000 shares of restricted
common stock in connection with notes payable issued to certain shareholders
and
third parties valued at approximately $9,500 (estimated to be fair value based
on the trading price on the issuance date).
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS (continued)
Common
Stock (continued)
During
the year ended December 31, 2004, the Company completed its offering of common
stock to accredited investors through a private placement. The Company offered
a
maximum of 4,375,000 units at a price of $0.80 per unit, with a minimum offering
of 625,000 units. Each unit consisted of two shares of restricted common stock
and one warrant to purchase one share of restricted common stock at an exercise
price of $0.60 per share exercisable for twenty-four months after June 17,
2004.
The Company agreed to commence the registration process with the SEC for the
common stock issued and the common stock underlying the warrants within ninety
days after the (June 17, 2004) termination of this offering. If the average
closing price of the Company’s common stock on the OTCBB for the thirty
consecutive trading days following the effectiveness of the registration
statement is equal to or greater than $1.20, the Company has the right to call
the warrants at the exercise price within fifteen business days of such
occurrence. During the three months ended June 30, 2004, the Company issued
7,391,750 shares of its restricted common stock in connection with the private
placement. The Company received proceeds of approximately $2,650,000, net of
broker/dealer commission, legal fees, and Blue Sky fees related to the private
placement of $306,548 which were recorded in additional paid-in capital in
the
accompanying consolidated balance sheet.
On
December 15, 2004, the Company filed the registration statement described in
the
preceding paragraph (the “Registration Statement”) with the SEC. The Company has
since filed two amendments to the Registration Statement and has recently
received comments on the amendment that was filed in January 2006 from the
SEC.
However, pending the filing of the Company’s December 31, 2005 Form 10-KSB, the
Company had not amended the Registration Statement as of March 20, 2006. Thus,
as of that date, the Registration Statement had not been declared
effective.
In
March
2005, the Company issued 124,997 shares of restricted common stock to four
consultants in connection with services rendered valued at $33,249 (estimated
to
be the fair value based on the trading price on the issuance date). These
securities were issued pursuant to Section
4(2) of the Securities Act.
During
the quarter ended March 31, 2005, the Company issued 100,000 shares of its
common stock to directors of the Company in consideration for their services
rendered during the March 31, 2005 quarter. Such shares were valued at $38,000
(estimated to be the fair value based on the trading price on the issuance
date). These securities were issued pursuant to Section 4(2) of the Securities
Act.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS
Common
Stock (continued)
In
a
termination and settlement agreement entered into with the Company’s former CEO
on February 1, 2005, the Company agreed to issue the former CEO 494,000 shares
of restricted common stock (see Note 7). The former CEO also agreed to return
5,400,000 shares of the Company’s common stock to treasury. In termination and
settlement agreements with two other officers, they agreed to return 1,114,214
shares of the Company’s common stock to treasury.
During
the quarter ended June 30, 2005, the Company commenced a private equity offering
to accredited investors and sold 910,000 units at $0.80 per unit, for an
aggregate of approximately $712,000 in net proceeds. Each unit is priced at
$0.80 and consists of two shares of restricted common stock and one warrant
to
purchase one share of restricted common stock at an exercise price of $0.60
exercisable for thirty-six months after the close of the offering. These
securities were issued pursuant to Rule 506 of Regulation D.
During
the quarter ended June 30, 2005, the Company issued 168,412 shares of restricted
common stock to consultants in connection with services rendered valued at
$49,042 (estimated to be the fair value based on the trading price on the
issuance date). These securities were issued pursuant to Section
4(2) of the Securities Act.
Under
the
terms of the Settlement Agreement (see Note 7), the Licensor retained 100,000
shares of the Company’s common stock and returned the remaining 4,344,444 shares
of common stock for cancellation. Accordingly, the Company recorded a debit
to
treasury stock for $4,344. In addition, the Company agreed to issue the Licensor
500,000 additional shares of its common stock. These
securities were issued pursuant to
Section
4(2) of the Securities Act.
During
the quarter ended September 30, 2005, the Company sold 856,250 units at $0.80
per unit, or an aggregate of $685,000 in proceeds, to accredited investors
in a
private equity offering. Each unit was priced at $0.80 and consisted of two
shares of restricted common stock and one warrant to purchase one share of
restricted common stock at an exercise price of $0.60 exercisable for thirty-six
months after the close of the offering. These securities were issued pursuant
to
Rule 506 of Regulation D.
During
the quarter ended September 30, 2005 the Company issued 165,000 shares of
restricted common stock to a consultant for services rendered, valued at $46,200
(estimated to be the fair value based on the trading price on the issuance
date). This security was issued pursuant to Section 4(2) of the Securities
Act.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS
Common
Stock (continued)
During
the quarter ended September 30, 2005, the Company issued 1,150,000 shares of
restricted common stock to consultants in connection with one-year service
agreements. Such stock was valued at $334,500 (estimated to be the fair value
based on the trading price on the issuance date). As a result of these
transactions, the Company recorded a debit to deferred compensation of
$334,500 and a credit to common stock and additional paid-in capital of $1,150
and $333,350, respectively. The Company is amortizing such deferred compensation
over the life of the consulting contracts. These securities were issued pursuant
to Section 4(2) of the Securities Act.
In
August
2005, the Company issued 500,000 shares of its common stock to directors of
the
Company in consideration for services rendered during the September 30, 2005
quarter. These shares were valued at $140,000 (estimated to be the fair value
based on the trading price on the issuance date). These securities were issued
pursuant to Section 4(2) of the Securities Act.
Also,
in
August 2005, the Company issued 250,000 shares of restricted common stock for
a
performance-based bonus earned by an officer of the Company valued at $70,000
(estimated to be the fair value based on the trading price on the issuance
date). The Company also granted options to purchase 250,000 shares of the
Company’s common stock exercisable one-third per year for a period of three
years from the date of issuance at a price of $0.60 per share. These securities
were issued pursuant to Section 4(2) of the Securities Act.
During
the quarter ended December 31, 2005, the Company sold 143,750 units at $0.80
per
unit, or an aggregate of $115,000 in proceeds, to accredited investors in a
private equity offering. Each unit was priced at $0.80 and consisted of two
shares of restricted common stock and one warrant to purchase one share of
restricted common stock at an exercise price of $0.60 exercisable for thirty-six
months after the close of the offering. These securities were issued pursuant
to
Rule 506 of Regulation D.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS
Common
Stock (continued)
During
the quarter ended September 30, 2005, the Company issued 169,090 shares of
restricted common stock to a consultant for services rendered, valued at $60,872
(estimated to be the fair value based on the trading price on the issuance
date). These securities were issued pursuant to Section 4(2) of the Securities
Act.
During
the quarter ended September 30, 2005, the Company issued 280,000 shares of
restricted common stock to two consultants in connection with one-year service
agreements, valued at $115,000 (estimated to be the fair value based on the
trading price on the issuance date). As a result of these transactions, the
Company recorded a debit to deferred compensation of $115,000 and a credit
to
common stock and additional paid in capital of $280 and $114,720, respectively.
The Company is amortizing such deferred compensation over one year. These
securities were issued pursuant to Section 4(2) of the Securities
Act.
Warrants
During
the year ended December 31, 2004, in connection with the June 2004 private
placement described above, the Company issued 3,695,875 warrants to purchase
one
share of restricted common stock at an exercise price of $0.60 exercisable
for
twenty-four months from June 17, 2004.
During
the year ended December 31, 2004, the Company issued warrants to purchase
100,000 shares of its common stock, exercisable at $0.60 per share for a period
of five years from the date of issuance, to a consultant. The warrants are
valued at approximately $56,000 (estimated to be the fair value based on the
Black-Scholes pricing model on the issuance date). Such expense is included
in
consulting and other compensation in the accompanying consolidated statement
of
operations.
During
the year ended December 31, 2004, in connection with the extension of a
consulting agreement with an investment banker, the Company issued 150,000
shares of restricted common stock, with warrants to purchase 350,000 shares
of
the Company’s common stock, exercisable at $0.60 per share for a period of five
years from the date of issuance, to the investment banker for services
rendered. The 350,000 warrants were valued at approximately $196,000 (estimated
to be the fair value based on the Black-Scholes pricing model on the issuance
date). The Company recorded such amount as consulting expense which is included
in consulting and other compensation in the accompanying consolidated statements
of operations.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS (continued)
Warrants (continued)
During
the quarter ended December 31, 2005, the Company issued warrants to purchase
125,000 shares of its common stock to consultants for services. Such warrants
were valued at $31,250 (estimated to be the fair value based on the
Black-Scholes pricing model on the issuance date). The Company recorded such
amount as consulting expense which is included in consulting and other
compensation in the accompanying consolidated statements of
operations.
During
the year ended December 31, 2005, in connection with a private placement, the
Company issued warrants to purchase 1,910,000 shares of the Company’s restricted
common stock at an exercise price of $0.60 exercisable for thirty-six months
after October 2005.
The
following tables summarize information concerning outstanding warrants as of
December 31, 2005:
| |
Number
of Warrants
|
|
Weighted-Average
Exercise Price
|
|
Warrants
outstanding and exercisable at
|
|
|
|
|
|
|
January
1, 2004
|
|
-
|
|
|
- |
|
Granted
|
|
4,145,875
|
|
$
|
0.60
|
|
Cancelled
or forfeited
|
|
-
|
|
|
-
|
|
Warrants
outstanding and exercisable at
|
|
|
|
|
|
|
December
31, 2004
|
|
4,145,875
|
|
$ |
0.60
|
|
Granted
|
|
3,335,000
|
|
$
|
0.60
|
|
Cancelled
or forfeited
|
|
-
|
|
|
-
|
| Warrants
outstanding
and exercisable at |
|
|
|
|
|
|
December
31, 2005
|
|
7,480,875
|
|
$
|
0.60
|
No
warrants were issued prior to January 1, 2004.
| |
|
Outstanding
|
|
Exercisable
|
|
Range
of
Exercise
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)
|
| |
|
|
|
|
|
|
|
|
|
$0.60
|
|
7,480,875
|
$1.01
|
3.5
|
|
7,480,875
|
$1.01
|
3.5
|
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS
(continued)
Stock
Options
During
the year ended November 30, 2003, the Company’s Board of Directors approved an
Incentive Stock Option Plan ("ISOP") to grant options to its key personnel.
There are two types of options that can be granted under the ISOP: i) options
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code ("Qualified Stock Options"), and ii) options not specifically
qualified for favorable income tax treatment under the Internal Revenue Code
("Non-Qualified Stock Options"). The ISOP is administered by the Company’s board
of directors or the compensation committee (the "Administrator"). The Company
is
authorized to grant qualified stock options to any of its employees or
directors.
The
purchase price for the shares subject to any option shall be determined by
the
Administrator at the time of the grant, but shall not be less than 85% of the
fair market value per share of the Company’s common stock on the grant date.
Except as described below, the purchase price for the shares subject to any
Qualified Stock Option shall not be less than 100% of fair market value per
share of common stock on the grant date. In the case of any Qualified Stock
Option granted to an employee who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or any of
its
subsidiaries, the option price shall not be less than 110% of the fair market
value per share of the Company’s common stock on the grant date.
No
option
is exercisable after the expiration of the earliest of: (a) ten years after
the
option is granted, (b) three months after the optionee’s employment with the
Company and its subsidiaries terminates, or a non-employee director or
consultant ceases to provide services to the Company, if such termination or
cessation is for any reason other than disability or death, or (c) one year
after the optionee’s employment with the Company and its subsidiaries
terminates, or a non-employee director or consultant ceases to provide services
to the Company, if such termination or cessation is a result of death or
disability; provided, however, that the agreement for any option may provide
for
shorter periods in each of the foregoing instances.
The
Administrator has the right to set the period within which each option shall
vest or be exercisable and to accelerate such time frames; however, each option
shall be exercisable at the rate of at least 20% per year from the grant date.
Unless otherwise provided by the Administrator, options will not be subject
to
any vesting requirements.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS (continued)
Stock
Options (continued)
For
the
year ended December 31, 2004, under the ISOP, the Company granted options to
purchase 165,000 shares of common stock to employees. The stock options have
an
exercise price of $0.50 per share and vest one-third each consecutive year
following the date of grant. Such stock options expire on the earlier of three
years after vesting or ninety days after termination of employment with the
Company. 110,000 options were cancelled during the year ended December 31,
2004.
In
September 2005, the Company entered into an employment agreement with its Chief
Executive Officer, Robert DelVecchio. Pursuant to the terms of such agreement,
the Company granted options to Mr. DelVecchio to purchase 5,000,000 shares
of
our common stock for a period of ten years from the date of issuance and
exercisable at a price of $0.60 per share. These options became fully vested
and
exercisable upon issuance, with a fair value of $1,950,000 (using Black Scholes
to estimate the fair value upon date of issuance). Such expense is included
in
salaries and related in the accompanying consolidated statement of operations.
These options were issued pursuant to Section 4(2) of the Securities Act. The
Board of Directors issued such options to Mr. DelVecchio for his past services
to the Company other than as an employee or director. Therefore, these options
have been accounted for under SFAS No. 123.
In,
2005,
the Company granted 1,965,000 options to purchase its common stock to
consultants in connection with three service agreements. Such options were
valued at $498,750 (estimated to be the fair value based on the Black-Scholes
pricing model on the issuance date), and are amortized over the lives of the
service agreements. The president of Janus Financial Services, Inc., an entity
that received $1.7 million of the above options has been a member of the
Company’s board of directors since September 2005. The Company recorded such
amount as a debit to deferred compensation and a credit to additional paid
in
capital. The options have an exercise price of $0.60 per share and have
contractual lives that range from two to three years.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
8. EQUITY
TRANSACTIONS (continued)
Stock
Options (continued)
In
addition, under the ISOP, the Company granted options to purchase 280,000 shares
of common stock to employees. The stock options have exercise prices that range
from $0.39 to $0.60 per share and vest one-third each consecutive year following
the date of grant. Such stock options expire on the earlier of three years
after
vesting or ninety days after termination of employment with the Company.
The
following tables summarize information concerning outstanding stock options
as
of December 31, 2005:
| |
Number
of Options
|
|
Weighted-
Average
Exercise
Price
|
|
Options
outstanding and exercisable at
|
|
|
|
|
|
|
January
1, 2004
|
|
- |
|
|
- |
|
Granted
|
|
165,000
|
|
$
|
0.50
|
|
Cancelled
or forfeited
|
|
(110,000)
|
|
$
|
0.50
|
| Options
outstanding
and exercisable at |
|
|
|
|
|
|
December
31, 2004
|
|
55,000
|
|
$
|
0.42
|
|
Granted
|
|
7,245,000
|
|
$
|
0.59
|
|
Cancelled
or forfeited
|
|
-
|
|
|
-
|
| Options
outstanding
and exercisable at |
|
|
|
|
|
|
December
31, 2005
|
|
7,300,000
|
|
$
|
0.60
|
| |
|
Outstanding
|
|
Exercisable
|
|
Range
of
Exercise
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)
|
| |
|
|
|
|
|
|
|
|
|
$0.45
- $0.60
|
|
7,300,000
|
$0.60
|
7.4
|
|
6,265,000
|
$0.60
|
7.4
|
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
9. RESTRUCTURING
COSTS
Because
the Company’s revenue and operating margin had not grown in line with
management’s original expectations, the Company adopted a non-discretionary
restructuring plan that resulted in a workforce reduction and other cost
reductions (collectively, the “Restructuring”) intended to strengthen the
Company’s future operating performance. The Company implemented the
Restructuring during the fourth quarter of 2004 through the first quarter of
2005. The Company’s total expense related to this Restructuring was
approximately $242,000, $48,000 of which was recognized in 2004 and $194,000
in
the first quarter of 2005. No restructuring costs have been incurred since
March
31, 2005.
The
Restructuring charge recognized in the first quarter of 2005 was comprised
primarily of fixed asset write-offs from the termination of construction work
for the regional office in Fort Worth, Texas and the pharmacy in Santa Monica,
California. The Company accounts for the costs associated with exiting an
activity, including costs associated with a reduction of its workforce, in
accordance with SFAS No. 146.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
10. INCOME
TAXES
A
reconciliation of income taxes computed at the U.S. Federal Statutory income
tax
rate to the provision for income taxes is as follows:
| |
2005
|
|
2004
|
| |
|
|
|
|
U.S.
Federal Statutory tax at 34%
|
$
|
(1,725,000)
|
|
$
|
(2,907,000)
|
|
State
Taxes, net of federal benefit
|
|
(305,000)
|
|
|
(513,000)
|
| Valuation
Allowance |
|
2,035,000
|
|
|
3,420,000
|
| |
|
|
|
|
|
|
Provision
for income taxes
|
$
|
5,000
|
|
$
|
-
|
The
net
deferred income tax asset (liability) consists of the following at December
31,
2005 and December 31, 2004:
| |
2005
|
|
2004
|
| |
|
|
|
|
Net
Operating Losses
|
$
|
4,980,000
|
|
$
|
2,904,000
|
|
Depreciable
Assets
|
|
1,150,000
|
|
|
1,191,000
|
|
D Deferred
Tax Assets
|
|
6,130,000
|
|
|
4,095,000
|
|
Valuation
Allowance
|
|
(6,130,000)
|
|
|
(4,095,000)
|
| |
|
|
|
|
|
|
|
$ |
- |
|
$
|
-
|
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, 2005 and 2004 will not be recognized. Consequently, the Company
has
established a valuation allowance against the entire deferred tax
assets.
As
of
December 31, 2005, the Company has federal and state net operating losses of
approximately $12.5 million that begin to expire in 2023 and 2010 for federal
and state purposes, respectively.
The
utilization of some or all of the Company’s net operating losses may be severely
restricted now or 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, utilization of the Company’s California net operating
losses for the years beginning in 2002 and 2003 has been suspended under state
law.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
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,
2005 and 2004:
| |
Year
Ended December 31, 2005
|
|
Year
Ended December 31, 2004
(As
Restated)
|
| |
|
|
|
| Numerator
for basic
and diluted loss |
|
|
|
|
|
|
per
common share:
|
|
|
|
|
|
|
Net
loss charged to common stockholders
|
$
|
(4,797,092)
|
|
$
|
(7,903,706)
|
| |
|
|
|
|
|
| Denominator
for
basic and diluted loss |
|
|
|
|
|
|
per
common share:
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
40,961,989
|
|
|
41,112,800
|
| |
|
|
|
|
|
|
Basic
and diluted loss per common share
|
$
|
(0.12)
|
|
$
|
(0.19)
|
12. COMMITMENTS
AND CONTINGENCIES
Operating
Leases
The
Company occupies buildings and retail space under operating lease agreements
expiring on various dates through June 2009 with monthly payments ranging from
approximately $1,400 to $2,600. Certain leases include future rental escalations
and renewal options.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
12. COMMITMENTS
AND CONTINGENCIES (continued)
Operating
Leases (continued)
As
of
December 31, 2005, future minimum payments under operating leases approximated
the following for the years ending December 31, 2005 and
thereafter:
|
2006
|
|
151,134
|
|
2007
|
|
155,101
|
|
2008
|
|
134,209
|
|
2009
|
|
49,070
|
|
Thereafter
|
|
-
|
| |
|
|
| |
|
$489,514
|
Total
rent expense for the years ended December 31, 2005 and 2004 was approximately
$141,000 and $217,000 and is included in selling, general, and administrative
expenses in the accompanying consolidated statements of operations.
Legal
Matters
Safescript
Pharmacies, Inc. (formerly known as RTIN Holdings, Inc.) failed to provide
the
Company with essential services as set forth in the license agreement that
they
entered into; this forced the Company to terminate its use of all technology
granted under the license agreement entered into with Safescript Pharmacies,
Inc. On March 17, 2004, the Company filed a lawsuit in Nevada State Court
against Safescript Pharmacies, Inc. seeking damages, declaratory relief, to
rescind the License and to recover the consideration paid. On March 19, 2004,
Safescript Pharmacies, Inc. filed for Chapter 11 bankruptcy protection. The
litigation in Nevada State Court was stayed due to Safescript Pharmacies, Inc.
filing for bankruptcy. The Company re-filed substantially the same claim as
an
adversary proceeding in Safescript Pharmacies, Inc.’s bankruptcy case, which was
pending in the U.S. Bankruptcy Court located in Tyler, Texas. In July 2004,
this
case was transferred to the U.S. District Court for the Eastern District of
Texas located in Tyler, Texas.
On
June
30, 2005, the United Stated Bankruptcy Court for the Eastern District of Texas
(“District Court”) approved the Settlement Agreement between Safescript
Pharmacies, Inc., a Texas corporation and Safe Med Systems, Inc., a Texas
corporation (collectively, “Safescript”), and the Company. Under the terms of
the Settlement Agreement, Safescript retained 100,000 shares of Company common
stock and returned the remaining 4,344,444 shares of common stock for
cancellation (see Note 7). In addition, the Company agreed to issue Safescript
500,000 additional shares of its common stock and dismiss the lawsuit then
pending in the District Court with prejudice.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
12. COMMITMENTS
AND CONTINGENCIES (continued)
Legal
Matters (continued)
The
Settlement Agreement contained a mutual release which resulted in Safescript
releasing the Company from any liability with respect to the note payable due
to
Safescript in the amount of approximately $1,013,000 (see Note 7).
On
July
11, 2005, a creditor of Safescript filed a motion with the District Court for
reconsideration of its approval of the Settlement Agreement. On October 14,
2005, the District Court denied the creditor’s motion. The creditor appealed the
District Court’s approval of the Settlement Agreement. Due to a settlement
between the Licensor and the creditor, the appeal was withdrawn finalizing
the
Company’s Settlement Agreement with the Licensor.
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. Other
than
as disclosed herein, the Company is not currently involved in any litigation
which it believes could have a material adverse effect on its financial position
or results of operations.
13. SIGNIFICANT
FOURTH QUARTER ADJUSTMENTS
During
the fourth quarter of 2005, the Company recorded certain adjustments (as
described below) which affected the previously reported results of operations
for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.
The
Company recorded an adjustment to accrue for credit sales that the Company
did
not record in previous quarters since the Company was using the cash basis
to
record revenues until management changed to the accrual basis of accounting
for
revenue for reasons explained in the “Restatement” section of Note
1. The Company also recorded additional revenues that were not
recorded during the three quarters ended March 31, 2005, June 30, 2005 and
September 30, 2005.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
13. SIGNIFICANT
FOURTH QUARTER ADJUSTMENTS (continued)
The
following table illustrates the impact of the above adjustments on net income
or
loss as previously reported:
| |
Quarter
Ended
March
31, 2005
|
|
Quarter
Ended
June
30, 2005
|
|
Quarter
Ended September 30, 2005
|
|
Net
(loss) income, as previously reported
|
$
|
(1,103,898)
|
|
$
|
90,484
|
|
$
|
(2,835,877)
|
|
Adjustment
to accrue credit sales
|
|
8,717
|
|
|
93,022
|
|
|
117,783
|
|
Adjustment
to record unrecorded revenues
|
|
12,132
|
|
|
23,222
|
|
|
27,943
|
|
Change
in minority interest due to the above adjustments
|
|
(7,203)
|
|
|
(40,159)
|
|
|
(50,345)
|
| |
|
|
|
|
|
|
|
|
|
Net
(loss) income, as restated
|
$
|
(1,090,252)
|
|
$
|
166,569
|
|
$
|
(2,740,496)
|
The
above
adjustments did not have a material effect on the previously reported quarterly
income or loss per common share.
14. SUBSEQUENT
EVENTS (UNAUDITED)
Newly
Formed Entities
On
January 3, 2006, the Company incorporated Assured Pharmacy Plus, Corp. (“Plus
Corp.”) as a wholly-owned subsidiary to develop arrangements with third party
health plan providers to accept traditional co-payments and fill prescriptions
for their members who rely upon overnight courier for delivery of their
prescription.
On
January 3, 2006, the Company also incorporated Assured Pharmacy DME, Corp.
(“DME”) as a wholly-owned subsidiary for the purpose of facilitating and making
available specialized medical equipment to our consumers.
Notes
Payable to Stockholders
On
January 5, 2006, the Company entered into agreements with three related party
shareholders to extend their promissory notes that were due January 2006, to
January 31, 2007.
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
14. SUBSEQUENT
EVENTS (UNAUDITED) (continued)
Consulting
Agreements
On
January 17, 2006, the Company entered into a one year consulting agreement
with
Insights Consultants Corporation (ICC). ICC will receive 400,000 shares of
the
Company’s common stock in exchange for advice and assistance in developing and
implementing plans and materials for presenting the Company and its business
plans and personnel to the financial community. Two hundred thousand shares
were
issued upon execution of this agreement and two hundred thousand will be issued
in six months. The stock was valued at $180,000 (estimated to be the fair value
based upon the trading price on the date of issuance).
On
January 21, 2006, the Company entered into a loan agreement with VVPH Inc.
Under
the terms of the agreement, the Company received $400,000 for a twelve month
term which can be extended for an additional twelve month period by mutual
consent. On the date of funding, the Company paid the lender a one time
commitment fee equal to 3% of the initial amount of the loan. The loan has
an
interest rate of 15% per annum to be paid in monthly installments. Pursuant
to
the terms of this agreement, VVPH has a continuing right to convert all or
a
portion of the then outstanding amount of the obligations into a number of
shares of the Company’s common stock determined at a conversion price equal to
the rolling seven trading day weighted average closing bid price for the common
stock on the OTCBB. The conversion price per share shall not be less than $0.40
or more than $0.80.
In
January 2006, the Company engaged Wall Street Consultants Group (“WSCG”) to
provide consulting pertaining to identifying and communicating information
about
the Company to new investors. Under the terms of the agreement, WSCG will
provide these services for a period of six months in exchange for a fee of
125,000 shares of the Company’s restricted common stock. Such shares were valued
at approximately $62,000 (estimated to be the fair value based upon the trading
price on the date of issuance).
(formerly
known as eRxsys,
Inc.)
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
December
31, 2005 and December 31,
2004
14. SUBSEQUENT
EVENTS (UNAUDITED) (continued)
Acquisition
of Additional Interest in APN
In
February 2004, the Company entered into a joint venture agreement (the
“Agreement”) with TAPG, L.L.C. ("TAPG"), a Louisiana limited liability company,
and formed Safescript Northwest, Inc. ("Safescript Northwest"), a Louisiana
corporation, for the purpose of establishing and operating up to five
pharmacies. Effective August 19, 2004, Safescript Northwest changed its name
to
Assured Pharmacies Northwest, Inc. ("APN"). Since its inception, the Company
has
owned 75% of APN, while TAPG has owned the remaining 25%. As of December 31,
2005, the Company advanced APN a total of $351,857 as an interest-free loan
to
sustain operations at both pharmacies operated by APN. On March 6, 2006, the
interest-free loan of $351,857 was converted into 378 shares of APN’s common
stock. Following the conversion of this debt into equity, the Company has
increased its ownership interest in APN to 94.8%. TAPG now owns the remaining
5.2% interest.
No
events
occurred requiring disclosure under Item 304(b) of Regulation S-B.
We
carried out an evaluation of the effectiveness of the design and operation
of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of December 31, 2005. This evaluation was carried
out under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, Mr. Robert DelVecchio. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of December 31, 2005, our disclosure controls and procedures are of
limited effectiveness. There have been no significant changes in our internal
controls over financial reporting during the quarter ended December 31, 2005
that have materially affected or are reasonably likely to materially affect
such
controls.
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
our
reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
Limitations
on the Effectiveness of Internal Controls
Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud
and
material error. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving our objectives and our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective at that reasonable assurance level. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of
two
or more people, or by management override of the internal control. The design
of
any system of controls also is based in part upon certain assumptions about
the
likelihood of future events, and there can be no assurance that any design
will
succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions,
or
the degree of compliance with the policies or procedures may deteriorate.
None.
PART
III
The
following information sets forth the names of our current directors and
executive officers, their ages and their present positions with the Company.
| Name |
Age |
Position(s)
and Office(s) Held |
| |
|
|
| Robert
DelVecchio |
41 |
Chief
Executive Officer, Chief Financial Officer, & Director |
| Richard
Falcone |
52 |
Director |
| James
Manfredonia |
44 |
Director |
| Haresh
Sheth |
55 |
Director |
| John
Eric Mutter |
45 |
Chief
Operating Officer |
Set
forth
below is a brief description of the background and business experience of each
of our current executive officers and directors.
Robert
DelVecchio.
On
February 3, 2005, our board of directors appointed Mr. Robert DelVecchio to
serve as Chief Executive Officer. Mr. DelVecchio was appointed as our Chief
Financial Officer and as a member of the board of directors on March 31, 2005.
Since 1995, Mr. DelVecchio has acted as Chief Executive Officer and President
of
Brockington Securities, Inc., a broker-dealer who is a member of the National
Association of Securities Dealers.
Richard
Falcone. Mr.
Falcone was appointed as a member of our board of directors in July 2004. Since
2001, Mr. Falcone has served as Chief Financial Officer of The A Consulting
Team, Inc., an IT service company. Mr. Falcone has served as Chief Financial
Officer of Netgrocer.com. In 1990, Mr. Falcone joined Bed Bath & Beyond,
Inc. as its Chief Financial Officer. In 1983, Mr. Falcone joined Tiffany &
Co. and served as Manager of Audit, Director of Financial Control, and Director
of International Finance and Operations. Mr. Falcone has also worked at
PriceWaterhouseCoopers & Co., an international public accounting
firm.
James
Manfredonia. Mr.
Manfredonia was appointed as a member of our board of directors in June 2004.
Since 2002, Mr. Manfredonia has served as manager of listed equity trading
and
New York Stock Exchange operations at Bear Stearns. Mr. Manfredonia currently
serves as the Chairman of the New York Stock Exchange Upstairs Traders Advisory
Committee and as a member of the Market Performance Committee of the New York
Stock Exchange. Prior to joining Bear Stearns, Mr. Manfredonia worked for ten
years at Merrill Lynch where he managed the listed trading desk with additional
responsibilities for NASDAQ, portfolio trading, sales
trading,
and NYSE staff. Mr. Manfredonia was the founding general partner of Blair
Manfredonia Limited Partners, a hedge fund/broker-dealer. Mr. Manfredonia has
also worked at Lehman Brothers, Salomon Brothers, and Drexel
Burnham.
Haresh
Sheth. Mr.
Sheth
was appointed as a member of our board of directors in September 2005. Mr.
Sheth
is a graduate of West Virginia University where he earned an engineering degree.
Since 1991, Mr. Sheth has acted as President of Janus Finance Corporation,
an
asset based finance company. Mr. Sheth joined Mosaic Capital Advisors LLC in
2004 as their group financial officer.
John
Eric Mutter.
Mr.
Mutter was appointed to serve as Chief Operating Officer on May 11, 2005. Since
January 2004, Mr. Mutter has acted as a consultant to Assured Pharmacy, Inc.
providing technology and information systems support. From 2000 to 2003, Mr.
Mutter performed similar responsibilities for the MedEx Systems Inc. designing,
implementing and managing a digital prescribing infrastructure for Pegasus
Pharmacies. Prior to these positions, Mr. Mutter has held numerous field
engineering and technology positions with Alpha Microsystems, Tomba
Communications, Neosoft Inc., Checkpoint Systems, and Southwest Communications.
Term
of Office
Our
directors are appointed for a one-year term to hold office until the next annual
meeting of our shareholders or until removed from office in accordance with
our
bylaws.
Our
executive officers are appointed by our board of directors and hold office
until
removed by the board.
Significant
Employees
We
have
no significant employees other than our directors and executive
officers.
Family
Relationships
There
are
no family relationships between or among the directors, executive officers
or
persons nominated or chosen by us to become directors or executive
officers.
Involvement
in Certain Legal Proceedings
To
the
best of our knowledge, during the past five years, none of the following
occurred with respect to a present or former director, executive officer, or
employee: (1) any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of
the
bankruptcy or within two years prior to that time; (2) any conviction in a
criminal proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (3) being subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise
limiting
his or her involvement in any type of business, securities or banking
activities; and (4) being found by a court of competent jurisdiction (in a
civil
action), the SEC or the Commodities Futures Trading Commission to have violated
a federal or state securities or commodities law, and the judgment has not
been
reversed, suspended or vacated.
Audit
Committee
We
do not
have a separately-designated standing audit committee. The entire board of
directors performs the functions of an audit committee, but no written charter
governs the actions of the board of directors when performing the functions
of
what would generally be performed by an audit committee. The board of directors
approves the selection of our independent accountants and meets and interacts
with the independent accountants to discuss issues related to financial
reporting. In addition, the board of directors reviews the scope and results
of
the audit with the independent accountants, reviews with management and the
independent accountants our annual operating results, considers the adequacy
of
our internal accounting procedures and considers other auditing and accounting
matters including fees to be paid to the independent auditor and the performance
of the independent auditor.
Richard
Falcone is an audit committee financial expert and is independent, as the term
is used in Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
For
the
fiscal year ending December 31, 2005, the board of directors:
| 1. |
Reviewed
and discussed the audited financial statements with management,
and
|
| 2. |
Reviewed
and discussed the written disclosures and the letter from our independent
auditors on the matters relating to the auditor's
independence.
|
Based
upon the board of directors’ review and discussion of the matters above, the
board of directors authorized inclusion of the audited financial statements
for
the year ended December 31, 2005 to be included in this Annual Report on Form
10-KSB and filed with the SEC.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our directors and executive officers and
persons who beneficially own more than ten percent of a registered class of
the
Company’s equity securities to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of the Company. Officers, directors and greater than ten percent beneficial
shareholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. To the best of our knowledge based solely on
a
review of Forms 3, 4, and 5 (and any amendments thereof) received by us during
or with respect to the year ended December 31, 2005, the following persons
have
failed to file, on a timely basis, the identified reports required by Section
16(a) of the Exchange Act during fiscal year ended December 31, 2005:
|
Name
and principal position
|
Number
of
late
reports
|
Transactions
not
timely
reported
|
Known
failures to
file
a required form
|
|
Robert
DelVecchio
|
0
|
0
|
0
|
|
Richard
Falcone
|
1
|
1
|
0
|
|
James
Manfredonia
|
1
|
1
|
0
|
|
Haresh
Sheth
|
1
|
1
|
0
|
|
John
Eric Mutter
|
1
|
1
|
0
|
Code
of Ethics Disclosure
As
of
December 31, 2005, we have not adopted a Code of Ethics for Financial
Executives, which include our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. We have begun the process of drafting a code of ethics which
will be filed with the SEC upon its adoption by the board of directors.
The
table
below summarizes all compensation awarded to, earned by, or paid to our current
executive officers for each of the last three completed fiscal
years.
| |
|
Annual
Compensation
|
Long
Term Compensation
|
|
Name
|
Title
|
Year
|
Salary
($)
|
Bonus
($)
|
Other
Annual Compensation
($)
|
Restricted
Stock
Awarded
($)
|
Options/
SARs
(#)
|
LTIP
Payouts
($)
|
All
Other
Compensation
($)
|
|
Robert
DelVecchio
|
CEO,
CFO
|
2005
2004
2003
|
23,000
n/a
n/a
|
0
n/a
n/a
|
0
n/a
n/a
|
0
n/a
n/a
|
5,000,000
n/a
n/a
|
0
n/a
n/a
|
0
n/a
n/a
|
|
John
Eric Mutter
|
COO
|
2005
2004
2003
|
185,000
n/a
n/a
|
0
n/a
n/a
|
0
n/a
n/a
|
70,000
n/a
n/a
|
250,000
n/a
n/a
|
0
n/a
n/a
|
0
n/a
n/a
|
|
David
Parker 1
|
Former
CEO
|
2005
2004
2003
|
15,175
129,082
33,923
|
0
0
0
|
0
0
144,000
2
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
|
A.J.
LaSota
3
|
Former
President
|
2005
2004
2003
|
8,890
108,940
29,400
|
0
0
0
|
0
0
129,600
4
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
| 1 |
On
February 1, 2005, we received the resignation of David Parker. Under
the
terms of a settlement and termination agreement, Mr. Parker returned
to
the corporate treasury 5,400,000 shares of our common
stock.
|
| 2 |
David
Parker was issued 300,000 shares of restricted common stock valued
at
$144,000 on the issuance date.
|
| 3 |
On
February 1, 2005, we received the resignation of A.J. LaSota. Under
the
terms of a settlement and termination agreement, Mr. LaSota returned
to
the corporate treasury 684,861 shares of our common
stock.
|
| 4 |
A.J.
LaSota was issued 270,000 shares of restricted common stock valued
at
$129,600 on the issuance date.
|
Compensation
to Directors
Only
our
outside directors receive compensation for their services as directors. We
have
compensated our outside directors for their service on the board of directors
as
follows:
|
Outside
Director
|
Year
|
Shares
of Common
Stock
Received
|
|
Richard
Falcone
|
2005
2004
|
300,000
50,000
|
|
James
Manfredonia
|
2005
2004
|
300,000
50,000
|
|
Annette
McEvoy (1)
|
2005
2004
|
25,000
50,000
|
|
Geoffrey
S. Carroll (2)
|
2005
2004
|
25,000
50,000
|
| 1 |
On
February 16, 2005, Annette McEvoy resigned as a member of our board
of
directors
|
| 2 |
On
February 11, 2005, Geoffrey Carroll resigned as a member of our board
of
directors.
|
Other
than as set forth above, our outside directors currently receive $1,500 for
attending any board of director’s meeting in-person, $1,500 for any speaking
engagement on our behalf, and reimbursement for reasonable expenses incurred
in
attending board or committee meetings.
Summary
of Options Grants
The
following table sets forth the individual grants of stock options made by the
company during the year ended December 31, 2005, for the named executive
officers:
|
OPTION
/ SAR GRANTS IN LAST FISCAL YEAR
|
|
Name
|
Number
of
securities
underlying
options
/ SARs
granted
(#)
|
Percent
of total
options
/ SARs
granted
to
employees
in
fiscal
year
|
Exercise
or
Base
price
($
/Sh)
|
Expiration
date
|
|
Robert
DelVecchio
|
5,000,000
|
95.2%
|
$0.60
|
September
30, 2015
|
|
John
Eric Mutter
|
83,333
|
1.58%
|
$0.60
|
August
29, 2008
|
|
John
Eric Mutter
|
83,333
|
1.58%
|
$0.60
|
August
29, 2009
|
|
John
Eric Mutter
|
83,334
|
1.58%
|
$0.60
|
August
29, 2010
|
The
following table sets forth, as of March 16, 2006, the beneficial ownership
of
our common stock by each executive officer and director, by each person known
by
us to beneficially own more than 5% of our common stock and by the executive
officers and directors as a group. Except as otherwise indicated, all shares
are
owned directly and the percentage shown is based on 44,665,740 shares of common
stock issued and outstanding on March 16, 2006.
|
Title
of class
|
Name
and address
of
beneficial owner (1)
|
Amount
of
beneficial
ownership
|
Percent
of
class*
|
|
Executive
Officers & Directors:
|
|
Common
|
Robert
DelVecchio
17935
Sky Park Circle, Suite F
Irvine,
California 92614
|
970,860
shares(2)
|
14.2%(3)
|
|
Common
|
James
Manfredonia
17935
Sky Park Circle, Suite F
Irvine,
California 92614
|
350,000
shares
|
0.8%
|
|
Common
|
Richard
Falcone
17935
Sky Park Circle, Suite F
Irvine,
California 92614
|
350,000
shares
|
0.8%
|
|
Common
|
Haresh
Sheth
17935
Sky Park Circle, Suite F
Irvine,
California 92614
|
0
shares
|
1.3%
(4)
|
|
Common
|
John
Eric Mutter
17935
Sky Park Circle, Suite F
Irvine,
California 92614
|
325,000
shares
|
0.7%
|
|
Total
of All Directors and Executive Officers:
|
1,995,860
shares
|
17.8%
|
|
More
Than 5% Beneficial Owners:
|
|
Common
|
Mosaic
Financial Services, LLC
545
Fifth Avenue, Suite 709
New
York, NY 10017
|
2,500,000
shares
|
5.6%
|
| (1) |
As
used in this table, "beneficial ownership" means the sole or shared
power
to vote, or to direct the voting of, a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose
of, or to direct the disposition of, a security). In addition, for
purposes of this table, a person is deemed, as of any date, to have
"beneficial ownership" of any security that such person has the right
to
acquire within 60 days after such
date.
|
| (2) |
Mr.
DelVecchio is the indirect beneficial owner of 970,860 shares held
by
Brockington Securities, Inc.
|
| (3) |
Included
in the calculation of beneficial ownership for Mr. DelVecchio are
350,000
warrants which are exercisable within 60 days. Brockington Securities,
Inc. holds warrants to purchase 350,000 shares of common stock at
the
exercise price of $0.60 per share. These warrants are immediately
exercisable and expire on June 17, 2009. Mr. DelVecchio is the indirect
beneficial owner of the warrants held by Brockington Securities,
Inc. Also
included in the calculation of beneficial ownership for Mr. DelVecchio
are
options to purchase 5,000,000 shares of common stock at an exercise
price
of $0.60 per share. These
|
| |
options
are immediately exercisable and were granted to Mr. DelVecchio pursuant
to
the terms of an employment agreement executed in September 2005.
|
| (4) |
Mr.
Sheth maintains a 24% voting interest and 25% economic interest in
Mosaic
Capital Advisors, LLC (“MCA”). MCA is the investment advisor to Mosaic
Partners Fund and Mosaic Partners Fund LP. As of the date reported
above,
Mosaic Partners Fund held 387,500 shares of the Company’s common stock and
Mosaic Partners Fund LP held 1,050,000 shares of the Company’s common
stock. Mosaic Financial Services, LLC is a wholly-owned subsidiary
of MCA.
Pursuant to Rule 13d-4 of the Securities and Exchange Act of 1934,
Mr.
Sheth disclaims beneficial ownership over the shares held by Mosaic
Partners Fund, Mosaic Partners Fund LP, and Mosaic Financial Services,
LLC. Mr. Sheth is also the President of Janus Financial Services,
Inc.
Pursuant to the terms of a consulting agreement, Janus Financial
Services,
Inc. hold warrants to purchase 566,667 shares of common stock at
an
exercise price of $0.60 per share. These warrants are immediately
exercisable and expire on September 29, 2017. These warrants are
included
in the calculation of beneficial ownership for Mr. Sheth.
|
Except
as
disclosed below, none of our directors or executive officers, nor any proposed
nominee for election as a director, nor any person who beneficially owns,
directly or indirectly, shares carrying more than 5% of the voting rights
attached to all of our outstanding shares, nor any members of the immediate
family (including spouse, parents, children, siblings, and in-laws) of any
of
the foregoing persons has any material interest, direct or indirect, in any
transaction during the last two years or in any presently proposed transaction
which, in either case, has or will materially affect us.
| 1. |
Our
former CEO, David Parker, founded RxSystems, Inc. (“RxSystems”) in March
2002. In March 2002, RxSystems acquired from the Safescript Pharmacies,
Inc. (formerly known as RTIN Holdings, Inc.) the exclusive licensing
rights to establish and operate pharmacies under the name “Safescript
Pharmacies” throughout California, Oregon, Washington and Alaska. On March
27, 2003, RxSystems assigned to us all of its rights under this exclusive
license. We agreed to reimburse Mr. Parker $370,000 for personal
funds
advanced to secure the License. These funds plus five percent interest
per
annum were due and payable in full on December 31, 2007. In a termination
and settlement agreement entered into with Mr. Parker on February
1, 2005,
Mr. Parker agreed to accept $10,000 cash and 494,000 shares of our
common
stock and release and discharge us from all liability associated
with this
debt. The price per share for the issued shares was approximately
$0.80
and the market price on February 1, 2005 was $0.30 per
share.
|
| 2. |
On
November 27, 2003, we entered into an agreement with David Parker
to
cancel debt owed to him and reported in our consolidated financial
statements as “Advances due to a shareholder.” Initially, Mr. Parker
agreed to release and discharge us from all liability associated
with this
debt and we agreed to transfer, assign, and convey all of our rights
under
the exclusive license granted by Safescript Pharmacies, Inc. solely
for
the consolidated statistical metropolitan area of Fresno, California.
As a
part of this agreement, we agreed to continue to make all payments
under
the license agreement, including those owed on the Fresno market,
until
the existing obligation to Safescript Pharmacies, Inc. for this license
regarding the consolidated statistical metropolitan area of Fresno,
California was fully paid. This agreement was amended on February
16,
2004. As a result of this amendment to the agreement, Mr. Parker
received
220,429 shares of our common stock and forever discharged
|
| |
us
from all liability associated with this debt. Mr. Parker also relinquished
to us all of his rights under the exclusive license granted by Safescript
Pharmacies, Inc. solely for the consolidated statistical metropolitan
area
of Fresno, California. The price per share for the issued shares
was
approximately $0.64 and the market price on February 16, 2004 was
$0.60
per share.
|
| 3. |
On
April 24, 2003, we entered into a joint venture agreement with TPG
for the
purpose of funding the establishment and operations of pharmacies.
Ron
Folse, our former Executive Vice President, and A.J. LaSota, our
former
President and Director each own approximately 19% of TPG. On March
5,
2004, Mr. Folse and Mr. LaSota resigned from all positions of authority
in
TPG.
|
| 4. |
On
January 26, 2004, we entered into an agreement with Brockington
Securities, Inc. (“Brockington”) to act as our financial advisor,
investment banker, and placement agent. Our current CEO, Mr. Robert
DelVecchio, is the President and CEO of Brockington. Pursuant to
this
agreement, Brockington received 500,000 shares of our common stock.
The
price per share for the issued shares was approximately $0.56 and
the
market price on January 26, 2004 was $0.64 per share. On June 18,
2004,
our board of directors approved an extension for an additional term
of
eighteen months to the agreement entered into with Brockington. Pursuant
to the terms of this extension, Brockington received an additional
150,000
shares of our common stock and warrants to purchase 350,000 shares
of our
common stock exercisable for a period of five years from the date
of
issuance at the price of $0.60 per share. In connection with the
aforementioned extension, Brockington was granted certain “piggy-back”
registration rights relating to the equity instruments issued in
June
2004. The price per share for the issued shares was approximately
$0.47
and the market price on June 18, 2004 was $0.62 per
share.
|
| 5. |
On
June 17, 2004, we completed an exempt offering to accredited investors
pursuant to Rule 506 of Regulation D under the Securities Act and
Brockington acted as placement agent for this offering. Upon closing
of
this offering, Brockington received a commission of $295,670 and
reimbursed expenses of $8,000.
|
| 6. |
In
December 2004, we received a loan from Robert James, Inc. (the “Lender”),
a company under the control of Mr. DelVecchio, evidenced by a promissory
note (“Note”) for the purpose of purchasing inventory for our pharmacies.
This Note is for a maximum of $150,000 and matured on the earlier
of March
6, 2005 or the date that we were able to consummate an accounts receivable
factoring arrangement for our working capital. The outstanding principal
amount of this Note bears interest at a rate of three percent per
month.
In consideration of this Note, we agreed to pay the Lender an
administrative fee of $1,500 and a financing fee of $2,100. In addition
to
these fees, we agreed to pay the Lender by the fifth day of every
month
from January 2005 until the principal amount is repaid plus an
administrative fee of $1,875 and a financing fee of $2,675. On February
13, 2005, the loan was paid in
full.
|
| 7. |
On
February 1, 2005, we entered into a Termination and Settlement Agreements
with Mr. David Parker and Mr. A.J. LaSota. Mr. Parker and Mr. LaSota
resigned from their positions
|
| 7. |
as
officers and directors. In accordance with the terms of these agreements,
Mr. Parker and Mr. LaSota returned to the corporate treasury 5,400,000
and
429,353 shares of our common stock, respectively. Also on February
1,
2005, we entered into a Settlement Agreement with Ron Folse, our
former
Executive Vice President. In accordance with the terms of this
agreement,
Mr. Folse returned to the corporate treasury 429,353 shares of
our common
stock.
|
| 8. |
On
February 23, 2005, we entered into an accounts receivable servicing
agreement and line of credit agreement with Mosaic Financial Services,
LLC
(“Mosaic”). The monthly interest rate under this agreement is equal to one
and one quarter percent of the maximum amount of the credit line.
This
agreement allows us to secure financing for inventory purchases over
an
extended period of time. Under the terms of the line of credit agreement,
the maximum amount that can be drawn to purchase inventory increased
on
July 1, 2005 from $500,000 to $700,000. This agreement was for a
term of
one year with a provision to automatically renew for another one
year
period unless either party provides notice to the other of termination
within 180 days prior to the end of the effective term.
|
| |
Mosaic
provided notice to us of its intent to exercise its right under
the line
of credit agreement to convert the $700,000 previously advanced
into
shares of our common stock. On October 24, 2005, our board of directors
authorized the issuance of 2,500,000 shares of our restricted common
stock
to Mosaic in accordance with the conversion right provided in the
line of
credit agreement. The price per share for the issued shares was
$0.28 and
the market price on October 24, 2005 was $0.39 per share. The issuance
of
these shares to Mosaic satisfied our obligations in full under
the
accounts receivable servicing agreement and line of credit
agreement.
On
October 31, 2005, we entered into another line of credit agreement
(“LOC”)
with Mosaic enabling us to draw a maximum of $1,000,000 to purchase
inventory. This LOC has a one time commitment fee equal to three
percent
of the initial amount of the LOC which has a monthly interest rate of
1.5% of the then LOC limit. These accrued finance charges will
be deducted
prior to any advances. Under the terms of the LOC, Mosaic has a
right to
convert all or a portion of the outstanding advances into shares
of our
common stock where the conversion price is based on the weighted
average
closing bid price for our common stock on the OTCBB (or such other
equivalent market on which our common stock is quoted) as for the
seven
trading days immediately preceding the date the conversion right
is
exercised. The conversion price shall not be less than $0.40 nor
more than
$0.80. Our management anticipates that this LOC will adequately
finance
inventory purchases for our existing pharmacies over the next twelve
months. This LOC is secured by substantially all of our
assets.
Mosaic
is a wholly-owned subsidiary of Mosaic Capital Advisors LLC. Mr.
Haresh
Sheth who is a member of our board of directors acts as group financial
officer to Mosaic Capital Advisors LLC. Mr. Sheth was appointed
to our
board of directors in September
2005.
|
| 9. |
During
the quarterly period ended September 30, 2005, we entered into a
consulting agreement with Janus Financial Services, Inc. (“Janus”).
Pursuant to the terms of the consulting agreement, we agreed to pay
Janus
a monthly consulting fee in the amount of
|
| |
$10,000
for a period of two years. Under the terms of the consulting agreement,
we
also issued Janus options to purchase 1,700,000 shares of our common
stock
exercisable at $0.60 per share. These options become fully vested
over
three years (566,667 options fully vest on September 29, 2005; 566,667
become fully vested on September 29, 2006; and 566,666 become fully
vested
on September 29, 2007) and are exercisable until September 29, 2017.
Mr.
Haresh Sheth who is a member of our board of directors also acts
as
President to Janus Financial Services,
Inc.
|
|
Exhibit
Number
|
Description
|
|
3.1
|
Articles
of Incorporation, as amended (1)
|
|
3.2
|
By-laws,
as amended (1)
|
|
|
|
|
|
|
|
|
|
| 1 |
Previously
included as an exhibit to the registration statement filed on Form
SB-2 on
December 15, 2004.
|
Audit
Fees
The
aggregate fees billed and unbilled by our auditors for professional services
rendered in connection with a review of the financial statements included in
our
quarterly reports on Form 10-QSB and the audit of our annual consolidated
financial statements for the fiscal years ended December 31, 2005 and December
31, 2004 were approximately $117,000 and $91,000 respectively.
Audit-Related
Fees
Our
auditors did bill additional fees of $33,000 during the fiscal year ended
December 31, 2005 for assurance and related services that are reasonably related
to the performance of the audit and review of our Form SB-2 filing with the
SEC.
Tax
Fees
The
aggregate fees billed and unbilled by our auditors for professional services
for
tax compliance, tax advice, and tax planning were $13,000 and $20,000 for the
fiscal years ended December 31, 2005 and 2004.
All
Other Fees
The
aggregate fees billed by our auditors for all other non-audit services, such
as
attending meetings and other miscellaneous financial consulting, for the fiscal
years ended December 31, 2005 and 2004 were $5,000 and $6,000
respectively.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Assured Pharmacy,
Inc.
|
|
|
By:
|
/s/ Robert DelVecchio
|
| |
Robert
DelVecchio
Chief
Executive Officer and Chief Financial Officer
March
31, 2006
|
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and
on the date stated:
|
By:
|
/s/ Robert DelVecchio
|
|
|
|
| |
Robert
DelVecchio
Director
March
31, 2006
|
|
|
|
|
By:
|
/s/ James Manfredonia
|
|
By:
|
/s/ Haresh Sheth
|
| |
James
Manfredonia
Director
March
31, 2006
|
|
|
Haresh
Sheth
Director
March
31, 2006
|
