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EX-32.2 - CERTIFICATION - Pharmagen, Inc.snpk_ex322.htm
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EXCEL - IDEA: XBRL DOCUMENT - Pharmagen, Inc.Financial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number:  000-54523

SUNPEAKS VENTURES, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
27-077112
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
9337 Fraser Avenue
Silver Spring, MD
 
20910
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code    (204) 898-8160
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x
(Do not check if a smaller reporting company)      
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o No x

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes  o No  o

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of November 7, 2012, there were 373,549,531 shares of common stock, $0.001 par value, issued and outstanding.
 


 
 

 
 
SUNPEAKS VENTURES, INC.
 
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION      
         
ITEM 1
Financial Statements
    4  
           
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    22  
           
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
    27  
           
ITEM 4
Controls and Procedures
    28  
           
PART II – OTHER INFORMATION        
           
ITEM 1
Legal Proceedings
    30  
           
ITEM 1A
Risk Factors
    30  
           
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds
    30  
           
ITEM 3
Defaults Upon Senior Securities
    30  
           
ITEM 4
Mine Safety Disclosures
    30  
           
ITEM 5
Other Information
    30  
           
ITEM 6
Exhibits
    31  
 
 
2

 
 
PART I – FINANCIAL INFORMATION

This Quarterly Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the “Exchange Act”).  These statements are based on management’s beliefs and assumptions, and on information currently available to management.  Forward-looking statements include the information concerning our possible or assumed future results of operations set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used.

Forward-looking statements are not guarantees of future performance.  They involve risks, uncertainties and assumptions.  Our future results and shareholder values may differ materially from those expressed in these forward-looking statements.  Readers are cautioned not to put undue reliance on any forward-looking statements.

 
3

 
 
ITEM 1  Financial Statements

SUNPEAKS VENTURES, INC.

Condensed Consolidated Financial Statements (Unaudited)

       
   
Page
 
       
Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011
    5  
         
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2012 and 2011
    6  
         
Condensed Consolidated Statement of Stockholders’ Deficit for the nine months ended September 30, 2012
    7  
         
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011
    8  
         
Notes to Unaudited Condensed Consolidated Financial Statements
    9  
 
 
4

 

SUNPEAKS VENTURES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

             
   
September 30, 2012
   
December 31, 2011
 
             
ASSETS
           
             
Current Assets
           
Cash
  $ 44,593     $ 38,658  
Accounts receivable
    445,281       211,549  
Inventory
    33,625       12,144  
Prepaid expenses and other current assets
    228,081       12,568  
   Total Current Assets
    751,580       274,919  
                 
Property and equipment, net of accumulated depreciation of $52,189 and $27,237
    93,921       29,683  
                 
Total Assets
  $ 845,501     $ 304,602  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 541,609     $ 97,606  
Line of credit
    257,404       200,000  
Due to related parties
    223,215       376,745  
   Total Current Liabilities
    1,022,228       674,351  
                 
Convertible debt, net
    429,590       -  
Embedded conversion derivative liabilities
    1,520,394       -  
   Total liabilities
    2,972,212       674,351  
                 
Commitments and contingencies
            -  
                 
Stockholders’ Deficit
               
Preferred stock; Series A $0.001 par value; 25,000,000 shares authorized; 3,000,000 shares issued and outstanding
    3,000       3,000  
Common stock $0.001 par value; 550,000,000 shares authorized; 370,500,750 and 200,000,000 shares issued and outstanding
    370,501       200,000  
Additional paid in capital
    (268,750 )     (196,134 )
Accumulated deficit
    (2,231,462 )     (376,615 )
   Total Stockholders’ Deficit
    (2,126,711 )     (369,749 )
                 
Total Liabilities and Stockholders’ Deficit
  $ 845,501     $ 304,602  
                 
The accompanying notes are an integral part of these consolidated financial statements
 
 
5

 
 
SUNPEAKS VENTURES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
  $ 1,780,716     $ 188,692     $ 3,057,537     $ 182,920  
Revenues, Related Party
    -       39,639       188,710       117,010  
Cost of Sales
    (1,531,824 )     (159,383 )     (2,174,795 )     (209,830 )
Gross Profit
    248,892       68,948       1,071,452       90,100  
          
                               
Operating Expenses
                               
   General and administrative
    361,052       92,234       1,126,837       194,258  
   Salaries and commissions
    265,960       58,454       679,022       77,320  
   Professional fees
    195,885       76,832       529,381       112,521  
          Total Operating Expenses
    822,897       227,520       2,335,240       384,099  
                                 
Operating Loss
    (574,005 )     (158,572 )     (1,263,788 )     (293,999 )
                                 
Other Expenses
                               
  Derivative losses
    (377,685 )     -       (328,267 )     -  
  Interest expense
    (85,754 )     (538 )     (262,792 )     (4,302 )
          Total Other Expenses
    (463,439 )     (538 )     (591,059 )     (4,302 )
                                 
Net Loss
  $ (1,037,444 )   $ (159,110 )   $ (1,854,847 )   $ (298,301 )
                                 
Basic and diluted loss per share
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.00 )
                                 
Weighted average common shares outstanding –basic and diluted
    370,500,750       200,000,000       347,318,148       200,000,000  
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
6

 
 
SUNPEAKS VENTURES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Unaudited)

   
Preferred Stock
   
Common Stock
   
Additional
Paid in
    Accumulated        
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                                           
Balance, December 31, 2011
    3,000,000     $ 3,000       200,000,000     $ 200,000     $ (196,134 )   $ (376,615 )   $ (369,749 )
                                                         
Effect of reverse merger
    -       -       220,500,750       220,501       (220,501 )     -       -  
Cancellation of shares
    -       -       (50,000,000 )     (50,000 )     50,000       -       -  
Imputed interest expense on advances from related party
    -       -       -       -       7,303       -       5,108  
Forgiveness of shareholder debt
    -       -       -       -       90,582       -       90,582  
Net loss
    -       -       -       -       -       (1,854,847 )     (1,854,847 )
Balance, September 30, 2012
    3,000,000     $ 3,000       370,500,750     $ 370,501     $ (268,750 )   $ (2,231,462 )   $ (2,126,711 )
                                                         
The accompanying notes are an integral part of these consolidated financial statements
 
 
7

 
 
SUNPEAKS VENTURES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Operating Activities
           
  Net loss
  $ (1,854,847 )   $ (171,163 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Imputed interest on advances from related party
    7,303       -  
Accretion of debt discount
    171,717       -  
Change in fair value of embedded conversion derivative liabilities
    328,267       -  
Depreciation
    24,952       16,651  
  Changes in operating assets and liabilities:
               
Accounts receivable
    (233,732 )     (75,619 )
Inventory
    (21,481 )     43,622  
Prepaid expenses and other current assets
    (215,513 )     (2,562 )
Accounts payable and accrued liabilities
    444,003       176,554  
Due to related parties
    (62,948 )     74,505  
Net Cash (Used in) Provided by Operating Activities
    (1,412,279 )     61,989  
                 
Investing Activities
               
  Purchase of property and equipment
    (89,190 )     (55,627 )
Net Cash Used in Investing Activities
    (89,190 )     (55,627 )
                 
Financing Activities
               
  Net proceeds from convertible debt
    1,450,000       -  
  Net proceeds from lines of credit
    57,404       19,351  
Net Cash Provided by Financing Activities
    1,507,404       19,351  
                 
Net Increase in Cash
    5,935       25,713  
  Cash at Beginning of Period
    38,658       6,812  
Cash at End of Period
  $ 44,593     $ 32,525  
                 
Supplemental Cash Flow Information:
               
   Interest paid
  $ 17,306     $ 4,302  
   Income taxes paid
  $ -     $ -  
                 
Non-Cash Financing Transactions:
               
  Allocation of convertible debt to embedded conversion derivative liabilities
  $ 1,192,127     $ -  
  Forgiveness of note payable – related party
  $ 90,582     $ -  
  Cancellation of shares
  $ 50,000     $ -  
  Effects of reverse merger
  $ 220,501     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
8

 
 
SUNPEAKS VENTURES, INC.

NOTES TO UNAUDITED CONDENSED
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”), Sunpeaks, 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 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, resulting in HDS becoming a wholly-owned subsidiary of the Company. Additionally, pursuant to the Exchange Agreement, 200,000,000 shares of Sunpeaks’ common stock held by Sunpeaks’ 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 Sunpeaks (referred to as the “Merger”) was a reverse acquisition of Sunpeaks 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.

As of the time of the Merger, Sunpeaks 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 (the “Acquisition”). 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 and the acquisition is reflected in the accompanying financial statements for the year ended December 31, 2011 as if it occurred as of January 1, 2011.  
 
 
9

 

NOTE 2 – LIQUIDITY

The accompanying unaudited 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 September 30, 2012 has an accumulated net loss totaling $2,231,462. At September 30, 2012, the Company held cash of $44,593.  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 condensed 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 condensed consolidated financial statements as of and for the three and nine months ended September 30, 2012 and 2011 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 HDS for the years ended December 31, 2011 and 2010, and notes thereto included as an exhibit in our Form 8-K/A as filed with the Securities and Exchange Commission (“SEC”) on July 27, 2012.

The results for interim periods are not necessarily indicative of results for the entire year. The balance sheet at December 31, 2011 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 condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary HDS. As discussed above, for accounting purposes the acquisition of HDS by Sunpeaks was considered a reverse acquisition of Sunpeaks 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.
 
 
10

 

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, sole owner and Director of the Company. Healthrite is a pharmacy and is therefore prohibited from distributing pharmaceuticals across state lines. During the nine month periods ended September 30, 2012 and 2011, the Company recognized net revenue from sales to Healthrite of $80,758 and $117,010, respectively, based on gross sales of $188,710 and $1,128,588, respectively. During April 2012, the Company’s sales arrangement with Healthrite ceased.  See NOTE 9 for additional discussion.

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 September 30, 2012 and December 31, 2011, there were no cash equivalents.

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.
 
 
11

 

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 September 30, 2012 and December 31, 2011, the Company’s allowance for doubtful accounts was $0.

Inventory

Inventory is comprised of Clotamin and pharmaceuticals and is recorded at lower of cost or market on a first-in, first-out (“FIFO”) method. 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 September 30, 2012 and December 31, 2011, the allowance for obsolete or unmarketable inventory was $0, and during the nine month periods ended September 30, 2012 and 2011, 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
 
 
12

 

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 an impairment has occurred through analysis of undiscounted cash flow of the asset at the lowest level that has an identifiable cash flow. If an 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 September 30, 2012 and December 31, 2011 or during the nine month periods ended September 30, 2012 and 2011.

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 nine months ended September 30, 2012.   

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.
 
 
13

 

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 nine month periods ended September 30, 2012 and 2011, were $375,795 and $3,152, respectively.

Concentration of Risk

The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC). Beginning December 31, 2010 through December 31, 2012 all non-interest-bearing transaction accounts were fully insured, regardless of the balance of the account, at all FDIC-insured institutions. This unlimited insurance coverage was separate from, and in addition to, the insurance coverage provided to the depositor’s other accounts held by a FDIC-insured institution, which are insured for balances up to $250,000 per depositor until December 31, 2013. At September 30, 2012 and December 31, 2011, the amounts held in the banks did not exceed the insured limit of $250,000.

During the three months ended September 30, 2012, three vendors accounted for 45%, 19% and 9% of purchases, and during the nine months ended September 30, 2012, three vendors accounted for 46%, 18% and 7% of purchases.  During the three and nine months ended September 30, 2011, one vendor accounted for 68% and 68% of purchases, respectively.

During the three and nine months ended September 30, 2012, one customer accounted for 24% and 33% of sales, respectively.  During the three and nine months ended September 30, 2011, one customer accounted for 59% and 39% of sales, respectively.  At September 30, 2012, one customer accounted for 58% of accounts receivable. At December 31, 2011, no customers accounted for more than 10% of 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.
 
 
14

 

Income (Loss) per Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. No common stock equivalents existed at September 30, 2012 and December 31, 2011 or during the three and nine month periods ended September 30, 2012 and 2011.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). For the three and nine month periods ended September 30, 2012 and 2011, 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.

Subsequent Events

The Company evaluated material events occurring between September 30, 2012 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, Sunpeaks qualifies as a non-operating public shell company because as of the Merger date, Sunpeaks 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 (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 condensed 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.

Following the Merger, the financial statements of Sunpeaks give retroactive effect of the reverse recapitalization and represent the historical operations of HDS.
 
 
15

 

NOTE 5 - ACQUISITION

On August 1, 2011, pursuant to the Agreement, HDS acquired certain assets of GNR in exchange for assumption of debt and financial obligations of GNR (the “Acquisition”). From the date of inception of the Company and GNR until the time of the Acquisition, the President and sole owner of the Company held a 44% ownership interest in GNR, with the remaining 56% ownership interest of GNR being held by the brother of the Company’s President. Prior to the acquisition, the Company and GNR were considered entities under common control, with common ownership, as control and ownership of each entity resided with the Company’s President and an immediate family member.

Pursuant to ASC Subtopic 805-50, HDS recorded assets acquired and liabilities assumed at their carrying value, which equaled historical cost, on the date of transfer. Carrying value of assets and liabilities acquired by the Company as of the acquisition date consisted of:
       
Assets Acquired
     
   Inventory
  $ 40,550  
         
Liabilities Assumed
       
   Accounts payable
    2,733  
   Due to Healthrite
    7,000  
   Line of credit
    130,488  
Total Liabilities Assumed
    140,221  
         
Net Liabilities Assumed
  $ 99,671  

Pursuant to ASC Section 805-50-45, the Acquisition was accounted for as a transfer between entities under common control, whereas results of operations for the period in which the Acquisition occurred are reported as though the Acquisition had occurred at the beginning of the period. Accordingly, results of operations, presented in the accompanying combined financial statements, for the period January 1, 2011 through July 31, 2011 are comprised of combined operations of the Company and GNR, as separate entities, and beginning August 1, 2011, results of operations are comprised of the operations of the Company, including results of operations related to the assets acquired and liabilities acquired pursuant to the Agreement.

Intercompany transactions occurred on or after August 1, 2011 have been eliminated. Likewise, for the period January 1, 2011 through July 31, 2011, effects of any intra-entity transactions (between HDS and GNR) have been eliminated, resulting in operations for the period prior to Acquisition date essentially being on the same basis as operations post Acquisition date.
 
 
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NOTE 6 – DEBT

Lines of Credit

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 September 30, 2012 and December 31, 2011), is due on demand, and is secured by all assets of the Company. As of September 30, 2012 and December 31, 2011, 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 September 30, 2012 and December 31, 211. There are no outstanding debt covenants.

On May 7, 2012, the Company entered into a $500,000 line of credit agreement with a lender which bears interest at a floating per annum rate equal to the greater of (a) the prime rate as published by the Wall Street Journal plus the prime rate increment of 3.5%, or (b) the minimum prime rate of 3.25% plus the prime rate increment of 3.5%.   Advances are limited to 80% of the eligible receivables balance of the Company as determined by the lender.  Advances are repaid through collections on accounts receivable which are remitted directly through lockbox to the lender.  The credit line is secured by all assets of the Company. As of September 30, 2012, the Company had outstanding balances on the line of credit of $57,404. The Company is currently in good standing and was in good standing at September 30, 2012. There are no outstanding debt covenants.

Convertible debt

During the three months ended March 31, 2012 and June 30, 2012, the Company issued $400,000 and $1,050,000, respectively, 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. During the nine months ended September 30, 2012, the Company recorded aggregate debt discounts of $1,192,127 related to the conversion rights.

The debt discount is accreted to interest expense over the life of the convertible debentures using the effective interest method.  During the three and nine months ended September 30, 2012, the Company recorded interest accretion expense of $50,367 and $171,717 respectively, which is included in interest expense on the accompanying condensed consolidated statement of operations.
 
 
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NOTE 7 – FAIR VALUE MEASUREMENTS

The following table presents the embedded conversion derivative liabilities, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2012.
                         
   
Total
   
Level 1
   
Level 2
   
Level 3
 
Embedded conversion derivative liabilities
  $ 1,520,394     $ -     $ -     $ 1,520,394  

The following table reconciles, for the nine months ended September 30, 2012, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:
         
Balance of embedded conversion derivative liability, December 31, 2011
 
$
-
 
     Fair value of embedded conversion derivative liabilities at issuance
   
1,192,127
 
     Loss at issuance
   
161,100
 
     Loss on fair value adjustments to embedded conversion derivative liabilities
   
167,167
 
Balance of embedded conversion derivative liabilities, September 30, 2012
 
$
1,520,394
 

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.
 
 
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NOTE 8 - EQUITY

Preferred Stock
 
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.
 
 
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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.
 
Voting Rights

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.

NOTE 9 – RELATED PARTY TRANSACTIONS

As discussed in NOTE 3, the Company has 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 and nine month periods ended September 30, 2012, the Company recognized net revenue from sales to Healthrite of $0 and $80,758, respectively, based on gross sales of $0 and $188,710,  respectively.  During the three and nine month periods ended September 30, 2011, the Company recognized net revenue from sales to Healthrite of $39,639 and $117,010, respectively, based on gross sales of $287,262 and $1,128,588, respectively.  

At December 31, 2011, the Company owed HealthRite $100,647. During the nine months ended September 30, 2012, the Company repaid $17,065 of the amount 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.

Additionally, ICAPP, LLC, an entity controlled by Mackie Barch that was originally set up to be a holding company, loaned HDS $998, interest free.  At December 31, 2011, the company owed ICAPP, LLC $998; however, the balance was forgiven during June 2012 and recognized as a equity contribution to the Company by the Company’s President and Director. The Company has never done any business with ICAPP, LLC.

At September 30, 2012 and December 31, 2011, the Company owed $148,215 and $200,100, 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 $7,303 and $0 on these advances owed during the nine months ended September 30, 2012 and 2011, respectively.

During December 2011, the Company received an advance from a related party of $75,000, and this amount was outstanding as of December 31, 2011 and September 30, 2012.  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.  During the nine months ended September 30, 2012 and 2011, the Company recorded interest expense of approximately $2,465 and $0, respectively, on this advance.
 
 
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NOTE 10 – INCOME TAXES

No provision for federal income taxes has been recognized for the nine months ended September 30, 2012 and 2011 as the Company incurred a net operating loss for income tax purposes in each period and has no carryback potential.

Deferred tax assets and liabilities at September 30, 2012 and December 31, 2011 totaled a net deferred tax asset of approximately $815,944 and $128,049, 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 September 30, 2012, the Company has net operating loss carryforwards totaling approximately $2.3 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 September 30, 2012 and December 31, 2011, the Company has no uncertain tax positions.
 
NOTE 11 – SUBSEQUENT EVENTS

TCA Global Credit Master Fund, LP

Effective on October 11, 2012, we entered into a Senior Secured Revolving Credit Facility Agreement (the “Credit Agreement”) dated as of September 30, 2012 with TCA Global Credit Master Fund, LP,. a Cayman Islands limited partnership. Pursuant to the Agreement, TCA agreed to loan up to $5 million to us for working capital purposes. A total of $700,000 was funded by TCA in connection with the closing. 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 us and our 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 our assets in favor of TCA. The initial Revolving Note in the amount of $700,000 is due and payable along with interest thereon on April 11, 2013, and bears interest at the rate of 12% per annum, increasing to 18% per annum upon the occurrence of an event of default.  We also agreed to pay TCA a fee of $150,000, payable in the form of 3,048,781 shares of common stock.
 
 
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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, Healthcare Distribution Specialists LLC (“HDS”), was formed in the State of Delaware on September 24, 2008.  As a result of a Share Exchange Agreement between HDS and Sunpeaks Ventures, Inc., on February 13, 2012, HDS became the wholly-owned subsidiary of Sunpeaks, but the transaction was accounted for as a reverse merger with HDS being the accounting acquirer.  In connection with this transaction we appointed new management and directors, and changed the business focus of Sunpeaks to that of HDS, 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.

Going Concern

As a result of our financial condition, our auditors have indicated in a footnote to our financial statements as of December 31, 2011 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 thirty days.  There is no assurance that our existing cash flow will ever be adequate to satisfy our existing operating expenses and capital requirements.

 
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Results of Operations for the Three and Nine Months Ended September 30, 2012 Compared to the Three and Nine Months Ended September 30, 2011

Introduction

Our revenues, including related party revenues, for the three and nine months ended September 30, 2012 were $1,780,716 and $3,246,247, respectively, compared to $228,331 and $299,930, respectively, for the three and nine months ended September 30, 2011.  We had very little operations in the three and nine month periods ended September 30, 2011, and thus comparisons between 2012 and 2011 are dramatic.  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, cost of sales, gross profit, operating expenses, operating loss, other expenses, and net loss for the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011, are as follows:

   
3 Months Ended
September 30, 2012
   
9 Months Ended
September 30, 2012
   
3 Months Ended
September 30, 2011
   
9 Months Ended
September 30, 2011
 
                         
Revenue
  $ 1,780,716       3,057,537     $ 188,692       182,920  
Revenues, related party
    -       188,710       39,639       117,010  
Cost of Sales
    (1,531,824 )     (2,174,795 )     (159,383 )     (209,830 )
Gross Profit
  $ 248,892       1,071,452     $ 68,948       90,100  
                                 
Operating Expenses:
                               
  General and Administrative
  $ 361,052       1,126,837     $ 92,234       194,258  
  Salaries and commissions
    265,960       679,022       58,454       77,320  
  Professional fees
    195,885       529,381       76,832       112,521  
Total Operating Expenses
  $ 822,897       2,335,240     $ 227,520       384,099  
                                 
Operating Loss
  $ (574,005 )     (1,263,788 )   $ (158,572 )     (293,999 )
                                 
Other Expenses:
                               
  Derivative losses
  $ (377,685 )     (328,267 )   $ -       -  
  Interest expense
    (85,754 )     (262,792 )     (538 )     (4,302 )
Total Other Expenses
  $ (463,439 )     (591,059 )   $ (538 )     (4,302 )
                                 
Net Income (Loss)
  $ (1,037,444 )     (1,854,847 )   $ (159,110 )     (298,301 )

Revenues

For the three and nine months ended September 30, 2012, we had revenues, including related party revenues, of $1,780,716 and $3,246,247, respectively, compared to $228,331 and $299,930, respectively, for the three and nine months ended September 30, 2011.  This significant increase in revenues was primarily due to an increase in our sales of hard-to-find drugs, which was largely a result of additional licenses we received in 2011 and 2012.  As of September 30, 2011, we had licenses to sell drugs in one state.  As of September 30, 2012 we had licenses to sell drugs in 39 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 September 30, 2011, we had approximately 50 different entities to which we sold drugs, compared to approximately 642 different entities as of September 30, 2012.  By December 31, 2012, we expect to have licenses in approximately 40-45 states, which should lead to a continued increase in sales in 2012 and 2013.  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 our sole officer and director.

 
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Cost of Sales and Gross Profit
 
For the three and nine months ended September 30, 2012, our cost of sales was $1,531,824 (86% of revenues) and $2,174,795 (67% of revenues), respectively, compared to $159,383 (70% of revenues) and $209,830 (70% of revenues), respectively, for the three and nine months ended September 30, 2011.  In 2012, our cost of sales as a percentage of revenues was higher for the three months ended September 30, as compared to the nine months ended September 30, because of a larger percentage of sales made at lower margins during the third quarter as compared to year to date.

Operating Expenses

Operating Expenses for 2012

Our total operating expenses of $822,897 for the three months ended September 30, 2012 consisted of general and administrative expenses of $361,052 (44% of the total operating expenses), salaries and commissions of $265,960 (32% of the total operating expenses), and professional fees of $195,885 (24% of the total operating expenses).  Our total operating expenses was 46% of our revenues for the period.

Our total operating expenses of $2,335,240 for the nine months ended September 30, 2012 consisted of general and administrative expenses of $1,126,837 (48% of the total operating expenses), salaries and commissions of $679,022 (29% of the total operating expenses), and professional fees of $529,381 (23% of the total operating expenses).  Our total operating expenses was 72% of our revenues for the period.

Our total operating expenses for the nine months ended September 30, 2012 was a significantly higher percentage of our revenues as compared to the three months ended September 30, 2012 (72% versus 46%) because of non-recurring expenses associated with going public along with one time advertising expenses and stocking fees.

Operating Expenses for 2011

Our total operating expenses of $227,520 for the three months ended September 30, 2011 consisted of general and administrative expenses of $92,234 (41% of the total operating expenses), salaries and commissions of $58,454 (26% of the total operating expenses), and professional fees of $76,832 (34% of the total operating expenses).  Our total operating expenses was 99% of our revenues for the period.

 
24

 
 
Our total operating expenses of $384,099 for the nine months ended September 30, 2011 consisted of general and administrative expenses of $194,258 (51% of the total operating expenses), salaries and commissions of $77,320 (20% of the total operating expenses), and professional fees of $112,521 (29% of the total operating expenses).  Our total operating expenses was 128% of our revenues for the period.

Because our operations were new, our revenues were low, and we were not getting the benefit of any economies of scale, we do not believe that our operating expenses for 2011 are indicative of our financial performance going forward.

Operating Loss

For the three and nine months ended September 30, 2012, our operating loss was $574,005 and $1,263,788, respectively, compared to $158,572 and $293,999, respectively, for the three and nine months ended September 30, 2011.  Our operating loss increased significantly in each period as compared to the same period last year because our operations were new in 2011 and we were not incurring expenses at the same magnitude as in 2012.

Other Expenses

Other Expenses for 2012

Our total other expenses of $463,439 for the three months ended September 30, 2012 consisted of derivative losses of $377,685 and interest expense of $85,754.  Our total other expenses of $591,059 for the nine months ended September 30, 2012 consisted of derivative losses of $328,267 and interest expense of $262,792, both of which are non-operating expenses.

Other Expenses for 2011

Our total other expenses of $538 for the three months ended September 30, 2011 consisted entirely of interest expense.  Our total other expenses of $4,302 for the nine months ended September 30, 2011 also consisted entirely of interest expense.

Net Loss

For the three and nine months ended September 30, 2012, our net loss was $1,037,444 and $1,854,847, respectively, compared to $159,110 and $298,301, respectively, for the three and nine months ended September 30, 2011.

For the nine months ended September 30, 2012, after adjusting for derivative losses of $328,267, interest expense of $262,792, and other non-recurring expenses such as $196,880 associated with going public, and $535,980 of advertising and slotting fees, our recurring net loss was approximately $530,928.

 
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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, 2012 consisted of cash of $44,593.  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 is through equity and/or debt financing.  However management cannot provide any assurances that we will be successful in accomplishing any of our plans.

Our cash, current assets, total assets, current liabilities, and total liabilities as of September 30, 2012 and December 31, 2011, respectively, are as follows:

   
September 30,
   
December 31,
       
   
2012
   
2011
   
Change
 
                   
Cash
  $ 44,593     $ 38,658     $ 5,935  
Total Current Assets
    751,580       274,919       476,661  
Total Assets
    845,501       304,602       540,899  
Total Current Liabilities
    1,022,228       674,351       347,877  
Total Liabilities
    2,972,212       674,351       2,297,861  
 
Our cash increased slightly from $38,658 as of December 31, 2011 to $44,593 as of September 30, 2012 from the proceeds of convertible debt.  Total current assets increased by $476,661, from $274,919 as of December 31, 2011 to $751,580 as of September 30, 2012, primarily because of an increase in accounts receivable of $233,732 and an increase in prepaid expenses and other current assets of $215,513.  Prepaid expenses are primarily advertising contracts to promote our Clotamin product.  These same increases were primarily responsible for our increase in total assets.

Cash Requirements
 
We had cash available as of September 30, 2012 of $44,593.  Based on our current revenues, cash on hand, and our current net monthly burn rate of approximately $150,000, we will need to continue to raise money from the issuance of equity and/or convertible debt to fund operations.

Sources and Uses of Cash

Operations

Our net cash used in operating activities was ($1,412,279) for the nine months ended September 30, 2012, compared to net cash provided by operating activities of $61,989 for the nine months ended September 30, 2011.  This increase is a result of increased operations as described earlier.

 
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For the nine months ended September 30, 2012, our net cash used in operating activities consisted primarily of our net loss of $1,854,847, offset by an accretion of debt discount of $171,717, change in fair value of embedded conversion derivative liabilities of $328,267, plus a decrease in accounts receivable of $233,732, decrease in prepaid expenses and other current assets of $215,513, and an increase in accounts payable and accrued liabilities of $444,003.

Investments

Our net cash used in investing activities was $89,190 for the nine months ended September 30, 2012, compared to $55,627 for the nine months ended September 30, 2011.  For both periods our net cash used in investing activities consisted entirely of the purchase of property and equipment.

Financing

Our net cash provided by financing activities was $1,507,404 for the nine months ended September 30, 2012, compared to $19,351 for the nine months ended September 30, 2011.

For the nine months ended September 30, 2012, our net cash provided by financing activities consisted of proceeds from convertible debt of $1,450,000 and net proceeds from lines of credit of $57,404.

Off-balance sheet arrangements

As of September 30, 2012, 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

The Company has evaluated recent pronouncements and does not expect their adoption to have a material impact on the Company’s financial position, or statements.

ITEM 3  Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

 
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ITEM 4  Controls and Procedures

(a)           Disclosure Controls and Procedures

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2012, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2012, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in Item 4(b).

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud.  Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented if there exists in an individual a desire to do so.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

(b)           Management Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as amended, as a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and includes those policies and procedures that:

·  
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and any disposition of our assets;
·  
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·  
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2012.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on this assessment, Management identified the following two material weaknesses that have caused management to conclude that, as of September 30, 2012, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

1.           We do not have written documentation of our internal control policies and procedures.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the year ending June 30, 2012.  Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2.           We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

(c)           Remediation of Material Weaknesses
 
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.

We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.
 
(d)           Changes in Internal Control over Financial Reporting
 
No change in our system of internal control over financial reporting occurred during the period covered by this report, the quarter September 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION

ITEM 1  Legal Proceedings

We do not have any material updates to report on our pending litigation.

In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations.  However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

ITEM 1A  Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 2  Unregistered Sales of Equity Securities and Use of Proceeds

There have been no events which are required to be reported under this Item.

ITEM 3  Defaults Upon Senior Securities

There have been no events which are required to be reported under this Item.

ITEM 4  Mine Safety Disclosures

Not applicable.

ITEM 5  Other Information

There have been no events which are required to be reported under this Item.

 
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ITEM 6   Exhibits

(a)           Exhibits

2.1 (3)
 
Share Exchange Agreement with HDS
     
3.1 (1)
 
Articles of Incorporation of Sunpeaks Ventures, Inc.
     
3.2 (2)
 
Amended and Restated Articles of Incorporation of Sunpeaks Ventures, Inc.
     
3.3 (1)
 
Bylaws of Sunpeaks Ventures, Inc.
     
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
32.1
 
Chief Executive Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Chief Financial Officer Certification Pursuant to 18 USC, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document
     
101.SCH
 
XBRL Schema Document
     
101.CAL
 
XBRL Calculation Linkbase Document
     
101.DEF
 
XBRL Definition Linkbase Document
     
101.LAB
 
XBRL Lables Linkbase Document
     
101.PRE
 
XBRL Presentation Linkbase Document
_____________
(1)
Incorporated by reference from our Registration Statement on Form S-1, filed with the Commission on September 18, 2009.

(2)
Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 4, 2011.

(3)
Incorporated by reference from Exhibit 10.10 of our Current Report on Form 8-K filed with the Commission on February 17, 2012.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  Sunpeaks Ventures, Inc.  
       
Dated:  November 14, 2012
By:
/s/ Mackie Barch
 
   
Mackie Barch
 
   
President and Chief Executive Officer
 
 
 
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