NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Organization and Description of Business
Sunpeaks Ventures, Inc. (“Sunpeaks” or the “Company”) was incorporated in the State of Nevada on June 25, 2009. On February 13, 2012, pursuant to a Share Exchange Agreement (“Exchange Agreement”), the Company acquired 100% ownership interest in Healthcare Distribution Specialists LLC (“HDS”), a Delaware limited liability company, in exchange for the issuance of 200,000,000 newly-issued restricted shares of the Companies’ common stock and 3,000,000 newly-issued restricted shares of the Companies’ Class A Preferred Stock (the “Exchange Shares”), to the former owner of HDS, resulting in HDS becoming a wholly-owned subsidiary of the Company. Additionally, pursuant to the Exchange Agreement, 200,000,000 shares of the Companies’ common stock held by the Companies’ former controlling owner were cancelled. As a result of the acquisition, the former owners of HDS hold majority ownership of the Company.
For financial accounting purposes, the acquisition of HDS by the Company (referred to as the “Merger”) was a reverse acquisition of the Company by HDS and was treated as a recapitalization. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on February 13, 2012, and represent the operations of HDS prior to the Merger.
HDS changed its name to Pharmagen Distribution, LLC effective January 23, 2013.
As of the time of the Merger, the Company held minimal assets and was considered a non-operating public shell in the development stage. Following the Merger, the Company is no longer considered development stage and operates through one operating segment which distributes hard-to-find and specialty drugs to the healthcare provider market throughout the United States, while functioning as an aggregator of real-time market demand for these products. The Company also owns and sells a specialized over-the-counter multivitamin product called Clotamin. Clotamin is specifically designed for use by patients on Warfarin, a blood thinner that has a known interaction with the vitamin K present in standard over-the-counter multivitamins.
Prior to the Merger, on August 1, 2011, pursuant to an Amended and Restated Asset Acquisition Agreement (the “Agreement”) between HDS and Global Nutritional Research, LLC (“GNR”), HDS acquired certain assets of GNR in exchange for assumption of debt and financial obligations of GNR. Prior to the acquisition, HDS and GNR were considered entities under common control and common ownership, as control and ownership of each entity resided with HDS’s President and an immediate family member. As entities under common control, in accordance with accounting principles generally accepted in the United States (“GAAP”), the acquired assets and liabilities of GNR were recognized in the accompanying financial statements at their carrying amounts.
The Company changed its name from Sunpeaks Ventures, Inc. to Pharmagen, Inc. (trading symbol PHRX) effective January 15, 2013.
On December 13, 2012, the Company acquired Bryce Rx Laboratories (“Bryce”) through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce. Bryce specializes in the formulation of drugs that are not commercially available, require alternate delivery systems, and or dosing changes. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000), payable (i) One Hundred Thousand Dollars ($100,000) at Closing, and (b) Two Hundred Fifty Thousand Dollars ($250,000) on December 31 of each of the four (4) years beginning in 2013 (See Note 5).
Bryce changed its name to Pharmagen Laboratories, Inc. effective on March 4, 2013.
NOTE 2 – GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern. The Company has a history of incurring net losses and at March 31, 2013 has an accumulated net loss totaling $3,989,676. At March 31, 2013, the Company held cash of $646,958. These conditions give rise to substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company expects to finance its operations primarily through its existing cash and future financings. However, there exists substantial doubt about the Company’s ability to continue as a going concern because it will be required to obtain additional capital in the future to continue its operations and there is no assurance that the Company will be able to obtain such capital, through equity or debt financings, or any combination thereof, whether on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support its growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations would be materially negatively impacted. The Company’s ability to complete additional offerings is dependent on the state of the debt and equity markets at the time of any proposed offering, and such market’s reception of the Company and the offering terms. In addition, the Company’s ability to complete an offering may be dependent on the status of the Company’s business activities, which cannot be predicted.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information, and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other information that are normally required by GAAP can be condensed or omitted.
The consolidated financial statements as of and for the three months ended March 31, 2013 and 2012 are unaudited. In the opinion of management, these financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The accompanying unaudited condensed consolidated financial statements were prepared consistent with and should be read in conjunction with the financial statements of the Company for the years ended December 31, 2012 and 2011, and notes thereto included in our Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on April 1, 2013.
The results for interim periods are not necessarily indicative of results for the entire year. The balance sheet at December 31, 2012 has been derived from audited financial statements; however, the notes to the financial statements do not include all of the information and notes required by GAAP for complete financial statements.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Pharmagen Distribution, LLC and Pharmagen Laboratories, Inc. As discussed above, for accounting purposes the acquisition of HDS by the Company was considered a reverse acquisition of the Company by HDS and was treated as a recapitalization. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on February 13, 2012, and represent the operations of HDS prior to the Merger. All material intercompany accounts and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Revenue Recognition
The Company’ revenue consists of revenue from sales of pharmaceutical products. Revenue is recognized at the time when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service has been provided, and collectability is assured.
Sales of Product:
The Company earns product revenue from selling pharmaceutical products at the time of delivery, which is the time at which title to the product is transferred.
Sourcing and Distribution of Products, as an agent:
In accordance with ASC Section 605-45-45, revenue is recognized from agent distribution sales for the net amount retained when all criteria for revenue recognition have been met. Determining whether an entity functions as an agent or a principal is a matter of judgment. The Company considers multiple indicators in the determination of whether it acts as an agent in sales transactions.
The Company acts as an agent for sales of products on behalf of HealthRite Pharmaceuticals (“HealthRite”), a company wholly owned and controlled by the President and a Director of the Company. HealthRite is a pharmacy and is therefore prohibited from distributing pharmaceuticals across state lines. During April 2012, the Company’s sales arrangement with HealthRite ceased. See NOTE 9 for additional discussion. During the three month periods ended March 31, 2013 and 2012, the Company recognized net revenue from sales to HealthRite of $0 and $77,371 based on gross sales of $0 and $180,710, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with a maturity of three months or less at the time of issuance to be cash equivalents. These investments are carried at cost which approximates fair value. At March 31, 2013 and December 31, 2012, there were no cash equivalents.
The Company had cash of $646,958 and $322,556 at March 31, 2013 and December 31, 2012, respectively.
Accounts Receivable
The Company’s accounts receivable are composed of trade receivables from customers for sales of products. Trade receivables include accounts receivable for sales of product and sourcing and distribution of product for which the Company acts as an agent, which are based on gross sales to customers.
Accounts receivable are stated at their principal balances and are non-interest bearing and unsecured. The Company maintains an allowance for doubtful accounts for the estimated probable losses on uncollectible accounts receivable.
Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding historical balance or when we determine that it is highly unlikely the balance will be collected. At March 31, 2013 and December 31, 2012, the Company’s allowance for doubtful accounts was $0.
Inventory
Inventory is comprised of Clotamin and non-Clotamin and is recorded at lower of cost or market on a first-in, first-out (“FIFO”) method. The non-Clotamin is a collection of several raw materials that are used in combinations to make pharmaceutical drugs, some of which is stored in a warehouse and handled by a third party. The Company establishes inventory reserves for estimated obsolete or unmarketable inventory equal to the differences between the cost of inventory and the estimated realizable value based upon assumptions about future and market conditions. If obsolete or unmarketable inventory are identified and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value in the period that the impairment is first recognized. At March 31, 2013 and December 31, 2012, the allowance for obsolete or unmarketable inventory was $0, and during the three month periods ended March 31, 2013 and 2012, the Company recognized no inventory impairments.
Property and Equipment
Property and equipment are stated at cost at date of acquisition. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized.
Amortization of leasehold improvements is included in depreciation expense. The Company records operating lease expense on a straight-line basis. The Company amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.
The estimated useful life of each asset is as follows:
|
Estimated
Useful Lives
|
|
|
Furniture and equipment
|
3-7 years
|
Leasehold improvements
|
1 year
|
Depreciation expense for the three months ended March 31, 2013 and 2012 was $17,417 and $10,551, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. Factors that might indicate a potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset, a significant change in the long-lived asset’s physical condition, a change in industry conditions or a reduction in cash flows associated with the use of the long-lived asset.
If these or other factors indicate the carrying amount of the asset may not be recoverable, we determine whether impairment has occurred through analysis of undiscounted cash flow of the asset at the lowest level that has an identifiable cash flow. If impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. We measure the fair value of the asset using market prices or, in the absence of market prices, based on an estimate of discounted cash flows. Cash flows are generally discounted using an interest rate commensurate with a weighted average cost of capital for a similar asset. No impairments were identified as of March 31, 2013 and December 31, 2012 or during the three month periods ended March 31, 2013 and 2012.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill is assessed for impairment by applying fair value based tests annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit to its carrying value, including goodwill. The Company uses un-discounted cash flow models to determine the fair value of a reporting unit. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess.
At March 31, 2013 and December 31, 2012, the Company’s intangible assets consisted of Goodwill and Customer Relations. During the three months ended March 31, 2013 and 2012 the Company recorded amortization expense on Customer Relations of $1,230 and $0, respectively.
Deferred financing costs
Deferred financing costs include fees paid in conjunction with obtaining the convertible line of credit and are amortized over the contractual term of the related financial instrument using effective interest method.
Derivative Liability
We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 "Derivatives and Hedging Activities" which requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
Debt Discount
Costs incurred with parties who are providing long-term financing, which include the fair value of an embedded derivative conversion feature are reflected as a debt discount and are amortized over the life of the related debt. The Company recorded debt discounts attributable to the embedded conversion derivative liabilities related to the convertible debt debentures issued during the three months ended March 31, 2013 totaling $511,548.
Financial Instruments and Fair Value Measures
The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities, line of credit, convertible debt and amounts due to related parties. We believe the recorded values of our financial instruments approximate their fair values because of their nature and respective maturity dates or durations.
The Company measures fair value in accordance with ASC Topic 820,
Fair Value Measurements and Disclosures
, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are as follows:
Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 – Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs for which there is little or no market data and which we make our own assumptions about how market participants would price the assets and liabilities.
Derivative instruments are recognized as either assets or liabilities and are measured at fair value using the Black Scholes model. The changes in the fair value of derivatives are recognized in earnings.
Shipping and Handling Costs
Shipping and handling costs incurred for inventory purchases and product shipments are included in general and administrative expenses for all periods presented.
Advertising Expenses
Advertising costs are expensed as incurred and are included in general and administrative expenses for all periods presented. Advertising expenses for the three month periods ended March 31, 2013 and 2012, were $8,972 and $47,505, respectively.
The Company accrues sales commission to sales representatives when sales are made and pays it when cash is reasonably collectible from customers according to its performance based model for commission valuing. Depending on the experience of the sales representative, and whether monthly targets are met, the commission percentage range from 8-25% of the sales generated.
Concentration of Risk
The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC) and at times, balances may exceed government insured limits. All of the Company’s non-interest bearing cash balances were fully insured at December 31, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and non-interest bearing cash balances may again exceed federally insured limits. At March 31, 2013, the amounts held in the banks exceeded the insured limit. The Company has never experienced any losses related to these balances.
During the three months ended March 31, 2013 three vendors accounted for 29%, 16% and 12% of purchases at Pharmagen. During the three months ended March 31, 2012, one vendor accounted for 57% of purchases at Pharmagen.
During the three months ended March 31, 2013, one customer accounted for 46% of Pharmagen sales. During the three months ended March 31, 2012, one customer accounted for 28% of Pharmagen sales. At March 31, 2013, one customer accounted for 19% and one customer for 16% of Pharmagen accounts receivable and at December 31, 2012, one customer accounted for 58% of Pharmagen’s accounts receivable.
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. The Company provides a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more-likely-than-not that the deferred tax assets will not be realized. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made. The Company’s policy is to recognize interest and penalties related to the estimated obligations for tax positions as a component of income tax expense.
The Company records liabilities related to uncertain tax positions in accordance with the guidance that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company does not believe any such uncertain tax positions currently pending will have a material adverse effect on its financial statements, although an adverse resolution of one or more of these uncertain tax positions in any period could have a material impact on the results of operations for that period.
Income (Loss) per Share
We have presented basic loss per share, computed on the basis of the weighted average number of common shares outstanding during the year, and diluted loss per share, computed on the basis of the weighted average number of common shares and all dilutive potential common shares outstanding during the year. Potential common shares result from convertible debts and convertible line of credit. However, for all years presented, all outstanding convertible notes are anti-dilutive due to the losses for the years. Anti-dilutive common stock equivalents of 119,879,899 were excluded from the loss per share computation for March 31, 2013. No common stock equivalents existed at March 31, 2012.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). For the three month periods ended March 31, 2013 and 2012, the Company had no items representing other comprehensive income or loss.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
In February 2013, the Financial Accounting Standards Board (“FASB”) issued amendments to the accounting guidance for presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where the net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. These amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company does not believe the adoption of this guidance will have a material impact on the consolidated financial statements.
Subsequent Events
The Company evaluated material events occurring between March 31, 2013 and through the date when the consolidated financial statements were issued.
NOTE 4 – MERGER
For financial accounting purposes, the Merger is accounted for as a reverse recapitalization. Reverse recapitalization accounting is attributable to a long-held position of the staff of the Securities and Exchange Commission as the acquisition of a non-operating public shell company does not qualify as a business for business combination purposes, as described in ASC Topic 805, Business Combinations. Reverse recapitalization accounting applies when a non-operating public shell company acquires a private operating company and the owners and management of the private operating company have actual or effective voting and operating control of the combined company. In the Merger transaction, The Company qualifies as a non-operating public shell company because as of the Merger date, the Company held nominal net monetary assets, consisting of cash.
A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the public shell corporation accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Under recapitalization accounting, the equity of the accounting acquirer, HDS, is presented as the equity of the combined enterprise and the capital stock account of HDS is adjusted to reflect the par value of the outstanding stock of the legal acquirer (the Company) after giving effect to the number of shares issued in the business combination. Shares retained by the Company are reflected as an issuance as of the merger date for the historical amount of the net assets of the acquired entity, which in this case is zero, on the accompanying condensed consolidated statement of stockholders’ deficit of 220,500,750 shares, which consists of the Companies shares outstanding at December 31, 2011 of 370,500,750 plus 50,000,000 shares issued by the Company immediately prior and conjunction with the Merger to settle the Companies’ debt outstanding prior to the Merger date, less 200,000,000 shares cancelled which were held by the former controlling owner of the Company.
Following the Merger, the financial statements of the Company give retroactive effect of the reverse recapitalization and represent the historical operations of HDS.
NOTE 5 – ACQUISITION
Bryce Rx Laboratories
On December 13, 2012 (“Acquisition Date”), the Company acquired Bryce Rx Laboratories (“Bryce”) through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce Rx Laboratories, Inc. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000), payable (i) One Hundred Thousand Dollars ($100,000) at Closing, and (b) Two Hundred Fifty Thousand Dollars ($250,000) on December 31 of each of the four (4) years beginning in 2013. The closing date was December 13, 2012.
The cost of the acquisition was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values at the date of acquisition, December 13, 2012. The estimates of the fair value of the assets acquired, liabilities assumed and the stock issued for the acquisition were prepared with the assistance of an independent valuations consultant. The following is a summary of the purchase price allocation:
Assets acquired
|
|
|
|
Cash
|
|
$
|
20,000
|
|
Accounts receivable
|
|
|
74,067
|
|
Inventory
|
|
|
66,000
|
|
Customer relations
|
|
|
24,944
|
|
Goodwill
|
|
|
1,195,881
|
|
Total assets acquired
|
|
|
1,380,892
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
Line of credit
|
|
|
217,460
|
|
Other current liabilities
|
|
|
63,432
|
|
Total liabilities assumed
|
|
|
280,892
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,100,000
|
|
|
|
|
|
|
Purchase price
|
|
$
|
1,100,000
|
|
Amortization for the customer relations for the year ended March 31, 2013 was $1,230.
NOTE 6 – DEBT
The Company has a $200,000 line of credit agreement with a financial institution which bears interest at US prime rate plus 1% per annum, but in no event less than 5.5% (5.5% at March 31, 2013 and December 31, 2012), is due on demand, and is secured by all assets of the Company. As of March 31, 2013 and December 31, 2012, the Company had outstanding balances on the line of credit of $200,000. The Company is currently in good standing and was in good standing at March 31, 2013 and December 31, 212. There are no outstanding debt covenants.
On December 13, 2012, upon the acquisition of Bryce, the Company assumed two lines of credit from Bryce, an overdraft line of credit and a business line of credit which at that time had an outstanding balance of $22,410 and $195,050, respectively. The overdraft line of credit agreement has a maximum credit line of $25,000 and bears interest at 9.25%, and the business line of credit has a maximum credit line of $200,000, bears interest rate at 4.5% and expires in 2016. As of March 31, 2013 and December 31, 2012, the Company had outstanding balances on the overdraft line of credit and business line of credit of $19,850 and $195,050, respectively.
Non-interest bearing note payable
In connection with the acquisition of Bryce, the Company issued a note payable in the amount $1,000,000 to the seller. The note payable is payable in four installments at $250,000 each on December 31 beginning in 2013. Accrued imputed interest for the three months ended March 31, 2013 was $13,562.
2012 Convertible line of credit
On October 11, 2012 (“Closing Date”), the Company entered into a Senior Secured Revolving Credit Facility Agreement (the “Revolving Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. Pursuant to the Agreement, TCA agreed to loan up to $5 million to the Company for working capital purposes. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Promissory Note (the “Revolving Note”), the repayment of which is secured by a Security Agreement executed by the Company and its wholly-owned subsidiary, Healthcare Distribution Specialists, LLC. Pursuant to the Security Agreements, the repayment of the Revolving Note is secured by a security interest in substantially all of the Company’s assets in favor of TCA.
On October 11, 2012, the Company advanced a total of $700,000 from the Credit Agreement and paid a commitment fee of $128,963 by issuing 3,048,781 common shares valued at then current trading price of $0.042 per share. The Company recorded the commitment fee as deferred financing costs. The deferred financing cost is amortized over the life of the Credit Agreement. During the year ended December 31, 2012 the Company amortized $57,238. The Credit Agreement carries interest at the rate of 12% per annum, increasing to 18% per annum upon the occurrence of an event of default and expires in six months following the Closing Date.
On December 12, 2012, the Company advanced another $750,000 from the Credit Agreement which matures in six months after December 12, 2012 and amended the terms. According to the amended Credit Agreement, the Company is to issue a variable number of shares that equal $150,000 and if TCA is not able to realize at least $150,000 upon sale of the shares, the Company shall issue additional common shares to TCA to make up for the shortfall (“Make-Whole Provision”) or settle any deficit in cash.
On December 12, 2012, the Company issued 4,545,454 common shares as a commitment fee for the fixed amount of $150,000. Those shares were fair valued at $140,909 at the then current trading price of $0.031 per share and recorded as deferred financing costs. The deferred financing cost is amortized over the life of the amended Credit Agreement. During the year ended December 31, 2012, the Company amortized $14,670 and during the three months ended March 31, 2013, the Company amortized $69,489.
As at December 31, 2012, the 4,545,454 shares were revalued at $136,364 using the then current trading price of the Company, and in accordance with the Make-Whole Provision, the Company recorded a stock payable of $13,636 as a liability.
During the three months ended March 31, 2013, the Company entered into a Senior Secured Credit Facility Agreement with TCA which includes a mandatory redemption feature applicable to all previous commitment fees, accordingly the Company recorded indemnification liability of $300,000 related to the $700,000 and $750,000 advances in 2012 and recorded $286,364 as shares held in escrow and reversed the $13,636 stock payable.
In addition, TCA has the right, in its sole discretion, to convert the outstanding principal and any accrued interest, fees or expenses due into shares of the Company’s Common Stock at the conversion price per share equal to the converted amount divided by 85% of the lowest daily volume weighted average price of the Company’s common stock during the five trading days immediately prior to the conversion date. The Company has evaluated the embedded conversion feature under ASC 815 and determined the embedded conversion feature to be a derivative and recorded an initial derivative liability of $415,515 for the $700,000 advance and $463,661 for the $750,000 advance as debt discount. (See Note 7) The debt discount is amortized over six months using the effective interest method.
During the year ended December 31, 2012, the Company repaid $131,026 and relieved $79,455 of related derivative liability into paid-in-capital. During the three months ended March 31, 2013, the Company repaid $115,819 and relieved $49,819 of related derivative liability into paid-in-capital. As of March 31, 2013 and December 31, 2012, the Revolving Note had a balance of $1,203,155 and $1,318,974, respectively.
As of December 31, 2012, the accrued interest and unamortized discount was $22,325 and $590,136, respectively. As of March 31, 2013 the accrued interest and unamortized discount was $60,472 and $241,086, respectively. Discount amortization for the three months ending March 31, 2013 was $349,050, of which $23,208 was additional amortization was accelerated due to repayments.
The derivatives for all convertible lines of credit were valued using the Black-Scholes option pricing model with the following assumptions:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Market value of stock on measurement date
|
|
$
|
0.031
|
|
|
$
|
0.030
|
|
Risk-free interest rate
|
|
|
0.07
|
%
|
|
|
0.05
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
209
|
%
|
|
|
201
|
%
|
Term
|
|
.25 years
|
|
|
0.27 years
|
|
2013 Convertible line of credit
On March 29, 2013 (“Closing Date”), the Company entered into a Senior Secured Credit Facility Agreement (the “Secured Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. Pursuant to the Agreement, TCA agreed to loan up to $2 million to the Company for working capital purposes. A total of $600,000 was funded by TCA in connection with the closing. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Convertible Promissory Note (the “Note”), the repayment of which is secured by a Security Agreement and each of the Company’s wholly-owned subsidiaries. Pursuant to the Security Agreements, the repayment of the Note is secured by a security interest in substantially all of the Company’s assets in favor of TCA.
The initial Note in the amount of $600,000 is due and payable along with interest thereon on June 14, 2014, and bears interest at the rate of 12% per annum, increasing to 18% per annum upon the occurrence of an event of default. The Note is convertible into the Company’s common stock at eighty five percent (85%) of the lowest VWAP during the five (5) business days immediately prior to the conversion date, subject to TCA not being able to beneficially own more than 4.99% of the Company’s outstanding common stock upon any conversion.
The Company has the right to prepay the Note, in whole or in part, provided, that the Company pays TCA an amount equal to the then outstanding amount of the Note plus 5% for repayments up until 180 days following the Closing and the then outstanding amount of the Revolving Note plus 2.5% for repayments subsequent to 180 days following the Closing.
The Company also agreed to pay TCA an investment banking fee of $100,000, payable in the form of 6,666,667 shares of common stock (the “Commitment Shares”).
The Commitment Shares are mandatorily redeemable six months after March 29, 2013 for cash in an amount equal to the $100,000 minus the amount realized by TCA as of such date. Accordingly the Company recorded an indemnification liability of $100,000 and offset to shares in escrow.
The Commitment Shares were granted on March 29, 2013. The fair value of those shares on the grant date was $206,667 valued at the then current trading price of $0.031 per share and was recorded as deferred financing cost. The deferred financing cost is amortized over the life of the Secured Credit Agreement.
According to the Secured Credit Agreement, the Company is to issue a variable number of shares that equal to a dollar amount equal to $100,000 and if TCA is not able to realize at least $100,000 upon sale of the shares, the Company shall issue additional common shares to TCA to make up for the shortfall (“Make-Whole Provision”) or settle any deficit in cash. The Company recorded the $100,000 as indemnification liability and offset to shares held in escrow.
Under the initial accounting, the Company allocated $511,548 of the $600,000 proceeds to the embedded conversion derivative liability. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt.
The debt discount is accreted to interest expense over the life of the convertible debentures using effective interest method. During the three months ended March 31, 2013, the Company recorded interest accretion expense of $2,315, which is included in interest expense on the accompanying consolidated statement of operations.
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid- in capital.
The derivatives for convertible promissory note were valued using the Black-Scholes option pricing model with the following assumptions:
|
|
At Issuance,
March 29,
2013
|
|
Market value of stock on measurement date
|
|
$
|
0.031
|
|
Risk-free interest rate
|
|
|
0.14
|
%
|
Dividend yield
|
|
|
0
|
%
|
Volatility factor
|
|
|
209
|
%
|
Term
|
|
1.23 years
|
|
Convertible debt
2012 Convertible Debentures
During the year ended December 31, 2012, the Company issued a total $1,450,000 of convertible debentures to an investor, with various maturities from March 1, 2014 through May 16, 2014. Interest accrues at the rate of ten percent per annum and is payable at the respective maturity date in cash.
The investor is entitled to convert the accrued interest and principal of the convertible debentures into common stock of the Company at a conversion price equal to 80% of the Average Closing Price of the common stock. The Average Closing Price is set forth in the convertible debt agreements as follows: average closing price during the ten consecutive trading days immediately prior to conversion for $400,000 of convertible debt issued during the first quarter of 2012 and average closing price during the three consecutive trading days immediately prior to conversion for $1,050,000 of convertible debt issued during the second quarter of 2012. In the event the common stock of the Company trades at or above $0.30 at any time during the day for a period of ten consecutive trading days, the Company may at its option convert all or part of the convertible debt into common stock at the applicable conversion price.
Accounting for Convertible Debt
Under the initial accounting, the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the value of the convertible debt at the issuance date for $575,000 of the convertible debt issuance. For the remaining $875,000 of debt issuances, the Company allocated $617,127 of the proceeds to the embedded conversion derivative liability. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. As of March 31, 2013, the Company recorded aggregate debt discounts of $1,192,127 related to the conversion rights and recorded $161,100 of expense related to the excess value of the derivative value over the value of the convertible debt.
The debt discount is accreted to interest expense over the life of the convertible debentures using effective interest method. During the three months ended March 31, 2013 and 2012, the Company recorded interest accretion expense of $94,248 and $11,918, respectively, which is included in interest expense on the accompanying consolidated statement of operations.
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid-in capital.
The derivatives for all convertible debentures were valued using the Black-Scholes option pricing model with the following assumptions:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Market value of stock on measurement date
|
|
$
|
0.031
|
|
|
$
|
0.030
|
|
Risk-free interest rate
|
|
|
0.14
|
%
|
|
|
0.16
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
209
|
%
|
|
|
200
|
%
|
Term
|
|
0.96-1.19 years
|
|
|
1.21-1.44 years
|
|
NOTE 7 – FAIR VALUE MEASUREMENTS
Fair Value on a Recurring Basis
The following table presents the Company’s financial liabilities measured and recorded on a recurring basis at fair value on the Company’s consolidated balance sheets and their level within the fair value hierarchy as of March 31, 2013.
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Embedded conversion derivative liabilities
|
|
$
|
2,244,201
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,244,201
|
|
Indemnification liability
|
|
$
|
500,000
|
|
|
$
|
-
|
|
|
$
|
500,000
|
|
|
$
|
-
|
|
The following table presents the Company’s financial liabilities measured and recorded on a recurring basis at fair value on the Company’s consolidated balance sheets and their level within the fair value hierarchy as of December 31, 2012.
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Embedded conversion derivative liabilities
|
|
$
|
1,901,853
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,901,853
|
|
Stock payable
|
|
$
|
13,636
|
|
|
$
|
-
|
|
|
$
|
13,636
|
|
|
$
|
-
|
|
Indemnification liability
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
Fair Value on Non Recurring Basis
The Company’s assets measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012 were as follows:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,195,881
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,195,881
|
|
The following table reconciles, for the three months ended March 31, 2013, the beginning and ending balances for embedded conversion derivatives that are recognized at fair value in the consolidated financial statements:
|
|
Significant Unobservable
Inputs (Level 3)
|
|
|
|
Quarter Ended
March 31,
2013
|
|
Beginning balance
|
|
$
|
1,901,853
|
|
Fair value of embedded conversion derivative liabilities at issuance
|
|
|
511,548
|
|
Loss at issuance
|
|
|
-
|
|
Debt settlement
|
|
|
(49,819)
|
|
Gain on fair value adjustments to embedded conversion derivative liabilities
|
|
|
(119,381)
|
|
Balance of embedded conversion derivative liabilities, March 31, 2013
|
|
|
2,244,201
|
|
The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to additional paid in capital.
When the fair value of the embedded conversion derivative liability exceeds the carrying value of the convertible debentures on the issuance date, the convertible debentures is recorded at a full discount and the excess amount of the embedded derivative liability over the carrying value of the convertible debenture is recognized as a loss on derivative upon issuance. The Company has considered the provisions of ASC 480,
Distinguishing Liabilities from Equity
, as the conversion feature embedded in each debenture could result in the stated note principal being converted to a variable number of the Company’s common shares.
The Company believes the recorded values of its other financial instruments (consisting of cash, accounts receivable, accounts payable, accrued liabilities, line of credit and due to related parties) approximate their fair values because of their nature and respective maturity dates or durations.
NOTE 8 – EQUITY
Merger with Healthcare Distribution Specialist LLC
On February 13, 2012, Sunpeaks Ventures, Inc. (“Sunpeak”), acquired all of the membership interests of Healthcare Distribution Specialists LLC (“HDS”), a Delaware limited liability company, in exchange for the issuance of 200,000,000 newly-issued restricted shares of Sunpeaks’ common stock and 3,000,000 newly-issued restricted shares of Sunpeaks’ Class A Preferred Stock (the “Exchange Shares”), to the former owner of HDS. Following the acquisition, Sunpeak cancelled 200,000,000 shares of common stock owned by its former shareholders. As a result of the acquisition, the former owners of HDS hold majority ownership of the Company and the acquisition was treated as a recapitalization.
A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the public shell corporation accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Under recapitalization accounting, the equity of the accounting acquirer, HDS, is presented as the equity of the combined enterprise and the capital stock account of HDS is adjusted to reflect the par value of the outstanding stock of the legal acquirer (Sunpeaks) after giving effect to the number of shares issued in the business combination. Shares retained by Sunpeaks are reflected as an issuance as of the merger date for the historical amount of the net assets of the acquired entity, which in this case is zero, on the accompanying consolidated statement of stockholders’ deficit of 220,500,750 shares, which consists of Sunpeaks shares outstanding at December 31, 2011 of 370,500,750 plus 50,000,000 shares issued by Sunpeaks immediately prior and conjunction with the Merger to settle Sunpeaks’ debt outstanding prior to the Merger date, less 200,000,000 shares cancelled which were held by the former controlling owner of Sunpeaks.
Common stock
TCA Global Credit Master Fund, LP (“TCA”)
On October 11, 2012, the Company issued 3,048,781 common shares to TCA pursuant to the Credit Agreement as commitment fees (see Note 6). The Company fair valued those shares at the then current trading price of $0.042 per share for a total of $128,963.
On December 12, 2012, the Company entered into a Committed Equity Facility Agreement (“TCA Equity Agreement”) with TCA. Pursuant to the terms of the TCA Equity Agreement, TCA shall commit to purchase up to Seven Million Five Hundred Thousand Dollars ($7,500,000) of the Company’s common stock, par value $0.001 per share for a period of twenty-four (24) months commencing on the effective date of a registration statement on Form S-1. The purchase price of the shares is equal to ninety-five percent (95%) of the net aggregate sales proceeds received by TCA from the sale of the shares during the five (5) consecutive trading days after TCA is able to deposit and clear the shares TCA’s brokerage account.
According to the TCA Equity Agreement, the Company shall repurchase from TCA any unsold shares twelve months after December 12, 2012 and pay to TCA in cash an amount equal to the $100,000 minus the amount realized by TCA as of such date. Accordingly the Company recorded an indemnification liability of $100,000.
On December 12, 2012, the Company issued 3,030,302 common shares as a commitment shares, the fair value of those on the issuance date was $93,939 valued at the then current trading price of $0.031 per share and were considered held in escrow due to the indemnification liability.
In addition, the Company also issued 4,545,455 shares of common stock as commitment fee in connection with the Amended Credit Agreement (see Note 6), the Company valued those shares at the then current trading price of $0.03 per share for a total of $140,909.
As at December 31, 2012, the 4,545,454 shares were revalued at $136,364 using the then current trading price of the Company, and in accordance with the Make-Whole Provision (see Note 6), the Company recorded a stock payable of $13,636 as a liability.
During the three months ended March 31, 2013, the Company entered into a Senior Secured Credit Facility Agreement (see below) with TCA which includes a mandatorily redemption feature applicable to all previous advances, accordingly the Company recorded indemnification liability of $300,000 related to the $700,000 and $750,000 advances in 2012 and recorded $286,364 as shares held in escrow and reversed the $13,636 stock payable.
On March 29, 2013 (“Closing Date”), the Company entered into a Senior Secured Credit Facility Agreement (the “Secured Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. According to the Secured Credit Agreement, the Company agreed to pay TCA an investment banking fee of $100,000, payable in the form of 6,666,667 shares of common stock (the “Commitment Shares”).
The Commitment Shares are mandatorily redeemable six months after March 29, 2013 for cash in an amount equal to the $100,000 minus the amount realized by TCA as of such date. Accordingly the Company recorded an indemnification liability of $100,000 and offset to shares in escrow.
The Commitment Shares were granted on March 29, 2013. The fair value of those shares on the grant date was $206,667 valued at the then current trading price of $0.031 per share and was recorded as deferred financing cost.
Preferred Stock
On November 3, 2011, we designated twenty five million (25,000,000) shares of the Preferred Stock as Class A Preferred Stock. Our Class A Preferred Stock has liquidation preference over our common stock, voting rights of one hundred (100) votes per share, with each share convertible into five (5) shares of our common stock.
As of March 31, 2013, we have 3,000,000 shares of Preferred Stock A issued and outstanding.
Liquidation Preference
In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of Class A Preferred Shares shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus of any nature, an amount equal to the stated par value less the aggregate amount of all prior distributions to its preferred shareholders made to holders of all classes of preferred shares, plus any accrued previously declared but unpaid dividends (the amount so determined being hereinafter referred to as the “Liquidation Preference”). No distribution shall be made to the holders of the common shares upon liquidation, dissolution, or winding up until after the full amount of the Liquidation Preference has been distributed or provided to the holders of the preferred shares.
If, upon such liquidation, dissolution or winding up the assets thus distributed among the preferred shareholders shall be insufficient to permit payment to such shareholders of the full amount of the liquidation preference, the entire assets of the Company shall be distributed ratably among the holders of all classes of preferred shares.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, when the Company has completed distribution of the full Liquidating Preference to the holders of the Class A preferred shares, the Class A Preferred shares shall be considered to have been redeemed, and thereafter, the remaining assets of the Company shall be paid in equal amounts on all outstanding shares of common stock.
Conversion Rights
At any time holders of the Class A Preferred Shares who endorse the share certificates and deliver them together with a written notice of their intent to convert to the corporation at its principal office, shall be entitled to convert such shares and receive five (5) shares of common stock for each share being converted. Such conversion is subject to the following adjustments, terms, and conditions:
1)
|
If the number of outstanding shares of common stock has been decreased since the initial issuance of the Class A Preferred Shares (or series having conversion rights (by reason of any split, stock dividend, merger, consolidation or other capital change or reorganization affecting the number of outstanding shares of common stock), the number of shares of common stock to be issued on conversion to the holders, or Class A Preferred Shares shall not be adjusted unless by appropriate amendment of this article. If the number of outstanding shares of common stock has been increased since the initial issuance of the Class A Preferred Shares (or series having conversion rights (by reason of any split, stock dividend, merger, consolidation or other capital change or reorganization affecting the number of outstanding shares of common Stock), the number of shares of common stock to be issued on conversion to the holders, or Class A Preferred Shares shall equitably be adjusted by appropriate amendment of this article, and other articles as applicable.
|
2)
|
Shares converted under this article shall not be reissued. The corporation shall at all times reserve and keep available a sufficient number of authorized but unissued common shares, and shall obtain and keep in effect any required permits to enable it to issue and deliver all common shares required to implement the conversion rights granted herein.
|
3)
|
No fractional shares shall be issued upon conversion, but the corporation shall pay cash for any fractional shares of common stock to which shareholders may be entitled at the fair value of such shares at the time of conversion. The board of directors shall determine such fair value.
|
With respect to each matter submitted to a vote of stockholders of the Corporation, each holder of Class A Preferred Shares shall be entitled to cast that number of votes which is equivalent to the number of shares of Class A Preferred Shares owned by such holder times one hundred (100). The Company shall not, without the affirmative vote or written consent of the holders of at least a majority of the outstanding Class A Preferred Shares (i) authorize or create any additional class or series of stock ranking prior to or on a parity with the Class A Preferred Shares as to the dividends or the distribution of assets upon liquidation, or (ii) change any of the rights, privileges or preferences of the Class A Preferred Shares.
Contributed capital for debt forgiveness
During June 2012, HealthRite, a related party (see Note 9) agreed to forgive the remaining balance of $90,582 owed. The forgiveness of this debt was recorded as a contribution of capital.
Contributed capital for imputed Interest on advances from related party
At March 31, 2013 and December 31, 2012, the Company owed $125,815 and $148,215, respectively, to its President for repayment of advances. The advances are unsecured, non-interest bearing, and due on demand. The Company imputed interest expense of $1,947 and $2,638 on these advances owed during the three months ended March 31, 2013 and 2012, respectively.
NOTE 10 – RELATED PARTY TRANSACTIONS
As discussed in NOTE 3, the Company had a sales arrangement with HealthRite, a specialty pharmacy wholly owned by the Company’s President and Director. Pursuant to the arrangement, HealthRite would purchase pharmaceutical products directly from manufacturers and resells the products to the Company, who then sells the products to customers. The Company acts as an agent in the sales of HealthRite product to customers and recognizes revenue for the net amount retained.
During the three month periods ended March 31, 2013 and 2012, the Company recognized net revenue from sales to HealthRite $0 and $77,371 based on gross sales of $0 and $180,710, respectively.
During the twelve months ended December 31, 2012, the Company repaid $10,065 of the $100,647amount owed to HealthRite and the remaining balance of $90,582 was forgiven during June 2012 and recognized as an equity contribution to the Company by the Company’s President and Director. During April 2012, the Company’s sales arrangement with HealthRite ceased. At
March 31, 2013 and December 31, 2012,
the Company owed HealthRite $0.
At March 31, 2013 and December 31, 2012, the Company owed $125,815 and $148,215, respectively, to its President for repayment of advances. The advances are unsecured, non-interest bearing, and due on demand. The Company imputed interest expense of $1,947 and $2,638 on these advances owed during the twelve months ended March 31, 2013 and 2012, respectively.
During December 2011, the Company received an advance from a related party in the amount of $75,000, and this amount was outstanding as of December 31, 2011. The advance is unsecured, bears interest at 5.5% and was originally due on June 13, 2012. On July 6, 2012, the due date was extended to October 13, 2012. The Company paid this amount on October 12, 2012 with the proceeds from TCA.
On February 19, 2013, the Company received an advance from a related party in the amount of $75,000, and this amount was outstanding as of March 31, 2013. The advance is unsecured, bears interest at 6 % and is due on November 19, 2013.
NOTE 11 – INCOME TAXES
No provision for federal income taxes has been recognized for the three months ended March 31, 2013 and 2012 as the Company incurred a net operating loss for income tax purposes in each period and has no carryback potential.
Deferred tax assets at March 31, 2013 and December 31, 2012 totaled a net deferred tax asset of approximately $1,134,007 and $807,208, respectively, and consisted primarily of deferred tax assets resulting from net operating loss carryforwards. We have provided a full valuation allowance due to uncertainty regarding the realizability of these tax assets. At March 31, 2013, the Company has net operating loss carryforwards totaling approximately $3,335,315 million for federal income tax purposes, which may be carried forward in varying amounts until the time when they begin to expire in 2029 through 2032, but may be limited in their use due to significant changes in the Company’s ownership.
At March 31, 2013 and December 31, 2012, the Company has no uncertain tax positions.
NOTE 12 – SUBSEQUENT EVENTS
The Company has evaluated through the filing date of these consolidated financial statements and determined there is no reportable subsequent event.