Pharmagen, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATION - Pharmagen, Inc.	phrx_ex311.htm
EXCEL - IDEA: XBRL DOCUMENT - Pharmagen, Inc.	Financial_Report.xls
EX-32.2 - CERTIFICATION - Pharmagen, Inc.	phrx_ex322.htm
EX-31.2 - CERTIFICATION - Pharmagen, Inc.	phrx_ex312.htm
EX-32.1 - CERTIFICATION - Pharmagen, Inc.	phrx_ex321.htm
EX-10.12 - CONVERTIBLE PROMISSORY NOTE - Pharmagen, Inc.	phrx_ex1012.htm

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 March 31, 2014

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

Pharmagen, Inc.

(Exact name of registrant as specified in its charter)

Nevada		27-0777112
(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 o No x

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 x No o

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 has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities 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 May 12, 2014, there were 517,075,954 shares of common stock, par value $0.001, issued and outstanding.

PHARMAGEN, INC.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		3

ITEM 1	Financial Statements	3

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

ITEM 3	Quantitative and Qualitative Disclosures About Market Risk	38

ITEM 4	Controls and Procedures	39

PART II – OTHER INFORMATION		40

ITEM 1	Legal Proceedings	40

ITEM 1A	Risk Factors	40

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	40

ITEM 3	Defaults Upon Senior Securities	42

ITEM 4	Mine Safety Disclosures	42

ITEM 5	Other Information	42

ITEM 6	Exhibits	43

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.

ITEM 1 FINANCIAL STATEMENTS

PHARMAGEN, INC.

Consolidated Financial Statements (Unaudited)

	Page

Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013		5

Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013		6

Consolidated Statements of Stockholder Deficit for the three months ended March 31, 2014		7

Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013		8

Notes to Unaudited Consolidated Financial Statements		9

PHARMAGEN, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2014		December 31, 2013
ASSETS
Current Assets
Cash	$	264,673	$	225,983
Accounts receivable, net of reserve for uncollectible accounts of $319,085		325,780		367,848
Inventory		169,877		136,969
Prepaid expenses and other current assets		76,665		58,104
Deferred financing costs, net of accumulated amortization of $0 and $421,638		-		90,401

Total Current Assets		836,995		879,305

Property and equipment, net of accumulated depreciation of $178,358 and $149,454		423,784		383,022
Customer relations, net of accumulated amortization of $6,218 and $4,971		18,726		19,973
Total Assets	$	1,279,505	$	1,282,300

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities
Accounts payable and accrued liabilities	$	1,726,715	$	1,379,421
Lines of credit		344,968		359,339
Settlement agreement		2,283,182		-
Convertible settlement agreement, net of unamortized discount of $41,188 and $102,092		225,989		230,857
Current portion of capital lease obligation		41,559		42,488
Convertible lines of credit		-		1,110,743
Convertible note payable, net of unamortized discount of $70,443 and $508,464		1,418,757		1,657,036
Derivative liability		1,456,852		2,113,542
Due to related parties		171,920		190,815
Indemnification liability		-		500,000
Current portion of note payable, in default, net of unamortized discount of $35,344		624,656		500,000
Total Current Liabilities		8,294,598		8,084,241

Capital lease obligation, net of current portion		269,000		270,308
Note payable, net of current portion, in default		520,000		500,000
Loss contingency		-		14,265
Total liabilities		9,083,598		8,868,814

Commitments and contingencies
Convertible Redeemable Preferred stock; Series C $0.001 par value; 500,000 shares authorized; 225,000 shares and 125,000 shares issued and outstanding		225,000		125,000

Stockholders’ Deficit
Convertible Preferred stock; Series A $0.001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding		-			-
Convertible Preferred stock; Series B $0.001 par value; 5,100,000 shares authorized, issued and outstanding		5,100			5,100
Common stock $0.001 par value; 1,000,000,000 shares authorized; 504,451,417 and 434,408,072 shares issued and outstanding		506,451			434,407
Additional paid in capital		1,320,455			1,477,779
Stock held in escrow		-			(480,303	)
Accumulated deficit		(9,861,099	)		(9,148,497	)
Total Stockholders’ Deficit		(8,029,093	)		(7,711,514	)

Total Liabilities and Stockholders’ Deficit	$	1,279,505		$	1,282,300

The accompanying notes are an integral part of these consolidated financial statements.

PHARMAGEN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2014			2013

Revenues	$	1,319,464		$	1,721,331
Cost of Sales		(582,990	)		(686,540	)
Gross Profit		736,474			1,034,791

Operating Expenses
General and administrative		401,029			529,064
Salaries and commissions		461,468			563,286
Professional fees		284,500			269,952
Total Operating Expenses		1,146,997			1,362,302

Operating Loss		(410,523	)		(327,511	)

Other Expenses
Derivative gains		358,188			119,381
Loss on settlement of debt, net of previously accrued loss contingency		(15,646	)		-
Interest expense		(644,621	)		(633,663	)
Total Other Expenses		(302,079	)		(514,282	)

Net Loss		(712,602	)		(841,793	)

Deemed dividend related to incremental beneficial conversion feature on convertible redeemable preferred stock		(100,000	)		-
Net loss attributable to common stockholders	$	(812,602	)	$	(841,793	)

Basic and diluted loss per share	$	(0.00	)	$	(0.00	)

Weighted average common shares outstanding –basic and diluted		480,383,004			381,273,436

The accompanying notes are an integral part of these consolidated financial statements.

PHARMAGEN, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

	Preferred Stock														Additional			Stock
	Series A				Series B				Common Stock						Paid in			Held in			Accumulated
	Shares		Amount		Shares		Amount		Shares			Amount			Capital			Escrow			Deficit			Total
Balance, December 31, 2013		-	$	-		5,100,000	$	5,100		434,408,072		$	434,407		$	1,477,779		$	(480,303	)	$	(9,148,497	)	$	(7,711,514	)
Derivative liability settlement		-		-		-		-		-			-			298,502			-			-			298,502
Common stock issued for debt financing		-		-		-		-		81,834,550			81,835			71,457			-			-			153,292
Deemed dividends on convertible redeemable preferred stock due to beneficial conversion feature		-		-		-		-		-			-			-			-			-			-
Cancellation of shares		-		-		-		-		(17,291,205	)		(17,291	)		(553,187	)		480,303			-			(90,175	)
Stock issued for services		-		-		-		-		7,500,000			7,500			20,250			-			-			27,750
Stock compensation - warrants		-		-		-		-		-			-			4,160			-			-			4,160
Imputed interest on advances from related party		-		-		-		-		-			-			1,494			-			-			1,494
Net loss		-		-		-		-		-			-			-			-			(712,602	)		(712,602	)

Balance, March 31, 2014		-	$	-		5,100,000	$	5,100		506,451,417		$	506,451		$	1,320,455		$	-		$	(9,861,099	)	$	(8,029,093	)

The accompanying notes are an integral part of these consolidated financial statements.

PHARMAGEN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended March 31,
	2014			2013
Operating Activities
Net loss	$	(712,602	)	$	(841,793	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Change in fair value of derivative liability		(358,188	)		(119,381	)
Imputed interest on advances from related party		1,494			1,947
Amortization of debt discount		500,581			445,613
Amortization of deferred financing costs		39,996			133,088
Share based payments		31,910			-
Loss on settlement of debt, net of previously accrued loss contingency and cash		10,373			-
Depreciation & amortization expense		30,151			18,647
Changes in operating assets and liabilities:
Accounts receivable		42,068			(126,981	)
Inventory		(32,908	)		(34,246	)
Prepaid expenses and other current assets		(14,061	)		11,882
Accounts payable and accrued liabilities		509,545			350,605
Net Cash Provided by (Used in) Operating Activities		48,359			(160,619	)

Investing Activities
Purchase of property and equipment		(62,166	)		(16,260	)
Net Cash Used in Investing Activities		(62,166	)		(16,260	)

Financing Activities
Net proceeds from advances from related parties		-			75,000
Repayments of advances to related parties		(18,895	)		(22,400	)
Net proceeds from convertible lines of credit		(14,371	)		484,181
Proceeds from convertible redeemable preferred stock		100,000			-
Principal payments on capital lease obligations		(14,237	)		-
Cash paid for deferred financing costs		-			(35,500	)
Net Cash Provided by Financing Activities		52,497			501,281

Net Increase (Decrease) in Cash		38,690			324,402
Cash at Beginning of Period		225,983			322,556
Cash at End of Period	$	264,673		$	646,958

Supplemental Cash Flow Information:
Interest paid	$	5,821		$	3,699
Income taxes paid	$	-		$	-

Non-Cash Financing Transactions:
Allocation of convertible debt to embedded conversion derivative liabilities	$	-	$	511,548
Settlement of convertible line of credit and convertible note payable through settlement agreement	$	2,433,182	$	-
Acquisition of equipment through capital lease	$	12,000	$	-
Payment of settlement agreement through acquisition of debt	$	150,000	$	-
Shares issued for deferred financing costs	$	-	$	206,667
Cancellation of shares	$	90,175	$	-
Shares issued in settlement of debt of accrued interest	$	146,292	$	-
Settlement of derivative liability	$	298,502	$	49,819
Recognition of indemnification liability	$	-	$	400,000
Deemed dividend due to beneficial conversion feature on convertible redeemable preferred stock	$	100,000		-

The accompanying notes are an integral part of these consolidated financial statements

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

NOTE 1 – ORGANIZATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Organization and Description of Business

Sunpeaks Ventures, Inc. (“Sunpeaks” or the “Company”) was incorporated in the State of Nevada on June 25, 2009. On February 13, 2012, pursuant to a Share Exchange Agreement (“Exchange Agreement”), the Company acquired 100% ownership interest in Healthcare Distribution Specialists LLC (“HDS”), a Delaware limited liability company, in exchange for the issuance of 200,000,000 newly-issued restricted shares of the Companies’ common stock and 3,000,000 newly-issued restricted shares of the Companies’ Class A Preferred Stock (the “Exchange Shares”), to the former owner of HDS, resulting in HDS becoming a wholly-owned subsidiary of the Company. Additionally, pursuant to the Exchange Agreement, 200,000,000 shares of the Companies’ common stock held by the Companies’ former controlling owner were cancelled. As a result of the acquisition, the former owners of HDS hold majority ownership of the Company.

For financial accounting purposes, the acquisition of HDS by the Company (referred to as the “Merger”) was a reverse acquisition of the Company by HDS and was treated as a recapitalization. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on February 13, 2012, and represent the operations of HDS prior to the Merger.

HDS changed its name to Pharmagen Distribution, LLC effective January 23, 2013.

As of the time of the Merger, the Company held minimal assets and was considered a non-operating public shell in the development stage. Following the Merger, the Company is no longer considered development stage and operates through one operating segment which distributes hard-to-find and specialty drugs to the healthcare provider market throughout the United States, while functioning as an aggregator of real-time market demand for these products. The Company also owns and sells a specialized over-the-counter multivitamin product called Clotamin. Clotamin is specifically designed for use by patients on Warfarin, a blood thinner that has a known interaction with the vitamin K present in standard over-the-counter multivitamins.

Prior to the Merger, on August 1, 2011, pursuant to an Amended and Restated Asset Acquisition Agreement (the “Agreement”) between HDS and Global Nutritional Research, LLC (“GNR”), HDS acquired certain assets of GNR in exchange for assumption of debt and financial obligations of GNR. Prior to the acquisition, HDS and GNR were considered entities under common control and common ownership, as control and ownership of each entity resided with HDS’s President and an immediate family member. As entities under common control, in accordance with accounting principles generally accepted in the United States (“GAAP”), the acquired assets and liabilities of GNR were recognized in the accompanying financial statements at their carrying amounts.

The Company changed its name from Sunpeaks Ventures, Inc. to Pharmagen, Inc. (trading symbol PHRX) effective January 15, 2013.

On December 13, 2012, the Company acquired Bryce Rx Laboratories (“Bryce”) through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce. Bryce specializes in the formulation of drugs that are not commercially available, require alternate delivery systems, and or dosing changes. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000), payable (i) One Hundred Thousand Dollars ($100,000) at Closing, and (b) Two Hundred Fifty Thousand Dollars ($250,000) on December 31 of each of the four (4) years beginning in 2013 (See Note 5).

Bryce changed its name to Pharmagen Laboratories, Inc. effective on March 4, 2013.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

NOTE 2 – GOING CONCERN

The accompanying consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation of the Company as a going concern. The Company has a history of incurring net losses and at March 31, 2014 has an accumulated net loss totaling $9,861,099. At March 31, 2014, the Company held cash of $264,673. These conditions give rise to substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company expects to finance its operations primarily through its existing cash and future financings. However, there exists substantial doubt about the Company’s ability to continue as a going concern because it will be required to obtain additional capital in the future to continue its operations and there is no assurance that the Company will be able to obtain such capital, through equity or debt financings, or any combination thereof, whether on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support its growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, the Company’s operations would be materially negatively impacted. The Company’s ability to complete additional offerings is dependent on the state of the debt and equity markets at the time of any proposed offering, and such market’s reception of the Company and the offering terms. In addition, the Company’s ability to complete an offering may be dependent on the status of the Company’s business activities, which cannot be predicted.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information, and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). As permitted under those rules, certain footnotes or other information that are normally required by GAAP can be condensed or omitted.

The consolidated financial statements as of and for the three months ended March 31, 2014 and 2013 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 consolidated financial statements were prepared consistent with and should be read in conjunction with the financial statements of the Company for the years ended December 31, 2013 and 2012, and notes thereto included in our Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2014.

The results for interim periods are not necessarily indicative of results for the entire year. The balance sheet at December 31, 2013 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.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Pharmagen Distribution, LLC and Pharmagen Laboratories, Inc. As discussed above, for accounting purposes the acquisition of HDS by the Company was considered a reverse acquisition of the Company by HDS and was treated as a recapitalization. Accordingly, the financial statements have been prepared to give retroactive effect of the reverse acquisition completed on February 13, 2012, and represent the operations of HDS prior to the Merger. All material intercompany accounts and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of these 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’s 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.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments purchased with a maturity of three months or less at the time of issuance to be cash equivalents. These investments are carried at cost which approximates fair value. At March 31, 2014 and December 31, 2013, there were no cash equivalents.

The Company had cash of $264,673 and $225,983 at March 31, 2014 and December 31, 2013, respectively.

Accounts Receivable

The Company’s accounts receivable are composed of trade receivables from customers for sales of products. Trade receivables include accounts receivable for sales of product and sourcing and distribution of product for which the Company acts as an agent, which are based on gross sales to customers.

Accounts receivable are stated at their principal balances and are non-interest bearing and unsecured. The Company maintains an allowance for doubtful accounts for the estimated probable losses on uncollectible accounts receivable.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

Uncollectible accounts receivable are written off when a settlement is reached for an amount less than the outstanding historical balance or when we determine that it is highly unlikely the balance will be collected. At March 31, 2014 and December 31, 2013, the Company’s allowance for doubtful accounts was $319,085.

Inventory

Inventory is comprised of Clotamin and non-Clotamin and is recorded at lower of cost or market on a first-in, first-out (“FIFO”) method. The non-Clotamin is a collection of several raw materials that are used in combinations to make pharmaceutical drugs, some of which is stored in a warehouse and handled by a third party. The Company establishes inventory reserves for estimated obsolete or unmarketable inventory equal to the differences between the cost of inventory and the estimated realizable value based upon assumptions about future and market conditions. If obsolete or unmarketable inventory are identified and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value in the period that the impairment is first recognized. At March 31, 2014 and December 31, 2013, the allowance for obsolete or unmarketable inventory was $0, and during the three month periods ended March 31, 2014 and 2013, 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		Lease term, generally 1–2 years

Depreciation expense for the three months ended March 31, 2014 and 2013 was $28,904 and $17,417, respectively.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. Factors that might indicate a potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset, a significant change in the long-lived asset’s physical condition, a change in industry conditions or a reduction in cash flows associated with the use of the long-lived asset.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

If these or other factors indicate the carrying amount of the asset may not be recoverable, we determine whether impairment has occurred through analysis of undiscounted cash flow of the asset at the lowest level that has an identifiable cash flow. If impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. We measure the fair value of the asset using market prices or, in the absence of market prices, based on an estimate of discounted cash flows. Cash flows are generally discounted using an interest rate commensurate with a weighted average cost of capital for a similar asset. No impairments were identified as of March 31, 2014 or December 31, 2013 or during the three month periods ended March 31, 2014 and 2013.

Intangible Assets

At March 31, 2014 and 2013, the Company’s intangible assets consisted of Customer Relations. Amortization expense on Customer Relations during the three month periods ended March 31, 2014 and 2013 was $1,247 and $1,230, respectively.

Deferred financing costs

Deferred financing costs include fees paid in conjunction with obtaining the convertible line of credit and are amortized over the contractual term of the related financial instrument using effective interest method.

Derivative Liability

We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 "Derivatives and Hedging Activities" which requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

Beneficial Conversion Features

We evaluate and account for embedded beneficial conversion features in accordance with Emerging Issues Task Force 98-5. A beneficial conversion feature exists on the date a convertible instrument is issued when the fair value of the underlying common stock to which the instrument is convertible into is in excess of the remaining unallocated proceeds of the instrument. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount (for convertible notes) and a dividend (for convertible preferred stock) with a corresponding amount to additional paid in capital. When a debt discount is recorded, the debt discount is amortized to interest expense over the life of the note using the effective interest method.

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 using the effective interest method. When the debt is settled, the related debt discount is recorded as interest expense and the related derivative liability is relieved into additional paid in capital.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

The Company valued the embedded derivative conversion liability using Black-Scholes method. The Company recorded debt discounts attributable to the embedded conversion derivative liabilities related to the convertible debt and convertible lines of credit issued during the three month periods ended March 31, 2014 and 2013 totaling $0 and $511,548, respectively.

Financial Instruments and Fair Value Measures

The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities, line of credit, convertible debt and amounts due to related parties. We believe the recorded values of our financial instruments approximate their fair values because of their nature and respective maturity dates or durations.

The Company measures fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are as follows:

Level 1 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

Level 2 – Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs for which there is little or no market data and which we make our own assumptions about how market participants would price the assets and liabilities.

Derivative instruments are recognized as either assets or liabilities and are measured at fair value using the Black Scholes model. The changes in the fair value of derivatives are recognized in earnings.

Shipping and Handling Costs

Shipping and handling costs incurred for inventory purchases and product shipments are included in general and administrative expenses for all periods presented.

Advertising Expenses

Advertising costs are expensed as incurred and are included in general and administrative expenses for all periods presented. Advertising expenses for the three month periods ended March 31, 2014 and 2013 were $394 and $8,972, respectively.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

Sales Commission

The Company accrues sales commission to sales representatives when sales are made and pays it when cash is reasonably collectible from customers according to its performance based model for commission valuing. Depending on the experience of the sales representative, and whether monthly targets are met, the commission percentage range from 8-25% of the sales generated.

Concentration of Risk

The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (FDIC) and at times, balances may exceed government insured limits. All of the Company’s non-interest bearing cash balances are insured up to $250,000 per depositor at each financial institution, and non-interest bearing cash balances may exceed federally insured limits. At March 31, 2014 and December 31, 2013, the amounts held in the banks did not exceed the federally insured limit. The Company has never experienced any losses related to these balances.

During the three months ended March 31, 2014, three vendors accounted for 33%, 25% and 17% of purchases at Pharmagen. During the three months ended March 31, 2013, three vendors accounted for 29%, 16% and 12% of purchases at Pharmagen.

During the three months ended March 31, 2014, two customers accounted for 25% of Pharmagen sales. During the three months ended March 31, 2013, one customer accounted for 46% of Pharmagen sales. At March 31, 2014 and December 31, 2013, no customers accounted for more than 10% of Pharmagen 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.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

Income (Loss) per Share

We have presented basic loss per share, computed on the basis of the weighted average number of common shares outstanding during the year, and diluted loss per share, computed on the basis of the weighted average number of common shares and all dilutive potential common shares outstanding during the year. Potential common shares result from convertible debts and convertible line of credit. However, for all years presented, all outstanding convertible notes are anti-dilutive due to the losses for the years. Anti-dilutive common stock equivalents of 141,837,251 were excluded from the loss per share computation for the three months ended March 31, 2014. Anti-dilutive common stock equivalents of 119,879,899 were excluded from the loss per share computation for the three months ended March 31, 2013.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). For the three months ended March 31, 2014 and 2013, the Company had no items representing other comprehensive income or loss.

Stock Based Payments

We account for share-based awards to employees in accordance with ASC 718 “Stock Compensation”. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50 “Equity”, wherein such awards are expensed over the period in which the related services are rendered at their fair value.

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.

Reclassifications

Certain reclassifications were made to the financial statements for the three months ended March 31, 2013 in order to conform with the 2014 presentation.

Subsequent Events

The Company evaluated material events occurring between March 31, 2014 and through the date when the consolidated financial statements were issued.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

NOTE 4 – 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 March 31, 2014 and December 31, 2013), is due on demand, and is secured by all assets of the Company. As of March 31, 2014 and December 31, 2013, the Company had outstanding balances on the line of credit of $200,000. The Company is currently in good standing and was in good standing at March 31, 2014 and December 31, 2013. There are no outstanding debt covenants.

On December 13, 2012, upon the acquisition of Bryce, the Company assumed two lines of credit from Bryce, an overdraft line of credit and a business line of credit which at that time had an outstanding balance of $22,410 and $195,050, respectively. The overdraft line of credit agreement has a maximum credit line of $25,000 and bears interest at 9.25%, and the business line of credit had a maximum credit line of $200,000 (increased to $250,000 during the three months ended March 31, 2014), bears interest rate at 4.5% and expires in 2016. As of March 31, 2014 and December 31, 2013, the Company had outstanding balances on the overdraft line of credit and business line of credit of $144,968 and $159,340, respectively.

Capital lease obligation

Through March 31, 2014, the Company has acquired assets with a cost of $336,914, included in furniture and equipment, under a capital lease. The lease has a term of seven years, has payments of $4,922 including interest at 6%, and contains a bargain purchase option.

Future minimum lease payments as of March 31, 2014 are:

Amounts payable in year one	$	59,062
Amounts payable in year two		59,062
Amounts payable in year three		59,062
Amounts payable in year four		59,062
Amounts payable in year five		59,062
Thereafter		78,749
Total payments		374,059
Less amounts representing interest		(63,501	)
Total capital lease obligation		310,559
Less current portion of capital lease obligation		(41,559	)
Capital lease obligation, net of current portion	$	269,000

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

Notes payable

On December 13, 2012 (“Acquisition Date”), the Company acquired Bryce Rx Laboratories (“Bryce”) through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce Rx Laboratories, Inc. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000).

In connection with the acquisition of Bryce, the Company issued a note payable in the amount $1,000,000 to the seller. The note payable is payable in four installments at $250,000 each on December 31 beginning in 2013. Accrued imputed interest as of March 31, 2014 and December 31, 2013 was $68,562 and $55,000, respectively. As of March 31, 2014, the note is in default.

On February 24, 2014, the Company issued a note payable in the amount of $180,000, including an original issue discount of $30,000. The net proceeds of $150,000 were paid by the note holder directly to TCA Global Credit Master Fund, LP as a principal payment under the terms of the settlement agreement entered into on February 14, 2014 (see further information in next section). The note is non-interest bearing through December 31, 2014, and carries 8% interest from January 1, 2015 through maturity of October 1, 2015. Payments are due as follows:

On April 1, and May 1, 2014, the Company shall pay $5,000, which will be applied against the principal balance.

In the event the Company, between the date of the note and the maturity date, closes on debt or equity financing that in the aggregate exceeds $15 million, then the Company shall pay the entire unpaid principal amount within 120 days of the closing of said financing.

In the event any principal balance remains outstanding as of June 1, 2014, then the Company shall make payments on the first of each month beginning June 1, 2014 through the interest start date, an amount equal to 7.5% of the gross profit from pharmaceutical sales by Pharmagen Distribution, LLC for the month prior to the immediately preceding month, with a maximum monthly payment of $15,000, until the entire principal amount is paid in full.

In the event any principal amount remains unpaid as of the interest start date, then in addition to other payments set forth herein, including principal or interest, the Company shall pay an amount equal to 20% of the gross profit from pharmaceutical sales by Pharmagen Distribution, LLC for a period beginning on the interest start date and ending on the later of six months, or until the entire principal amount and accrued interest is paid in full.

As additional consideration, the Company issued 2,000,000 shares, valued at $7,000, to the note holder.

The Company established a debt discount totaling $37,000 relating to the original issue discount and value of the shares. The debt discount is accreted to interest expense over the life of the convertible debentures using the effective interest method. During the three months ended March 31, 2014, the Company recorded interest accretion expense of $1,656, which is included in interest expense on the accompanying consolidated statement of operations.

The current portion of the note payable at March 31, 2014 is $160,000.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

TCA Global Credit Master Fund, LP

2012 Convertible line of credit

On October 11, 2012 (“Closing Date”), the Company entered into a Senior Secured Revolving Credit Facility Agreement (the “Revolving Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. Pursuant to the Agreement, TCA agreed to loan up to $5 million to the Company for working capital purposes. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Promissory Note (the “Revolving Note”), the repayment of which is secured by a Security Agreement executed by the Company and its wholly-owned subsidiary, Healthcare Distribution Specialists, LLC. Pursuant to the Security Agreements, the repayment of the Revolving Note is secured by a security interest in substantially all of the Company’s assets in favor of TCA.

On October 11, 2012, the Company advanced a total of $700,000 from the Credit Agreement and paid a commitment fee of $128,963 by issuing 3,048,781 common shares valued at then current trading price of $0.042 per share. The Company recorded the commitment fee as deferred financing costs. The deferred financing cost is amortized over the life of the Credit Agreement. During the years ended December 31, 2013 and 2012, the Company amortized $71,724 and $57,239, respectively, of the deferred financing costs. The Credit Agreement carries interest at the rate of 12% per annum, increasing to 18% per annum upon the occurrence of an event of default and expires in nine months following the Closing Date.

On December 12, 2012, the Company advanced another $750,000 from the Credit Agreement which matures in six months after December 12, 2012 and amended the terms. According to the amended Credit Agreement, the Company is to issue a variable number of shares that equal $150,000 and if TCA is not able to realize at least $150,000 upon sale of the shares, the Company shall issue additional common shares to TCA to make up for the shortfall (“Make-Whole Provision”) or settle any deficit in cash.

On December 12, 2012, the Company issued 4,545,454 common shares as a commitment fee for the fixed amount of $150,000. Those shares were fair valued at $140,909 at the then current trading price of $0.031 per share and recorded as deferred financing costs. The deferred financing cost is amortized over the life of the amended Credit Agreement. During the years ended December 31, 2013 and 2012, the Company amortized $126,239 and $14,670, respectively, of the deferred financing costs.

As of December 31, 2012, the 4,545,454 shares were revalued at $136,364 using the then current trading price of the Company, and in accordance with the Make-Whole Provision, the Company recorded a stock payable of $13,636 as a liability.

During the year ended December 31, 2013, the Company entered into a Senior Secured Credit Facility Agreement with TCA which includes a mandatory redemption feature applicable to all previous commitment fees, accordingly the Company recorded an indemnification liability of $300,000 related to the $700,000 and $750,000 advances in 2012 and recorded $286,364 as shares held in escrow and reversed the $13,636 stock payable.

In addition, TCA has the right, in its sole discretion, to convert the outstanding principal and any accrued interest, fees or expenses due into shares of the Company’s Common Stock at the conversion price per share equal to the converted amount divided by 85% of the lowest daily volume weighted average price of the Company’s common stock during the five trading days immediately prior to the conversion date. The Company has evaluated the embedded conversion feature under ASC 815 and determined the embedded conversion feature to be a derivative and recorded an initial derivative liability of $415,515 for the $700,000 advance and $463,661 for the $750,000 advance as a debt discount. (See Note 7) The debt discount is amortized over six months using the effective interest method.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

The derivatives for all convertible lines of credit were valued using the Black-Scholes option pricing model with the following assumptions:

	March 14, 2014			December 31, 2013
Market value of stock on measurement date	$	0.0029		$	0.0039
Risk-free interest rate		0.00	%		0.09	%
Dividend yield		0	%		0	%
Volatility factor		210	%		193	%
Term	0 years			0.50 years

2013 Convertible promissory note

On March 29, 2013 (“Closing Date”), the Company entered into a Senior Secured Credit Facility Agreement (the “Secured Credit Agreement”) with TCA Global Credit Master Fund, LP (“TCA”), a Cayman Islands limited partnership. Pursuant to the Agreement, TCA agreed to loan up to $2 million to the Company for working capital purposes. A total of $600,000 was funded by TCA in connection with the closing. The amounts borrowed pursuant to the Credit Agreement are evidenced by a Convertible Promissory Note (the “Note”), the repayment of which is secured by a Security Agreement and each of the Company’s wholly-owned subsidiaries. Pursuant to the Security Agreements, the repayment of the Note is secured by a security interest in substantially all of the Company’s assets in favor of TCA.

The initial Note in the amount of $600,000 is due and payable along with interest thereon on June 14, 2014, and bears interest at the rate of 12% per annum, increasing to 18% per annum upon the occurrence of an event of default. The Note is convertible into the Company’s common stock at eighty five percent (85%) of the lowest VWAP during the five (5) business days immediately prior to the conversion date, subject to TCA not being able to beneficially own more than 4.99% of the Company’s outstanding common stock upon any conversion.

The Company has the right to prepay the Note, in whole or in part, provided, that the Company pays TCA an amount equal to the then outstanding amount of the Note plus 5% for repayments up until 180 days following the Closing and the then outstanding amount of the Revolving Note plus 2.5% for repayments subsequent to 180 days following the Closing.

The Company also agreed to pay TCA an investment banking fee of $100,000, payable in the form of 6,666,667 shares of common stock (the “Commitment Shares”).

The Commitment Shares are mandatorily redeemable six months after March 29, 2013 for cash in an amount equal to the $100,000 minus the amount realized by TCA as of such date. Accordingly the Company recorded an indemnification liability of $100,000 and offset to shares in escrow.

The Commitment Shares were granted on March 29, 2013. The fair value of those shares on the grant date was $206,667 valued at the then current trading price of $0.031 per share and was recorded as deferred financing cost. The deferred financing cost is amortized over the life of the Secured Credit Agreement. During the three months ended March 31, 2014, the Company amortized $39,996 of the deferred financing costs.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

Under the initial accounting, the Company allocated $511,548 of the $600,000 proceeds to the embedded conversion derivative liability. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt.

The debt discount is accreted to interest expense over the life of the convertible debentures using the effective interest method. During the three months ended March 31, 2014, the Company recorded interest accretion expense of $8,179, which is included in interest expense on the accompanying consolidated statement of operations.

The fair value of the conversion features are calculated at the time of issuance and the Company records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability are recorded in other income (expense) in the consolidated statements of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid- in capital.

On March 14, 2014, the Company entered into a Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA pursuant to which the convertible promissory note was extinguished. On this date, the Company also wrote off the remaining unamortized debt discount of $95,993 and the unamortized deferred finance fee of $50,405, and the derivative liability balance totaling $43,807 was also relieved to paid-in capital.

The derivatives for convertible promissory note were valued using the Black-Scholes option pricing model with the following assumptions:

	March 14, 2014			December 31, 2013
Market value of stock on measurement date	$	0.0029		$	0.0039
Risk-free interest rate		0.00	%		0.09	%
Dividend yield		0	%		0	%
Volatility factor		210	%		193	%
Term	0 years			0.45 years

TCA Settlement and Release Agreement

On March 14, 2014, the Company entered into a Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA pursuant to which the Company agreed to pay $2,433,183 pursuant to one of two alternative payment schedules as set forth in the Settlement Agreement in full settlement of all outstanding amounts due to TCA. Under payment Schedule 1, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, $1,700,000 on September 30, 2014, and approximately $23,975 on each of twelve (12) consecutive months beginning on October 31, 2014. In the alternative, under payment Schedule 2, we agreed to pay $150,000 on each of March 14, 2014 and March 31, 2014, $300,000 on June 30, 2014, and approximately $675,675 on each of September 30, 2014, December 31, 2014, and March 31, 2015. The election between payment Schedule 1 and Schedule 2 will be made by us on or before September 30, 2014. In addition, TCA will return to us for cancellation all of the approximately 17,291,205 shares of our common stock previously issued to it. In connection with this settlement, the Company recorded a loss on settlement totaling $24,638 (net of cash in TCA lockbox of $5,273), of which $14,265 had been accrued for as a loss contingency as of December 31, 2013.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

As noted in the previous section, the Company acquired an original issue discount note payable totaling $180,000, with net proceeds of $150,000, in order to pay the first principal payment of the TCA settlement agreement.

For further discussion, see note 8.

Convertible debt

2012 Convertible Debentures

During the year ended December 31, 2012, the Company issued a total $1,450,000 of convertible debentures to an investor, with various maturities from March 1, 2014 through May 16, 2014. Interest accrues at the rate of ten percent per annum and is payable at the respective maturity date in cash.

The investor is entitled to convert the accrued interest and principal of the convertible debentures into common stock of the Company at a conversion price equal to 80% of the Average Closing Price of the common stock. The Average Closing Price is set forth in the convertible debt agreements as follows: average closing price during the ten consecutive trading days immediately prior to conversion for $400,000 of convertible debt issued during the first quarter of 2012 and average closing price during the three consecutive trading days immediately prior to conversion for $1,050,000 of convertible debt issued during the second quarter of 2012. In the event the common stock of the Company trades at or above $0.30 at any time during the day for a period of ten consecutive trading days, the Company may at its option convert all or part of the convertible debt into common stock at the applicable conversion price.

Accounting for Convertible Debt

Under the initial accounting, the Company allocated the proceeds to the embedded conversion derivative liability, which exceeded the value of the convertible debt at the issuance date for $575,000 of the convertible debt issuance. For the remaining $875,000 of debt issuances, the Company allocated $617,127 of the proceeds to the embedded conversion derivative liability. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. The Company recorded aggregate debt discounts of $1,192,127 related to the conversion rights and recorded $161,100 of expense related to the excess value of the derivative value over the value of the convertible debt.

The debt discount is accreted to interest expense over the life of the convertible debentures using the effective interest method. During the three months ended March 31, 2014 and 2013, The Company recorded interest accretion expense of $292,749 and $94,248, respectively, which is included in interest expense on the accompanying consolidated statement of operations.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

The derivatives for 2012 convertible debentures were valued using the Black-Scholes option pricing model with the following assumptions:

	March 31, 2014			December 31, 2013
Market value of stock on measurement date	$	0.0038		$	0.0039
Risk-free interest rate		0.05	%		0.07 - 0.10	%
Dividend yield		0	%		0	%
Volatility factor		210	%		193	%
Term	0.25 years			0.21-0.44 years

2013 Convertible Debentures

On June 5, 2013, the Company issued a total $63,000 of convertible debentures to an investor. The Debenture has a maturity date of March 7, 2014, and is convertible after 180 days into common stock of the Company at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance – 120% of the principal amount; (b) between 61 and 90 days after issuance – 125% of the principal amount; (c) between 91 and 120 days after issuance – 130% of the principal amount; (d) between 121 and 180 days after issuance – 135% of the principal amount.

On August 1, 2013, the Company issued a total $42,500 of convertible debentures to the same investor. The Debenture has a maturity date of May 5, 2014, and is convertible after 180 days into common stock of the Company at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means the closing bid price on the applicable day. The “Fixed Conversion Price” shall mean $0.00005. The shares of common stock issuable upon conversion of the Note will be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. The Note can be prepaid by us at a premium as follows: (a) between 31 and 60 days after issuance – 120% of the principal amount; (b) between 61 and 90 days after issuance – 125% of the principal amount; (c) between 91 and 120 days after issuance – 130% of the principal amount; (d) between 121 and 180 days after issuance – 135% of the principal amount.

On July 10, 2013, the Company issued a $50,000 convertible debenture to an investor. The Debenture has a maturity date of March 7, 2014 and the note is convertible into the Company's common stock at a conversion price which is the lesser of $0.03 or 60% of the lowest trade price in the 25 trading days prior to the conversion.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

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. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. The Company recorded aggregate debt discounts of $155,000 related to the conversion rights and recorded $55,294 of expense related to the excess value of the derivative value over the value of the convertible debt.

The debt discount is accreted to interest expense over the life of the convertible debentures using the straight-line method. During the year ended December 31, 2013, the Company recorded interest accretion expense of $41,100, including $12,680 related to conversion of debt, which is included in interest expense on the accompanying consolidated statement of operations.

During the three months ended March 31, 2014, the Company issued shares totaling 45,276,471 in settlement of $76,300 of the outstanding principal balance and $4,220 of accrued interest, and relieved $89,474 of related derivative liability into paid-in-capital. These settlements were in accordance with the original agreement and therefore debt extinguishment accounting did not apply. These settlements were made as follows:

The Company issued 11,600,000 shares of common stock in settlement of $23,000 principal and $2,520 of accrued interest on January 10, 2014

The Company issued 7,500,000 shares of common stock in settlement of $15,000 principal on February 12, 2014

The Company issued 9,000,000 shares of common stock in settlement of $10,800 principal on February 27, 2014

The Company issued 11,764,706 shares of common stock in settlement of $20,000 principal on February 28, 2014

The Company issued 5,411,765 shares of common stock in settlement of $7,500 principal and $1,700 accrued interest on March 7, 2014

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

As of March 31, 2014, 2013 convertible debentures had a remaining balance of $39,200.

	Market value of stock on measurement date		Risk-free interest rate			Dividend yield			Volatility factor			Term
On settlement, January 10, 2014	$	0.0039		0.03 - 0.05	%		0	%		210	%		0.15 - 0.32 years
On settlement, February 10, 2014	$	0.0038		0.07	%		0	%		210	%		0.23 years
On settlement, February 27, 2014	$	0.0038		0.04	%		0	%		210	%		0.36 years
On settlement, February 28, 2014	$	0.0035		0.05	%		0	%		210	%		0.18 years
On settlement, March 6, 2014	$	0.003		0.06	%		0	%		210	%		0.16 years
Remeasurement, March 31, 2014	$	0.0038		0.05	%		0	%		210	%		0.28 years

The derivatives for 2013 convertible debentures were valued using the Black-Scholes option pricing model with the following assumptions:

Convertible Settlement Agreement

On August 30, 2013, the Circuit Court in the Twelfth Judicial Circuit in and for Sarasota County, Florida (the “Court”), entered an Order Granting Approval of Settlement Agreement (the “Order”) approving, among other things, the fairness of the terms and conditions of an exchange pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”), in accordance with a Settlement Agreement (the “Settlement Agreement”) between the Company and IBC Funds, LLC, a Nevada limited liability company (“IBC”), in the matter entitled IBC Funds, LLC, vs. Pharmagen, Inc., Case No. 2013 CA 6471 NC (the “Action”). IBC commenced the Action against us to recover an aggregate of $623,759 of past-due accounts payable, which IBC had purchased from certain of our vendors pursuant to the terms of separate claim purchase agreements between IBC and each of the respective vendors (the “Assigned Accounts), plus fees and costs (the “Claim”). The Assigned Accounts relate to certain research, technical, development and legal services. The Order provides for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding on September 5, 2013.

In settlement of the Claims, the Company shall initially issue and deliver to IBC, in one or more tranches as necessary, shares of Common Stock (the “Initial Issuance”), subject to adjustment and ownership limitations as set forth below, sufficient to satisfy the compromised amount at a forty-five percent (45%) discount to market (the total amount of the claims multiplied by 55%) based on the market price during the valuation period as defined herein through the issuance of freely trading securities issued pursuant to Section 3(a)(10) of the Securities Act (the “settlement shares”). The Company shall also issue to IBC, on the issuance date(s), 400,000 shares as a settlement fee.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

During the Valuation Period, the Company shall deliver to IBC, through the Initial Issuance and any required Additional Issuance, that number of shares (the “Final Amount”) with an aggregate value equal to (A) the sum of the Claim Amount, divided by (B) the Purchase Price. If at any time during the Valuation Period the Bid Price is below 90% of the Bid Price on the day before the Issuance Date, Company will immediately cause to be issued and delivered to IBC such additional shares as may be required to effect the purposes of this Settlement Agreement (each, an “Additional Issuance”). At the end of the Valuation Period, if the sum of the Initial Issuance and any Additional Issuance is greater than the Final Amount, IBC shall promptly deliver any remaining shares to Company or its transfer agent for cancellation.

The Valuation Period is calculated as the twenty (20) day trading period preceding the share request (the “Trading Period”); provided that the Valuation Period shall be extended as necessary in the event that (1) the Initial Issuance is delivered in more than one tranche, and/or (2) one or more Additional Issuances is required to be, in which case the Valuation Period for each issuance shall be extended to include additional trading days pursuant to such issuance. The Valuation Period shall begin on the first trading following the Issuance Date, but shall be suspended to the extent that any subsequent Initial Issuance tranche and/or Additional Issuance is due to be made until such date as such Initial Issuance tranche and/or Additional Issuance is delivered to IBC. Any period of suspension of the Valuation Period shall be established by means of a written notice from ITB to the Company.

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. The proceeds allocated to the embedded conversion derivative liability were recognized as a discount to the convertible debt. The Company recorded aggregate debt discounts of $623,759 related to the conversion rights and recorded $248,641 of expense related to the excess value of the derivative value over the value of the convertible debt, which were accounted for as a loss on settlement of accounts payable.

The debt discount is accreted to interest expense over the life of the convertible debentures using the straight-line method. During the three months ended March 31, 2014, the Company recorded interest accretion expense of $60,904, including $17,697 related to conversion of debt, which is included in interest expense on the accompanying consolidated statement of operations.

During the three months ended March 31, 2014, the Company issued shares totaling 34,558,079 in settlement of $65,772 of the outstanding balance and relieved $84,163 of related derivative liability into paid-in-capital. These settlements were in accordance with the original agreement and therefore debt extinguishment accounting did not apply. These settlements were made as follows:

The Company issued 10,000,000 shares of common stock in settlement of $21,450 principal on January 7, 2014

The Company issued 10,000,000 shares of common stock in settlement of $18,700 principal on January 22, 2014

The Company issued 14,558,079 shares of common stock in settlement of $25,622 principal on February 4, 2014

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

As of March 31, 2014 the Convertible Settlement Agreement had a balance of $267,177.

The derivatives for 2013 convertible debentures were valued using the Black-Scholes option pricing model with the following assumptions:

	Market value of stock on measurement date		Risk-free interest rate			Dividend yield			Volatility factor			Term
On settlement, January 7, 2014	$	0.0037		0.08	%		0	%		210	%	0.48 years
On settlement, January 22, 2014	$	0.0039		0.07	%		0	%		210	%	0.44 years
On settlement, February 4, 2014	$	0.0037		0.07	%		0	%		210	%	0.40 years
Remeasurement, March 31, 2014	$	0.0038		0.06	%		0	%		210	%	0.25 years

NOTE 5 – FAIR VALUE MEASUREMENTS

Fair Value on a Recurring Basis

The following table presents the Company’s financial liabilities measured and recorded on a recurring basis at fair value on the Company’s consolidated balance sheets and their level within the fair value hierarchy as of March 31, 2014.

		Total				Level 1				Level 2				Level 3
Embedded conversion derivative liabilities		$	1,456,852			$	-			$	-			$	1,456,852

	Total		Level 1		Level 2		Level 3
Embedded conversion derivative liabilities	$	2,113,542	$	-	$	-	$	2,113,542
Indemnification liability	$	500,000	$	-	$	500,000	$	-

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

The following table reconciles, for the three months ended March 31, 2014, the beginning and ending balances for embedded conversion derivatives that are recognized at fair value in the consolidated financial statements:

	Significant Unobservable Inputs (Level 3)
Beginning balance, December 31, 2013	$	2,113,542
Debt settlement		(298,502	)
Gain on fair value adjustments to embedded conversion derivative liabilities		(358,188	)
Balance of embedded conversion derivative liabilities, March 31, 2014	$	1,456,852

When the fair value of the embedded conversion derivative liability exceeds the carrying value of the convertible debentures on the issuance date, the convertible debentures is recorded at a full discount and the excess amount of the embedded derivative liability over the carrying value of the convertible debenture is recognized as a loss on derivative upon issuance. The Company has considered the provisions of ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the stated note principal being converted to a variable number of the Company’s common shares.

The Company believes the recorded values of its other financial instruments (consisting of cash, accounts receivable, accounts payable, accrued liabilities, line of credit and due to related parties) approximate their fair values because of their nature and respective maturity dates or durations.

NOTE 6 – EQUITY

Merger with Healthcare Distribution Specialist LLC

On February 13, 2012, Sunpeaks Ventures, Inc. (“Sunpeak”), acquired all of the membership interests of Healthcare Distribution Specialists LLC (“HDS”), a Delaware limited liability company, in exchange for the issuance of 200,000,000 newly-issued restricted shares of Sunpeaks’ common stock and 3,000,000 newly-issued restricted shares of Sunpeaks’ Class A Preferred Stock (the “Exchange Shares”), to the former owner of HDS. Following the acquisition, Sunpeak cancelled 200,000,000 shares of common stock owned by its former shareholders. As a result of the acquisition, the former owners of HDS hold majority ownership of the Company and the acquisition was treated as a recapitalization.

A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the public shell corporation accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets are recorded. Under recapitalization accounting, the equity of the accounting acquirer, HDS, is presented as the equity of the combined enterprise and the capital stock account of HDS is adjusted to reflect the par value of the outstanding stock of the legal acquirer (Sunpeaks) after giving effect to the number of shares issued in the business combination. Shares retained by Sunpeaks are reflected as an issuance as of the merger date for the historical amount of the net assets of the acquired entity, which in this case is zero, on the accompanying consolidated statement of stockholders’ deficit of 220,500,750 shares, which consists of Sunpeaks shares outstanding at December 31, 2011 of 370,500,750 plus 50,000,000 shares issued by Sunpeaks immediately prior and conjunction with the Merger to settle Sunpeaks’ debt outstanding prior to the Merger date, less 200,000,000 shares cancelled which were held by the former controlling owner of Sunpeaks.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

Common stock

TCA Global Credit Master Fund, LP (“TCA”)

In relation to the Settlement and Release Agreement and a Consolidated, Amended and Restated Promissory Note with TCA, TCA will return to us for cancellation all of the 17,291,205 shares of our common stock previously issued to it. This cancellation was accounted for as of March 14, 2014, the date of the agreement.

Shares issued with debt financing

As noted in Note 6, the Company entered into an original issue discount note payable, and as additional consideration under the terms of the note agreement issued 2,000,000 shares, valued at $7,000, to the note holder.

Convertible Settlement Agreement

As noted in Note 6, the Company entered into convertible settlement agreement with IBC whereby the Company would issue shares in several tranches to satisfy the outstanding debt. During the three months ended March 31, 2014, the Company settled $65,772 of the outstanding debt in exchange for the issuance of 34,558,079 shares of the Company’s common stock.

Conversion of Debt

As noted in Note 6, the Company entered into convertible debt agreements with multiple investors. During the three months ended March 31, 2014, the Company settled $76,300 of the outstanding principal and $4,220 of accrued interest in exchange for 45,276,471 shares of the Company’s common stock.

Shares issued for services

During the three months ended March 31, 2014, the Company issued 7,500,000 shares valued at $27,750 for consulting services.

Preferred Stock

Series A

On November 3, 2011, we designated twenty five million (25,000,000) shares of the Preferred Stock as Class A Preferred Stock. Our Class A Preferred Stock has liquidation preference over our common stock, voting rights of one hundred (100) votes per share, with each share convertible into five (5) shares of our common stock.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

On December 16, 2013, the shareholder of the 3,000,000 Preferred Stock A shares exchanged the shares for the 5,100,000 shares of the Company’s newly created Preferred Stock B shares. For more information see disclosure regarding Series B shares.

As of March 31, 2014, we have 0 shares of Preferred Stock A issued and outstanding.

Series B

On December 16, 2013, we designated five million one hundred thousand (5,100,000) shares of the Preferred Stock as Class B Preferred Stock. Our Class B Preferred Stock has liquidation preference over our common stock, voting rights of 1% of the number of votes of all shareholders for each 100,000 shares, with each 680,000 shares convertible into 1% of the outstanding shares of our common stock, after giving effect to the shares issued as a result of the conversion.

On December 20, 2013, we received a signed version of a Securities Exchange Agreement December 16, 2013 with Old Line Partners, LLC, a Nevada limited liability company, whose manager is Mackie Barch, one of our officers and directors. Pursuant to the terms of the Exchange Agreement, Old Line exchanged all three million (3,000,000) shares of our Class A Preferred Stock that were issued and outstanding for five million one hundred thousand (5,100,000) shares of our newly created Series B Convertible Preferred Stock. The exchange was accounted for as an extinguishment of stock and the Company recorded the difference between the fair value of the Preferred A and the Preferred B stock as of the exchange date of $332,000 as an increase to APIC and a deemed dividend.

As of March 31, 2014, we have 5,100,000 shares of Preferred Stock B issued and outstanding.

Series C

On December 16, 2013, we designated five hundred thousand (500,000) shares of the Preferred Stock as Class C Preferred Stock. Our Class C Preferred Stock has liquidation preference over our common stock, voting rights of one (1) vote per share, with each 50,000 shares convertible into fifty thousand (50,000) shares of our common stock.

During the three months ended March 31, 2014, the Company issued 100,000 Preferred Stock C for $100,000. The conversion feature of the Preferred Stock was evaluated and it was determined that a beneficial conversion feature exists. The Company recorded $100,000 as a deemed dividend. As the Company had a negative retained earnings balance at the date of issuance, the dividends were accounted for as a debit and credit to additional paid-in capital.

Preferred C has been evaluated and it has been determined that it contains a substantive redemption feature and therefore it has been classified as temporary equity under commitments and contingencies in the accompanying consolidated balance sheet.

As of March 31, 2014, we have 225,000 shares of Preferred Stock C issued and outstanding.

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

Contributed capital for imputed interest on advances from related party

At March 31, 2014 and December 31, 2013, the Company owed $96,920 and $115,815, respectively, to its President for repayment of advances. The advances are unsecured, non-interest bearing, and due on demand. The Company imputed interest expense of $1,494 and $1,947 on these advances owed during the three months ended March 31, 2014 and 2013, respectively.

Stock Compensation – Warrants

On December 9, 2013, the Company executed a Consulting Services Agreement with Bagel Boy Equity Group II, LLC, a private family office, whereby its managing partner, Richard A. Wolpow, will become Chairman of the Board of Directors and interim Chief Operating Officer. Bagel Boy Equity Group will lead the Company’s efforts to deploy a roll-up consolidation plan in the hard-to-find secondary wholesale and sterile compounding market.

As consideration under the Consulting Agreement, the Company issued to Bagel Boy a warrant to acquire up to three percent (3%) of the Company’s issued and outstanding shares of common stock, calculated at the time of exercise, at an exercise price of $0.0065 per share (the “Commencement Warrant”). The warrant vests in two equal parts, one-half immediately upon vesting and one-half upon completion of the acquisition of two (2) Acquisition Targets, as defined in the Consulting Agreement. The warrant may be exercised at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to the vesting set forth above and a 9.9% ownership limitation set forth therein. The warrants were valued as of the date of issuance using the Black-Scholes option pricing model. In accordance with ASC 505-50 “Equity”, these awards are expensed over the period in which the related services are rendered at their fair value. Therefore, the unvested portion of the warrants which are to be earned under the above mentioned terms were revalued as of March 31, 2014 and stock compensation related to these warrants from inception of the agreement were adjusted based upon the newly determined fair value of the warrants. The assumptions used at the date of issuance and as of the end of the reporting period are shown below:

	March 31, 2014			December 9, 2013
Market value of stock on measurement date	$	0.0038		$	0.0063
Risk-free interest rate		2.30	%		2.23	%
Dividend yield		0	%		0	%
Volatility factor		210	%		193	%
Term	7.5 years			7.5 years

The value of the warrant was determined to be $69,605. The Company recorded $4,074 in stock compensation for the three months ended March 31, 2014. Unvested stock compensation totaling $13,049 will be recorded as the remaining vesting requirements are met.

As further consideration under the Consulting Agreement, we agreed to pay to Bagel Boy a consulting fee of $15,000 per month, payable in the form of cash (at a 25% discount) or in the form of a cashless exercise warrant exercisable at fifty percent (50%) of the lowest five (5) closing bid prices during the ten (10) trading days prior to exercise (the “Consulting Warrant”). The warrant may be exercised at any time beginning on June 9, 2014 and during the seven (7) years thereafter, subject to a 9.9% ownership limitation set forth therein. The warrants were valued as of the date of issuance using the Black-Scholes option pricing model. In accordance with ASC 505-50 “Equity”, these awards are expensed over the period in which the related services are rendered at their fair value. Therefore, the unvested portion of the warrants which are to be earned under the above mentioned terms were revalued as of March 31, 2014 and stock compensation related to these warrants from inception of the agreement were adjusted based upon the newly determined fair value of the warrants. The assumptions used at the date of issuance and as of the end of the reporting period are shown below:

PHARMAGEN, INC.

(a Nevada corporation)

Notes to Unaudited Consolidated Financial Statements

March 31, 2014

	March 31, 2014			December 9, 2013
Market value of stock on measurement date	$	0.0038		$	0.0063
Risk-free interest rate		2.30	%		2.23	%
Dividend yield		0	%		0	%
Volatility factor		210	%		193	%
Term	7.5 years			7.5 years

The value of the warrant was determined to be $4,464. The Company recorded $85 in stock compensation for the three months ended March 31, 2014. Unvested stock compensation totaling $747 will be recorded as the remaining vesting requirements are met.

NOTE 7 – RELATED PARTY TRANSACTIONS

On February 19, 2013, the Company received an advance from a related party in the amount of $75,000, and this amount was outstanding as of March 31, 2014. The advance is unsecured, bears interest at 6% and is due on November 19, 2014.

NOTE 8 – INCOME TAXES

No provision for federal income taxes has been recognized for the three months ended March 31, 2014 and 2013 as the Company incurred a net operating loss for income tax purposes in each period and has no carryback potential.

There is no balance for deferred tax assets as of March 31, 2014 and December 31, 2013 due to uncertainty regarding the realizability of deferred tax assets.

At March 31, 2014 and December 31, 2013, the Company has no uncertain tax positions.

NOTE 9 – SUBSEQUENT EVENTS

The Company has evaluated through the filing date of these consolidated financial statements and noted the following subsequent events:

On April 1, 2014, we entered into a Securities Purchase Agreement with Bagel Boy Equity Group II, LLC, an entity owned and controlled by our Interim-Chief Operating Officer and Chairman of the Board of Directors, Richard A. Wolpow, pursuant to which we sold one hundred thousand (100,000) shares of our Series C Convertible Preferred Stock at $1.00 per share, for total consideration of $100,000.

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, 2013 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 Months Ended March 31, 2014 compared to the Three Months Ended March 31, 2013

Introduction

Our revenues for the three months ended March 31, 2014 were $1,319,464, compared to $1,721,331 for the three months ended March 31, 2013. 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 months ended March 31, 2014, as compared to the three months ended March 31, 2013, are as follows:

	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013

Revenue	$	1,319,464			1,721,331
Cost of Sales		(582,990	)		(686,540	)
Gross Profit	$	736,474			1,034,791

Operating Expenses:
General and Administrative	$	401,029			529,064
Salaries and commissions		461,468			563,286
Professional fees		284,500			269,952
Total Operating Expenses	$	1,146,997			1,362,302

Operating Loss	$	(410,523	)		(327,511	)

Other Expenses:
Derivative gains	$	358,188			119,381
Loss on settlement of debt		(15,646	)		-
Interest expense		(644,621	)		(633,663	)
Total Other Expenses	$	(302,079	)		(514,282	)

Net Loss	$	(712,602	)		(841,793	)

Revenue

Our revenue for the three months ended March 31, 2014 decreased by $401,867, or 23%, as compared to the three months ended March 31, 2013. The decrease in revenue is a result of a decrease in our sales of hard-to-find drugs during the quarter, even though we continued to increase the number of states in which we are licensed to sell drugs, and our sales of prescription based drugs. As of January 1, 2014, we had licenses to sell drugs in 45 states.

We report revenues from sales of our hard-to-find drugs and Clotamin in one business segment. 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 March 31, 2014, three vendors accounted for 33%, 25% and 17% of purchases at Pharmagen, while during the three months ended March 31, 2013, three vendors accounted for 29%, 16% and 12% of purchases at Pharmagen.

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 months ended March 31, 2014, our cost of sales was $582,990, or 44% of our revenue, as compared to $686,540, or 40% of revenue for the three months ended March 31, 2013. The decrease in cost of sales was $103,550, or 15%. The slight increase 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 decreased by $128,035, or 24%, for the three months ended March 31, 2014 compared the three months ended March 31, 2013. 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 decrease as our operations and revenues decrease, and likewise increase as our operations and revenues increase, up to a point, but then level off.

Salaries and Commissions

Our salaries and commissions decreased by $101,818, or 18%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, as we implemented cost-cutting measures aimed specifically at reducing our overhead expenses. During the three months ended March 31, 2014, approximately $124,000 was paid as commissions to our sales force, as compared to approximately $103,000 for the three months ended March 31, 2013. 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 $14,548, or 5%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The slight 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.

Derivative Gains

Our derivative gains increased by $238,807, or 200%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. These derivative losses relate to the change in fair value of embedded derivatives related to convertible debt agreements.

Loss on Settlement of Debt

Our loss on settlement of debt increased to $15,646 from $0 for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The loss on settlement of debt is related to the TCA Settlement and release agreement entered into on March 14, 2014. In connection with this settlement, the Company recorded a loss on settlement totaling $24,638 (net of cash held in TCA lockbox of $5,273), of which $14,265 had been accrued for as a loss contingency as of December 31, 2013.

Interest Expense

Our interest expense increased by $10,958, or 2%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Operating Loss; Net Loss

Our operating loss increased by $83,012, or 25%, from ($327,511) to ($410,523), for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Our net loss decreased by $129,191, or 15%, from ($841,793) to ($712,602), for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Our losses for three months ended March 31, 2014 decreased by 15% while our revenues decreased by a larger 23%.

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 March 31, 2014 consisted of cash of $264,673. We no longer have access to 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 from current operations will be sufficient to meet our operating expenses by December 31, 2014 or thereafter.

Our cash, current assets, total assets, current liabilities, and total liabilities as of March 31, 2014 and December 31, 2013 are as follows:

	March 31,		December 31,
	2014		2013

Cash	$	264,673	$	225,983
Total Current Assets		836,995		879,305
Total Assets		1,279,505		1,282,300
Total Current Liabilities		8,294,598		8,084,241
Total Liabilities		9,083,598		8,868,814

Our cash increased by $38,690, or 17% as of March 31, 2014 compared to December 31, 2013.

Total current assets decreased by $42,310, or 5%, as of March 31, 2014 as compared to March 31, 2013. The decrease was primarily a result of the decrease in deferred financing costs from $90,401 to zero, and a decrease in accounts receivable of $42,068, offset by the increase in cash described above and an increase in inventory of $32,908 and prepaid expenses of $18,561. Prepaid expenses consists of prepaid insurance premiums.

Total assets increased by $2,795, or less than 1%, as of March 31, 2014 as compared to March 31, 2013. In addition to the changes described above in the current assets, the decrease was primarily a result of an increase in property and equipment, net of depreciation, of $40,762.

Cash Requirements

We had cash available as of March 31, 2014 of $264,673. Our cash provided by operating activities was $48,359 for the three months ended March 31, 2014, compared to cash used in operating activities of $160,619 for the three months ended March 31, 2013, a difference of $208,978. Based on our current revenues and cash on hand, and our monthly cash flow needs of approximately $90,000, we will need to continue to raise money from the issuance of equity to pay down our long term debt.

Sources and Uses of Cash

Operations

Our net cash provided by operating activities was $48,359 for the three months ended March 31, 2014, compared to net cash used in operating activities $160,619 for the three months ended March 31, 2013, a difference of $208,978. For the three months ended March 31, 2014, our net cash provided by operating activities consisted of our net loss of $712,602 and a change in fair market value of derivative liability of $358,188, offset primarily by an amortization of debt discount of $500,581 and accounts payable and accrued liabilities of $509,545.

Investments

Our net cash used in investing activities was $62,166 for the three months ended March 31, 2014, compared to $16,260 for the three months ended March 31, 2013. 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 $52,497 for the three months ended March 31, 2014, compared to $501,281 for the three months ended March 31, 2013. For the three months ended March 31, 2014, our net cash provided by financing activities consisted primarily of net proceeds from preferred stock of $100,000, offset by repayments of advances to related parties of $18,895, net proceeds from convertible lines of credit of $14,371, and principal payments in capital lease obligations of $14,237.

Off-balance sheet arrangements

As of March 31, 2014, 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.

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.

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 March 31, 2014, 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 March 31, 2014, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described in our Annual Report on Internal Control Over Financial Reporting filed in our Annual Report on Form 10-K.

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.

(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 three month period ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 Legal Proceedings

There have been no updates to the legal proceedings disclosure in our Annual Report on Form 10-K for the year ended December 31, 2013.

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

Bridge Financing

On February 14, 2014, we entered into a second Securities Purchase Agreement with Bagel Boy Equity Group, II, LLC, an entity owned and controlled by Mr. Wolpow, for the sale of an additional one hundred thousand (100,000) shares of our newly created Series C Convertible Preferred Stock at $1.00 per share, for total consideration of $100,000. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the shareholder was accredited, familiar with our operations, and there was no solicitation in connection with the issuance. Our Board of Directors approved an offering of up to five hundred thousand (500,000) shares of Series C Convertible Preferred Stock at $1.00 per share.

On March 19, 2014, we entered into a Securities Purchase Agreement with three investors pursuant to which we sold an aggregate of one hundred and seventy-five thousand (175,000) shares of our newly created Series C Convertible Preferred Stock at $1.00 per share, for total consideration of $175,000. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as the investors were familiar with our operations and there was no solicitation in connection with the issuance.

The shares of Series C Convertible Preferred Stock have one (1) vote per share, are redeemable by us on ten (10) trading days advance notice at two hundred percent (200%) of the purchase price, and are convertible into common stock on either a fixed percentage basis or a variable conversion basis.

On a fixed conversion basis, the holders of the Series C Convertible Preferred Stock can acquire upon conversion, in the aggregate, fifteen percent (15%) of the then-outstanding shares of common stock of the Company. On a variable conversion basis, the shares are convertible at 33.33% of the lowest five (5) closing bid prices of our common stock during the ten (10) trading days prior to conversion. In no event can any single shareholder convert the Series C Convertible Preferred Stock if it will result in their ownership exceeding 9.99% of our then issued and outstanding shares.

Original Issue Discount Promissory Note

On February 24, 2014, we entered into an Original Issue Discount Promissory Note in the amount of one hundred eighty thousand dollars ($180,000). Under the terms of the note, the holder advanced one hundred fifty thousand dollars ($150,000) to us, which will be repaid as follows:

(a) on April 1 and May 1, 2014, we will pay five thousand dollars ($5,000) to the holder, which will be applied against the outstanding principal amount,

(b) in the event we, between the date of the note and the maturity date (October 1, 2015) close on debt or equity financing that, in the aggregate, exceeds fifteen million dollars ($15,000,000), then we will repay the entire unpaid principal amount no later than the date which is one hundred twenty (120) days after the closing of said financing,

(c) in the event any of the principal amount remains unpaid as of June 1, 2014, then we will pay to the holder on the first of each month beginning on June 1, 2014, and continuing until December 31, 2014 (the “Interest Start Date”), an amount equal to seven and one half percent (7.5%) of the gross profit from pharmaceutical sales by our wholly-owned subsidiary, Pharmagen Distribution, LLC for the month prior to the immediately preceding month, with a maximum monthly payment of fifteen thousand dollars ($15,000), until the entire principal amount, plus accrued interest, is repaid in full,

(d) in the event any of the principal amount remains unpaid as of the Interest Start Date, then in addition to any other payments set forth herein, including principal or interest, we will pay to the holder an amount equal to twenty percent (20%) of the gross profit from pharmaceutical sales by our wholly-owned subsidiary, Pharmagen Distribution, LLC, for a period beginning on the Interest Start Date and ending on the later of (i) six (6) months, or (ii) until the entire Principal Amount, plus accrued interest, is repaid in full, and

(e) notwithstanding the above, the entire unpaid principal amount and all accrued but unpaid interest shall be due on the maturity date.

In addition, we issued to the note holder two million (2,000,000) shares of our common stock, restricted in accordance with Rule 144. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was accredited, familiar with our operations, and no general solicitation was utilized.

Stylinz Industries, Inc., Consulting Agreement

On March 24, 2014, we received a fully executed copy of a Consulting Services Agreement dated March 24, 2014, with Stylinz Industries, Inc., a Wyoming corporation, pursuant to which Stylinz Industries, Inc., will provide consulting services to us. As partial consideration under the Consulting Agreement, we agreed to pay Stylinz Industries Fifty Dollars ($50.00) per billed hour and Seventy Five Dollars ($75.00) per hour for travel time, payable on a quarterly basis by executing and delivering a Warrant Agreement. The Warrant Agreement shall provide Stylinz Industries with cashless warrants exercisable into our common stock. The number of shares issued shall be based on any Consulting Fee (as defined in the Consulting Agreement) then due and owing and calculated using the Conversion Price on the date the warrants are exercised.

The “Conversion Price” shall be the greater of: (i) fifty percent (50%) of the average of the lowest five (5) closing bid prices during the ten (10) trading days prior to exercise; or (ii) $0.05. The warrants may be exercised at any time beginning on August 27, 2014, subject to a 9.9% ownership limitation set forth therein.

This issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as the consultant was familiar with our operations and there was no solicitation in connection with the issuance.

Common Stock

On March 26, 2014, we issued an aggregate of 7,500,000 shares of our common stock, restricted in accordance with Rule 144, to two individuals for consulting services, 5,000,000 of which was pursuant to a Consulting Agreement dated effective July 1, 2013. The issuances were exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

Convertible Note

On July 22, 2013, we entered into a convertible promissory note in the original principal amount of up to $250,000. The note is convertible into the lesser of $0.04 or 60% of the lowest trade price in the 25 trading days previous to the conversion (plus an additional 10% discount if we are not DWAC eligible). The note is due and payable one year after each advance by the lender. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were sophisticated and familiar with our operations, and there was no solicitation in connection with the offering.

ITEM 3 Defaults Upon Senior Securities

On December 13, 2012, we acquired Bryce Rx Laboratories through a Stock Purchase Agreement with Robert Guiliano, an individual, for the purchase of all of the outstanding securities of Bryce Rx Laboratories, Inc. The purchase price was One Million One Hundred Thousand Dollars ($1,100,000). In connection with the acquisition of Bryce, we issued a note payable in the amount $1,000,000 to the seller. The note payable is payable in four installments at $250,000 each on December 31 beginning in 2013. Accrued imputed interest as of March 31, 2014 and December 31, 2013 was $68,562 and $55,000, respectively. As of March 31, 2014, the note is in default.

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.

ITEM 6 Exhibits

(a) Exhibits

2.1 (5)		Amended and Restated Asset Acquisition Agreement between Amerisure Pharmaceuticals, LLC and Global Nutritional Research, LLC

2.2 (4)		Share Exchange Agreement with Healthcare Distribution Specialists, LLC dated February 13, 2012

2.3 (8)		Stock Purchase Agreement with Bryce Rx Laboratories, Inc. dated December 13, 2012

3.1 (1)		Amended and Restated Articles of Incorporation of Sunpeaks Ventures, Inc.

3.2 (11)		Certificate of Amendment to Articles of Incorporation

3.2 (2)		Bylaws of Sunpeaks Ventures, Inc.

3.3 (3)		Certificate of Amendment to Articles of Incorporation

4.1 (6)		Sunpeaks Ventures, Inc. 2012 Omnibus Stock Grant and Option Plan

4.2 (7)		Sunpeaks Ventures, Inc. Form of Non Statutory Stock Option Agreement

4.3 (8)		Certificate of Designation for Series C Convertible Preferred Stock

4.4 (9)		Certificate of Designation for Series B Convertible Preferred Stock

10.1 (10)		Consulting Services Agreement with Bagel Boy Equity Group II, LLC

10.2 (10)		Common Stock Commencement Warrant

10.3 (10)		Common Stock Consulting Warrant

10.4 (10)		Form of Securities Purchase Agreement for Series C Convertible Preferred Stock

10.5 (11)		Original Issue Discount Promissory Note dated February 24, 2014

10.6 (11)		Securities Purchase Agreement dated February 24, 2014

10.7 (12)		Settlement and Release Agreement dated March 14, 2014

10.8 (12)		Consolidated, Amended and Restated Promissory Note dated March 14, 2014

10.9 (13)		Consulting Services Agreement

10.10 (13)		Common Stock Purchase Consulting Warrant

10.11 (13)		Form of Securities Purchase Agreement for Series C Convertible Preferred Stock

10.12		Convertible Promissory Note

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 Exhibit 3.1 to our Current Report on Form 8-K filed with the Commission on November 4, 2011.

(2)	Incorporated by reference from Exhibit 3.2 to our Registration Statement on Form S-1 filed with the Commission on September 18, 2009.

(3)	Incorporated by reference from Exhibit 3.1 to our Current Report on Form 8-K filed with the Commission on January 14, 2013.

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

(5)	Incorporated by reference from Exhibit 10.15 to our Current Report on Form 8-K filed with the Commission on July 27, 2012.

(6)	Incorporated by reference from Exhibit 4.1 to our Registration Statement on Form S-8 filed with the commission on August 3, 2012.

(7)	Incorporated by reference from Exhibit 4.2 to our Registration Statement on Form S-8 filed with the commission on August 3, 2012.

(8)	Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 16, 2013.

(9)	Incorporated by reference from our Current Report on Form 8-K filed with the Commission on December 20, 2013.

(10)	Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 24, 2014.

(11)	Incorporated by reference from our Current Report on Form 8-K filed with the Commission on February 28, 2014.

(12)	Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 21, 2014.

(13)	Incorporated by reference from our Current Report on Form 8-K filed with the Commission on March 25, 2014.

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.

	Pharmagen, Inc.

Dated: May 15, 2014		/s/ Mackie Barch
		By: Mackie Barch
		Its: President and Chief Executive Officer

Pharmagen, Inc. - FORM 10-Q - May 15, 2014

Attached files

Pharmagen, Inc. Reports