UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly
period ended June 30, 2015. |
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Or |
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[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition
period from ___________to ___________ |
Commission
File Number 000-53071
TARGETED
MEDICAL PHARMA, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
20-5863618 |
(State
or other jurisdiction of
incorporation or organization) |
|
(I.R.S.
Employer
Identification No.) |
|
|
|
2980
Beverly Glen Circle, Los Angeles, California |
|
90077 |
(Address
of principal executive offices) |
|
(Zip
Code) |
(310)
474-9809
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last report)
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] |
Accelerated
filer [ ] |
Non-accelerated
filer [ ] |
Smaller
reporting company [X] |
|
(Do not check if a smaller reporting company) |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
Shares
outstanding of the Registrant’s common stock:
Class |
|
Outstanding
as of August 13, 2015 |
Common
stock, $0.001 par value |
|
27,397,400 |
TARGETED
MEDICAL PHARMA, INC.
FORM
10-Q FOR THE QUARTER
ENDED
JUNE 30, 2015
TABLE
OF CONTENTS
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Condensed
Consolidated Balance Sheets (Unaudited) |
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|
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| |
June
30, 2015 | | |
December
31, 2014 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Cash | |
$ | 21,371 | | |
$ | 11,739 | |
Accounts receivable, net | |
| 181,621 | | |
| 203,348 | |
Inventories | |
| 124,857 | | |
| 127,183 | |
Other current assets | |
| 228,744 | | |
| 191,689 | |
TOTAL CURRENT ASSETS | |
| 556,593 | | |
| 533,959 | |
| |
| | | |
| | |
Property and equipment, net | |
| 79,020 | | |
| 107,185 | |
Intangible assets, net | |
| 1,762,031 | | |
| 1,859,152 | |
TOTAL ASSETS | |
$ | 2,397,644 | | |
$ | 2,500,296 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’
DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
| |
| | | |
| | |
Accounts payable | |
$ | 1,925,504 | | |
$ | 1,460,352 | |
Accrued liabilities | |
| 7,270,724 | | |
| 7,273,980 | |
Notes payable, current portion - related parties | |
| 2,504,411 | | |
| 2,504,411 | |
Notes payable, current portion, net | |
| 1,475,128 | | |
| 1,092,762 | |
Derivative liability | |
| 45,593 | | |
| 18,075 | |
TOTAL CURRENT LIABILITIES | |
| 13,221,360 | | |
| 12,349,580 | |
| |
| | | |
| | |
Notes payable, less current portion - related parties | |
| 547,331 | | |
| — | |
Notes payable, less current portion, net | |
| 741,195 | | |
| 122,290 | |
TOTAL LIABILITIES | |
| 14,509,886 | | |
| 12,471,870 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES (SEE
NOTE 10) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock, $0.001 par value: 20,000,000 shares authorized; no shares issued and outstanding | |
| | | |
| | |
Common stock, $0.001 par value: 100,000,000 shares authorized; 27,397,400 shares issued and outstanding as of June
30, 2015; 26,768,756 shares issued and outstanding as of December 31, 2014 | |
| 27,398 | | |
| 26,769 | |
Additional paid-in capital | |
| 17,002,355 | | |
| 16,919,073 | |
Accumulated deficit | |
| (29,141,995 | ) | |
| (26,917,416 | ) |
TOTAL STOCKHOLDERS’
DEFICIT | |
| (12,112,242 | ) | |
| (9,971,574 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES
AND STOCKHOLDERS’ DEFICIT | |
$ | 2,397,644 | | |
$ | 2,500,296 | |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Operations (Unaudited) |
|
|
| |
Three Months Ended June
30, | | |
Six Months Ended June
30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
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| | |
| | |
| |
REVENUES | |
| | | |
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| | |
Product revenue | |
$ | 1,212,856 | | |
$ | 2,065,923 | | |
$ | 2,147,909 | | |
$ | 3,699,203 | |
Service revenue | |
| 129,222 | | |
| 155,278 | | |
| 262,057 | | |
| 322,901 | |
Total revenue | |
| 1,342,078 | | |
| 2,221,201 | | |
| 2,409,966 | | |
| 4,022,104 | |
| |
| | | |
| | | |
| | | |
| | |
COST OF SALES | |
| | | |
| | | |
| | | |
| | |
Cost of product sold | |
| 150,568 | | |
| 123,654 | | |
| 272,424 | | |
| 262,973 | |
Cost of services sold | |
| 384,071 | | |
| 386,310 | | |
| 812,982 | | |
| 806,525 | |
Total cost of sales | |
| 534,639 | | |
| 509,964 | | |
| 1,085,406 | | |
| 1,069,498 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 807,439 | | |
| 1,711,237 | | |
| 1,324,560 | | |
| 2,952,606 | |
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| | | |
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OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
Research and development | |
| 3,289 | | |
| 29,278 | | |
| 10,393 | | |
| 87,761 | |
Selling, general and administrative | |
| 1,175,219 | | |
| 1,778,002 | | |
| 2,960,008 | | |
| 3,671,674 | |
Total operating expenses | |
| 1,178,508 | | |
| 1,807,280 | | |
| 2,970,401 | | |
| 3,759,435 | |
| |
| | | |
| | | |
| | | |
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Loss from operations | |
| (371,069 | ) | |
| (96,043 | ) | |
| (1,645,841 | ) | |
| (806,829 | ) |
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| | | |
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OTHER INCOME (EXPENSES) | |
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Interest expense | |
| (266,802 | ) | |
| (264,465 | ) | |
| (670,449 | ) | |
| (523,665 | ) |
Change in fair value of derivative liabilities | |
| 91,701 | | |
| 3,118 | | |
| 91,711 | | |
| (1,366 | ) |
Total other expenses | |
| (175,101 | ) | |
| (261,347 | ) | |
| (578,738 | ) | |
| (525,031 | ) |
| |
| | | |
| | | |
| | | |
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Loss before income taxes | |
| (546,170 | ) | |
| (357,390 | ) | |
| (2,224,579 | ) | |
| (1,331,860 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income tax expense | |
| — | | |
| 65,828 | | |
| — | | |
| 65,828 | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (546,170 | ) | |
$ | (423,218 | ) | |
$ | (2,224,579 | ) | |
$ | (1,397,688 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted
net loss per common share | |
$ | (0.02 | ) | |
$ | (0.02 | ) | |
$ | (0.08 | ) | |
$ | (0.05 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted
weighted average common shares outstanding | |
| 26,948,487 | | |
| 26,422,847 | | |
| 26,859,118 | | |
| 26,164,136 | |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Cash Flows (Unaudited) |
|
|
| |
Six Months Ended June
30, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (2,224,579 | ) | |
$ | (1,397,688 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities: | |
| | | |
| | |
Depreciation | |
| 28,165 | | |
| 64,796 | |
Amortization | |
| 97,121 | | |
| 139,886 | |
Amortization of debt discount | |
| 170,813 | | |
| 231,380 | |
Stock-based compensation to employees and directors | |
| 44,832 | | |
| 24,902 | |
Stock-based compensation to consultants | |
| 27,024 | | |
| 215,800 | |
Change in fair value of derivative liabilities | |
| (91,711 | ) | |
| 1,366 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 21,727 | | |
| (128,127 | ) |
Inventories | |
| 2,326 | | |
| 212,131 | |
Prepaid income taxes | |
| — | | |
| 356,902 | |
Other current assets | |
| (37,055 | ) | |
| 64,415 | |
Accounts payable | |
| 465,152 | | |
| (118,690 | ) |
Accrued liabilities | |
| 8,799 | | |
| 687,060 | |
| |
| | | |
| | |
Net cash (used in) provided by operating activities | |
| (1,487,386 | ) | |
| 354,133 | |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of common stock | |
| — | | |
| 240,000 | |
Proceeds from notes payable - related parties | |
| 650,000 | | |
| — | |
Payments on notes payable - related parties | |
| — | | |
| (231,604 | ) |
Proceeds from notes payable, net | |
| 1,200,000 | | |
| — | |
Payments on notes payable | |
| (352,982 | ) | |
| (829,191 | ) |
| |
| | | |
| | |
Net cash provided by (used in) financing activities | |
| 1,497,018 | | |
| (820,795 | ) |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| 9,632 | | |
| (466,662 | ) |
| |
| | | |
| | |
Cash at beginning of period | |
| 11,739 | | |
| 491,806 | |
| |
| | | |
| | |
Cash at end of period | |
$ | 21,371 | | |
$ | 25,144 | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during the period for interest | |
$ | 95,394 | | |
$ | 252,152 | |
| |
| | | |
| | |
Non cash investing and financing activities: | |
| | | |
| | |
Amortization of note discount | |
$ | 170,813 | | |
$ | 231,380 | |
Issuance of common stock for interest | |
$ | 12,055 | | |
$ | — | |
Note discount from embedded conversion feature in connection with debenture | |
$ | 119,229 | | |
$ | — | |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited
1.
DESCRIPTION OF BUSINESS
Targeted
Medical Pharma, Inc. (the “Company” or “TMP”), also doing business as Physician
Therapeutics (“PTL”), is a specialty pharmaceutical company that develops and commercializes amino acid
based medications. On July 30, 2007, the Company formed Complete Claims Processing, Inc. (“CCPI”), a
wholly owned subsidiary which provides specialty billing and collection services for our products dispensed by physician clients
and to physician clients of some of our distributors.
Segment
Information:
The
Company recognized revenue outside of the United States during the three and six months ended June 30, 2015 of $32,370 and did
not recognize revenue outside of the United States during the three and six months ended June 30, 2014. The Company has two principal
business operations: (i) the distribution of proprietary medical foods and (ii) billing and collection services relating to our
products. The Company’s operations are organized into two reportable segments during the six months ended June 30, 2015
and 2014.
|
● | TMP:
The Company distributes its proprietary medical foods and generic pharmaceuticals as
PTL. TMP develops and distributes amino acid based therapeutic products and distributes
pharmaceutical products from other manufacturers through employed sales representatives,
independent distributors and pharmacies. TMP also performs the administrative, regulatory
compliance, sales and marketing functions of the corporation, owns the corporation’s
intellectual property, is responsible for research and development relating to medical
food products and development of software used for the dispensation and billing of medical
foods and generic products. The TMP segment also manages contracts and chargebacks. |
|
● | CCPI:
This segment provides point-of-care dispensing solutions and billing and collections
services. |
Results
for the three and six months ended June 30, 2015 and 2014, are reflected in the table below:
For the three
months ended June 30, | |
| | |
| | |
| |
| |
| | |
| | |
| |
2015 (Unaudited) | |
Total | | |
TMP | | |
CCPI | |
Gross sales | |
$ | 1,342,078 | | |
$ | 1,212,856 | | |
$ | 129,222 | |
Gross profit (loss) | |
$ | 807,439 | | |
$ | 1,062,288 | | |
$ | (254,849 | ) |
Net loss | |
$ | (546,170 | ) | |
$ | (291,321 | ) | |
$ | (254,849 | ) |
Total assets | |
$ | 2,397,644 | | |
$ | 2,364,606 | | |
$ | 33,038 | |
| |
| | | |
| | | |
| | |
2014 (Unaudited) | |
| | | |
| | | |
| | |
Gross sales | |
$ | 2,221,201 | | |
$ | 2,065,923 | | |
$ | 155,278 | |
Gross profit (loss) | |
$ | 1,711,237 | | |
$ | 1,942,269 | | |
$ | (231,032 | ) |
Net loss | |
$ | (423,218 | ) | |
$ | (192,186 | ) | |
$ | (231,032 | ) |
Total assets | |
$ | 3,821,088 | | |
$ | 3,780,270 | | |
$ | 40,818 | |
For the six months ended June 30, | |
| | |
| | |
| |
| |
| | |
| | |
| |
2015 (Unaudited) | |
Total | | |
TMP | | |
CCPI | |
Gross sales | |
$ | 2,409,966 | | |
$ | 2,147,909 | | |
$ | 262,057 | |
Gross profit (loss) | |
$ | 1,324,560 | | |
$ | 1,875,485 | | |
$ | (550,925 | ) |
Net loss | |
$ | (2,224,579 | ) | |
$ | (1,673,654 | ) | |
$ | (550,925 | ) |
Total assets | |
$ | 2,397,644 | | |
$ | 2,364,606 | | |
$ | 33,038 | |
| |
| | | |
| | | |
| | |
2014 (Unaudited) | |
| | | |
| | | |
| | |
Gross sales | |
$ | 4,022,104 | | |
$ | 3,699,203 | | |
$ | 322,901 | |
Gross profit (loss) | |
$ | 2,952,606 | | |
$ | 3,436,230 | | |
$ | (483,624 | ) |
Net loss | |
$ | (1,397,688 | ) | |
$ | (914,064 | ) | |
$ | (483,624 | ) |
Total assets | |
$ | 3,821,088 | | |
$ | 3,780,270 | | |
$ | 40,818 | |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
2.
LIQUIDITY AND GOING CONCERN
The
accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.
The Company has incurred recurring losses and reported losses for the three and six months ended June 30, 2015, totaling $546,170
and $2,224,579, respectively, as well as an accumulated deficit as of June 30, 2015, amounting to $29,141,995. As a result of
our continued losses, at June 30, 2015, the Company’s current liabilities significantly exceed current assets, resulting
in negative working capital of $12,664,767. Further, the Company does not have adequate cash to cover projected operating costs
for the next 12 months. As of June 30, 2015, the Company also owes approximately $650,000 to the Internal Revenue Service (“IRS”)
and the California Franchise Tax Board (“FTB”) for unpaid payroll taxes. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. In order to ensure the continued viability of the Company,
either future equity financings must be obtained or profitable operations must be achieved in order to repay the existing short-term
debt and to provide a sufficient source of operating capital. No assurances can be made that the Company will be successful obtaining
the equity financing needed to continue to fund its operations, or that the Company will achieve profitable operations and positive
cash flow. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
3.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and
Regulation S-X and do not include all the information and disclosures required by accounting principles generally accepted in
the United States of America. The Company has made estimates and judgments affecting the amounts reported in our consolidated
financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from our
estimates. The consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of
management, necessary to provide a fair statement of results for the interim periods presented. The consolidated balance sheet
as of December 31, 2014 was derived from the Company’s audited financial statements. The consolidated financial statements
should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2014. Results of the three and six months ended June 30, 2015, are not necessarily indicative of the
results to be expected for the full year ending December 31, 2015.
Principles
of Consolidation
The
consolidated financial statements include accounts of TMP and its wholly owned subsidiary, CCPI (collectively referred to as “the
Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition,
TMP and CCPI share the common operating facility, certain employees and various costs. Such expenses are principally paid by TMP.
Due to the nature of the parent and subsidiary relationship, the individual financial position and operating results of TMP and
CCPI may be different from those that would have been obtained if they were autonomous.
Cash
Equivalents
The
Company considers all highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents.
The recorded carrying amounts of the Company’s cash and cash equivalents approximate their fair value. As of June 30, 2015
and 2014, the Company had no cash equivalents.
Accounting
Estimates
The
preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company’s critical accounting policies that involve significant judgment and estimates
include revenue recognition, share based compensation, recoverability of intangibles, valuation of derivatives, and valuation
of deferred income taxes. Actual results could differ from those estimates.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
Revenue
Recognition
TMP
markets and sells medical foods through employed sales representatives, independent distributors, and pharmacies. Product sales
are invoiced upon shipment at Average Wholesale Price (“AWP”), which is a commonly used term in the
industry, with varying rapid pay discounts, under five models: Physician Direct Sales, Distributor Direct Sales, Physician Managed,
Hybrid Models, and the Cambridge Medical Funding Group WC Receivable Purchase Assignment Model.
Under
the following revenue models, product sales are invoiced upon shipment. However, revenues are not recorded until collectability
is reasonably assured, which the Company has determined is when the payment is received:
Physician
Direct Sales Model (9% of product revenues for the six months ended June 30, 2015): Under this model, a physician purchases
products from TMP, but does not retain CCPI’s services. TMP invoices the physician upon shipment under terms which allow
a significant rapid pay discount off AWP for payment within discount terms, in accordance with the product purchase agreement.
The physicians dispense the product and perform their own claims processing and collections. TMP recognizes revenue under this
model on the date of shipment at the gross invoice amount less the anticipated rapid pay discount offered in the product purchase
agreement. In the event payment is not received within the term of the agreement, the amount due from the physician for the purchased
TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up
to 20% may be applied to the outstanding balance. The physician is responsible for payment directly to TMP.
Distributor
Direct Sales Model (19% of product revenues for the six months ended June 30, 2015): Under this model, a distributor purchases
products from TMP, sells those products to a physician, and the physician does not retain CCPI’s services. TMP invoices
distributors upon shipment under terms which include a significant discount off AWP. TMP recognizes revenue under this model on
the date of shipment at the net invoice amount. In the event payment is not received within the term of the agreement, the amount
payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term,
a late payment fee of up to 20% may be applied to the outstanding balance.
Physician
Managed Model (33% of product revenues for the six months ended June 30, 2015): Under this model, a physician purchases products
from TMP and retains CCPI’s services. TMP invoices the physician upon shipment under terms which allow a significant rapid
pay discount for payment received within terms in accordance with the product purchase agreement, which includes a security interest
for TMP in the products and receivables generated by the dispensing of the products. The physician also executes a billing and
claims processing services agreement with CCPI for billing and collection services relating to our products (discussed below).
CCPI submits a claim for reimbursement on behalf of the physician client. The CCPI fee and product invoice amount are deducted
from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the physician
client. In the event the physician fails to pay the product invoice within the agreed term, we can deduct the payment due from
any of the reimbursements received by us on behalf of the physician client as a result of the security interest we obtained in
the products we sold to the physician client and the receivables generated by selling the products in accordance with our agreement.
In the event payment is not received within the term of the agreement, the amount due from the physician for the purchased TMP
products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to
20% may be applied to the outstanding balance.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
Hybrid
Model (14% of product revenues for the six months ended June 30, 2015): Under this model, a distributor purchases products
from TMP and sells those products to a physician and the physician retains CCPI’s services. TMP invoices distributors upon
shipment under terms which allow a significant rapid pay discount for payment received within terms in accordance with the product
purchase agreements. The physician client of the distributor executes a billing and claims processing services agreement with
CCPI for billing and collection services (discussed below). The distributor product invoice and the CCPI fee are deducted from
the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the distributor
for further delivery to their physician clients. In the event payment is not received within the term of the agreement, the amount
payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term,
a late payment fee of up to 20% may be applied to the outstanding balance.
Since
we are in the early stage of our business, as a courtesy to our physician clients, our general practice has been to extend the
rapid pay discount from our Physician Managed and Hybrid models beyond the initial term of the invoice until the invoice is paid
and not to apply a late payment fee to the outstanding balance.
Due
to substantial uncertainties as to the timing and collectability of revenues derived from our Physician Managed and Hybrid models,
which can take in excess of five years to collect, we have determined that these revenues do not meet the criteria for recognition,
in accordance with The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic No. ASC 605, Revenue Recognition (“ASC 605”), upon shipment.
These revenues are recorded when collectability is reasonably assured, which the Company has determined is when the payment is
received, which is upon collection of the claim.
The
Company has entered into an agreement with Cambridge Medical Funding Group, LLC (“CMFG”) related to
California Workers’ Compensation (“WC”) benefit claims. Under this arrangement, we have determined
that pursuant to FASB ASC Topic No. 860, Transfers of Financial Assets and ASC 605 we have met the criteria for revenue
recognition on the date that payment is due from CMFG, which approximates the product shipment date.
CMFG
#1 – WC Receivable Purchase Assignment Model (“CMFG #1”) (25% of product revenues for the
six months ended June 30, 2015): Under this model, physicians who purchase products from TMP under the Company’s Physician
Managed Model will have the option to assign their accounts receivables (primarily those accounts receivables with dates of service
starting with the year 2013) from California WC benefit claims to CMFG, at a discounted rate. Each agreement is executed among
CMFG, TMP, and each individual physician, and serves as a master agreement for all assigned receivables by the physician to CMFG.
Since these accounts receivable originated from the Company’s Physician Managed Model, CCPI’s services are also retained.
The physician’s fees and financial obligations due to TMP, for the purchase of TMP product and use of CCPI’s services,
are satisfied directly by CMFG, usually within seven (7) days of transmission of the accounts receivable to CMFG. CMFG has agreed
to pay an amount equal to 20% of eligible assigned accounts receivable as an advance payment. CMFG makes this payment directly
to TMP, on behalf of the physician. TMP applies this payment to the physician’s financial obligations due to CCPI for the
physician’s use of the Company’s medical billing and claims processing services, and the physician’s financial
obligation due to TMP for the cost of the product. The Company recognizes revenue on the date that payment is due from CMFG. Under
CMFG #1, the Company only receives the 20% advance payment, where such payment is without recourse or future obligation for TMP
to repay the 20% advanced amount back to CMFG or the physician. Actual amounts collected on the assigned accounts receivable are
shared between CMFG and the physician, where the first 37% of amounts collected are disbursed to CMFG and additional amounts collected
are shared at a ratio of 75:25, where 75% is disbursed to the physician and 25% is disbursed to CMFG.
During
the six months ended June 30, 2015 and 2014, the Company issued billings to Physician Managed and Hybrid model customers aggregating
$1.5 million and $1.7 million, respectively, which were not recognized as revenues or accounts receivable in the accompanying
consolidated financial statements at the time of such billings. Direct costs associated with the above billings are expensed as
incurred. Direct costs associated with all billings, aggregating $272,424 and $262,973, respectively, were expensed in the accompanying
consolidated financial statements at the time of such billings. In accordance with the Company’s revenue recognition policy,
the Company recognized revenues from certain of these customers when cash was collected, aggregating $1,051,917 and $1,737,873
during the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, we had approximately $7.0 million in unrecorded
accounts receivable that potentially will be recorded as revenue in the future as our CCPI subsidiary secures claims payments
on behalf of our PMM and Hybrid Customers. All unpaid invoices underlying claims assigned to CMFG pursuant to CMFG #1 are excluded
from unrecorded accounts receivable.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
CCPI
receives no revenue in the Physician Direct or Distributor Direct models because it does not provide collection and billing services
to these customers. In the Physician Managed and Hybrid models CCPI has a billing and claims processing service agreement with
the physician. The billing and claims processing agreement includes a service fee that is based upon a percentage of collections
on all claims. Because fees are only earned by CCPI upon collection on the claim, and the fee is not determinable until the amount
of the collection is known, CCPI recognizes revenue at the time claims are paid. Under CMFG #1 the Company recognizes revenue
related to CCPI’s services upon receipt of the 20% advance payment from CMFG.
No
returns of products are allowed except for products damaged in shipment, which historically have been insignificant.
The
rapid pay discounts to the AWP amount offered to the physician or distributor vary based upon the expected payment term from the
physician or distributor. The discounts are derived from the Company’s experience of the collection rates from internal
sources and updated for facts and circumstances and known trends and conditions in the industry, as appropriate. As described
in the various models, we recognize provisions for rapid pay discounts in the same period in which the related revenue is recorded.
We believe that our current provisions appropriately reflect our exposure for rapid pay discounts. These rapid pay discounts have
typically ranged from 40% to 88% of AWP.
Allowance
for Doubtful Accounts
Trade
accounts receivable are stated at the amount management expects to collect from outstanding balances. Currently, accounts receivable
are comprised of amounts due from our CMFG #1, distributor customers and other miscellaneous receivables. The carrying amounts
of accounts receivable are reduced by an allowance for doubtful accounts that reflects management’s best estimate of the
amounts that will not be collected. The Company individually reviews all accounts receivable balances and based upon an assessment
of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. An allowance is recorded
for those accounts that are determined to likely be uncollectible through a charge to earnings and a credit to a valuation allowance.
Balances that remain outstanding after we have used reasonable collection efforts will be written off. Based on an assessment
as of June 30, 2015 and December 31, 2014, of the collectability of invoices, we established an allowance for doubtful accounts
of $9,408 and $55,773, respectively.
Under
the Company’s Physician Managed Model and Hybrid Model, CCPI performs billing and collection services on behalf of the physician
client and deducts the CCPI fee and product invoice amount from the reimbursement received by CCPI on behalf of the physician
client before the reimbursement is forwarded to the physician client. Extended collection periods are typical in the workers compensation
industry with payment terms extending from 45 days to in excess of five years. The physician remains personally liable for purchases
of product from TMP and TMP retains a security interest in all products sold to the physician, and the resulting claims receivable
from sales of the products. CCPI maintains an accounting of all managed accounts receivable on behalf of the physician. As described
above, due to uncertainties as to the timing and collectability of receivables derived from these models, revenue is recorded
when payment is received, there is no related accounts receivable, and therefore no allowance for doubtful accounts is necessary.
Inventory
Valuation
Inventory
is valued at the lower of cost (first in, first out) or market and consists primarily of medical food products.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of
the related assets. Computer equipment is depreciated over three to five years. Furniture and fixtures are depreciated over five
to seven years. Leasehold improvements are amortized over the shorter of fifteen years or term of the applicable property lease.
Maintenance and repairs are expensed as incurred; major renewals and betterments that extend the useful lives of property and
equipment are capitalized. When property and equipment is sold or retired, the related cost and accumulated depreciation are removed
from the accounts and any gain or loss is recognized. Amenities are capitalized as leasehold improvements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
Impairment
of Long-Lived Assets
The
long-lived assets held and used by the Company are reviewed for impairment no less frequently than annually or whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and
circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. No
impairment indicators existed at June 30, 2015 and December 31, 2014, so no long-lived asset impairment was recorded.
Intangible
Assets
Intangible
assets with finite lives, including patents and internally developed software (primarily the Company’s PDRx Software), are
stated at cost and are amortized over their useful lives. Patents are amortized on a straight line basis over their statutory
lives, usually fifteen to twenty years. Internally developed software is amortized over three to five years. Intangible assets
with indefinite lives are tested annually for impairment, during the fiscal fourth quarter and between annual periods, and more
often when events indicate that an impairment may exist. If impairment indicators exist, the intangible assets are written down
to fair value as required. The Company has one intangible asset with an indefinite life which is a domain name for medical foods.
Taking into account the cyclical and non-recurring events that affected operations, the Company determined that no impairment
indicators existed at June 30, 2015, or December 31, 2014, so no intangible asset impairment was recorded for the three or six
months ended June 30, 2015, or the year ended December 31, 2014.
Fair
Value of Financial Instruments
The
Company’s financial instruments are accounts receivable, accounts payable, notes payable, and warrant derivative liability.
The recorded values of accounts receivable and accounts payable approximate their values based on their short term nature. Notes
payable are recorded at their issue value or if warrants are attached at their issue value less the proportionate value of the
warrant. Warrants issued with ratcheting provisions are classified as derivative liabilities and are revalued using the Black-Scholes
model each quarter based on changes in the market value of our common stock and unobservable level 3 inputs.
The
Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value,
of which the first two are considered observable and the last is considered unobservable:
Level
1: Quoted prices in active markets for identical assets or liabilities.
Level
2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level
3 assumptions: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities including liabilities resulting from imbedded derivatives associated with certain warrants to purchase
common stock.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
Derivative
Financial Instruments
Derivative
liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC Topic
815-40 Derivatives and Hedging – Contracts in Entity’s own Equity (“ASC 815-40”).
Pursuant to ASC 815-40, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants
issued is required to be classified as a derivative liability instead of as equity. Further, under ASC Topic 815-15 –
Derivatives and Hedging – Embedded Derivatives (“ASC 815-15”) an evaluation of the
embedded conversion feature of convertible debt is also evaluated to determine if the bifurcated debt conversion feature is required
to be classified as a derivative liability. The estimated fair value of the warrants and the embedded conversion feature of debt
classified as derivative liabilities are determined using the Black-Scholes option pricing model. The model utilizes Level 3 unobservable
inputs to calculate the fair value of the warrants at each reporting period. The Company determined that using an alternative
valuation model such as a Binomial-Lattice model would result in minimal differences. The fair value of the warrants and the embedded
conversion feature of debt classified as derivative liabilities are adjusted for changes in fair value at each reporting period,
and the corresponding non-cash gain or loss is recorded as other income or expense in the consolidated statement of operations.
As of June 30, 2015, 95,000 warrants and the embedded conversion feature of the $650,000 Debenture were classified as derivative
liabilities. Each reporting period the warrants and the embedded conversion feature are re-valued and adjusted through the caption
“change in fair value of derivative liabilities” on the consolidated statements of operations. The Company’s
remaining warrants are recorded to additional paid in capital as equity instruments.
Income
Taxes
The
Company determines its income taxes under the asset and liability method. Under the asset and liability approach, deferred income
tax assets and liabilities are calculated and recorded based upon the future tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future periods for differences between the financial statements carrying amounts and
the tax basis of existing assets and liabilities. Generally, deferred income taxes are classified as current or non-current in
accordance with the classification of the related asset or liability. Those not related to an asset or liability are classified
as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances
are provided for significant deferred income tax assets when it is more likely than not that some or all of the deferred tax assets
will not be realized.
The
Company recognizes tax liabilities by prescribing a minimum probability threshold that a tax position must meet before a financial
statement benefit is recognized and also provides guidance on de-recognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The minimum threshold is defined as a tax position that is more likely
than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of
benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax
outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which
such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included
in income tax expense. U.S. GAAP also requires management to evaluate tax positions taken by the Company and recognize a liability
if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable
taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of June
30, 2015, there are no uncertain tax positions taken, or expected to be taken, that would require recognition of a liability that
would require disclosure in the financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
The
Company’s effective tax rates were approximately 0% and 5% for the six months ended June 30, 2015 and 2014, respectively.
During 2013, the Company decided to fully reserve its net deferred income tax assets by taking a full valuation allowance against
these assets. As a result of this decision, during the six months ended June 30, 2015 and 2014, the Company did not recognize
any income tax benefit as a result of its net loss. Further, during the six months ended June 30, 2014, the Company recognized
$65,828 of income tax expense upon the final resolution of the Company’s Federal and state income tax audits for years 2010
through 2012. Thus, during the six months ended June 30, 2015 and 2014, the effective tax rate differed from the U.S. federal
statutory rate primarily due to the change in the valuation allowance and to a lesser extent, for the six months ended June 30,
2014, upon the recognition of income tax expense resulting from the Company’s Federal and state income tax audits. The table
below shows the balances for the deferred income tax assets and liabilities as of the dates indicated.
| |
June 30, 2015 | | |
December 31, 2014 | |
Deferred income tax asset-short-term | |
$ | 1,564,915 | | |
$ | 1,517,270 | |
Allowance | |
| (1,564,915 | ) | |
| (1,517,270 | ) |
Deferred income tax asset-short-term, net | |
| — | | |
| — | |
| |
| | | |
| | |
Deferred income tax asset-long-term | |
| 9,003,458 | | |
| 8,303,462 | |
Deferred income tax liability-long-term | |
| (986,498 | ) | |
| (1,074,928 | ) |
Deferred income tax asset-long-term | |
| 8,016,960 | | |
| 7,228,534 | |
Allowance | |
| (8,016,960 | ) | |
| (7,228,534 | ) |
Deferred income tax asset-long-term, net | |
| — | | |
| — | |
| |
| | | |
| | |
Total deferred tax asset, net | |
$ | — | | |
$ | — | |
The
ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when
those temporary differences and net operating loss carryovers are deductible. Management considers the scheduled reversal of deferred
tax liabilities, taxes paid in carryover years, projected future taxable income, available tax planning strategies, and other
factors in making this assessment. Based on available evidence, management believes it is more likely than not that all of the
deferred tax assets will not be realized. Accordingly, the Company has maintained a valuation allowance for the current year.
At
June 30, 2015, the Company had total domestic Federal and state net operating loss carryovers of approximately $9,898,000 and
$12,616,000, respectively. Federal and state net operating loss carryovers expire at various dates between 2021 and 2032.
Under
the Tax Reform Act of 1986, as amended, the amounts of and benefits from net operating loss carryovers and research and development
credits may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses
that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%,
as defined, over a three year period. The Company does not believe that such an ownership change has occurred.
Stock-Based
Compensation
The
Company accounts for stock option awards in accordance with FASB ASC Topic No. 718, Compensation-Stock Compensation. Under
FASB ASC Topic No. 718, compensation expense related to stock-based payments is recorded over the requisite service period based
on the grant date fair value of the awards. Compensation previously recorded for unvested stock options that are forfeited is
reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for
stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards,
including the option’s expected term and the price volatility of the underlying stock.
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows the provisions of FASB ASC Topic No. 505-50, Equity Based Payments to Non-Employees. Accordingly, the measurement
date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete.
In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of
the consulting agreement.
Loss
per Common Share
The
Company utilizes FASB ASC Topic No. 260, Earnings per Share. Basic loss per share is computed by dividing loss available
to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar
to basic loss per share except that the denominator is increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted
loss per common share reflects the potential dilution that could occur if convertible debentures, options and warrants were to
be exercised or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the entity.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
Since
the effects of outstanding options, warrants and the conversion of convertible debt are anti-dilutive in all periods presented,
shares of common stock underlying these instruments have been excluded from the computation of loss per common share.
The
following sets forth the number of shares of common stock underlying outstanding options, warrants and convertible debt as of
June 30, 2015 and 2014:
| |
June 30, | |
| |
| 2015 | | |
| 2014 | |
Warrants | |
| 4,699,372 | | |
| 4,256,465 | |
Stock options | |
| 2,357,341 | | |
| 2,423,841 | |
Convertible debentures | |
| 2,166,667 | | |
| — | |
| |
| 9,223,380 | | |
| 6,680,306 | |
Research
and Development
Research
and development costs are expensed as incurred. In instances where we enter into agreements with third parties for research and
development activities, we may prepay fees for services at the initiation of the contract. We record the prepayment as a prepaid
asset and amortize the asset into research and development expense over the period of time the contracted research and development
services are performed. Typically, we expensed 50% of the contract amount within the first two years of the contract and 50% over
the remainder of the record retention requirements under the contract based on our experience on how long the clinical trial service
is provided.
Reclassifications
Certain
prior year amounts have been reclassified for comparative purposes to conform to the current-year financial statement presentation.
These reclassifications had no effect on previously reported results of operations.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers
(Topic 606)” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”)
605, Revenue Recognition. The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common
revenue standard for U.S. GAAP and International Financial Reporting Standards. The amendments (i) remove inconsistencies and
weaknesses in revenue requirements, (ii) provide a more robust framework for addressing revenue issues, (iii) improve comparability
of revenue recognition across entities, industries, jurisdictions, and capital markets, (iv) provide more useful information to
users of financial statements through improved disclosure requirements, and (v) simplify the preparation of financial statements
by reducing the number of requirements to which an entity must refer. The new revenue recognition standard requires entities to
recognize revenue in a way that reflects the transfer of promised goods or services to customers in an amount based on the consideration
to which the entity expects to be entitled to in exchange for those goods or services. On July 9, 2015, the FASB agreed to delay
the effective date by one year. Therefore, ASU 2014-09 is effective for interim and annual reporting periods beginning after December
15, 2017 and early adoption is not permitted. The amendments can be applied retrospectively to each prior reporting period or
retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. The
Company has not determined what transition method it will use and is currently assessing the impact that this guidance may have
on its consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
In
August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 is intended
to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to
continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after
December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted.
The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial
condition.
4.
STOCK-BASED COMPENSATION
In
January 2011 the Company’s stockholders approved the Company’s 2011 Stock Incentive Plan (the “Plan”).
The Plan, as amended, provides for the issuance of a maximum of five million (5,000,000) shares of the Company’s common
stock to be offered to the Company’s directors, officers, employees, and consultants. Options granted under the Plan have
an exercise price equal to or greater than the fair value of the underlying common stock at the date of grant and become exercisable
based on a vesting schedule determined at the date of grant. The options expire between 5 and 10 years from the date of grant.
Restricted stock awards granted under the Plan are subject to a vesting period determined at the date of grant.
During
the three and six months ended June 30, 2015, the Company had stock-based compensation expense of $6,861 and $15,524, respectively,
related to issuances from the Plan to the Company’s employees and directors, included in reported net loss. During the three
and six months ended June 30, 2014, the Company had stock-based compensation expense included in reported net loss of $12,451
and $24,902, respectively. The total amount of stock-based compensation from issuances pursuant to the Plan to employees and directors
for the three and six months ended June 30, 2015 and 2014, related solely to the issuance of stock options.
A
summary of stock option activity for the six months ended June 30, 2015 and year ended December 31, 2014, is presented below:
| |
| | |
Outstanding
Options | |
| |
Shares
Available for
Grant | | |
Number
of
Shares | | |
Weighted
Average
Exercise Price | | |
Weighted
Average
Remaining
Contractual
Life (years) | | |
Aggregate
Intrinsic Value | |
| |
| | |
| | |
| | |
| | |
| |
December 31, 2013 | |
| 1,792,697 | | |
| 2,794,841 | | |
$ | 1.89 | | |
| 7.03 | | |
$ | 0 | |
Cancellations and forfeitures | |
| 373,800 | | |
| (373,800 | ) | |
$ | 2.62 | | |
| | | |
| | |
Restricted stock awards | |
| (75,000 | ) | |
| — | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| 2,091,497 | | |
| 2,421,041 | | |
$ | 1.77 | | |
| 5.88 | | |
$ | 0 | |
Grants | |
| (200,000 | ) | |
| 200,000 | | |
$ | 0.30 | | |
| | | |
| | |
Cancellations and forfeitures | |
| 263,700 | | |
| (263,700 | ) | |
$ | 1.31 | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
June 30, 2015 | |
| 2,155,197 | | |
| 2,357,341 | | |
$ | 1.70 | | |
| 5.33 | | |
$ | 0 | |
The
aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing
stock price on the respective date and the exercise price, times the number of shares) that would have been received by the option
holders had all option holders exercised their options. There have not been any options exercised during the six months ended
June 30, 2015 and year ended December 31, 2014.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
All
options that the Company grants are granted at the per share fair value on the grant date. Vesting of options differs based on
the terms of each option. The Company has valued the options at their date of grant utilizing the Black Scholes option pricing
model. As of the issuance of these financial statements, there was not an active public market for the Company’s shares.
Accordingly, the fair value of the underlying options was determined based on the historical volatility data of similar companies,
considering the industry, products and market capitalization of such other entities. The risk-free interest rate used in the calculations
is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the
options as calculated using the simplified method. The expected life of the options used was based on the contractual life of
the option granted. Stock-based compensation is a non-cash expense because we settle these obligations by issuing shares of our
common stock from our authorized shares instead of settling such obligations with cash payments.
The
Company did not issue any options during the year ended December 31, 2014. The Company utilized the Black-Scholes option pricing
model and the assumptions used for the six months ended June 30, 2015 are as follows:
| |
Six
Months Ended June
30, 2015 | |
Weighted average risk free interest rate | |
| 1.13 | % |
Weighted average life (in years) | |
| 3.4 | |
Volatility | |
| 66 | % |
Expected dividend yield | |
| 0 | % |
Weighted average grant-date fair value per share of options granted | |
$ | 0.01 | |
A
summary of the changes in the Company’s nonvested options during the six months ended June 30, 2015, is as follows:
| |
Number
of
Non-vested
Options | | |
Weighted
Average Fair
Value at Grant
Date | | |
Intrinsic
Value | |
| |
| | |
| | |
| |
Non-vested at December 31,
2014 | |
| 170,833 | | |
$ | 0.57 | | |
$ | — | |
Vested in six months ended June 30, 2015 | |
| 25,000 | | |
$ | 0.93 | | |
$ | — | |
Non-vested at June 30, 2015 | |
| 345,833 | | |
$ | 0.22 | | |
$ | — | |
Exercisable at June 30, 2015 | |
| 2,011,508 | | |
$ | 0.96 | | |
$ | — | |
Outstanding at June 30, 2015 | |
| 2,357,341 | | |
$ | 0.93 | | |
$ | — | |
As
of June 30, 2015, total unrecognized compensation cost related to unvested stock options was $49,259. The cost is expected to
be recognized over a weighted average period of 1.93 years.
5.
WARRANTS
During
the year ended December 31, 2014, the Company issued a total of 662,907 warrants, at an average exercise price of $0.35 per share.
Included in these issuances are 162,907 warrants issued to William E. Shell, M.D., the Company’s former Chief Executive
Officer, in connection with the July 24, 2014 loan to the Company (See Note 7), and 500,000 warrants to several consultants for
financial advisory and investor relations services. The Company has not issued any warrants during the six months ended June 30,
2015 and during the three months ended March 31, 2015, the Company cancelled 220,000 warrants, with an average exercise price
of $0.42 per share.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
The
Company utilized the Black-Scholes option pricing model and the assumptions used for the year ended December 31, 2014 are as follows:
| |
Year
Ended December
31, 2014 | |
Weighted average risk free interest rate | |
| 1.67%
– 1.72 | % |
Weighted average life (in years) | |
| 5.0 | |
Volatility | |
| 67 | % |
Expected dividend yield | |
| 0 | % |
Weighted average grant-date fair value per share of options granted | |
$ | 0.67 | |
The
following table summarizes information about common stock warrants outstanding at June 30, 2015:
Outstanding | | |
Exercisable | |
Exercise
Price | | |
Number
Outstanding | | |
Weighted
Average
Remaining
Contractual
Life
(Years) | | |
Weighted
Average
Exercise
Price | | |
Number
Exercisable | | |
Weighted
Average
Exercise
Price | |
| | |
| | |
| | |
| | |
| | |
| |
$ | 0.01 | | |
| 365,000 | | |
| 3.55 | | |
$ | 0.01 | | |
| 365,000 | | |
$ | 0.01 | |
$ | 0.80 | | |
| 162,907 | | |
| 4.12 | | |
$ | 0.80 | | |
| 162,907 | | |
$ | 0.80 | |
$ | 1.00 | | |
| 1,625,000 | | |
| 1.99 | | |
$ | 1.00 | | |
| 1,625,000 | | |
$ | 1.00 | |
$ | 2.00 | | |
| 1,812,500 | | |
| 8.05 | | |
$ | 2.00 | | |
| 1,812,500 | | |
$ | 2.00 | |
$ | 2.60 | | |
| 20,000 | | |
| 2.85 | | |
$ | 2.60 | | |
| 20,000 | | |
$ | 2.60 | |
$ | 3.38 | | |
| 713,965 | | |
| 1.57 | | |
$ | 3.38 | | |
| 713,965 | | |
$ | 3.38 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| $0.01
- 3.38 | | |
| 4,699,372 | | |
| 4.46 | | |
$ | 1.67 | | |
| 4,699,372 | | |
$ | 1.67 | |
Included
in the Company’s outstanding warrants are 2,586,872 warrants that were issued to a related party over the period from August
2011 through July 2014 at exercise prices ranging from $0.01 to $3.38. One of the related party warrants contains provisions that
require it to be accounted for as a derivative security. As of June 30, 2015 and December 31, 2014, the value of the related liability
was $9,517 and $18,075, respectively. Changes in these values are recorded as income or expense during the reporting period that
the change occurs.
6.
ACCRUED LIABILITIES
Accrued
liabilities at June 30, 2015, and December 31, 2014, are comprised of the following:
| |
June
30, 2015 | | |
December
31, 2014 | |
| |
| | |
| |
Due to physicians | |
$ | 3,137,446 | | |
$ | 2,659,698 | |
Accrued salaries and director fees | |
| 3,666,259 | | |
| 3,996,901 | |
Other | |
| 467,019 | | |
| 617,381 | |
Total accrued liabilities | |
$ | 7,270,724 | | |
$ | 7,273,980 | |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
7.
NOTES PAYABLE
Notes
payable at June 30, 2015, and December 31, 2014, are comprised of the following:
| |
June 30, 2015 | | |
December 31, 2014 | |
Notes payable to William Shell Survivor’s Trust (a) | |
$ | 1,874,411 | | |
$ | 1,874,411 | |
Notes payable to William Shell (b) | |
| 130,000 | | |
| 130,000 | |
Notes payable to Lisa Liebman (c) | |
| 500,000 | | |
| 500,000 | |
Note payable to Cambridge Medical Funding Group, LLC (d) | |
| 1,218,687 | | |
| 1,523,559 | |
Note payable to Derma Medical Systems, Inc. (e) | |
| 650,000 | | |
| — | |
Note payable to Shlomo Rechnitz (f) | |
| 1,151,890 | | |
| — | |
Total notes payable | |
| 5,524,988 | | |
| 4,027,970 | |
Less: debt discount | |
| (256,923 | ) | |
| (308,507 | ) |
| |
| 5,268,065 | | |
| 3,719,463 | |
Less: current portion | |
| (3,979,539 | ) | |
| (3,597,173 | ) |
Notes payable – long-term portion | |
$ | 1,288,526 | | |
$ | 122,290 | |
(a) | Between
January 2011 and December 2012, William E. Shell, M.D., the Company’s former Chief
Executive Officer, former Chief Scientific Officer, greater than 10% shareholder and
a former director, loaned $5,132,334 to the Company. As consideration for the loans,
the Company issued promissory notes in the aggregate principal amount of (i) $4,982,334
to the Elizabeth Charuvastra and William Shell Family Trust dated July 27, 2006 and amended
September 29, 2006 (the “Family Trust”), and (ii) $150,000
to the William Shell Survivor’s Trust (the “Survivor’s Trust”).
At the time these promissory notes were issued, all of these notes were issued with maturity
dates of five years from the date of issuance with interest payable on the maturity date.
On June 22, 2012, the Company’s Board of Directors ratified an amendment that modified
all promissory notes that were issued prior to June 22, 2012 to demand notes with interest
payable quarterly (the “June 2012 Amendment”). The Company
disputes the validity of the June 2012 Amendment. On December 21, 2012, all notes issued
to the Family Trust were assigned to the Survivor’s Trust (the “WS
Trust Notes”) which in turn assigned certain promissory notes, in the aggregate
principal amount of $500,000, to Lisa Liebman. The WS Trust Notes accrue interest at
rates ranging between 3.25% and 12.0% per annum. |
| |
| During
the three and six months ended June 30, 2015, the Company incurred interest expense of
$21,610 and $42,983, respectively, on the WS Trust Notes. During the three and six months
ended June 30, 2014, the Company incurred interest expense of $21,455 and $43,591, respectively.
At June 30, 2015 and December 31, 2014, accrued interest on the WS Trust Notes totaled
$64,299 and 21,316, respectively. |
| |
| On
March 13, 2015, we received from counsel for Dr. Shell, Ms. Liebman, the Elizabeth Charuvastra
and William Shell Family Trust dated July 27, 2006 and amended September 29, 2006 (the
“Family Trust”) and the William Shell Survivor’s Trust
(the “Survivor’s Trust”), a written demand for repayment
of all principal and interest outstanding on all outstanding notes. The Company disputes
the enforceability of the demand |
(b) | On
July 24, 2014, Dr. Shell loaned $130,000 to the Company. As consideration for the loan,
the Company issued Dr. Shell a promissory note in the aggregate principal amount of $130,000
(the “Shell Note”). The Shell Note accrues interest at the
rate of 8% per annum and is payable on demand. As additional consideration for entering
into the loan agreement, Dr. Shell received 162,907 warrants to purchase shares of the
Company’s common stock at an exercise price of $0.798 per share (the “Shell
Warrant”). The Company recorded a debt discount in the amount of $44,867
based on the estimated fair value of the Shell Warrant. The debt discount was amortized
as non-cash interest expense on the date of issuance using the effective interest method.
During the three and six months ended June 30, 2015, the Company incurred interest expense
of $2,593 and $5,157, respectively, on the Shell Note. At June 30, 2015 and December
31, 2014, accrued interest on the Shell Note totaled $7,095 and $1,938, respectively. |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
(c) | On
December 21, 2012 the William Shell Survivor’s Trust assigned certain promissory
notes, in the aggregate principal amount of $500,000, to Lisa Liebman (the “Liebman
Notes”), a related party. Lisa Liebman is married to Dr. Shell. The Liebman
Notes accrue interest at rates ranging between 3.25% and 3.95% per annum. The Liebman
Notes were included in the disputed June 2012 Amendment. The principal and interest on
the Liebman Notes is reflected as payable on demand. During the three and six months
ended June 30, 2015, the Company incurred interest expense on the Liebman Notes of $4,784
and $9,516, respectively. During both the three and six months ended June 30, 2015 and
2014, the Company incurred interest expense of $4,784 and $9,516, respectively At June
30, 2015 and December 31, 2014, accrued interest on the Liebman Notes totaled $14,353
and $4,837, respectively. |
(d) | On
June 28, 2013, the Company entered into an arrangement with CMFG which was governed pursuant
to the terms of four contemporaneous agreements. On October 1, 2013, CMFG assigned its
rights pursuant to the Workers’ Compensation Receivables Funding, Assignment and
Security Agreement, to Raven Asset-Based Opportunity Fund I LP, a Delaware limited partnership
(“Raven”). The components of the agreements are detailed as
follows: |
| ● | Workers’
Compensation Receivables Funding, Assignment and Security Agreement, as amended (“CMFG
#2”) – The Company has assigned the future proceeds of accounts receivable
of WC benefit claims with dates of service between the year 2007 and December 31, 2012
(the “Funded Receivables”), to Raven. In exchange, the Company
received a loan of $3.2 million. Prior to July 1, 2014, the monthly division of collections
on Funded Receivables was distributed as follows: First, to CMFG as a servicing fee in
an amount equal to five percent (5%) of the collections; Second, to Raven to pay off
any shortfalls from previous months (a shortfall will have been deemed to occur if Raven
receives less than $175,000 in a given month); Third, to Raven in an amount up to $175,000;
Fourth, to the Company in an amount of $125,000; Fifth, to Raven and the Company, the
remainder of the Funded Receivables split at a ratio of 50% to 50%. Effective July 1,
2014, the monthly division of collections on the Funded Receivables was modified and
until such time as Raven has received payment of $3.95 million in collections from Funded
Receivables, the Funded Receivables will be distributed as follows: First, to CMFG as
a servicing fee in an amount equal to five percent (5%) of the collections; Second, to
Raven to pay off any shortfalls from previous months (a shortfall will have been deemed
to occur if Raven receives less than $125,000 in a given month); Third, to Raven in an
amount up to $125,000; Fourth, to the Company in an amount of $125,000; Fifth, to Raven
and the Company, the remainder of the Funded Receivables split at a ratio of 50% to 50%.
Once Raven has received payment of $3.95 million in collections from Funded Receivables,
the Funded Receivables will cease to be distributed as described above, and will instead
be distributed as follows: First, to CMFG as a servicing fee in an amount equal to five
percent (5%) of the collections; and Second, to Raven and the Company, the remainder
of the Funded Receivables split at a ratio of 45% to 55%, respectively. |
| ● | Common
Stock Warrant to James Giordano, CEO of CMFG – The Company issued a ten (10) year
warrant to purchase 1,412,500 shares of common stock at an exercise price of $2.00 per
share (the “Giordano Warrant”) as consideration for consulting
services performed by Mr. Giordano, as described below. The warrants became exercisable
during December 2013. The exercisable amount is limited to the average trading volume
for the ten days prior to the date of exercise. |
| ● | Professional
Services and Consulting Agreement with Mr. Giordano – The Company entered into
a consulting arrangement with Mr. Giordano for consulting services relating to medical
receivable billing, billing/management strategies, and areas related to financing. Mr.
Giordano’s only form of compensation for his consulting services was the issuance
of the Giordano Warrant. The consulting agreement terminates at such time as all the
obligations or contemplated transactions detailed in the Giordano Warrant have been satisfied. |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
| ● | Professional
Services and Consulting Agreement with CMFG – The Company entered into a consulting
arrangement with CMFG for consulting services relating to medical receivable billing,
billing/management strategies, and areas related to financing. The agreement provided
for the Company to pay a one-time fee of $64,000 upon execution of the agreement. |
| | |
| As
additional consideration, Raven received a warrant to purchase 400,000 shares of the
Company’s common stock at an exercise price of $2.00 per share (the “Raven
Warrant”)(See Note 5). The warrants became exercisable April 1, 2014. However,
the exercisable amount is limited to the average trading volume for the ten days prior
to the date of exercise. The Company accounted for the additional issuance of warrants
as a modification of the original award issued June 28, 2013. |
| | |
| The
Company recorded a debt discount in the amount of $925,521 based on the estimated fair
value of the Giordano and Raven Warrants. The debt discount is being amortized as non-cash
interest expense over the term of the debt using the effective interest method. During
the three and six months ended June 30, 2015, interest expense of $77,127 and $154,253,
respectively, was recorded from the debt discount amortization. During the three and
six months ended June 30, 2014, interest expense was $115,690 and $231,380, respectively. |
| | |
| During
the three and six months ended June 30, 2015, the Company incurred interest expense,
excluding amortization of debt discount, of $67,085 and $154,253, respectively, pursuant
to CMFG #2. During the three and six months ended June 30, 2014, the Company incurred
interest expense, excluding amortization of debt discount, of $82,852 and $181,822, respectively. |
(e) | On
January 13, 2015, the Company entered into a securities purchase agreement, pursuant
to which the Company sold a senior secured convertible debenture (the “Debenture”)
in the principal amount of $650,000, to Derma Medical Systems, Inc. (“Derma”).
Thomas R. Wenkart, M.D., a director of the Company, is the owner and President of Derma.
The Debenture accrues interest at 4% per annum, throughout the term of the Debenture,
and unless earlier converted into shares of the Company’s common stock, has a maturity
date of January 12, 2018. Interest on the Debenture is paid semi-annually, at the Company’s
option, in either cash or shares of common stock. At Derma’s option, the principal
amount of the Debenture is convertible into shares of common stock at a conversion price
of $0.30, subject to adjustment. If, at any time while the Debenture is outstanding,
the Company sells or grants any option to purchase or sells or grants any right to reprice,
or otherwise disposes of or issues, any Common Stock or Common Stock equivalents entitling
any person to acquire shares of Common Stock at an effective price per share that is
lower than the conversion price (such issuances, collectively, a “Dilutive
Issuance”), then the conversion price shall be reduced. The conversion
price shall be reduced by multiplying the conversion price by a fraction, the numerator
of which is the number of shares of Common Stock issued and outstanding immediately prior
to the Dilutive Issuance plus the number of shares of Common Stock which the offering
price for such Dilutive Issuance would purchase at the then conversion price, and the
denominator of which shall be the sum of the number of shares of Common Stock issued
and outstanding immediately prior to the Dilutive Issuance plus the number of shares
of Common Stock so issued or issuable in connection with the Dilutive Issuance. |
| |
| The
debt conversion feature embedded in the Debenture is accounted for under ASC Topic 815
– Derivatives and Hedging. At issuance, the fair value of the debt conversion
feature totaled $119,229 on the Debenture. The fair value of the debt conversion feature
was allocated from the gross proceeds of the Debenture and the respective discount is
being amortized to interest expense over the term of the Debenture using the effective
interest method. The valuation of the bifurcated debt conversion feature was valued at
the issue date utilizing the Black Scholes option pricing model. During the three and
six months ended June 30, 2015, interest expense of $16,560, was recorded from the debt
discount amortization. Additionally, the Company is required to mark to market the value
of the conversion feature liability. Therefore, as of June 30, 2015, the Company revalued
the fair value of the debt conversion feature for the Debenture and determined the conversion
feature liability to be $36,075, a decrease of $83,154 from the fair value determined
at the date of issuance. Changes in the conversion feature liability are recorded as
income or expense during the reporting period that the change occurs. |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
| During
the three and six months ended June 30, 2015, the Company incurred interest expense,
excluding amortization of debt discount, of $6,570 and $12,055, respectively, on the
Debenture. Pursuant to the terms of the Debenture, the Company issued 40,183 shares of
its common stock in payment of the interest. |
| |
(f) | On
February 23, 2015, Shlomo Rechnitz loaned $1.2 million to the Company. As consideration
for the loan, the Company issued Mr. Rechnitz a promissory note in the aggregate principal
amount of $1.2 million (the “Rechnitz Note”). The Rechnitz
Note accrues interest at 4% per annum, throughout its term, and has a maturity date of
February 22, 2017. Principal and interest on the Rechnitz Note is payable in monthly
installments of $52,110, beginning on March 22, 2015, and continuing until February 22,
2017. During the three and six months ended June 30, 2015, the Company incurred interest
expense of $11,487 and $16,221, respectively, on the Rechnitz Note. At June 30, 2015,
accrued interest on the Rechnitz Note totaled $12,222 and the Company is $156,330 in
arrears on its monthly payment obligations. |
8.
RELATED PARTY TRANSACTIONS
Notes
Payable
As
of June 30, 2015, and December 31, 2014, the Company has notes payable agreements issued to related parties with aggregate outstanding
principal balances of $3,154,411 and $2,504,411, respectively (See Note 7).
9.
EQUITY TRANSACTIONS
During
the six months ended June 30, 2015, the Company issued an aggregate of 588,461 shares of its common stock pursuant to agreements
with its employees and consultants to the Company. The shares were valued at $35,307, an average of $0.06 per share. Additionally,
pursuant to the terms of the Debenture, the Company issued 40,183 shares of its common stock in payment of interest in the amount
of $12,055.
10.
COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
The
Company is a party to various legal proceedings. At present, the Company believes that the ultimate outcome of these proceedings,
individually and in the aggregate, will not materially harm our financial position, results of operations, cash flows, or overall
trends. However, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur.
Unfavorable resolutions could include substantial monetary damages. Were unfavorable resolutions to occur, the possibility exists
for a material adverse impact on our business, results of operations, financial position, and overall trends. Management might
also conclude that settling one or more such matters is in the best interests of our stockholders, employees, and customers, and
any such settlement could include substantial payments. However, the Company has not reached this conclusion with respect to any
particular ongoing matter at this time.
On
April 27, 2015, as a result of binding arbitration through JAMS, an award of $1.17 million dollars was issued against TMP for
breach of contract, and in favor of PDR Medical Management, LLC (“PDR”), a former distributor of the
Company’s products. The amount of the award was for sums previously included in the Company’s financial statements
as “Due to Physicians” (See Note 6). Additionally, the arbitrator awarded an additional $333,274 to PDR which is reflected
in accounts payable as of June 30, 2015. The additional amount consisted of attorneys’ fees and costs of $216,174 and prejudgment
interest of $117,100.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
On
March 13, 2015, the Company received from counsel for Dr. Shell, Ms. Liebman, the Elizabeth Charuvastra and William Shell Family
Trust dated July 27, 2006 and amended September 29, 2006 (the “Family Trust”) and the William Shell
Survivor’s Trust (the “Survivor’s Trust”), a written demand for repayment of all principal
and interest outstanding on all outstanding notes. The Company disputed the enforceability of the demand. On April 27, 2015, Dr.
Shell, Ms. Liebman and the Survivor’s Trust filed suit in Superior Court of California, County of Los Angeles, for repayment
of all principal and interest outstanding. Additionally, between June 4, 2013, and November 25, 2013, the William Shell Survivor’s
Trust converted $2,000,000 of its notes into 1,769,629 shares of the Company’s common stock. The complaint now alleges that
the conversion of $2,000,000 in notes held by the Survivor’s Trust did not occur. On May 28, 2015, The Survivor’s
Trust applied for issuance of a right to attach order and for issuance of writ of attachment in the amount of $2,517,334 as a
provisional remedy to secure enforcement of certain of the outstanding notes, which is currently set for hearing on September
1, 2015. The Company disputes the allegations of the Complaint and opposing the issuance of any provisional writ of attachment
in connection with the allegations. In addition, the lawsuit may be deemed related to pending litigation between Dr. Shell and
the beneficiaries of the Family Trust concerning the ownership and control of trust assets.
On
May 13, 2015, the Company received from counsel for Dr. Shell, a written demand for arbitration primarily related to unpaid compensation
Dr. Shell claims he is due. The demand is seeking an award of $1.9 million. The Company denies the allegations of the arbitration
demand and will vigorously defend against the claims in the arbitration. On June 12, 2015, Dr. Shell filed a civil lawsuit which
is substantially identical to the claims alleged in his May 13, 2015 demand for arbitration. The Company denies the allegations
of the lawsuit on the same basis as the identical claims in arbitration and has moved to dismiss the civil lawsuit, which motion
is currently set for hearing on November 16, 2016.
Leases
The
Company leases its operating facility under a lease agreement expiring February 28, 2018 at the rate of $21,007 per month. The
Company, as lessee, is required to pay for all insurance, repairs and maintenance and any increases in real property taxes over
the lease period.
11.
SUBSEQUENT EVENTS
The
Company has evaluated events that occurred subsequent to June 30, 2015 and through the date the financial statements were issued.
Management concluded that no additional subsequent events required disclosure in these financial statements other than those disclosed
in these notes to these financial statements.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report contains forward-looking statements. All statements other than statements of historical fact are, or may be deemed
to be, forward-looking statements. Such forward-looking statements include statements regarding, among others, (a) our expectations
about possible business combinations, (b) our growth strategies, (c) our future financing plans, and (d) our anticipated needs
for working capital. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations,
are generally identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “approximate,” “estimate,” “believe,” “intend,” “plan,”
“budget,” “could,” “forecast,” “might,” “predict,” “shall”
or “project,” or the negative of these words or other variations on these words or comparable terminology. This information
may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements
to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements.
These statements may be found in this Quarterly Report.
These
condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes
for the fiscal year ended December 31, 2014, contained in the Company’s Annual Report on Form 10-K dated April 14, 2015.
Forward-looking
statements are based on our current expectations and assumptions regarding our business, potential target businesses, the economy
and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent
uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from
those contemplated by the forward-looking statements as a result of various factors, including, without limitation, the risks
outlined under “Risk Factors”, changes in local, regional, national or global political, economic, business,
competitive, market (supply and demand) and regulatory conditions and the following:
|
● |
Adverse
economic conditions; |
|
|
|
|
● |
inability
to raise sufficient additional capital to operate our business; |
|
|
|
|
● |
the
commercial success and market acceptance of any of our products; |
|
|
|
|
● |
the
potential impact of our agreement with CMFG; |
|
|
|
|
● |
the
timing and outcome of clinical studies; |
|
|
|
|
● |
the
outcome of potential future regulatory actions, including inspections from the FDA; |
|
|
|
|
● |
unexpected
regulatory changes, including unanticipated changes to workers compensation state laws and/or regulations; |
|
|
|
|
● |
the
expectation that we will be able to maintain adequate inventories of our commercial products; |
|
|
|
|
● |
the
results of our internal research and development efforts; |
|
|
|
|
● |
the
adequacy of our intellectual property protections and expiration dates on our patents and products; |
|
|
|
|
● |
the
inability to attract and retain qualified senior management and technical personnel; |
|
|
|
|
● |
the
potential impact, if any, of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation
Act of 2010 on our business; |
|
|
|
|
● |
our
plans to develop other product candidates; and |
|
|
|
|
● |
other
specific risks referred to in the section entitled “Risk Factors ”. |
We
caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or
as guarantees or assurances of future performance. All forward-looking statements speak only as of the date of this Quarterly
Report. We undertake no obligation to update any forward-looking statements or other information contained herein.
Information
regarding market and industry statistics contained in this Quarterly Report is included based on information available to us that
we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities
offerings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance
of products and services. Except as required by U.S. federal securities laws, we have no obligation to update forward-looking
information to reflect actual results or changes in assumptions or other factors that could affect those statements. See the section
entitled “Risk Factors” for a more detailed discussion of risks and uncertainties that may have an impact on
our future results.
Recent
Developments
On
March 13, 2015, the Company received from counsel for Dr. Shell, Ms. Liebman, the Elizabeth Charuvastra and William Shell Family
Trust dated July 27, 2006 and amended September 29, 2006 (the “Family Trust”) and the William Shell
Survivor’s Trust (the “Survivor’s Trust”), a written demand for repayment of all principal
and interest outstanding on all outstanding notes. The Company disputed the enforceability of the demand. On April 27, 2015, Dr.
Shell, Ms. Liebman and the Survivor’s Trust filed suit in Superior Court of California, County of Los Angeles, for repayment
of all principal and interest outstanding. Additionally, between June 4, 2013, and November 25, 2013, the William Shell Survivor’s
Trust converted $2,000,000 of its notes into 1,769,629 shares of the Company’s common stock. The complaint now alleges that
the conversion of $2,000,000 in notes held by the Survivor’s Trust did not occur. On May 28, 2015, The Survivor’s
Trust applied for issuance of a right to attach order and for issuance of writ of attachment in the amount of $2,517,334 as a
provisional remedy to secure enforcement of certain of the outstanding notes, which is currently set for hearing on September
1, 2015. The Company disputes the allegations of the Complaint and opposing the issuance of any provisional writ of attachment
in connection with the allegations. In addition, the lawsuit may be deemed related to pending litigation between Dr. Shell and
the beneficiaries of the Family Trust concerning the ownership and control of trust assets.
On
May 13, 2015, the Company received from counsel for Dr. Shell, a written demand for arbitration primarily related to unpaid compensation
Dr. Shell claims he is due. The demand is seeking an award of $1.9 million. The Company denies the allegations of the arbitration
demand and will vigorously defend against the claims in the arbitration. On June 12, 2015, Dr. Shell filed a civil lawsuit which
is substantially identical to the claims alleged in his May 13, 2015 demand for arbitration. The Company denies the allegations
of the lawsuit on the same basis as the identical claims in arbitration and has moved to dismiss the civil lawsuit, which motion
is currently set for hearing on November 16, 2016.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2015 AND 2014
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Operations (Unaudited)
For
the Three Months Ended June 30, 2015 and 2014
| |
| | |
% of | | |
| | |
% of | |
| |
2015 | | |
Sales | | |
2014 | | |
Sales | |
Total revenue | |
$ | 1,342,078 | | |
| 100.0 | % | |
$ | 2,221,201 | | |
| 100.0 | % |
Total cost of sales | |
| 534,639 | | |
| 39.8 | % | |
| 509,964 | | |
| 23.0 | % |
Gross profit | |
| 807,439 | | |
| 60.2 | % | |
| 1,711,237 | | |
| 77.0 | % |
Total operating expenses | |
| 1,178,508 | | |
| 87.8 | % | |
| 1,807,280 | | |
| 81.3 | % |
Loss from operations | |
| (371,069 | ) | |
| (27.6 | %) | |
| (96,043 | ) | |
| (4.3 | %) |
Total other expenses | |
| (175,101 | ) | |
| (13.1 | %) | |
| (261,347 | ) | |
| (11.8 | %) |
Loss before income taxes | |
| (546,170 | ) | |
| (40.7 | %) | |
| (357,390 | ) | |
| (16.1 | %) |
Income tax expense | |
| — | | |
| — | | |
| 65,828 | | |
| 3.0 | % |
NET LOSS | |
$ | (546,170 | ) | |
| (40.7 | %) | |
$ | (423,218 | ) | |
| (19.1 | %) |
Revenue
During
the three months ended June 30, 2015 and 2014, the Company recognized total revenue of $1,342,078 and $2,221,201, respectively.
Total revenue included product revenues from the Company’s TMP segment and service revenues from the Company’s CCPI
segment. Total revenues were comprised as follows:
| |
Three
Months Ended June 30, | |
| |
2015 | | |
%
of total
revenue | | |
2014 | | |
%
of total
revenue | |
Total product revenue | |
$ | 1,212,856 | | |
| 90.4 | % | |
$ | 2,065,923 | | |
| 93.0 | % |
Total service revenue | |
| 129,222 | | |
| 9.6 | % | |
| 155,278 | | |
| 7.0 | % |
Total revenue | |
$ | 1,342,078 | | |
| 100.0 | % | |
$ | 2,221,201 | | |
| 100.0 | % |
Product
Revenue:
Product
sales are invoiced upon shipment at AWP primarily under five models, as described in Note 3 to our consolidated financial statements:
Physician Direct Sales, Distributor Direct Sales, Physician Managed, Hybrid and CMFG #1 Models. The Company has also begun to
offer an Online Cash Model for direct sales to physicians, pharmacies and patients. Currently, revenue derived from the Online
Cash Model is aggregated with Physician Direct Sales. Due to substantial uncertainties as to the timing and collectability of
revenues derived from our Physician Managed and Hybrid Models, which can take in excess of five years to collect, we have determined
that these revenues do not meet the criteria for recognition, in accordance with ASC 605, upon shipment. These revenues are recorded
when collectability is reasonably assured, which the Company has determined is when the payment is received, regardless of the
year originally invoiced (the “Cash Method”). Conversely, product sales under the Company’s Physician
Direct Sales, Distributor Direct Sales and CMFG #1 Models are recognized upon shipment (the “Accrual Method”).
As a result, the Company’s basis of recognizing revenue is a hybrid of the cash and accrual methods.
The
Company recognized product revenue for the three months ended June 30, 2015 and 2014, of $1,212,856 and $2,065,923, respectively.
The distribution of product revenue between the Cash Method and the Accrual Method of revenue recognition is as follows:
| |
Three
Months Ended June 30, | |
Revenue recognition method | |
2015 | | |
%
of product
revenue | | |
2014 | | |
%
of product
revenue | |
Cash method | |
$ | 700,021 | | |
| 57.7 | % | |
$ | 1,070,018 | | |
| 51.8 | % |
Accrual method | |
| 512,835 | | |
| 42.3 | % | |
| 995,905 | | |
| 48.2 | % |
Total product revenue | |
$ | 1,212,856 | | |
| 100.0 | % | |
$ | 2,065,923 | | |
| 100.0 | % |
The
decrease in total product revenue is primarily attributed to two factors. First, the Company experienced a decrease in product
revenue of $447,192 from sales under the CMFG #1 Model. Under the CMFG #1 Model, certain physicians that purchased products from
TMP under the Physician Managed Model had assigned their accounts receivables from California WC benefit claims to CMFG, at a
discounted rate. The physician’s fees and financial obligations due to TMP, for the purchase of TMP product and use of CCPI’s
services, were satisfied directly by CMFG. During the three months ended June 30, 2015, as a result of low reimbursement on the
accounts receivable, CMFG terminated the relationship with some physicians and delayed the acceptance of claims for other physicians.
The second factor that significantly attributed to the decrease in product revenue was the result of a decrease in cash collections
from the Company’s cash method customers. The decrease in cash collections from the Company’s cash method customers
is attributed to a reduction in aggregate actual billings (product shipments) and, to a lesser extent, routine fluctuations in
payer reimbursements resulting from the beginning of the year resetting of patient deductibles. The reduction in product shipments
to cash method customers is the result of an effort to eliminate historically unprofitable accounts that offered significant rapid
pay discounts and uncertainty of payment. As reflected in the following table, during the three months ended June 30, 2015 and
2014, the Company shipped product to its cash method customers with product billings of $857,691 and $750,714, respectively, resulting
in a 14.3% increase in product shipments to customers that, for purposes of revenue recognition, are accounted for as cash method
customers. However, product shipments to cash method customers actually decreased by 10.2% during the six months ended June 30,
2015, compared with the six months ended June 30, 2014. Because of the significant delay between the shipment of product and the
receipt of payment from the Company’s cash basis customers the overall decrease in product shipments to cash method customers
is the primary additional cause of the overall decrease in product revenue.
| |
Three
Months Ended June 30, | |
Actual billings | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | |
Cash method | |
$ | 857,691 | | |
$ | 750,714 | | |
$ | 106,977 | | |
| 14.3 | % |
Accrual method | |
| 512,835 | | |
| 995,905 | | |
| (483,070 | ) | |
| (48.5 | %) |
Total product billings | |
$ | 1,370,526 | | |
$ | 1,746,619 | | |
$ | (376,093 | ) | |
| (21.5 | %) |
Service
Revenue:
In
addition to product revenue, which is recognized in the TMP segment, the Company also recognizes service revenue from billing
and collection services in its CCPI segment. The Company recognized service revenue for the three months ended June 30, 2015 and
2014, of $129,222 and $155,278, respectively. In each of the Physician Managed and Hybrid Models, CCPI provides billing and collection
services. In consideration for its services, CCPI receives a service fee that is based upon a percentage of gross collections.
Because fees are only earned by CCPI upon collection on the claim, and the fee is not determinable until the amount of the collection
on the claim is known, CCPI recognizes revenue at the time claims are paid. Under the CMFG #1 Model (under which CCPI also provides
billing and collection services) CCPI recognizes revenue on the date that the 20% advance payment is due from CMFG. The decrease
in service revenue of $26,056 is primarily due to an overall decrease in aggregate collections.
Cost
of Product Sold
The
reported cost of product sold for the three months ended June 30, 2015 increased by $26,914 to $150,568 from $123,654 for the
three months ended June 30, 2014. The cost of product sold as a percentage of reported product revenue increased to 12.4% for
the three months ended June 30, 2015, compared to 6.0% for the three months ended June 30, 2014. Since the Company recognizes
the cost of product sold on all products shipped, regardless of whether the sale resulted from a Cash Method or an Accrual Method
customer, the cost of product sold as a percent of product billings (shipments) is more relevant for comparison purposes.
The
actual cost of product sold as a percent of product billings during the three months ended June 30, 2015, was 11.0% compared with
7.1% in the three months ended June 30, 2014. The increase in product cost as a percent of product billings is primarily attributed
to the delay in the acceptance of assigned claims for certain physicians by CMFG pursuant to the CMFG #1 Model. The existence
of the delay resulted in a reduction in accrual method billings while at the same time the Company recognized the cost of product
sold for these sales.
The
following table illustrates the timing impact of the Company’s revenue recognition policy on cost of product sold:
| |
Three Months Ended June
30, | |
| |
2015 | | |
2014 | |
Derived from consolidated statements of operations: | |
| | | |
| | |
Reported product revenue | |
$ | 1,212,856 | | |
$ | 2,065,923 | |
Cost of product sold | |
$ | 150,568 | | |
$ | 123,654 | |
| |
| | | |
| | |
Cost of product sold as a % of reported revenue | |
| 12.4 | % | |
| 6.0 | % |
| |
| | | |
| | |
Derived from actual billings (net of rapid pay discounts): | |
| | | |
| | |
Cash method billings | |
$ | 857,691 | | |
$ | 750,714 | |
Accrual method billings | |
| 512,835 | | |
| 995,905 | |
Total actual billings | |
$ | 1,370,526 | | |
$ | 1,746,619 | |
Cost of product sold | |
$ | 150,568 | | |
$ | 123,654 | |
| |
| | | |
| | |
Cost of product sold as a % of actual billings | |
| 11.0 | % | |
| 7.1 | % |
Cost
of Services Sold
The
cost of services sold for the three months ended June 30, 2015, decreased $2,239 to $384,071 from $386,310 for the three months
ended June 30, 2014. Cost of services sold consists primarily of salaries and employee benefits. During the three months ended
June 30, 2015 and 2014, salaries and employee benefits were $259,611 and $316,770, respectively, a decrease of $57,159. The decrease
in salaries and employee benefits was the result of a series of personnel reductions at the Company’s billing and collections
subsidiary and was offset by an increase of $58,489 attributed to the contracting of a third party billing and collections company
for assistance in the collection of workers’ compensation claims on behalf of CCPI’s physician customers.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2015, decreased $628,772 to $1,178,508 from $1,807,280 for the three months ended
June 30, 2014. Operating expenses as a percentage of total revenue increased to 88% of revenue from 81% of revenue. Operating
expenses consist of research and development expense, which decreased $25,989, and selling, general and administrative expenses,
which decreased $602,783. Changes in these items are further described below.
Research
and Development Expense
Research
and development expenses for the three months ended June 30, 2015, decreased $25,989, to $3,289 from $29,278 for the three months
ended June 30, 2014. The level of expense typically varies from year to year depending on both the number of clinical trials that
we have in progress and the level of activity occurring in the clinical trials. The level of activity during the three months
ended June 30, 2015 was significantly less than the activity during the three months ended June 30, 2014.
During
the three months ended June 30, 2014, a 128 patient clinical study with the Henry M. Jackson Foundation for the Advancement of
Military Medicine, Inc., in support of Womack Army Medical Center Fort Bragg NC (the “Foundation”) was
initiated on the effectiveness of Theramine for the treatment of acute or sub-acute lower back pain due to injury. Subsequent
to initiation of the clinical study, the Foundation requested that the Company perform certain tasks that it felt were necessary
to continue the clinical study. The Company has not yet made a determination as to whether it will perform the requested tasks.
Consequently, the clinical study has been placed on hold and no expenses were incurred as a result of this clinical study during
the three months ended June 30, 2015. The $15,000 in expense that the Company incurred during the three months ended June 30,
2014 as a result of this study was the primary cause for the $25,989 decrease in research and development expense. The remaining
decrease in research and development expenses during the three months ended June 30, 2015 compared to June 30, 2014 is due to
various research and development related expenses, none of which are significant individually.
Selling,
General and Administrative Expense
Selling,
general and administrative expenses (“SG&A”) were $1,175,219 and $1,778,002 for the three months
ended June 30, 2015 and 2014, respectively. As reflected in the table below, the decrease in SG&A for the three months ended
June 30, 2015, when compared to the three months ended June 30, 2014, was primarily the result of various fluctuations in the
following expense categories: salaries and employee benefits, depreciation and amortization and general and administrative expenses.
| |
Three Months Ended June
30, | |
| |
2015 | | |
2014 | | |
$
Change | | |
%
Change | |
| |
| | |
| | |
| | |
| |
Salaries and employee benefits | |
$ | 639,198 | | |
$ | 1,165,395 | | |
$ | (526,197 | ) | |
| (45.2 | %) |
Professional fees | |
| 133,826 | | |
| 150,425 | | |
| (16,599 | ) | |
| (11.0 | %) |
Rent | |
| 66,026 | | |
| 53,335 | | |
| 12,691 | | |
| 23.8 | % |
Insurance | |
| 86,543 | | |
| 78,463 | | |
| 8,080 | | |
| 10.3 | % |
Depreciation & amortization | |
| 29,606 | | |
| 50,500 | | |
| (20,894 | ) | |
| (41.4 | %) |
General and administrative | |
| 220,020 | | |
| 279,884 | | |
| (59,864 | ) | |
| (21.4 | %) |
Total selling, general and administrative expenses | |
$ | 1,175,219 | | |
$ | 1,778,002 | | |
$ | (602,783 | ) | |
| (33.9 | %) |
The
$526,197 decrease in salaries and employee benefits is primarily attributed to an overall reduction in employees. The Company
has made a concerted effort to reduce costs and as a result of this effort the number of employees in the TMP segment has decreased
from 31 employees at June 30, 2014 to 22 employees at June 30, 2015. Additionally, during the three months ended June 30, 2014,
the Company had eliminated an additional 5 positions. Taking into consideration these 5 eliminated positions, the number of employees
in the TMP segment has decreased by 45%.
Property
and equipment are stated at cost and are depreciated using the straight line method over the estimated useful lives of the assets,
which generally range between 3 and 7 years. The Company allocates depreciation and amortization expense between cost of sales
and operating expenses. The decrease in depreciation and amortization that is included in SG&A, of $20,894, is primarily attributed
to the timing of when assets were placed in service. The Company has not placed any new assets into service since 2013 and as
a result a significant amount of its capitalized assets have now been fully depreciated.
General
and administrative expense experienced a decrease of $59,864 during the three months ended June 30, 2015 over the three months
ended June 30, 2014. During the three months ended June 30, 2015, the Company has continued its practice to either postpone or
eliminate discretionary expenses. Travel and office related expenses, components of the Company’s general and administrative
expenses, represented some of the largest individual decreases. The remaining decreases in general and administrative expenses
are a combination of several types of expenses, none of which are significant individually.
Other
Income and Expenses
Other
income and expense includes interest expense, amortization of discounts on notes payable and changes in the fair value of the
Company’s derivative liabilities associated with issuances of warrants and debt. During the three months ended June 30,
2015, the Company reported other expense of $175,101 compared with expense of $261,347 during the three months ended June 30,
2014.
Interest
expense increased by $2,337, resulting in interest expense of $266,802 in the three months ended June 30, 2015, as compared to
interest expense of $264,465 in the three months ended June 30, 2014. During the three months ended June 30, 2015, the Company
incurred interest expense from the $3.2 million loan with Cambridge Medical Funding Group (the “Cambridge Note”)
of $67,085 and recorded non-cash interest expense of $77,127 based on the estimated fair value of the warrants issued in connection
with the Cambridge Note. During the three months ended June 30, 2014, the Company incurred interest expense from the Cambridge
Note of $82,852 and recorded non-cash interest expense of $115,690, a net decrease of $54,330. The decrease in interest expense
associated with the Cambridge Note was primarily offset by an increase attributed to; (i) a $650,000 4% senior secured convertible
debenture (the “Debenture”) issued to Derma Medical Systems, Inc. on January 13, 2015 and (ii) a $1.2
million 4% promissory note issued to Shlomo Rechnitz on February 23, 2015 (the “Rechnitz Note”).
Changes
in the fair value of the Company’s derivative liabilities resulted in income of $91,701 in the three months ended June 30,
2015, compared with income of $3,118 in the three months ended June 30, 2014. The Company’s derivative liabilities are comprised
of 95,000 warrants that were issued in July 2012 with anti-dilution ratcheting provisions and the fair value of the debt conversion
feature of the Debenture that was issued in January 2015. The income that was recognized in the three months ended June 30, 2015,
represents a decrease in the fair value of both the warrant derivative liability and the debt conversion feature of the Debenture.
The decrease in fair value was primarily caused by the decrease in the value of our common stock, which trades on the OTCQB tier
of the over-the-counter securities market under the symbol “TRGM”. During the three months ended June 30, 2014, income
was recognized due to a decrease in the warrant derivative liability from the 95,000 warrants.
Current
and Deferred Income Taxes
In
June 2013 the Company made a decision to fully reserve its net deferred tax assets. As a result of this decision, we did not record
an income tax benefit during the three months ended June 30, 2015 and 2014. Further, as a result of the findings from the IRS
and FTB audits for the tax years 2010 through 2012, we recorded income tax expense of $65,828 during the three months ended June
30, 2014.
The
ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when
those temporary differences and net operating loss carryovers are deductible. Management considers the scheduled reversal of deferred
tax liabilities, taxes paid in carryover years, projected future taxable income, available tax planning strategies, and other
factors in making this assessment. Based on available evidence, management believes it is less likely than not that all of the
deferred tax assets will be realized. Accordingly, the Company has established a 100% valuation allowance of $9,581,875.
Net
Loss
Net
loss for the three months ended June 30, 2015, was $546,170 compared to a net loss of $423,218 for the three months ended June
30, 2014. The increased net loss was a result of a combination of both decreased revenues and expenses as described above.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Condensed
Consolidated Statements of Operations (Unaudited)
For
the Six Months Ended June 30, 2015 and 2014
| |
| | |
% of | | |
| | |
% of | |
| |
2015 | | |
Sales | | |
2014 | | |
Sales | |
| |
| | |
| | |
| | |
| |
Total revenue | |
$ | 2,409,966 | | |
| 100.0 | % | |
$ | 4,022,104 | | |
| 100.0 | % |
Total cost of sales | |
| 1,085,406 | | |
| 45.0 | % | |
| 1,069,498 | | |
| 26.6 | % |
Gross profit | |
| 1,324,560 | | |
| 55.0 | % | |
| 2,952,606 | | |
| 73.4 | % |
Total operating expenses | |
| 2,970,401 | | |
| 123.3 | % | |
| 3,759,435 | | |
| 93.5 | % |
Loss from operations | |
| (1,645,841 | ) | |
| (68.3 | %) | |
| (806,829 | ) | |
| (20.1 | %) |
Total other expenses | |
| (578,738 | ) | |
| (24.0 | %) | |
| (525,031 | ) | |
| (13.0 | %) |
Loss before income taxes | |
| (2,224,579 | ) | |
| (92.3 | %) | |
| (1,331,860 | ) | |
| (33.1 | %) |
Income tax expense | |
| — | | |
| — | | |
| 65,828 | | |
| 1.6 | % |
NET LOSS | |
$ | (2,224,579 | ) | |
| (92.3 | %) | |
$ | (1,397,688 | ) | |
| (34.7 | %) |
Revenue
During
the six months ended June 30, 2015 and 2014, the Company recognized total revenue of $2,409,966 and $4,022,104, respectively.
Total revenue included product revenues from the Company’s TMP segment and service revenues from the Company’s CCPI
segment. Total revenues were comprised as follows:
| |
Six
Months Ended June 30, | |
| |
2015 | | |
%
of total
revenue | | |
2014 | | |
%
of total
revenue | |
Total product revenue | |
$ | 2,147,909 | | |
| 89.1 | % | |
$ | 3,699,203 | | |
| 92.0 | % |
Total service revenue | |
| 262,057 | | |
| 10.9 | % | |
| 322,901 | | |
| 8.0 | % |
Total revenue | |
$ | 2,409,966 | | |
| 100.0 | % | |
$ | 4,022,104 | | |
| 100.0 | % |
Product
Revenue:
Product
sales are invoiced upon shipment at AWP primarily under five models, as described in Note 3 to our consolidated financial statements:
Physician Direct Sales, Distributor Direct Sales, Physician Managed, Hybrid and CMFG #1 Models. The Company has also begun to
offer an Online Cash Model for direct sales to physicians, pharmacies and patients. Currently, revenue derived from the Online
Cash Model is aggregated with Physician Direct Sales. Due to substantial uncertainties as to the timing and collectability of
revenues derived from our Physician Managed and Hybrid Models, which can take in excess of five years to collect, we have determined
that these revenues do not meet the criteria for recognition, in accordance with ASC 605, upon shipment. These revenues are recorded
when collectability is reasonably assured, which the Company has determined is when the payment is received, regardless of the
year originally invoiced (the “Cash Method”). Conversely, product sales under the Company’s Physician
Direct Sales, Distributor Direct Sales and CMFG #1 Models are recognized upon shipment (the “Accrual Method”).
As a result, the Company’s basis of recognizing revenue is a hybrid of the cash and accrual methods.
The
Company recognized product revenue for the six months ended June 30, 2015 and 2014, of $2,147,909 and $3,699,203, respectively.
The distribution of product revenue between the Cash Method and the Accrual Method of revenue recognition is as follows:
| |
Six
Months Ended June 30, | |
Revenue recognition method | |
2015 | | |
%
of product
revenue | | |
2014 | | |
%
of product
revenue | |
Cash method | |
$ | 1,051,917 | | |
| 49.0 | % | |
$ | 1,737,873 | | |
| 47.0 | % |
Accrual method | |
| 1,095,992 | | |
| 51.0 | % | |
| 1,961,330 | | |
| 53.0 | % |
Total product revenue | |
$ | 2,147,909 | | |
| 100.0 | % | |
$ | 3,699,203 | | |
| 100.0 | % |
The
decrease in total product revenue is primarily attributed to two factors. First, the Company experienced a decrease in product
revenue of $667,761 from sales under the CMFG #1 Model. Under the CMFG #1 Model, certain physicians that purchased products from
TMP under the Physician Managed Model had assigned their accounts receivables from California WC benefit claims to CMFG, at a
discounted rate. The physician’s fees and financial obligations due to TMP, for the purchase of TMP product and use of CCPI’s
services, were satisfied directly by CMFG. During the three months ended June 30, 2015, as a result of low reimbursement on the
accounts receivable, CMFG terminated the relationship with some physicians and delayed the acceptance of claims for other physicians.
The second factor that significantly attributed to the decrease in product revenue was the result of a decrease in cash collections
from the Company’s cash method customers. The decrease in cash collections from the Company’s cash method customers
is attributed to a reduction in aggregate actual billings (product shipments) and, to a lesser extent, routine fluctuations in
payer reimbursements resulting from the beginning of the year resetting of patient deductibles. The reduction in product shipments
to cash method customers is the result of an effort to eliminate unprofitable historical accounts that offered significant rapid
pay discounts and uncertainty of payment. As reflected in the following table, during the six months ended June 30, 2015 and 2014,
the Company shipped product to its cash method customers with product billings of $1,515,948 and $1,688,642, respectively. The
10.2% decrease in product shipments to customers that, for purposes of revenue recognition, are accounted for as cash method customers
is the primary additional cause of the overall decrease in product revenue.
| |
Six
Months Ended June 30, | |
Actual billings | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | |
Cash method | |
$ | 1,515,948 | | |
$ | 1,688,642 | | |
$ | (172,694 | ) | |
| (10.2 | %) |
Accrual method | |
| 1,095,992 | | |
| 1,961,330 | | |
| (865,338 | ) | |
| (44.1 | %) |
Total product billings | |
$ | 2,611,940 | | |
$ | 3,649,972 | | |
$ | (1,038,032 | ) | |
| (28.4 | %) |
Cost
of Product Sold
The
reported cost of product sold for the six months ended June 30, 2015 increased by $9,451 to $272,424 from $262,973 for the six
months ended June 30, 2014. The cost of product sold as a percentage of reported product revenue increased to 12.7% for the six
months ended June 30, 2015, compared to 7.1% for the six months ended June 30, 2014. Since the Company recognizes the cost of
product sold on all products shipped, regardless of whether the sale resulted from a Cash Method or an Accrual Method customer,
the cost of product sold as a percent of product billings (shipments) is more relevant for comparison purposes.
The
actual cost of product sold as a percent of product billings during the six months ended June 30, 2015, was 10.4% compared with
7.2% in the six months ended June 30, 2014. The increase in product cost as a percent of product billings is primarily attributed
to the delay in the acceptance of assigned claims for certain physicians by CMFG pursuant to the CMFG #1 Model. The existence
of the delay resulted in a reduction in accrual method billings while at the same time the Company recognized the cost of product
sold for these sales.
The
following table illustrates the timing impact of the Company’s revenue recognition policy on cost of product sold:
| |
Six Months Ended June
30, | |
| |
2015 | | |
2014 | |
Derived from consolidated statements of operations: | |
| | | |
| | |
Reported product revenue | |
$ | 2,147,909 | | |
$ | 3,699,203 | |
Cost of product sold | |
$ | 272,424 | | |
$ | 262,973 | |
| |
| | | |
| | |
Cost of product sold as a % of reported revenue | |
| 12.7 | % | |
| 7.1 | % |
| |
| | | |
| | |
Derived from actual billings (net of rapid pay discounts): | |
| | | |
| | |
Cash method billings | |
$ | 1,515,948 | | |
$ | 1,688,642 | |
Accrual method billings | |
| 1,095,992 | | |
| 1,961,330 | |
Total actual billings | |
$ | 2,611,940 | | |
$ | 3,649,972 | |
Cost of product sold | |
$ | 272,424 | | |
$ | 262,973 | |
| |
| | | |
| | |
Cost of product sold as a % of actual billings | |
| 10.4 | % | |
| 7.2 | % |
Cost
of Services Sold
The
cost of services sold for the six months ended June 30, 2015, increased by $6,457 to $812,982 from $806,525 for the six months
ended June 30, 2014. Cost of services sold consists primarily of salaries and employee benefits. Salaries and employee benefits
are largely a fixed cost. Thus, during periods of declining revenues the Company experiences a significant increase in the cost
of services sold as a percentage of total revenue. Accordingly, the cost of services sold for the six months ended June 30, 2015,
increased to 33.7% of total revenue from 20.1% for the six months ended June 30, 2014. During the six months ended June 30, 2015
and 2014, salaries and employee benefits were $581,682 and $663,275, respectively, a decrease of $81,593. The decrease in salaries
and employee benefits was the result of a series of personnel reductions at the Company’s billing and collections subsidiary
and was primarily offset by two factors. First, the Company recognized an increase of $58,489 attributed to the contracting of
a third party billing and collections company for assistance in the collection of workers’ compensation claims on behalf
of CCPI’s physician customers. Second, the Company incurred an increase of $33,150 attributed to the filing of liens for
workers’ compensation claims on behalf of CCPI’s physician customers.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2015, decreased $789,034 to $2,970,401 from $3,759,435 for the six months ended June
30, 2014. Operating expenses as a percentage of total revenue increased to 123% of revenue from 94% of revenue. Operating expenses
consist of research and development expense, which decreased $77,368, and selling, general and administrative expenses, which
decreased $711,666. Changes in these items are further described below.
Research
and Development Expense
Research
and development expenses for the six months ended June 30, 2015, decreased $77,368, to $10,393 from $87,761 for the six months
ended June 30, 2014. The level of expense typically varies from year to year depending on both the number of clinical trials that
we have in progress and the level of activity occurring in the clinical trials. The level of activity during the six months ended
June 30, 2015 was significantly less than the activity during the six months ended June 30, 2014.
During
the six months ended June 30, 2014, the Company was conducting two clinical studies. The first study was a 60 patient clinical
study with the University of Cincinnati Physicians Company, LLC, an Ohio nonprofit company. This study was being conducted on
the effects of Theramine in the prevention of migraine headaches. During the six months ended June 30, 2014, the Company recorded
$44,000 in expense related to this study. In October 2014 the Company elected to terminate this study. The second study was a
128 patient clinical study with the Foundation that was initiated to evaluate the effectiveness of Theramine for the treatment
of acute or sub-acute lower back pain due to injury. Subsequent to initiation of the clinical study, the Foundation requested
that the Company perform certain tasks that it felt were necessary to continue the clinical study. The Company has not yet made
a determination as to whether it will perform the requested tasks. Consequently, the Foundation clinical study has been placed
on hold and no expenses were incurred as a result of this clinical study during the six months ended June 30, 2015. The $15,000
in expense that the Company incurred as a result of the clinical study with the Foundation combined with $44,000 in expense related
to the study with the University of Cincinnati was the primary cause for the $77,368 decrease in research and development expense.
Selling,
General and Administrative Expense
Selling,
general and administrative expenses (“SG&A”) were $2,960,008 and $3,671,674 for the six months ended
June 30, 2015 and 2014, respectively. As reflected in the table below, the decrease in SG&A for the six months ended June
30, 2015, when compared to the six months ended June 30, 2014, was primarily the result of various fluctuations in the following
expense categories: salaries and employee benefits, professional fees, depreciation and amortization and general and administrative
expenses.
| |
Six Months Ended June
30, | |
| |
2015 | | |
2014 | | |
$
Change | | |
%
Change | |
| |
| | |
| | |
| | |
| |
Salaries and employee benefits | |
$ | 1,316,519 | | |
$ | 2,297,070 | | |
$ | (980,551 | ) | |
| (42.7 | %) |
Professional fees | |
| 717,244 | | |
| 611,790 | | |
| 105,454 | | |
| 17.2 | % |
Rent | |
| 146,118 | | |
| 124,692 | | |
| 21,426 | | |
| 17.2 | % |
Insurance | |
| 170,990 | | |
| 138,639 | | |
| 32,351 | | |
| 23.3 | % |
Depreciation & amortization | |
| 64,299 | | |
| 106,124 | | |
| (41,825 | ) | |
| (39.4 | %) |
General and administrative | |
| 544,838 | | |
| 393,359 | | |
| 151,479 | | |
| 38.5 | % |
Total selling, general and administrative expenses | |
$ | 2,960,008 | | |
$ | 3,671,674 | | |
$ | (711,666 | ) | |
| (19.4 | %) |
The
$980,551 decrease in salaries and employee benefits is primarily attributed to an overall reduction in employees. The Company
has made a concerted effort to reduce costs and as a result of this effort the number of employees in the TMP segment has decreased
from 31 employees at June 30, 2014 to 22 employees at June 30, 2015. Additionally, during the three months ended June 30, 2014,
the Company had eliminated an additional 5 positions. Taking into consideration these 5 eliminated positions, the number of employees
in the TMP segment has decreased by 45%.
The
second largest component of our SG&A is professional fees which, compared to the six months ended June 30, 2014, increased
by $105,454. During the six months ended June 30, 2015, the Company experienced an increase in professional fees as a result of
multiple factors.
|
● |
On
April 27, 2015, as a result of binding arbitration through JAMS, an award of $1.17 million dollars was issued against TMP
for breach of contract, and in favor of PDR Medical Management, LLC (“PDR”), a former distributor
of the Company’s products. The amount of the award was for sums previously included in the Company’s financial
statements as “Due to Physicians” (See Note 6). Additionally, the arbitrator awarded an additional $333,274 to
PDR. The additional amount consisted of attorneys’ fees and costs of $216,174 and prejudgment interest of $117,100.
The portion that was allocated to attorneys’ fees and costs accounted for the majority of the increase in professional
fees. |
The
$216,174 increase in professional fees was partially offset by a decrease in financial advisory and investor relations services
and a decrease in fees paid to a Medicaid consultant.
|
● |
During
the six months ended June 30, 2014, primarily as a result of two different consulting agreements, the Company incurred $181,038
in fees for financial advisory and investor relations services. During the quarter ended March 31, 2015, the Company had terminated
all of these types of consulting services resulting in a decrease in financial advisory and investor relations services of
$112,264. |
|
|
|
|
● |
In
January 2013, the Company engaged a consultant for assistance in attaining Medicaid approval of four of the Company’s
products: Theramine®, Sentra AM®, Sentra PM® and AppTrim®. The
Company terminated this consulting engagement at March 31, 2014. During the six months ended June 30, 2014, the Company recognized
$30,000 in fees related to this consulting contract as opposed to no fees during the six months ended June 30, 2015. |
The
remaining variance in professional fees is due to various types of professional fees, none of which are significant individually.
Property
and equipment are stated at cost and are depreciated using the straight line method over the estimated useful lives of the assets,
which generally range between 3 and 7 years. The Company allocates depreciation and amortization expense between cost of sales
and operating expenses. During the six months ended June 30, 2015, as reflected in the Company’s consolidated statements
of cash flows, in aggregate depreciation and amortization decreased by $79,396. The decrease in depreciation and amortization
that is included in SG&A, of $41,825, is primarily attributed to the timing of when assets were placed in service. The Company
has not placed any new assets into service since 2013 and as a result a significant amount of its capitalized assets have now
been fully depreciated.
General
and administrative expense experienced an increase of $151,479 during the six months ended June 30, 2015 over the six months ended
June 30, 2014. During the six months ended June 30, 2014, the Company successfully resolved a dispute with a former vendor over
an amount due of $139,318. The entire amount was written-off. Upon elimination of this one-time adjustment, the adjusted increase
in general and administrative expense was $12,161. This increase in general and administrative expenses is a combination of several
types of expenses, none of which are significant individually.
Other
Income and Expenses
Other
income and expense includes interest expense, amortization of discounts on notes payable and changes in the fair value of the
Company’s derivative liabilities associated with issuances of warrants and debt. During the six months ended June 30, 2015,
the Company reported other expense of $578,738 compared with expense of $525,031 during the six months ended June 30, 2014.
Interest
expense increased by $146,784, resulting in interest expense of $670,449 in the six months ended June 30, 2015, as compared to
interest expense of $523,665 in the six months ended June 30, 2014. The increase was primarily due to the award of prejudgment
interest of $117,100 in the PDR arbitration, $73,915 in interest related to untimely payroll tax deposits and an increase of $28,276
in interest from the existence of two new promissory notes: (i) a $650,000 4% senior secured convertible debenture (the “Debenture”)
issued to Derma Medical Systems, Inc. on January 13, 2015 and (ii) a $1.2 million 4% promissory note issued to Shlomo Rechnitz
on February 23, 2015 (the “Rechnitz Note”). The aggregate increase in interest expense attributed to
the PDR arbitration, untimely payroll tax deposits and two new loans of $219,291 was partially offset by a reduction in interest
expense on the $3.2 million loan with Cambridge Medical Funding Group (the “Cambridge Note”). During
the six months ended June 30, 2015, the Company incurred interest expense from the Cambridge Note of $153,764 and recorded non-cash
interest expense of $154,253 based on the estimated fair value of the warrants issued in connection with the Cambridge Note. During
the six months ended June 30, 2014, the Company incurred interest expense from the Cambridge Note of $181,822 and recorded non-cash
interest expense of $231,380, a net decrease of $105,185.
Changes
in the fair value of the Company’s derivative liabilities resulted in income of $91,711 in the six months ended June 30,
2015, compared with an expense of $1,366 in the six months ended June 30, 2014. The Company’s derivative liabilities are
comprised of 95,000 warrants that were issued in July 2012 with anti-dilution ratcheting provisions and the fair value of the
debt conversion feature of the Debenture that was issued in January 2015. The income that was recognized in the six months ended
June 30, 2015, represents a decrease in the fair value of both the warrant derivative liability and the debt conversion feature
of the Debenture. The decrease in fair value was primarily caused by the decrease in the value of our common stock, which trades
on the OTCQB tier of the over-the-counter securities market under the symbol “TRGM”. Conversely, during the six months
ended June 30, 2014, expense was recognized due to an increase in the warrant derivative liability from the 95,000 warrants.
Current
and Deferred Income Taxes
In
June 2013 the Company made a decision to fully reserve its net deferred tax assets. As a result of this decision, we did not record
an income tax benefit during the six months ended June 30, 2015 and 2014. Further, as a result of the findings from the IRS and
FTB audits for the tax years 2010 through 2012, we recorded income tax expense of $65,828 during the six months ended June 30,
2014.
The
ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when
those temporary differences and net operating loss carryovers are deductible. Management considers the scheduled reversal of deferred
tax liabilities, taxes paid in carryover years, projected future taxable income, available tax planning strategies, and other
factors in making this assessment. Based on available evidence, management believes it is less likely than not that all of the
deferred tax assets will be realized. Accordingly, the Company has established a 100% valuation allowance of $9,581,875.
Net
Loss
Net
loss for the six months ended June 30, 2015, was $2,224,579 compared to a net loss of $1,397,688 for the six months ended June
30, 2014. The increased net loss was a result of a combination of both decreased revenues and expenses as described above.
FINANCIAL
CONDITION
Our
negative working capital of $12,664,767 as of June 30, 2015 increased by $849,146 from our December 31, 2014 negative working
capital of $11,815,621. Our operating losses during the six months ended June 30, 2015 were funded by proceeds from notes payable
of $1,850,000.
Unrecognized
Accounts Receivable
As
of June 30, 2015, we have approximately $7.0 million in unrecognized accounts receivable and unrecognized revenues that potentially
will be recorded as revenue in the future as our CCPI subsidiary secures claims payments on behalf of our Cash Method customers.
Except for collection expenses incurred by CCPI, all expenses associated with these unrecognized accounts receivable, including
cost of products sold, have already been expensed in our financial statements. In addition, for federal and state income tax purposes
the Company has recognized these unrecognized accounts receivable as revenues. Therefore, the Company will not incur current tax
liabilities for these unrecognized accounts receivable when they are collected.
For
the six months ended June 30, 2015, the Company performed its regular analysis of outstanding invoices comprising unrecognized
accounts receivables; specifically, the underlying outstanding insurance claims for each physician customer which is the source
of future payment of these outstanding invoices. The analysis takes into account the value of claims outstanding, the age of these
claims, and historical claims settlement and payment patterns. At June 30, 2015, the Company determined that collections on its
unrecognized accounts receivable would approximate $7.0 million. The analysis also took into account the impact of the agreement
with Raven Asset-Based Opportunity Fund I LP (“Raven”), particularly the agreement dated June 28, 2013,
as amended, regarding future collections. In exchange for loans of $3.2 million the Company assigned its interest in certain pre-2013
workers compensation claims to Raven and agreed to share approximately 50% of future collections proceeds from settlement of such
claims. At June 30, 2015, cumulative payments made to CMFG and Raven pursuant to CMFG #2 were $2.583 million. The Company allocated
these payments as debt repayment of $1,981,313 and interest expense of $602,037. Thus, at June 30, 2015, the remaining principal
amount due to CMFG was $1,218,687. The Company expects CMFG will receive aggregate future payments of approximately $3.3 million.
As a result of this updated and expanded analysis, of the total amount of $7.0 million in unrecognized accounts receivable, the
Company expects to retain approximately $3.7 million, net of estimated amounts of future proceeds belonging to Raven pursuant
to CMFG #2.
LIQUIDITY
AND CAPITAL RESOURCES
We
have historically financed operations through cash flows from operations as well as equity transactions and related party loans.
As noted above, we entered into an agreement with Raven that provided for loans of $3.2 million. Due to the uncertainty of our
ability to meet our current operating and capital expenses, in their report on our audited annual financial statements as of and
for the years ended December 31, 2014 and 2013, our independent auditor included an explanatory paragraph regarding concerns about
our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances
that led to this disclosure by our independent auditors. There is substantial doubt about our ability to continue as a going concern
as the continuation and expansion of our business is dependent upon either obtaining future equity financings or achieving profitable
operations in order to repay the existing short-term debt and to provide a sufficient source of operating capital. No assurances
can be made that the Company will be successful in obtaining equity financing needed to continue to fund its operations, or that
the Company will achieve profitable operations and positive cash flow. Our inability to take these actions as and when necessary
would materially adversely affect our liquidity, results of operations and financial condition.
Net
cash used in operating activities for the six months ended June 30, 2015, was $1,487,386 as opposed to net cash provided by operating
activities of $354,133 during the six months ended June 30, 2014. During the six months ended June 30, 2015 and 2014, the Company
reported a net loss of $2,224,579 and $1,397,688, respectively.
Net
proceeds from the issuance of notes payable offset the negative cash flows from operating activities. Ultimately, we experienced
an increase in cash of $9,632 in the six months ended June 30, 2015. A decrease in cash collections on claims filed by CCPI on
behalf of customers utilizing the Physician Managed Model and Hybrid Model negatively impacted cash flows in the six months ended
June 30, 2015. The collection cycle and cash flows may also be significantly affected if our mix of business can be shifted from
longer collection cycle business, such as workers compensation, to markets with shorter collection cycles, such as private insurance
and cash sales.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company’s June 28, 2013, agreement with Raven, as amended, is an off-balance sheet arrangement that could have a material
current effect, or that is reasonably likely to have a material future effect, on our financial condition, changes in financial
condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources. Under this agreement,
certain workers’ compensation claims have been assigned to Raven in exchange for loans to the Company. In addition to repaying
these loans the Company would share future collections with Raven, and thereby reduce the availability of future income to fund
the operations of the Company.
CONTRACTUAL
OBLIGATIONS
The
Company leases its operating facility under a lease agreement expiring February 28, 2018 at the rate of $21,007 per month. The
Company, as lessee, is required to pay for all insurance, repairs and maintenance and any increases in real property taxes over
the lease period on the operating facility.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
As
a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing
scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item
4. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures.
The
Company’s management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the
design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) as of June 30, 2015, and has determined that our disclosure controls and procedures were
effective as of June 30, 2015.
Limitations
on the Effectiveness of Disclosure Controls.
Readers
are cautioned that our management does not expect that our disclosure controls and procedures or our internal control over financial
reporting will necessarily prevent all fraud and material error. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management
override of the controls.
Changes
in Internal Control over Financial Reporting.
There
have not been any changes in the Company’s internal controls over financial reporting that occurred during the Company’s
six months ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings.
On
April 27, 2015, as a result of binding arbitration through JAMS, an award of $1.17 million dollars was issued against the Company
for breach of contract, and in favor of PDR Medical Management, LLC (“PDR”), a former distributor of
the Company’s products. The amount of the award was for sums previously included in the Company’s financial statements
as “Due to Physicians” (See Note 6). Additionally, the arbitrator awarded an additional $333,274 to PDR. The additional
amount consisted of attorneys’ fees and costs of $216,174 and prejudgment interest of $117,100.
On
March 13, 2015, we received from counsel for Dr. Shell, Ms. Liebman, the Elizabeth Charuvastra and William Shell Family Trust
dated July 27, 2006 and amended September 29, 2006 (the “Family Trust”) and the William Shell Survivor’s
Trust (the “Survivor’s Trust”), a written demand for repayment of all principal and interest outstanding
on all outstanding notes. We disputed the enforceability of the demand. On April 27, 2015, Dr. Shell, Ms. Liebman and the Survivor’s
Trust filed suit in Superior Court of California, County of Los Angeles, for repayment of all principal and interest outstanding.
Additionally, between June 4, 2013, and November 25, 2013, the William Shell Survivor’s Trust converted $2,000,000 of its
notes into 1,769,629 shares of the Company’s common stock. The complaint now alleges that the conversion of $2,000,000 in
notes held by the Survivor’s Trust did not occur. On May 28, 2015, The Survivor’s Trust applied for issuance of a
right to attach order and for issuance of writ of attachment in the amount of $2,517,334 as a provisional remedy to secure enforcement
of certain of the outstanding notes, which is currently set for hearing on September 1, 2015. We dispute the allegations of the
Complaint and oppose the issuance of any provisional writ of attachment in connection with the allegations. In addition, the lawsuit
may be deemed related to pending litigation between Dr. Shell and the beneficiaries of the Family Trust concerning the ownership
and control of trust assets.
On
May 13, 2015, we received from counsel for Dr. Shell, a written demand for arbitration primarily related to unpaid compensation
Dr. Shell claims he is due. The demand is seeking an award of $1.9 million. We deny the allegations of the arbitration demand
and will vigorously defend against the claims in the arbitration. On June 12, 2015, Dr. Shell filed a civil lawsuit which is substantially
identical to the claims alleged in his May 13, 2015 demand for arbitration. We deny the allegations of the lawsuit on the same
basis as the identical claims in arbitration and have moved to dismiss the civil lawsuit, which motion is currently set for hearing
on November 16, 2016.
Item
1A. Risk Factors.
There
have been no material changes from risk factors previously disclosed in Item 1A included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2014, which was filed with the SEC on April 14, 2015.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
Between
May 20, 2015 and June 17, 2015, the Company issued 588,461 shares of common stock as payment for services to its employees and
consultants. The shares were valued at $0.06 per share based on the price of the Company’s common stock. Additionally, on
June 30, 2015, pursuant to the terms of the Debenture, the Company issued 40,183 shares of its common stock in payment of interest
in the amount of $12,055. These shares were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities
Act.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information.
None.
Item
6. Exhibits.
Exhibit
Number |
|
Description |
31.1* |
|
Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) |
31.2* |
|
Certification
of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) |
32.1* |
|
Certification
of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title 18 of the United States Code |
101.INS** |
|
XBRL
Instance Document |
101.SCH** |
|
XBRL
Taxonomy Extension Schema Document |
101.CAL** |
|
XBRL
Taxonomy Extension Calculation Linkbase Document |
101.DEF** |
|
XBRL
Taxonomy Extension Definition Linkbase Document |
101.LAB** |
|
XBRL
Taxonomy Extension Label Linkbase Document |
101.PRE** |
|
XBRL
Taxonomy Extension Presentation Linkbase Document |
*
Filed herewith.
**
In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed”
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section,
and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of
1933, as amended, except as expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
TARGETED MEDICAL PHARMA, INC. |
|
|
|
Date: August 13, 2015 |
By: |
/s/ Kim Giffoni |
|
|
Kim Giffoni |
|
|
Chief Executive Officer |
|
|
|
Date: August 13, 2015 |
By: |
/s/ William B. Horne |
|
|
William B. Horne |
|
|
Chief Financial Officer and
Principal Accounting Officer |
Exhibit
31.1
CERTIFICATIONS
I,
Kim Giffoni as Chief Executive Officer of Targeted Medical Pharma, Inc., certify that:
|
1. |
I
have reviewed this quarterly report on Form 10-Q of Targeted Medical Pharma, Inc. for the second quarter ended June 30, 2015; |
|
|
|
|
2. |
Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report; |
|
|
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
|
|
4. |
The
registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
b. |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
c. |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report
based on such evaluation; and |
|
|
|
|
d. |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
|
5. |
The
registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent function): |
|
a. |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
b. |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: |
August
13, 2015 |
|
|
|
|
By: |
/s/
Kim Giffoni |
|
Name: |
Kim Giffoni |
|
Title: |
Chief Executive
Officer |
|
Exhibit
31.2
CERTIFICATIONS
I,
William B. Horne, as Chief Financial Officer of Targeted Medical Pharma, Inc., certify that:
|
1. |
I
have reviewed this quarterly report on Form 10-Q of Targeted Medical Pharma, Inc. for the second quarter ended June 30, 2015; |
|
|
|
|
2. |
Based
on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report; |
|
|
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
|
|
4. |
The
registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
b. |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
c. |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report
based on such evaluation; and |
|
|
|
|
d. |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
|
5. |
The
registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent function): |
|
a. |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
b. |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: |
August
13, 2015 |
|
|
|
|
By: |
/s/
William B. Horne |
|
Name: |
William B. Horne |
|
Title: |
Chief Financial
Officer |
|
Exhibit
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the quarterly report on Form 10-Q of Targeted Medical Pharma, Inc. (the “Company”) for
the fiscal quarter ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
Kim Giffoni, as Chief Executive Officer of the Company, and William B. Horne, as Chief Financial Officer of the Company, each
hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date:
August 13, 2015 |
By: |
/s/
Kim Giffoni |
|
|
Kim Giffoni |
|
|
Chief Executive
Officer |
|
|
|
Date: August
13, 2015 |
By: |
/s/ William
B. Horne |
|
|
William B. Horne |
|
|
Chief Financial
Officer and Principal Accounting Officer |
The
foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-Q or as a separate disclosure document
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject
to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32.1 is expressly and specifically
incorporated by reference in any such filing.
A
signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
Targeted Medical Pharma (CE) (USOTC:TRGM)
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