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NOTES PAYABLE AND UNSECURED CONVERTIBLE DEBENTURES | 6 Months Ended
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Jun. 30, 2014
Notes to Financial Statements |
Note 4 - NOTES PAYABLE AND UNSECURED CONVERTIBLE DEBENTURES | The table below summarizes the Company’s notes payable and unsecured convertible debentures as of June 30, 2014:
|  | Related Party |  |  | Unrelated |  |  | Total |
Secured debt |  | $ | - |  |  | $ | 3,804,111 |  |  | $ | 3,804,111 |
Revolving credit facilities |  |  | 527,000 |  |  |  | 30,000 |  |  |  | 557,000 |
Other notes and debt |  |  | 440,000 |  |  |  | 42,068 |  |  |  | 482,068 |
Total notes payable |  | $ | 967,000 |  |  | $ | 3,876,179 |  |  | $ | 4,843,179 |
Unsecured convertible |  |  |  |  |  |  |  |  |  |  |  |
debentures, net of discount |  | $ | - |  |  | $ | 1,498,954 |  |  | $ | 1,498,954 |
Total debt |  | $ | 967,000 |  |  | $ | 5,375,133 |  |  | $ | 6,342,133 |
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, the investors in our 2011 private placements consented to a partial anti-dilution adjustment in conversion price 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 condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013. As of June 30, 2014, we had the following unsecured convertible debentures outstanding to the following:
|  | Amount |  | Maturity Date |  | Interest Rate |  | # of Warrants |
HCI |  | $ | 1,150,000 |  | June 30, 2016 |  | 10.0% |  | 1,920,007 |
AQR |  |  | 200,000 |  | December 1, 2012 |  | 20.0% |  | 576,002 |
CNH |  |  | 100,000 |  | December 1, 2012 |  | 20.0% |  | 288,003 |
Coventry |  |  | 188,884 |  | April 1, 2016 |  | 16.0% |  | 575,999 |
Total |  |  | 1,638,884 |  |  |  |  |  | 3,360,011 |
Less debt discount |  |  | (139,930) |  |  |  |  |  |  |
Debentures, net |  | $ | 1,498,954 |  |  |  |  |  |  |
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. In February 2014, the Company entered into and Amended and Restated 10% Senior Convertible Debenture due June 30, 2016 with HCI in the amount of $1,150,000. The amendment relates to convertible debentures originally issued on May 16, 2011, August 22, 2011, November 30, 2011 and July 19, 2012 for an aggregate total of $1,000,000 in debentures. In addition to the extension of the maturity date, the interest rate was reduced from 16.0% to 10.0% per annum, and the conversion price was decreased from $0.90 to $0.75. As part of the agreement, the Company agreed to increase the principal amount of the debenture by $150,000 which represents eighteen months of interest due at the stated rate of 10% per annum. As a result, all interest accruable and payable between February 7, 2014 and August 8, 2015 is considered paid in full and satisfied. In addition, the Company issued 420,694 shares of common stock as payment of accrued interest of $252,417 at a rate of $0.60 per share. Further interest will not begin accruing until August 8, 2015. As part of the amendment, the exercise price of the related warrants was reduced from $0.90 to $0.75 resulting in the issuance of an additional 320,000 warrants per the warrant agreement terms. 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 accrued interest to the fair value of the common stock resulting in a gain on extinguishment of debt of $213,433 or $0.09 per common share. 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. 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 9 Legal Matters for further details). In March 2014, the issuance of warrants to Series D Preferred Stock holders as part of the milestone provision with an effective conversion price of $0.40 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 $0.50 to $0.40 per share. The amounts due on the debentures are classified as current at June 30, 2014 and December 31, 2013. 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 March 2014, the issuance of warrants to Series D Preferred Stock holders as part of the milestone provision with an effective conversion price of $0.40 per share qualified as a dilutive issuance per the terms of the convertible. 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 $0.50 to $0.40 per share. Interest expense related to the unsecured convertible debentures for the six months ended June 30, 2014 and 2013 was $138,911 and $438,213, respectively. Interest expense for the six months ended June 30, 2014 and 2013 included $108,571 and $242,934 at the stated rate, $27,603 and $175,745 in amortization of debt discount and $2,737 and $19,534 in amortization of deferred financing cost, respectively. The effective interest rate on convertible debentures was calculated as 17.2% and 29.6% for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the outstanding balance on unsecured convertible debentures, net of discounts was $1,498,954 with $396,664 classified as current. The outstanding debentures are convertible into an aggregate total of 2,755,544 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-year loan of $3,828,527 with an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements were $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 June 30, 2014, 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 $359,243 as required by the agreement. In addition, we have not met our minimum monthly purchase requirements of $500,000 per month. In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co. (“H.D. Smith”) 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, but not limited to Assured: (1) seeking new financing arrangements to improve its business viability, (2) providing financial statements to H.D. Smith on a monthly basis, (3) communicating with H.D. Smith regarding its business and financial position on a regular basis, and at the request of H.D. Smith, (4) making payments on the note when it is reasonably able to do so, (5) not entering into any agreements with any of their creditors that might impair their ability to perform under the agreement, and (6) ensuring that H.D. Smith is fully informed at all times of all matters relating to the operation of Assured’s businesses, including any planned changes in key personnel or material changes in the manner of operating such businesses. Due to our financial condition, we were unable to make the required payment on July 1, 2014 and we are currently in negotiations with the lender to restructure the terms of the note. 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% per annum. Under the terms of the agreement, the Company could request advanced payments 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. 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. On November 12, 2012, the credit limit was increased to $500,000, pursuant to an Amendment Agreement to the Revolving Line of Credit Agreement dated March 10, 2009. All additional terms of the loan remain unchanged and the Company was not in violation of any provisions of the loan agreement. In May 2014, the credit limit was increased to $600,000 pursuant to an Amendment Agreement to the Revolving Line of Credit Agreement dated March 10, 2009. As of June 30, 2014, the outstanding balance on the revolving line of credit was $527,000. 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 June 30, 2014, the outstanding balance on the revolving line of credit was $30,000. Other Notes and Debt TPG, LLC On December 15, 2006, the Company entered into a Share Purchase Agreement (the “Share Agreement”) with TPG, LLC pursuant to which the Company purchased 49 shares of common stock of Assured Pharmacies, Inc. (“API”) for 50,000 shares of common stock of the Company and a $460,000 note payable. The note is payable in $5,000 monthly installments through November 2007 and $15,000 monthly installments with the remaining balance due at maturity, February 15, 2009. The Company did not comply with the note terms due to its distressed financial condition. In December 2013, the parties entered into a Fourth Amendment to the Share Agreement between the Company and TPG, LLC. 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, as follows: (a) Six consecutive monthly installments of $2,000 on or before the 1st of each month commencing in December 2013 through May 2014. (b) Sixteen consecutive monthly installments of $3,000 on or before the 1st of each month, commencing in June 2014 through September 2015. As of June 30, 2014, the outstanding principal balance on the note was $42,068. Pinewood Notes In January 2014, we entered into a $200,000 note agreement with Pinewood Trading Fund, LP (“Pinewood”), a related party with a maturity date of January 28, 2016. The note bears an interest rate of 16% per annum payable on July 1 and January 1 of each calendar year. Unless otherwise instructed by Pinewood, the accrued and unpaid interest shall be paid in duly authorized, validly issued, fully paid and non-assessable shares of the Company’s common stock. As of June 30, 2014, the outstanding balance on the note was $214,078, which includes $14,078 in accrued but unpaid interest. In February and March 2014, the Company entered into short term promissory notes with Pinewood, a related party for an aggregate total of $240,000. The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014. As of June 30, 2014, the aggregate outstanding balance on the notes was $275,058, which includes $25,058 in accrued but unpaid interest. As of August 14, 2014, the Company has not repaid the short term promissory note and is currently in negotiations to restructure the repayment terms of the note.

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21475-112644 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 19, 20, 22 -Article 5 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.19,20,22) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 + Details
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