Related Party Transactions

12 Months Ended

Dec. 31, 2012

Related Party Transactions [Abstract]

Related Party Transactions

13. Related Party Transactions

Lalit Dhadphale, the Company’s President, Chief Executive Officer and Principal Financial Officer, and Cape Bear Partners LLC (“Cape Bear”), who at the time was a beneficial owner of 12% of the Company’s common stock, guaranteed certain obligations with an original principal value of approximately $1,200,000, which notes were assumed by the Company in connection with its 2009 reverse merger. The guarantees state that Mr. Dhadphale and Cape Bear each guarantee the full payment of principal and interest under the notes. On January 5, 2011, the remaining convertible note balance under these notes was satisfied by conversion to common stock, and the guarantee was terminated.

Jason Smith is a manager of Rock Castle, a stockholder of the Company through September 2, 2011. Jason Smith is also the son of Dennis Smith, the controlling stockholder of Masters Pharmaceutical, Inc., one of the Company’s former suppliers.  The Company purchased from Masters Pharmaceutical, Inc., $618,768 of inventory, representing approximately 11% of total purchases during the year ended December 31, 2011. There were no accounts payable due to Masters Pharmaceutical, Inc. at December 31, 2011. For the year ended December 31, 2011, sales to Masters Pharmaceuticals, Inc. were approximately 1.56% of net sales.

On September 12, 2011, the Company entered into a Promissory Note Agreement for $300,000 with a stockholder, at an interest rate of 5% per annum which became payable on demand as of  November 12, 2011.   On March 13, 2013, the Promissory Note Agreement was converted into common stock. During the years ended December 31, 2012 and 2011, the Company recorded interest expense of $15,041 and $4,562, respectively. As of December 31, 2012, accrued interest was $19,603.

Between June 2009 and April 2012, an employee who is the son of the managing member of Cape Bear, received advances from the Company in various forms. In April 2012, this employee voluntarily resigned from the Company.  At the height, the balance of these advances totaled $391,468 including interest. Principal repayments towards the outstanding advances aggregating $235,000 have been made during 2012. Previously classified as an asset, the outstanding amount was reclassified under Stockholders’ Deficiency as the Company determined to exercise its rights associated with a pledge agreement for 42,860 shares of common stock. As of December 31, 2012, the Company established a $137,610 reserve for the unsecured balance (based on the recent market price of the common stock) such that the carrying value of these advances was $18,858.  The Company continues to pursue all avenues of collection. The Company also provided fulfillment services at no charge to a business partly owned by a member of his household. The Company’s Board of Directors determined that not all of these advances were approved in accordance with the Company’s policy on related party transactions, documented appropriately or recorded correctly in the Company’s accounting system. As a result, the Company was not able to monitor the outstanding amount of these advances on a continuous basis. The individual agreed to repay the remaining balance with interest based on prime rate on the first business day of the calendar quarter.

During the years ended December 31, 2012 and 2011, the Company received advances of $605,000 and $560,000 and repaid advances of $293,812 and $106,188 respectively, from certain stockholders. Such advances are due on demand and are non-interest bearing.

During the year ended December 31, 2012, a director was paid $93,800 for general financial and business consulting.

From March 2011 to April 2013, a wife of a director served as the agent for the Company's D&O insurance. During the years ended December 31, 2012 and 2011, the Company recorded insurance premium expense of $47,930 and $29,834, respectively.