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PHRX > SEC Filings for PHRX > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for PHARMAGEN, INC.

Form 10-Q for PHARMAGEN, INC.


14-Nov-2013

Quarterly Report


ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

Our Management's Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; our ability to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly Statement reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, its unaudited financial statements and related notes elsewhere in this Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States.

Introduction

Our wholly-owned subsidiary, Pharmagen Distribution LLC ("PDS"), was formed in the State of Delaware on September 24, 2008, as Healthcare Distribution Specialists, LLC. As a result of a Share Exchange Agreement between us and PDS on February 13, 2012, PDS became our wholly-owned subsidiary, but the transaction was accounted for as a reverse merger with PDS being the accounting acquirer. In connection with this transaction we appointed new management and directors, and changed our business focus to that of PDS, which is a value-added distributor of hard-to-find and specialty drugs to the healthcare provider market, while functioning as an aggregator of real-time market demand for these products. In addition to our distribution business, we also own and sell a specialized over-the-counter multivitamin product called Clotamin.

On December 13, 2012, we acquired Bryce Laboratories, Inc., and subsequently changed its name to Pharmagen Laboratories, Inc. Pharmagen Laboratories specializes in the formulation of drugs that are not otherwise commercially available, require specialized delivery systems, or require dosing changes. Through Pharmagen Laboratories, we can fill some of our existing customer orders in-house as well as orders from third parties.


Going Concern

As a result of our financial condition, our auditors have indicated in their report to our financial statements as of December 31, 2012 their uncertainty as to our ability to continue as a going concern. In order to continue as a going concern we must effectively balance many factors and begin to generate sufficient revenue to fund our operations. If we are not able to do this we may not be able to continue as an operating company. At our current revenue and burn rate, our cash on hand will not cover our operating expenses for even the next sixty days. There is no assurance that our existing cash flow will ever be adequate to satisfy our existing operating expenses and capital requirements.

Results of Operations for the Three and Nine Months Ended September 30, 2013 compared to the Three and Nine Months Ended September 30, 2012

Introduction

Our revenues, including related party revenues, for the three and nine months ended September 30, 2013 were $1,073,661 and $3,769,986, respectively, compared to $1,780,716 and $3,246,247 for the three and nine months ended September 30, 2012. Our revenues are generated from the wholesale distribution of hard-to-find drugs, and sales from our pharmaceutical product Clotamin.

Revenues and Net Operating (Income) Loss

Our revenues (including revenues from related party), cost of sales, gross
profit, operating expenses, operating loss, other expenses, and net loss for the
three and nine months ended September 30, 2013, as compared to the three and
nine months ended September 30, 2012, are as follows:

                                           Three Months      Three Months       Nine Months       Nine Months
                                               Ended             Ended             Ended             Ended
                                           September 30,     September 30,     September 30,     September 30,
                                               2013              2012              2013              2012

Revenue                                    $   1,073,661         1,780,716     $   3,769,986         3,057,537
Revenues, related party                                -                 -                 -           188,710
Cost of Sales                                   (400,640 )      (1,531,824 )      (1,366,467 )      (2,174,795 )
Gross Profit                               $     673,021           248,892     $   2,403,519         1,071,452

Operating Expenses:
 General and Administrative                $     432,512           361,052     $   1,417,976         1,126,837
 Salaries and commissions                        412,332           265,960         1,426,932           679,022
 Professional fees                               541,426           195,885           941,749           529,381
 Loss on settlement of payables                  256,761                 -           256,761                 -
Total Operating Expenses                   $   1,643,031           822,897     $   4,043,418         2,335,240

Operating Loss                             $    (970,010 )        (574,005 )   $  (1,639,899 )      (1,263,788 )

Other Expenses:
 Derivative gain (loss)                    $     354,967          (377,685 )   $        (115 )        (328,267 )
 Interest expense                               (732,212 )         (85,754 )      (2,049,979 )        (262,792 )
Total Other Expenses                       $    (377,245 )        (463,439 )   $  (2,050,094 )        (591,059 )

Net Loss                                   $  (1,347,255 )      (1,037,444 )   $  (3,689,993 )      (1,854,847 )


Revenue

Our revenue for the three months ended September 30, 2013 decreased by $707,055, or approximately 40%, as compared to the three months ended September 30, 2012. However, our revenue for the nine months ended September 30, 2013 increased by $523,739, or 16%, as compared to the nine months ended September 30, 2012. The decrease in our year-over-year three-month revenue is a result of a decrease in our sales of hard-to-find drugs during the third quarter. Conversely, the increase in our year-over-year nine-month revenue is also related to sales of our hard-to-find drugs, which increased because of our marketing efforts and the increased number of states in which we hold licenses, during the first quarter of 2013 compared to the first quarter of 2012. In addition, during the nine month period ended September 30, 2013, we had sales of prescription based drugs. On January 1, 2012, we had licenses to sell drugs in 24 states. Currently, we are licensed to sell drugs in 45 states. The more states we can sell into the greater number of purchasers, such as clinics, hospitals, etc., that we can access. For example, as of January 1, 2012, we had approximately 129 different entities to which we sold drugs, compared to over 150 entities as of January 1, 2013.

In 2011, we did not recognize a portion of our gross sales because we received it from Healthrite Pharmaceuticals because Healthrite was owned and controlled by Mackie Barch, one of our officers and our sole director, and Healthrite bore most of the risk for the purchasing and selling of the drugs, with us acting more as a sales agent for Healthrite due to licensing restrictions. In early 2012, Healthrite notified us that due to the cost and effort to maintain a pharmaceutical license it had surrendered its pharmaceutical license and would no longer be selling pharmaceuticals, effective April 10, 2012. As expected, this action did not have a material impact on our business since we now have our own direct relationship with suppliers and resellers of hard-to-find drugs, but it does allow us to recognize all the revenue from our product sales rather than having a disparity between our gross sales and the net revenue we recognize since we are no longer be sourcing the drugs from a related party.

We report revenues from sales of our hard-to-find drugs and Clotamin in one business segment. Related party revenues are sales to Healthrite Pharmaceuticals, a company wholly-owned and controlled by one of our officers and director.

Of our total revenues of $1,073,661 and $3,769,986 for the three and nine months ended September 30, 2013, none of it was revenue generated from the markup of the drugs we purchased from Healthrite, as compared to total revenues of $1,780,716 and $3,246,247 for the three and nine months ended September 30, 2012, of which $0 and $188,710 (or less than 6%) was markup on drugs purchased from Healthrite.

We purchase our hard-to-find drugs from a wide variety of small vendors depending on the particular hard-to-find drug that is being sought. Our current vendors are small, regional pharmaceutical wholesalers. Approximately 70% of our purchase orders are for under $1,000 each. During the three months ended September 30, 2013, three vendors accounted for 32%, 31% and 11% of our product purchases, while during the three months ended September 30, 2012, three vendors accounted for 35%, 16%, and 14% of our product purchases.

During the three months ended September 30, 2013, three customers accounted for 19%, 12%, and 8% of our sales, while during the three months ended September 30, 2012, three customers accounted for 38%, 11%, and 7% of our sales. At September 30, 2013, one customer accounted for 46% of our accounts receivable, while at June 30, 2013, two customers accounted for 19% and 16% of our accounts receivable and at December 31, 2012, one customer accounted for 58% of our accounts receivable.

Cost of Sales

Our cost of sales represents the direct costs attributable to the production of the operations that produce our revenues. For the three and nine months ended September 30, 2013, our cost of sales was $400,640 and $1,366,467, or 37% and 36%, respectively, of our non-related party revenue, as compared to $1,531,824 and $2,174,795, or 86% and 71%, respectively, of non-related party revenue for the three and nine months ended September 30, 2012. The decrease in cost of sales as a percentage of sales is a result of the particular product mix for the period and larger margins available with more volume. Our cost of sales will increase as our revenues increase, but we expect our cost of sales as percentage of revenue to remain relatively stable.


General and Administrative Expenses

General and administrative expenses increased by $71,460, or 20% for the three months ended September 30, 2013 compared the three months ended September 30, 2012, and increased by $291,139, or 26%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Because our general and administrative expenses consist primarily of shipping costs, costs for human resources, depreciation expense, costs of business licenses and permits, merchant services and bank fees, rent expense, and other general expenses, we expect them to increase as our operations and revenues increase up to a point, but then level off, as we have seen in each of the first three quarters of 2013.

Salaries and Commissions

Our salaries and commissions increased by $146,372, or 55%, for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, and increased by $747,910, or 110%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2013. During the three and nine months ended September 30, 2013, $49,413 and $336,144, respectively, was paid as commissions to our sales force, as compared to $39,089 and $138,254, respectively, for the three and nine months ended September 30, 2012. The remaining amounts were paid to our officers, Mackie Barch and Eric Clarke, as well as the administrative staff.

Professional Fees

Our professional fees increased by $345,541, or 176%, for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012, and increased by $412,368, or 78%, for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012. The increase was a result of increased costs for legal, accounting, and consulting services related to being a fully-reporting public company and the overall increase in business operations.


Loss on Settlement of Payables

Our loss on settlement of payables increased to $256,761 from $0 for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012, and increased from $0 to $256,761 for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012. The loss on settlement of payables are unpaid obligations in the Settlement Agreement entered into with IBC Funds, LLC in August 2013 and will be reduced as our common stock is issued in connection therewith.

Derivative Gain (Loss)

Our derivative gain increased by $732,652 and $328,152, respectively, for the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012. These derivative losses relate to the financing activities during the period.

Interest Expense

Our interest expense increased by $646,458 and $1,787,187, or 753% and 680%, respectively, for the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012. We financed operations through a revolving credit facility with TCA Global Master Fund, which accounted for the majority of this expense.

Operating Loss; Net Loss

Our operating loss increased by $396,005, or 69%, from ($574,005) to ($970,010), for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, and by $376,111, or 30%, from ($1,263,788) to ($1,639,899), for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

Our net loss increased by $309,811, or 30%, from ($1,037,444) to ($1,347,255), for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, and by $1,835,146, or 99%, from ($1,854,847) to ($3,689,993), for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

Our losses for three months ended September 30, 2013 increased by 30% while our revenues decreased by a similar 40%. Our losses for the nine months ended September 30, 2013 increased by 99% even though our revenues increased by $523,739, or 16%. These increased losses for the nine-month periods are attributable to operating losses as well as the interest expense described above.

Liquidity and Capital Resources

Introduction

Our principal needs for liquidity have been to fund operating losses, working capital requirements, and debt service. Our principal source of liquidity as of September 30, 2013 consisted of cash of $188,357 and available credit on our revolving credit facility. We expect that working capital requirements and debt service will continue to be our principal needs for liquidity over the near term. Working capital requirements are expected to increase as a result of our anticipated growth.


We have not yet established an ongoing source of revenues sufficient to cover our operating costs and allow us to continue as a going concern. Our ability to continue as a going concern is dependent on obtaining adequate capital to fund operating losses until we become profitable. If we are unable to obtain adequate capital, we could be forced to cease operations. Management's plan to meet our operating expenses in the short term is through equity and/or debt financing, as we do not anticipate that our revenues will be sufficient to meet our operating expenses by December 31, 2013 or thereafter.

Our cash, current assets, total assets, current liabilities, and total liabilities as of September 30, 2013, June 30, 2013, and December 31, 2012, respectively, are as follows:

                             September 30,       June 30,        December 31,
                                 2013              2013              2012
Cash                        $       188,357     $   205,032     $      322,556
Total Current Assets              1,426,746       1,356,514          1,585,807
Total Assets                      3,025,230       2,649,164          2,897,497
Total Current Liabilities         8,000,549       7,017,841          2,434,654
Total Liabilities                 9,035,093       7,767,841          5,589,258

Our cash decreased by $16,675 as of September 30, 2013 compared to June 30, 2013, and by $134,199 compared to December 31, 2012.

Total current assets increased by $70,232 as of September 30, 2013 as compared to June 30, 2013, and decreased by $159,061 compared to December 31, 2012. The decrease as compared to December 31, 2012 was primarily a result of the decrease in cash described above and a decrease in accounts receivable of $29,068 and a decrease in deferred financing costs of $57,157, offset by an increase in inventory of $15,199 and prepaid expenses and other current assets of $46,164. Prepaid expenses are primarily advertising contracts to promote our Clotamin product.

Total assets increased by $376,066 as of September 30, 2013 as compared to June 30, 2013, and increased by $127,733 compared to December 31, 2012. In addition to the changes described above in the current assets, the increase as compared to December 31, 2012 was primarily a result of an increase in property and equipment, net of depreciation, of $290,518

Cash Requirements

We had cash available as of September 30, 2013 of $188,357. Based on our current revenues, cash on hand, and our current net monthly burn rate of approximately $220,000, we will need to continue to raise money from the issuance of equity and/or from our revolving credit facility to fund short term operations.

Sources and Uses of Cash

Operations

Our net cash used in operating activities was $660,175 for the nine months ended September 30, 2013, compared to $1,412,279 for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, our net cash used in operating activities consisted of our net loss of $3,689,993, offset primarily by an amortization of debt discount of $1,537,020, amortization of deferred financing costs of $299,323, loss on settlement of accounts payable of $256,761, prepaid expenses and other curren tassets of $149,833, and accounts payable and accrued liabilities of $584,810.


Investments

Our net cash used in investing activities was $27,660 for the nine months ended September 30, 2013, compared to $89,190 for the nine months ended September 30, 2012. For both periods, our net cash used in investing activities consisted of purchase of property and equipment.

Financing

Our net cash provided by financing activities was $553,636 for the nine months ended September 30, 2013, compared to $1,507,404 for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, our net cash provided by financing activities consisted primarily of net proceeds from convertible debt of $755,500, offset by net proceeds from convertible lines of credit of $125,174, principal payments on debt of $41,190, and cash paid for deferred financing costs of $35,500.

Off-balance sheet arrangements

As of September 30, 2013, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources that are material to investors.

Critical accounting policies and estimates

Our critical accounting policies are set forth in Note 3 - Summary of Significant Accounting Policies, to our financial statement footnotes.

Recent accounting pronouncements

We have evaluated recent pronouncements and do not expect their adoption to have a material impact on our financial position or statements.

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