UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, ~~2012~~2013.

¨	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: 333-181361

Assured Pharmacy, Inc.

(Exact name of registrant as specified in its charter)

Nevada	98-0233878
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

~~2595~~5600 ~~Dallas~~Tennyson Parkway, Suite ~~206~~390, ~~Frisco~~Plano, ~~Texas~~TX ~~75034~~75024

(Address of principal executive offices) (Zip Code)

(972) ~~668~~473-~~7394~~4033

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Exchange Act:

Title of Each Class

Name of Exchange of Which Registered

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $21,~~717~~463,~~417~~551 as of March 1527, ~~2013~~2014, based on the last sale price of the registrant’s common stock as reported on the OTC Bulletin Board on such ~~dated~~date.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding at March 1527, ~~2013~~2014
Common Stock, $0.001 par value		510,~~627~~476,~~267~~387

Table of Contents

Form 10-k

Assured Pharmacy, Inc.

December 31, ~~2012~~2013

Table of Contents

		Page(s)
Part I.
Item 1.	BUSINESS	4 - 1213
Item 1A.	RISK FACTORS	1214 - 2426
Item 1B.	UNRESOLVED STAFF COMMENTS	2426
Item 2.	PROPERTIES	~~24 - 25~~26
Item 3.	LEGAL PROCEEDINGS	2526 - 27
Item 4.	MINE SAFETY DISCLOSURES	2527
	EXECUTIVE OFFICERS OF THE REGISTRANT	2527 - 28
Part II.
Item 5.	MARKET FOR ~~REGISTRANTS~~REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES	2528 - 2831
Item 6.	SELECTED FINANCIAL DATA	2831
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	2831 - 3941
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	3941
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	4042
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES	4143
Item 9A.	CONTROLS AND PROCEDURES	4143
Item 9B.	OTHER INFORMATION	4143
Part III.
Item 10.	DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	4244 - 4446
Item 11.	EXECUTIVE COMPENSATION	4446 - 4649
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	4750 - 4953
Item 13.	CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	5054 - 5156
Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	5256
Part IV.
Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	5257 - 5458
EX-10.23	(AMENDMENT TO REVOLVING CREDIT AGREEMENT)	54
EX-10.4	(FOURTH AMENDMENT TO PURCHASE AGREEMENT)	57
EX-10.24	(PROMISSORY NOTE AGREEMENT DATED FEBRUARY 1, 2013)	54
EX-10.5	(AMENDMENT TO REVOLVING LINE OF CREDIT)	57
EX-10.25	(FORM OF SUBSCRIPTION AGREEEMENT FOR COMMON STOCK)	54
EX-10.6	(LETTER AGREEMENT- DEBENTURE )	57
EX-10.26	(FORM OF STOCK PURCHASE AGREEMENT FOR COMMON STOCK)	54
EX-10.7	(AMENDED AND RESTATED CONVERTIBLE DEBENTURE)	57
EX-10.27	(FORM OF COMMON STOCK PURCHASE WARRANT)	54
EX-10.8	(FORBEARANCE AGREEMENT)	57
EX-10.28	(FORM OF REGISTRATION RIGHTS AGREEMENT)	54
EX-10.9	(FORM OF 12% PROMISSORY NOTE)	57
EX-14.1	CODE OF ETHICS AND CONDUCT	54
EX-10.10	(PROMISSORY NOTE – PINEWOOD)	57
EX-21.1	(SUBSIDIARIES OF THE REGISTRANT)	5458
EX-31.1	(CERTIFICATION OF CHIEF EXECUTIVE OFFICER)	5458
EX-31.2	(CERTIFICATION OF CHIEF FINANCIAL OFFICER)	5458
EX-32.1	(CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER)	5458

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FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of the factors that we believe could affect our results include:

·	limitations on our ability to continue operations and implement our business plan;

·	our history of operating losses;

· our inability to make timely payments under our loan facility and our arrangement with TPG;

·	our inability to make timely payments to convertible debenture and secured debt holders;

·	the timing of and our ability to obtain financing on acceptable terms;

· dependence onone key supplier;

·	dependence on third-party payors;

·	the effects of changing economic conditions;

·	the loss of members of the management team or other key personnel;

· changes in governmental laws and regulations, or the interpretation or enforcement thereof and related compliance costs; and/or

· ~~competition~~costs ~~from~~and ~~larger~~other effects of legal and administrative proceedings, ~~more~~settlements, ~~established~~investigations ~~companies~~and ~~with~~claims, ~~greater~~which ~~economic~~may ~~resources~~not ~~than~~be wecovered ~~have;~~by insurance.

· costs and other effects of legal and administrative proceedings, settlements, investigations and claims, which may not be covered by insurance;

· control by our principal equity holders.

There are likely other factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements. All forward-looking statements attributable to us in this document apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events, except as required by law.

In this report, unless the context indicates otherwise: “Assured Pharmacy,” the “Company,” “we,” “our,” “ours” or “us” refer to Assured Pharmacy, Inc., a Nevada corporation, and its subsidiaries.

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~~part~~PART iI

~~item~~ITEM 1. ~~business~~ BUSINESS

We were organized as a Nevada corporation on October 22, 1999 under the name Surforama.com, Inc. and previously operated under the name eRXSYS, Inc. We changed our name to Assured Pharmacy, Inc. in October 2005. Since May 2003, we have been engaged in the business of establishing and operating pharmacies that specialize in dispensing highly regulated pain medication for chronic pain management. Because our focus is on dispensing medication, we typically ~~will~~ do not keep in inventory non-prescription drugs, or health and beauty related products, such as walking canes, bandages and shampoo. We primarily derive our revenue from the sale of prescription medications. The majority of our business is derived from repeat business from our customers.

Our pharmacies maintain a variety of different drug classes, known as Schedule II, Schedule III, and Schedule IV drugs, which vary in degrees of addictiveness. Schedule II drugs are considered narcotics by the United States Drug Enforcement Administration (“DEA”), and are the most addictive; hence, they are highly regulated by the DEA and are required to be segregated and secured in a separate cabinet. Schedule III and Schedule IV drugs are less addictive and are less regulated. Because our business model focuses on servicing pain management physicians and their chronic pain patients, we carry in inventory a larger amount of Schedule II drugs than most other pharmacies.

We currently have ~~four~~two operating pharmacies and two pharmacies under development in Greewood Village, Colorado and Waltham, Massachusetts, each of which are wholly owned through a subsidiary. The opening date and locations of our pharmacies are as follows:

Location		Opening Date
Riverside, California		June 10, 2004
Kirkland, Washington		August 11, 2004
Gresham, Oregon		January 26, 2007
Leawood, Kansas		November 28, 2011

In February 2004, we entered into an agreement with TAPG, L.L.C., a Louisiana limited liability company (“TAPG”), for the purpose of operating up to five pharmacies and incorporated Assured Pharmacies Northwest, Inc. (“APN”), formerly known as Safescript Northwest, Inc., to operate these pharmacies. APN operates the pharmacy in Kirkland, Washington. In June 2011, we acquired all of the outstanding capital stock of APN held by TAPG pursuant to the terms of a Stock Purchase Agreement dated as of June 30, 2011. Pursuant to this agreement, we issued TAPG 300,000 restricted shares of our common stock and TAPG agreed to cancel $17,758 in principal and interest we owed to TAPG. As a result of this transaction, APN became our wholly owned subsidiary.

In April 2003, we entered into an agreement with TPG, L.L.C., a Louisiana limited liability company (“TPG”), for the purpose of funding the establishment of and operating up to fifty pharmacies and incorporated Assured Pharmacies, Inc. (“API”) to operate these pharmacies. We owned 51% of API’s outstanding capital stock and TPG owned the remaining 49%. API operated the pharmacies in Santa Ana and Riverside, California. ~~In December 2012, we consolidated the operations of the Santa Ana pharmacy into our Riverside pharmacy.~~ We entered into a Purchase Agreement with TPG and acquired all of the outstanding capital stock of API held by TPG for the purchase price of $460,000 in cash and the issuance of 278 restricted shares of our common stock. As a result of this transaction, API also became our wholly owned subsidiary. The cash component of the purchase price is payable in monthly installments over time. As In ofDecember ~~March 15~~2012, ~~2013,~~ we ~~had~~consolidated ~~paid~~the ~~TPG~~operations ~~an aggregate~~ of ~~$332,500~~the ~~including~~Santa ~~principal~~Ana ~~and~~pharmacy ~~interest and~~into our ~~outstanding~~Riverside ~~obligations to TPG under the Purchase Agreement~~pharmacy. ~~Due~~ In toAugust ~~our current financial condition~~2013, we ~~did~~closed ~~not make~~ the ~~required~~operations ~~monthly installment payment~~ of ~~$10,000~~our ~~starting~~Riverside inpharmacy. The ~~September~~Purchase ~~15,~~Agreement ~~2012~~has ~~through~~been ~~March~~subsequently 15amended, ~~2013 and may be unable to make~~ the ~~delinquent~~latest ~~payments~~amendment orwas the ~~final~~Fourth ~~payment~~Amendment ~~due~~ to ~~TPG~~Purchase Agreement which ~~includes~~was ~~principal~~completed ~~and interest~~ on ~~or before July 15~~December 19, 2013. AsUnder the terms of ~~March~~the 15amendment, ~~2013,~~the weCompany ~~owe~~issued ~~TPG $242~~200,~~873~~000 ~~plus~~restricted ~~all~~shares ~~accumulated~~of ~~accrued~~the ~~interest. If~~Company’s wecommon ~~remain~~stock ~~unable~~and toagreed ~~fulfill our obligations~~ to ~~TPG~~repay ~~under~~ the ~~Purchase~~remaining ~~Agreement~~$60,000 wedue ~~will~~in ~~attempt~~six toconsecutive ~~restructure~~monthly ~~and~~payments ~~extend the terms~~ of ~~payments due to TPG~~$2,000 ~~but~~followed ~~can~~by ~~provide~~sixteen noconsecutive ~~assurance~~monthly wepayments ~~will~~of ~~be able to do so on acceptable terms or even at all~~$3,000. InUnder ~~order to secure our obligations under~~ the ~~Purchase~~agreement ~~Agreement,~~ TPG holds a security interest in the shares of API capital stock acquired by us under the Purchase Agreement. If TPG should demand payment and we are unable to renegotiate the terms for our outstanding obligations to TPG under the Purchase Agreement, TPG could declare us in default and may seize the shares of API capital stock acquired by us under the Purchase Agreement, which would result in API no longer being a wholly owned subsidiary and have a material adverse effect on our business, operating results and financial condition. ~~TPG has not issued a notice of default relating to our failure to make the monthly installment payments required under the Purchase Agreement.~~

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Our pharmacy in ~~Gresham, Oregon is operated by Assured Pharmacy Gresham, Inc, and our pharmacy in~~ Leawood, Kansas is operated by Assured Pharmacy Kansas, Inc., ~~each of~~ which is a wholly owned subsidiary.

Market for Our Products and Services

We primarily dispense pharmaceutical drugs to patients who require medication for chronic pain management. Our pharmacies maintain an inventory of highly regulated medication that is specifically tailored to the needs of our recurring customers. This practice frequently enables our pharmacies to fill customers’ prescriptions from its existing inventory and decreases the wait time required to fill these prescriptions. We believe our focus and familiarity with dispensing highly regulated medications better positions our pharmacists to understand the needs of our customers.

Principal Suppliers

We doobtain ~~not~~pharmaceutical ~~have~~products ~~any~~primarily ~~written supply agreements with any of our drug suppliers and all transactions are handled on a purchase order basis. We purchased approximately 92% of our inventory of prescription drugs~~ from ~~one wholesale drug supplier (~~H.D. Smith Wholesale Drug Co. (“HDS”) ~~during~~and ~~the~~other ~~fiscal~~secondary ~~year 2012~~suppliers. Management believes that the wholesale pharmaceutical ~~and non-pharmaceutical~~ distribution industry is highly competitive ~~because~~due ofto the consolidation of the pharmacy industry and the practice of certain large pharmacy chains to purchase directly from product manufacturers. ~~Although~~While the loss of a key supplier could adversely affect or business if alternative suppliers are unavailable, management believes we could obtain the majority of our inventory through other distributors at competitive prices and upon competitive payment terms if our relationship with our primary wholesale drug supplier was terminated~~, the termination of our relationship would be likely to adversely affect our business, prospects, financial condition and results of operation~~.

Customers and Third-Party Payors

In fiscal ~~2012~~2013, over 9294 percent of our pharmacy sales were made to customers covered by health care insurance plans, which typically contract with a third-party payor such as an insurance company, a prescription benefit management company, a governmental agency, workers’ compensation, a private employer, a health maintenance organization or other managed care provider. The plan agrees to pay for all or a portion of a customer’s eligible prescription purchases sometimes at reduced reimbursement levels. Any significant loss of third-party payor business could have a material adverse effect on our business and results of operations.

Our Strategic Plan

Our plan is to develop a national footprint as a premier provider of pharmacy services to physicians and patients primarily in the treatment of chronic pain. Our business model provides pharmacy services which are typically utilized by physicians for the risk management benefits of our model in this increasingly regulated industry due to prescription drug abuse and diversion. Chronic pain patients typically utilize our services for the convenience, safety and specialization benefits.

We have developed and refined what we believe is a unique pharmacy service model for chronic pain physicians and patients that is capable of being scaled into a national chain. We currently have ~~four~~two operating pharmacies, ~~each of which is wholly owned through a subsidiary,~~ and our plan is to develop ~~three~~up to four (34) additional pharmacies per year up to a total of twelve operating pharmacies subject to our ability to secure additional financing. We currently have two pharmacies under development in the Denver, Colorado and Boston, Massachusetts markets. Management plans to open the Denver pharmacy in the 2nd quarter of 2014 and open the Boston pharmacy in the 4th quarter of 2014 subject to financing availability. We intend to finance this plan through a mix of equity and debt financing arrangements, increased sales and lower operating expenses, but there can be no assurance that such additional financing will be available to us on acceptable terms, or at all.

~~Over~~Beginning ~~the~~in ~~past~~August ~~year~~2013, wemanagement ~~have~~has ~~undertaken~~developed ~~targeted~~and ~~actions~~implemented toa ~~reduce~~plan ~~certain costs relating~~ to ~~our~~scale ~~corporate~~back ~~infrastructure and pharmacy~~ operations, ~~while~~in ~~still~~an ~~maintaining~~attempt ~~the~~to ~~specialized~~avoid ~~controls~~ceasing ~~required for our industry~~operations. ~~These~~ As ~~targeted~~a ~~actions~~result, ~~include~~management aclosed ~~reduction~~two pharmacies in ~~the~~order ~~number~~to ofreduce ~~staff~~overall infixed ~~our~~pharmacy ~~established~~costs ~~four~~by ~~pharmacies~~50% and atconcentrate ~~the~~our ~~corporate~~limited ~~level,~~working acapital ~~reduction~~to insupport the ~~cost~~operations of ~~dispensing~~the ~~supplies~~two ~~due~~remaining topharmacies awe ~~change~~believe inhave ~~our~~the ~~supplier~~best ~~for~~prospects. Management ~~these~~considered ~~products~~several ~~and~~factors ~~a decrease~~ in ~~investor~~determining ~~relations~~which ~~expense~~two ~~due~~pharmacies to ~~the~~close, ~~discontinuation~~including ofhistorical ~~the~~financial ~~use of an investor relations service firm. Corporate infrastructure includes executive management~~performance, ~~centralized~~regulatory ~~support services~~costs, ~~accounting,~~current ~~finance,~~sales ~~information systems~~prospects, ~~human~~geographic ~~resources,~~and ~~payroll~~physical location and ~~compliance~~strength toof ~~support~~existing ~~each~~physician ~~pharmacy's operations~~relationships. ~~Notwithstanding~~ After ~~theses~~consideration ~~actions,~~of ~~our~~these ~~total~~factors, ~~operating~~management ~~expenses~~closed ~~have~~our ~~increased~~Gresham, Oregon and ~~the~~Riverside, ~~costs~~California pharmacies toon ~~support~~August ~~our~~5, ~~existing~~2013 ~~corporate~~and ~~infrastructure~~August ~~are~~8, ~~significant~~2013, ~~when allocated over the operations of four pharmacies~~respectively.

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Management believes that our current corporate infrastructure can efficiently support ~~our~~up ~~existing~~to ~~pharmacies~~total ~~and~~of ~~develop~~twelve ~~three~~operating ~~additional~~pharmacies. Corporate ~~new~~infrastructure ~~pharmacies~~includes ~~per~~executive ~~year~~management, upcentralized tosupport ~~total~~services, ofaccounting, ~~twelve~~finance, ~~operating~~information ~~pharmacies. As~~systems, ahuman ~~result~~resources, wepayroll ~~believe~~and ~~that~~compliance ~~the~~to ~~implementation~~support ofeach ~~our~~pharmacy's ~~plan~~operations. In tolight ~~open~~of upthese actions to ~~eight~~scale ~~additional~~back ~~pharmacies~~our ~~will~~operations, ~~not~~the ~~require~~costs ~~material~~to ~~additional~~support our existing corporate infrastructure remain significant when allocated over the operations of two remaining pharmacies. ~~Further,~~In weorder ~~expect~~to ~~that~~align the ~~opening~~costs of ~~each~~our ~~new~~current ~~pharmacy~~corporate ~~will~~infrastructure ~~have~~with aour ~~positive~~scaled ~~impact~~back onoperations, ~~our~~management ~~consolidated~~has ~~operating~~implemented ~~results~~cost ~~within~~reduction ~~nine~~initiatives ~~months~~including ~~from~~staffing ~~opening~~reductions, deferral of ~~the~~senior ~~new~~management ~~pharmacy,~~compensation ~~but~~by ~~there~~approximately ~~can~~fifty bepercent noand ~~assurance~~reduced ~~that~~operating ~~such~~costs ~~positive~~at ~~results~~our ~~will~~two ~~occur~~remaining pharmacies.

In addition to the operational restructuring, we have also strengthened our financial position considerably by securing additional fnancing and restructuring our balance sheet over the past several months. A lead investor has provided us with $1.44 million of new financing from August 2013 to date, which enabled us to implement a plan to streamline our operations and target near-term profitability. The new financing was disbursed throughout our operations to meet increasing demand from physicians who wish to have greater precision in the management of their chronic patients. We have successfully restructured, approximately $7.9 million of our outstanding debt and accrued interest. The holders of the Company’s long-term debt, totaling approximately $5.5 million, have agreed to extend the maturity of their debt until 2016. In addition, the holders of the Company’s long-term debt, totaling approximately $1.6 million have converted their debt into common equity at a price of $0.60 per share. As part of these debt extensions and conversions, an aggregate total of approximately $800,000 in accrued interest has converted into common equity at a price of $0.60 per share. All of these balance sheet adjustments have allowed us to focus the new capital on meeting the increasing demand for our services resulting in revenue growth.

Because our management believes that our current corporate infrastructure can efficiently support our existing pharmacies and develop up to four additional new pharmacies per year up to total of twelve operating pharmacies, we believe that the implementation of our plan to open up to ten additional pharmacies will not require material additional corporate infrastructure. Further, we target the opening of each new pharmacy to have a positive impact on our consolidated operating results within nine months from opening the new pharmacy, but there can be no assurance that such positive results will occur.

The success of future pharmacy locations is highly dependent on the location of that particular pharmacy. Future pharmacy locations, when established, will be selected based on criteria which include: i) the proximity to physician and medical facilities; ii) convenience of the particular location; iii) size and growth rate of the surrounding metropolitan area; iv) state and local tax rates; v) competitive business environment and vi) access to qualified personnel and the associated cost. Management believes that the success of new pharmacies will be positively impacted by its research process and diligence in selecting new locations.

The foundation for our plan to increase sales at our existing ~~four~~two operating pharmacies includes isexpanding ~~based on increasing~~ our outreach program to physicians, more effectively communicating to them the risk management and service benefits that our business model provides and increasing our customer retention rate. ~~Presently,~~ We believe that our customer retention rates ~~are~~can ~~adversely~~be ~~impacted~~strengthened by increasing our ~~inability~~inventory tolevels ~~purchase~~and ~~inventory~~expanding ~~necessary~~our topurchasing ~~fill~~capacity ~~every~~with ~~prescription~~existing weand ~~receive~~new drug suppliers. We Since ~~believe~~the ~~that~~restructure of our ~~customer~~operations ~~retention~~in ~~rates~~August ~~can~~2013, beour ~~strengthened~~revenue byper ~~increasing~~business ~~our~~day ~~inventory~~from ~~levels~~the ~~and~~existing ~~expanding~~two ~~our~~pharmacies ~~purchasing~~has ~~capacity~~increased ~~with~~approximately ~~existing~~112% ~~and~~from ~~new~~approximately ~~drug~~$12,500 ~~suppliers~~per day in July 2013 to approximately $26,500 in revenue per day in February 2014. Since the majority of our pharmacies’ operating expenses are fixed expenses, we expect any increase in revenue to have a positive ~~impact~~impacton or our consolidated operating results. Management believes that our existing pharmacies can increase prescription production volume by as much as an additional 5075% - 75100% without incurring any significant additional operating expenses, but there can be no assurances in this regard.

The implementation of the foregoing plan to increase sales at our existing pharmacies and open additional pharmacies is dependent on our ability to obtain additional financing and improve our liquidity position. If we are not able to secure additional financing, the implementation of our business plan will be delayed and our ability to expand and develop additional pharmacies will be impaired. We are currently seeking up to $2.5 million in additional funding through equity financing arrangements in addition to the debt restructuring described below, but there can be no assurance that such additional financing will be available to us on acceptable terms, or at all. Management has registered a class of our common stock under the Securities Exchange Act of 1934, as amended, and believes that filing periodic public reports with the SEC will enhance our ability to raise capital and under acceptable terms.

Our business is highly leveraged and the successful implementation of the foregoing plan necessitates that we reach an agreement with our existing debt holders to extend the maturity date of debt securities which came due in 2012. As of December 31, 2012, we had $844,948 in debt securities which were due in the year 2012, which included $500,000 in principal amount of unsecured convertible debentures. We are attempting to extend the maturity date of all outstanding debt securities which were due in 2012, but can provide no assurance that the holders of such securities will agree to extend the maturity date on these securities on acceptable terms. We are also discussing the possibility of these debt holders converting the securities into equity. If our debt holders choose not to convert certain of these securities into equity, we will need to repay such debt, or reach an agreement with the debt holders to extend the terms thereof. If we are forced to repay the debt, this need for funds would have a material adverse impact on our business operations, financial condition and prospects, would threaten our ability to operate as a going concern and may force us to seek bankruptcy protection.

Our lack of liquidity has resulted in us being significantly reliant on our drug suppliers for financing which has compromised our ability to negotiate more favorable pricing terms. To the extent that we are successful in securing additional financing, we intend to allocate a portion of any proceeds we receive toward paying down our outstanding balance due with our primary drug supplier. Management anticipates that reducing our dependence on our primary drug supplier for financing will enable us to secure more favorable pricing terms and minimize the resulting financing and interest fees we incur. Management believes that drug pricing improvements of 100 to 200 basis points are possible in addition to the elimination of financing and interest fees from our primary drug supplier if we are successful in reducing or, to the extent possible, eliminating our purchase of drugs using supplier financing. In February 2013, the Company entered into a secured loan agreement with our primary wholesaler. Under the terms of this agreement, the Company received a one (1) year loan of $3,828,527 with an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements are $27,000 per month for four consecutive months,

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~~followed~~The byimplementation ~~four consecutive monthly principal reductions~~ of ~~$37,000,~~the ~~followed~~foregoing byplan ~~three~~to ~~consecutive~~increase ~~monthly~~sales inat ~~principal~~our ~~reductions~~existing ofpharmacies ~~$42,000,~~and ~~with~~open ~~remaining~~additional ~~principal~~pharmacies ~~and~~is ~~interest~~dependent ~~due~~on ~~February~~our 1,ability ~~2014.~~to ~~The~~obtain ~~proceeds~~additional ~~from~~financing ~~the~~and ~~note~~improve ~~were~~our ~~simultaneously~~liquidity ~~exchanged~~position. If ~~for~~we ~~$3,534,793~~are innot ~~outstanding~~able ~~vendor~~to ~~invoices~~secure ~~and~~additional ~~$293~~financing,~~734~~ inthe ~~outstanding~~implementation ~~secured~~of ~~note~~our ~~payable.~~business ~~The~~plan ~~note~~will isbe ~~secured~~delayed byand ~~all~~our ofability ~~the~~to ~~assets~~expand ~~of the Company~~ and ~~its~~develop ~~subsidiaries~~additional ~~through~~pharmacies ~~UCC-1~~will ~~filings~~be inimpaired. We ~~the~~are ~~states~~currently ofseeking ~~Nevada~~up ~~and~~to ~~Louisiana~~$3. As0 ~~long~~million ~~as the Company is~~ in ~~compliance~~additional ~~with~~funding ~~the~~through ~~terms~~debt and ofequity ~~the~~financing ~~loan agreement~~arrangements, ~~the~~but ~~Company~~there ~~will~~can ~~realize~~be ~~drug~~no ~~pricing~~assurance ~~improvements~~that ofsuch ~~100~~additional tofinancing ~~200~~will ~~basis~~be ~~points~~available ~~in addition~~ to ~~the~~us ~~elimination~~on ofacceptable ~~financing~~terms, ~~and~~or ~~interest~~at ~~fees associated with the trade payable~~all.

WeIn ~~currently~~February ~~have~~2013, ~~approximately~~the ~~$1.0~~Company ~~million~~entered ininto ~~gross~~a ~~receivables~~secured ~~due~~loan ~~from~~agreement ~~various~~with ~~workers’~~our ~~compensation~~primary ~~carriers~~wholesaler. inUnder the ~~State~~terms of ~~California~~this agreement, the Company received a one (1) year loan of $3,828,527 with an interest rate of 6.25% ~~These~~per ~~receivables~~annum, ~~are~~with ~~primarily~~interest ~~related~~payable tomonthly. ~~worker’s~~Monthly ~~compensation~~payment ~~claims~~requirements ~~from~~are ~~insurance~~$27,000 ~~carriers~~per month for ~~prescription~~four ~~medications~~consecutive ~~dispensed~~months, tofollowed ~~injured~~by ~~workers~~four inconsecutive ~~the~~monthly ~~State~~principal reductions of ~~California. The~~$37,000, ~~delay~~followed by three consecutive monthly in ~~payment~~principal ~~typically~~reductions ~~arises~~of $42,000, with remaining principal and interest due toFebruary ~~monetary~~1, ~~disputes~~2014, ~~between~~which ~~the~~was ~~claimant~~subsequently ~~and~~amended. The proceeds from the ~~employer~~note were simultaneously exchanged for $3,534,793 in outstanding vendor invoices and~~/or~~ ~~the~~$293,734 ~~employer’s~~in ~~insurance~~outstanding ~~carrier~~secured note payable. The ~~settlement~~note ~~period~~is ~~for~~secured ~~such~~by ~~dispute~~all ~~cases~~of ~~can~~the ~~range~~assets ~~from~~of ~~one~~the ~~year~~Company toand ~~ten~~its ~~years~~subsidiaries through UCC-1 filings in the states of Nevada and Louisiana. ~~Management~~As ~~estimates~~long as the ~~net~~Company ~~realizable~~is ~~value~~in compliance with the terms of the ~~other~~loan ~~receivables~~agreement, the Company will realize drug pricing improvements of 100 to be200 ~~approximately~~basis ~~$207,000~~points in addition to the elimination of financing and interest fees associated with the trade payable. On ~~April~~In 1,July ~~2010~~2013, we ~~discontinued~~entered ~~dispensing~~into ~~medication~~an toAmendment ~~California~~To ~~worker’s~~Promissory ~~compensation~~Note ~~customers~~Agreement ~~whose~~with ~~claims~~H.D. ~~could~~Smith ~~not~~Wholesale beDrug ~~authorized~~Co. ~~and~~to ~~billed~~extend ~~electronically. This~~the ~~change~~maturity ~~was~~date ~~due~~of toour ~~lower~~Promissory ~~profit~~Note ~~margins~~Agreement ~~and~~dated ~~cash~~February ~~flow~~1, ~~constraints~~2013 ~~that~~by ~~are~~two ~~associated~~years ~~with~~from ~~the~~February ~~manual~~1, ~~authorization~~2014 ~~and~~to ~~billing~~February ~~process~~1, 2016. WeThe ~~recently~~Company ~~engaged~~shall abe ~~collection~~required ~~firm~~to ~~that~~make ~~specializes~~monthly inpayments ~~the collection~~ of ~~these~~$42,000 ~~type~~per ofmonth ~~receivables~~for toeach ~~aggressively~~of ~~collect~~the ~~these~~twenty ~~past~~three ~~due~~months ~~receivables. During~~during the ~~year~~extension ~~ended~~period. As ~~December~~of 31March 27, ~~2012~~2014, due to our ~~collection~~current ~~firm~~financial condition, ~~collected~~we ~~approximately~~have ~~$229,000~~not inmade ~~past~~principal ~~due~~and ~~balances~~interest ~~resulting~~payments in ~~approximately~~the amount of $~~136~~338,~~000~~479 inas ~~bad~~required ~~debt~~by ~~recoveries.~~the agreement. In WeMarch ~~expect~~2014, we entered into a Forbearance Agreement with the lender that ~~any~~the ~~recovery~~lender offorbears ~~these~~from accelerating the outstanding ~~receivables~~balance ~~will~~of ~~improve~~the ~~our~~Note ~~overall~~and ~~operating~~from ~~cash~~instituting ~~flow,~~collection ~~but~~efforts wefrom ~~can~~the ~~make~~date noof ~~assurances~~the inagreement ~~this~~through ~~regard~~July 1, 2014.

~~Management~~We ~~believes~~currently ~~that~~have ~~the~~approximately ~~foregoing~~$800,000 ~~plan~~in ~~and~~gross ~~outlined~~receivables ~~steps~~due tofrom ~~improve~~various ~~our~~workers’ ~~liquidity~~compensation ~~position~~carriers ~~will~~in ~~have~~the aState ~~positive~~of ~~impact~~California. onThese ~~our~~receivables ~~efforts~~are toprimarily ~~generate~~related ~~earnings~~to ~~and~~worker’s ~~positive~~compensation ~~cash~~claims ~~flow,~~from ~~but~~insurance ~~the~~carriers ~~implementation~~for ofprescription ~~such~~medications ~~plan~~dispensed isto ~~dependent~~injured onworkers ~~our~~in ~~ability~~the toState ~~secure~~of ~~additional~~California ~~financing~~by ~~and restructure~~ our ~~outstanding~~discontinued ~~debt~~operation. WeThe ~~can~~delay ~~make no assurances~~ in ~~this~~payment ~~regard. In~~typically ~~January~~arises ~~2013,~~due weto ~~initiated~~monetary adisputes ~~securities~~between ~~offering~~the ~~through~~claimant aand ~~private~~the ~~placement~~employer ~~for~~and/or athe ~~minimum~~employer’s ofinsurance 10carrier. ~~units~~The ofsettlement ~~securities~~period for asuch ~~minimum~~dispute ofcases ~~$250,000~~can ~~and~~range afrom ~~maximum~~one ofyear ~~80 units for a maximum of $2,000,000 (subject~~ to ~~increase~~ten ~~to as much as 100 units for $2,500,000 to cover over-allotments, if any)~~years. ~~Each~~Management ~~unit~~estimates ~~consists~~the ofnet ~~(a)~~realizable ~~38,462~~value ~~shares~~ of ~~common~~the ~~stock,~~other ~~valued~~receivables atto ~~$0.65~~be ~~for~~approximately $25141,000 ~~and (b) 38,462 warrants with an initial exercise price of $0~~.~~90 per share.~~ InWe ~~the~~engaged ~~event~~a ~~only~~collection ~~the~~firm ~~minimum~~that ~~offering~~specializes ofin ~~10 units are sold,~~ the ~~Company~~collection ~~will issue an aggregate~~ of ~~384,620~~these ~~shares~~type of ~~common~~receivables ~~stock~~to ~~and~~aggressively ~~384,620~~collect ~~warrants~~these inpast ~~such~~due ~~units~~receivables. If During the ~~maximum~~year ~~offering~~ended ofDecember 8031, ~~units is sold~~2013, ~~Assured~~our ~~will~~collection ~~issue an aggregate of 3~~firm,~~076,960~~ ~~shares~~collected ofapproximately ~~common stock and 3~~$167,~~076,960~~000 ~~warrants~~ in ~~such~~past ~~units. The~~due ~~Company~~balances ~~will~~resulting ~~pay the placement agent a cash commissions equal to 10% of the gross proceeds received by the Company~~ in ~~this~~approximately offering and three year warrants to purchase that number of shares of common stock equal to 10% of the aggregate number of shares of common stock and warrant shares included in the units sold in the offering (615$100,~~392~~000 ~~shares if all 80 units are sold and 769,240 shares if the over-allotment is exercised~~ in ~~full). The~~bad ~~outstanding~~debt common stock related to the private placement is subject to certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per sharerecoveries. ~~The~~We ~~Company~~expect ~~has also agreed~~ that ~~the~~any ~~38,462~~recovery ~~shares~~ of ~~common~~these ~~stock~~outstanding ~~and~~receivables ~~the~~will ~~38,462~~improve ~~warrants~~our ~~included~~overall inoperating ~~the~~cash ~~units are subject to increase~~flow, ~~and~~but ~~the~~we ~~$0.65~~can ~~per~~make ~~share~~no ~~value~~assurances ~~and the $0.90 warrant exercise prices are subject to decrease,~~ in ~~each~~this ~~case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”)~~regard. ~~Such Make-Whole Adjustments are as follows:~~

Share Price	Warrant Exercise Price	Adjusted Shares per Unit	Adjusted Warrants per Unit	Consolidated 2013 Revenues
$0.65	$0.90	None	None	$21,850,000 or above
$0.60	$0.85	41,667	41,667	From $20,700,000 to $21,849,999
$0.55	$0.80	45,455	45,455	From $19,550,000 to $20,699,999
$0.50	$0.75	50,000	50,000	From $18,400,000 to $19,549,999
$0.45	$0.70	55,556	55,556	From $17,250,000 to $18,399,999
$0.40	$0.65	62,500	62,500	Less than $17,250,000

Management believes that the foregoing plan and outlined steps to improve our liquidity position will have a positive impact on our efforts to generate earnings and positive cash flow, but the implementation of such plan is dependent on our ability to secure additional financing and restructure our outstanding debt. We can make no assurances in this regard. From January 1, 2014 through March 27, 2014, the Company has secured loans in the aggregate amount of $440,000 from Pinewood Trading Fund, LP, a related party, extended the maturity date of an aggregate total of $1,000,000 in convertible debentures from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest into common stock at $0.60 per share. In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015. The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced. The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.

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Each warrant has a term of three years and may be exercised at an initial exercise price of $0.90 per warrant share; which exercise price is, in addition to the potential Make-Whole Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant. The warrants may only be exercised for cash. However, as provided in the Registration Rights Agreement (described below), after a date which shall be 180 days following the Final Closing Date, there will be a cashless exercise option available to the warrant holders at any time during which a registration statement providing for the resale of the warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to an exemption from the registration requirements under the Securities Act. Assuming completion of the $2,000,000 Maximum Offering, $650,000 of the net proceeds (after offering expenses) will be used to reduce our outstanding balance to our primary wholesale drug supplier; approximately $350,000 will be used to open our fifth pharmacy in Denver, Colorado; and the remaining net proceeds, estimated at approximately $750,000 will be used for working capital and general corporate purposes (including the repayment of certain debt obligations described below, and the potential opening of as many as two additional pharmacies in 2013 and 2014).

A consent and waiver was obtained from a holder of a majority of the Series A and C preferred stock and a waiver was obtained from the holders of a majority of the Series B preferred stock as required in the certificate of designation. A waiver was obtained from all convertible debenture holders that were required. As part of the waivers, the Series A, B, and C preferred holders and 100 percent of the applicable convertible debenture holders agreed to waive anti-dilution adjustments which the consenting holder may be entitled under their respective agreements and accept a partial ratchet anti-dilution adjustment with a decrease in the conversion price to $0.90 per share of the Company securities for the private placement provided the minimum unit threshold was met. The table below summarizes the impact of the $0.90 partial ratchet anti-dilution adjustment by security:

	December 31, 2012		Adjusting Anti-dilution effect		Post Adjusted Anti-dilution effect
Warrants		3,811,116		1,669,056		5,480,172
Stock options		1,840,556		-		1,840,556
Convertible notes		2,304,478		990,844		3,295,322
Series A Preferred		1,292,492		269,848		1,562,340
Series B Preferred		2,993,504		2,988,729		5,982,233
Series C Preferred		451,750		451,028		902,778
		12,693,896		6,369,505		19,063,401

In February 2013, the Company completed initial sales to accredited investors in the private placement described above for twenty-four (24) common stock units for a total of 923,088 shares of common stock at an aggregate purchase price of $600,000 (before deducting expenses and fees related to the private placement) and warrants to purchase an aggregate of 923,088 with an initial exercise price of $0.90 per share. The private placement is continuing. The Company paid cash fees of $18,000 to the placement agent and is also obligated to issue 27,693 warrants with an exercise price of $0.90 and 27,693 warrants with an exercise price of $0.65 to the placement agent at a negotiated discount rate to the placement agent agreement terms. The net proceeds of the initial closing of the private placement were used to pay down our outstanding balance with our primary wholesaler. As part of the private placement, the investors also received warrants to purchase an aggregate of 923,088 shares of the Company’s common stock.

In February and March 2013, the Company also issued a total of 60 shares of Series A Preferred at $1,000 per share for a total of $60,000 to Mosaic Private Equity Fund US, LP, a related party. The net proceeds of the sale were used for general working capital purposes.

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Competition

We face competition with local, regional and national companies, including other drugstore chains, independently owned drugstores and mail order pharmacies. Competition in this industry is intense primarily because national pharmacies including Walgreens and CVS Pharmacy have expanded significantly and prescription drugs are now offered at a variety of retail establishments when traditionally prescription drugs were only provided at local pharmacies. Supermarkets and discount stores now maintain retail pharmacies onsite as a part of a business plan to provide consumers with all of their retail needs at one location. Many of these retail pharmacies rely substantially on the sale of non-prescription drugs or health and beauty related products to generate revenue. The business model of retail pharmacies is generally not focused or dedicated to physicians practicing in pain management. These retail pharmacies traditionally keep in inventory non-prescription drugs, or health and beauty related products such as walking canes, bandages and shampoo. Consumers are able to have their prescriptions filled at these retail pharmacies, but typical retail pharmacies either do not keep in inventory or keep limited amounts of Class II drugs in inventory. As a result, the time it takes for traditional retail pharmacies to fill a prescription for Class II drug is extended. Because of our pain management focus, we maintain an appropriate inventory level of Class II drugs to meet the needs of the patients of physicians that send prescriptions to our pharmacies. We view our ability to fill a prescription for Class II drugs without any period of delay as one of our competitive strengths.

Research and Development

We did not incur any research and development expenditures in either the fiscal year ended December 31, ~~2012~~2013 or ~~2011~~2012.

Existing and Probable Governmental Regulation

Pharmacy operations are subject to significant governmental regulation on the federal and state level. Compliance with governmental regulation is essential to continued operations. We believe that we are in compliance with each of the laws, rules, and regulations set forth below and have not experienced any ~~incidence~~incidents of noncompliance.

Licensure Laws

Each state’s board of pharmacy enforces laws and regulations governing pharmacists and pharmacies. Each of our pharmacies applied and received a license. In addition, each pharmacy must employ a licensed pharmacist to serve as the Pharmacist in Charge (“PIC”). The PIC oversees personnel and reports on the operations at a specific pharmacy. State law regulates the number of employees and clerks that can work under the supervision of one PIC. Licensure requires strict compliance with state pharmacy standards.

Although we believe our pharmacies are compliant, changes in pharmacy laws and differing interpretations regarding such laws could impact our level of compliance. A pharmacy’s failure to comply with applicable ~~law~~laws and ~~regulation~~regulations could result in licensure revocation as well as the imposition of fines and penalties.

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Drug Enforcement Laws

The United States Department of Justice enforces the Drug Enforcement Act through the DEA. The DEA strictly enforces regulations governing controlled substances. In addition to regulation by the DEA, we are subject to significant state regulation regarding controlled substances. Because our pharmacies’ operations focus on highly regulated pain medications, failure to adhere to DEA and state controlled substance requirements could jeopardize our ability to operate. While we believe we are in compliance with current DEA requirements, such requirements and interpretation of these requirements do change over time.

Federal Health Programs

As we grow, we believe that a significant amount of our revenues will be derived from governmental programs such as Medicaid. With the passage of the Medicare Modernization and Prescription Drug Act of 2003, we also believe that Medicare will become a significant source of funding.

The Federal Health Care Programs Anti-Kickback Act

Federal law prohibits the solicitation or receipt of remuneration in return for referrals and the offer or payment of remuneration to induce the referral of patients or the purchasing, leasing, ordering or arranging for any good, facility, service or item for which payment may be made under a “federal health care program” (defined as “any plan or program that provides health benefits, whether directly, through insurance, or otherwise, which is funded directly, in whole or in part, by the United States Government other than the Federal Employees Health Benefit Program”).

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Because our business and operations involve providing health care services, we are subject to the Federal Health Care Programs Anti-Kickback Act (the “Act”). The Anti-Kickback Statute, codified in 42 U.S.C. § 1320a-7b(b), prohibits individuals and entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration to other individuals and entities (directly or indirectly, overtly or covertly, in cash or in kind):

· In return for referring an individual to a person for the furnishing or arranging of any item or service for which payment ~~maybe~~may be made under a federal or state healthcare program; or · In return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing or ordering any good, facility, service or item from which payment may be made under a federal or state health care program.

·There Inare ~~return~~both criminal and civil penalties for ~~purchasing,~~violating ~~leasing,~~the ~~ordering~~Act. Criminal sanctions include a fine not to exceed $25,000 or ~~arranging~~imprisonment ~~for~~up orto ~~recommending~~five ~~purchasing~~years or both, ~~leasing~~for oreach ~~ordering~~offense. Civil ~~any~~penalties ~~good~~include fines of up to $50,000 ~~facility~~for each violation, ~~service~~monetary damages up to three times the amount paid for referrals and/or ~~item~~exclusion from ~~which~~the ~~payment~~Medicare ~~may~~program. beCourts ~~made~~have ~~under~~broadly aconstrued ~~federal~~the Anti-Kickback Statute to include virtually anything of value given to an individual or ~~state~~entity ~~health~~if ~~care~~one ~~program~~purpose of the remuneration is to influence the recipient’s reason or judgment relating to referrals.

There are both criminal and civil penalties for violating the Act. Criminal sanctions include a fine not to exceed $25,000 or imprisonment up to five years or both, for each offense. In addition, monetary penalties for each offense may be increased to up to $250,000 for individuals and up to $500,000 for organizations. Civil penalties include fines of up to $50,000 for each violation, monetary damages up to three times the amount paid for referrals and/or exclusion from the Medicare program. Courts have broadly construed the Anti-Kickback Statute to include virtually anything of value given to an individual or entity if one purpose of the remuneration is to influence the recipient’s reason or judgment relating to referrals.

The Department of Health and Human Service’s Office of Inspector General (“OIG”) promulgated safe harbor regulations specifying payment practices that will not be considered to violate the statute. If a payment practice falls within one of the safe harbors, it will be immune from criminal prosecution and civil exclusion under the Act even if it fails to fall within another potentially applicable safe harbor. Significantly, failure to fall within any safe harbor does not necessarily mean that the payment arrangement violates the statute. Failure to comply with a safe harbor can mean one of three things: (1) the arrangement does not fall within the broad scope of the anti-fraud and abuse rules so there is no risk of prosecution; (2) the arrangement is a clear statutory violation and is subject to prosecution; or (3) the arrangement may violate the anti-fraud and abuse rules in a less serious manner, in which case there is no way to predict the degree of risk.

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Because our pharmacies maintain relationships with referring physicians, our operations are subject to scrutiny under the Act.

If our operations fail to comply with the Act, we could be criminally sanctioned. In addition, the right of any of our pharmacies to participate in governmental health plans could be terminated. We have a compliance program to ensure that we are in compliance with the Act.

Ethics in Patient Referrals Act

The Ethics in Patient Referrals Act, 42 U.S.C. §1395nn, commonly referred to as Stark II (“Stark II”), prohibits physicians from referring or ordering certain Medicare or Medicaid reimbursable “designated health services” from any entity with which the physician or any immediate family member of the physician has a financial relationship. A financial relationship is generally defined as a compensation or ownership/investment interest. The purpose of the prohibition is to assure that physicians base their treatment decisions upon the needs of the patients and not upon any financial benefit that would inure to the physician as a result of the referral.

Prescription medications are classified as “designated health services” under Stark II. Physicians owning stock in our company are not allowed to refer any Medicare or Medicaid patient to any of our pharmacies until and unless our company’s capitalization exceeds $75,000,000. A referral made in violation of Stark II results in non-payment to the pharmacy and could result in the imposition of fines and penalties as well as termination of our participation in Medicare and Medicaid.

State Fraud and Abuse Laws

Certain of the states in which we operate have adopted their own laws similar to the Act and Stark II. However, in some instances, state laws apply to all health care services, regardless of whether such services are payable by a government health plan. For example, in California, physicians and other practitioners are not permitted to own more than 10% of any entity that owns a pharmacy.

HIPAA

The Federal Health Insurance Portability and Accountability Act of 1996, commonly known as “HIPAA,” mandates the adoption of regulations aimed at standardizing transaction formats and billing codes for documenting medical services, dealing with claims submissions and protecting the privacy and security of individually identifiable health information. HIPAA regulations that standardize transactions and code sets require standard formatting for healthcare providers, like us, that submit claims electronically.

The HIPAA privacy regulations apply to “protected health information,” or “PHI,” which is defined generally as individually identifiable health information transmitted or maintained in any form or medium, excluding certain education records and student medical records. The privacy regulations seek to limit the use and disclosure of most paper and oral communications, as well as those in electronic form, regarding an individual’s past, present or future physical or mental health or condition, or relating to the provision of healthcare to the individual or payment for that healthcare, if the individual can or may be identified by such information. HIPAA provides for the imposition of civil or criminal penalties if PHI is improperly disclosed.

HIPAA’s security regulations require us to ensure the confidentiality, integrity and availability of all electronic protected health information that we create, receive, maintain or transmit. We must protect against reasonably anticipated threats or hazards to the security of such information and the unauthorized use or disclosure of such information.

In addition to HIPAA, we are subject to state privacy laws and other state privacy or health information requirements not preempted by HIPAA, including those which may furnish greater privacy protection for individuals than HIPAA.

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The scope of our operations involving health information is broad and the nature of those operations is complex. Although we believe that our contract arrangements with healthcare payers and providers and our business practices are in compliance with applicable federal and state electronic transmissions, privacy and security of health information laws, the requirements of these laws, including HIPAA, are complicated and are subject to interpretation. In addition, state regulation of matters also covered by HIPAA, especially the privacy standards, is increasing, and determining which state laws are preempted by HIPAA is a matter of interpretation. Failure to comply with HIPAA or similar state laws could subject us to loss of customers, denial of the right to conduct business, civil damages, fines, criminal penalties and other enforcement actions.

WeThe ~~are~~Health ~~impacted~~Information byTechnology ~~the~~for ~~Health~~Economic ~~Insurance Portability~~ and ~~Accountability~~Clinical Health Act ~~of 1996~~ (“~~HIPAA~~HITECH”), ~~which~~part ~~mandates,~~of ~~among~~the ~~other~~American ~~things,~~Recovery ~~the~~and ~~adoption~~Reinvestment Act of ~~standards~~2009, tochanged ~~enhance~~several ~~the~~aspects ~~efficiency~~of ~~and~~HIPAA ~~simplify~~including, ~~the~~without ~~administration~~limitation, of the ~~healthcare~~following: ~~system.~~(i) applies HIPAA ~~requires~~security ~~the~~provisions ~~Department of Health~~ and ~~Human~~penalties ~~Services~~directly to ~~adopt~~business ~~standards~~associates ~~for~~of ~~electronic~~covered ~~transactions~~entities; ~~and~~(ii) ~~code~~requires ~~sets~~certain ~~for~~notifications ~~basic~~in ~~healthcare~~the ~~transactions~~event ~~such~~of asa ~~payment~~security ~~and~~breach ~~remittance~~involving ~~advice~~PHI; (~~“transaction standards”~~iii); ~~privacy~~restricts ofcertain ~~individually~~unauthorized ~~identifiable~~disclosures; ~~healthcare information~~ (~~“privacy standards”~~iv); ~~security~~changes ~~and~~the ~~electronic~~treatment ~~signatures~~of ~~(“security~~certain ~~standards”),~~marketing asactivities; ~~well~~and as(v) ~~unique~~strengthens ~~identifiers~~enforcement ~~for~~activities. ~~providers,~~In ~~employers~~addition, ~~health~~the ~~plans~~Secretary ~~and~~issued ~~individuals;~~an ~~and~~interim ~~enforcement.~~final Werule ~~are~~on ~~required~~August to24, ~~comply~~2009 ~~with~~that ~~these~~requires ~~standards~~notifications ~~and~~for ~~are~~certain ~~subject~~unpermitted todisclosures ~~significant~~of ~~civil~~PHI. ~~and~~The ~~criminal~~final ~~penalties~~rule ~~for~~was ~~failure~~issued toon doJanuary so17, 2013.

Management believes that we are in material compliance with these standards. However, HIPAA’s privacy and transaction standards only recently became effective, and the security standards are mandatory as of April 21, 2005. Considering HIPAA’s complexity, there can be no assurance that future changes will not occur. Changes in standards as well as changes in the interpretation of those standards could require us to incur significant costs to ensure compliance.

Management anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for pharmacies. Given the continuous debate regarding the cost of healthcare services, management cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect that any future legislation or regulation may have on us.

OBRA 1990

Our business is subject to various other federal and state regulations. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990 (“OBRA”) and comparable state regulations, our pharmacists are required to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists and may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effect.

2010 Health Care Reform Legislation

The Patient Protection and Affordable Care Act and the reconciliation law known as Health Care and Education Affordability Reconciliation Act (combined we refer to both Acts as the “2010 Health Care Reform Legislation”) were enacted in March 2010. State participation in the expansion of Medicaid under the 2010 Health Care Reform Legislation is voluntary. Three key provisions of the 2010 Health Care Reform Legislation that are relevant to the Corporation are: (i) the gradual modification to the calculation of the Federal Upper Limit (“FUL”) for drug prices and the definition of Average Manufacturer’s Price (“AMP”), (ii) the closure, over time, of the Medicare Part D coverage gap, which is otherwise known as the “Donut Hole,” and (iii) short cycle dispensing. Regulations under the 2010 Health Care Reform Legislation are expected to continue being drafted, released, and finalized throughout the next several years. Pending the promulgation of these regulations, the Company is unable to fully evaluate the impact of the 2010 Health Care Reform Legislation.

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FUL and AMP Changes

The 2010 Health Care Reform Legislation amended the Deficit Reduction Act of 2005 (the “DRA”) to change the definition of the Federal Upper Limit (“FUL”) by requiring the calculation of the FUL as no less than 175% of the weighted average, based on utilization, of the most recently reported monthly AMP for pharmaceutically and therapeutically equivalent multi-source drugs available through retail community pharmacies nationally.

In addition, the definition of AMP changed to reflect net sales only to drug wholesalers that distribute to retail community pharmacies and to retail community pharmacies that directly purchase from drug manufacturers. Further, the 2010 Health Care Reform Legislation continues the current statutory exclusion of prompt pay discounts offered to wholesalers and adds three other exclusions to the AMP definition: i) bona fide services fees; ii) reimbursement for unsalable returned goods (recalled, expired, damaged, etc.); and iii) payments from and rebates/discounts to certain entities not conducting business as a wholesaler or retail community pharmacy. In addition to reporting monthly, the manufacturers are required to report the total number of units used to calculate each monthly AMP. The Centers for Medicare and Medicaid Services (“CMS”) will use this information when it establishes FULs as a result of the new volume-weighted requirements pursuant to the 2010 Health Care Reform Legislation.

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In September 2011, CMS issued the first draft FUL reimbursement files for multiple source drugs, including the draft methodology used to calculate the FULs in accordance with the Health Care Legislation. These draft FUL prices are based on the manufacturer reported and certified July 2011 monthly AMP and AMP unit data. CMS continues to release this data monthly and is expected to do so going forward. CMS has not posted monthly AMPs for individual drugs, but only posted the weighted average of monthly AMPs in a FUL group and the calculation methodology.

On February 2, 2012, CMS issued proposed regulations further clarifying the AMP and FUL changes described above and indicated that the final rule would be issued ~~sometime~~ in ~~2013~~July 2014.

Until CMS provides final guidance and the industry adapts to this now public available pricing information, the Company is unable to fully evaluate the impact of the changes in FUL and AMP to its business.

Part D Coverage Gap

Starting on January 1, 2011, the Medicare Coverage Gap Discount Program (the “Program”) requires drug manufacturers to provide a 50% discount on the negotiated ingredient cost to certain Part D beneficiaries for certain drugs and biologics purchased during the coverage gap (this is exclusive of the pharmacy dispensing fee). In addition, the 2010 Health Care Legislation includes a requirement that closes or eliminates the coverage gap entirely by fiscal year 2020. The coverage gap will be eliminated by gradually reducing the coinsurance percentage for both drugs covered and not covered by the Program for each applicable beneficiary. At this time, we are unable to fully evaluate the impact of the changes to the coverage gap to our business.

Medicare Part D Proposed Changes

In the Proposed Rule, CMS clarifies the meaning of drug categories and classes of clinical concern for which all Part D drugs therein must be included on Part D sponsor formularies, subject to certain exceptions. CMS establishes criteria for determining which categories or classes of drugs are protected and states that anticonvulsants, antineoplastics, and antiretrovirals meet the criteria, while antidepressants, antipsychotics, and immunosuppressants do not. However, CMS defers any change in formulary requirements for the antipsychotic class and continues to require all drugs from within that class to be on Part D formularies in 2015.

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In the Proposed Rule, CMS also proposes to require physicians and eligible professionals to enroll in the Medicare program in order to prescribe covered Part D drugs. CMS proposes that a prescriber or eligible professional of Part D drugs must have either an approved enrollment record in the Medicare fee-for-service program or a valid opt-out affidavit on file with a Part A or Part B Medicare Administrative Contractor for a prescription written by a prescriber to be eligible for coverage under the Part D program. Until CMS issues final guidance, the Corporation is unable to evaluate the full impact of these proposed changes to drug categories and classes and prescriber enrollment requirements on its business.

Reimbursement

Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over and to certain disabled persons. Medicaid is a medical assistance program administered by each state that provides healthcare benefits to certain indigent patients. Within the Medicare and Medicaid statutory framework, there are substantial areas subject to administrative rulings, interpretations, and discretion that may affect payments made under Medicare and Medicaid.

We receive payment for our services from commercial Medicare Part D Plans, third party payors government reimbursement programs such as Medicare and Medicaid, and other non-government sources such as commercial insurance companies, health maintenance organizations, preferred provider organizations, and contracted providers.

Other Laws

In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would affect major changes in the healthcare system, either nationally or at the state level. The legislative initiatives include prescription drug benefit proposals for Medicare participants. Although we believe we are well positioned to respond to these developments, we cannot predict the outcome or effect of legislation resulting from these reform efforts.

Compliance with Environmental Laws

We did not incur any costs in connection with the compliance ~~with~~of any federal, state, or local environmental laws.

Employees

We currently have 3818 employees, of which 3616 are full-time employees. Our employees are not represented by labor unions or collective bargaining agreements.

Additional Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available free of charge via our website (www.assuredrxservices.com) as soon as reasonably practicable after they are filed with, or furnished to, the SEC.

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ITEM 1A. RISK FACTORS

Investment in our common stock involves a number of substantial risks. Investors should not purchase our stock unless they are able to bear the complete loss of the investment. In addition to the risks and investment considerations discussed elsewhere in this Form 10-K, the following factors should be carefully considered before making an investment decision regarding our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline and investors could lose all or a part of the money paid to buy our securities.

Risks Related to Our Business and Industry

If we do not obtain additional financing, we could be forced to discontinue operations.

As of December 31, ~~2012~~2013, we had cash in the amount of $212,~~298~~856 and total liabilities in the amount of $78,~~567~~999,~~704~~130. During fiscal ~~2012~~year 2013, we received $~~350~~1,~~400~~990,000 in financing in ~~debt~~equity offerings exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). ~~From January 1, 2013 through March 15, 2013 we received $660,000 in financing in equity offerings exempt from the registration requirements of the Securities Act.~~ However, we still require additional financing to implement our business plan for the next twelve months and open any additional pharmacies. We also had a working capital deficit of $61,~~312~~746,~~121~~832 as of December 31, ~~2012~~2013. Our current cash on hand is insufficient for us to operate our ~~four~~two existing pharmacies at the current level for the next twelve months. Our business plan calls for ongoing expenses in connection with salary expense and establishing additional pharmacies. These expenditures are anticipated to be approximately $42,~~600~~400,000 for the next twelve months. In order to continue to pursue our business plan to establish and operate additional pharmacies, we will require additional funding. However if we are not able to secure additional funding, the implementation of our business plan will be delayed and our ability to expand and develop additional pharmacies will be impaired and we could be forced to cease operations. We intend to secure additional funding through additional debt or equity financing arrangements, and increased sales generated by our operations ~~and reduced expenses~~. There can be no assurance that we will be successful in raising all of the additional funding that we are seeking

If we are unable to support our current debt service and liabilities as they come due, we will probably be required to discontinue operations.

Our business is highly leveraged, and had total debt and other liabilities in the amount of $78,~~567~~999,~~704~~130 ~~net of unamortized discounts of $376,007~~ at December 31, ~~2012~~2013. This debt includes the $21,~~589~~500,~~776~~000 of unsecured convertible notes ~~described~~and ~~herein. In February 2013, we converted~~ $3,~~534~~804,~~793~~111 in ~~trade payables and the remaining balance of $293,734 in~~ a secured note ~~into~~to ~~a one year note payable with an interest rate of 6.25 percent with~~ our primary wholesaler. If we are unable to meet our debt service obligations or default on our obligations in any other way, even if we are otherwise generating earnings and positive cash flow, we could lose substantially all of our business assets as well as being held liable for any deficiency in payment. The net result of such a failure would likely be the end of our business operations and a complete loss of your investment.

~~Approximately~~- ~~$2,435,196~~14 ~~in principal amount of unsecured convertible debentures is due or will become due in 2013, of which $500,000 is past due.~~-

As of December 31, 2012, we had a cash balance of $21,298. Over the last several years, we have been substantially dependent on funding our operations through the private sale of both equity and debt securities. Of the $2,435,196 in principal amount of our outstanding convertible debentures coming due in 2013 or already due, $500,000 is currently past due. We are attempting to restructure the terms of the $500,000 in principal amount of our outstanding unsecured convertible debentures which had a maturity date in 2012, but can provide no assurance that the holders of such securities will agree to extend the maturity date on these securities on acceptable terms. We are also discussing the possibility of these debt holders converting such securities into equity. If these debenture holders choose not to convert these securities which have a maturity date in 2012 into equity, we will need to repay such debt, or reach an agreement with the debt holders to modify the terms thereof. If we are forced to repay such debt and are unable to meet these obligations or default on our obligations in any other way, even if we are otherwise generating positive earnings, we could lose substantially all of our business assets as well as being held liable for any deficiency in payment. The net result of such a failure would likely be the end of our business operations and a complete loss of your investment.

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We may default on our outstanding obligations under a Purchase Agreement with TPG.

We entered into a Purchase Agreement with TPG and acquired all of the outstanding capital stock of API held by TPG for the purchase price of $460,000 in cash and the issuance of 278 restricted shares of our common stock. As a result of this transaction, API also became our wholly owned subsidiary. The cash component of the purchase price is payable in monthly installments over time. As of March 15, 2013, we had paid TPG an aggregate of $332,500 including principal and interest and our outstanding obligations to TPG under the Purchase Agreement. Due to our current financial condition, we did not make the required monthly installment payment of $10,000 starting in September 15, 2012 through March 15, 2013 and may be unable to make the delinquent payments or the final payment due to TPG which includes principal and interest on or before July 15, 2013. As of March 15, 2013, we owe TPG $242,873 plus all accumulated accrued interest. If we remain unable to fulfill our obligations to TPG under the Purchase Agreement, we will attempt to restructure and extend the terms of payments due to TPG, but can provide no assurance we will be able to do so on acceptable terms or even at all. In order to secure our obligations under the Purchase Agreement, TPG holds a security interest in the shares of API capital stock acquired by us under the Purchase Agreement. If TPG should demand payment and we are unable to renegotiate the terms for our outstanding obligations to TPG under the Purchase Agreement, TPG could declare us in default and may seize the shares of API capital stock acquired by us under the Purchase Agreement, which would result in API no longer being a wholly owned subsidiary and have a material adverse effect on our business, operating results and financial condition. TPG has not issued a notice of default relating to our failure to make the monthly installment payments required under the Purchase Agreement.

There is substantial doubt regarding our ability to continue as a going concern.

As noted in our consolidated financial statements, we had an accumulated stockholders’ deficit of approximately $4348.~~1million~~6 million and recurring losses from operations as of December 31, ~~2012~~2013. We also had a working capital deficit of approximately $61.37 million as of December 31, ~~2012~~2013 and debt with maturities within one year in the amount of approximately $3800,000.~~0 million.~~ From January 1, ~~2013~~2014 through March 15, ~~2013~~2014, the Company has ~~completed~~secured ~~equity~~loans ~~offerings~~in the amount of $~~660~~440,000 with Pinewood Trading Fund, LP, a related party and ~~restructured~~extended the ~~credit~~maturity ~~facility~~date ~~with~~of ~~its~~an ~~primary~~aggregate ~~wholesaler~~total of $1,000,000 in convertible debentures from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest into common stock at $0.60 per share. We intend to fund operations through raising additional capital through debt financing and equity issuances, increased sales, and reduced expenses, which may be insufficient to fund our capital expenditures, working capital or other cash requirements for the year ending December 31, ~~2013~~2014. We are continuing to seek additional funds to finance our immediate and long term operations. The successful outcome of future financing activities cannot be determined at this time and there is no assurance that if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The audit reports of BDO USA, LLP ~~and UHY, LLP~~ for the fiscal ~~year~~years ended December 31, ~~2012~~2013 and ~~2011~~2012, respectively contain a paragraph that emphasizes the substantial doubt as to our continuance as a going concern. ~~This~~There is a significant risk that we may not be able to remain operational for an indefinite period of time.

If we are unable to generate significant net revenues from our operations, our business will fail.

As we pursue our business plan, we are incurring significant expenses. We incurred operating expenses for the ~~six~~year ~~months~~ ended December 31, ~~2012~~2013 in the amount of $53,~~091~~334,~~210~~ 131 (excluding non-cash operating expenses of $~~773~~685,~~053~~930) and had gross profit of $31,~~067~~120,~~126~~492 on sales of $145,~~145~~192,~~533~~577 for the same period. We incurred operating expenses for the year ended December 31, ~~2011~~2012 in the amount of $4,~~455~~174,~~678~~ 014 (excluding non-cash operating expenses of $1912,~~535,190~~785) and had gross profit of $31,~~223~~327,~~889~~485 on sales of $165,~~444~~636,~~573~~195 for the same period. We incurred operating expenses for the year ended December 31, 2010 in the amount of $4,492,937 (excluding non-cash operating expenses of $628,880) and had gross profit of $3,115,688 on sales of $16,276,752 for such period. We have a history of operating losses and cannot guarantee profitable operations in the future. The success and viability of our business is contingent upon generating significant net revenues from the operations of our pharmacies such that we are able to pay our operating expenses and operate our business at a profit. Currently, we are unable to generate sufficient revenues from our existing business to pay our operating expenses and operate at a profit. In the event that we remain unable to generate sufficient revenues from our pharmacies to pay our operating expenses, we will not be able to achieve profitability or continue operations. In such circumstance, you may lose all of your investment.

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Failure to maintain optimal inventory levels could increase our inventory holding costs or cause us to lose sales, either of which could have a material adverse effect on our business, financial condition and results of operations.

We need to maintain sufficient inventory levels to operate our business successfully as well as meet our customers’ expectations. However, we must also guard against the risk of accumulating excess inventory. We are exposed to inventory risks as a result of our growth, changes in physician prescriptions writing practices, manufacturer backorders and other vendor-related problems. An additional risk to our ability to maintain optimal inventory levels is that our financial condition may inhibit us from securing vendor financing which is a necessity in maintaining proper inventory levels. Carrying too much inventory would increase our inventory holding costs, and failure to have inventory in stock when a prescription is presented for fulfillment could cause us to lose that prescription, lose that customer, or lose the referring physician, any of which could have a material adverse effect on our business, financial condition and results of operations.

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If we are unable to hire, retain and motivate qualified personnel, we may not be able to grow effectively and execute our business plan.

We depend on the services of our senior management. We have retained the services of Robert DelVecchio to serve as our Chief Executive Officer, Mike Schneidereit to serve as our Chief Operating Officer and Brett Cormier to serve as our Chief Financial Officer. Our success depends on the continued efforts of Messrs. DelVecchio, Schneidereit and Cormier. The loss of the services of any of these individuals could have an adverse effect on our business, prospects, financial condition, and results of operations.

As our business develops, our success is largely dependent on our ability to hire and retain additional highly qualified managerial, sales and technical personnel. These managerial, technical and sales personnel are generally in high demand and we may not be able to attract the staff we need at a cost that is within our operating budget. In addition, we may lose employees or consultants that we hire due to higher salaries and fees being offered by other businesses. If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively and implement our business plan.

Pending and future litigation could subject us to significant monetary damages and/or require us to change our business practices.

We are subject to risks relating to litigation and other proceedings in connection with the dispensing of pharmaceutical products by our pharmacies. See the subsection entitled “Legal Proceedings” for a description of legal proceedings pending against us. While we believe that the disclosed suit is without merit and intend to contest it vigorously, we can give no assurance that an adverse outcome in this suit or others that may occur in the future would not have a material adverse effect on our consolidated results of operations, consolidated financial position and/or consolidated cash flow from operations, or would not require us to make material changes to our business practices. We periodically respond to subpoenas and requests for information from governmental agencies. To our knowledge, we are not a target or a potential subject of a criminal investigation. We cannot predict with certainty what the outcome of any of the foregoing might be or whether we may in the future become a target or potential target of an investigation or the subject of further inquiries or ultimately settlements with respect to the subject matter of these subpoenas. In addition to potential monetary liability arising from these suits and proceedings, from time to time we incur costs in providing documents to government agencies. Current pending claims and associated costs may be covered by our insurance, but certain other costs are not insured. There can be no assurance that such costs will not increase and/or continue to be material to our performance in the future.

We are largely dependent on one wholesale drug supplier and our results of operations could be materially adversely affected if we are not able to supply our pharmacies with adequate inventory for any reason, including the termination of our relationship with this key supplier.

In the event that we are unable to maintain adequate inventory in any of our pharmacies, we could experience an interruption in our ability to service customers. During the year ended December 31, ~~2012~~2013, we purchased approximately 9291% of our inventory of prescription drugs from one wholesale drug supplier (H.D. Smith Wholesale Drug Co.). Although management believes we could obtain a majority of our inventory though another supplier at competitive prices and upon competitive payment terms if our relationship with this wholesale drug supplier is terminated, the termination of our relationship would be likely to adversely affect our business, prospects, financial condition and results of operations.

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Because we are dependent on third-party payors, our business is volatile and there is an increased risk of loss of your investment.

Nearly all of our pharmacy sales are to customers whose medications were covered by health benefit plans and other third party payors. Health benefit plans include insurance companies, governmental health programs, workers’ compensation, self-funded ERISA plans, health maintenance organizations, health indemnity insurance, and other similar plans. In general, a health benefit plan agrees to pay for all or a portion of a customer’s eligible prescription purchases. Any significant loss of third-party payor business for any reason could have a material adverse effect on our business and results of operations. These third-party payors could change how they reimburse us, without our prior approval, for the prescription drugs that we provide to their members. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act granted a prescription drug benefit to participants, which has resulted in us being reimbursed for some prescription drugs at prices lower than our current reimbursement levels. There have been a number of recent proposals and enactments by various states to reduce Medicaid reimbursement levels in response to budget problems, some of which propose to reduce reimbursement levels in the applicable states significantly, and we expect other similar proposals in the future. If third-party payors reduce their reimbursement levels or if Medicare or Medicaid programs cover prescription drugs at lower reimbursement levels, our margins on these sales would be reduced, and the profitability of our business and our results of operations, financial condition or cash flows would be adversely affected. Additionally, there are no guarantees that health benefit plans will contract with our pharmacies.

Continuing government and private efforts to contain healthcare costs may reduce our future revenue.

We could be adversely affected by the continuing efforts of government and private payors to contain healthcare costs. To reduce healthcare costs, payors seek to lower reimbursement rates, limit the scope of covered services and negotiate reduced or capped pricing arrangements. While many of the proposed policy changes would require congressional approval to implement, we cannot assure you that reimbursement payments under governmental and private third party payer programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement under these programs. Any changes that lower reimbursement rates under Medicare, Medicaid or private pay programs could result in a substantial reduction in our net operating revenues. Our operating margins may continue to be under pressure because of deterioration in reimbursement, changes in payer mix and growth in operating expenses in excess of increases, if any, in payments by third party payors.

The changing U.S. healthcare industry and increasing enforcement environment may negatively impact our business.

In recent years, the healthcare industry has undergone significant changes in an effort to reduce costs and government spending. These changes include an increased reliance on managed care and cuts in Medicare funding.

We expect the healthcare industry to continue to change significantly in the future. Some of these potential changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing prescription drug pricing or mandated benefits may cause healthcare payors to reduce the price they are willing to pay for pharmaceutical drugs. If we are unable to adjust to changes in the healthcare environment, it could have a material adverse effect on our financial position, results of operations and liquidity.

Further, both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare area. The OIG and the U.S. Department of Justice have, from time to time, established national enforcement initiatives, targeting all providers of a particular type, that focus on specific billing practices or other suspected areas of abuse. In addition, under the federal False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. A number of states have adopted similar state whistleblower and false claims provisions.

We- ~~are~~17 ~~subject to increased costs and regulatory scrutiny relating to us carrying a larger amount of Schedule II drugs in inventory than most other pharmacies.~~-

Because our business model focuses on servicing pain management doctors and chronic pain patients, we carry a larger amount of Schedule II drugs in inventory than most other pharmacies. Schedule II drugs, considered narcotics by the United States Drug Enforcement Administration (“DEA”), are the most addictive and considered to present the highest risk of abuse. For this reason, Schedule II drugs are highly regulated by the DEA such regulations are more stringent that regulations impacting Schedule III and IV drugs. The manufacture, shipment, storage, sale and use of controlled substances are subject to a high degree of regulation, including security, record-keeping and reporting obligations enforced by the DEA. This high degree of regulation associated with our sale of Schedule II drugs can result in significant regulatory costs in order to comply with the required regulations and also result in increased acquisition costs, which may reduce our profit margin and have a material adverse effect on our business, operating results and financial condition.

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We are subject to increased costs and regulatory scrutiny relating to us carrying a larger amount of Schedule II drugs in inventory than most other pharmacies.

Because our business model focuses on servicing pain management doctors and chronic pain patients, we carry a larger amount of Schedule II drugs in inventory than most other pharmacies. Schedule II drugs, considered narcotics by the United States Drug Enforcement Administration (“DEA”), are the most addictive and considered to present the highest risk of abuse. For this reason, Schedule II drugs are highly regulated by the DEA. Such regulations are more stringent that regulations impacting Schedule III and IV drugs. The manufacture, shipment, storage, sale and use of controlled substances are subject to a high degree of regulation, including security, record-keeping and reporting obligations enforced by the DEA. This high degree of regulation associated with our sale of Schedule II drugs can result in significant regulatory costs in order to comply with the required regulations and also result in increased acquisition costs, which may reduce our profit margin and have a material adverse effect on our business, operating results and financial condition.

Changes in Medicare Part D and current and future regulations promulgated thereunder could adversely affect our revenue and impose increased costs.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 ("MMA") included a major expansion of the Medicare program with the addition of a prescription drug benefit under the new Medicare Part D program. The continued impact of these regulations depends upon a variety of factors, including our ongoing relationships with the Part D Plans and the patient mix of our customers. Future modifications to the Medicare Part D program may reduce revenue and impose additional costs to our industry. In addition, we cannot assure you that Medicare Part D and the current and future regulations promulgated under Medicare Part D will not have a material adverse effect on our institutional pharmacy business.

If we fail to comply with complex and rapidly evolving laws and regulations, we could suffer penalties or be unable to operate our business.

We are subject to numerous federal and state regulations. Each of our pharmacy locations must be licensed by the state government. The licensing requirements vary from state to state. An additional registration certificate must be granted by the DEA, and, in some states, a separate controlled substance license must be obtained to dispense Class II drugs. In addition, pharmacies selling Class II drugs are required to maintain extensive records and often report information to state agencies. If we fail to comply with existing or future laws and regulations, we could suffer substantial civil or criminal penalties, including the loss of our licenses to operate our pharmacies and our ability to participate in federal and state healthcare programs. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations. Although we believe that we are substantially compliant with all existing statutes and regulations applicable to our business, different interpretations and enforcement policies of these laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business.

If we fail to comply with Medicare and Medicaid regulations, including the federal anti-kickback statute, we may be subjected to penalties or loss of eligibility to participate in these programs.

The Medicare and Medicaid programs are highly regulated. These programs are also subject to frequent and substantial changes. If we fail to comply with applicable reimbursement laws and regulations, whether purposely or inadvertently, our reimbursement under these programs could be curtailed or reduced or we could become ineligible to continue to participate in these programs. Federal or state governments may also impose other penalties on us for failure to comply with the applicable reimbursement regulations.

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Among these laws is the federal anti-kickback statute. This statute prohibits anyone from knowingly and willfully soliciting, receiving, offering or paying any remuneration with the intent to induce a referral, or to arrange for the referral or order of, services or items payable under a federal healthcare program. Courts have interpreted this statute broadly. Violations of the anti-kickback statute may be punished by a criminal fine of up to $25,000 for each violation or imprisonment, civil money penalties of up to $50,000 per violation and damages of up to three times the total amount of the remuneration and/or exclusion from participation in federal health care programs, including Medicare and Medicaid. This law impacts the relationships that we may have with potential referral sources. We have relationships with a variety of potential referral sources, including physicians. The Office of Inspector General (“OIG”) at the U.S. Department of Health and Human Services (“HHS”), or OIG, among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse or waste. The OIG carries out this responsibility through a nationwide program of audits, investigations and inspections. The OIG has promulgated safe harbor regulations that outline practices that are deemed protected from prosecution under the anti-kickback statute. While we endeavor to comply with the applicable safe harbors, certain of our current arrangements may not qualify for safe harbor protection. Failure to meet a safe harbor does not mean that the arrangement necessarily violates the anti-kickback statute, but may subject the arrangement to greater scrutiny. It cannot be assured that practices outside of a safe harbor will not be found to violate the anti-kickback statute.

The anti-kickback statute and similar state laws and regulations are expansive. We do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality, or could require us to make changes in our pharmacies, personnel, services and operating expenses. A determination that we have violated these laws, or the public disclosure that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, financial condition, results of operations or prospects and our business reputation could suffer significantly. If we fail to comply with the anti-kickback statute or other applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more pharmacies), and exclusion of one or more pharmacies from participation in the Medicare, Medicaid and other federal and state health care programs. In addition, we are unable to predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation or regulations may take or their impact.

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Federal and state medical privacy regulations may increase the costs of operations and expose us to civil and criminal sanctions.

We must comply with extensive federal and state requirements regarding the transmission and retention of health information. The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, referred to as HIPAA, was enacted to ensure that employees can retain and at times transfer their health insurance when they change jobs, to enhance the privacy and security of personal health information and to simplify healthcare administrative processes. HIPAA requires the adoption of standards for the exchange of electronic health information. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on our results of operations, financial condition, and liquidity.

Unexpected safety or efficacy concerns may arise from pharmaceutical products.

Unexpected safety or efficacy concerns can arise with respect to pharmaceutical drugs dispensed at our pharmacies, whether or not scientifically justified, leading to product recalls, withdrawals or declining sales. If we fail to or do not promptly withdraw pharmaceutical drugs upon a recall by a drug manufacturer, our business and results of operations could be negatively impacted.

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Prescription volumes may decline, and our net revenues and ability to generate earnings may be negatively impacted, if products are withdrawn from the market or if increased safety risk profiles of specific drugs result in utilization decreases.

We dispense significant volumes of drugs from our pharmacies. These volumes are the basis for our net revenues. When increased safety risk profiles of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or reduce the numbers of prescriptions written for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced consumer demand for such drugs. On occasion, products are withdrawn by their manufacturers. In cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our volumes, net revenues, profitability and cash flows may decline.

Certain risks are inherent in providing pharmacy services; our insurance may not be adequate to cover any claims against us.

Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceutical products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. In addition, federal and state laws that require our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or eliminate these effects. Although we maintain professional liability insurance and an umbrella policy, from time to time, claims may result in the payment of significant amounts, some portions of which may not be funded by insurance. Our current professional liability insurance coverage is $2 million per occurrence and $4 million in annual aggregate. In addition, we carry an additional umbrella policy for coverage up to an ~~additional~~aggregate $of $4 million ~~in the aggregate~~annually. We cannot assure you that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future. Our results of operations, financial condition or cash flows may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liability for which we self-insure or we suffer reputational harm.

Legal and regulatory changes reducing reimbursement rates for pharmaceuticals may reduce our gross profit.

Our own gross profit margins may be adversely affected by laws and regulations reducing reimbursement rates and charges. Our revenues are determined by a number of factors, including the mix of pharmaceuticals dispensed, whether the drugs are brand or generic and the rates of reimbursement among payors. Changes in the payor mix among private pay, Medicare and Medicaid can also significantly affect our earnings and cash flow.

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If competition increases, our ability to attract and retain customers or expand our business could be impaired.

We face competition with local, regional and national companies, including other drugstore chains, independently owned drugstores and mail order pharmacies. Competition in this industry is intense primarily because national pharmacies including Walgreens and CVS Pharmacy have expanded significantly. Prescription drugs are now offered at a variety of retail establishments. Supermarkets and discount stores now maintain retail pharmacies onsite as a part of a business plan to provide consumers with all of their retail needs at one location. Many of these retail pharmacies rely substantially on the sale of non-prescription drugs or health and beauty related products to generate revenue. Our management is unaware of any company that operates pharmacies in the United States that exclusively dispense pharmaceutical products to patients who require medication for chronic pain management. Our business, prospects, financial condition, and results of operations could be negatively impacted if chain retail pharmacies revise their business model to focus on dispensing pharmaceutical products to patients who require medication for chronic pain management. We may not be able to effectively compete against them because our existing and potential competitors may have financial and other resources that are superior to ours. We cannot assure you that we will be able to continue to compete effectively in our market or increase our sales volume in response to further increased competition. In addition, we may be at a competitive disadvantage because we are more highly leveraged than our competitors. If we are unable to compete effectively with our competition, we will not be able to attract and retain business resulting in a loss of business and potential discontinuation of operations.

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A significant disruption in our computer systems or a cyber security breach could adversely affect our operations.

We rely extensively on our computer systems to manage our ordering, pricing, point-of-sale, inventory replenishment and other processes. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism, severe weather conditions, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations. Any compromise of our security could also result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business.

Our ability to conduct operations depends on the security and stability of our technology infrastructure as well as the effectiveness of, and our ability to execute, business continuity plans across our operations. A failure in the security of our technology infrastructure or a significant disruption in service within our operations could materially adversely affect our business, the results of our operations and our financial position.

We maintain, and are dependent on, a technology infrastructure platform that is essential for many aspects of our business operations. It is imperative that we securely store and transmit confidential data, including personal health information, while maintaining the integrity of our confidential information. We have designed our technology infrastructure platform to protect against failures in security and service disruption. However, any failure to protect against a security breach or a disruption in service could materially adversely impact our business operations and our financial results. Our technology infrastructure platform requires an ongoing commitment of significant resources to maintain and enhance systems in order to keep pace with continuing changes as well as evolving industry and regulatory standards. In addition, we may from time to time obtain significant portions of our systems-related or other services or facilities from independent third parties, which may make our operations vulnerable to such third parties’ failure to adequately perform. In the event we or our vendors experience malfunctions in business processes, breaches of information systems, failure to maintain effective and up-to-date information systems or unauthorized or non-compliant actions by any individual, this could disrupt our business operations or impact patient safety, result in customer and member disputes, damage our reputation, expose us to risk of loss, litigation or regulatory violations, increase administrative expenses or lead to other adverse consequences.

We operate dispensing pharmacies and corporate facilities that depend on the security and stability of technology infrastructure. Any service disruption at any of these facilities due to failure or disruption of technology, malfunction of business process, disaster or catastrophic event could, temporarily or indefinitely, significantly reduce, or partially or totally eliminate our ability to process and dispense prescriptions and provide products and services to our clients and members. Any such service disruption at these facilities or to this infrastructure could have a material adverse effect on our business operations and our financial results.

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Our failure to effectively manage new pharmacy openings could lower our sales and profitability.

Our strategic plan is largely dependent upon securing additional financing and opening new pharmacies and operating them profitably. Our ability to open new pharmacies and operate them profitably depends upon a number of factors, some of which may be beyond our control. These factors include:

· the ability to identify new pharmacies locations, negotiate suitable leases and build out the pharmacies in a timely and cost efficient manner; · the ability to hire and train skilled pharmacists and other employees;

·- ~~the~~21 ~~ability to hire and train skilled pharmacists and other employees;~~-

·Table ~~the~~of ~~ability to integrate new pharmacies into our existing operations and leverage existing infrastructure; and~~Contents

· the ability to integrate new pharmacies into our existing operations and leverage existing infrastructure; and · the ability to increase sales at new ~~pharmacies locations~~pharmacylocations.

A failure to manage new pharmacy openings in a timely and cost efficient manner would adversely affect our results of operations, financial condition and cash flows.

We will not be able to compete effectively if we are unable to attract, hire and retain qualified pharmacists.

There is a nationwide shortage of qualified pharmacists. We currently employ four pharmacists, one pharmacist at each operating pharmacy. Although we have not experienced any difficulty recruiting pharmacists in the past, we may experience difficulty attracting, hiring and retaining qualified pharmacists in the future. If we are unable to attract, hire and retain enough qualified pharmacists, our business, prospects, financial condition, and results of operations could be adversely affected.

We will incur increased costs as a result of being a public reporting company.

As a public reporting company, we now face increased legal, accounting, administrative and other costs and expenses as a public reporting company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, including the requirements of Section 404, as well as new rules and regulations subsequently implemented by the Securities and Exchange Commission and the Public Company Accounting Oversight Board impose additional reporting and other obligations on public reporting companies. We expect that compliance with these public company requirements will increase our costs and make some activities more time-consuming. A number of those requirements will require us to carry out activities we have not done recently or at all. For example, we will adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our Securities and Exchange Commission reporting requirements. For example, under Section 404 of the Sarbanes-Oxley Act, we will need to document and test our internal control procedures and our management will need to assess and report on our internal control over financial reporting. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our accountants identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. It also could become more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We expect that the additional reporting and other obligations imposed on us by these rules and regulations will increase our legal and financial compliance costs and the costs of our related legal, accounting and administrative activities significantly. Management estimates that compliance with the Exchange Act reporting requirements as a reporting company will cost in excess of $50,000 annually. Given our current financial resources, these additional compliance costs could have a material adverse impact on our financial position and ability to achieve profitable results. These increased costs will require us to divert money that we could otherwise use to expand our business and achieve our strategic objectives.

The health of the economy in general and in the markets we serve could adversely affect our business and our financial results.

Our business is affected by the economy in general, including changes that could affect drug utilization trends, resulting in an adverse effect on our business and financial results. Although a recovery might be underway, it is possible that a worsening of the economic environment will cause decline in drug utilization, and dampen demand for pharmaceutical drugs. If this were to occur, our business and financial results could be adversely affected.

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Risk Factors Relating to Our Common Stock

Our debenture holders and preferred stockholders would have priority in distributions over our common stockholders following a liquidation event affecting the company. As a result, in the event of a liquidation event, our common stockholders would receive distributions only after priority distributions are paid and may receive nothing in liquidation.

In the event of any Liquidation (as such term is defined in our Certificate of Designation of Series A, B, C and CD Convertible Preferred Stock, as herein incorporated by reference), the holders of our outstanding Series A, Series B, Series C and Series CD Convertible Preferred Stock (collectively, “Preferred Stock”) would be entitled to a liquidation preference payment of ~~$1,000 per share of Preferred Stock prior and~~ in preference to any payment to holders of the Common Stock. As a result, our Preferred Stock has an aggregate liquidation preference of approximately $7,663,000. Any proceeds after payment of the liquidation preference payment shall be paid pro rata to the holders of Preferred Stock and Common Stock on an as converted to Common Stock basis. The liquidation preference for our outstanding debentures ranks senior to our Preferred Stock and Common Stock. As such, holders of Common Stock might receive nothing in liquidation, or receive much less than they would if there were no Preferred Stock outstanding.

We intend to secure additional funding in the future through issuances of securities and such additional funding may be dilutive to stockholders or impose operational restrictions.

We intend to secure additional funding in the future to help establish pharmacies and fund our operations through sales of shares of our common or preferred stock or securities convertible into shares of our common stock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants which may limit our operating flexibility. If additional capital is raised through the issuances of shares of our common or preferred stock or securities convertible into shares of our common stock, the percentage ownership of existing stockholders will be reduced. These stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

~~Our~~- ~~principal~~22 ~~stockholder currently has the ability to elect a majority of our directors and may have different interests than us or other stockholders in the future.~~-

Mosaic Capital Advisors, LLC (“Mosaic”) beneficially owns approximately 44.2% of our outstanding common stock and will beneficially own 92.2% of our outstanding Series A Convertible Preferred Stock. So long as 35% of the authorized shares of Series A Preferred Stock are outstanding, the holders of outstanding shares of Series A Preferred Stock shall, voting together as a separate class, be entitled to elect four Directors to the Board and partially exercised this right by appointing Messrs. Sheth, Bilodeau and Eagle to serve as directors. As a result, Mosaic has the ability to exert control over our management and affairs and over matters requiring stockholder approval, including the election of a majority of our directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in our control and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders.

We have issued and may issue additional shares of preferred stock with superior rights than the common stock, which could result in a decrease in the value of our common stock and further delay or prevent a change in control of us.

Our board of directors is authorized to issue up to 5,000,000 shares of preferred stock. As of March 15, 2013, there were (i) 1,466 shares of Series A Preferred Stock issued and outstanding, which are convertible into 1,629,006 shares of common stock; (ii) 5,384 shares of Series B Preferred Stock issued and outstanding, which are convertible into 5,982,233 shares of common stock; and (iii) 813 shares of Series C Preferred Stock issued and outstanding, which are convertible into 902,778 shares of common stock. Our board of directors has the power to establish the dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges with respect to any series of preferred stock. The issuance of any shares of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock. Holders of preferred stock may have the right to receive dividends, preferences in liquidation and conversion rights. The issuance of preferred stock could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of us without further vote or action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

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IfOur weprincipal ~~are~~stockholder ~~unable~~currently tohas ~~achieve~~the ~~net~~ability ~~revenues~~to ~~milestones,~~elect wea ~~will~~majority beof ~~required~~our todirectors ~~issue~~and ~~additional~~may ~~common~~have ~~stock~~different ~~and~~interests ~~common~~than ~~stock~~us ~~warrants~~or ~~resulting~~other stockholders in ~~additional~~the ~~dilution to our stockholders~~future.

~~Our~~As ~~2013~~of ~~private~~March ~~placement~~27, is2014, ~~subject~~Pinewood toTrading ~~certain~~Fund, ~~“Make~~LP ~~Whole~~(“Pinewood”) ~~adjustments~~beneficially ~~based~~owns onapproximately ~~consolidated revenues for the fiscal year 2013~~49. As4% of ~~March~~our ~~15,~~outstanding ~~2013,~~common westock ~~have~~and ~~completed~~beneficially ~~sales~~owns ofapproximately ~~$600,000~~93.5% inof ~~securities~~our ~~per~~outstanding ~~the~~Series ~~private~~D ~~placement~~Convertible ~~for~~Preferred aStock. ~~total~~As of ~~923,088~~March ~~common shares and 923~~2014,~~088~~ ~~common~~Pinewood ~~stock~~is ~~warrants~~entitled ~~with~~to anelect ~~exercise~~a ~~price~~majority of ~~$0.90 per share. In~~ the ~~event~~Board ~~that~~of ~~the~~Directors, ~~minimum~~to ~~revenue~~be accomplished ~~milestone~~in isany ~~not~~manner ~~reached,~~that the ~~investors~~investor ~~would~~deems ~~receive~~most ~~1,500,000~~expedient ~~common shares~~ and in ~~1,500,000~~compliance ~~common stock warrants~~ with anapplicable ~~exercise~~laws ~~price~~and ofthe ~~$0.55~~Company’s ~~per share~~charter documents.

IfWe wehave issued and may issue ~~common~~additional ~~stock~~shares atof apreferred ~~price~~stock ~~below~~with ~~the~~superior ~~effective~~rights to our common stock, ~~price~~which ofcould ~~previous~~result ~~issuances,~~in wea ~~may~~decrease bein ~~required~~the tovalue ~~issue~~of ~~additional~~our common stock and ~~common~~further ~~stock~~delay ~~warrants~~or ~~resulting~~prevent ina ~~additional~~change ~~dilution~~in tocontrol ~~our~~of ~~stockholders~~us.

Our board of directors is authorized to issue up to 5,000,000 shares of preferred stock. As of March 27, 2014, there were (i) 1,466 shares of Series A Preferred Stock issued and outstanding, which are convertible into 1,629,006 shares of common stock; (ii) 5,124 shares of Series B Preferred Stock issued and outstanding, which are convertible into 5,693,344 shares of common stock; (iii) 813 shares of Series C Preferred Stock issued and outstanding, which are convertible into 902,778 shares of common stock ; and (iv) 1,070 shares of Series D Preferred Stock issued and outstanding which are convertible into 2,140,000 shares of common stock. Our board of directors has the power to establish the dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges with respect to any series of preferred stock. The issuance of any shares of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock. Holders of preferred stock may have the right to receive dividends, preferences in liquidation and conversion rights. The issuance of preferred stock could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of us without further vote or action by the stockholders and may adversely affect the voting and other rights of the holders of common stock.

If we issue common stock at a price below the effective common stock price of previous issuances, we may be required to issue additional common stock purchases, and common stock warrants resulting in additional dilution to our stockholders.

All of the Company’s convertible notes and related warrants, preferred stock, and the common stock and related warrants issued in the 2013 private placement contain anti-dilution provisions that give the investors the right to equal price adjustments in the event of the issuance of stock below the current price of the existing investor. The investors also have the right to waive their respective anti-dilution rights. In the event that the Company is required to issue shares below the effective price and is unable to obtain waivers, the issuance of additional common stock and warrants will be required resulting in additional dilution to existing stockholders.

Trading on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.

Our common stock is quoted on the OTC Markets. Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like NYSE or Amex. These factors may result in investors having difficulty reselling any shares of our common stock.

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Because our common stock is quoted and traded on the OTC Markets, short selling could increase the volatility of our stock price.

Short selling occurs when a person sells shares of stock which the person does not yet own and promises to buy stock in the future to cover the sale. The general objective of the person selling the shares short is to make a profit by buying the shares later, at a lower price, to cover the sale. Significant amounts of short selling, or the perception that a significant amount of short sales could occur, could depress the market price of our common stock. In contrast, purchases to cover a short position may have the effect of preventing or retarding a decline in the market price of our common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the OTC Markets or any other available markets or exchanges. Such short selling if it were to occur could impact the value of our stock in an extreme and volatile manner to the detriment of our shareholders.

Our stock price is likely to be highly volatile because of several factors, including a limited public float.

The market price of our common stock has been volatile in the past and is likely to be highly volatile in the future because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. Our stockholders may not be able to resell shares of our common stock following periods of volatility because of the market’s adverse reaction to volatility.

Other factors that could cause such volatility may include, among other things:

·	actual or anticipated fluctuations in our operating results;

·	the absence of securities analysts covering us and distributing research and recommendations about us;

·	we may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;

·	overall stock market fluctuations;

·	announcements concerning our business or those of our competitors;

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·	actual or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;

·	conditions or trends in the industry;

·	litigation;

·	changes in market valuations of other similar companies;

·	future sales of common stock;

·	departure of key personnel or failure to hire key personnel; and

·	general market conditions.

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Any of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.

FINRA (“Financial Industry Regulatory Authority”) sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity and liquidity of our common stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker-dealers may be willing to make a market in our common stock, which may limit your ability to buy and sell our stock.

Because our common stock is quoted on the OTC Markets and is subject to the “Penny Stock” rules, investors may have trouble reselling their shares.

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on the over-the-counter markets). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Should a broker-dealer be required to provide the above disclosures or fail to deliver such disclosures on the execution of any transaction involving a penny stock in violation of federal or state securities laws, an investor may be able to cancel his or her purchase and get the money back. In addition, if the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages. If an investor has signed an arbitration agreement, however, the investor may have to pursue the claim through arbitration. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.

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If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud resulting in current and potential stockholders losing confidence in our financial reporting.

~~Effective~~The ~~internal~~Company ~~controls~~reported ~~are~~three ~~necessary~~material ~~for~~weaknesses usin toour ~~provide~~internal ~~reliable~~controls ~~financials~~as ~~reports~~of ~~and~~December ~~effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud~~31, ~~our operating results could be harmed~~2013. We ~~have~~are ~~during~~working ~~fiscal~~to ~~2008~~remediate ~~discovered,~~the ~~and~~remaining ~~may~~three inmaterial ~~the future discover~~weaknesses, ~~areas~~which ofare ~~our~~(1) ~~internal~~the ~~controls~~Company ~~that~~did ~~need~~not ~~improvement. During~~maintain ~~fiscal~~effective ~~2008, our internal~~ controls ~~need~~over its ~~improvement~~quarterly and ~~the~~annual ~~primary~~financial ~~contributing~~statements ~~factors~~and todisclosure; (2) the ~~need~~Company ~~for such improvement were that we~~ did not maintain aeffective ~~sufficient~~controls ~~complement~~over the recording of ~~personnel~~complex ~~with~~transactions as a ~~level~~result of ~~knowledge~~the aggregation of ~~our~~deficiencies; ~~accounting records~~ and ~~technical~~(3) ~~competence~~inadequate tooversight ~~ensure~~over ~~proper~~key ~~application~~corporate ofgovernace ~~U.S.~~activities: The ~~generally~~roles ~~accepted accounting principles~~ and weresponsibilities ~~did~~of ~~not~~the ~~maintain~~board ~~sufficient~~of ~~written~~directors ~~policies~~are ~~and~~not ~~procedures,~~adequately ~~and~~defined ~~support. We~~to ~~remediate~~take ~~these~~sufficient ~~issues~~oversight byrole ~~retaining~~of ~~new~~certain ~~personnel~~corporate ~~with~~goverance ~~the~~activities ~~requisite~~(compensation, ~~level~~audit, ofetc.). We ~~knowledge~~will ~~and~~continue ~~experience,~~to ~~including~~implement ~~Mr.~~measures ~~Brett~~we ~~Cormier~~believe ashave ~~our~~effectively ~~Chief Financial Officer~~addressed, ~~and~~or ~~developing~~will ~~and~~effectively ~~implementing~~address, ~~appropriate~~all ~~written~~of ~~policies~~our ~~and~~reported ~~procedures~~material weaknesses. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

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We have never paid dividends and have no plans to in the future.

Holders of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our common stock may have will be in the form of appreciation, if any, in the market value of their shares of common stock. See “Dividend Policy.”

We provide indemnification of our officers and directors and we may have limited recourse against these individuals.

Our Amended and Restated Articles of Incorporation and Bylaws contain broad indemnification and liability limiting provisions regarding our officers and directors, including the limitation of liability for certain violations of fiduciary duties. We therefore will have only limited recourse against these individuals.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We are currently leasing our executive offices and pharmacy locations. Our executive offices are located at ~~2595~~5600 ~~Dallas~~Tennyson Parkway, Suite ~~206~~390, ~~Frisco~~Plano, TXTexas ~~75034~~75024 and consist of approximately 1,~~500~~400 square feet. Monthly rent under the lease for our executive offices is approximately $23,~~900~~200.

As discussed in Item ~~one~~1, we currently operate ~~four~~two retail pharmacies, located in ~~Riverside, California:~~ Kirkland, Washington; ~~Gresham Oregon;~~ and Leawood, Kansas and have leases on two additional pharmacies, located in Greenwood Village, Colorado and Waltham, Massachusetts that are under development. Each of our retail pharmacies are approximately 1,500 square feet and are leased from various property management companies for approximately five years. Monthly rent under each of the leases for our pharmacies ranges from $1,~~200~~300 to $3,~~700~~800.

Future store locations, when established, will be selected based on the following criteria: i) the proximity to physician and medical facilities; ii) convenience of the particular location; iii) size and growth rate of the surrounding metropolitan area; iv) state and local tax rates; v) competitive business environment and vi) access to qualified personnel and the associated cost.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be involved in various claims, lawsuits, and disputes with third parties, actions involving allegations of discrimination or breach of contract actions incidental to the normal operations of the business. Providing pharmacy services entails an inherent risk of medical and professional malpractice liability. We may be named as a defendant in such lawsuits and thus become subject to the attendant risk of substantial damage awards. We believe that we have adequate professional and medical malpractice liability insurance coverage. There can be no assurance, however, that we will not be sued, that any such lawsuit will not exceed our insurance coverage, or that we will be able to maintain such coverage at acceptable costs and on favorable terms.

On March 18, 2011, a lawsuit was filed by Tim Chandler, Jodi Marshall, Christie Garner, the Estate of Thomas Pike, Jr., and Angie Hernandez in the Circuit Court of the State of Oregon for Multnomah County against Payette Clinics, P.C., Scott Pecora, Kelly Bell, Penny Steers and our wholly-owned 24subsidiaries, Assured Pharmacies Northwest, Inc. and Assured Pharmacy Gresham, Inc. The lawsuit arises from allegations that nurse practitioners at Payette Clinics, P.C. prescribed the five plaintiffs controlled substances in amounts that were excessive under the appropriate medical standard of care. Only one of the plaintiffs, Tim Chandler, brought claims against our subsidiaries. Mr. Chandler’s claims against our subsidiaries were for negligence on the basis of allegations that our subsidiaries knew or had reason to know that the prescriptions fell below the standard of care applicable to the prescription of such controlled substances but nonetheless filled the prescriptions. The plaintiffs, as a whole, submitted a prayer for $7,500,000 in damages. Mr. Chandler only seeks “an amount to be proven at trial” for noneconomic damages and unnecessary expenses. Management believes that the allegations against our subsidiaries are without merit and plans to vigorously defend this claim. We have $2,000,000 in insurance coverage for claims relating to pharmacy negligence. This lawsuit has been stayed as a result of a co-defendant in this lawsuit (Payette Clinics, P.C.) having filed for bankruptcy. The bankruptcy has since been discharged and the automatic stay lifted. The state court stay was also lifted. On June 20, 2013, a Motion to Stay took place and the court granted the defendants’ motion. All proceedings are now stayed until May 30, 2014. The Company has denied any liability and is vigorously defending this action.

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On ~~March~~May 189, ~~2011~~2013, a lawsuit was filed by ~~Tim~~Coventry ~~Chandler~~Enterprises, ~~Jodi~~LLC ~~Marshall,~~(“Coventry”) ~~Christie~~in ~~Garner,~~ the ~~Estate~~United ofStates ~~Thomas~~District ~~Pike, Jr., and Angie Hernandez in the Circuit~~ Court ofSouthern ~~the~~District ~~State~~ of ~~Oregon~~New ~~for Multnomah County against Payette Clinics, P~~York.~~C., Scott Pecora, Kelly Bell, Penny Steers and our wholly-owned subsidiaries, Assured Pharmacies Northwest, Inc. and Assured Pharmacy Gresham, Inc.~~ The lawsuit arises from allegations that ~~nurse~~Assured ~~practitioners~~Pharmacy atbreached ~~Payette~~its ~~Clinics,~~obligations ~~P.C.~~under ~~prescribed~~ the ~~five~~$200,000 ~~plaintiffs~~16% ~~controlled~~Senior ~~substances~~Convertible inDebenture ~~amounts~~due ~~that~~December ~~were~~1, ~~excessive~~2013 ~~under~~with ~~the~~Coventry ~~appropriate~~Enterprises, ~~medical standard of care~~LLC. ~~Only~~Due ~~one~~to of the ~~plaintiffs, Tim Chandler, brought claims against our subsidiaries. Mr. Chandler~~Company’s ~~claims~~financial ~~against~~condition, ~~our~~we ~~subsidiaries~~have ~~were~~been ~~for~~unable ~~negligence~~to onrepay the ~~basis~~$200,000 ofin ~~allegations~~principal ~~that~~and ~~our~~accrued ~~subsidiaries~~interest ~~knew~~due orunder ~~had reason to know that~~ the ~~prescriptions~~agreement. In ~~fell~~November ~~below~~2013, the ~~standard~~parties ofentered ~~care~~into ~~applicable~~a toSettlement ~~the~~Agreement ~~prescription~~and ofGeneral ~~such~~Release ~~controlled~~which ~~substances~~included ~~but~~a ~~nonetheless~~forbearance ~~filled~~re ~~the~~stipulated ~~prescriptions~~judgment. The ~~plaintiffs,~~parties asagree athat ~~whole,~~as ~~submitted~~of aDecember ~~prayer~~6, ~~for $7~~2013,~~500,000~~ inbefore ~~damages. Mr.~~any ~~Chandler~~application ~~only~~of ~~seeks~~any ~~“an~~payments, ~~amount~~we toowe beCoventry ~~proven at trial” for noneconomic damages and unnecessary expenses~~$280,678. ~~Management~~82, ~~believes~~which ~~that~~includes ~~the~~unpaid ~~allegations~~principal ~~against~~of ~~our subsidiaries are without merit and plans to vigorously defend this claim. We have~~ $2200,000,~~000~~ inunpaid ~~insurance~~interest ~~coverage~~of ~~for claims relating to pharmacy negligence~~$53,678. ~~This~~82 ~~lawsuit~~and ~~has~~unreimbursed ~~been~~attorney’s ~~stayed~~fees asand acosts ~~result~~ of ~~a co-defendant in this lawsuit (Payette Clinics~~$27, P000.~~C.) having filed for bankruptcy.~~ The ~~bankruptcy~~agreement ~~has~~establishes ~~since~~that ~~been~~the ~~discharged~~Company ~~and~~shall ~~the~~pay ~~automatic~~Coventry ~~stay lifted~~$280,678. ~~The~~82, ~~state~~plus ~~court~~interest ~~stay~~at ~~has also been lifted and~~ the ~~case~~rate isof ~~now proceeding~~16. ~~The~~0% ~~Company~~per ~~has~~annum ~~denied~~on ~~any~~the ~~liability~~following ~~and is vigorously defending this action.~~schedule:

a)	$50,000 payable on or before December 6, 2013; and

b)	$10,000 payable on or before the first day of each month starting January 1, 2014 and continuing thereafter until the obligation is paid.

On August 23, 2013, AQR Opportunistic Premium Offshore Fund, L.P. and CNH Diversified Opportunities Master Account, L.P. filed a lawsuit against Assured Pharmacy in the Supreme Court of the State of New York. Plaintiffs submitted a Motion for Summary Judgment in Lieu of Complaint against defendants to recover money allegedly owed by Assured Pharmacy, Inc. under two 16% Convertible Debentures totaling $300,000 issued in and around 2011 in a private placement. Assured removed the action to the Southern District of New York. Assured plans to vigorously defend the claim.

On October 25, 2013, a lawsuit was filed by Westlake Gresham North, LLC in the Circuit Court of the State of Oregon. The lawsuit arises from allegations that Assured Pharmacy Gresham, Inc. and Assured Pharmacy, Inc. are in breach of contract of lease agreement and is claiming $123,234 in damages. In December 2013, the parties entered into a Release and Settlement Agreement which included a Stipulated General Judgment with Money Award in the amount of $99,174. As part of the settlement, the Company is required to make monthly rent payments of $3,064.73 beginning with December 2013 rent and continuing until the lease expires or another tenant leases that space. The Company is also required to make a lump sum payment of $21,239.27 for past due rent by April 1, 2014.

On December 16, 2013 a lawsuit was filed by Ann Raffaele, in the Circuit Court of the State of Oregon for Multnomah County against Assured Pharmacy, Inc and our wholly-owned subsidiaries, Assured Pharmacies Northwest, Inc. and Assured Pharmacy Gresham, Inc. The lawsuit arises from allegations of medical negligence by Dr. Edward Goering, D.O. and Assured Pharmacy. The plaintiff submitted a prayer for $1,500,000 in damages. Management believes that the allegations against the Company are without merit and plans to vigorously defend this claim. We have $2,000,000 in insurance coverage for claims relating to pharmacy negligence.

On February 19, 2014, a lawsuit was filed by JS Barkats PLLC, in the Supreme Court of The State of New York for County of New York against Assured Pharmacy, Inc. and Robert DelVecchio, our Chief Executive Officer. The lawsuit arises from allegations of failing to remit legal fees due under written retainer agreements of $134,300 and failing to deliver 500,000 freely traded shares of the Company’s common stock pursuant to one of the retainer agreements. Management believes that the allegations against the Company are without merit and plans to vigorously defend this claim and is pursuing counter claims asking compensatory and punitive damages.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

~~EXECUTIVE~~- ~~OFFICERS~~27 ~~OF THE REGISTRANT~~-

Name	Age	Position(s)
Robert DelVecchio	48	Chief Executive Officer & Director
Mike Schneidereit	39	Chief Operating Officer
Brett Cormier	45	Chief Financial Officer

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The following is information about our executive officers as of the date of this report.

Robert DelVecchio. Mr. DelVecchio has been our Chief Executive Officer and a director since February 2005. In addition to leading our organization, Mr. DelVecchio’s responsibilities also include sales, investor relations, business development and fund raising. Since 1995, Mr. DelVecchio has acted as Chief Executive Officer and President of Brockington Securities, Inc., a broker-dealer and member of the FINRA from May 1995 - June 2010. Mr. DelVecchio is also a member of the board of directors of IGHL Foundation, a charitable organization that provides programs, services and support for people with developmental disabilities in the New York tri-state region.

Mike Schneidereit. Mr. Schneidereit joined us in October 2008 and became our Chief Operating Officer in May 2009. Mr. Schneidereit’s responsibilities include pharmacy operations, sales, purchasing and information technology. From March 2006 to 2008, Mr. Schneidereit was the Director of Operations for SureHealth, LLC where he was responsible for the management of their specialty pharmacy line of business and corporate information technology.

Brett Cormier, C.P.A. Mr. Cormier joined us in September 2008 and became our Chief Financial Officer in May 2009. Mr. Cormier is responsible for the management of the finance, accounting, human resources functions and our overall corporate administration. From February 2007 to August 2008, Mr. Cormier served as Chief Financial Officer of Sleep Holdings, Inc. and previously served as Vice President of Finance and Corporate Controller for First Broadcasting, LLC from August 2006 to January 2007. From February 2003 to July 2007, Mr. Cormier served as Vice President of Finance for Holigan Investment Group, Ltd. From April 1999 to February 2003, Mr. Cormier served as Corporate Controller of Monarch Dental Corporation.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is currently quoted on the OTC Markets. The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids” and “asks”, as well as volume information. Our shares are quoted on the OTC Markets under the symbol “APHY.”

Fiscal Year Ended December 31, 2013
	High Bid	Low Bid
Fiscal Quarter Ended:
March 31, 2013	$0.92	$0.35
June 30, 2013	$0.92	$0.51
September 30, 2013	$0.73	$0.25
December 31, 2013	$0.40	$0.10

Fiscal Year Ended December 31, 2012
	High Bid	Low Bid
Fiscal Quarter Ended:
March 31, 2012	$0.80	$0.20
June 30, 2012	$0.90	$0.34
September 30, 2012	$0.61	$0.50
December 31, 2012	$0.50	$0.20

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The following table sets forth the range of high and low closing bid quotations for our common stock for each of the periods indicated as reported by the OTC Markets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of the close of business on April 15, 2011, we effectuated a 1-for-180 reverse stock split. All prices in the following table reflect post-reverse split prices.

Fiscal Year Ended December 31, 2012
	High Bid	Low Bid
Fiscal Quarter Ended:
March 31, 2012	$0.80	$0.20
June 30, 2012	$0.90	$0.34
September 30, 2012	$0.61	$0.50
December 31, 2012	$0.50	$0.20
Fiscal Year Ended December 31, 2011
	High Bid	Low Bid
Fiscal Quarter Ended:
March 31, 2011	$1.35	$0.43
June 30, 2011	$1.16	$0.01
September 30, 2011	$1.15	$0.65
December 31, 2011	$0.75	$0.51

Holders of Common Stock

As of March 1514, ~~2013~~2014, there were approximately ~~153~~164 record holders of our common stock. This number does not include stockholders whose shares are held in securities position listings.

Dividends

We have not paid or declared any dividends on our common stock and we do not anticipate paying dividends on our common stock in the foreseeable future.

Issuer Purchases of Equity Securities

None.

Recent Sales of Unregistered Securities

The following is a summary of recent ~~transactions by us involving~~ sales orof our securities that were not registered under the Securities Act.

~~Common~~Between February ~~Stock~~4, 2013 and ~~Warrant~~May ~~Issuances~~30, 2013, we entered into subscription agreements with eight investors pursuant to which we sold an aggregate of 1,323,093 shares of restricted common stock at $0.65 and warrants to purchase 1,923,093 common shares with an exercise price of $0.90. We received gross proceeds of $860,000, which were used to reduce our outstanding amount due to our primary wholesaler and general working capital purposes. The net cash proceeds from this private transaction were $814,190, net of closing fees of $45,810 which include $32,800 in placement agent fees paid to TriPoint Global Equities, LLC (“TriPoint”). In addition, TriPoint also received warrants to purchase a total of 100,924 common shares of which 50,462 warrants and 50,462 warrants have an exercise price of $0.65 and $0.90, respectively. The warrants were fully vested on the date of issuance and expire on May 30, 2018.

OnAll ~~March~~of ~~23,~~the ~~2012,~~common westock ~~issued~~offerings and sales above were deemed to ~~one~~be ~~holder~~exempt ofunder ~~Series~~Rule A506 ~~Convertible~~of ~~Preferred~~Regulation ~~Stock~~D and/or Section 4(a) ~~total~~2 of ~~104,250~~the ~~shares~~Securities Act of ~~common~~1933. ~~stock~~No ~~upon~~advertising or general solicitation was employed in offering the ~~conversion~~securities. The offerings and sales were made to a limited number of ~~150~~persons, ~~shares~~all of ~~Series~~whom Awere ~~Convertible~~accredited ~~Preferred~~investors, ~~Stock.~~our ~~The~~business ~~shares~~associates or existing security holders, and transfers of ~~common~~the ~~stock~~securities were ~~issued~~restricted ~~pursuant~~by tous ~~the~~in ~~provisions~~accordance ofwith ~~Section~~the ~~3(a)(9)~~requirements of the Securities Act. In addition to representations by the above-referenced persons, we have made independent determinations that all of ~~1933.~~the Weabove-referenced ~~did~~persons ~~not~~were ~~receive~~accredited ~~any~~or ~~proceeds~~sophisticated ~~upon~~investors, ~~conversion~~were capable of ~~such~~analyzing ~~preferred~~the ~~shares~~merits and ~~such~~risks ~~issuances~~of ~~involved~~their investment, and understood the ~~issuance~~speculative nature of ~~shares~~their toinvestment. ~~existing~~Furthermore, ~~security~~all ~~holders~~of inthe ~~exchange~~above-referenced ~~for~~persons ~~other~~were ~~securities.~~provided with business and financial information concerning our company.

For each of the following common stock and warrant issuances, these securities were issued upon the exemption from the registration provisions of the Securities Act of 1933 provided for by Section 4(2a)2 ~~thereof~~and ~~for transactions not involving~~ 3(a ~~public offering~~)(9). There were no underwriters or placement agents employed in connection with any of these transactions. ~~Use of this exemption is based on the following facts:~~

·	Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.

·	The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities.

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·	The recipients had access to business and financial information concerning our company.

·	All securities issued were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from registration in compliance with federal and state securities laws.

On- ~~May~~29 17, 2012, we issued 225,000 shares of restricted common stock to a financial consultant in exchange for financial consulting services. We determined that the aggregate amount of consideration we received in exchange for these services to be $180,000 or $0.80 per share.-

OnTable ~~May 21, 2012, we issued 125,000 shares~~ of restricted common stock to a financial consultant in exchange for strategic advisory and consulting services. We determined that the aggregate amount of consideration we received in exchange for the services to be $63,750 or $0.51 per share.Contents

On ~~September~~February 1422, ~~2012~~2013, we issued 65227,~~000~~333 ~~shares of restricted~~ common ~~stock~~shares toas apayment for ~~Jack E. Brooks~~$45,667 ain ~~financial~~accrued ~~consultant~~interest inon ~~exchange~~outstanding ~~for~~convertible ~~strategic~~debentures ~~advisory~~to ~~and~~a ~~consulting~~convertible ~~services~~debenture holder. We ~~determined~~The ~~that~~aggregate ~~the~~fair ~~aggregate~~market ~~amount~~value of ~~consideration~~the weshares ~~received~~on inthe ~~exchange~~date ~~for~~of ~~the~~issuance ~~services~~was determined to be $33102,~~150~~300 or $0.5145 per share.

On ~~December~~May 1928, ~~2012~~2013, we issued ~~125~~205,~~000~~556 shares of ~~restricted~~common stock upon conversion of 185 shares of Series B Convertible Preferred Stock to one holder. The shares of common stock were issued pursuant to athe ~~financial~~provisions ~~consultant~~of inSection ~~exchange~~3(a)(9) ~~for~~of ~~strategic~~the ~~advisory~~Securities ~~and~~Act ~~consulting~~of ~~services~~1933. We ~~determined~~did ~~that~~not ~~the~~receive ~~aggregate~~any ~~amount~~proceeds upon conversion of ~~consideration~~such wepreferred ~~received~~shares inand ~~exchange~~such ~~for~~issuances involved the ~~securities~~issuance of shares to beexisting ~~$63,750~~security orholders ~~$0.51~~in ~~per~~exchange ~~share~~for other securities.

On ~~February~~May 528, 2013, we issued ~~769~~80,~~240~~000 shares of restricted common stock atto ~~$0.65~~a ~~and~~consultant ~~warrants~~for tofinancial ~~purchase~~consulting ~~769,240~~services ~~common~~provided. We ~~shares~~determined ~~with~~that anthe ~~exercise~~aggregate ~~price~~amount of ~~$0.90~~consideration we received in aexchange ~~private~~for ~~placement~~these services to ~~Pinewood~~be ~~Trading~~$72,000 ~~Company~~or $0.90 per share.

On ~~February~~August 1128, 2013, we issued ~~an additional 153~~25,~~848~~000 shares of restricted common stock atto ~~$0.65~~a ~~and~~consultant ~~warrants~~for tofinancial ~~purchase~~consulting ~~153,848~~services ~~common~~provided. We ~~shares~~determined ~~with~~that anthe ~~exercise~~aggregate ~~price~~amount of ~~$0.90~~consideration we received in aexchange ~~private~~for ~~placement~~these services to ~~Pinewood~~be ~~Trading~~$7,750 ~~Company~~or $0.31 per share.

On September 10, 2013, we issued 40,000 shares of restricted common stock to a consultant for financial consulting services provided. We determined that the aggregate amount of consideration we received in exchange for these services to be $36,000 or $0.90 per share.

On September 26, 2013, we issued 83,334 shares of common stock upon conversion of 75 shares of Series B Convertible Preferred Stock to one holder. The shares of common stock were issued pursuant to the provisions of Section 3(a)(9) of the Securities Act of 1933. We did not receive any proceeds upon conversion of such preferred shares and such issuances involved the issuance of shares to existing security holders in exchange for other securities

On September 30, 2013, we issued 325,000 shares of restricted common stock to a consultant for financial consulting services provided. We determined that the aggregate amount of consideration we received in exchange for these services to be $266,500 or $0.82 per share.

On November 20, 2013, we issued 75,000 shares of restricted common stock to a consultant for financial consulting services provided. We determined the aggregate amount of consideration we received in exchange for these services to be $67,500 or $0.90 per share.

On January 3, 2014, we issued an aggregate total of 2,019,123 shares of restricted common stock to eight debenture holders upon conversion of $965,784 in debentures and payment of $245,689 in accrued interest on outstanding convertible debentures at the conclusion of our Tender Offer.

On February 13, 2014, we issued 420,694 common shares as payment of $252,417 in accrued interest on outstanding convertible debentures to a convertible debenture holder. The aggregate fair market value of the shares on the date of issuance was determined to be $34,100 or $0.15 per share.

On March 14, 2014, we issued 1,175,408 shares of restricted common stock to a debenture holder upon conversion of $500,000 in debentures and payment of $205,245 in accrued interest on outstanding convertible debentures. As part of the transaction, we also issued 833,334 three year warrants to purchase common stock at an initial exercise price of $0.60 for twelve months and increasing to $0.75 for the remaining 24 months.

Preferred Stock

For each of the following preferred stock issuances, these securities were issued in reliance upon the exemption from the registration provisions of the Securities Act of 1933 provided for by Section 4(2) thereof for transactions not involving a public offering. There were no underwriters or placement agents employed in connection with any of these transactions. Use of this exemption is based on the following facts:

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·	Neither we nor any person acting on our behalf solicited any offer to buy nor sell securities by any form of general solicitation or advertising.

·	The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities.

·	The recipients had access to business and financial information concerning our company.

·	All securities issued were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from registration in compliance with federal and state securities laws.

Between January 10, 2013 and March 4, 2013, we issued a total of 60 shares of Series A Convertible Preferred Stock for gross proceeds of $60,000 to Mosaic Private Equity Fund US, LP. a related party, in accordance with the terms of that certain Purchase Agreement dated February 9, 2009. Each share of Series A Convertible Preferred Stock is convertible into 1,111 shares of common stock (subject to adjustment for certain dilutive transactions).

Between November 19, 2013 and December 3, 2013, we issued a total of 1,000 shares of Series D Convertible ~~Debentures~~Preferred Stock for gross proceeds of $1,000,000 to Pinewood Trading Fund, LP, a related party, in accordance with the terms of that certain Purchase Agreement dated September 1, 2013. As part of the transaction we also issued 1,000 Series A and 1,000 Series B five year warrants to purchase an aggregate total of 4,000,000 shares of common stock at an initial exercise price of $0.50. Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).

On ~~January~~December 317, ~~2012~~2013, we ~~entered~~issued ~~into~~a ~~subscription~~total ~~agreements with an accredited investor pursuant to which we sold 16.0% senior convertible debentures for an aggregate principal amount~~ of ~~$50,400. The~~20 ~~cash proceeds from this private transaction were $50,400. The debentures are convertible into~~ shares of ~~our~~Series ~~common~~D ~~stock~~Convertible atPreferred anStock ~~initial conversion price of $1.26 per share~~ for angross ~~aggregate~~proceeds ~~total~~ of 40$20,000 ~~common~~to ~~shares~~Craig ~~on an as converted basis~~Eagle, ~~subject~~a todirector ~~adjustment. The~~on ~~debenture~~the ~~maturity~~Company’s ~~dates are May 30~~Board, ~~2013~~in accordance with ~~two~~the ~~periodic~~terms ~~redemptions~~ of ~~twenty-five~~that ~~percent~~certain ~~(25%)~~Purchase ofAgreement ~~the~~dated ~~original~~December ~~principal amount~~17, ~~plus~~2013. As ~~any~~part ~~unpaid interest and a final redemption~~ of ~~fifty percent (50%) of~~ the ~~original~~transaction ~~principal~~we ~~amount~~also ~~plus~~issued ~~any~~20 ~~unpaid~~Series ~~interest~~A ~~due at maturity. The periodic redemption dates are November 30, 2012~~ and ~~February~~20 ~~28,~~Series ~~2013.~~B five Weyear ~~have~~warrants ~~the option~~ to ~~pay~~purchase ~~all~~an oraggregate ~~part~~total of ~~the~~80,000 ~~initial twenty-five percent (25%) redemption amount due with~~ shares of ~~our~~ common stock, ~~subject~~at toan ~~certain~~initial ~~equity~~exercise ~~conditions,~~price asof ~~defined in the debenture~~$0.50. ~~These~~Each ~~equity~~share ~~conditions~~of ~~include,~~Series ~~among~~D ~~others,~~Convertible ~~our~~Preferred ~~compliance~~Stock ~~with~~is ~~honoring~~convertible ~~all~~into ~~conversions and redemptions~~2,000 ~~payment~~shares of ~~all liquidated damages of the debenture, an effective registration to allow for resale of the~~ common ~~shares~~stock ~~and~~(subject ~~the ability~~ to ~~resell~~adjustment ~~such common pursuant to Rule 144. In July 2012,the debenture holder entered into amendment agreements to extend the periodic redemption dates and maturity dates~~ for acertain ~~period~~dilutive ~~of one year~~transactions).

-On 27December -20, 2013, we issued a total of 50 shares of Series D Convertible Preferred Stock for gross proceeds of $50,000 to an individual accredited investor in accordance with the terms of that certain Purchase Agreement dated December 20, 2013. As part of the transaction we also issued 50 Series A and 50 Series B five year warrants to purchase an aggregate total of 200,000 shares of common stock at an initial exercise price of $0.50. Each share of Series D Convertible Preferred Stock is convertible into 2,000 shares of common stock (subject to adjustment for certain dilutive transactions).

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As part of the private transaction, the investors also received warrants to purchase 48,000 shares of our common stock. The warrants were fully vested in the date of issuance and are exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The investors may exercise the warrant on a cashless basis only if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. As part of the debenture amendments entered into during the months of June and July 2012, the exercise period of warrants to purchase an aggregate total of 657,889 shares of our common stock was increased from three to five years.

In July 2012, we completed a sale through a private transaction to Hillair Capital Investments, LP of 16.0% senior convertible debentures for an aggregate principal amount of $300,000. The proceeds from the private placement resulting in cash gross proceeds of an aggregate of $300,000, net of legal fees and other closing costs of $40,000 from this transaction. The debentures are convertible into shares of our common stock at an initial conversion price of $1.26 per share for an aggregate total of 238,096 common shares on an as converted basis (subject to adjustment for certain dilutive transactions). The debenture matures on December 1, 2013 with two periodic redemptions of twenty-five percent (25%) of the original principal amount on June 1, 2013 and September 1, 2013, plus any unpaid interest and a final redemption of fifty percent (50%) of the original principal amount plus any unpaid interest due at maturity. We have the option to pay all or part of the initial twenty-five percent (25%) redemption amount due with shares of our common stock, subject to certain equity conditions, as defined in the debenture. These equity conditions include, among others, our compliance with honoring all conversions and redemptions, payment of all liquidated damages of the debenture, an effective registration to allow for resale of the common shares and the ability to resell such common pursuant to Rule 144.

As part of the private transaction, the investors also received warrants to purchase 285,715 shares of our common stock. The warrants were fully vested on the date of issuance and are exercisable for a period of five years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The investors may exercise the warrant on a cashless basis only if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.

All of the convertible debenture offerings and sales above were deemed to be exempt under Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, our business associates or existing security holders, and transfers of the securities were restricted by us in accordance with the requirements of the Securities Act. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, were capable of analyzing the merits and risks of their investment, and understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with business and financial information concerning our company.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Forward-Looking Statements” and “Risk Factors” in Item 1A of this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are engaged in the business of establishing and operating pharmacies that specialize in dispensing highly regulated pain medication for chronic pain management. Because our focus is on dispensing medication, we typically do not keep in inventory non-prescription drugs, or health and beauty related products, such as walking canes, bandages and shampoo. We primarily derive our revenue from the sale of prescription medications. The majority of our business is derived from repeat business from our customers and we have limited “walk-in” prescriptions.

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We currently have ~~four~~two operating pharmacies and two pharmacies that are under development, each of which are wholly owned through subsidiaries. The opening date and locations of our pharmacies are as follows:

Location		Opening Date
Riverside, California		June 10, 2004
Kirkland, Washington		August 11, 2004
Gresham, Oregon		January 26, 2007
Leawood, Kansas		November 28, 2011

The table set forth below summarizes the number of prescriptions dispensed and the number of patients serviced by our operating pharmacies during the year ended December 31, ~~2012~~2013 and ~~2011~~2012, respectively.

	Year ended	Year ended
	December 31, 2012	December 31, 2011
	December 31, 2013	December 31, 2012
Total Number of Prescriptions1	~~121~~48,~~392~~139	~~117~~49,~~410~~759
Total Number of Patients Serviced2	4825,~~177~~401	3922,~~965~~945

“Total Number of Prescriptions” equals the total number of prescriptions dispensed by our operating pharmacies and delivered to or picked up by the customer.

“Total Number of Patients Serviced” equals the total number of patients serviced measured on a monthly basis.

Recent Events

In January ~~2013~~2014, wethe ~~initiated~~Company aentered ~~securities~~into ~~offering through~~ a ~~private placement for a minimum of 10 units of securities for a minimum of~~ $~~250~~200,000 ~~and~~promissory anote ~~maximum~~with ofPinewood 80Trading ~~units for a maximum of $2~~Fund,~~000,000~~ ~~(subject to increase to as much as 100 Units for $2~~LP.,~~500,000~~ toa ~~cover over-allotments,~~related ~~if any)~~party. ~~Each~~The ~~Unit~~note ~~consists~~bears ~~of (a) 38,462 shares of common stock, valued at $0.65 for $25,000 and (b) 38,462 warrants with~~ an ~~initial~~interest ~~exercise~~rate ~~price~~ of $016.9000% per ~~share. If~~annum ~~the~~payable ~~maximum offering of 80 units is sold, Assured will issue an aggregate of 3,076,960 shares of common stock and 3,076,960 warrants~~ in ~~such units. The Company shall pay~~ the ~~placement agent cash commissions equal to 10% of the gross proceeds received by the~~ Company’s ~~in this offering and three year warrants to purchase that number of shares of~~ common stock ~~equal~~payable toon ~~10%~~July of1st ~~the aggregate number of shares of common stock~~ and ~~warrant~~January ~~shares~~1st included in the units sold in the offering (615,392 shares if all 80 units are sold and 769,240 shares if the over-allotment is exercised in full). The outstanding common stock related to the private placement are subject to certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. The Company has also agreed that the 38,462 shares of ~~common~~each ~~stock~~calendar ~~and~~year ~~the 38,462 warrants included in the units are subject to increase,~~ and ~~the~~matures ~~$0.65~~on ~~per~~January ~~share value and the $0.90 warrant exercise prices are subject to decrease~~28, ~~in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”)~~2016. ~~Such Make-Whole Adjustments are as follows:~~

Share Price	Warrant Exercise Price	Adjusted Shares per Unit	Adjusted Warrants per Unit	Consolidated 2013 Revenues
$0.65	$0.90	None	None	$21,850,000 or above
$0.60	$0.85	41,667	41,667	From $20,700,000 to $21,849,999
$0.55	$0.80	45,455	45,455	From $19,550,000 to $20,699,999
$0.50	$0.75	50,000	50,000	From $18,400,000 to $19,549,999
$0.45	$0.70	55,556	55,556	From $17,250,000 to $18,399,999
$0.40	$0.65	62,500	62,500	Less than $17,250,000

In February and March 2014, the Company entered into five short term promissory notes with Pinewood Trading Fund, LP., a related party for an aggregate total of $240,000. The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.

-In 29February -2014, the Company entered into an Amended and Restated 10% Senior Convertible Debenture due June 30, 2016 with Hillair Capital Investments, LP. in the amount of $1,150,000. The amendment relates to convertible debentures originally issued on May 16, 2011, August 22, 2011, November 30, 2011 and July 19, 2012 for an aggregate total of $1,000,000 in debentures. In addition to the extension of the maturity date, the interest rate was reduced from 16.0% to 10.0% per annum and the conversion price was decreased from $0.90 to $0.75. In addition, the Company issued 420,694 shares of common stock as payment of accrued interest of $252,417 at a rate of $0.60 per share. As part of the agreement, all interest accruable and payable between February 7, 2014 and August 7, 2015 has been added to this debenture at a rate of 10% per annum and is considered paid in full and satisfied. Further interest will not begin accruing until August 8, 2015. As part of the amendment, the exercise price of the related warrants was reduced from $0.90 to $0.75 resulting in the issuance of an additional 320,000 warrants per the warrant agreement terms.

In March 2014, the Company entered into a $600,000 Nondisclosable Revolving Line of Credit Loan with Third Coast Bank SSB due on March 25, 2015. The loan is not subject to an interest rate, but is subject to service charges based on the amount of funds advanced. The loan is secured by the Company’s accounts receivable and is guaranteed by Pinewood Trading Fund, LP., a related party.

Our consolidated net revenues for the fiscal year ending December 31, 2013 were $7,463,113 which included $2,270,536 in revenues from discontinued operations. Since the net revenues are below the Make-Whole Adjustment minimum threshold of $17,250,000 per our 2013 private placement agreement, the Company is required to issue an additional 826,907 shares of common stock to the eight investors that participated in the private placement by April 30, 2014. A Make-Whole adjustment for the related warrants in not required due to the anti-dilution adjustment in November 2013 anti-dilutive adjustment.

In March 2014, the Company did not meet the requirements of the Milestone Provision of the Series D Preferred of reaching positive net income on a Special Adjusted Basis (“SAB”) for the trailing two months ending February 2014. As a result, the Company is required to issue an additional 856 shares of Series D Preferred stock and additional 3,424,000 warrants to purchase common stock at $0.40 to the Series D holders. In addition, the exercise price on an aggregate total 4,280,000 warrants has been reduced to $0.40 per share. Pinewood is also entitled to elect a majority of the Board of Directors, to be accomplished in any manner that the Initial Investor deems most expedient and in compliance with applicable laws and the Company’s charter documents.

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Table of Contents

~~Each~~The ~~warrant~~Milestone ~~has~~Provision aadjustment ~~term~~reduction of ~~three~~the ~~years and may be exercised at an initial~~ exercise price ofto $0.9040 ~~per~~also ~~warrant~~met ~~share; which exercise price is, in addition to~~ the ~~potential~~requirement ~~Make-Whole~~for ~~Adjustment, subject to certain weighted average and other~~ anti-dilution ~~adjustments~~for ascertain ~~provided in the form of warrant. The~~ warrants ~~may~~and ~~only~~convertible bedebentures ~~exercised for cash. However, as provided~~ in ~~the Registration Rights Agreement (described below), after a date~~ which ~~shall be 180 days following the Final Closing Date, there will be~~ a ~~cashless~~waiver ~~exercise~~was ~~option~~not ~~available~~obtained. The toadjustment ~~the~~results ~~Warrant~~in ~~holders at any time during which~~ a ~~registration~~conversion ~~statement~~price ~~providing~~decrease ~~for~~from ~~the~~$0.50 ~~resale~~to of$0.40 ~~the~~on ~~warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to~~ an ~~exemption~~aggregate ~~from~~total ~~the registration requirements under the Securities Act. Assuming completion~~ of ~~the~~ $2500,000~~,000~~ ~~Maximum~~in ~~Offering~~debentures, ~~$650,000~~and increase of ~~the net proceeds (after offering expenses) will be used to reduce our outstanding balance to our primary wholesale drug supplier; approximately $350~~250,000 ~~will~~shares beon ~~used~~an toas ~~open~~converted ~~our~~basis. The ~~fifth~~adjustment ~~Pharmacy~~results in ~~Denver,~~an ~~Colorado;~~additional ~~and the remaining net proceeds~~994,504 ~~estimated~~warrants atto ~~approximately $750,000 will~~ be ~~used~~issued ~~for~~at ~~working~~an ~~capital~~exercise ~~and~~price ~~general corporate purposes (including the repayment~~ of ~~certain~~$0.40 ~~debt obligations described below,~~ and ~~the~~an ~~potential~~exercise ~~opening~~price ofadjustment asfrom ~~many~~$0.50 asto ~~two~~$0.40 ~~additional~~on ~~pharmacies~~an inaggregate ~~2013~~total ~~and~~of ~~2014)~~3,978,004 warrants.

AThe ~~consent~~table ~~and~~below ~~waiver~~summarizes ~~was obtained from a holder of a majority of~~ the ~~Series~~impact ~~A and C preferred stock and a waiver was obtained from the holders~~ of ~~a majority of~~ the ~~Series~~2013 BPrivate ~~preferred~~Placement stock as required in the certificate of designation. A waiver was obtained from all convertible debenture holders that were required. As part of the waivers, the Series A, B, and C preferred holders and 100 percent of the applicable convertible debenture holders agreed to waive antiMake-~~dilution~~Whole ~~adjustments~~Adjustment ~~which the consenting holder may be entitled under their respective agreements~~ and ~~accept a partial ratchet anti-dilution adjustment with a decrease in~~ the ~~conversion~~2013 ~~price~~Series toD ~~$0.90~~Preferred ~~per~~Milestone ~~share~~Adjustment ofby ~~the~~security ~~Company~~as ~~securities~~converted ~~for~~into ~~the~~common ~~private placement provided the minimum unit threshold was met. The table below summarizes the impact of the $0.90 partial ratchet anti-dilution adjustment by security~~shares:

	December 31, 2012		Adjusting Anti-dilution effect		Post Adjusted Anti-dilution effect
	December 31, 2013		Adjusting effect		Post Adjusted effect
Warrants		3,811,116		1,669,056		5,480,172
Common stock		10,255,693		826,907		11,082,600
Warrants		15,244,914		4,418,504		19,663,418
Stock options		1,840,556		-		1,840,556
Convertible notes		2,~~304~~333,~~478~~333		~~990~~250,~~844~~000		32,~~295~~583,~~322~~333
Series A Preferred		1,~~292~~629,~~492~~006		~~269,848~~-		1,~~562~~629,~~340~~006
Series B Preferred		25,~~993~~693,~~504~~344		~~2,988,729~~-		5,~~982~~693,~~233~~344
Series C Preferred		~~451~~902,~~750~~778		~~451,028~~-		902,778
		12,693,896		6,369,505		19,063,401
Series D Preferred		2,140,000		1,712,000		3,852,000
		40,039,624		7,207,411		47,247,035

In ~~February~~March ~~2013~~2014, ~~the~~we ~~Company~~entered ~~completed~~into ~~initial~~a ~~sales~~Forbearance toAgreement ~~accredited~~with ~~investors~~H.D. inSmith ~~the~~Wholesale ~~private~~Drug ~~placement~~Co. in ~~described~~which ~~above~~the ~~for~~lender ~~twenty-four~~agreed ~~(24)~~to forbear ~~common~~from ~~stock~~accelerating ~~units~~the ~~for~~outstanding abalance ~~total~~ of ~~923,088~~the ~~shares~~Note ofand ~~common~~form ~~stock~~instituting atcollection anefforts ~~aggregate~~from ~~purchase~~the ~~price~~date of ~~$600,000 (before deducting expenses and fees related to~~ the ~~private~~agreement ~~placement)~~through ~~and~~July ~~warrants to purchase an aggregate of 923~~1,~~088~~ ~~with an initial exercise price of $0~~2014.90 ~~per share.~~ The ~~private~~forbearance ~~placement~~was isrequired ~~continuing.~~due ~~The net proceeds of the initial closing of the private placement were used~~ to ~~pay down~~ our ~~outstanding~~inability ~~balance~~to ~~with~~make ~~our~~payments ~~primary~~required ~~wholesaler. The~~under ~~Company~~the ~~paid~~agreement ~~cash fees~~ of $18338,~~000~~479 ~~to the placement agent~~ and isour ~~also~~inability ~~obligated~~ to ~~issue~~meet ~~27,693~~the ~~warrants with an exercise price of~~ $~~0.90 and 27~~500,~~693~~000 ~~warrants~~minimum ~~with~~monthly anpurchase ~~exercise~~requirement ~~price~~due ~~of $0.65~~ to the ~~placement~~closure ~~agent per the agreement. As part~~ of ~~the~~our ~~private~~two ~~placement,~~pharmacy ~~the investors also received warrants to purchase an aggregate of 923,088 shares of the Company’s common stock~~locations.

InResults ~~February and March 2013, the Company also issued a total~~ of 60Operations ~~shares of Series A Preferred at $1,000 per share~~ for ~~a total of $60,000 to Mosaic under~~ the ~~existing~~Years ~~2009~~Ended ~~Securities~~December ~~Purchase agreement. The Company has issued a total of 559 shares of Series A Preferred for $558~~31,~~500~~ ~~under~~2013 ~~the~~and ~~2009 Securities Purchase agreement. The net proceeds of the sale were used for general working capital purposes.~~2012

~~Results~~Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of ~~Operations~~our operating results for the ~~Years~~years ~~Ended~~ended December 31, ~~2012~~2013 and ~~2011~~2012, represented as a percentage of total sales for each respective period:

Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended December 31, 2012 and 2011, represented as a percentage of total sales for each respective period:

	Year Ended December 31,
	2013			2012

Sales		100.0	%		100.0	%
Cost of sales		78.4			76.4
Gross profit		21.6			23.6
Operating expenses
Salaries and related expenses		36.4			33.8
Selling, general and administrative		41.0			40.3
Total operating expenses		77.4			74.1
Loss from continuing operations		-55.8			-50.5
Other expenses
Interest expense, net		24.3			24.8
(Gain) Loss on extinguishment of debt		-29.8			1.6
Gain on change in forward contract liability		-2.3			-
Loss on change in fair market value of derivative		1.4			-
Gain on change in fair value of warrant liability		-2.8			-6.3
Total other expenses and income		-9.2			20.1
Net loss from continuing operations, before tax		-46.7			-70.6
Income taxes		6.3			0.2
Net loss from continuing operations, net of tax		-53.0			-70.8
Net loss from discontinued operations, net of tax		-11.7			-0.3
Net loss		-64.7			-71.1

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	Year Ended December 31,
	2012			2011
Sales		100.0	%		100.0	%
Cost of sales		78.3			80.4
Gross profit		21.7			19.6
Operating expenses
Salaries and related expenses		21.7			17.3
Selling, general and administrative		19.8			19.1
Total operating expenses		41.5			36.4
Loss from operations before noncontrolling interest		-19.8			-16.8
Other expenses
Interest expense, net		10.4			5.6
Loss on extinguishment of debt		0.6			0.1
Gain on change in fair value of warrant liability		-2.5			-2.7
Total other expenses and income		8.5			3.0
Net loss from operations before noncontrolling interest		-28.3			-19.8
Net income attributable to noncontrolling interest		-			-0.1
Net loss attributable to Assured Pharmacy, Inc.		-28.3			-19.9

Sales

Our total sales reported for the year ended December 31, ~~2012~~2013 was $145,~~145~~192,~~533~~577, a 147.09% decrease from $165,~~444~~636,~~573~~195 for the year ended December 31, ~~2011~~2012. Our sales for the year ended December 31, ~~2012~~2013 and ~~2011~~2012 was generated primarily from the sale of prescription drugs through our pharmacy operations and to a much lesser extent fees from management services provided. Our total sales from pharmacy operations for the year ended December 31, ~~2012~~2013 was $145,~~073~~173,~~961~~395, a 137.90% decrease from $165,~~354~~564,~~578~~624 for the year ended December 31, ~~2011~~2012. Our total sales from management services for the year ended December 31, ~~2012~~2013 was $7119,~~572~~183, a 2073.52% decrease from $8971,~~995~~571 for the year ended December 31, ~~2011~~2012.

Sales per prescription dispensed by our pharmacies was approximately $~~116~~107 per prescription for the year ended December 31, ~~2012~~2013, a 163.89% decrease from approximately $~~139~~112 per prescription for the year ended December 31, ~~2011~~2012. The decrease in sales per prescription dispensed is primarily attributable to a shift in prescription mix from higher priced brand medications to lower priced generic medications. Management attributes this shift in prescription mix to changes in physician and patient mix, additional generic medications being available on the market, changes in insurance coverage, reformulation of existing pain medications and inventory constraints due to working capital limitations. Management attributes the increase in prescription volumes primarily to ~~our direct sales efforts, which was partially offset by~~ inventory ~~purchasing~~ constraints due to working capital limitations.

The number of prescriptions dispensed by our pharmacies was 48,139 for the year ended December 31, 2013 compared to 49,759 for the year ended December 31, 2012. Management attributes the decrease in prescription volumes primarily to inventory purchasing constraints due to working capital limitations.

The number of patients serviced by our pharmacies was 25,401 for the year ended December 31, 2013 compared to 22,945 patients for the year ended December 31, 2012.

Cost of Sales

The total cost of sales for the year ended December 31, ~~2012~~2013 was $114,~~078~~072,~~407~~085, a 165.25% decrease from $134,~~220~~308,~~684~~710 for the year ended December 31, ~~2011~~2012. The cost of sales consists primarily of direct cost of prescription drugs. The decrease in cost of sales is primarily attributable to decreased sales in the reporting period.

Gross Profit

Our total gross profit decreased to $31,~~067~~120,~~126~~492, or approximately 21.76% of sales, for the year ended December 31, ~~2012~~2013. This is a decrease from a gross profit of $31,~~223~~327,~~889~~485, or approximately 1923.6% of sales for the year ended December 31, ~~2011~~2012. Our gross profit from pharmacy sales decreased to $21,~~995~~101,~~554~~310, or approximately 21.23% of pharmacy revenues, for the year ended December 31, ~~2012~~2013. This is a decrease from a gross profit of $31,~~133~~255,~~894~~914, or approximately 1922.26% of pharmacy sales, for the year ended December 31, ~~2011~~2012. The decrease in the gross profit percentage for the year ended December 31, 2013, when compared to the prior fiscal year, is primarily attributable to shift in prescription mix.

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The increase in the gross profit percentage for the year ended December 31, 2012, when compared to the prior fiscal year, is primarily attributable to an increase in sales of generic drugs as a percentage of total prescription sales which has lower costs and higher gross margins.

Operating Expenses

Operating expense for the year ended December 31, ~~2012~~2013 was $54,~~864~~020,~~263~~061, a 23.17% decrease from $54,~~990~~174,~~868~~016 for the year ended December 31, ~~2011~~2012. Our operating expenses for the year ended December 31, ~~2012~~2013 consisted of salaries and related expenses of $31,~~065~~891,~~982~~862 and selling, general and administrative expenses of $2,~~798~~128,~~281~~199. Our operating expenses for the year ended December 31, ~~2011~~2012 consisted of salaries and related expenses of $21,~~850~~903,~~034~~475 and selling, general and administrative expenses of $32,~~140~~270,~~834~~541.

Salaries and related expenses ~~increased~~decreased $11,613 in the year ended December 31, ~~2012~~2013, when compared to the previous fiscal year~~, primarily due to the addition of our Kansas City pharmacy in November 2011 which was partially offset by staff reductions at our existing pharmacies and at the corporate level~~.

Selling, general and administrative expenses decreased $~~342~~142,~~553~~342 in the year ended December 31, ~~2012~~2013 when compared to the previous fiscal year. The significant components of selling, general and administrative expenses are as follows:

	Year Ended December 31,
	2012			2011
Stock-based compensation expenses		851,561			782,643
Provision for other receivables doubtful accounts		(136,038	)		659,616
Provision for accounts receivable doubtful accounts		30,610			65,322
Selling expenses		105,787			88,771
Professional fees		484,351			196,330
Delivery expenses		365,653			298,720
Facility related expenses		311,114			249,363
Travel and related expenses		165,156			150,858
Vendor late fee expenses		105,508			108,726
Investor relations expense		10,089			61,273
Other general and administrative expenses		504,490			479,212
Total	$	2,798,281		$	3,140,834

- 34 -

The decrease in selling, general and administrative expenses is primarily due to a decrease in provision for other receivables doubtful accounts of $795,654 and to a lesser decreases in investor relations expense, provision for accounts receivable doubtful accounts, vendor late fee expenses and other general and administrative expenses which were partially offset by increases in professional fees, stock based compensation, delivery expenses, facility related expenses, selling expenses and travel expenses. The decrease in bad debt expense primarily relates to increased collection activity on our past due other receivable accounts. The increase in stock-based compensation expense and professional fees are primarily related to securing additional financing and expenses associated with filing our registration statement. The increase in delivery expenses are primarily due to an increase in the number of patients serviced by our operating pharmacies, our pharmacies provided services to a total of 48,177 patients for the year ending December 31, 2012, a 20.5% increase when compared to the 39,965 patients serviced in the previous fiscal year. The increases in facility related expenses, travel expenses and selling expenses primarily relate to our Kansas City pharmacy which opened in November 2011.

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Other Income and Expense

	Year Ended December 31,
	2013		2012

Stock-based compensation expenses		628,965		851,561
Provision for accounts receivable doubtful accounts		32,426		12,968
Selling expenses		41,045		60,383
Professional fees		510,478		430,100
Delivery expenses		192,802		161,629
Facility related expenses		245,549		173,522
Travel and related expenses		109,658		164,128
Vendor late fee expenses		14,387		57,036
Investor relations expense		24,000		10,089
Other general and administrative expenses		328,889		349,125
Total	$	2,128,199	$	2,270,541

~~Total~~The ~~other~~decrease ~~expenses~~in selling, general and ~~income~~administrative ~~for~~expenses ~~the~~is ~~year~~primarily ~~ended~~due ~~December~~to ~~31,~~a ~~2012~~decrease ~~was~~in stock based compensation of $1222,~~208~~596 and to a lesser decreases in travel and related expenses,~~369~~ vendor late fee expenses, aselling ~~$716~~expenses and other general and administrative expenses which were partially offset by increases in professional fees,~~387~~ ~~increase~~delivery ~~from~~expenses, ~~$491~~facility related expenses,~~982~~ provision for ~~the~~accounts ~~year~~receivable ~~ended~~doubtful ~~December~~accounts ~~31,~~and ~~2011~~investor relations expenses. The ~~significant~~decrease ~~components~~in vendor late fees is primarily attributable to reduced late fees to our primary wholesaler as a result of ~~other~~our ~~income~~February 2013 refinancing. The increase in professional fees is primarily related to securing additional financing and expenses associated with our public filings. The increase in delivery expenses are asprimarily ~~follows:~~ due to an increase in the number of patients serviced by our operating pharmacies. The increases in facility related expenses primarily relate to our Denver and Boston pharmacy locations that are under development.

	Year ended December 31,
	2012			2011
Interest expense, net		1,475,358			918,333
Loss on extinguishment of debt		90,205			16,923
Gain on change in fair value of warrants		(357,194	)		(443,274	)
Total	$	1,208,369		$	491,982

Other (Income) and Expense

~~The~~Total ~~increase~~other ~~was~~expenses ~~primarily~~and ~~attributable~~income tofor anthe ~~increase~~year inended ~~interest~~December ~~expense~~31, of2013 was $~~557~~475,~~025~~428 ~~and~~in toother income, a ~~lesser~~$1,608,342 ~~extent~~decrease anfrom ~~increase of~~ $731,~~282~~132,914 in ~~loss~~other onexpense ~~extinguishment~~for ofthe ~~debt~~year ~~and~~ended aDecember ~~decrease~~31, of2012. The ~~$86,080~~significant incomponents ~~the~~of ~~change~~other inincome ~~fair~~and ~~value~~expenses ofare ~~warrant~~as ~~liability.~~follows:

The increase in interest expense is primarily due to an increase in the average debt outstanding the year ended December 31, 2012 compared to the year ended December 31, 2011. We issued convertible debentures in January and July 2012, throughout the fiscal year 2011 and in December 2010 and increased our borrowing under revolving credit facilities to fund our operations and open our new pharmacy in Leawood, Kansas.

	Year ended December 31,
	2013			2012

Interest expense, net		1,261,843			1,399,903
(Gain) loss on extinguishment of debt		(1,548,915	)		90,205
Gain on change in fair value of forward contract		(117,364	)		-
Loss on change in fair value of derivative		73,917
Gain on change in fair value of warrants		(144,909	)		(357,194	)
Total	$	(475,428	)	$	1,132,914

~~Our~~The ~~total~~decrease ~~outstanding~~was ~~debt~~primarily ~~increased~~attributable to a gain on extinguishment of debt of $31,~~960~~548,~~293~~915 ascompared to a loss on extinguishment of ~~December~~debt 31of $90,205 ~~2012~~in asthe ~~compared~~prior year and to ~~$3,367,314~~a atlesser ~~December~~extent 31a decrease of $138,060 ~~2011.~~in ~~Interest~~interest expense, ~~also~~an ~~increased~~$144,909 ~~due~~gain toon ~~the~~change ~~full~~in ~~year~~fair value ~~amortization~~ of ~~debt~~derivative and ~~discounts~~an on$117,364 ~~existing~~gain ~~debt~~on aschange ~~well~~in asfair ~~the~~value ~~additional~~of ~~amortization~~forward ~~related~~contract towhich ~~new~~was ~~indebtedness. The~~partially ~~table~~offset ~~below~~by ~~summarizes~~a ~~the~~decrease ~~components~~ of ~~interest~~$73,917 ~~expense~~in ~~for~~ the ~~year~~change ~~ended~~in ~~December~~fair ~~31,~~value ~~2012~~of ~~and 2011:~~derivative.

	Year Ended December 31,
	2012		2011
Interest expense at stated rates (6.25% - 20.00%)	$	668,768	$	374,848
Amortization of deferred financing costs		121,963		71,416
Amortization of debt discount		684,627		472,069
Interest expense, net	$	1,475,358	$	918,333

The decrease in interest expense is primarily due to a decrease in amortization of debt discount of $351,372 and to a lesser extent an $85,832 decrease in amortization of deferred financing costs which was partially offset by a $299,144 increase in interest expense at the stated rates due to an increase in the average debt outstanding the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in the average debt outstanding is primarily attributable to the conversion of approximately $3.5 million in vendor payables into a secured note payable in February 2013.

~~The~~- ~~$90,205~~35 loss on extinguishment of debt for the year ended December 31, 2012 resulted from the modification and extension of seven convertible debenture agreements that met the requirements for extinguishment accounting treatment. The loss on extinguishment of debt of $16,923 in the year ended December 31, 2011 relates to the cancellation of $300,000 in convertible debentures and related warrants in exchange for a 16% convertible debenture due December 1, 2012.-

The gain on change in fair value of warrant liability represents the change in fair value calculated on warrants issued in connection with private placements in the fiscal years 2011and 2012 which grant the warrant holder certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.

Net income attributable to non-controlling interest

Net income attributable to non-controlling interest for the year ended December 31, 2012 was $0 compared to income of $12,051 for the year ended December 31, 2011. Income and losses are allocated to non-controlling interest holders based on their percentage during the year. On June 30, 2011, we entered into a Stock Purchase Agreement with TAPG and issued 300,000 restricted shares of our common stock in exchange for all of TAPG’s rights, title and interest in APN and the cancellation of the $17,758 in principal and interest due to TAPG. As a result of this acquisition, APN became a wholly-owned subsidiary.

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Our total outstanding debt increased to $5,833,519 as of December 31, 2013 as compared to $3,960,293 at December 31, 2012. The table below summarizes the components of interest expense for the year ended December 31, 2013 and 2012:

	Year Ended December 31,
	2013		2012

Interest expense at stated rates (6.25% - 20.00%)	$	892,457	$	593,313
Amortization of deferred financing costs		36,131		121,963
Amortization of debt discount		333,255		684,627
Interest expense, net	$	1,261,843	$	1,399,903

The $1,548,915 gain on extinguishment of debt for the year ended December 31, 2013 resulted from troubled debt restructurings that met the requirements for extinguishment accounting treatment. An aggregate of $1,662,107 in principal and $557,259 in accrued interest was converted into common stock at $0.60 per share. The loss on extinguishment of debt of $90,205 in the year ended December 31, 2012 resulted from the modification and extension of seven convertible debenture agreements that met the requirements for extinguishment accounting treatment.

The gain on change in fair value of warrant liability represents the change in fair value calculated on warrants issued in connection with private placements in the fiscal years 2011through 2013 which grant the warrant holder certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.

The gain on change in fair value of forward contract liability represents the change in fair value calculated on forward contract issued in connection with our 2013 private placement of common stock. The Company also agreed that the 38,462 shares of common stock included in the units is subject to increase and the $0.65 per share value is subject to decrease, in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”).

The loss on change in fair value of derivative represents the change in fair value calculated on derivative issued in connection with our 2013 Series D Preferred stock issuances. The derivative relates to the conversion feature into common stock at an initial rate of 2,000 common shares for each share of Series D Preferred stock, subject to adjustment for certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share.

Loss from Discontinued Operations, net of tax

Discontinued operations include the operations of our Riverside, California and Gresham, Oregon pharmacies that were closed in August 2013. Our net loss from discontinued operations for the year ended December 31, 2013 was $609,292, compared to a net loss of $16,940 for the year ended December 31, 2012. The increase in our net loss was primarily attributable to impairment of goodwill of $697,766 and to a lesser extent decreasing sales, and a decrease in gross profits which were partially offset by an increase in the tax benefit and a decrease in operating expenses and other expenses and income.

Net Loss

Our net loss for the year ended December 31, ~~2012~~2013 was $43,~~005~~361,~~506~~513, compared to a net loss of $34,~~271~~005,~~012~~506 for the year ended December 31, ~~2011~~2012. The ~~increase~~decrease in our net loss was primarily attributable to an ~~increase~~decrease in other expenses of $~~716~~1,~~387and~~682,259 and to a lesser extent, a decrease in ~~gross~~operating ~~profit~~expenses of $~~156~~153,~~763~~955 which was partially offset by an increase in the loss on discontinued operations, net of tax of $592,352 and to a lesser extent a decrease in ~~operating~~gross ~~expenses~~profit of $~~126~~206,~~605~~993.

Our net loss per common share for the year ended December 31, ~~2012~~2013 was $0.9691, compared to a net loss per common share of $10.1496 for the year ended December 31, ~~2011~~2012. The decrease to our net loss per common share was primarily attributable to an increase in the weighted average number of common shares outstanding to 46,~~150~~126,~~976~~838 for the year ended December 31, 2012, from 24,~~876~~150,~~335~~976 for the year ended December 31, ~~2011~~2012 ~~and~~which awas partially offset by $~~734~~1,~~494~~548,595 increase in our net loss applicable to common stock.

The increase in our loss applicable to common stock is primarily due to a $2,192,588 redemption feature on preferred stock in the year ended December 31, 2013. The redemption feature on preferred stock relates the mandatory redemption feature on our Series D Preferred stock issuances and represents the adjustment to the carrying amount of the instrument to equal the redemption value of the instrument. The redemption feature on preferred stock is a deemed dividend distribution for accounting purposes.

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Financial condition, Liquidity and Capital Resources

Liquidity and Capital Resources

As of December 31, ~~2012~~2013, we had a cash balance of $212,~~298~~856, a minimal decrease from a balance of $2321,~~316~~298 at December 31, ~~2011~~2012. At December 31, ~~2012~~2013, we had a working capital deficit of $61,~~312~~746,~~121,~~832 ana ~~increase~~decrease from a working capital deficit of $26,~~639~~312,~~565~~121 as of December 31, ~~2011~~2012. The ~~increase~~decrease in our working capital deficit was primarily attributable to an ~~increase~~decrease in current liabilities attributable to ~~unsecured~~the ~~convertible~~conversion ~~debentures~~of ~~and~~approximately ~~notes~~$3,534,793 ~~payable~~in ~~issued~~vendor ~~during~~payables into a long term secured note, the ~~years~~conversion ~~ended~~of ~~December~~an 31aggregate total of $1,662,107 ~~2012~~in ~~and~~debt ~~2011~~principal and ~~increase~~an aggregate total of $557,259 in ~~accounts~~accrued ~~payable~~interest into common stock at a conversion price of $0.60, which was partially offset by a decrease in assets in discontinued operations of $562,751 due to the closure of our Riverside and ~~accrued~~Gresham ~~expenses~~pharmacies in August 2013.

Over the last several years, our operations have been funded primarily through the sale of both equity and debt securities and cash made available under certain credit facilities. In order for us to finance operations, continue our growth plan and service our existing debt, additional funding is required from external sources. We intend to fund operations through increased sales, lower operating expenses and debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements for the next twelve months. Our management is seeking financing and anticipates that its efforts will result in sufficient funds to finance our operations beyond the next twelve months. However, there can be no assurance that the additional financing necessary to finance our operations for the next twelve months will be available to us on acceptable terms, or at all.

AsOur ofcurrent ~~December~~cash ~~31,~~on ~~2012,~~hand weis ~~have~~insufficient ~~$844,948~~for inus ~~debt securities which were due in the year 2012 and $2,137,758 in debt securities which come due in the year 2013. We are attempting~~ to ~~extend~~operate ~~the~~our ~~maturity~~two ~~date~~existing ofpharmacies ~~these~~at ~~debt securities, but can provide no assurance that~~ the ~~holders~~current oflevel ~~such~~for ~~securities will agree to extend~~ the ~~maturity~~next ~~date~~twelve ~~on these securities on acceptable terms~~months. IfOur ~~our~~business ~~debt~~plan ~~holders~~calls ~~choose~~for ~~not~~ongoing toexpenses ~~convert~~in ~~certain~~connection ~~of these securities into equity, we will need to repay such debt, or reach an agreement~~ with ~~the~~salary ~~debt~~expense ~~holders to extend the terms thereof. If we are forced to repay the debt, this need for funds would have a material adverse impact on our business operations, financial condition~~ and ~~prospects,~~establishing ~~including~~additional ~~our ability to operate as a going concern~~pharmacies. If weThese expenditures are ~~forced~~anticipated to ~~repay the debt, our current and forecasted levels of cash flows and available cash on hand will not~~ be ~~sufficient~~approximately ~~to fund our operations in 2013. Accordingly~~$2, ~~we will be required to obtain additional financing in order to repay the debt~~400,000 for ~~cover operating losses and fund working capital needs. We cannot provide any assurances of~~ the ~~availability~~next oftwelve ~~future financing or the terms on which it might be available~~months. ~~In the absence of such financing, we may be forced to scale back or cease operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures.~~

InAs ~~February~~of December 31, 2013, we have $300,000 in debt securities which were due in the ~~Company~~year ~~entered~~2012 ~~into~~and a$483,943 ~~secured~~in ~~loan~~debt ~~agreement~~securities ~~with~~which ~~our~~come ~~primary~~due ~~wholesaler~~in the year 2014. We ~~Under~~are attempting to extend the ~~terms~~maturity date of ~~this~~these ~~agreement~~debt securities, but can provide no assurance that the ~~Company~~holders ~~received~~of asuch ~~one~~securities ~~(1)~~will ~~year~~agree ~~loan~~to extend the maturity date on these securities on acceptable terms. If our debt holders choose not to convert certain of $3these securities into equity,~~828~~ we will need to repay such debt,~~527~~ ~~with~~or reach an ~~interest~~agreement ~~rate~~with ofthe ~~6.25%~~debt ~~per~~holders ~~annum,~~to ~~with~~extend ~~interest~~the ~~payable~~terms ~~monthly~~thereof. If ~~Monthly~~we ~~payment~~are ~~requirements~~forced ~~are~~to ~~$27~~repay the debt,~~000~~ ~~per~~this ~~month~~need for ~~four~~funds ~~consecutive~~would ~~months,~~have ~~followed~~a bymaterial ~~four~~adverse ~~consecutive~~impact ~~monthly~~on ~~principal~~our ~~reductions~~business ofoperations, ~~$37~~financial condition and prospects,~~000,~~ ~~followed~~including byour ~~three~~ability ~~consecutive~~to ~~monthly~~operate ~~principal~~as ~~reductions~~a ofgoing ~~$42,000,~~concern. If ~~with~~we ~~remaining~~are ~~principal~~forced to repay the debt, our current and ~~interest~~forecasted ~~due~~levels ~~February~~of 1,cash ~~2014.~~flows ~~The~~and ~~proceeds~~available ~~from~~cash ~~the~~on ~~note~~hand ~~were~~will ~~simultaneously~~not ~~exchanged~~be ~~for~~sufficient ~~$3,534,793~~to infund ~~outstanding~~our ~~vendor~~operations ~~invoices~~for ~~and~~the ~~$293~~year 2014. Accordingly,~~734~~ inwe ~~outstanding~~will ~~secured~~be ~~note~~required ~~payable.~~to ~~The~~obtain ~~note~~additional isfinancing ~~secured~~in byorder ~~all~~to ofrepay the ~~assets~~debt, ofcover ~~the~~operating ~~Company~~losses and ~~its~~fund ~~subsidiaries~~working ~~through~~capital ~~UCC-1 filings~~needs. AsWe ~~long~~cannot asprovide any assurances of the ~~Company~~availability isof infuture ~~compliance~~financing ~~with~~or the terms ofon ~~the~~which ~~loan~~it ~~agreement,~~might be available. In the ~~Company~~absence ~~will~~of ~~realize~~such ~~drug~~financing, ~~pricing~~we ~~improvements~~may ofbe ~~100~~forced to ~~200~~scale ~~basis~~back ~~points~~or incease ~~addition~~operations, toliquidate ~~the~~assets, ~~elimination~~seek ofadditional ~~financing~~capital ~~and~~on ~~interest~~less ~~fees~~favorable ~~associated~~terms ~~with~~and/or ~~the~~pursue ~~trade~~other ~~payable~~remedial measures.

-In 34February -and March 2014, the Company entered into five short term promissory notes with Pinewood Trading Fund, LP., a related party for an aggregate total of $240,000. The short term notes bear an interest rate of 12.0% per annum and mature on April 30, 2014.

In February 2014, the Company entered into an Amended and Restated 10% Senior Convertible Debenture due June 30, 2016 with Hillair Capital Investments, LP. in the amount of $1,150,000. The amendment relates to convertible debentures originally issued on May 16, 2011, August 22, 2011, November 30, 2011 and July 19, 2012 for an aggregate total of $1,000,000 in debentures. In addition to the extension of the maturity date, the interest rate was also reduced from 16.0% to 10.0% per annum and the conversion price was decreased from $0.90 to $0.75. As part of the agreement, the Company agreed to increase the principal amount of the debenture by $150,000 which represents eighteen months of interest at the stated rate of 10%. As a result, all interest accruable and payable between February 7, 2014 and August 8, 2015 is considered paid in full and satisfied. In addition, the Company issued 420,694 shares of common stock as payment of accrued interest of $252,417 at a rate of $0.60 per share. As part of the agreement, all interest accruable and payable between February 7, 2014 and August 7, 2015 has been added to this debenture at a rate of 10% per annum and is considered paid in full and satisfied. Further interest will not begin accruing until August 8, 2015. As part of the amendment, the exercise price of the related warrants was reduced from $0.90 to $0.75 resulting in the issuance of an additional 320,000 warrants per the warrant agreement terms.

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Table of Contents

In ~~February~~March ~~2013~~2014, ~~the~~we ~~Company~~entered ~~completed~~into ~~initial~~a ~~sales~~Forbearance toAgreement ~~accredited~~with ~~investors~~H.D. inSmith ~~the~~Wholesale ~~private~~Drug ~~placement~~Co. in ~~described~~which ~~above~~the ~~for~~lender ~~twenty-four~~agreed ~~(24)~~to forbear ~~common~~from ~~stock~~accelerating ~~units~~the ~~for~~outstanding abalance ~~total~~ of ~~923,088~~the ~~shares~~Note ofand ~~common~~from ~~stock~~instituting atcollection anefforts ~~aggregate~~from ~~purchase~~the ~~price~~date of ~~$600,000~~the ~~(before~~agreement ~~deducting~~through ~~expenses~~July ~~and~~1, ~~fees~~2014. ~~related~~The toforbearance ~~the~~was ~~private~~required ~~placement)~~due ~~and warrants~~ to ~~purchase~~our aninability ~~aggregate~~to ofmake ~~923,088~~payments ~~with~~required anunder ~~initial~~the ~~exercise~~agreement ~~price~~ of $~~0.90 per share~~338,479 anand ~~the~~our ~~private~~inability ~~placements is continuing. The net proceeds of the initial closing of the private placement were used~~ to ~~pay~~meet ~~down our outstanding balance with our primary wholesaler. As part of~~ the ~~private placement~~$500,000 ~~the~~minimum ~~investors~~monthly ~~also~~purchase ~~received~~requirement ~~warrants~~due to ~~purchase~~the anclosure ~~aggregate~~ of ~~923,088~~our ~~shares~~two ofpharmacy ~~the Company’s common stock~~locations.

In ~~February and~~ March ~~2013~~2014, the Company ~~also~~entered ~~issued~~into a ~~total~~$600,000 ofNondisclosable 60Revolving ~~shares~~Line of ~~Series~~Credit ALoan ~~Preferred~~with atThird ~~$1,000~~Coast ~~per~~Bank ~~share~~SSB ~~for~~due aon ~~total~~March ~~of $60~~25,~~000~~ to2015. The ~~Mosaic~~loan ~~under~~is ~~the~~not ~~existing~~subject ~~2009~~to ~~Securities~~an ~~Purchase~~interest ~~agreement.~~rate, ~~The~~but ~~Company~~is ~~has~~subject ~~issued~~to aservice ~~total~~charges ofbased ~~559~~on ~~shares~~the amount of ~~Series~~funds Aadvanced. The ~~Preferred~~loan ~~for~~is ~~$558,500~~secured ~~under~~by the ~~2009~~Company’s ~~Securities~~accounts ~~Purchase~~receivable ~~agreement.~~and ~~The~~is ~~net~~guaranteed ~~proceeds~~by ofPinewood ~~the~~Trading ~~sale~~Fund, ~~were~~LP., ~~used~~a ~~for~~related ~~general working capital purposes~~party.

The table below lists our obligations under outstanding notes payable and unsecured convertible debentures, as of December 31, ~~2012~~2013:

	Related Party			Unrelated			Total
Secured Debt (1)		-			~~304~~3,~~638~~804,111			~~304~~3,~~638~~804,111
Revolving Credit facilities (2)		~~447~~477,000			-			~~447~~477,000
Other Notes and Debt (3)		-			~~242~~52,~~872~~408			~~242~~52,~~872~~408
Unsecured Convertible Debentures, net of unamortized discount (4)		498,798			2,090,978			2,589,776
Unsecured Convertible Debentures		-			1,500,000			1,500,000
		945,798			2,638,488			3,584,286
		477,000			5,356,519			5,833,519
Less: current portion		~~(498,798~~-	)		(2783,~~219,226~~943	)		(2783,~~718,024~~943	)
	$	~~447~~477,000		$	~~419~~4,~~262~~572,576		$	~~866~~5,~~262~~049,576

1) In ~~September~~February ~~2010~~2013, we received a ~~two~~one year loan of $~~400~~3,~~000~~828,527 ~~with~~from anour ~~adjustable~~primary ~~interest~~wholesaler ~~rate~~upon conversion of ~~prime~~trade ~~plus~~payables of $3,534,793 and cancellation of secured loan with a remaining balance of $293,734.00 The note bears an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements were $527,000 per month for the first ~~eight~~four consecutive months, followed by ~~eight~~four consecutive monthly principal reductions of $1037,000, followed by ~~seven~~three consecutive monthly principal reductions of $1542,000, with remaining principal and interest due ~~September~~February 1, ~~2012~~2014. OnIn ~~February~~July 1, 2013, the secured loan was ~~canceled~~amended and the ~~remaining~~maturity ~~balance~~date ofwas ~~$293,734~~extended ~~was~~to ~~included~~February in1, ~~the~~2016 ~~one~~with ~~year~~monthly ~~secured~~payment ~~note~~requirements of $342,~~828,527 to the wholesaler~~000.

2) As of December 31, ~~2012~~2013, revolving credit facilities consisted of an outstanding balance of $~~447~~477,000 on a line of credit we entered into with Brockington Securities, Inc., a company under the control of our Chief Executive Officer.

3) As of December 31, ~~2012~~2013, other notes and debt consisted of the outstanding principal balance of $~~242~~52,~~872~~408 due to TPG in connection with our acquisition of their ownership interest in API, which ~~operates~~operated our discontinued pharmacy in Riverside, California.

4) Unamortized debt discount was $376,007 at December 31, 2012.

Obligations and Commercial Commitments

Not required for smaller reporting companies

Outstanding Trade Balance. At December 31, ~~2012~~2013, we ~~had~~did not have an outstanding ~~trade~~ balance ~~of approximately $3.6 million~~ with our primary wholesaler ~~which is secured by all of our assets~~. ~~In February 2013, the entire outstanding trade balance was converted into a one year secured note with a 6.25% interest rate.~~

Capital Expenditures. At March 1527, ~~2013~~2014, we had no material commitments for capital expenditures.

-Cash ~~35 -~~Flows

As of December 31, 2013, we had $2,856 in cash and total current assets in the amount of $830,281 and had current liabilities in the amount of $2,577,113, resulting in a working capital deficit of $1,746,832.

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Table of Contents

Cash Flows

As of December 31, ~~2012~~2013, we had $212,~~298~~856 in cash and total current assets in the amount of $1830,~~255,583~~281 and had current liabilities in the amount of $72,~~567~~577,~~704~~113, resulting in a working capital deficit of $61,~~312~~746,~~121~~832.

The following discussion focuses on information in more detail on the main elements of the $18,442 and $2,018 net decrease in cash during the ~~year~~years ended December 31, 2013 and 2012, respectively included in the accompanying Consolidated Statements of Cash Flows. The table below sets forth a summary of the significant sources and uses of cash for the years ended December 31:

	2012			2011
	2013			2012
Cash used in operating activities	$	(~~530~~1,~~815~~876,728	)	$	(1530,~~224,744~~815	)
Cash used in investing activities		(2153,~~285~~838	)		(2721,~~087~~285	)
Cash provided by financing activities		~~550~~1,~~082~~912,124			1550,~~237,822~~082
Decrease in cash	$	(218,~~018~~442	)	$	(142,~~009~~018	)

Operating activities used $1,876,728 in cash for the year ended December 31, 2013 compared to $530,815 in cash used for the year ended December 31, 2012. Our net loss of $3,287,596 plus non-cash expenses of $92,467 was the primary reason for our negative operating cash flows which were partially offset by a $1,503,335 change in operating assets and liabilities. Our net loss of $4,005,506, less non-cash expenses of $1,316,348 was the primary reason for our negative ~~operating~~operation cash flows which were partially offset by a $2,158,343 change in operation assets and liabilities. The table below summarizes the components of our cash used in operating activities for the year ended December 31, 2013 and 2012:

Net loss from operations including non-controlling interest	$	(43,~~005~~287,~~506~~596	)	$	(4,005,506	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment		3436,~~614~~129			34,614
Amortization of debt issuance costs		~~121~~36,~~963~~131			121,963
Amortization of discount on debt		~~684~~333,~~627~~255			684,627
Stock based compensation		~~847~~628,~~561~~964			847,561
Loss on extinguishment of debentures and notes		90,205
Issuance of common stock in lieu of debenture interest		45,467			-
Provision for accounts receivable doubtful accounts		30,610
(Gain) or Loss on extinguishment of debentures and notes		(1,548,915	)		30,610
Provision for other receivable doubtful accounts		(136,038	)
Provision for accounts receivable doubtful accounts		16,683			(136,038	)
Gain on change in fair value of warrant liability		(357,194	)
Recoveries of other receivable doubtful accounts		(100,708			-
		1,316,348
Provision for obsolete inventory		24,006			-
Changes in operating assets and liabilities:		2,158,343
Impairment of goodwill		697,766			90,205
Net cash used in operating activities	$	(530,815	)
Loss on sale of property and equipment		1,028			-
Gain on change in fair value of forward contract		(117,364	)		-
Loss on change in fair value of derivative		73,917
Gain on change in fair value of warrant liability		(144,909	)		(357,194	)
		(18,550	)		1,316,348
Changes in operating assets and liabilities:		1,503,335			2,158,343
Net cash used in operating activities	$	(1,876,728	)	$	(530,815	)

Operating assets and liabilities reduced the overall cash deficit in the years ended December 31, 213 and 2012 primarily due to our increases in our accounts payable and accrued expenses, asdecreases ~~well as reductions~~ in our ~~inventories due to our cash constraints during 2012. However, collection of our~~ accounts receivable and our other receivables related to worker's compensation claims ~~have~~and ~~had~~decreases ain ~~positive impact on reducing~~ our ~~cash deficit~~inventories. Cash used in investing activities was $21,285 in the year ended December 31, 2012, compared to $27,087 in the year ended December 31, 2011. Investing activities in the year ended December 31, 2012 and 2011 consisted entirely of purchases of property and equipment.

Cash ~~provided~~used byin ~~financing~~investing activities ~~during~~was $53,838 in the year ended December 31, ~~2012 was $550~~2013,~~082.~~ ~~Over~~compared ~~the~~to ~~last several years~~$21,285 ~~our~~in ~~operations have been funded primarily through~~ the ~~sale of debt securities and advances from revolving credit facilities made available to us. During the~~ year ended December 31, 2012. Investing weactivities ~~received~~in ~~net proceeds from~~ the ~~issuance~~year ofended ~~convertible~~December ~~debentures of $307~~31,~~502~~ 2013 and ~~net~~2012 ~~proceeds~~consisted onentirely ~~revolving credit facilities~~ of ~~$288,680,~~purchases ~~which~~and ~~was~~sales ~~partially offset by net principal repayments~~ of ~~$46,100~~property ~~on notes payable. Registration Statement We filed an initial registration statement that was effective on November 14, 2012 for the offer~~ and ~~sale or other disposition of 2,292,067 shares of our common stock issuable on exercise of warrants by the selling shareholders~~equipment.

~~Off~~Cash ~~Balance~~provided ~~Sheet~~by ~~Arrangements~~financing activities during the year ended December 31, 2013 was $1,912,124 compared to $550,082 in the year ended December 31, 2012. Over the last several years, our operations have been funded primarily through the sale of debt securities and advances from revolving credit facilities made available to us. During the year ended December 31, 2013 we received net proceeds from the issuance of preferred stock of $1,097,395, net proceeds from the issuance of common stock of $814,190 and net proceeds on revolving credit facilities of $30,000, which was partially offset by net principal repayments of $29,461 on notes payable. During the year ended December 31, 2012 we received net proceeds from the issuance of convertible debentures of $307,502 and net proceeds on revolving credit facilities of $288,680, which was partially offset by net principal repayments of $46,100 on notes payable.

As- of39 ~~December 31, 2012, there were no off balance sheet arrangements.~~-

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Registration Statement

We filed an initial registration statement that was effective on November 14, 2012 for the offer and sale or other disposition of 2,292,067 shares of our common stock issuable on exercise of warrants by the selling shareholders.

Off Balance Sheet Arrangements

As of December 31, 2013, there were no off balance sheet arrangements.

Going Concern Assumption

The consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of December 31, ~~2012~~2013, we had an accumulated deficit of approximately $4348.16 million, recurring losses from operations and negative cash flow from operating activities for the year ended December 31, ~~2012~~2013, of approximately $~~531~~1,900,000. We also had negative working capital of approximately $61.37 million and debt with maturities within one year in the amount of approximately $~~3.0~~800,000 ~~million~~ as of December 31, ~~2012~~2013.

From January 1, 2014 through March 27, 2014, the Company has secured loans in the amount of $440,000 with Pinewood Trading Fund, LP, a related party, extended the maturity date of an aggregate total of $1,000,000 in convertible debentures from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest into common stock at $0.60 per share and secured a Revolving Line of Credit for $600,000 from Third Coast Bank. The Company intends to fund operations through raising additional capital through debt financing and equity issuances, increased sales, increased collection activity on past due other receivable balances and reduced expenses, which may be insufficient to fund its capital expenditures, working capital or other cash requirements for the year ending December 31, 2014. The Company is in negotiations with current debt holders to restructure and extend payment terms of the existing short term debt. The Company is seeking additional funds to finance its immediate and long-term operations. The successful outcome of future financing activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

In response to these financial issues, management has taken the following actions:

● We are seeking investment capital.

● We are aggressively targeting new physicians.

● We are aggressively seeking to renegotiate past due existing ~~debt~~debentures.

● We are aggressively increasing collection activity on past due receivable balances.

Critical Accounting Policies and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We have chosen accounting policies within GAAP that we believe are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. We regularly assess these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 2 to the Consolidated Financial Statements included elsewhere in this annual report on Form 10K. We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

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Revenue Recognition

We recognize revenue from prescriptions dispensed on an accrual basis when the product is delivered to or picked up by the customer. Payments are received directly from the customer at the point of sale, or the customers' insurance provider is billed electronically. For third party medical insurance and other claims, authorization to ensure payment is obtained from the customer’s insurance provider before the medication is dispensed to the customer. Authorization is obtained for these sales electronically and a corresponding authorization number is issued by the customers' insurance provider.

We recognize revenue from service contracts on an accrual basis when the service is provided to the customer. In March 2010, we entered into a one year Pharmacy Agreement with Generex to provide pharmacy and marketing services for Generex’s proprietary buccal insulin spray product Oral-lyn™. The Oral-lyn™ product will be dispensed as part of the United States Food and Drug Administration’s Treatment Investigation New Drug Program. The remuneration for the one year service contract was $300,000, payable on execution of the Pharmacy Agreement. The Company recognized revenue related to this contract on a straight in basis over the one year term of the contract.

Accounts Receivable and Allowances

Our accounts receivable consist of amounts due from third party medical insurance carriers, pharmacy benefit management companies, patients and credit card processors. Management periodically reviews the accounts receivable to assess collectability and estimate and potential doubtful accounts. Accounts receivable are written off after collection efforts have been completed in accordance with our policies. The doubtful accounts allowance reduces the carrying value of the account receivable.

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Other Receivables and Allowances

The other receivables are primarily related to worker’s compensation claims from insurance carriers for prescription medications dispensed to injured workers in the State of California. The delay in payment typically arises due to monetary disputes between the claimant and the employer and/or the employer’s insurance carrier. The settlement period for such dispute cases can range from one year to ten years. We typically file a lien (“Green Lien”) on each case that has a past due balance to protect the account receivable when the case ultimately settles. Management has classified such receivables as long term assets due to these factors. On April 1, 2010, we discontinued dispensing medication to California worker’s compensation customers whose claims could not be authorized and billed electronically.

During the year ended December 31, 2011, management performed a comprehensive assessment of the allowance for doubtful accounts for other receivables estimation methodologies in light of its expectations around the ultimate collection of its other receivables balances. Management performed a detailed case analysis, taking into consideration recent collection history, status of each case and the overall decrease in case activity over the last two years. In connection with that comprehensive assessment of the allowance for doubtful accounts, management recorded a $659,616 bad debt provision to reduce the other receivables balance to the expected net realizable value. As of December 31, 2012 management assessed its remaining other receivables accounts and updated its overall allowance considering the $136,038 in recovery of accounts previously included in the allowance.

Inventories

Inventories are located at our pharmacy locations. Inventory consists solely of finished products (primarily prescription drugs) and is valued at the lower of first-in, first-out cost (FIFO) or market. Our inventories are maintained on a periodic basis through the performance of physical inventory counts. Our cost of sales is recorded based upon the actual results of the physical inventory counts, and is estimated when a physical inventory is not performed in a particular month. Historically, no significant adjustments have resulted from reconciliations with the physical inventories.

Inventories are comprised of brand and generic pharmaceutical drugs. Our pharmacies maintain a wide variety of different drug classes, known as Schedule II, Schedule III, and Schedule IV drugs, which vary in degrees of addictiveness. Schedule II drugs, considered narcotics by the DEA, are the most addictive; hence, they are highly regulated by the DEA and are required to be segregated and secured in a separate cabinet. Schedule III and Schedule IV drugs are less addictive and are not regulated. Because our business model focuses on servicing pain management doctors and chronic pain patients, we carry in inventory a larger amount of Schedule II drugs than most other pharmacies.

Stock-based Compensation

We issue options and restricted shares of common stock to employees and consultants. Stock option and restricted share awards are granted at the fair market value of our common stock on the date of grant.

WeThe ~~apply~~Company ~~the~~records fair value recognition provisions of ASC 718 “Compensation – Stock Compensation,” for stock compensation transactions. This requires companies to measure and recognize compensation expense for all share-based payments at fair value. The total applicable compensation cost is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.

Goodwill

Goodwill represents the excess purchase price of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. The Company’s goodwill relates to its acquisition of the 49% interest in API. The Company reviews goodwill for impairment at least annually. The annual impairment test for goodwill is a two-step process and involves comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test would be performed to measure the amount of impairment loss to be recorded, if any. The Company estimated the API’s fair value based on the income approach. The Company’s conducts its’ annual impairment tests in December of each year.

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Assured Pharmacy consists of a management services holding company (“APHY”) and four operating pharmacies as of the year ended December 31, 2012 and five operating pharmacies as of the year ended December 31, 2011. In December 2006, we acquired the remaining 49% ownership of Assured Pharmacies, Inc. which is the owner of our Riverside and Santa Ana pharmacies through the TPG acquisition (“API”). The two API pharmacies operate in the same metropolitan area and have operating synergies and are viewed as one reportable unit by management while each of the remaining pharmacies and APHY constitute a reportable unit that is a component of Assured’s single operating segment. In December 2012, the Company consolidated the operations of our Santa Ana pharmacy into our Riverside pharmacy. The reportable units consist of APHY, API, Kirkland, Gresham and December for the years ended December 31, 2012 and 2011.

The Company’s goodwill of $697,766 as of December 31, 2012 and 2011 is associated with the API pharmacies acquisition in 2006 and is recorded only at the API reporting unit. The goodwill was a result of the purchase price in excess of the identifiable assets and liabilities related to the acquisition of the minority ownership in these two pharmacies.

Management estimated the fair value of the API reporting unit using the income approach by preparing a discounted cash flow analysis. The impairment analysis for management’s assessment of goodwill for 2012 and 2011 used a baseline trend from prior fiscal years. Management then considered the historical trends and made estimates on future years’ growth in a cash flow projection analysis to assess the API goodwill for impairment. Since the business is primarily based on repeat patients, management also considered the most recent patient and store specific monthly trends. The resulting forecasted growth rates did not vary significantly from historical levels. Additionally, management performed a sensitivity analysis by preparing an additional discounted cash flow model assuming a 3% growth rate to approximate the inflation rate which did not result in goodwill impairment. Management then averaged the two scenarios to determine the final estimated fair value of the reporting unit.

The financial condition of the overall Company has negatively impacted the operating results of the reporting units by constraining revenue growth, decreasing gross profit margins and increasing operating expenses. Despite these financial constraints, API’s operations as a stand-alone reporting unit have the historical and projected operations to be a viable business. Based on the results of the impairment testing, management believes that the fair value of the API reporting unit is substantially in excess of its carrying value and concluded that there was no impairment.

The Company accounts for its common stock warrants under ASC 480, “Distinguishing Liabilities from Equity,” which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and it requires or may require the issuer to settle the obligation by transferring assets, would qualify for classification as a liability. The guidance required the Company’s outstanding warrants from convertible debenture private placements in the years ended December 31, 2012, 2011 and 2010 to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as a change in fair value of warranty liability in the Company’s consolidated statements of operations. Specifically, the warrants issued in connection with convertible debenture private placements in December 2010, throughout the years 2011 and 2012, grant the warrant holder certain anti-dilution protection which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Upon exercise or expiration of the warrant, the fair value of the warrant at that time will be reclassified to equity from a liability. The following table is a summary of the warrant liability activity measured at fair value using Level 3 inputs:

New Accounting Standards

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for our year ended December 31, 2012. We do not expect the adoption of these provisions to have a significant effect on our consolidated financial statements

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08 “Intangibles—Goodwill and Other” intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments in this ASU are effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011, with early adoption permitted. In addition, Topic 350 also requires an entity to perform a “Step 2” for reporting units with zero or negative carrying values. The adoption of ASU 2011-08 did not have an impact on our consolidated results of operations or financial conditions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements	Page No.
Report of Independent Registered Public Accounting Firm	F-1 ~~to F~~-2 1
Consolidated Balance Sheets as of December 31, 2012 and 2011	F-3
Consolidated Balance Sheets as of December 31, 2013 and 2012	F - 2
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011	F-4
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012	F - 3
Consolidated Statement of Stockholders’ Deficit for the years ended December 31, 2012 and 2011	F-5
Consolidated Statement of Stockholders’ Deficit for the years ended December 31, 2013 and 2012	F - 4
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012	F - 5
Notes to Consolidated Financial Statements	F -7 6 to F -40 39

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Assured Pharmacy, Inc.

~~Frisco~~Plano, Texas

We have audited the accompanying consolidated balance ~~sheet~~sheets of Assured Pharmacy, Inc. and subsidiaries (the “Company”) as of December 31, ~~2012~~2013 and 2012 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the ~~year~~years inthen ~~the period~~ ended ~~December 31, 2012~~. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our ~~audit~~audits.

We conducted our ~~audit~~audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our ~~audit~~audits ~~provides~~provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Assured Pharmacy, Inc. at December 31, 2013 and 2012, and the results of their operations and their cash flows for the years inthen ~~the period~~ ended ~~December 31~~, ~~2012,~~ in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ BDO USA, LLP BDO USA, LLP Dallas, Texas ~~April~~March 131, ~~2013~~2014

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Assured Pharmacy, Inc.

Frisco, Texas

We have audited the accompanying consolidated balance sheet of Assured Pharmacy, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Assured Pharmacy, Inc. at December 31, 2011, and the results of their operations and their cash flows for the years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ UHY, LLP UHY, LLP Dallas, Texas March 15, 2012

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

FOR THE YEARS ENDED DECEMBER 31, ~~2012~~2013 AND ~~2011~~2012

	December 31,			December 31,
	2012			2011
	2013			2012
ASSETS
Current Assets
Cash	$	212,~~298~~856		$	2321,~~316~~298
Accounts receivable, net		~~676~~323,~~946~~965			~~839~~333,~~328~~687
Inventories		~~410~~273,~~205~~195			~~698~~198,~~772~~778
Prepaid and other current assets		~~147~~226,~~134~~217			~~332~~135,~~132~~021
Total current assets		1,255,583			1,893,548
Assets of discontinued operations, net		4,048			566,799
Other receivables, net		206,736			300,003
Total current assets		830,281			1,255,583
Property and equipment, net		6178,~~413~~094			7445,~~742~~743
Goodwill		697,766			697,766
Assets of discontinued operations, net		140,563			920,172
TOTAL ASSETS	$	21,~~221~~048,~~498~~938		$	2,~~966~~221,~~059~~498
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses		41,~~849~~642,~~680~~518			32,~~361~~194,~~170~~377
Unsecured convertible debentures, net of discount		1,671,716			978,792
Liabilities of discontinued operations		150,652			2,655,303
Unsecured convertible debentures, related party, net of discount		498,798			474,212
Unsecured convertible debentures, net of discount		357,528			1,661,408
Notes payable		547,510			593,610
Unsecured convertible debentures, related party, net of discount		-			509,106
Notes payable to related parties		-			158,320
Notes payable		426,415			547,510
Total current liabilities		72,~~567~~577,~~704~~113			57,~~566~~567,~~104~~704
Notes payable to related parties, net of current portion		447,000			-
Notes payable, net of current portion		3,430,104			-
Unsecured convertible debentures, net of current portion and discount		419,262			520,513
Notes payable to related parties, net of current portion		477,000			447,000
Warrant liability		274,605			208,570
Unsecured convertible debentures, net of current portion and discount		1,142,472			388,339
TOTAL LIABILITIES		8,708,571			6,295,187
Unsecured, convertible debentures, related party, net of current portion and discount		-			30,923
Derivative liability		312,088			-
Warrant liability		1,060,353			274,605
TOTAL LIABILITIES		8,999,130			8,708,571
Commitments and Contingencies (see Note 8)
Series D redeemable convertible preferred stock; par value $0.001 per share; 15,000 shares authorized, 1,070 and 0 issued and outstanding, respectively		2,515,469			-
Assured Pharmacy, Inc.'s Stockholders' Deficit
Preferred stock; par value $0.001 per share; 5,000,000 shares authorized, 2,830
shares designated to Series A convertible, 7,745 shares designated to Series B
convertible, 813 shares designated to Series C convertible
Series A convertible preferred stock; par value $0.001 per share; 2,830
shares authorized, 1,406 and 1,556 issued and outstanding, respectively		1			2
shares authorized, 1,466 and 1,556 issued and outstanding, respectively		1			1
Series C convertible preferred stock; par value $0.001 per share; 813
shares authorized, 813 and 813 issued and and outstanding, respectively		1			1
shares authorized, 813 and 813 issued and outstanding, respectively		1			1
Series B convertible preferred stock; par value $0.001 per share; 7,745
shares authorized, 5,384 and 5,409 issued and outstanding, respectively		5			5
shares authorized, 5,124 and 5,409 issued and outstanding, respectively		5			5
Common stock; par value $0.001 per share; 35,000,000 shares authorized,
Common stock; par value $0.001 per share; 100,000,000 shares authorized,
4,476,846 and 3,818,707 issued and outstanding, respectively		4,477			3,818
10,255,693 and 3,818,707 issued and outstanding, respectively		10,256			4,477
Additional paid-in capital, net		3638,~~572~~142,~~314~~048			3536,~~725~~572,~~411~~314
Accumulated deficit		(4348,~~063~~617,~~871~~972	)		(3943,~~058~~063,~~365~~871	)
Stockholders' deficit		(610,~~487~~465,~~073~~661	)		(36,~~329~~487,~~128~~073	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	21,~~221~~048,~~498~~938		$	2,~~966~~221,~~059~~498

See accompanying notes to these consolidated financial statements.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, ~~2012~~2013 AND ~~2011~~2012

	Year Ended December 31,
	2012			2011
	2013			2012
Sales	$	145,~~145~~192,~~533~~577		$	165,~~444~~636,~~573~~195
Cost of sales		114,~~078~~072,~~407~~085			134,~~220~~308,~~684~~710
Gross profit		31,~~067~~120,~~126~~492			31,~~223~~327,~~889~~485
Operating expenses
Salaries and related expenses		31,~~065~~891,~~982~~862			21,~~850~~903,~~034~~475
Selling, general and administrative		2,~~798~~128,~~281~~199			32,~~140~~270,~~834~~541
Total operating expenses		54,~~864~~020,~~263~~061			54,~~990~~174,~~868~~016
Loss from operations		(2,797,137	)		(2,766,979	)
Loss from continuing operations		(2,899,569	)		(2,846,531	)
Other expenses
Interest expense, net		1,~~475~~261,~~358~~843			~~918~~1,~~333~~399,903
Loss on extinguishment of debt		90,205			16,923
(Gain) or Loss on extinguishment of debt		(1,548,915	)		90,205
Gain on change in fair value of warrant liability		(357,194	)		(443,274	)
Gain of change in fair value of forward contract liability		(117,364)			-
Total other expenses and income		1,208,369			491,982
Loss on change in fair market value of derivative		73,917			-
Net loss from operations		(4,005,506	)		(3,258,961	)
Gain on change in fair value of warrant liability		(144,909	)		(357,194	)
Net income attributable to non-controlling interest		-			(12,051	)
Total other expenses and income		(475,428	)		1,132,914
Net loss attributable to Assured Pharmacy, Inc.	$	(4,005,506	)	$	(3,271,012	)
Loss from continuing operations before income tax		(2,424,141	)		(3,979,445	)
Income tax expense		328,080			9,121
Loss from continuing operations, net of tax.		(2,752,221	)		(3,988,566	)
Discontinued operations:
Loss from operations of discontinued pharmacies, net of tax benefit		(609,292	)		(16,940	)
Net loss	$	(3,361,513	)	$	(4,005,506	)
Redemption feature on preferred stock		(2,192,588	)		-
Net loss applicable to common stock	$	(5,554,101	)	$	(4,005,506	)
Basic and diluted loss per common share
Net loss per common share - basic and diluted	$	(0.96	)	$	(1.14	)
Net loss to common stockholders from continuing operations	$	(0.81	)	$	(0.96	)
Basic and diluted weighted average number of common shares outstanding		4,150,976			2,876,335
Loss from discontinued operations, net of tax expense (benefit)	$	(0.10	)	$	(0.00	)
Net loss per common share - basic and diluted	$	(0.91	)	$	(0.96	)
Basic and diluted weighted average number of common shares outstanding		6,126,838			4,150,976

See accompanying notes to these consolidated financial statements.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, ~~2012~~2013 AND ~~2011~~2012

	ASSURED PHARMACY, Inc. Stockholders
	Common Stock				Series A Preferred Stock						Series C Preferred Stock				Series B Preferred Stock						Additional Paid In			Accumulated			~~Non-~~Total ~~controlling~~Stockholders'			~~Total Stockholders'~~
	Shares		Amount		Shares			Amount			Shares		Amount		Shares			Amount			Capital			Deficit			~~Interest~~Deficit			~~Deficit~~
Balance December 31, 2010		2,284,446	$	2,284		1,556		$	2			813	$	1		5,849		$	6		$	33,823,396		$	(35,787,353	)	$	697,981		$	(1,263,683	)
Balance December 31, 2011		3,818,707	$	3,818		1,556		$	2			813	$	1		5,409		$	5		$	35,725,411		$	(39,058,365	)	$	(3,329,128	)
Stock based compensation for services		~~942~~540,~~778~~000	$	~~943~~540																		~~781~~847,~~700~~021						847,561			~~782,643~~
Issuance of commons stock in lieu of cash to debtholders for interest		46,843	$	46																		61,597									61,643
Conversion of series A preferred stock into common		104,250	$	105		(150	)	$	(1	)												(104	)					-
Conversion of series B preferred stock into common		~~244~~13,~~640~~889	$	~~245~~14												(~~440~~25	)	$	(1	)		(~~244~~14	)					-			-
Beneficial conversion feature on debentures																						337,877									337,877
Net Loss																									(4,005,506	)		(4,005,506
Stock issued for acquisition of non-controlling interest		300,000	$	300																		721,085						(710,032	)		11,353
Balance December 31, 2012		4,476,846	$	4,477		1,406		$	1			813	$	1		5,384		$	5		$	36,572,314		$	(43,063,871	)	$	(6,487,073	)
Net (Loss) Income																									(3,271,012	)		12,051			(3,258,961	)
Stock based compensation for services		545,000	$	545																		728,356						728,901
Balance December 31, 2011		3,818,707	$	3,818		1,556		$	2			813	$	1		5,409		$	5		$	35,725,411		$	(39,058,365	)	$	-		$	(3,329,128	)
Issuance of series A preferred stock						60			-													60,000						60,000
Stock based compensation for services		540,000	$	540																		847,021									847,561
Conversion of series B preferred stock into common		288,890	$	289												(260)		$	-			(289	)					-
Conversion of series A preferred stock into common		104,250	$	105		(150	)	$	(1	)												(104	)								-
Issuance of common stock in lieu of interest		1,049,152	$	1,049																		159,473						160,522
Conversion of series B preferred stock into common		13,889	$	14												(25	)					(14	)								-
Issuance of common stock in conversion of convertible debentures		2,442,975	$	2,443																		286,313						288,756
Net Loss																									(4,005,506	)					(4,005,506	)
Issuance of common stock in conversion of note payable		129,737	$	130																		18,033						18,163
Balance December 31, 2012		4,476,846	$	4,477		1,406		$	1			813	$	1		5,384		$	5		$	36,572,314		$	(43,063,871	)	$	-		$	(6,487,073	)
Issuance of common stock warrants in conversion of convertible debenture																						14,012						14,012
Issuance of common stock in private placement		1,323,093	$	1,323																		303,836						305,159
Redemption feature on preferred stock																									(2,192,588	)		(2,192,588	)
Net Loss																									(3,361,513	)		(3,,361,513	)
Balance December 31, 2013		10,255,693	$	10,256		1,466		$	1			813	$	1		5,124		$	5		$	38,142,048		$	(48,617,972	)	$	(10,465,661	)

See accompanying notes to these consolidated financial statements.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, ~~2012~~2013 AND ~~2011~~2012

	YEAR ENDED DECEMBER 31,
	2012			2011
	2013			2012
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss including noncontrolling interest	$	(4,005,506	)	$	(3,258,961	)
Net loss	$	(3,361,513	)	$	(4,005,506	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment		3436,~~614~~129			2734,~~609~~614
Amortization of debt issuance costs		~~121~~36,~~963~~131			71121,~~416~~963
Amortization of discount on debt		~~684~~333,~~627~~255			~~472~~684,~~069~~627
Stock based compensation		~~847~~628,~~561~~964			~~782~~847,~~643~~561
Issuance of common stock in lieu of debenture interest		-45,467			~~61,643~~-
Loss on extinguishment of debentures and notes		90,205			16,923
(Gain) or loss on extinguishment of debentures and notes		(1,548,915	)		90,205
Provision for accounts receivable doubtful accounts		3016,~~610~~683			6530,~~322~~610
Provision (recoveries) for other receivables doubtful accounts		(~~136~~100,~~038~~708	)		~~659~~(136,~~616~~038	)
Gain on change in fair value of warrant liability		(357,194	)		(443,274	)
Provision for obsolete inventory		24,006			-
Impairment of goodwill		697,766			-
Loss on sale of property and equipment		1,028			-
Gain on change in fair value of forward contract liability		(117,364	)		-
Loss on change in fair market value of derivative		73,917			-
Gain on change in fair value of warrant liability		(144,909	)		(357,194	)
Changes in operating assets and liabilities:
Accounts receivable		~~131~~332,~~773~~251			87131,~~154~~773
Inventories		~~288~~113,~~568~~004			67288,~~733~~568
Prepaid expenses and other current assets		20(68,~~190~~537	)		~~162~~20,~~588~~190
Other receivables		~~229~~166,~~305~~881			10229,~~758~~306
Accounts payable and accrued liabilities		1959,~~488,507~~736			(71,~~983~~488,507	)
Net cash used in operating activities		(~~530~~1,~~815~~876,728	)		(1530,~~224,744~~815	)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment		(2154,~~285~~838	)		(2721,~~087~~285	)
Net cash used in investing activities		(21,285	)		(27,087	)
Sale of property and equipment		1,000			-
Net cash used in investing activities		(53,838	)		(21,285	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable		(4629,~~100~~461	)		(8346,~~536~~100	)
Payment of issuance cost for convertible debentures and notes		~~(42,898~~-	)		(~~229~~42,~~446~~898	)
Proceeds from issuance of convertible debentures		~~350,400~~-			1350,~~565,384~~400
Proceeds from advances on shareholder revolving note		336,500			21,540
Payment of issuance cost for common stock		(45,810	)		-
Repayment of advances on shareholder revolving note		(47,820	)		(36,120	)
Payment of issuance cost for preferred stock		(32,605	)		-
Net cash provided by financing activities		550,082			1,237,822
Proceeds from issuance of Series A preferred stock		60,000			-
Net decrease in cash		(2,018	)		(14,009	)
Proceeds from issuance of Series D preferred stock		1,070,000			-
Cash at beginning of period		23,316			37,325
Proceeds from issuance of common stock		860,000			-
Cash at end of period	$	21,298		$	23,316
Proceeds from advances on shareholder revolving note		270,500			336,500
Repayment of advances on shareholder revolving note		(240,500	)		(47,820	)
Net cash provided by financing activities		1,912,124			550,082
Net decrease in cash		(18,442	)		(2,018	)
Cash at beginning of period		21,298			23,316
Cash at end of period	$	2,856		$	21,298

See accompanying notes to these consolidated financial statements.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND PLAN OF OPERATIONS

Organization

Assured Pharmacy, Inc. (“Assured Pharmacy” or the “Company”) was organized as a Nevada corporation on October 22, 1999, under the name Surforama.com, Inc. The Company is engaged in the business of providing pharmacy services to physicians and patients primarily in the treatment of chronic pain. The Company derives its revenue primarily from the sale of prescription drugs and primarily dispenses highly regulated pain medications and does not offer non-prescription drugs or health and beauty related products inventoried at traditional pharmacies. The majority of the Company's business is derived from repeat business from its customers.

The Company ~~has~~had ~~four~~two operating pharmacies as of the year ended December 31, ~~2012~~2013 and ~~five~~four operating pharmacies as of the year ended December 31, ~~2011~~2012. The pharmacies are located in ~~Santa Ana, California, Riverside, California,~~ Kirkland, Washington, ~~Gresham, Oregon~~ and Leawood, Kansas. In ~~December~~August ~~2012~~2013, weas ~~consolidated~~a ~~the~~result ~~operations~~ of our ~~Santa~~financial ~~Ana~~condition ~~pharmacy~~and ~~into~~inability to secure additional funding or significantly improve our ~~Riverside~~liquidity ~~pharmacy~~position, management ~~location~~reevaluated its strategic plan. ~~Due~~Management developed and implemented a plan to ~~the~~scale ~~close~~back ~~proximity~~operations ~~between~~as we could not continue to support the working capital needs of four pharmacies. As a result, management ~~expects~~decided to ~~retain~~close ~~the~~two ~~majority~~pharmacies ofin ~~our~~order ~~existing~~to ~~customers~~reduce overall fixed pharmacy costs by 50% and ~~leverage~~concentrate our ~~existing~~limited ~~infrastructure~~working capital to support the operations of the two remaining pharmacies we believe have the best prospects. Management considered several factors in determining which istwo ~~expected~~pharmacies to ~~result~~close, inincluding ahistorical ~~reduction~~financial ofperformance, regulatory costs, current sales prospects, geographic and physical location and strength of existing physician relationships. After consideration of these factors, management closed our Gresham and Riverside pharmacies on August 5, 2013 and August 8, 2013, respectively.

The Company’s common stock is ~~now~~ traded on the OTC Market’s OTC:QB quotations system under the ticker symbol APHY.

In June 2009, the Company filed a Certificate of Designation with the state of Nevada to designate 2,830 preferred shares as Series A Convertible Preferred Stock (“Series A Preferred”) and 7,745 shares as Series B Convertible Preferred Stock (“Series B Preferred”) from the 5,000,000 preferred shares authorized (see Note 5 for further details). In May 2010, the Company filed a Certificate of Designation with the state of Nevada to designate 813 preferred shares as Series C Convertible Preferred Stock (“Series C Preferred”). In November 2013, the Company filed a Certificate of Designation with the state of Nevada to designate 15,000 preferred shares as Series D Redeemable Convertible Preferred Stock.

In January 2010, the Company filed a Certificate of Amendment to Articles of Incorporation with the State of Nevada to increase the number of authorized common shares from 833,333 shares to 16,666,667 shares.

In May 2012, the Company’s Board of Directors (“the Board”) and a majority of the Company’s shareholders approved an amended and restated articles of incorporation effectuating an increase in the number of authorized common shares of the Company from 16,666,667 to 35,000,000. As required, a consent and waiver was obtained from the majority of the Series A and Series C Preferred holders in accordance with the certificate of designation.

In October 2013, we filed a Proxy Statement on Schedule 14A with the Securities and Exchange Commission. The Board of Directors has submitted several actions to be taken by consent in lieu of a meeting in order to facilitate future financings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Amend and restate the Articles of Incorporation of the Company to increase the authorized number of shares of Common stock available for issuance from 35,000,000 to 100,000,000.

2.	Create and designate a class of Preferred Stock called the “Series D Preferred Stock,” consisting of 15,000 shares of stock, par value $0.001 per share, and designate to such class of stock those rights as described in that certain Certificate of Designation.

In November 2013, the Board of Directors increased the Company’s authorized Common Stock from 35,000,000 to 100,000,000 to provide greater flexibility with respect to future transactions, including joint ventures, raising capital, acquisitions and other general corporate purposes. Each additional share of Common Stock authorized by the amendment to the Articles of Incorporation will have the same rights and privileges as each share of Common Stock currently authorized or outstanding. If this proposal is rejected, the Company may have insufficient authorized and unissued outstanding shares of Common Stock to take advantage of potential business opportunities.

The Company does not currently have any plans for the potential increase in the number of authorized shares available for issuance. The Series D Preferred Stock described below, designates that any one share of Series D Preferred Stock may, at the option of the holder, be converted at any time into 2,000 fully-paid and non-assessable shares of Common Stock.

The Board of Directors believes it to be in the best interest of the Company to create and designate a class of Preferred Stock called the “Series D Preferred Stock,” consisting of 15,000 shares of stock, par value $0.001 per share, and designate to such class of stock those rights and preferences as described in that certain Certificate of Designation, attached hereto at Exhibit B.

The designation of the Series D Preferred Stock adversely alters and affects the rights of our Common Stockholders. Pursuant to the terms of the Series D Preferred Stock, the initial investor must approve certain corporate actions of the Company, regardless of the total Common Stock votes for or against such actions. Such actions include, but are not limited to: any increase or decrease in the authorized number of shares of Common Stock or Preferred Stock; the delisting of any of the Company’s securities from the OTCQB or any national securities exchange; any redemption or repurchase with respect to the Common Stock or Preferred Stock; any liquidation, dissolution or winding-up of the business and affairs of the Company; any material modification or deviation from the Company’s annual business plan and operating budget; any payment or declaration of a dividend or other distribution on any shares of Common Stock or Preferred Stock made by the Board of Directors; and any change in the principal business of the Company. In addition to the foregoing, holders of the Series D Preferred Stock have the right to elect one director of the Company so long as at least 35% of the Series D Preferred Stock is issued and outstanding.

Registration Statement

On November 13, 2012, we completed the registration of 2,292,067 shares of common stock, par value $0.001 per share, issuable upon exercise of warrants on Form S-1, as amended. We became a public company on November 14, 2012 and are ~~now~~ subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s common stock began trading on the OTC Market’s OTC:QB quotation system under the ticker symbol “APHY”.

Reverse Stock Split

In March 2011, the Company’s Board approved an amended and restated certificate of incorporation effecting a 1 for 180 reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of April 15, 2011. As required, a consent and waiver was obtained from the majority of the Series A Preferred holders in accordance with the certificate of designation.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Going Concern Considerations

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of December 31, ~~2012~~2013, the Company had an accumulated deficit of approximately $4346.14 million and, recurring losses from operations. The Company also had negative working capital of approximately $61.37 million and debt with maturities within one year in the amount of approximately $~~3.0~~800,000 ~~million~~ as of December 31, ~~2012~~2013.

From January 1, ~~2013~~2014 tothrough March 1527, ~~2013~~2014, the Company ~~completed~~has ~~equity~~secured ~~offerings~~loans in the amount of $~~660~~440,000 from Pinewood Trading Fund, LP, a related party and ~~restructured~~extended ~~its~~the ~~credit~~maturity ~~facility~~date ~~with~~of ~~its’~~an ~~primary~~aggregate ~~wholesaler~~total ~~(see~~of ~~note~~$1,000,000 12in ~~for~~convertible ~~further~~debentures ~~details)~~from December 1, 2013 to June 30, 2016 and converted $252,417 in accrued interest due to convertible debenture holders into common stock at $0.60 per share. The Company intends to fund operations through raising additional capital through debt financing and equity issuances, increased sales, increased collection activity on past due other receivable balances and reduced expenses, which may be insufficient to fund its capital expenditures, working capital or other cash requirements for the year ending December 31, ~~2013~~2014. The Company is in negotiations with current debt holders to restructure and extend payment terms of the existing short term debt. The Company is seeking additional funds to finance its immediate and long-term operations. The successful outcome of future financing activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to recoverability and -classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

In response to these financial issues, management has taken the following actions:

·	The Company is seeking to renegotiate existing debt.

·	The Company is seeking investment capital.

·	The Company is aggressively targeting new physicians.

· The Company is aggressively increasing collection activity on past due other receivable balances

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies presented below is designed to assist in understanding the Company's consolidated financial statements. Such financial statements and accompanying notes are the representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States (“U.S. GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Significant estimates and assumptions involved include the collectability of accounts receivable, accounting for stock based compensation and other stock based payments, convertible debt issuances, the valuation of the deferred tax asset, inventory, warrant liability and long-lived assets valuation (including goodwill). Actual results could materially differ from these estimates.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

Risks and Uncertainties

The Company operates in a highly competitive industry that is subject to intense competition. The Company faces risks and uncertainties relating to its ability to successfully implement its business strategy. Among other things, these risks include the ability to develop and sustain revenue growth; managing and expanding operations; competition; attracting, retaining and motivating qualified personnel; maintaining and developing new strategic relationships; and the ability to anticipate and adapt to the changing markets and any changes in government regulations.

As a result, the Company may be subject to the risk of delays in obtaining (or failing to obtain) regulatory clearance and other uncertainties, including financial, operational, technological, regulatory and other risks associated with an emerging business, including the risk of business failure.

The Company's pharmacies are subject to licensing and regulation by the health, sanitation, safety, building and fire agencies in the state or municipality where located. Difficulties or failures in obtaining or maintaining the required licensing and/or approvals could prevent the continued operations of such pharmacies. Management believes that the Company is operating in compliance with all applicable laws and regulations.

Concentration of Credit Risk

~~Accounts~~During ~~receivable~~the ~~from~~year ~~worker’s~~ended ~~compensation~~December ~~insurance~~31, ~~carriers~~2013 inand 2012, the ~~State~~Company ofpurchased ~~California~~approximately ~~totaled~~$5.3 ~~approximately~~million and $10.1 million, respectively, or 91% and 92%, respectively, of its prescription drug inventory from one primary wholesale vendor. At December 31, 2013 and 2012, accounts payable to the vendor were approximately $0 and $3.6 million, ~~and~~respectively. The Company had a vendor note payable with the aforementioned vendor totaling $13.48 million and $305,000 as of December 31, ~~2012~~2013 and ~~2011~~2012, respectively. (In February 2013, the amounts payable to vendor were converted into a note (See ~~Accounts~~Note ~~Receivable~~4 Secured Debt for further details).) During the year ended December 31, 2013 and ~~Allowances~~2012, ~~accounting~~the ~~policy~~Company ~~for~~purchased aapproximately ~~detail~~$539,000 and $858,000, respectively, or 9% and 8%, respectively, of ~~these~~its ~~amounts~~prescription ~~disclosed~~drug inventory from another secondary wholesale vendor. At December 31, 2013 and 2012, accounts payable to the vendor were approximately $132,000 and $113,000, respectively. During the year ended December 31, 2013 and 2012 management believes that the wholesale pharmaceutical and non-pharmaceutical distribution industry is highly competitive because of consolidation in the retail pharmacy industry and the practice of certain large pharmacy chains to purchase directly from product manufacturers. Although management believes it could obtain the majority of its inventory from other distributors at competitive prices and with competitive payment terms, if its relationship with its primary wholesale drug vendor was terminated, there can be no assurance that the termination of such relationship would not adversely affect the Company.

During the year ended December 31, 2012 and 2011, the Company purchased approximately $10.1 million and $10.7 million, respectively, or 92% and 80%, respectively, of its prescription drug inventory from one primary wholesale vendor. At December 31, 2012 and 2011, accounts payable to the vendor were approximately $3.6 million and $2.6 million, respectively. During the year ended December 31, 2012 and 2011, the Company purchased approximately $858,000 and $1.4 million, respectively, or 8% and 10%, respectively, of its prescription drug inventory from another secondary wholesale vendor. At December 31, 2012 and 2011, accounts payable to the vendor were approximately $113,000 and $113,000, respectively. During the year ended December 31, 2012 and 2011, the Company purchased approximately $0 and $ 717,000 respectively, or 0% and 5%, respectively, of its prescription drug inventory from a second primary wholesale vendor. Management believes that the wholesale pharmaceutical and non-pharmaceutical distribution industry is highly competitive because of consolidation in the retail pharmacy industry and the practice of certain large pharmacy chains to purchase directly from product manufacturers. Although management believes it could obtain the majority of its inventory from other distributors at competitive prices and with competitive payment terms, if its relationship with its primary wholesale drug vendor was terminated, there can be no assurance that the termination of such relationship would not adversely affect the Company.

Governmental Regulations

The pharmacy business is subject to extensive and often changing federal, state and local regulations, and the Company’s pharmacies are required to be licensed in the states in which they are located or do business. While management continuously monitors the effects of regulatory activity on the Company's operations and it currently has a pharmacy license for each pharmacy the Company operates, the failure to obtain or renew any regulatory approvals or licenses could adversely affect the continued operations of the Company's business.

The Company is also subject to federal and state laws that prohibit certain types of direct and indirect payments between healthcare providers. These laws, commonly known as the fraud and abuse laws, prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of products and/or services. Violation of these laws can result in a loss of licensure, civil and criminal penalties and exclusion from various federal and state healthcare programs. The Company expends considerable resources in connection with compliance efforts. Management believes that the Company is in compliance with federal and state regulations applicable to its business.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is also impacted by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which mandates, among other things, the adoption of standards to enhance the efficiency and simplify the administration of the healthcare system. HIPAA requires the Department of Health and Human Services to adopt standards for electronic transactions and code sets for basic healthcare transactions such as payment and remittance advice (“transaction standards”); privacy of individually identifiable healthcare information (“privacy standards”); security and electronic signatures (“security standards”), as wells as unique identifiers for providers, employers, health plans and individuals; and enforcement. The Company is required to comply with these standards and is subject to significant civil and criminal penalties for failure to do so. Management believes the Company is in compliance with these standards. There can be no assurance, however, that future changes will not occur which the Company may not be, or may have to incur significant costs to be in compliance with new standards or regulations. Management anticipates that federal and state governments will continue to review and assess alternate healthcare delivery systems, payment methodologies and operational requirements for pharmacies. Given the continuous debate regarding the cost of healthcare services, management cannot predict with any degree of certainty what additional healthcare initiatives, if any, will be implemented or the effect any future legislation or regulation will have on the Company.

Cash

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. The Company deposits its cash with federally insured financial institutions, which at times may have balances that exceed Federal Deposit Insurance Corp insurance limitations. Management believes the risk of loss related to the excess balances is minimal.

Accounts Receivable and Allowances

The Company's accounts receivable consist of amounts due from third party medical insurance carriers, pharmacy benefit management companies, patients and credit card processors. Management periodically reviews the accounts receivable to assess collectability and estimate potential doubtful accounts. Accounts receivable are written off after collection efforts have been completed in accordance with the Company’s policies. The doubtful accounts allowance reduces the carrying value of the account receivable.

The Company’s accounts receivables are detailed as follows:

	2012			2011
	2013			2012
Accounts receivable
Third party medical insurance and other	$	~~682~~324,~~010~~095		$	~~840~~334,~~256~~484
Allowance for doubtful accounts		(~~5,064~~130	)		(~~928~~797	)
Total accounts receivable, net	$	~~676~~323,~~946~~965		$	~~839~~333,~~328~~687

The provision for bad debts for the years ended December 31, ~~2012~~2013 and ~~2011~~2012 was $3032,~~610~~426 and $6512,~~322~~968, respectively. The Company also wrote off $2633,~~474~~093 and $6622,~~610~~480 in doubtful accounts in the years ended December 31, ~~2012~~2013 and ~~2011~~2012, respectively.

Inventories

Inventories are located at the Company’s pharmacy locations. Inventory consists solely of finished products (primarily prescription drugs) and is valued at the lower of first-in, first-out cost (FIFO) or market. Our inventories are maintained on a periodic basis through the performance of physical inventory counts. Our cost of sales is recorded based upon the actual results of the physical inventory counts, and is estimated when a physical inventory is not performed in a particular month. Historically, no significant adjustments have resulted from reconciliations with the physical inventories. We also maintain inventory reserves for excess and obsolete inventory based on analysis of our inventory and sales activity.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories are comprised of brand and generic pharmaceutical drugs. The Company's pharmacies maintain a wide variety of different drug classes, known as Schedule II, Schedule III, and Schedule IV drugs, which vary in degrees of addictiveness. Schedule II drugs, considered narcotics by the DEA, are the most addictive; hence, they are highly regulated by the Drug Enforcement Administration (“DEA”) and are required to be segregated and secured in a separate cabinet. Schedule III and Schedule IV drugs are less addictive and are not regulated. Because the Company's business model focuses on servicing pain management ~~doctors~~physicians and chronic pain patients, the Company carries a larger amount of Schedule II drugs in inventory than most other pharmacies.

Property and Equipment

Property and equipment are stated at cost, and are being depreciated using the straight-line method over the estimated useful lives of the related assets, which generally range between three and ten years. Company’s property and equipment consist of computers, software, office furniture and equipment, store fixtures, and leasehold improvements on pharmacy build-outs. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease terms, typically five years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement, other disposition of property and equipment or termination of a lease, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in results of operations. During the years ended December 31, ~~2012~~2013 and ~~2011~~2012, no impairments of property and equipment were recognized.

Other Receivables and Allowances

The other receivables are primarily related to worker’s compensation claims from insurance carriers for prescription medications dispensed to injured workers in the State of California. The delay in payment typically arises due to monetary disputes between the claimant and the employer and/or the employer’s insurance carrier. The settlement period for such dispute cases can range from one year to ten years. The Company typically files a lien (“Green Lien”) on each case that has a past due balance to protect the account receivable when the case ultimately settles. Management has classified such receivables as long term assets due to these factors. On April 1, 2010, the Company discontinued dispensing medication to California worker’s compensation customers whose claims could not be authorized and billed electronically. This change was due to lower profit margins and cash flow constraints that are associated with the manual authorization and billing process.

During the year ended December 31, 2011, management performed a comprehensive assessment of the allowance for doubtful accounts for other receivables estimation methodologies in light of its expectations around the ultimate collection of its other receivables balances. Management performed a detailed case analysis, taking into consideration recent collection history, status of each case and the overall decrease in case activity over the last two years. In connection with that comprehensive assessment of the allowance for doubtful accounts, management recorded a $659,616 bad debt provision to reduce the other receivables balance to the expected net realizable value. In February 2012, management engaged a collection service organization that specializes in the collection of California workers’ compensation receivables to aggressively pursue collections on these receivables. As of December 31, 2012, management assessed its remaining other receivables accounts and updated its overall allowance considering the $136,038 in recovery of accounts previously included in the allowance.

	2012			2011
Other Receivables
Worker's compensation	$	1,034,766		$	1,375,662
Allowance for doubtful accounts		(828,030	)		(1,075,659	)
Total other receivables, net	$	206,736		$	300,003

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management recorded bad debt recoveries of $136,038 for the year ended December 31, 2012 and recorded provision for bad debts of $659,616 for the year ended December 31, 2011. The Company wrote off $111,590 and $15,885 in uncollectible accounts in the years ending December 31, 2012 and 2011, respectively.

Goodwill

Deferred Loan Costs

During the years ended December 31, ~~2012~~2013 and ~~2011~~2012, the Company incurred loan origination and other professional fees that were associated with closing certain loans. These fees ~~amounted to $42,898 and $240,201 during the years ended December 31, 2012 and 2011, respectively and~~ are included in prepaid and other assets on the consolidated balance sheet, net of amortization. Such fees have been deferred and are being amortized to interest expense over the life of the loan on a straight line basis, which approximates the effective interest method. Interest expense recorded on these fees was $~~121~~36,~~963~~131 and $71121,~~416~~963 for the years ended December 31, ~~2012~~2013 and ~~2011~~2012, respectively, and was reflected in interest expense, net on the consolidated statements of operations.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

The Company recognizes revenue from prescriptions dispensed on an accrual basis when the product is delivered to or picked up by the customer. Payments are received directly from the customer at the point of sale, or the customers' insurance provider is billed electronically. For third party medical insurance and other claims, authorization to ensure payment is obtained from the customer’s insurance provider before the medication is dispensed to the customer. Authorization is obtained for these sales electronically and a corresponding authorization number is issued by the customers' insurance provider.

The Company recognizes revenue from service contracts on an accrual basis when the service is provided to the customer. In March 2010, we entered into a one year Pharmacy Agreement with Generex to provide pharmacy and marketing services for Generex’s proprietary buccal insulin spray product Oral-lyn™. The Oral-lyn™ product will be dispensed as part of the United States Food and Drug Administration’s Treatment Investigation New Drug Program. The remuneration for the one year service contract was $300,000, payable on execution of the Pharmacy Agreement. The Company recognized revenue related to this contract on a straight line basis over the one year term of the contract.

Advertising

Advertising costs for marketing and promotions are included in selling expenses, when incurred. Advertising costs for the years ended December 31, ~~2012~~2013 and ~~2011~~2012 were $~~11,208~~0 and $109,~~084~~708, respectively. Such expenses are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Delivery expenses

The Company incurred expenses totaling $~~365~~192,~~653~~802 and $~~298~~161,~~720~~629 for the years ended December 31, ~~2012~~2013 and ~~2011~~2012, respectively, to deliver products sold to its customers. Delivery expenses are reported as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations.

Stock-based Compensation

The Company issues options and restricted shares of common stock to employees and consultants. Stock option and restricted share awards are granted at the fair market value of the Company's common stock on the date of grant.

The Company ~~applies~~records the fair value recognition provisions of ASC 718 “Compensation – Stock Compensation,” for stock compensation transactions. This requires companies to measure and recognize compensation expense for all share-based payments at fair value. The total applicable compensation cost is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.

For the years ended December 31, ~~2012~~2013 and ~~2011~~2012, the Company recognized $~~847~~628,~~561~~964 and $~~782~~847,~~643~~561, respectively, in compensation expense which is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Basic and Diluted Loss per Common Share

The Company computes loss per common share using ASC 260 “Earnings Per Share.” Basic loss per share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts, such as stock options and warrants to issue common stock, were exercised or converted into common stock. Because the Company has incurred net losses and there are no dilutive potential common shares, basic and diluted loss per common share are the same.

FIncome ~~- 13~~Taxes

The recognition and measurement of benefits related to the Company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the Company’s assumptions or changes in the Company’s assumptions in future periods are recorded in the period they become known. Under ASC 740 we determined that all of our income tax positions meet the more-likely-than-not recognition threshold and, therefore, required no reserve. In the event of future uncertain tax positions, additional interest and penalty charges associated with tax positions would be classified as income tax expense in the Consolidated Financial Statements.

Fair Values of Financial Instruments

Management believes that the carrying amounts of the Company's financial instruments, consisting primarily of cash, accounts receivable, accounts payable and accrued expenses approximated their fair values at December 31, 2013 and 2012, due to their short-term nature.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes

The Company recognizes liabilities or assets for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements in accordance with FASB ASC 740-10, “ Accounting for Income Taxes” (“ASC 740-10”). These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. ASC 740-10 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred asset will not be realized. The Company evaluates the realizability of its net deferred income tax assets and valuation allowances as necessary, at least on an annual basis. During this evaluation, the Company reviews its forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of its deferred income tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease the Company’s income tax provision or benefit. The recognition and measurement of benefits related to the Company’s tax positions requires significant judgment, as uncertainties often exist with respect to new laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and the Company’s assumptions or changes in the Company’s assumptions in future periods are recorded in the period they become known. Under ASC 740 we determined that all of our income tax positions meet the more-likely-than-not recognition threshold and, therefore, required no reserve. In the event of future uncertain tax positions, additional interest and penalty charges associated with tax positions would be classified as income tax expense in the Consolidated Financial Statements.

Fair Values of Financial Instruments

The Company measures certain financial liabilities (warrant liability) at fair value on a recurring basis. The Company follows a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

Level 1 Measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities that the company has the ability to access at the measurement date.

Level 2 Measurements are inputs other than quoted prices included in Level 1 that are observable either directly or indirectly.

Level 3 Measurements are unobservable inputs.

The fair value of the warrant liability of $~~274~~1,~~605~~060,353 and $~~208~~274,~~570~~605 as of December 31, ~~2012~~2013 and ~~2011~~2012, respectively, was measured using Level 3 measurements.

Management also believes that the December 31, ~~2012~~2013 and ~~2011~~2012 interest rates associated with the notes payable approximates the market interest rates for these types of debt instruments and as such, the carrying amount of the notes payable approximates their fair value.

Common Stock Warrant Liability

The Company accounts for its common stock warrants under ASC 480, “Distinguishing Liabilities from Equity,” which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and it requires or may require the issuer to settle the obligation by transferring assets, would qualify for classification as a liability. The guidance required the Company’s outstanding warrants from convertible debenture private placements in the years ended December 31, 2013, 2012 and 2011 to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as a change in fair value of warranty liability in the Company’s consolidated statements of operations. Specifically, the warrants issued in connection with convertible debenture private placements in throughout the years ended December 31, 2013, 2012 and 2011, grant the warrant holder certain anti-dilution protection which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Upon exercise or expiration of the warrant, the fair value of the warrant at that time will be reclassified to equity from a liability. The following table is a summary of the warrant liability activity measured at fair value using Level 3 inputs:

	Warrant Liability


Balance at December 31, 2011	$	208,570

Granted		511,765
Cancelled, forfeited or expired		(88,536	)
Change in fair value of common stock warrants		(357,194	)


Balance at December 31, 2012	$	274,605

Granted		949,407
Cancelled, forfeited or expired		(18,750	)
Change in fair value of common stock warrants		(144,909	)


Balance at December 31, 2013	$	1,060,353

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Forward contracts

As part of the 2013 private placement of common stock, the Company also agreed that the 38,462 shares of common stock included in the units is subject to increase and the $0.65 per share value is subject to decrease, in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”) (see Note 6 Common Stock for further details). The Company separately valued the forward contracts using Level 3 inputs. The fair value of the forward contracts of $115,767 was recorded as a liability and is included in accounts payable and accrued expenses on the Consolidated Balance Sheet as of December 31, 2013. The following table is a summary of the forward contract liability activity measured at fair value using Level 3 inputs:

	Forward Contract Liability


Balance at December 31, 2012	$	-

Granted		233,131
Cancelled, forfeited or expired
Change in fair value		(117,364	)

Balance at December 31, 2013	$	115,767

Derivative Liability

The derivative relates to the conversion feature into common stock at an initial rate of 2,000 common shares for each share of Series D Preferred stock, subject to adjustment for certain anti-dilution protection and provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share (see Note 5 Redeemable Preferred Stock for further details). Management analyzed the terms of the conversion option and concluded that the conversion feature was derivative since it met the definition of a derivative and did qualify for any of the exceptions. The Company therefore separately valued the derivative contracts using Level 3 inputs. The fair value of the derivatives of $312,088 was recorded as a derivative liability on the Consolidated Balance Sheet as of December 31, 2013. The following table is a summary of the derivative liability activity measured at fair value using Level 3 inputs:

	Derivative Liability


Balance at December 31, 2012	$	-

Granted		238,171
Cancelled, forfeited or expired
Change in fair value		73,917

Balance at December 31, 2013	$	312,088

Recent Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist , which is included in ASC Topic 740 (Income Taxes). ASU 2013-11 requires an entity to net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. The provisions of this new guidance are effective for reporting periods beginning after December 15, 2013. The guidance is not expected to have a material impact on our statement of operations, financial position, or cash flows.

3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2013 and 2012:

	2013			2012

Furniture and equipment	$	18,167		$	18,167
Computer equipment and information systems		488,613			471,240
Leasehold improvements		136,536			84,294
		643,316			573,701

Less: accumulated depreciation and amortization		(565,222	)		(527,928	)
	$	78,094		$	45,753

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Common~~Depreciation ~~Stock~~and ~~Warrant~~amortization ~~Liability~~expense for the years ended December 31, 2013 and 2012 was $25,569 and $23,440, respectively. Depreciation and amortization expenses are included in selling, general and administrative expenses on the consolidated statements of operations.

The Company accounts for its common stock warrants under ASC 480, “Distinguishing Liabilities from Equity,” which requires any financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and it requires or may require the issuer to settle the obligation by transferring assets, would qualify for classification as a liability4. NOTES ~~The~~PAYABLE ~~guidance~~AND ~~required~~UNSECURED ~~the~~CONVERTIBLE Company’s outstanding warrants from convertible debenture private placements in the years ended December 31, 2012 and 2011 to be classified as liabilities and to be fair valued at each reporting period, with the changes in fair value recognized as a change in fair value of warranty liability in the Company’s consolidated statements of operations. Specifically, the warrants issued in connection with convertible debenture private placements in throughout the years ended December 31, 2012 and 2011, grant the warrant holder certain anti-dilution protection which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Upon exercise or expiration of the warrant, the fair value of the warrant at that time will be reclassified to equity from a liability. The following table is a summary of the warrant liability activity measured at fair value using Level 3 inputs:DEBENTURES

	Warrant Liability
Balance at December 31, 2010	$	138,263
Granted		649,944
Cancelled, forfeited or expired		(136,363	)
Change in fair value of common stock warrants		(443,274	)
Balance at December 31, 2011	$	208,570
Granted		511,765
Cancelled, forfeited or expired		(88,536	)
Change in fair value of common stock warrants		(357,194	)
Balance at December 31, 2012	$	274,605

The table below summarizes the Company’s notes payable and unsecured convertible debentures as of December 31, 2013:

Non-controlling Interests

	Related Party		Unrelated		Total

Secured debt	$	-	$	3,804,111	$	3,804,111
Revolving credit facilities		477,000		-		477,000
Other notes and debt		-		52,408		52,408
Total notes payable	$	477,000	$	3,856,519	$	4,333,519

Unsecured convertible
debentures, net of discount	$	-	$	1,500,000	$	1,500,000

Total debt	$	477,000	$	5,356,519	$	5,833,519

~~The~~Maturities Company’s non-controlling equity interests are specifically related to the non-controlling interests owned by TAPG in APN. On June 30, 2011, the Company entered into a Stock Purchase Agreement with TAPG to issue 300,000 restricted shares of ~~the~~debt ~~Company’s~~at ~~common~~December ~~stock in exchange for all of TAPG’s rights~~31, ~~title~~2013 ~~and~~are ~~interest~~as in APN and the cancellation of the $17,758 in principal and interest due to TAPG (see Note 4 for further details). The book value of TAPG’s non-controlling interest on June 30, 2011 was $710,032. As a result of this acquisition, the Company increased its ownership interest in APN to 100% making it a wholly-owned subsidiary.follows:

New Accounting Standards

	Secured Debt		Revolving Credit Facilities		Other notes and debt		Unsecured convertible debentures		Total

2014		399,889		-		26,526		357,528		783,943
2015		300,863		-		25,882		104,659		431,404
2016		3,103,359		477,000		-		1,037,813		4,618,172
Total	$	3,804,111	$	477,000	$	52,408	$	1,500,000	$	5,833,519

In2013 ~~May~~Debt 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. These provisions did not have a significant effect on our consolidated financial statements.Restructuring

Our current financial condition and inability to secure additional funding or significantly improve our liquidity position resulted in management’s reevaluation of its strategic plan in August 2013. A key objective of the restructuring plan was to renegotiate terms with our existing debt holders. Below is a summary of the restructuring actions taken:

Tender Offer

In October 2013, we filed a tender offer on Form SC TO-I. The tender offer statement relates to the offer to holders of unsecured debentures to tender their 16% Senior Convertible Debentures in an issuer tender offer to exchange them for one of two options which are:

Option #1: The issuance of restricted shares of common stock for the settlement of the balance of the Eligible Debenture, which shall consist of principal plus the currently outstanding unpaid interest as of September 30, 2013, at $0.60 per share with the issuance of new warrants to purchase common stock (the “New Warrants”) at an exercise price of $0.60 per share for the first twelve (12) months following the closing date of the issuer tender offer (the “Tender Offer”) and $0.75 thereafter for the remainder of the New Warrant’s term, with such term to be an extension of the term of the Eligible Warrant by an additional three (3) years; or

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

InOption ~~September~~#2: ~~2011,~~The ~~the~~issuance ~~FASB~~of ~~issued~~amended ~~Accounting~~and ~~Standards~~restated ~~Update~~debentures (the “~~ASU~~New Debentures”) ~~No. 2011-08~~which ~~“Intangibles—Goodwill~~include ~~and~~the ~~Other”~~principal ~~intended~~balance toplus ~~simplify~~all ~~goodwill~~accrued ~~impairment~~and ~~testing.~~unpaid ~~Entities~~interest ~~will~~as beof ~~allowed~~September to30, ~~perform~~2013 aof ~~qualitative~~the ~~assessment~~Eligible onDebentures ~~goodwill~~with ~~impairment~~a toreduction ~~determine~~of ~~whether~~the itinterest israte ~~more~~from ~~likely~~sixteen ~~than~~percent ~~not~~ (~~defined~~16%) asto ~~having~~ten ~~a likelihood of more than 50~~ percent (10%), ~~that~~ the ~~fair~~extension ~~value~~ of athe ~~reporting~~maturity ~~unit~~date isfor ~~less~~an ~~than~~additional ~~its~~three ~~carrying~~(3) ~~amount~~years aspast athe ~~basis~~Eligible ~~for~~Debenture’s ~~determining~~maturity ~~whether~~date, itreduction isof ~~necessary to perform~~ the ~~two-step~~conversion ~~goodwill~~price ~~impairment~~to ~~test~~$0.75 ~~The~~per ~~amendments~~share, inand ~~this~~execution ~~ASU~~of ~~are~~a ~~effective~~subordination ~~for~~agreement ~~goodwill~~pursuant ~~impairment~~to ~~tests~~which ~~performed~~the inCompany ~~interim~~will ~~and~~make ~~annual~~no ~~periods~~further ~~for~~payments ~~fiscal~~to ~~years~~the ~~beginning~~debt ~~after~~holders ~~December 15,~~until ~~2011,~~such ~~with~~time ~~early~~as ~~adoption~~the ~~permitted.~~redemption Inof ~~addition,~~certain ~~Topic~~Series ~~350~~D ~~also~~Preferred ~~requires~~Stock an(to ~~entity~~be todesignated) has ~~perform~~been amade in full (“~~Step~~Subordination 2Agreement”) ~~for~~and ~~reporting~~the ~~units~~issuance ~~with~~of ~~zero~~New orWarrants, ~~negative~~the ~~carrying~~expiration ~~values.~~date ~~The~~of ~~Company~~which ~~has~~shall ~~evaluated~~be ~~the~~3 ~~adoption~~years ofpast ~~ASU~~the ~~2011-08~~expiration ~~and~~date ~~has~~set ~~determined~~forth ~~that~~in itthe ~~did~~Eligible ~~not~~Warrants ~~have~~and ana ~~impact~~reduction onof ~~its~~the ~~consolidated~~conversion ~~results~~price ofto ~~operations~~$0.75 orper ~~financial conditions~~share.

3The tender offer was submitted to holders of an aggregate of $2,465,784 in debentures. ~~PROPERTY~~ The ~~AND~~tender ~~EQUIPMENT~~offer expired on December 31, 2013 with an aggregate total of $965,784 of the original debentures tendered by the tender offer. As a result, an aggregate total of $965,784 in convertible debentures to eight holders was exchanged for 1,609,641 shares of the Company’s common stock. In addition, an aggregate total of $245,689 in accrued but unpaid interest was exchanged for 409,482 shares of the Company’s common stock. In addition, the Company granted an additional aggregate total of 772,625 warrants to the debenture holders that tendered. The warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the fair value of the stock warrants is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 (see Note 6 Stock Warrants for further details).

~~Property~~Since the Company is experiencing financial difficulties and ~~equipment~~the ~~consisted~~debenture holders have granted a concession, the transaction met the requirement for troubled debt accounting treatment. The Company recorded the transactions by first allocating the fair value of the ~~following~~warrants atto ~~December~~warrant ~~31,~~liability ~~2012~~(see Note 6 Stock Warrants for further details) with remaining amount being applied to common stock and ~~2011:~~accrued interest. Management then compared the allocated value of the common stock to the fair value of the common stock resulting in a gain on extinguishment of debt of $747,591 or $0.12 per common share.

	2012			2011
Furniture and equipment	$	31,323		$	28,164
Computer equipment and information systems		513,476			522,981
Leasehold improvements		118,083			147,958
		662,882			699,103
Less: accumulated depreciation and amortization		(601,469	)		(624,361	)
	$	61,413		$	74,742

Convertible Debenture Exchange

~~Depreciation~~In ~~and~~November ~~amortization~~2013, ~~expense~~Joseph ~~for~~McDevitt, ~~the~~a ~~years~~related ~~ended~~party ~~December~~investor 31and holder of $500,000 ~~2012~~convertible ~~and~~debenture ~~2011~~due ~~was~~in July 2013 exchanged $34500,~~614~~000 debenture and $27205,~~609~~245 in accrued interest for a total of 1,175,408 ~~respectively~~common shares at a conversion rate of $0.60 per share. ~~Depreciation~~As ~~and~~consideration ~~amortization~~for ~~expenses~~the ~~are~~conversion, ~~included~~the inCompany ~~selling~~issued 833,334 ~~general~~three ~~and~~year ~~administrative~~warrants ~~expenses~~to onpurchase common shares at an exercise price of $0.60 for the ~~consolidated~~first ~~statements~~twelve months following the closing date and $0.75 thereafter for the remainder of ~~operations~~the new warrant term.

4Since the Company is experiencing financial difficulties and the debenture holder has granted a concession, the transaction met the requirement for troubled debt accounting treatment. ~~NOTES~~ Management ~~PAYABLE~~compared ~~AND~~the ~~UNSECURED~~value ~~CONVERTIBLE~~of ~~DEBENTURES~~the common stock and accrued interest to the fair value of the common stock resulting in a gain on extinguishment of debt of $526,676 or $0.09 per common share.

~~The table below summarizes the Company’s notes payable and unsecured convertible debentures as of December 31~~TPG, ~~2012:~~L.L.C. Amendment

	Related Party		Unrelated		Total
Secured debt	$	-	$	304,638	$	304,638
Revolving credit facilities		447,000		-		447,000
Other notes and debt		-		242,872		242,872
Total notes payable	$	447,000	$	547,510	$	994,510
Unsecured convertible
debentures, net of discount	$	498,798	$	2,090,978	$	2,589,776
Total debt	$	945,798	$	2,638,488	$	3,584,286

In December 2013, the parties entered into a Fourth Amendment to the Share Agreement between Assured Pharmacy, Inc. (“Buyer”) and TPG, LLC (‘Seller”). The maturity date of the note was extended from July 2013 to September 1, 2015. We issued 200,000 shares of the Company’s common stock and agreed to pay the remaining outstanding balance of $60,000 together with accrued interest at the rate of prime plus 2% per annum commencing from December 19, 2013.

Since the Company is experiencing financial difficulties and the debt holder has granted a concession, the transaction met the requirement for troubled debt accounting treatment. Management compared the value of the common stock and accrued interest to the fair value of the common stock resulting in a gain on extinguishment of debt of $274,648 or $0.04 per common share.

In total, the Company issued an aggregate total of 3,394,531 common shares in exchange for a total aggregate amount of debt and accrued interest of $2,219,366 as a result of the 2013 Debt Restructuring. In addition, management negotiated repayment extensions of an aggregate of $4,535,519 in principal outstanding during the year ended December 31, 2013. Subsequent to the reporting period, management also negotiated a repayment extension of an additional $1,000,000 in convertible debentures and exchanged 420,694 shares of common stock for payment of accrued interest of $252,417 on these debentures (See Note 14 HCI Debenture Extension for further details).

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	Secured Debt		Revolving Credit Facilities		Other notes and debt		Unsecured convertible debentures			Total
2013		304,638		-		242,872		2,435,195			2,982,705
2014		-		447,000		-		530,588			977,588
Total		304,638		447,000		242,872		2,965,783			3,960,293
Less debt discount		-		-		-		(376,007	)		(376,007	)
Carrying value of debt	$	304,638	$	447,000	$	242,872	$	2,589,776		$	3,584,286

Unsecured Convertible Debentures

~~Unsecured~~The ~~Debt~~Company completed various sales through private placements of senior convertible debentures to accredited investors. The debentures were convertible into shares of the Company’s common stock at an initial conversion price of $1.26 per share on an as converted basis, subject to adjustment. A consent and waiver was obtained from the majority of the Series A and C Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders as required in the certificate of designation. From September 2012 through February 2013, all of the investors in 2011 private placements consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for a total of 2,072,654 common shares on an as converted basis, subject to adjustment for stock dividends, stock splits and related distributions

~~2010~~As ~~Issuances~~part of the private placements, the investors received warrants to purchase shares of the Company’s common stock. The warrants were initially exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment (see Note 6 Stock Warrants for further details). The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the fair value of the stock warrants is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 and 2012.

In As ~~April 2010, we entered into a secured loan agreement with an accredited investor in a private placement. Under the terms~~ of ~~this~~December ~~agreement~~31, ~~the Company received a loan of $250~~2013,~~000~~ atwe anhave ~~interest rate of 12% per annum, with interest payable in advance with~~ the ~~principal~~following ~~due~~unsecured ~~in April 2011 at maturity. In June 2011, the outstanding principal loan balance of $250,000 was converted into a 16.0% senior~~ convertible debenture through a private placement for an aggregate principal amount of $250,000, which matured in June 2012. A consent and waiver was obtained from the majority of the Series A Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders, as required in the certificate of designation. The debentures ~~are~~outstanding ~~convertible into shares of the Company’s common stock at an initial conversion price of $1.26 per share for a total of 198,413 common shares on an as converted basis, subject~~ to ~~adjustment for stock dividends, stock splits and related distributions. In June 2012,~~ the agreement was amended and the maturity date of the debenture was extended to June 22, 2013. In September 2012, the investor consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for a total of 277,778 common shares on an as converted basis, subject to adjustment for stock dividends, stock splits and related distributions (see Note 12 for further details).following:

As part of the private placement, the investor received a warrant to purchase 238,095 shares of the Company’s common stock. The warrant is exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment for stock dividends, stock splits and related distributions. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject to certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the fair value of the stock warrants is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012 and 2011. As part of the June 2012 amendment, the exercise period of the warrants was extended from three years to five years.

	$		Maturity Date		Interest Rate		# of Warrants

HCI		1,000,000		June 30, 2016		16.0%		1,600,007
AQR		200,000		December 1, 2012		20.0%		576,002
CNH		100,000		December 1, 2012		20.0%		288,003
Coventry		200,000		April 1, 2016		16.0%		575,999
Total	$	1,500,000						3,040,011

The Company separately valued the embedded beneficial conversion feature present in convertible securities as the difference, as of the commitment date, between the effective conversion price of the convertible security and the fair value of the common stock underlying the convertible security. The embedded beneficial conversion feature was valued at $50,448 separately, and was recognized by allocating to additional paid-in capital and discount on debt.HCI

The ~~total~~Company ~~gross~~issued ~~discount~~an onaggregate ~~the~~total ~~debenture~~of ~~issuance was~~ $~~152~~1,~~483~~000,000 ~~which~~in ~~will~~senior beconvertible ~~amortized~~debentures onto aHillair ~~straight~~Capital ~~line~~Investment, ~~basis~~Inc. ~~over~~(“HCI”) during the ~~twelve~~years ~~(12)~~ended ~~month~~December ~~term~~31, 2012 and 2011. As of December 31, 2013, the ~~loan.~~debentures ~~The~~and ~~effective~~related interest ~~rate~~were onpast ~~the~~due. The ~~debenture~~Company ~~was~~and ~~calculated~~HCI assubsequently ~~79.6%.~~agreed ~~There~~to ~~are~~a nomodification ~~financial~~and ~~covenants~~extension ~~that~~of the ~~Company~~maturity isdate ~~required~~ to ~~maintain~~June 30, 2016 with HCI as described in further detail in Note 14 HCI Debenture Extension.

AQR & CNH

In August 2011, the Company issued an aggregate total of $300,000 in senior convertible debentures to AQR Opportunistic Premium Offshore Fund, LP. (“AQR”) and CNH Diversified Opportunities Master Account, LP. Due to our current financial condition, we did not make the periodic redemption payments of $75,000 due on June 1, 2012 and September 1, 2012 and the final payment due of $150,000 on or before December 1, 2012 to two convertible debenture holders that did not extend. Upon default, amounts owed become immediately payable to the debenture holder upon issuance of a notice of default. The debenture holders have issued a notice of default relating to our failure to make the periodic redemption payments on June 1, 2012 or September 1, 2012 or the final payment of $250,000 due on December 1, 2012 under the debenture agreement. in August 2013, the two holders filed a lawsuit against the Company for payment of past due amounts (See Note 8 Legal Matters for furter details). In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the convertible debenture. No waivers were obtained from the two debenture holders that were holding an aggregate total of $300,000 debentures. The anti-dilution adjustment reduced the conversion price from $0.90 to $0.50 per share. Management is pursuing the renegotiation of the terms of the debentures, but no assurances can be provided at this time. The amounts due on the debentures are classified as current at December 31, 2013 and 2012.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In July 2010, we completed a sale in a private placement to an accredited, related party investor affiliated with Mosaic Private Equity Fund (U.S.), L.P. (“MPE”), Mosaic Financial Services, LLC (“MFS”) and Mosaic Private Equity (III), Ltd., (“MPE III”), (collectively “Mosaic”), a related party (see Note 7 for further details), for a 10.0% convertible debenture for an aggregate principal amount of $500,000 (before deducting expenses and fees related to the private placement) due in July 2012. A consent and waiver was obtained from the majority of the Series A and C Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders, as required in the certificate of designation. The debentures are convertible into shares of the Company’s Series A Preferred at an initial conversion price of $1,000 per share and subject to adjustments, and each share of Series A Preferred is convertible into 695 shares of the Company’s common stock for a total of 347,500 common shares on an as converted basis. Interest on the note is payable quarterly and is calculated based on the higher of the average stock price for the five (5) prior trading days or $1.80 per common share. In July 2012, the Company entered into an Amendment to the debenture agreement, in which the term of the loan was modified and extended for a period of one year by mutual consent. As consideration for the extension, the interest rate for the debenture was increased from 10.0% to 16.0%. In September 2012, the holders of a majority of the Series A and C Preferred stock consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for a total of 555,556 common shares on an as converted basis, subject to adjustment for stock dividends, stock splits and related distributions (see Note 12 for further details).Coventry

~~The~~On ~~Company~~December ~~separately~~6, ~~valued~~2013, the ~~embedded~~Company ~~beneficial~~settled ~~conversion~~a ~~feature~~lawsuit ~~present~~with inCoventry ~~convertible~~Enterprises, ~~securities~~LLC, as(“Coventry”) ~~the~~a ~~difference,~~holder as of ~~the~~$200,000 ~~commitment~~in ~~date,~~convertible ~~between~~debentures ~~the~~issued ~~effective~~in ~~conversion~~2011. The ~~price~~terms of the ~~convertible~~settlement ~~security~~were ~~and~~before ~~the~~any ~~fair~~application ~~value~~ of ~~the~~any ~~common~~payments, ~~stock~~we ~~underlying~~owe ~~the~~Coventry ~~convertible~~$280,679, ~~security.~~which ~~The~~includes ~~embedded~~unpaid ~~beneficial~~principal ~~conversion~~of ~~feature~~$200,000, ~~was~~unpaid ~~valued~~interest atof $9353,~~750~~679 ~~separately,~~ and ~~was~~unreimbursed ~~recognized~~attorney’s byfees ~~allocating~~and tocosts ~~additional~~of ~~paid-in~~$27,000. The ~~capital~~Company ~~and~~shall ~~discount~~pay onCoventry ~~debt.~~$280,679, ~~There~~plus ~~are~~interest noat ~~financial~~the ~~covenants~~rate ~~that~~of ~~the~~16.0% ~~Company~~per isannum ~~required~~on tothe ~~maintain.~~following schedule:

~~In December 2010, the Company completed~~ a sale in a private placement to an accredited investor for a 12.5% senior convertible debenture for an aggregate principal amount of $300,000 (before deducting expenses and fees related to the private placement) ~~with periodic redemptions of~~ $~~150~~50,000 ~~due~~payable inon ~~December 2011 and March 2012, plus any unpaid interest. The Company has the option to pay all~~ or ~~part~~before ~~of the~~ December ~~2011 periodic redemptions with shares of the Company’s common stock~~6, ~~subject~~2013; ~~to certain Equity Conditions, as defined in the loan agreement. These Equity Conditions include, among others, the Company’s compliance with honoring all conversions~~ and redemptions, payment of all liquidated damages of the debenture, an effective registration to allow for resale of the common shares and the ability to resell such common pursuant to Rule 144. A consent and waiver was obtained from the majority of the Series A Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders as required in the certificate of designation. The debentures are convertible into shares of the Company’s common stock at an initial conversion price of $1.44 per share for a total of 208,334 common shares on an as converted basis, subject to adjustment.

Asb) ~~part of the private placement~~$10,000 ~~the~~payable ~~investor~~on ~~received~~or abefore ~~warrant to purchase 250,000 shares of~~ the ~~Company’s~~first ~~common~~day ~~stock. The warrant is exercisable for a period~~ of ~~three~~each ~~years~~month ~~from~~starting ~~the~~January ~~date of issuance at an initial exercise price of $~~1~~.73~~, ~~subject~~2014 toand ~~adjustment. The~~continuing ~~investor~~thereafter ~~may~~until ~~exercise~~ the ~~warrant~~obligation on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is ~~less than the exercise price per share~~paid. ~~Accordingly, the stock warrants were classified as a warrant liability.~~

~~The~~Based ~~Company~~on ~~separately~~the ~~valued~~payment ~~the~~terms ~~embedded~~above, ~~beneficial~~the ~~conversion~~obligation ~~feature~~will ~~present~~be paid in ~~convertible~~full ~~securities~~on asApri1 ~~the~~1, ~~difference~~2016. In November 2013, asthe issuance of ~~the~~Series ~~commitment~~D ~~date,~~preferred ~~between~~stock ~~the~~with ~~amount~~an ~~allocated~~effective toconversion ~~the~~price ~~convertible~~of ~~debenture~~$0.50 ~~and~~per ~~the~~share ~~fair~~qualified ~~value~~as ofa ~~the~~dilutive ~~common~~issuance ~~stock~~per ~~underlying~~the terms of the convertible ~~security~~debenture. No ~~The~~waivers ~~embedded~~were ~~beneficial~~obtained ~~conversion~~from ~~feature~~Coventry ~~was~~debenture ~~valued~~holders atthat were holding an aggregate total of $52200,~~014~~000 ~~separately,~~debentures. The ~~and~~anti-dilution ~~was~~adjustment ~~recognized~~reduced bythe ~~allocating~~conversion price toon ~~additional~~the ~~paid-in~~debenture ~~capital~~from ~~and~~$0.90 ~~discount~~to on$0.50 ~~debt~~per share.

~~The~~ Interest ~~total~~expense ~~gross~~related ~~discount~~to onthe unsecured convertible debentures for the ~~debenture~~years ~~issuance~~ended December 31, 2013 and 2012 was $~~190~~929,~~277~~908 and $1,306,791, ~~which~~respectively. Interest ~~will~~expense befor ~~amortized~~the onyears aended ~~straight~~December ~~line~~31, ~~basis~~2013 ~~over~~and 2012 included $560,522 and $500,781 at the ~~fifteen~~stated ~~(15)~~rate, ~~month~~$333,255 ~~term~~and $684,627 in amortization of ~~the~~debt ~~loan~~discount and $36,131 and $121,963 in amortization of deferred financing cost, respectively. The effective interest rate on ~~the~~convertible ~~loan~~debentures was calculated as 6832.40%. ~~There~~and ~~are~~46.2% nofor ~~financial~~the ~~covenants~~years ~~that~~ending ~~the~~December ~~Company~~31, is2013 ~~required~~and to2012, ~~maintain~~respectively.

As of December 31, 2013, the outstanding balance on unsecured convertible debentures is $1,500,000 with $357,528 classified as current. The outstanding debentures are convertible into an aggregate total of 2,333,333 common shares.

Secured Debt

In February 2013, the Company entered into a secured loan agreement with our primary wholesaler. Under the terms of this agreement, the Company received a one (1) year loan of $3,828,527 with an interest rate of 6.25% per annum, with interest payable monthly. Monthly payment requirements are $27,000 per month for four consecutive months, followed by four consecutive monthly payments of $37,000, followed by three consecutive monthly payments of $42,000, with remaining principal and interest due February 1, 2014. The proceeds from the note were simultaneously exchanged for $3,534,793 in outstanding vendor invoices and $293,734 in a secured note payable with the same primary wholesaler. The note is secured by all of the assets of the Company and its subsidiaries through UCC-1 filings. As part of the agreement, the Company is required to purchase a minimum of $500,000 in monthly purchases each month. The secured loan was subsequently extended with monthly payment requirements of $42,000, with remaining principal and interest due February 1, 2016.

As of December 31, 2013, the outstanding principal balance on the note was $3,804,111. Due to our current financial condition, we have not made principal and interest payments in the amount of $228,940 as required by the agreement. In March 2014, we entered into a Forbearance Agreement with H.D. Smith Wholesale Drug Co. in which the lender agreed to forbear from accelerating the outstanding balance of the Note and form instituting collection efforts from the date of the agreement through July 1, 2014 provided certain conditions are met (See Note 14 H.D. Smith Forbearance for further details). Interest expense for the year ended December 31, 2013 on these notes were $219,050.

Revolving Credit Facilities

Brockington Securities, Inc. - Revolver

In March 2009, the Company entered into a Revolving Line of Credit Agreement with Brockington Securities Inc., a related party, for a credit limit of $300,000 with a term of one year bearing interest of 12.0% per annum. Under the terms of the agreement, the Company could request for advance from time to time, provided, however, any requested advance will not, when added to the outstanding principal advanced of all previous advances, exceed the credit limit. The Company could repay accrued interest and principal at any time, however no partial repayment would relieve the Company of the obligation of the entire unpaid principal together with any accrued interest and other unpaid charges. There are no financial covenants that the Company is required to maintain.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~2011~~The ~~Issuances~~agreement has been subsequently extended. In November 2012, the Modification Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the credit limit was modified and increased from $300,000 to $500,000. The latest extension occurred in December 23, 2013, pursuant to a Modification and Extension Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the term of the loan was modified and the maturity date of the loan was extended to June 30, 2016 by mutual consent. All additional terms of the loan remain unchanged and the Company was not in violation of any provisions of the loan agreement.

In As ~~May~~of ~~2011, the existing $300,000 convertible debenture and related warrants were cancelled and exchanged for a 16.0% senior convertible debenture due~~ December ~~1, 2012 in a private placement. Interest expense for the year ended December~~ 31, ~~2011 was $57~~2013,~~441~~ ~~which~~the isoutstanding ~~comprised~~balance ofon ~~$9,247 in cash interest at~~ the ~~stated~~revolver ~~rate,~~was $37477,~~555~~000 inwith ~~amortization~~remaining ofavailability ~~discount and $10,639 in amortization~~ of ~~debt issuance cost. As a result of the transaction, the Company recognized a loss on extinguishment of debt of~~ $1623,~~923~~000.

~~During~~Third ~~the~~Coast ~~year~~Bank ~~ended~~– December 31, 2011, the Company completed sales through private placements to accredited investors of 16.0% senior convertible debentures for an aggregate principal amount of $1,865,384 (before deducting expenses and fees related to the private placements). The proceeds from the private placements included the cancellation of a $300,000 convertible debenture and related warrants resulting in cash gross proceeds of an aggregate of $1,565,384 from these private placements. The Company incurred an aggregate total of $222,543 in cash fees and expenses related to the private placements resulting in cash net proceeds of an aggregate of $1,342,841 from the private placements. The debentures are convertible into shares of the Company’s common stock at an initial conversion price of $1.26 per share for an aggregate total of 1,480,469 common shares on an as converted basis, subject to adjustment. A consent and waiver was obtained from the majority of the Series A and C Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders as required in the certificate of designation. From September 2012 through February 2013, all of the investors in 2011 private placements consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for a total of 2,072,654 common shares on an as converted basis, subject to adjustment for stock dividends, stock splits and related distributions (see Note 12 for further details).Revolver

~~The~~In ~~debenture maturity dates range from~~ December ~~2012 to May~~ 2013, ~~with~~the ~~two~~Company ~~periodic~~entered ~~redemptions~~into ofa ~~twenty-five~~revolving ~~percent~~Promissory ~~(25%)~~Note ofwith ~~the~~Third ~~original~~Coast ~~principal~~Bank ~~amount~~SSB, ~~plus~~for ~~any unpaid interest and~~ a ~~final~~credit ~~redemption~~limit of ~~fifty~~$30,000 ~~percent~~with ~~(50%)~~a term of ~~the~~one ~~original~~year ~~principal~~bearing ~~amount~~a ~~plus~~variable ~~any~~interest ~~unpaid~~rate ~~interest~~of ~~due~~prime atplus ~~maturity~~.500 ~~The~~percentage ~~Company~~points ~~has~~with ~~the~~an ~~option~~interest torate ~~pay~~floor ~~all or part~~ of ~~the initial twenty-five percent (25~~5.00%) ~~redemption~~per ~~amount~~annum. The ~~due~~Promissory ~~with~~Note ~~shares~~was ofguaranteed ~~the~~by ~~Company’s~~Pinewood ~~common stock~~Trading, ~~subject to certain Equity Conditions~~Fund, ~~as defined in the loan agreement~~LP. ~~These Equity Conditions include~~, ~~among~~a ~~others,~~related the Company’s compliance with honoring all conversions and redemptions, payment of all liquidated damages of the debenture, an effective registration to allow for resale of the common shares and the ability to resell such common pursuant to Rule 144party.

InAs ~~June and July 2012, six debenture holders entered into amendment agreements to extend the periodic redemption dates and maturity dates for an aggregate~~ of ~~$665,384~~December in debentures by one year. The Company evaluated the modifications by computing the discounted cash flows of the existing loan and comparing them to the discounted cash flows of the changed loan. If the difference in the present value between the existing loan and the changed loan was 10% or greater31, ~~then the loan is substantially different which requires extinguishment accounting treatment. As a result of the modification of the debenture terms~~2013, the Company ~~recognized~~had anot ~~loss~~drawn on ~~extinguishment of debt of $75,585 related to~~ the ~~June and July 2012 amendments~~facility.

~~In September 2012, a holder of three debentures entered into an amendment agreement to extend the periodic redemption dates and maturity dates of an aggregate total of $700,000 in debentures~~5. REDEEMABLE ~~The~~CONVERTIBLE ~~extended~~PREFERRED periodic redemptions of $175,000 are due in June 2013 and September 2013 with $350,000 plus any accrued interest is due at maturity on December 1, 2013. As a result of the modification of the debenture terms, the Company recognized a loss on extinguishment of debt of $14,620.STOCK

~~Due~~On toSeptember ~~our current financial condition, we did not make the periodic redemption payments of $125,000 due on June~~ 1, ~~2012 and September 1~~2013, ~~2012~~the ~~and~~Company ~~the~~entered ~~final~~into ~~payment~~a ~~due~~Stock ofPurchase ~~$250,000~~Agreement on(“SPA”) orwith ~~before~~Pinewood ~~December~~Trading 1Fund, ~~2012 to three convertible debenture holders that did not extend. Upon default~~LP, ~~amounts~~(“initial ~~owed~~investor”) ~~become~~an ~~immediately payable~~existing toshareholder ~~the~~(related ~~debenture~~party) ~~holder upon issuance of a notice of default. None of the debenture holders have issued a notice of default relating~~ to ~~our~~purchase ~~failure~~up to ~~make the periodic redemption payments on June 1~~3,000 ~~2012~~shares orof ~~September~~Series 1,D ~~2012~~Convertible orPreferred ~~the~~Stock ~~final~~at ~~payment of~~ $~~250~~1,000 ~~due~~per ~~on December 1, 2012 under the debenture agreement~~share. ~~Amounts are listed as current at December 31, 2012.~~

In November 2013, the Company designated 15,000 shares to Series D Preferred Stock. The Series D Preferred rank senior to the Series A Preferred, Series C and Series B Preferred which ranks senior to the Company’s common stock with respect to the payment of any dividends and amounts upon liquidation or dissolution.

The initial investor must approve certain corporate actions of the Company, regardless of the total Common Stock votes for or against such actions. Such actions include, but are not limited to: any increase or decrease in the authorized number of shares of Common Stock or Preferred Stock; the delisting of any of the Company’s securities from the OTCQB or any national securities exchange; any redemption or repurchase with respect to the Common Stock or Preferred Stock; any liquidation, dissolution or winding-up of the business and affairs of the Company; any material modification or deviation from the Company’s annual business plan and operating budget; any payment or declaration of a dividend or other distribution on any shares of Common Stock or Preferred Stock made by the Board of Directors; and any change in the principal business of the Company. In addition to the foregoing, holders of the Series D Preferred Stock have the right to elect one director of the Company so long as at least 35% of the Series D Preferred Stock are issued and outstanding. Each share of Series D Preferred Stock is convertible into 2,000 shares of the Company’s common stock.

In addition, Pinewood may, but is not obligated to, nominate one (1) Director to add to the Company’s existing Board currently comprised of four (4) people (for a total of five (5) directors). The Company is further restricted, precluded, and prohibited from increasing the number of directors beyond 4 (or 5 should Pinewood elect to nominate a director) without the consent of Pinewood. This gives Pinewood the ability without restriction or notice to install a board member at any time, subject to applicable law, at the Pinewoods’ sole discretion.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~The~~Preferred ~~table~~Stock ~~below~~Private ~~summarizes the debenture obligations related to the 2011 private placements as of December 31, 2012:~~Placements

Debenture Maturity Date	Periodic Redemption Dates		Principal Amount		Periodic Redemption Amounts		Due at Maturity
December 2012	June 2012	September 2012	$	500,000	$	125,000	$	250,000
December 2013	June 2013	September 2013		700,000		175,000		350,000
January 2014	July 2013	October 2013		25,000		6,250		12,500
May 2014	November 2013	February 2014		640,384		160,096		320,192
			$	1,865,384	$	466,346	$	932,692

In November 2013, the Company issued 800 shares of Series D Preferred Stock to Pinewood Trading Fund, LP., a related party, for $1,000 per share for an aggregate purchase price of $800,000. For each share of Series D Preferred Stock purchased, two five-year warrants were issued as follows: (i) a Series A Warrant to purchase 2,000 shares of the Company’s common stock, par value $0.001 per share (“Common Stock”) and (ii) a Series B Warrant to purchase 2,000 shares of Common Stock.

AsIn ~~part~~December of2013, the ~~2011~~Company ~~private~~issued ~~placements,~~200 ~~the~~shares ~~investors~~of ~~received~~Series ~~warrants~~D toPreferred ~~purchase~~Stock anto ~~aggregate~~Pinewood ofTrading 1Fund,~~776,561~~ ~~shares of the Company’s common stock~~LP. ~~The~~, ~~warrants~~a ~~are~~related ~~exercisable~~party for a$1,000 ~~period~~per ofshare ~~three~~for ~~years from the date of issuance at~~ an ~~initial~~aggregate ~~exercise~~purchase price of $~~1.512~~200, ~~subject to adjustment~~000. ~~The~~ ~~investor~~For ~~may~~each ~~exercise~~share ~~the warrant on a cashless basis if the shares~~ of ~~common~~Series ~~stock~~D ~~underlying~~Preferred ~~the~~Stock ~~warrant~~purchased, ~~are~~two ~~not~~five-year ~~then registered pursuant to an effective registration statement. The outstanding~~ warrants ~~are~~were ~~subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are~~ issued atas anfollows: ~~effective~~(i) ~~price~~a ~~per~~Series ~~share~~A ~~that~~Warrant isto ~~less~~purchase ~~than the exercise price per share. Accordingly~~2,000 ~~the~~shares ~~fair value~~ of the ~~stock~~Company’s ~~warrants~~common ~~is classified as a warrant liability on the accompanying consolidated balance sheets as of December 31~~stock, ~~2012~~par ~~and~~value ~~2011~~$0. As001 ~~part~~per ofshare ~~the~~(“Common ~~June,~~Stock”) ~~July,~~ and ~~September~~(ii) ~~amendments,~~a ~~the~~Series ~~exercise~~B ~~period~~Warrant ~~of warrants~~ to purchase ~~an aggregate of 1~~2,~~300,368~~000 shares of ~~the~~Common ~~Company’s common stock was increased from three years to five years~~Stock.

~~The~~In ~~Company~~December ~~recorded~~2013, the ~~transactions~~Company byissued ~~first~~20 ~~allocating~~shares ~~the fair value~~ of ~~the~~Series ~~warrants~~D ofPreferred ~~$537,154~~Stock to ~~warrant~~Craig ~~liability~~Eagle, ~~and~~a ~~discount~~director onof ~~debt~~the ~~(see~~Company, ~~Note~~for 5$1,000 ~~Stock~~per ~~Warrants~~share for ~~further~~an ~~details).~~aggregate ~~The~~purchase ~~Company~~price ~~then~~of ~~separately~~$20,000. ~~valued~~For ~~the~~each ~~embedded~~share ~~beneficial~~of ~~conversion~~Series ~~feature~~D ~~present~~Preferred inStock ~~convertible~~purchased, ~~securities~~two asfive-year ~~the~~warrants ~~difference,~~were issued as offollows: ~~the~~(i) ~~commitment~~a ~~date,~~Series ~~between~~A ~~the~~Warrant ~~amount allocated~~ to ~~the~~purchase ~~convertible~~2,000 ~~debenture~~shares ~~and the fair value~~ of the Company’s common stock, ~~underlying~~par ~~the~~value ~~convertible security~~$0.001 ~~The~~per ~~embedded~~share ~~beneficial~~(“Common ~~conversion~~Stock”) ~~feature was valued at $287,429 separately,~~ and ~~was~~(ii) ~~recognized~~a bySeries ~~allocating~~B Warrant to ~~additional~~purchase ~~paid-in~~2,000 ~~capital~~shares ~~and~~of ~~discount~~Common ~~on debt~~Stock.

~~The~~In ~~total~~December ~~gross~~2013, ~~discount~~the onCompany ~~the~~issued ~~debenture~~50 ~~issuance~~shares ~~was~~of Series D Preferred Stock to an existing investor for $~~824~~1,~~584,~~000 ~~which~~per ~~will~~share befor ~~amortized~~an onaggregate apurchase ~~straight~~price ~~line~~of ~~basis~~$500,000. ~~over~~For ~~the~~each ~~respective~~share ~~term~~ of ~~the~~Series ~~debentures. The~~D ~~weighted~~Preferred ~~average~~Stock ~~effective~~purchased, ~~interest~~two ~~rate~~five-year ~~was~~warrants ~~calculated~~were issued as ~~55.0%.~~follows: ~~There~~(i) ~~are~~a noSeries ~~financial~~A ~~covenants~~Warrant ~~that~~to purchase 2,000 shares of the Company’s iscommon ~~required~~stock, par value $0.001 per share (“Common Stock”) and (ii) a Series B Warrant to ~~maintain~~purchase 2,000 shares of Common Stock.

As apart ~~result~~ of the ~~June,~~private ~~July and September modifications~~placements, the ~~Company~~investors ~~recorded~~received ~~the~~warrant ~~transactions~~to bypurchase ~~first~~an ~~allocating~~aggregate ~~the~~of ~~fair~~4,280,000 ~~value~~shares of the ~~warrants~~Company’s ofcommon ~~$396,186~~stock. The towarrants ~~warrant~~are ~~liability~~exercisable ~~and~~for ~~discount~~a onperiod ~~debt~~of ~~(see~~five ~~Note~~years 5from ~~Stock~~the ~~Warrants~~date ~~for~~of ~~further~~issuance ~~details).~~at ~~The~~an ~~Company~~initial ~~then~~exercise ~~separately~~price ~~determined~~of if$0.50, ansubject ~~embedded~~to ~~beneficial~~adjustment. The ~~conversion~~investor ~~feature~~may ~~was~~exercise ~~present~~the bywarrant ~~comparing~~on ~~the~~a ~~difference,~~cashless asbasis ofif the ~~commitment~~shares ~~date,~~of ~~between~~common stock underlying the ~~amount~~warrant ~~allocated~~are tonot ~~the~~then ~~convertible~~registered ~~debenture~~pursuant ~~and~~to ~~the~~an ~~fair~~effective ~~value~~registration ofstatement. The ~~the~~outstanding ~~common~~warrants ~~stock~~are ~~underlying~~subject ~~the~~certain ~~convertible~~anti-dilution ~~security~~protection clauses which ~~did~~provide ~~not~~exercise ~~result~~price adjustments in athe ~~beneficial~~event ~~conversion~~that ~~feature. The~~any ~~gross~~common ~~discount~~stock onor ~~the~~common ~~debentures~~stock ofequivalents ~~$396,186~~are ~~will~~issued beat ~~amortized~~an ~~over~~effective ~~the~~price ~~respective~~per ~~term~~share ofthat is less than the ~~debentures. The~~exercise ~~new~~price ~~weighted~~per ~~average~~share. Accordingly, ~~effective~~the ~~interest~~stock ~~rate~~warrants ~~was~~are ~~calculated~~classified as ~~47.3%.~~a ~~There~~warrant ~~are~~liability noon ~~financial~~the ~~covenants~~accompanying ~~that~~consolidated ~~the~~balance ~~Company~~sheet isas ~~required~~of toDecember ~~maintain~~31, 2013.

The Securities Purchase Agreement (“SPA”) contains a Milestone Adjustment provision. The Company believed that it could achieve this goal by March 1, 2014. If by March 1, 2014, the Company’s income, on a Special Adjustment Basis ("SAB") for the period beginning on January 1, 2014 and ending on February 28, 2014 (the “Measurement Period”) is not positive, on a SAB, then the Company will immediately issue (after the cash-flow on SAB calculation is final) to Investors, pro rata based on their ownership of Series D Preferred Stock, an aggregate additional (i) 2,400 shares of Series D Preferred Stock and (ii) for each share of Series D Preferred Stock issued above, one Series A Warrant and one Series B Warrant; and the exercise price of all warrants then held by the Investors (including the Warrants and any previously issued warrants of the Company then held by Investors) shall be reduced to $0.40 (forty cents), which number shall be subject to adjustment for issuances or circumstances following the Closing Date that would otherwise result in an adjustment to the exercise price of any such warrant In addition, if the milestone adjustment is required, the Initial Investor shall be entitled thereafter to elect a majority of the Board of Directors, to be accomplished in any manner that the Initial Investor deems most expedient and in compliance with applicable laws and the Company’s charter documents. The SAB shall be based on the trailing two month net income of the Company, excluding stock based compensation and non-cash other (non-operating) expenses. The milestone adjustment feature is not free standing from the Series D preferred stock and will not be separately classified from the preferred security. The fair value of the milestone adjustment will be recorded if the milestone adjustment is required.

The SPA also contains a Mandatory Redemption provision. If, as of January 1, 2016, (1) the Common Stock shall have traded on the 20 trading days prior to January 1, 2016 at an average closing price of less than $1.00; or (2) the Common Stock shall have had during the 30 trading days prior to January 1, 2016 an average daily trading volume of less than 70,000 shares, then the Company shall immediately, to the extent it may lawfully do so, redeem all outstanding shares of Series D Preferred Stock at a purchase price of $2,000 per share, plus a cumulative preference of 8% per annum compounded annually. Such redemption shall have preference over redemption of any other class of shares.

If the mandatory redemption does not occur within 10 business days, then payments to the Convertible Debt holders shall be subordinated, pursuant to that certain Subordination Agreement executed by the Convertible Debt holders, until the shares of Series D Preferred Stock are redeemed. If the mandatory redemption does not occur within 60 business days, the Initial Investor shall have the right to elect a majority of the Company’s Board of Directors, and may seek a sale of the Company, subject to the determination of the Board of Directors.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~2012~~Failure ~~Issuances~~to immediately redeem the Series D preferred shares will, at the Initial Investor’s election, result in the Company immediately issuing to the Initial Investor an additional (i) 2,400 shares of Series D preferred stock and (ii) for each share of Series D Preferred Stock issued above, one Series A Warrant and one Series B Warrant, and the exercise price of all warrants then held by the Initial Investor (including the Warrants and any previously issued warrants of the Company then held by Investor) shall be reduced to $0.10(ten cents) (which number shall be subject to adjustment for issuances of circumstances following the Closing that would otherwise result in an adjustment to the exercise price of any such warrant).

The mandatory redemption feature is not freestanding from the Series D preferred stock and will not be separately classified from the preferred security. Since the mandatory redemption is conditioned upon the Company’s stock price and volume which are note solely within the control of the issuer and the priced and date are fixed, the Series D Preferred are classified as temporary equity on the consolidated balance sheets as of December 31, 2013. Management analyzed the terms of the mandatory redemption feature and evaluated whether it was probable that the instruments will become redeemable and concluded that it was probable that the instruments will become redeemable. Management elected to recognized changes in the redemption value immediately as they occur and adjusted the redemption value as if it were also the redemption date for the instrument. As a result, management increased the carrying value of the preferred instrument by $2,192,588 for the redemption feature on preferred stock in the year ended December 31, 2013. The redemption feature on preferred stock is a deemed dividend distribution for accounting purposes.

InThe ~~January~~Series ~~2012,~~D ~~the~~Preferred ~~Company~~stock ~~completed~~includes a ~~sale~~conversion feature in awhich ~~private~~each ~~placement~~share toof anSeries ~~accredited~~D ~~investor~~Preferred ~~for~~Stock ais ~~16.0%~~initially ~~senior~~ convertible ~~debenture~~into ~~due May 30~~2,000 2012 for an aggregate principal amount of $50,400 (before deducting expenses and fees related to the private placement) with periodic redemptions of $12,600 due in November 2012 and February 2013, plus any unpaid interest. The Company has the option to pay all or part of the November 2012 periodic redemptions with shares of the Company’s common stock~~, subject to certain Equity Conditions, as defined in the loan agreement~~. ~~These~~ ~~Equity~~Management ~~Conditions~~analyzed ~~include, among others,~~ the ~~Company’s~~terms ~~compliance with honoring all conversions and redemptions, payment~~ of ~~all liquidated damages of~~ the ~~debenture,~~conversion anoption ~~effective~~and ~~registration~~concluded tothat ~~allow for resale of~~ the ~~common~~conversion ~~shares~~feature ~~and~~was ~~the~~derivative ~~ability~~since toit ~~resell~~met ~~such common pursuant to Rule 144. A consent and waiver was obtained from~~ the ~~majority~~definition of ~~the~~a ~~Series~~derivative ~~A Preferred holders~~ and adid ~~waiver~~qualify ~~was~~for ~~obtained~~any ~~from a majority~~ of the ~~Series B Preferred holders as required in the certificate of designation~~exceptions. The ~~debentures are convertible into shares of the Company’s common stock at an~~ initial ~~conversion~~aggregate ~~price~~fair ofvalue ~~$1.26 per share for a total~~ of ~~40,000 common shares on an as converted basis, subject to adjustment. In June 2012,~~ the ~~Company~~derivatives ~~entered into an amendment of the convertible debenture agreement, in which the term of the loan~~ was ~~modified~~determined ~~and extended by one year. In September 2012, the investor consented~~ to abe ~~partial anti-dilution adjustment in conversion price per share to~~ $~~0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013~~238,171 ~~the~~which ~~minimum offering~~ was ~~achieved~~recorded ~~resulting~~as ~~in an adjusted conversion price of $0.90 per share for~~ a ~~total~~derivative ofliability ~~56,000~~on ~~common~~the ~~shares~~Consolidated onBalance anSheet as ~~converted~~of ~~basis,~~December ~~subject to adjustment for stock dividends~~31, ~~stock~~2013 ~~splits~~(See ~~and~~Derivative ~~related~~Liability ~~distributions (see~~ Note 122 for further details).

AsThe ~~part of the private placement, the investor received a warrant to purchase 48,000 shares of the~~ Company’s ~~common~~allocated ~~stock. The warrant is exercisable for a period of three years from~~ the ~~date~~proceeds of ~~issuance~~these atpreferred ~~an initial exercise price of $1.512~~issuances, ~~subject~~by tofirst ~~adjustment. The~~allocating ~~investor may exercise~~ the ~~warrant~~proceeds ~~on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant~~ to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability onand ~~the~~derivative ~~accompanying~~liability ~~consolidated~~based ~~balance~~on ~~sheet~~fair asvalue ofand ~~December~~then ~~31,~~allocated ~~2012. As part of~~ the ~~June~~remaining ~~2012~~residual ~~amendment~~proceeds, ~~the~~net ~~Company~~of ~~extended~~closing ~~the~~costs ~~exercise~~to ~~term of~~ the ~~warrants~~preferred tostock ~~five years~~security.

~~The~~As ~~gross~~of ~~discount~~December on31, ~~the debenture issuance was $6~~2013,~~741,~~ ~~which~~an isaggregate ~~amortized~~total ~~on a straight line basis over the seventeen (17) month term~~ of ~~the~~1,070 ~~loan.~~Series ~~The~~D ~~effective~~Shares ~~interest~~had ~~rate~~been onissued ~~the~~for ~~debenture~~at ~~was~~total ~~initially~~purchase ~~calculated~~price ~~as 25.5%. As~~ of ~~result~~$1,070,000, ofwhich ~~the~~is ~~modification~~convertible ofinto ~~the~~2,140,000 ~~terms~~shares of ~~the~~common ~~debenture, a new effective interest rate was calculated as 21~~stock.~~6%. There are no financial covenants that the Company is required to maintain.~~

InSubsequent ~~July 2012, the Company completed a sale in a private placement~~ to ~~an accredited investor for a 16.0% senior convertible debenture for an aggregate principal amount of $300,000 (before deducting expenses and fees related to~~ the ~~private~~reporting ~~placement) due in December 2013 with periodic redemptions of $75~~period,~~000~~ ~~due in June 2013 and September 2013, plus any unpaid interest. The Company has~~ the ~~option to pay all or part of the June 2013 periodic redemptions with shares of the~~ Company’s ~~common~~did ~~stock,~~not ~~subject~~meet ~~to certain Equity Conditions, as defined in~~ the ~~loan~~requirements ~~agreement. These Equity Conditions include, among others, the Company’s compliance with honoring all conversions and redemptions, payment~~ of ~~all liquidated damages of~~ the ~~debenture,~~Milestone anProvision ~~effective registration to allow for resale~~ of the ~~common shares and the ability to resell such common pursuant to Rule 144. A consent and waiver was obtained from the majority of the~~ Series AD ~~and C~~ Preferred ~~holders and a waiver was obtained from a majority~~ of ~~the~~reaching ~~Series~~positive Bnet ~~Preferred~~income holders as required in the certificate of designation. The debentures are convertible into shares of the Company’s common stock at an initial conversion price of $1.26 per share for a total of 238,096 common shares on ~~an as converted basis, subject to adjustment. In September 2012 and February 2013, the investor consented to~~ a ~~partial~~SAB ~~anti-dilution~~for ~~adjustment in conversion price per share to $0.90 per share in~~ the ~~event~~trailing oftwo ~~the~~months ~~minimum~~ending ~~offering being achieved in a private placement of common stock and warrants. In~~ February ~~2013,~~2014 ~~the~~(See ~~minimum~~Note ~~offering~~14 ~~was~~Series ~~achieved~~D ~~resulting~~Preferred in– anMilestone ~~adjusted~~Provision ~~conversion price of $0.90 per share~~ for ~~a total of 333,334 common shares on an as converted basis, subject to adjustment for stock dividends, stock splits and related distributions (see Note 12 for~~ further details).

F 6. EQUITY ~~- 21~~TRANSACTIONS

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As part of the private placement, the investor received a warrant to purchase 285,716 shares of the Company’s common stock. The warrant is exercisable for a period of five years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheet as of December 31, 2012.

The gross discount on the debenture issuance was $108,838, which will be amortized on a straight line basis over the seventeen (17) month term of the loan. The effective interest rate on the debenture was calculated as 52.8%. There are no financial covenants that the Company is required to maintain.

The table below summarizes unsecured convertible debentures and related debt discounts as of December 31, 2012:

	Related Party			Unrelated			Total
Current	$	500,000		$	1,935,195		$	2,435,195
Non-current		-			530,588			530,588
Total	$	500,000		$	2,465,783		$	2,965,783
Less unamortized debt discount		(1,202	)		(374,805	)		(376,007	)
	$	498,798		$	2,090,978		$	2,589,776

The carrying value of the unsecured debentures is presented, net of total unamortized discount of $376,007 as of December 31, 2012. Amortization of the debt discount was recorded as interest expense which is calculated on a straight line basis over the life of loan, which approximates the effective interest method.

Interest expense related to the unsecured convertible debentures for the years ended December, 2012 and 2011 was $1,306,791 and $709,550, respectively.

As of January 25, 2013, all convertible debenture holders consented to the acceptance of a partial ratchet anti dilution adjustment of $0.90 per common share. In February 2013, the Company achieved the minimum offering required in the private placement resulting in increase of an aggregate of 990,844 common shares upon conversion of all convertible notes.

Secured Debt

In September 2010, the Company entered into a secured loan agreement with our primary wholesaler. Under the terms of this agreement, the Company received a two (2) year loan of $400,000 with an adjustable interest rate of prime plus 3.00% per annum, with interest payable monthly. Monthly payment requirements are $5,000 per month for eight consecutive months, followed by eight consecutive monthly principal reductions of $10,000, followed by seven consecutive monthly principal reductions of $15,000, with remaining principal and interest due September 1, 2012. The proceeds from the note were simultaneously exchanged for $400,000 in outstanding vendor invoices. The note is secured by all of the assets of the Company and its subsidiaries through UCC-1 filings.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2012, the outstanding balance of $304,638 plus accrued interest of $209 is past due. The note is in default as of December 31, 2012, the Company subsequently amended the agreement with the wholesaler as described in Note 12.

Revolving Credit Facilities

Brockington Securities, Inc. - Revolver

The agreement has been subsequently extended. The latest extension occurred in July 2012, pursuant to a Modification and Extension Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the term of the loan was modified and the maturity date of the loan was extended to June 30, 2014 by mutual consent. All additional terms of the loan remain unchanged and the Company was not in violation of any provisions of the loan agreement.

In November 2012, the Modification Agreement to the Revolving Line of Credit Agreement dated March 10, 2009, in which the credit limit was modified and increased from $300,000 to $500,000.

As of December 31, 2012, the outstanding balance on the revolver was $447,000 with remaining availability of $53,000.

Other Notes and Debt

TPG, L.L.C. Agreement

On December 15, 2006, the Company entered into a Share Purchase Agreement (the “Share Agreement”) with TPG pursuant to which the Company purchased 49 shares of common stock of API for 50,000 shares of common stock of the Company and a $460,000 note payable. The note is payable in $5,000 monthly installments through November 2007 and $15,000 monthly installments with the remaining balance due at maturity, February 15, 2009. The note is secured by a security interest in the 49 shares of API common stock.

In January 2011, the parties entered into a second amendment to the Share Agreement between Assured Pharmacy, Inc. (“Buyer”) and TPG, LLC (“Seller”). The maturity date of the note was extended from February 2009 to July 2012 and all prior defaults, late fees or other claims for obligations of Buyer that may have accrued have been waived. As part of the amendment, the Company also agreed to an exclusive venue specified by Seller for any and all disputes arising out of or relating to this second amendment.

In June 2012, the parties entered into a third amendment to the Share Agreement between Assured Pharmacy, Inc. (“Buyer”) and TPG, LLC (“Seller”). The maturity date of the note was extended from July 2012 to July 2013 and all prior defaults, late fees or other claims for obligations of Buyer that may have accrued have been waived.

The outstanding balance of $205,000 together with accrued interest at the rate of prime plus 2% per annum commencing from December 15, 2006, is payable as follows:

(a) Twelve (12) consecutive monthly installments of $10,000 on or before the 15th of each month commencing in July 2012 through June 2013.

(b) Remaining balance, including all interest due, payable on or before July 15, 2013.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2012, the outstanding principal balance on the loan was $242,872. Due to our current financial condition, we did not make the monthly installment payments of $10,000 due on September 15, 2012, October 15, 2012, November 15, 2012 and December 15, 2012 and may be unable to make the $213,091 payment due to TPG which includes principal and interest on or before July 15, 2013. If we remain unable to fulfill our obligations to TPG under the Share Agreement, we will attempt to restructure and extend the terms of payments due to TPG, but can provide no assurance we will be able to do so on acceptable terms or even at all. TPG has not issued a notice of default relating to our failure to make the monthly installment payments of $10,000 due required under the Purchase Agreement.

TAPG Note

On June 30, 2011 the outstanding principal balance payable to TAPG of $10,000 plus accrued interest of $7,758 was cancelled and simultaneously exchanged for the Company’s common stock as part of the acquisition of TAPG’s ownership interest in APN, (see Note 2 Non-controlling Interests for further details).

Other Agreements and Obligations

Primary Drug Wholesaler Security Interest

As part of our vendor terms and conditions with our primary drug wholesaler, our outstanding trade account balance is secured by all of the assets of the Company and it’s subsidiaries through UCC-1 Lien filings. The Company’s outstanding trade accounts payable balance with our wholesaler as of December 31, 2012 and 2011 was approximately $3.6 million and $2.6 million, respectively. The Company subsequently converted the outstanding balance into a secured note payable with the wholesaler as described in Note 12.

5. EQUITY TRANSACTIONS

Convertible Preferred Stock Series – A, B & C

The Company has authorized 5,000,000 shares of preferred stock, with 2,830 shares designated to Series A Preferred and 7,745 shares designated to Series B Preferred and 813 shares designated to Series C Preferred.

The Series A Preferred and Series C Preferred rank senior to the Series B Preferred which ranks senior to the Company’s common stock with respect to the payment of any dividends and amounts upon liquidation or dissolution. Except as required by law, the shares of preferred stock shall be voted together with the shares of common stock and not as a separate class. In addition, so long as 35% of the aggregate amount of the shares of Series A Preferred and Series C Preferred are outstanding, the holders of the outstanding shares voting together as a separate class are entitled to elect up to four directors to the Board and separately vote on a number of defined material actions typically requiring Board approval. Respectively, holders of shares of Series A, B and C Preferred have anti-dilution protections for sale of stock below conversion rate and stock splits and other similar pro rata events.

~~Preferred~~F ~~Stock~~- ~~Private Placements~~21

In June 2009, in a private placement pursuant to the Purchase Agreement dated February 9, 2009, with Mosaic, a related party (see Note 7 for further details), the Company agreed to sell 1,330 shares of its Series A Preferred and common stock purchase warrants to purchase an aggregate of 1,083,334 shares of its common stock for an aggregate purchase price of $1.3 million, of which $750,000 was paid by the cancellation of secured indebtedness of the Company owed to MFS, with the remaining $580,000 to be paid in cash. Each share of the 750 Series A Preferred shares that was issued in exchange for cancellation of secured indebtedness was convertible into 1,112 shares of common stock.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition, Mosaic shall have the option, exercisable upon written notice to the Company at any time during the 18 consecutive month period following the closing of the private placement, to purchase up to 1,000 shares of Series BA Preferred of the Company at a price per share of $1,000, subject to adjustment on a dollar for dollar basis based on funding of the cash portion of the purchase price. As a condition of closing of this transaction, the outstanding principal balance related to Short Term Notes and ~~Unsecured Debentures of $7.7 million was exchanged for 7,720 shares of~~ Series B Preferred. The Company also issued seven (7) shares of Series A Preferred to MFS at a price of $1,000 per share for shares in lieu of interest related to accrued interest on an additional $100,000 in subsequent debt funding received in 2009. Each share of the 7 Series A Preferred shares that was issued for interest due was convertible into 1,112 shares of common stock.

~~The~~In ~~Company~~June ~~has~~2009, ~~separately~~in ~~accounted~~a ~~for~~private placement pursuant to the ~~beneficial~~Purchase ~~conversion~~Agreement ~~feature~~dated ~~granted~~February to9, ~~the~~2009, ~~holders~~with ofMosaic, ~~Series~~a Arelated ~~Preferred~~party ~~and~~(see ~~Series~~Note B9 ~~Preferred. The~~for ~~value~~further ofdetails), the ~~beneficial~~Company ~~conversion~~agreed ~~feature~~to ~~related~~sell to1,330 shares of its Series A Preferred and ~~Series~~common Bstock ~~Preferred~~purchase iswarrants ~~$323,453~~to ~~and~~purchase ~~$772~~an aggregate of 1,~~000~~083,334 ~~respectively~~shares ~~which~~of isits ~~calculated~~common asstock ~~the~~for ~~difference~~an ~~between~~aggregate ~~the~~purchase ~~stated~~price ~~conversion~~of ~~price~~$1.3 million, of ~~the~~which ~~preferred~~$750,000 ~~shares~~was ~~and~~paid by the ~~fair~~cancellation ~~market~~of ~~value~~secured indebtedness of the ~~common~~Company ~~stock~~owed ~~into~~to ~~which~~MFS, with the ~~preferred~~remaining ~~shares~~$580,000 ~~are~~to ~~convertible~~be atpaid in cash. As a condition of closing of this transaction, the ~~commitment~~outstanding ~~date. These~~principal ~~issuances~~balance ~~resulted~~related into aShort ~~beneficial~~Term ~~conversion~~Notes ~~that~~and isUnsecured aDebentures ~~deemed~~of ~~dividend~~$7.7 ~~distribution~~million was exchanged for ~~accounting~~7,720 ~~purposes~~shares of Series B Preferred.

AsIn ofFebruary ~~December~~and ~~31,~~March ~~2012~~2013, the Company issued a total of ~~499~~60 shares of Series A Preferred ~~for~~at $~~498~~1,~~500~~000 toper ~~Mosaic~~share ~~under~~for ~~this~~a ~~Purchase~~total ~~agreement. Each share~~ of ~~Series~~$60,000 Ato ~~Preferred~~Mosaic isunder ~~convertible~~the ~~into~~existing ~~695~~2009 ~~shares~~Securities ofPurchase ~~common stock~~agreement. As The ofnet ~~December~~proceeds ~~31, 2012, no shares~~ of ~~Series~~the Asales ~~Preferred~~were ~~issued~~used tofor ~~Mosaic~~general ~~have~~working ~~been~~capital ~~converted into common stock~~purposes.

InAs ~~April~~of ~~2010~~December 31, we2013, ~~completed~~the Company issued a ~~sale~~total of ~~150~~559 shares of Series A Preferred ~~in a private placement to an accredited investor~~ for ~~an aggregate amount of~~ $~~150~~558,~~000~~500 ~~(before deducting expenses and fees related~~ to ~~the~~Mosaic ~~private~~under ~~placement). A~~this ~~consent~~Purchase ~~and waiver was obtained from the majority of the Series A Preferred holders and a waiver was obtained from a majority of the Series B Preferred holders as required in the certificate of designation~~agreement. Each share of Series A Preferred is convertible into 695 shares of ~~the Company’s~~ common stock ~~for a total of 104,250 shares, on an as converted basis~~. As of December 31, ~~2012~~2013, ~~150~~no ~~Series A Preferred~~ shares ~~issued have been converted into 104,250 shares~~ of ~~common stock and no share of~~ Series A Preferred ~~shares~~issued to Mosaic have been converted into common stock.

During the year ended December 31, 2012, 150 Series A Preferred shares were converted into 104,250 shares of common stock. During the year ended December 31, 2013 and 2012, 260 and 25 Series B Preferred shares were converted into 288,890 and 13,889 shares of common stock.

Series C

In May 2010, we filed a Certificate of Designation to designate 813 shares of the Company’s preferred stock in Series C Preferred. The rights of the Series C Preferred are identical to Series A Preferred and each share of Series C Preferred is convertible into 556 shares of the Company’s common stock. A consent and waiver was obtained from the majority of the Series A Preferred holders and the majority of the Series B Preferred holders as required in the certificate of designation. Subsequently, the Company issued 813 shares of the Company’s Series C Preferred at a price of $1,000 per share to an existing vendor in exchange for extinguishment of $300,000 in vendor’s secured payable and additional consideration in the form of a modification in vendor terms that are favorable to the Company and additional debt financing at terms that are significantly below market for the Company.

In September 2012, the holders of the majority of Series A, B and C Preferred stock consented to a partial anti-dilution adjustment in conversion price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted conversion price of $0.90 per share for the Series A, B and C Preferred holders for a total of 1,562,340, 5,982,233 and 902,778 common shares on an as converted basis, respectively, subject to adjustment for stock dividends, stock splits and related distributions (see Note 12 for further details).

FIn -August 252013, the holders of the majority of Series A, B and C Preferred stock consented to the Certificate of Designation of Series D preferred stock, the Series D Preferred Stock agreement with Pinewood Trading Fund, LP, and the increase in authorized common shares from 35,000,000 to 100,000,000.

The table below summarizes the Company’s outstanding convertible preferred stock as of December 31, 2013 and 2012:

	December 31, 2013							December 31, 2012

Convertible Preferred Stock		Number of Preferred Shares		Number of Common Shares if Converted		Weighted Average Conversion Price		Number of Preferred Shares		Number of Common Shares if Converted		Weighted Average Conversion Price

Series A Preferred			1,466		1,629,006	$	0.90		1,406		1,292,492	$	1.09
Series B Preferred			5,124		5,693,344	$	0.90		5,384		2,993,504	$	1.80
Series C Preferred			813		902,778	$	0.90		813		451,750	$	1.80
Total			7,403		8,225,128	$	0.90		7,603		4,737,746	$	1.60

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below summarizes the Company’s outstanding convertible preferred stock as of December 31, 2012 and 2011:

	December 31, 2012							December 31, 2011
Convertible Preferred Stock		Number of Preferred Shares		Number of Common Shares if Converted		Weighted Average Conversion Price		Number of Preferred Shares		Number of Common Shares if Converted		Weighted Average Conversion Price
Series A Preferred			1,406		1,292,492	$	1.09		1,556		1,396,742	$	0.95
Series B Preferred			5,384		2,993,504	$	1.80		5,409		3,007,404	$	1.80
Series C Preferred			813		451,750	$	1.80		813		451,750	$	1.80
Total			7,603		4,737,746	$	1.60		7,778		4,855,896	$	1.51

Common Stock

~~As of December 31, 2009, all of the authorized shares of the Company’s common stock were issued and outstanding.~~ In January 2010, the Company increased the number of authorized shares of its’ common stock to 16,666,667 in order to meet the reserve requirements of the convertible and other dilutive securities issued, as well as additional capacity for future equity transactions.

In April 2010, the Company issued 27,778 common shares for issuance costs on a secured debt transaction in a private placement (see Note 3 for further details).

In March 2011, the Company’s Board approved an amended and restated certificate of incorporation affecting a 1 for 180 reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of April 15, 2011, (see Note 1 – Reverse Stock Split for further details).

In May 2012, the Company’s Board and a majority of the Company’s shareholders approved an amended and restated articles of incorporation effectuating an increase in the number of authorized common shares of the Company from 16,666,667 to 35,000,000. As required, a consent and waiver was obtained from the majority of the Series A and Series C Preferred holders in accordance with the certificate of designation.

In January 2013, we initiated a securities offering through a private placement for a minimum of 10 units of securities for a minimum of $250,000 and a maximum of 80 units for a maximum of $2,000,000 (subject to increase as much as 100 units for $2,500,000 to cover over-allotments, if any). Each unit consists of (a) 38,462 shares of common stock, valued at $0.65 for $25,000 and (b) 38,462 warrants with an initial exercise price of $0.90 per share. If the maximum offering of 80 units is sold, Assured would have issued an aggregate of 3,076,960 shares of common stock and 3,076,960 warrants in such units. The Company shall have paid the placement agent cash commissions equal to 10% of the gross proceeds received by the Company in this offering and three year warrants to purchase that number of shares of common stock equal to 10% of the aggregate number of shares of common stock and warrant shares included in the units sold in the offering (615,392) shares if all 80 units are sold and 769,240 shares if the over-allotment is exercised in full). The outstanding common stock related to the private placement is subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. The Company also agreed that the 38,462 shares of common stock and the 38,462 warrants included in the units are subject to increase, and the $0.65 per share value and the $0.90 warrant exercise prices are subject to decrease, in each case based on the level of the Company’s consolidated net revenues that are derived during our 2013 fiscal year (the “Make-Whole Adjustments”). Such Make-Whole Adjustments are as follows:

Share Price	Warrant Exercise Price	Adjusted Shares per Unit	Adjusted Warrants per Unit	Consolidated 2013 Revenues
$0.65	$0.90	None	None	$21,850,000 or above
$0.60	$0.85	41,667	41,667	From $20,700,000 to $21,849,999
$0.55	$0.80	45,455	45,455	From $19,550,000 to $20,699,999
$0.50	$0.75	50,000	50,000	From $18,400,000 to $19,549,999
$0.45	$0.70	55,556	55,556	From $17,250,000 to $18,399,999
$0.40	$0.65	62,500	62,500	Less than $17,250,000

The warrants may only be exercised for cash. However, as provided in the Registration Rights Agreement, after a date which shall be 180 days following the Final Closing Date, there will be a cashless exercise option available to the warrant holders at any time during which a registration statement providing for the resale of the warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to an exemption from the registration requirements under the Securities Act.

A consent and waiver was obtained from the majority of the Series A and C preferred holders and a waiver was obtained from a majority of the Series B preferred holders as required in the certificate of designation and a waiver was obtained from all convertible debenture holders that were required. As part of the waiver, the Series A, B, and C preferred holders and 100 percent of the applicable convertible debenture holders agreed to waive anti-dilution adjustments which the consenting holder may be entitled under their respective agreements and accept a partial ratchet anti-dilution adjustment with a decrease in the conversion price of $0.90 per share of the Company securities for this private placement if the minimum unit threshold is met.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

From February 2013 to the closing of the private placement in May 2013, the Company completed sales in a private placement to accredited investors for thirty-four and four tenths (34.4) common stock units for a total of 1,323,093 shares of common stock at an aggregate purchase price of $860,000 (before deducting expenses and fees related to the private placement). The Company paid cash fees of $32,800 to the placement agents and issued 50,462 warrants with an exercise price of $0.90 and 50,462 warrants with an exercise price of $0.65 to the placement agent per the agreement. In addition, the Company paid $13,010 in legal and the closing costs on this transaction. The net proceeds of the private placement were used to pay down our outstanding balance with our primary wholesaler and general working capital purposes. As part of the private placement, the investors also received warrants to purchase an aggregate of 1,323,093 shares of the Company’s common stock at an exercise price of $0.90 per share.

In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant. No waivers were obtained from the investors regarding the dilutive issuance. The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and results in the issuance of an additional 1,058,475 warrants to the investors and the issuance of an additional 55,508 issued to the placement agents.

Our consolidated net revenues for the fiscal year ending December 31, 2013 were $7,463,113 which included $2,270,536 in revenues from discontinued operations. Since the net revenues are below the Make-Whole Adjustment minimum threshold of $17,250,000, the Company is required to issue an additional 826,907 shares of common stock to the eight investors that participated in the private placement by April 30, 2014. A Make-Whole adjustment for the related warrants is not required due to the anti-dilution adjustment in November 2013, noted above.

In November 2013, the Company’s Board and a majority of the Company’s shareholders approved an Amended and Restated Articles of Incorporation effectuating an increase in the number of authorized common shares of the Company from 35,000,000 to 100,000,000. As required, a consent and waiver was obtained from the majority of the Series A and Series C Preferred holders in accordance with the certificate of designation.

Stock Warrants

2009 Issuances

In connection with the issuance of shares of Series A Preferred to Mosaic in 2009, the Company also issued warrants to purchase shares of common stock. The holder has the right to purchase up to 1,083,334 shares of our common stock at an exercise price equal to $0.09 per share, subject to certain adjustments for stock splits and other similar pro rata events. The warrants may be exercised on a cashless basis at any time until June 30, 2019. As of December 31, ~~2012~~2013, no warrants have been exercised.

The gross value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions on the issuance date: expected stock price volatility of 441.2%, risk free rate of return of 3.5%; dividend yield of 0%, and a ten (10) year term. The net value of the warrant was recorded based on its relative value of $420,487, net of related offering costs on a pro rata basis for all shares involved.

F2011 ~~- 26~~Issuances

As part of the private placements of convertible debentures in 2011, the investors received warrants to purchase an aggregate total of 2,014,655 shares of the Company’s common stock (see Note 4 for further details). The warrants are initially exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The estimated fair value of these warrants was determined to be $639,189 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free interest rate range of (0.33% - 0.93%), and an expected stock volatility range of (65.3% - 82.1%). The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. On November 13, 2012, the Company’s registration on Form S-1 became effective for 2,014,655 shares of the Company’s common stock underlying warrants.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~2010~~The ~~Issuances~~outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013 and 2012. From September 2012 to February 2013, all of the investors in 2011 private placements consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 2,984,625 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions.

In December 2010, as part of the private placement of convertible debentures, the investor received a warrant to purchase 250,000 shares of the Company’s common stock (see Note 4 for further details). The warrant is exercisable for a period of three (3) years from the date of issuance at an initial exercise price of $1.73, subject to adjustment. The fair value of the warrants was determined using the Black-Scholes option pricing model using the following assumptions on the issuance date: expected stock price volatility of 443.9%, risk free rate of 0.87%, dividend yield of 0%, and a three (3) year term. The net value of the warrant was recorded based on its relative value of $138,263. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheet as of December 31, 2010. In May 2011, all of the warrants were cancelled and exchanged as part of the May 2011 private placement (see Note 4 for further details).

2011 Issuances

As part of the private placements of convertible debentures in 2011, the investors received warrants to purchase an aggregate total of 2,014,655 shares of the Company’s common stock (see Note 4 for further details). The warrants are exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The estimated fair value of these warrants was determined to be $639,189 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free interest rate range of (0.33% - 0.93%), and an expected stock volatility range of (65.3% - 82.1%). The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. On November 13, 2012, the Company’s registration on Form S-1 became effective for 2,014,655 shares of the Company’s common stock underlying warrants.

The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012 and 2011. From September 2012 to February 2013, all of the investors in 2011 private placements consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 2,984,625 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions (see Note 12 for further details).

As part of the modification and extensions to the 2011 convertible debentures in June, July and September 2012, the exercise period of warrants to purchase an aggregate total of 1,300,368 shares of the Company’s common stock (see Note 4 for further details) were extended from three to five years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The modifications also resulted in accounting extinguishment treatment resulting in the cancellation and reissuance of warrants to purchase an aggregate total of 1,205,129 shares of the Company’s common stock.

As part of the private placements of convertible debentures in November 2011, the placement agents received warrants to purchase an aggregate total of 129,412 shares of the Company’s common stock (see Note 4 for further details). The warrants are exercisable for a period of three years from the date of issuance at an initial exercise price of $1.26 and $1.52 for 58,824 and 70,588 shares, respectively, subject to adjustment. The estimated fair value of these warrants was determined to be $10,755 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free interest rate of 0.41%, and an expected volatility of 65.3%. The placement agent may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. On November 13, 2012, the Company’s registration on Form S-1 became effective for 129,412 shares of the Company’s common stock underlying warrants.

FThe outstanding warrants are subject certain anti-dilution 27protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012. In September 2012 the placement agents consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 201,571 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions

In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant. No waivers were obtained from the three debenture holders that were holding an aggregate total of 800,004 warrants regarding the dilutive issuance. The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and requires the issuance of an additional 640,000 warrants to the three investors.

On December 31, 2013, an aggregate total of 772,625 additional warrants were issued to seven warrant holders as part of the 2013 Tender Offer (See Note 4 2013 Debt Restructuring for further details). Subsequent to the reporting period, an additional 224,000 warrants were issued to a holder of 1,120,005 warrants as part of the modification and extension transaction (See Note 14 for further details).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012 and 2011. In September 2012 the placement agents consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 201,571 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions (see Note 12 for further details).

2012 Issuances

As part of the private placement of convertible debentures in January 2012, the investor received warrants to purchase a total of 48,000 shares of the Company’s common stock (see Note 4 for further details). The warrants are exercisable for a period of three years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The estimated fair value of these warrants was determined to be $6,741 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 0.62%, and an expected stock volatility of 84.7%. As part of the June 2012 amendment to the debenture agreement, the exercise period of the warrants were extended from three years to five years. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.

The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012. In September 2012, the investor consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 80.640 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions ~~(see Note 12 for further details)~~.

As part of the private placement of convertible debentures in July 2012, the investor received warrants to purchase a total of 285,716 shares of the Company’s common stock (see Note 4 for further details). The warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $1.512, subject to adjustment. The estimated fair value of these warrants was determined to be $108,838 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 0.62%, and an expected stock volatility of 94.9%. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.

The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2012. From September 2012 through February 2013, the investor consented to a partial anti-dilution adjustment in exercise price per share to $0.90 per share in the event of the minimum offering being achieved in a private placement of common stock and warrants. In February 2013, the minimum offering was achieved resulting in an adjusted exercise price of $0.90 per share and an increase in the number of warrants per the warrant agreement for an aggregate total warrants to purchase 480,002 shares of the Company’s common stock, subject to adjustment for stock dividends, stock splits and related distributions ~~(see Note 12 for further details)~~.

F On -December 2831, 2013, 40,320 additional warrants were issued to a holder of 48,000 warrants as part of the 2013 Tender Offer (See Note 4 2013 Debt Restructuring Tender Offer for further details). Subsequent to the reporting period, an additional 96,000 warrants were issued to Hillair Capital Investments, LP a holder of 480,002 warrants as part of the modification and extension transaction (See Note 14 Hillair Debenture Extension for further details).

2013 Issuances

In conjunction with the 2013 private placement of common stock, all of the Company's convertible debenture holders consented to the acceptance of a partial ratchet anti-dilution adjustment of $0.90 per common share. In February 2013, the Company achieved the minimum offering required in the private placement resulting in an increase of an aggregate total of 1,669,056 warrants to our convertible debenture holders and placement agent.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As part of the 2013 private placement of common stock ending in May 2013, the investors also received warrants to purchase an aggregate of 1,323,093 shares of the Company’s common stock. Each warrant has a term of three years and may be exercised at an initial exercise price of $0.90 per warrant share; which exercise price is, in addition to the potential Make-Whole Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant. The warrants may only be exercised for cash. However, as provided in the Registration Rights Agreement, after a date which shall be 180 days following the Final Closing Date, there will be a cashless exercise option available to the warrant holders at any time during which a registration statement providing for the resale of the warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to an exemption from the registration requirements under the Securities Act. The estimated fair value of these warrants was determined to be $243,055 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return range of 0.30% - 0.40% , and an expected stock volatility range of 56.05-60.10%. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant. No waivers were obtained from the investors regarding the dilutive issuance. The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and the issuance of an additional 1,058,475 warrants to the investors. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013.

As part of the 2013 private placement of common stock ending in May 2013, the placement agent received warrants to purchase an aggregate of 100,924 shares of the Company’s common stock. Each warrant has a term of five years and may be exercised at initial exercise prices of $0.65 and $0.90 per warrant share; which exercise price is, in addition to the potential Make-Whole Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant. The warrants may only be exercised for cash. However, as provided in the Registration Rights Agreement, after a date which shall be 180 days following the Final Closing Date, there will be a cashless exercise option available to the warrant holders at any time during which a registration statement providing for the resale of the warrant shares is not effective, unless the warrant shares may then be freely tradable without limitation pursuant to an exemption from the registration requirements under the Securities Act. The estimated fair value of these warrants was determined to be $32,845 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 1.41%, and an expected stock volatility of 81.2%. The investors may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. In November 2013, the issuance of Series D preferred stock with an effective conversion price of $0.50 per share qualified as a dilutive issuance per the terms of the warrant. No waivers were obtained from the investors regarding the dilutive issuance. The anti-dilution adjustment reduces the exercise price of the existing warrants from $0.90 to $0.50 and the issuance of an additional 55,508 warrants to the placement agents. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013.

As part of the exchange of $500,000 in convertible debentures in and related accrued interest in November 2013, the investor received warrants to purchase a total of 833,334 shares of the Company’s common stock (see Note 4 for further details). The warrants are exercisable for a period of three years from the date of issuance at an initial exercise price of $0.60 per share for the first twelve months and $0.75 for the remaining twenty four months of the exercise period, subject to adjustment for stock splits, etc. The estimated fair value of these warrants was determined to be $14,416 using the Black Scholes stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return of 0.58%, and an expected stock volatility of 75.08%. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant to an effective registration statement.

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As part of the issuances of Series D Preferred stock in November and December 2013, the investors also received an aggregate of 1,070 Series A Warrants which are exercisable into 2,140,000 common shares and an aggregate of 1,070 Series B Warrants which are exercisable into 2,140,000 common shares. Each warrant has a term of five years and may be exercised at an initial exercise price of $0.50 per warrant share; which exercise price is, in addition to the potential Milestone Adjustment, subject to certain weighted average and other anti-dilution adjustments as provided in the form of warrant. The Series A Warrants may only be exercised for cash. The Series B Warrants may be exercised on a cashless basis at the investor’s election. The estimated fair value of these warrants was determined to be $476,343 using the Lattice stock option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free rate of return range of 1.76%, and an expected stock volatility of 94.5%. The outstanding warrants are subject certain anti-dilution protection clauses which provide exercise price adjustments in the event that any common stock or common stock equivalents are issued at an effective price per share that is less than the exercise price per share. Accordingly, the stock warrants are classified as a warrant liability on the accompanying consolidated balance sheets as of December 31, 2013.

Subsequent to the reporting period, an additional 1,712,000 Series A warrants and 1,712,000 Series B warrants were issued as part of the Milestone Provision Adjustment and the exercise price on the previously issued 4,280,000 warrants was adjusted from $0.50 to $0.40 (See Note 14 Milestone Provision Adjustment for further details).

Expected Stock Volatility

Volatility is a measure of the tendency of investment returns to vary around a long-term average rate. Historical volatility is an appropriate starting point for setting this assumption. Companies should also consider how future experience may differ from the past. This may require using other factors to adjust historical volatility, such as implied volatility, peer-group volatility and the range and mean-reversion of volatility estimates over various historical periods. The peer-group utilized consisted of six companies in ~~2012~~2013 and ~~nine companies~~ in ~~2011~~2012, in the same or similar industries as the Company. In addition, if a best estimate cannot be made, management should use the mid-point in the range of reasonable estimates for volatility. The Company estimates the volatility of its common stock in conjunction with the Company’s issuance of financing instruments and volatility is calculated utilizing the historical and estimated future volatility of the Company and its peer-group.

Risk-Free Rate of Return

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option/warrant.

Expected Dividends

The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, it uses an expected dividend yield of zero.

Expected Term

The Company uses the related exercise period of the warrant or option as the expected term.

A summary of the warrants issued in connection with financing transactions is presented in the table below:

	Number of Shares			Weighted Average Exercise Price
Outstanding and Exercisable at December 31, 2010		1,333,334		$	0.40
Granted		2,144,067		$	1.51
Exercised		-		$	-
Cancelled, forfeited or expired		(250,000	)	$	1.73
Outstanding and Exercisable at December 31, 2011		3,227,401		$	1.03
Granted		1,538,844		$	1.51
Exercised		-		$	-
Cancelled, forfeited or expired		(1,205,129	)	$	1.51
Outstanding and Exercisable at December 31, 2012		3,561,116		$	1.08
Granted		6,537,351		$	0.60
Exercised		-		$	-
Cancelled, forfeited or expired		-		$	-
Anti-dilution adjustments:
Initial grant		(3,901,799	)	$	1.28
Initial grant repricing		3,901,799		$	0.77
Additional warrants granted		4,296,447		$	0.60
Outstanding and Exercisable at December 31, 2013		14,394,914		$	0.58

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about warrants outstanding and exercisable as of December 31, ~~2012~~2013:

		Outstanding								Exercisable		~~Exercisable~~
Range of Exercise Price		Number of Shares			Weighted Average Exercise Price				Weighted Average Remaining Life (Years)			Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Life (Years)
Exercise Price		Number of Shares		Weighted Average Exercise Price			Weighted Average Remaining Life (Years)			Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Life (Years)
$	0.09		1,083,334	$	$0.09	~~0.09~~		5.49		~~6.49~~	1,083,334	$	~~1,083,334~~0.09		$5.49	~~0.09~~		~~6.49~~
$	10.~~26 - $1.52~~50		28,~~477~~963,~~782~~337	$	$0.50	~~1.51~~		3.68		~~3.27~~	8,963,337	$	~~2,477,782~~0.50		$3.68	~~1.51~~		~~3.27~~
$	0.60		2,620,235	$	0.60			5.67			2,620,235	$	0.60		5.67
$	0.90		1,728,008	$	0.90			2.79			1,728,008	$	0.90		2.79

67. STOCK BASED COMPENSATION

Restricted Shares of Common Stock

During the years ended December 31, ~~2012~~2013 and ~~2011~~2012, the Company issued ~~540~~650,000 and ~~942~~540,~~772~~000 restricted share grants to consultants and directors as compensation for services, respectively. During the year ended December 31, 2011, the Company also cancelled 500,000 restricted share grants that were previously granted to employees of the Company. The Company granted 500,000 options to purchase common stock with a strike price of $0.68 in exchange for the 500,000 restricted shares. A summary of the activity of restricted shares of common stock for the years ended December 31, ~~2012~~2013 and ~~2011~~2012 is as follows:

	Directors					Shares for Services
	Shares			Weighted Average Grant Date Fair Value
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Non-vested on Dec 31, 2011		-		$	-
Nonvested on Dec 31, 2010		-		$	-		-		$	-
Granted		540,000			0.61
Granted		50,000			0.56		892,778			0.95
Vested		(540,000	)		0.61
Vested		(50,000	)		0.56		(892,778	)		0.95
Forfeited		-			-
Forfeited		-			-		-			-
Nonvested on Dec 31, 2012		-		$	-
Nonvested on Dec 31, 2011		-		$	-		-		$	-
Granted		650,000			0.84
Granted		-			-		540,000			0.61
Vested		(545,000	)		0.83
Vested		-			-		(540,000	)		0.61
Forfeited		(105,000	)		0.90
Forfeited		-			-		-			-
Non-vested on Dec 31, 2013		-		$	-
Nonvested on Dec 31, 2012		-		$	-		-		$	-

During the years ended December 31, ~~2012~~2013 and ~~2011~~2012, ~~540~~545,000 and ~~942~~540,~~778~~000 of restricted shares of common stock with a fair value of approximately $~~485~~449,~~391~~750 and $~~810~~485,~~500~~391 respectively, became fully vested. The aggregate market value of the share grants for ~~2012~~2013 and ~~2011~~2012 was $~~330~~544,~~650~~250 and $~~810~~330,~~500~~650, respectively, at the date of grant, which is amortized to expense ratably over the related service period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recognized $~~485~~349,~~391~~812 and $~~742~~485,~~089~~391 in stock compensation expense related to restricted share grants and is included in selling, general and administrative expenses in the consolidated statement of operations for the years ended December 31, ~~2012~~2013, and ~~2011~~2012, respectively. As of December 31, ~~2012~~2013, there was noapproximately $99,937 in unrecognized compensation cost related to restricted share awards and the related weighted-average period over which it is to be amortized is approximately six (6) months.

Stock Warrants

Historically, the Company issued warrants to purchase common stock to employees and consultants as compensation for services. For the year ended December 31, ~~2011~~2013, the Company issued warrants to purchase an aggregate of ~~250~~1,200,000 common shares to consultants as compensation for services. The Company did not issue warrants as compensation for services in the year ended December 31, 2012. The stock warrants have an exercise price ~~range~~of ~~from~~ $10.5265 ~~to $1.80~~ per share. Such stock warrants are exercisable for a period that varies from 3 to 5 years from the date of issuance. The estimated fair value of these warrants was determined to be $68428,~~030~~427 based on the Black-Scholes option pricing model on the issuance date, assuming that there will be no dividends, using the applicable exercisable periods, a risk-free interest rate range of (0.4138% - 0.9470%) and an expected volatility range of (6655.17% - 8158.82%) based on the historical and estimated future volatility of the Corporation and its peer-group ~~of six companies~~. The Company amortizes the fair value of the stock warrants to expense ratably over the related service period.

The following table summarizes the warrants outstanding and the number of shares of common stock subject to exercise as of December 31, ~~2012~~2013 and ~~2011~~2012 and the changes therein during the years then ended:

	Employees					Services
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding and Exercisable at December 31, 2010		2,388		$	225.00		-		$	-
Warrants granted		-			-		250,000			1.69
Warrants exercised		-			-		-			-
Warrants expired/cancelled		(2,388	)		225.00		-			-
Outstanding and Exercisable at December 31, 2011		-		$	-		250,000		$	1.69
Warrants granted		-			-		-			-
Warrants exercised		-			-		-			-
Warrants expired/cancelled		-			-		-			-
Outstanding and Exercisable at December 31, 2012		-		$	-		250,000		$	1.69
Warrants granted		-			-		1,200,000			0.65
Warrants exercised		-			-		-			-
Warrants expired/cancelled		-			-		(600,000	)		0.65
Outstanding and Exercisable at December 31, 2013		-		$	-		850,000		$	0.96

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about stock warrants outstanding and exercisable as of December 31, ~~2012~~2013:

		Outstanding		~~Outstanding~~					Exercisable					~~Exercisable~~
Range of Exercise Price		Number of Shares		~~Number of Shares~~	Weighted verage Exercise Price		Weighted Average ~~Exercise~~Remaining ~~Price~~Life (Years)		Number of Shares	~~Weighted Average Remaining Life (Years)~~		Weighted Average Exercise Price		~~Number of Shares~~	Weighted Average Remaining Life (Years)		~~Weighted Average Exercise Price~~		~~Weighted Average Remaining Life (Years)~~
	$1.52 - $1.80				250,000		$	1.69			3.47				250,000		$	1.69		3.47
$0.65			600,000		$	0.65		4.31		600,000		$	0.65			4.31
$1.52 - $1.80			250,000		$	1.69		2.47		250,000		$	1.69			2.47

The weighted average fair value of the warrants granted was $0.2736 per share for the year ended December 31, ~~2011~~2013. Stock compensation expense related to stock warrants for the years ended December 31, ~~2012~~2013 and ~~2011~~2012 was $27163,~~475~~690 and $4027,~~555~~475, respectively. As of December 31, ~~2012~~2013, there was no unrecognized compensation cost related to stock warrant awards.

Stock Options

During the year ended December 31, 2011, the Company modified the terms of options to purchase an aggregate of 277,778 shares of common stock previously granted to employees. The initial exercise price of the options was increased from $0.45 to $0.68 per share. Such stock options are exercisable for a period of 10 years from the date of issuance. The Company also granted options to purchase an aggregate of 500,000 shares of common stock to employees in exchange for cancellation of previously granted restricted shares (see Note 6 Restricted Shares of Common Stock). The stock options have an exercise price of $0.68 per share. Such stock options are exercisable for a period of 10 years from the date of issuance. The Company calculated the estimated fair value of these options using the Black-Scholes option pricing model assuming that there will be no dividends, using a 5 year estimated exercise period, a risk-free interest rate of 0.57%, and an expected volatility of 78.8% based upon the historical and expected volatility of the Company and its peer group. The impact of the term modifications resulted in no additional stock based compensation expense.

During the year ended December 31, 2011, the Company also granted options to purchase an aggregate total of 777,778. The stock options have an exercise price of $0.68 per share. The options vest over an eighteen month period beginning April 1, 2012 and are exercisable for a period of 10 years from the date of issuance. The Company calculated the estimated fair value of these options using the Black-Scholes option pricing model assuming that there will be no dividends, using a 5 year estimated exercise period, a risk-free interest rate of 2.24%, and an expected volatility of 78.8% based upon the historical and expected volatility of the Company and its peer group.

In May 2012, we adopted the Assured Pharmacy, Inc. 2012 Incentive Compensation Plan (the “2012 Incentive Plan”). The 2012 Incentive Plan is intended to provide incentives that will attract and retain the best available directors, employees and appropriate third parties who can provide us with valuable services. These purposes may be achieved through the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance stock awards and phantom stock awards.

The 2012 Incentive Plan permits the grant of awards that may deliver up to an aggregate of 1,667,667 shares of common stock, further subject to limits on the number of shares that may be delivered pursuant to incentive stock options, on the shares that may be delivered on the awards to any individual in a single year and on the number of shares that may be delivered on certain awards that are performance-based awards, within the meaning of Section 162(m) of the Internal Revenue Code. Awards may vest, in time, upon the occurrence of one or more events or by the satisfaction of performance criteria, or any combination. To the extent that awards are performance based, they may be based on one or more criteria, including (without limitation) earnings, cash flow, revenues, operating income, capital reissues, or other quantifiable company, customer satisfaction or market data, or any combination. In addition to common stock, awards may also be made in similar securities whose value is derived from our common stock.

FAwards with respect to which grant, vesting, exercisability or payment depend on the achievement of performance goals and awards that are options or stock appreciation rights granted to officers and employees will be intended to satisfy the requirements for “performance-based 32compensation” under Section 162(m) of the Internal Revenue Code. The 2012 Incentive Plan will be administered by the board of directors.

In May 2012, the Company awarded 525,000 options to purchase common stock under the 2012 Incentive Compensation Plan to three executives. The options vest immediately and are exercisable for a period of 10 years from the date of issuance. The Company calculated the estimated fair value of these options using the Black-Scholes option pricing model assuming that there will be no dividends, using a 5 year estimated exercise period, a risk-free interest rate of 0.77%, and an expected volatility of 90.1% based upon the historical and expected volatility of the Company and its peer group.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Awards~~At ~~with~~December ~~respect to which grant~~31, ~~vesting~~2013, ~~exercisability~~all oroptions ~~payment~~outstanding ~~depend on the achievement of performance goals~~ and ~~awards~~exercisable ~~that~~ are ~~options~~out ~~or stock appreciation rights granted to officers and employees will be intended to satisfy the requirements for “performance-based compensation” under Section 162(m)~~ of the ~~Internal~~money ~~Revenue~~and ~~Code. The~~accordingly, ~~2012~~their ~~Incentive~~intrinsic ~~Plan~~value ~~will~~is ~~be administered by the board of directors~~zero.

InThe ~~May~~following ~~2012,~~table summarizes the ~~Company awarded 525,000 options to purchase common~~ stock ~~under the 2012 Incentive Compensation Plan. The~~ options ~~vest~~outstanding ~~immediately~~ and ~~are~~the ~~exercisable~~number ~~for a period~~ of 10shares ~~years from the date~~ of ~~issuance.~~common ~~The~~stock ~~Company~~subject ~~calculated~~to ~~the~~exercise ~~estimated~~as ~~fair value~~ of ~~these~~December ~~options using the Black-Scholes option pricing model assuming that there will be no dividends~~31, ~~using~~2013 aand 52012 ~~year estimated exercise period, a risk-free interest rate of 0.77%,~~ and ~~an expected volatility of 90.1% based upon~~ the ~~historical~~changes ~~and~~therein ~~expected~~during ~~volatility of~~ the ~~Company~~years ~~and~~then ~~its peer group.~~ended:

At December 31, 2012, all options outstanding and exercisable are out of the money.

	Options Outstanding				Options Exercisable
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price

Outstanding at December 31, 2011		1,315,556	$	0.69		787,778	$	0.69

Options granted		525,000		0.60		525,000		0.60
Options vested		-		-		263,889		0.68
Options exercised		-		-		-		-
Options expired/cancelled		-		-		-		-

Outstanding at December 31, 2012		1,840,556	$	0.66		1,576,667	$	0.66

Options granted		-		-		-		-
Options vested		-		-		263,889		0.68
Options exercised		-		-		-		-
Options expired/cancelled		-		-		-		-

Outstanding at December 31, 2012		1,840,556	$	0.66		1,840,556	$	0.66

The following table summarizes ~~the~~information about stock options outstanding and ~~the~~exercisable ~~number of shares of common stock subject to exercise~~ as of December 31, ~~2012 and 2011 and the changes therein during the years then ended~~2013:

		Options Outstanding								Options Exercisable
				Outstanding												Exercisable
		Shares				Weighted Average Exercise Price				Shares				Weighted Average Exercise Price
Exercise Price				Stock Options Outstanding				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term in Years				Stock Options Exercisable		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years
Outstanding at December 31, 2010			287,778			$	0.48				287,778			$	0.48
$	0.60				525,000			$	0.60				8.35				525,000	$	0.60		8.35
Options granted			1,555,556				0.68				777,778				0.68
$	0.68				1,305,556			$	0.68				7.24				1,305,556	$	0.68		7.24
Options exercised			-				-				-				-
$	1.26				10,000			$	1.26				6.20				10,000	$	1.26		6.20
Options expired/cancelled			(527,778	)			0.56				(277,778	)			0.45
Outstanding at December 31, 2011			1,315,556			$	0.69				787,778			$	0.69
Options granted			525,000				0.60				525,000				0.60
Options vested			-				-				263,889				0.68
Options exercised			-				-				-				-
Options expired/cancelled			-				-				-				-
Outstanding at December 31, 2012			1,840,556			$	0.66				1,576,667			$	0.66

~~The~~F ~~following~~- ~~table summarizes information about stock options outstanding and exercisable as of December 31, 2012:~~32

		Outstanding						Exercisable
Exercise Price		Stock Options Outstanding		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years		Stock Options Exercisable		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years
$	0.60		525,000	$	0.60		9.35		525,000	$	0.60		9.35
$	0.68		1,305,556	$	0.68		8.24		1,041,667	$	0.68		8.24
$	1.26		10,000	$	1.26		7.20		10,000	$	1.26		7.20

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ASSURED PHARMACY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted average fair value of options granted was $0.60 ~~and $0.55~~ for the ~~years~~year ended December 31, 2012~~, and 2011, respectively~~. The Company recorded stock based compensation expense related to stock options for the years ended December 31, ~~2012~~2013 and ~~2011~~2012 of $~~334~~115,~~695~~462 and $0334,695, respectively, which is reflected in selling, general and administrative expense in the consolidated statement of operations. As of December 31, ~~2012~~2013, there was no unrecognized compensation cost related to stock option awards ~~was $115,462 and the related weighted-average period over which it is to be amortized is approximately nine (9) months~~.

The Company has reserved at total of 2,~~090~~690,556 shares of its common stock for incentive stock option and warrant awards outstanding to employees and consultants and an additional 1,142,667 shares of common stock for unissued options per the 2012 Incentive Plan. The Company does not expect to repurchase shares during the year ~~2013~~2014.

78. RELATED PARTY TRANSACTIONS

Transactions with related parties and their affiliates are made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other unaffiliated third parties, and do not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. For the years ended December 31, ~~2012~~2013 and ~~2011~~2012, related parties include the following:

·	Robert DelVecchio, an officer and a member of the board of directors of the Company and his affiliate Brockington Securities, Inc. (collectively, "DelVecchio").

· Mosaic Capital Advisors, LLC, directly appointed directors and owner of approximately 96% ~~and 87%~~ of the Company’s Series A Preferred as December 31, ~~2012 and 2010~~2013, respectively, and its affiliated entities Mosaic Financial Services (“MFS”), LLC, Mosaic Private Equity Fund, L.P., Mosaic Capital Management, Ltd. and its affiliated accredited investor (collectively, “Mosaic”).

· Pinewood Trading Company, owner of approximately 93.5% of the Company’s Series D Preferred Stock and 11% of the Company’s Series B Preferred as December 31, ~~2012 and 2011~~2013, ~~respectively,~~ and its managing partner Jack E. Brooks.

Outstanding debt to related parties consisted of the following at December 31, ~~2012~~2013 and ~~2011~~2012:

2013
	DelVecchio		Mosaic		Pinewood		Total
Notes payable - revolving	$	477,000	$	-	$	-	$	477,000
Unsecured convertible debentures, net		-		-		-		-
Accrued interest		23,170		-		16,200		39,370
	$	500,170	$	-	$	16,200	$	516,370
2012
	DelVecchio		Mosaic		Pinewood		Total
Notes payable - revolving	$	447,000	$	-	$	-	$	447,000
Unsecured convertible debentures, net		-		498,798		46,876		545,674
Accrued interest		27,392		134,520		5,376		167,288
	$	474,392	$	633,318	$	52,252	$	1,159,962
2011
	DelVecchio		Mosaic

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