NOTES PAYABLE AND UNSECURED CONVERTIBLE DEBENTURES

12 Months Ended

Dec. 31, 2013

Notes to Financial Statements

4. NOTES PAYABLE AND UNSECURED CONVERTIBLE DEBENTURES

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

		Related Party				Unrelated				Total

Secured debt		$	-			$	3,804,111			$	3,804,111
Revolving credit facilities			477,000				-				477,000
Other notes and debt			-				52,408				52,408
Total notes payable		$	477,000			$	3,856,519			$	4,333,519

Unsecured convertible
debentures, net of discount		$	-			$	1,500,000			$	1,500,000

Total debt		$	477,000			$	5,356,519			$	5,833,519

Maturities of debt at December 31, 2013 are as follows:

		Secured Debt				Revolving Credit Facilities				Other notes and debt				Unsecured convertible debentures				Total

2014			399,889				-				26,526				357,528				783,943
2015			300,863				-				25,882				104,659				431,404
2016			3,103,359				477,000				-				1,037,813				4,618,172
Total		$	3,804,111			$	477,000			$	52,408			$	1,500,000			$	5,833,519

2013 Debt Restructuring

Our current financial condition and inability to secure additional funding or significantly improve our liquidity position resulted in management’s reevaluation of its strategic plan in August 2013. A key objective of the restructuring plan was to renegotiate terms with our existing debt holders. Below is a summary of the restructuring actions taken:

Tender Offer

In October 2013, we filed a tender offer on Form SC TO-I. The tender offer statement relates to the offer to holders of unsecured debentures to tender their 16% Senior Convertible Debentures in an issuer tender offer to exchange them for one of two options which are:

Option #1: The issuance of restricted shares of common stock for the settlement of the balance of the Eligible Debenture, which shall consist of principal plus the currently outstanding unpaid interest as of September 30, 2013, at $0.60 per share with the issuance of new warrants to purchase common stock (the “New Warrants”) at an exercise price of $0.60 per share for the first twelve (12) months following the closing date of the issuer tender offer (the “Tender Offer”) and $0.75 thereafter for the remainder of the New Warrant’s term, with such term to be an extension of the term of the Eligible Warrant by an additional three (3) years; or

Option #2: The issuance of amended and restated debentures (the “New Debentures”) which include the principal balance plus all accrued and unpaid interest as of September 30, 2013 of the Eligible Debentures with a reduction of the interest rate from sixteen percent (16%) to ten percent (10%), the extension of the maturity date for an additional three (3) years past the Eligible Debenture’s maturity date, reduction of the conversion price to $0.75 per share, and execution of a subordination agreement pursuant to which the Company will make no further payments to the debt holders until such time as the redemption of certain Series D Preferred Stock (to be designated) has been made in full (“Subordination Agreement”) and the issuance of New Warrants, the expiration date of which shall be 3 years past the expiration date set forth in the Eligible Warrants and a reduction of the conversion price to $0.75 per share.

The tender offer was submitted to holders of an aggregate of $2,465,784 in debentures. The tender offer expired on December 31, 2013 with an aggregate total of $965,784 of the original debentures tendered by the tender offer. As a result, an aggregate total of $965,784 in convertible debentures to eight holders was exchanged for 1,609,641 shares of the Company’s common stock. In addition, an aggregate total of $245,689 in accrued but unpaid interest was exchanged for 409,482 shares of the Company’s common stock. In addition, the Company granted an additional aggregate total of 772,625 warrants to the debenture holders that tendered. The warrants are subject to certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the fair value of the stock warrants is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 (see Note 6 Stock Warrants for further details).

Since the Company is experiencing financial difficulties and the debenture holders have granted a concession, the transaction met the requirement for troubled debt accounting treatment. The Company recorded the transactions by first allocating the fair value of the warrants to warrant liability (see Note 6 Stock Warrants for further details) with the remaining amount being applied to common stock and accrued interest. Management then compared the allocated value of the common stock to the fair value of the common stock resulting in a gain on extinguishment of debt of $747,591 or $0.12 per common share.

Convertible Debenture Exchange

In November 2013, Joseph McDevitt, a related party investor and holder of a $500,000 convertible debenture due in July 2013 exchanged a $500,000 debenture and $205,245 in accrued interest for a total of 1,175,408 common shares at a conversion rate of $0.60 per share. As consideration for the conversion, the Company issued 833,334 three year warrants to purchase common shares at an exercise price of $0.60 for the first twelve months following the closing date and $0.75 thereafter for the remainder of the new warrant term.

Since the Company is experiencing financial difficulties and the debenture holder has granted a concession, the transaction met the requirement for troubled debt accounting treatment. Management compared the value of the common stock and accrued interest to the fair value of the common stock resulting in a gain on extinguishment of debt of $526,676 or $0.09 per common share.

TPG, L.L.C. Amendment

In December 2013, the parties entered into a Fourth Amendment to the Share Agreement between Assured Pharmacy, Inc. (“Buyer”) and TPG, LLC (‘Seller”). The maturity date of the note was extended from July 2013 to September 1, 2015. We issued 200,000 shares of the Company’s common stock and agreed to pay the remaining outstanding balance of $60,000 together with accrued interest at the rate of prime plus 2% per annum commencing from December 19, 2013, is as follows:

(a) Six (6) consecutive monthly installments of $2,000 on or before the 1st of each month commencing in December 2013 through May 2014.

(b) Sixteen (16) consecutive monthly installments of $3,000 on or before the 1st of each month commencing in June 2014 through September 2015.

Since the Company is experiencing financial difficulties and the debt holder has granted a concession, the transaction met the requirement for troubled debt accounting treatment. Management compared the value of the common stock and accrued interest to the fair value of the common stock resulting in a gain on extinguishment of debt of $274,648 or $0.04 per common share.

In total, the Company issued an aggregate total of 3,394,531 common shares in exchange for a total aggregate amount of debt and accrued interest of $2,219,366 as a result of the 2013 Debt Restructuring. In addition, management negotiated repayment extensions of an aggregate of $4,535,519 in principal outstanding during the year ended December 31, 2013. Subsequent to the reporting period, management also negotiated a repayment extension of an additional $1,000,000 in convertible debentures and exchanged 420,694 shares of common stock for payment of accrued interest of $252,417 on these debentures (See Note 14 HCI Debenture Extension for further details).

Unsecured Convertible Debentures

The Company completed various sales through private placements of senior convertible debentures to accredited investors. The debentures were convertible into shares of the Company’s common stock at an initial conversion price of $1.26 per share on an as converted basis, subject to adjustment. A consent and waiver was obtained from the majority of the Series A and C Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders as required in the certificate of designation. From September 2012 through February 2013, all of the investors in 2011 private placements consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for a total of 2,072,654 common shares on an as converted basis, subject to adjustment for stock dividends, stock splits and related distributions

As part of the private placements, the investors received warrants to purchase shares of the Company’s common stock. The warrants were initially exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment (see Note 6 Stock Warrants for further details). The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject to certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the fair value of the stock warrants is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 and 2012.

As of December 31, 2013, we have the following unsecured convertible debentures outstanding to the following:

		$				Maturity Date				Interest Rate				# of Warrants

HCI			1,000,000				June 30, 2016				16.0%				1,600,007
AQR			200,000				December 1, 2012				20.0%				576,002
CNH			100,000				December 1, 2012				20.0%				288,003
Coventry			200,000				April 1, 2016				16.0%				575,999
Total		$	1,500,000												3,040,011

HCI

The Company issued an aggregate total of $1,000,000 in senior convertible debentures to Hillair Capital Investment, Inc. (“HCI”) during the years ended December 31, 2012 and 2011. As of December 31, 2013, the debentures and related interest were past due. The Company and HCI subsequently agreed to a modification and extension of the maturity date to June 30, 2016 with HCI as described in further detail in Note 14 HCI Debenture Extension.

AQR & CNH

In August 2011, the Company issued an aggregate total of $300,000 in senior convertible debentures to AQR Opportunistic Premium Offshore Fund, LP. (“AQR”) and CNH Diversified Opportunities Master Account, LP ("CNH"). Due to our current financial condition, we did not make the periodic redemption payments of $75,000 due on June 1, 2012 and September 1, 2012 and the final payment due of $150,000 on or before December 1, 2012 to two convertible debenture holders that did not extend. Upon default, amounts owed become immediately payable to the debenture holder upon issuance of a notice of default. The debenture holders have issued a notice of default relating to our failure to make the periodic redemption payments on June 1, 2012 or September 1, 2012 or the final payment of $150,000 due on December 1, 2012 under the debenture agreement. in August 2013, the two holders filed a lawsuit against the Company for payment of past due amounts (See Note 8 Legal Matters for furter details). In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the convertible debenture. No waivers were obtained from the two debenture holders that were holding an aggregate total of $300,000 debentures. The anti-dilution adjustment reduced the conversion price from $0.90 to $0.50 per share. The amounts due on the debentures are classified as current at December 31, 2013 and 2012.

Coventry

On December 6, 2013, the Company settled a lawsuit with Coventry Enterprises, LLC, (“Coventry”) a holder of $200,000 in convertible debentures issued in 2011. The terms of the settlement were before any application of any payments, we owe Coventry $280,679, which includes unpaid principal of $200,000, unpaid interest of $53,679 and unreimbursed attorney’s fees and costs of $27,000. The Company shall pay Coventry $280,679, plus interest at the rate of 16.0% per annum on the following schedule:

a)	$50,000 payable on or before December 6, 2013; and
b)	$10,000 payable on or before the first day of each month starting January 1, 2014 and continuing thereafter until the obligation is paid.

Based on the payment terms above, the obligation will be paid in full on Apri1 1, 2016. In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the convertible debenture. No waivers were obtained from Coventry debenture holders that were holding an aggregate total of $200,000 debentures. The anti-dilution adjustment reduced the conversion price on the debenture from $0.90 to $0.50 per share.

Interest expense related to the unsecured convertible debentures for the years ended December 31, 2013 and 2012 was $929,908 and $1,306,791, respectively. Interest expense for the years ended December 31, 2013 and 2012 included $560,522 and $500,781 at the stated rate, $333,255 and $684,627 in amortization of debt discount and $36,131 and $121,963 in amortization of deferred financing cost, respectively. The effective interest rate on convertible debentures was calculated as 32.0% and 46.2% for the years ending December 31, 2013 and 2012, respectively.

As of December 31, 2013, the outstanding balance on unsecured convertible debentures is $1,500,000 with $357,528 classified as current. The outstanding debentures are convertible into an aggregate total of 2,333,333 common shares.

Secured Debt

In February 2013, the Company entered into a secured loan agreement with our primary wholesaler. Under the terms of this agreement, the Company received a one (1) year loan of $3,828,527 with an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements are $27,000 per month for four consecutive months, followed by four consecutive monthly payments of $37,000, followed by three consecutive monthly payments of $42,000, with remaining principal and interest due February 1, 2014. The proceeds from the note were simultaneously exchanged for $3,534,793 in outstanding vendor invoices and $293,734 in a secured note payable with the same primary wholesaler. The note is secured by all of the assets of the Company and its subsidiaries through UCC-1 filings. As part of the agreement, the Company is required to purchase a minimum of $500,000 in monthly purchases each month. The secured loan was subsequently extended with monthly payment requirements of $42,000, with remaining principal and interest due February 1, 2016.

As of December 31, 2013, the outstanding principal balance on the note was $3,804,111. Due to our current financial condition, we have not made principal and interest payments in the amount of $228,940 as required by the agreement. In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co. in which the lender agreed to forbear from accelerating the outstanding balance of the Note and from instituting collection efforts from the date of the agreement through July 1, 2014 provided certain conditions are met (See Note 14 H.D. Smith Forbearance for further details). Interest expense for the year ended December 31, 2013 on these notes were $219,050.

Revolving Credit Facilities

Brockington Securities, Inc. - Revolver

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

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

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

Third Coast Bank – Revolver

In December 2013, the Company entered into a revolving Promissory Note with Third Coast Bank SSB, for a credit limit of $30,000 with a term of one year bearing a variable interest rate of prime plus .500 percentage points with an interest rate floor of 5.00% per annum. The Promissory Note was guaranteed by Pinewood Trading, Fund, LP., a related party.

As of December 31, 2013, the Company had not drawn on the facility.