UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark One)
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[X] |
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal
year ended December 31, 2014. |
Or
|
[ ] |
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
|
|
For the transition
period from _____________ to _____________ |
Commission
File Number 000-53071
TARGETED
MEDICAL PHARMA, INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
20-5863618 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
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)
Securities
registered under Section 12(b) of the Act: None
Securities
registered under Section 12(g) of the Act: Common Stock, $0.001 par value per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding year (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 year (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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]
The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2014
was $10,205,521.
Shares
outstanding of the Registrant’s common stock:
Class |
|
Outstanding
as of April 13, 2015 |
Common
stock, $0.001 par value |
|
26,768,756 |
TARGETED
MEDICAL PHARMA, INC.
FORM
10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2014
TABLE
OF CONTENTS
PART
I
Item
1. Business.
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. We began our operations as Targeted Medical Foods, a California general partnership, which was converted into
a California limited liability company in 2002, to develop medical food products. In 2006, Targeted Medical Foods reorganized
as a Delaware corporation and changed its name to Targeted Medical Pharma, Inc. In 2007, we formed Complete Claims Processing
Inc., a California corporation and our wholly-owned subsidiary (“CCPI”), as a specialty billing and
collection services company to provide billing and collection services relating to our products dispensed by physician clients
and to physician clients of some of our distributors.
We
currently develop and distribute a line of patented amino acid based medical food products, dietary supplements and generic drugs
to physicians, pharmacies, and patients throughout the United States and abroad. Our proprietary patented technology uses a five
component system to allow uptake and use of important neurotransmitter precursors to produce the neurotransmitters that control
autonomic nervous system function such as sleep and pain perception. The neurotransmitters addressed by our patents include nitric
oxide, acetylcholine, serotonin, norepinephrine, epinephrine, dopamine and histamine. The technology addresses neuron specificity
and elimination of attenuation, or tolerance that is characterized by the need for increased dosage. The combination of the neurotransmitters
and their precise proportions allows for a wide range of products. There are seven issued patents and nine pending applications
that cover aspects of the inventions.
We
presently ship product to 17 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Maryland, Mississippi,
Missouri, Nevada, Ohio, Oregon, Pennsylvania, South Carolina, Texas and Washington, although the vast majority (approximately
84%) of our sales of products are in the state of California.
We
believe that medical foods will continue to grow in importance over the coming years. There is an increasing prevalence of chronic
diseases that are candidates for treatment with amino acid based medical foods, such as sleep disorders, posttraumatic stress
disorders, cognitive dysfunction, autism spectrum disorders and pulmonary disorders. Additionally, the aging population will see
an increased incidence of intolerance to traditional drugs related to changes in metabolic function that lead to increased and
more dangerous drug side effects. Congress, the Food and Drug Administration (“FDA”), the Center for
Medicare & Medicaid Services and private insurance companies are focusing increased efforts on pharmacovigilance (the branch
of the pharmaceutical industry which assesses and monitors the safety of drugs either in the development pipeline or which have
already been approved for marketing) to measure and reduce these adverse health consequences. We believe that there is an increasing
level of acceptance of medical foods as a primary therapy by patients and healthcare providers to treat pain syndromes, sleep
and cognitive disorders, obesity, hypertension, and viral infection. In clinical practice, medical foods are being prescribed
as both a standalone therapy and as an adjunct therapy to low doses of commonly prescribed drugs.
Medical
foods are neither dietary nor nutritional supplements. From a regulatory standpoint, the FDA took steps in 1988 to encourage the
development of medical foods by regulating this product category under the Orphan Drug Act. The term medical food, as defined
in Section 5(b) of the Orphan Drug Act is a “food which is formulated to be consumed or administered enterally under the
supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive
nutritional requirements, based on recognized scientific principles, are established by medical evaluation.” This definition
was incorporated by reference into the Nutrition Labeling and Education Act of 1990.
These
regulatory changes have reduced the costs and time associated with bringing medical foods to market, as beforehand medical foods
were categorized as drugs until 1972 and then as “foods for special dietary purposes” until 1988. The field of candidates
for development into medical foods is always expanding due to continuing advances in the understanding of the science of nutrition
and disease, coupled with advances in food technology increasing the number of products that can be formulated and commercialized.
We
distribute our products through an internal sales staff and a network of independent distributors to physicians and pharmacies
throughout the United States. With recent reductions in physician reimbursements for medical services by Medicare, workers compensation
and private insurance companies, many physicians are actively seeking additional sources of practice revenues. We act on behalf
of the dispensing physician to secure contracts with third party payers and, through our proprietary patented software, can bill
for dispensed drugs and medical food products. The average wholesale price (“AWP”) for medical food
is set by us under the terms of our federal re-labeler license. The AWP price is the price billed to the physician and the insurance
company. Certain applicable timely payment discounts and distributor discounts can reduce the net payable to us on behalf of the
physician or distributor.
The
traditional process for prescribing and delivering medications to patients is inefficient, unnecessarily costly and error-prone.
Physicians write virtually all of the approximately four billion annual prescriptions, resulting in errors and necessitating millions
of telephone inquiries from pharmacies for clarification and correction. The pharmacist or managed care organization checks this
information only after the physician writes the prescription. The inability of pharmacists and managed care organizations to communicate
with physicians at the time the physician is writing the prescription has made it difficult to manage pharmaceutical costs. The
existing process further inconveniences the patient, who must travel from the physician’s office to a pharmacy and must
often wait for the prescription to be filled.
We
have developed and market ten core medical foods. In the past we had also marketed 35 convenience-packed therapeutic systems consisting
of a medical food and a generic pharmaceutical, which physicians could prescribe and dispense together.
A
convenience-packed product was a box containing a 30-day supply of a generic pharmaceutical and a 30-day supply of a medical food
product. The box was appropriately labeled and contained separate plain-English inserts providing patient information about the
generic pharmaceutical and the medical food. In December 2014, we discontinued sales of our convenience-packed therapeutic systems,
which represented less than 10% of our total sales, in order to focus on marketing our higher margin core medical foods products.
The
market for the sale of prepackaged medications to physicians for on-site point-of-care dispensing includes medications distributed
for orthopedics, rheumatology, pain management, internal medicine and occupational medicine. On-site dispensing offers healthcare
providers the opportunity to improve financial performance by adding an incremental source of revenue and reducing expenses related
to prescription transmission, communications with pharmacists and billing and processing. From a patient’s perspective,
the dispensing of medications at the point-of-care provides an increased level of convenience, privacy and treatment compliance.
Patients who do not wish to receive medicines dispensed at the point-of-care are able to access our medical food products through
selected independent pharmacies or from online fulfillment through our website, store.medicalfoods.com.
We
support our physician clients with a proprietary pharmacy claims processing service specifically designed for billing and collecting
insurance reimbursement from private insurance and workers compensation for our medical food products and generic drugs. CCPI
provides this service to physician offices for the specific purpose of optimizing insurance reimbursement for dispensed products.
We
have developed a proprietary billing process and supporting software (collectively referred to as “PDRx”)
that facilitates physician dispensing, provides inventory control and assists regulatory reporting. The dispensed products include
our medical foods and generic pharmaceuticals. PDRx directly communicates dispensing data from the physicians’ offices
to our management servers in real-time. This allows our employees and physician clients to use PDRx from computers or smart
devices with internet access. This technology is hosted on company-owned and managed servers and accessed only through a secure
gateway, allowing for compliance with all laws and regulations relating to protected health information.
This
system also allows information to be delivered directly to us for purposes of future sales and educational content. Each physician’s
use of controlled substances is documented and reported to the Drug Enforcement Administration as required by law. This system
is covered by a patent application that we expect to mature into an issued patent in the near future. Our billing system utilizes
a combination of two unique identifying numbers and a computer recognition algorithm to bill third party payers on behalf of the
physician. With respect to our billing system, on February 5, 2013, the USPTO issued us US Pat. No. 8,370,172. Additionally, US
Pat. Application. No. 12/966,720 having a filing date of December 13, 2010 is pending and the Company is awaiting communication
from USPTO, which is expected within the next three to six months. The functional utility of this computer related system is currently
protected by US Pat. No. 8,370,172, US Pat. Application No. 12/966,720, and US Pat. Application No. 13/759,007 filed February
4, 2013.
Additional
patent applications for medical food products are in the process of being written and filed. Specifically, the Company has filed
for three patent applications at the USPTO covering technology for stimulating in vivo differentiation of stem and progenitor
cells for producing red blood cells, growth hormone, and testosterone. Specifically, these three patent applications cover compositions
and methods for augmenting and sustaining amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells
for producing red blood cells, growth hormone, and testosterone. Further, these three patent applications include additional disclosure
covering other embodiments for stimulating in vivo differentiation of stem and progenitor cells to produce additional tissue and
cell types. We are awaiting receipt of the examination results of these three patent applications from the USPTO, which we expect
to receive with respect to each of the three applications on or before June 15, 2015.
Our
Business Strategy
Our
objective is to become a leading provider of solutions based on our patented therapeutic systems for improved patient outcomes
and point-of-care tools designed to automate the physician’s work flow.
Our
strategy to achieve this objective includes the following:
| ● | Accelerating
sales through expansion of marketing efforts, conversion of traditional dispensing-only
physician clients to the PDRx system and development of strategic alliances with
physician practice management system vendors and managed care organizations. |
| | |
| ● | Increasing
customer utilization to enhance the patient care and practice revenue for physicians
through a combination of quality customer service, physician and ancillary staff education
and development of specific disease management solutions. |
Distinguishing
Characteristics of Our Products and Services
| ● | Proprietary
medical food |
We
sell ten core medical food products using patented technology that uses amino acids to produce and modulate neurotransmitters
in specific diseases.
| ● | Development
of practice-specific formularies |
Each
medical practice is involved in the management of patients with specific diseases. A formulary of medical food products and pharmaceutical
therapies is developed for specific individual medical practices.
We
manage the ordering, delivery, dispensing and tracking of branded and generic pharmaceuticals in each physician client’s
practice.
| ● | PDRx
medication management solutions |
PDRx
is our proprietary computer program used to facilitate and track dispensed medical food and drug products in a physician client’s
practice. PDRx facilitates a physician client’s management of inventory and the dispensing physician is alerted to
replenish products as necessary.
| ● | Claims
processing to insurance payers on behalf of customer physicians |
CCPI
is our wholly-owned subsidiary that manages the billing of our medical food and drug products to third party payers on behalf
of a physician client or a physician client of a distributor utilizing CCPI’s billing and collection services.
| ● | Claims
collection management |
CCPI
manages the collections on claims submitted to third party payers on behalf of a physician client or a physician client of a distributor
utilizing CCPI’s billing and collection services.
| ● | Physician
reporting and accounts receivable management |
We
submit a monthly report to each dispensing physician client that includes information about submitted claims and reimbursements
received. This is important at point-of-care to determine what drugs and medical foods are covered under a specific insurance
plan and the amount of co-payment and/or patient responsibility.
| ● | Physician
and ancillary staff education |
We
maintain a Client Education and Support department to inform physician clients on the appropriate use of our medical food products
and to teach ancillary staff the correct procedures for storing pharmaceutical products at the point-of-care site.
| ● | Controlled
substance reporting in California |
In
California all physicians who dispense Schedule III and Schedule IV controlled substances must provide the dispensing information
to the Department of Justice on a weekly basis through the Controlled Substance Utilization Review and Evaluation System (“CURES”).
We track this dispensing history in our PDRx software and file the CURES report on behalf of the physician client.
Business
Organization
We
have two principal business operations: (i) the distribution of proprietary medical foods and (ii) billing and collection services
relating to our products which is operated through our wholly-owned subsidiary, CCPI. Our principal business operations are organized
as follows:
Physician
Therapeutics (PTL)
We distribute our proprietary
medical foods and generic pharmaceuticals as PTL. In the past year physicians in the following 17 states have dispensed our products:
Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Maryland, Mississippi, Missouri, Nevada, Ohio, Oregon, Pennsylvania,
South Carolina, Texas and Washington, although the vast majority (approximately 84%) of our sales of products are in the state
of California. In addition, patients in several other states have received our products through our Web Sites.
Complete
Claims Processing, Inc. (CCPI)
CCPI is our wholly-owned
subsidiary. CCPI provides billing and collection services relating to our products on behalf of dispensing physician clients to
private insurance and workers compensation claims. CCPI bills for medical foods and generic pharmaceuticals that PTL sells. Neither
PTL nor CCPI produces generic pharmaceuticals. CCPI bills for all products that have recognized and appropriately registered NDC
numbers.
Background
of Physician Dispensing of Pharmaceuticals
Physician
dispensing may be a critical tool to increase medication adherence. An April 2014 study in the Annals of Internal Medicine noted
that nearly one-third of patients fail to fill first time prescriptions. The prescriptions most frequently abandoned were those
treating chronic conditions and expensive drugs, such as medication for headache, heart disease and depression.
Cost
is a driving reason for not filling a prescription. Results of the April 2014 study show that 45% of people under age 65 and without
insurance coverage for prescriptions had not filled a prescription in the last year due to cost. Additionally, 84% of working
age people without insurance coverage for prescriptions said they had taken some action, such as spending less on groceries or
not paying bills, in order to pay for medications.
Poor
adherence is also an issue as noted in the Mayo Clinic Proceedings April 2011, which found that approximately 50% of patients
with chronic illness do not take medication as prescribed. Further, the Mayo Clinic Proceedings found that poor adherence to medications
leads to increased morbidity and death and is estimated to incur costs of approximately $100 billion per year.
We
believe that the ease of physician dispensing and improved communication between patient and physician may increase the incidence
of the prescription being filled. Physician dispensing envisages a dual role for the physician - prescribing medication and dispensing
medicines to patients at the point-of-care. The conventional role of the physician is the prescription of medicine that is subsequently
dispensed at a pharmacy. The percentage of physicians dispensing drugs has risen to an estimated 7% - 10% according to a 2012
report of the American Association of State Compensation Insurance Funds. This number is expected to increase as doctors seek
improved patient compliance, convenience and safety. The benefits of point-of-care dispensing to physicians and patients are set
forth below.
Benefits
of Physician Dispensing:
| ● | Increased
Practice Revenue |
| | |
| ● | Reduced
Pharmacy Callback |
| | |
| ● | Improved
Patient Care and Patient Compliance |
| | |
| ● | Reduction
of Adverse Drug Events |
| | |
| ● | Increased
Convenience |
| | |
| ● | Lower
Cost Substitution |
In
44 out of 50 states in the U.S., physician dispensing of prescription drugs is legal subject to specified regulations. In six
other states, there are restrictions on this practice and, in Utah, Texas, Montana and New York, the restrictions are severe enough
that, in practical terms, physician dispensing is effectively prohibited altogether. Massachusetts and New Jersey have limitations
on the number of units that may be dispensed at any one time.
Medical
Foods Products Industry Overview
The
science of nutrition was long overlooked and underdeveloped and now has shown that the sick and elderly have special nutritional
needs that cannot be met by traditional adult diets. Medical nutrition has emerged as an attractive segment in the food industry
today.
Recent
research has shown that a number of diseases are associated with metabolic imbalances and that patients in treatment have specific
nutritional requirements. Some examples are pain syndromes, insomnia, cognitive disorders, IBS, and heart disease. Many older
Americans have or will develop chronic diseases that are amenable to the dietary management benefits of medical foods. Medical
foods help address these diseases and conditions in a drug-free way with food-based ingredients, yet are a medical product taken
under supervision by a physician. The term “medical foods” does not pertain to all foods fed to sick patients. Medical
foods are foods that are specially formulated and processed (as opposed to a naturally occurring foodstuff used in a natural state)
for patients who are seriously ill or who requires the product as a major treatment modality according to FDA regulations.
Medical
foods consist of food-based ingredients that are part of the normal human diet and are Generally Recognized As Safe (“GRAS”)
under FDA standards. Medical foods must make disease claims for which there is scientific evidence for the nutrient deficiencies
that cannot be corrected by normal diet. Medical foods are intended for a vulnerable population suffering from a particular chronic
disease and so have special, extra-rigorous guarantees of safety. All ingredients must be GRAS and used in the concentrations
normally found in the human diet. Medical foods are taken under the supervision of a physician who monitors and adjusts the food
‘dosage.’ In addition, under FDA guidelines and congressionally approved laws medical foods do not require FDA preapproval
but undergo continuous FDA monitoring and approval of label claims. Even though pre-market FDA approval is not required for a
medical food, the official requirements and responsibilities for the manufacturer, in terms of safety, are greater than for dietary
supplements, including solid scientific support for the formula as a whole. For these reasons, medical foods have greater guarantees
of efficacy. In contradistinction, dietary supplements, such as vitamins, minerals and botanicals, do not require FDA preapproval,
cannot make disease claims, are intended for normal people without disease and cannot claim that they prevent, mitigate or treat
a given disease. Dietary supplements do not require physician supervision and can be administered to a person that can self administer
the supplement without supervision. See discussion under “Products and Services” below.
Competition
According
to a 2014 study conducted by Biostrategies Group, the estimated size of the U.S. medical foods market is $2.1 billion with 10%
annual growth. Competition in the clinical nutrition market is dominated by a handful of companies, ranging from global nutritional
manufacturers to leading pharmaceutical companies. In the US a number of small companies have emerged to address specific areas
of disease with prescription medical foods. These companies include Nestle Nutrition, PamLab LLC, Primus Pharmaceuticals Inc.,
Neptune Technologies & Bioresources Inc., Abbot Nutrition, and Accera Inc. The majority of competitive participation is in
developed regions such as the United States, Western Europe, and Japan. However, many companies are expanding into less developed
regions, intensifying competition in less tapped markets. China, for example, is among the expanding competitive regions as companies
continue to break into the growing demand for clinical nutrition in new world markets. Companies highlighted in the study published
in Clinical Nutrition Products: World Markets, 3rd Edition, include:
| ● | Abbott
Laboratories |
| | |
| ● | Baxter
International |
| | |
| ● | B.
Braun |
| | |
| ● | Danone |
| | |
| ● | Fresenius
Kabi |
| | |
| ● | Mead
Johnson |
| | |
| ● | Nestle |
| | |
| ● | PBM
Products |
| | |
| ● | Wyeth |
We
provide services in a segment of the healthcare industry that is highly fragmented and extremely competitive. Our actual and potential
competitors in the United States and abroad may include major specialty pharmaceutical, biotechnology, packaged food and medical
food companies such as Nestle Nutrition, PamLab LLC, Primus Pharmaceuticals Inc., Neptune Technologies & Bioresources Inc.,
Abbot Nutrition and Accera Inc. Many of our potential competitors have considerably greater financial, technical, marketing, research
and other resources than we do, which may allow these competitors to discover important information and technology before we do.
It is anticipated that competition will continue to increase due to such factors as increased consumer and provider awareness
along with expanded insurance coverage for these types of products. Our competitors may succeed in developing products that circumvent
our technologies despite patent protection. Also, our competitors may succeed in developing technologies or products that are
more effective than those that will be developed by us or that would render our technology or product candidates less competitive
or obsolete.
In
addition, we are developing our product candidates to complement certain methods for treating various conditions. If those methods
change, it is likely that the demand for our services and product candidates would significantly decline or cease altogether.
The development of new or superior competing technologies or products, or a change in the methodology of treating the ailments
that our products address, could affect our competitive position and harm our business. Moreover, these competitors may offer
broader product lines and have greater name recognition than us and may offer discounts as a competitive tactic.
Additionally,
several development-stage companies are currently making or developing product candidates that compete with or will compete with
our current or potential products. Competitors may succeed in developing medical foods, obtaining approval from the FDA, or marketing
technologies or products that are more effective or commercially attractive than our current or potential products or that render
our technologies and current or potential products obsolete. Competitors may also develop proprietary positions that may prevent
us from commercializing product candidates.
We
believe that there are no competitors in medication management that offer a comprehensive solution with ease of use, accessibility,
information content and financial opportunity for physicians comparable to ours, especially the availability of patented medical
food products. In the emerging market for medical food products we have gained a competitive position due to our leadership in
technology and innovation as recognized by Frost and Sullivan in 2014, our commitment to conducting and publishing well designed,
evidence based, peer reviewed scientific studies, and our adherence to the letter of the statute that requires ongoing physician
supervision. By promoting the safety and efficacy of each product to physicians, pharmacies and patients we have been able to
establish a positive reputation in the medical and patient communities. Our patented products and clinical trials have validated
the clinical utility of our medical foods as standalone products as well as an adjunct to pharmaceuticals in certain specified
disease states.
The
medical foods sector is a small part of the greater market for clinical nutrition products worldwide. Because we have a record
of good manufacturing practices, favorable clinical results and adherence to the legal requirements for medical food marketing
we have set ourselves apart from our competitors. We have conducted a series of independent controlled clinical trials to validate
the efficacy of our products. The results of five of these trials have been published in peer reviewed medical journals.
Reimbursement
for Medical Food Prescriptions
Domestic
reimbursement groups in the United States include cash customers, private insurance, Medicare Advantage, Medicaid, PPO insurance,
selected HMO insurance and Workers’ Compensation insurance. We have obtained the billing codes and Average Wholesale Prices
(“AWP”) for our medical food products, which enable our products to be submitted for insurance reimbursement.
The AWP pricing and billing codes have been accepted by the major drug databases, including First DataBank, Medispan, Red Book
and Gold Standard.
Private
Insurance
The
private insurance market covers most Americans who are employed along with their families. Employers either provide insurance
to their employees or individuals will purchase insurance from a variety of private companies including Blue Cross/Blue Shield,
Aetna, Cigna, Anthem and others. Pharmacy benefits are administered through Pharmacy Benefit Managers (“PBMs”)
which are either part of the insurance company or administered through an independent company. Each PBM maintains formularies
which determine which products are covered and therefore eligible for payment. Some plans have open formularies which allow payment
for most products including medical foods. These are usually provided by either large employers or unions to their members. If
the pharmacy plan denies payment for the medical foods, then the corresponding medical plan can be billed for payment. Payment
usually occurs within 30 days of billing and an increasing percentage of private insurance plans now pay for our medical foods.
Workers’
Compensation
The
workers’ compensation market operates differently than the commercial insurance markets. Injured workers are covered, in
general, by state-administered workers’ compensation policies. The workers may select their own physician. Initial claims
for reimbursement of professional and prescription expenses can be paid within 45 days but many claims are subject to a long collection
cycle that may last in excess of five years. CCPI maintains an active claims submission and collection department.
While
ultimate collectability of workers’ compensation claims is very high, most workers’ compensation claims are denied
on first claim attempt and can take from 45 days to in excess of five years from the initial submission of a claim to collect.
The initial denial begins a process of correspondence designed to clear denial objections; submission of workers’ compensation
lien filings against insurer settlements on behalf of physicians and settlement hearings. Approximately 25% of claims are settled
within one year of claim billed date and approximately 50% cumulatively are settled within four years of claim billed date. The
majority of claims outstanding over four years are still active. Due to the uncertainty as to the timing and the amount of claims
settlement and collections we do not recognize revenue until cash is received. Cash received and revenue recognized in any given
year for PMM and Hybrid customers is comprised of collections on claims from that year and all prior years as applied to outstanding
invoices.
Highlights
of Growth Strategy
We
believe that we can grow our business using the following strategies:
|
● |
Expand
workers compensation marketplace first in California and then nationally. |
|
|
|
|
● |
Penetrate
the large private insurance market nationally focusing on markets with substantial PPO and private markets. |
|
|
|
|
● |
Penetrate
the Medicaid marketplace. |
|
|
|
|
● |
Leverage
proprietary technology to create, distribute, market, and provide insurance reimbursement for prescription products that encompass
medical food and generic drugs. |
Our
products are routinely reimbursed by third party payers such as private insurance and workers compensation. Products are distributed
primarily through dispensing physicians and selected pharmacies. In the physician dispensing environment revenues are redirected
from reimbursement to pharmacies to the physician who is acting as both the prescriber and the dispenser of medical therapies.
|
● |
Expand
internal sales distributions and expand the Physician Office Distribution (“POD”) while adding mail-order
pharmacies for physicians who do not wish to dispense. |
The
POD channel sells directly to physicians, who profit by prescribing and dispensing medical foods products and generic pharmaceuticals.
Current pricing pressure on healthcare insurance reimbursements has made physicians extremely receptive to carrying our products,
which, in addition to their therapeutic value and scientifically-validated efficacy, provide much desired additional income for
the physician. We believe a large number of physicians do not want to directly dispense to patients but are receptive to prescribing
side effect free medications through both mail-order pharmacies and conventional pharmacy distribution systems.
|
● |
Military
(Veterans, active military and their family). |
The
current treatment options for patients with post-traumatic stress syndrome (“PTSD”) are limited, associated
with a variety of harmful side effects, and do not address the unique nutritional needs of the disease. In 2014, the results of
a clinical trial studying the amino acid based medical foods, Sentra AM and Sentra PM in Veterans suffering from symptoms associated
with PTSD were published in the Journal of Central Nervous System Disease. In this 30 day open label pilot study patients taking
the medical foods Sentra AM and Sentra PM for 30 days showed a significant reduction in PTSD symptoms such as fatigue, cognitive
dysfunction, sleep disturbances, anxiety, and panic attacks as measured by the standardized questionnaires, and an average 57
percent increase in mental health scores. Clinically relevant improvements in sleep quality and a reduction in daytime drowsiness
were also observed in this study.
We believe that
this study illustrates the importance of managing the increased amino acid requirements of a disease and suggests that addressing
specific amino acid deficiencies in patients with PTSD can restore balance to the autonomic nervous system and potentially alleviate
many symptoms associated with the disease.
In
addition, the Company has initiated studies with the Defense Veterans Cooperative on Integrated Pain Management (“DVCIPM”)
for use of the products within the active duty military. These protocols involve acute and chronic back pain. Narcotic use within
the military is increasing because of these back pain syndromes and a side effect free back pain product would have substantial
use within the military community. The protocols, which are more fully described below under “Clinical Trials,”
are expected to begin in the second half of 2014 and will be performed at Fort Bragg. The Company’s products have been
approved for purchase by the Federal Supply Schedule through 2017.
|
● |
Expand
our reach into the PPO insurance, national workers’ compensation and cash markets. |
The
Company has been heavily focused on improving patient care in the California worker’s compensation system, providing medication
tools to physicians to help them shift away from the overprescribing of narcotic analgesics, hypnotic sleep aids, and nonsteroidal
anti-inflammatory drug (“NSAID”) pain medications. Payment protocols under the California workers compensation
system are slow and can take up to five years or longer for reimbursement. Expanding into workers compensation markets nationally
through a network of distributors who pay for the product in a 45-90 day window could generate additional revenue for the company
and help reduce medication side effects in this highly vulnerable patient population.
The
private insurance market is driven by select regions throughout the country with large employers who typically offer employees
and their families comprehensive pharmacy and medical plan coverage. Generally private payers reimburses in 20 to 60 days from
the date that the bill is submitted. Increasing the prescriber base in select markets such as Seattle, Atlanta, parts of Florida
and Los Angeles could improve cash flow considerably. The market for patients with private insurance is dramatically larger than
the workers compensation market alone.
There
is a significant proportion of healthcare providers in the U.S. who sell products directly to patients from their office through
what is called a cash and carry program. Recently, we have developed a cash based program which provides healthcare professionals
the opportunity to purchase products directly from us at a discounted rate and re-sell it to their patients either from the office
or through a drop ship program. Expanding this program through digital marketing initiatives and paid advertising may contribute
to the overall revenue stream and improve cash flow as payments are processed at the point of sale. In addition, this program
is available to healthcare providers who do not wish to sell products to patients through our E-prescribe platform. In this model,
a provider submits an electronic order for a patient and our on-site staff works with the patient directly to fill the order and
capture payment.
TMP
has entered into an agreement to conduct a double blind randomized placebo controlled trial with the Defense Veterans Cooperative
on Integrated Pain Management (“DVCIPM”) to look at the use of Theramine in soldiers with acute and
chronic back pain. Narcotic usage leads to addiction and inability to remain on active duty related to side effects. The study
has been approved by the Institutional Review Board (“IRB”) and is awaiting Investigational New Drug
(“IND”) approval from the FDA to initiate the study. The study hopes to demonstrate that Theramine is
a viable alternative for these patients and can reduce narcotic use in soldiers and veterans.
An
investigator initiated double blind placebo controlled trial is being performed by Philip Fleshner, MD, FACS, endowed chair of
Colorectal Surgery at Cedars Sinai Medical Center and Associate Professor of Surgery at UCLA School of Medicine, looking at Theramine
as a pain treatment following hemorrhoid surgery. Narcotic analgesics are the standard of care in treatment of postoperative pain
following hemorrhoid surgery, but can cause significant constipation which is especially problematic following hemorrhoid surgery
in addition to the addictive potential. The hope is that Theramine will decrease the use of narcotic analgesics in the population
and improve post operative care in these patients.
In
December 2014, the University of Cincinnati completed a double blind, placebo controlled investigator initiated study on the use
of Theramine in the treatment of chronic migraine headaches. Treatment options in this patient population are limited and Theramine
may become a viable alternative in this population.
The
Company has completed an open label study of an amino acid based medical food to treat the nutritional deficiencies in patients
with autism spectrum disorder (“ASD”). The results of the trial have been submitted for publication
in a peer reviewed medical journal. A multicenter, double blind placebo controlled trial looking at this product in children with
ASD has been written and is anticipated to begin later this year. In addition, a further multicenter open label observational
study is anticipated to begin during the third quarter of 2015.
| ● | Enforcement
of the Company’s patent on billing systems. |
In
February 2013, the Company was issued patent number 8,370,172 that covers the use of a physician’s National Provider Identifier
(“NPI”) in conjunction with a unique physician’s identification number that allows billing by
computer systems using these unique identification numbers. The Company is developing a plan for enforcement of this issued patent
and is in the process of interviewing potential patent attorneys. However, finalization of the plan for enforcement will be delayed
until the Company makes a final determination on legal representation, which may not occur until late 2015. The patent may cover
a large percentage of the 4 billion prescriptions dispensed in the United States each year. The Company’s strategy will
initially focus on physicians that directly dispense products to patients and those physicians’ billing companies. Following
this initial strategy, the Company may expand its enforcement to the other point-of-care physicians and billing systems. The Company
is exploring direct infringers who may have been knowingly violating the patent application during the post-publication timeframe.
The size and scope of this business is currently under exploration. The patent covers dispensing of medical foods, convenience
kits and pharmaceuticals as prescribed by point of care physicians.
| ● | Stem
cell related products. |
The
Company has developed a nutrient-based system for stimulation of progenitor stem cell systems and filed patent applications for
the general system and individual products. The initial product prototypes include stimulation of red blood cell progenitor cells,
neuron progenitor cells, insulin producing progenitor cells and testosterone producing progenitor cells. The nutrient-based systems
will be marketed as medical foods. The first initial prototype has been test marketed as a peripheral neuron stimulating system
for use in diabetic neuropathy. Initial clinical trials were completed in the second half of 2013. Two clinical trials have been
performed in normal subjects for oral stimulation of red blood cells and progenitor red blood cells as measured by reticulocyte
formation. These products address large markets which are difficult to quantify at this time. The nutrient-based stimulation of
stem cells does not require harvesting transformation and reinjection of transformed stem cells. The nutrient-based stimulation
and transformation of stem cells contains an inhibitory off switch. It is anticipated that the red blood cell stimulating system
will be available for marketing sometime in 2016.
Products
and Services
Medical
Foods
Medical
foods are a distinct product category different from both drugs and from dietary supplements, which are regulated by the FDA.
The medical food category, defined by the Orphan Drug Act of 1988 and the Food Labeling Act of 1993 and FDA guidelines, includes
such criteria as: specially formulated, administered orally, with on-going physician supervision, and intended for patients with
a disease or abnormal condition characterized by a distinctive nutritional requirement or metabolic imbalance. The precise statutory
definition is as follows: “The term medical food means a food which is formulated to be consumed or administered enterally
under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which
distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.”
The
FDA’s May 2007 Guidance for Industry states, “The term medical food is defined in section 5(b) of the Orphan Drug
Act. The term medical food does not pertain to all foods fed to sick patients. Medical foods are foods that are specially formulated
and processed (as opposed to a naturally occurring foodstuff used in a natural state) for the patient who is seriously ill or
who requires the product as a major treatment modality. Medical foods are only for a patient receiving active and ongoing
medical supervision wherein the patient requires medical care on a recurring basis for, among other things, instructions on the
use of the medical food.” [Emphasis added.]
Medical
foods are specially formulated and intended for the dietary management of a disease that has distinctive nutritional needs that
cannot be met by normal diet alone. A medical food may not be intended for a condition that may be addressed by merely a change
in the diet, e.g., a gluten-free diet for gluten sensitivity. Because they are highly specialized foods, and not dietary supplements,
they are not exempt from the GRAS requirements. The FDA uses the GRAS term to designate ingredients for food as safe for use without
further testing or review. The FDA maintains lists of such GRAS ingredients, both the form and dose. Ingredients in Medical Foods
must be GRAS. Accordingly, all the ingredients in PTL products must be GRAS. This is the basis for the FDA’s position that
medical foods do not require pre-approval. In addition, it is the GRAS designation that substantially reduces the development
cost of PTL products. The largest proportion of expenditures for drug development is used to estimate safety since proving safety
depends on the relative risk. Finding a 1 in 1,000,000 adverse event is very expensive but necessary if 20,000,000 people will
take the drug. The primary ingredients in PTL products are amino acids that are GRAS. Thus, all of their ingredients must either
have GRAS status or be FDA-approved food additives. Medical foods currently marketed in the United States include products for
inborn errors of metabolism and nutrient management of such conditions as healing from burns, osteoporosis, AIDS, and kidney disease.
In some cases a medical food may provide the sole nutrient/ food for a patient (e.g., a throat cancer victim). Medical foods are
administered both in hospitals and in clinical practice, out-patient settings.
We
have developed proprietary medical food formulations based on our patented Targeted Cellular Technology. The unifying foundation
of our products is a focus on managing diseases and disorders caused in whole or in part by changes in nutritional requirements
related to specific diseases that result in functional neurotransmitter depletion. These core medical food products are related
to the production of the chemical messengers that are known as neurotransmitters. Neurotransmitters are intimately involved in
the disease process and can be modulated through medically supervised nutritional management. Many pharmaceutical agents also
operate through a neurotransmitter mechanism. Pharmaceutical agents act by blocking or manipulating neurotransmitter pathways,
such as selective serotonin re-uptake inhibitors (“SSRIs”). Many diseases create accelerated utilization
of certain nutrients that are not able to be replaced by the normal diet alone. Functional depletion of neurotransmitters is also
associated with injury, prescription drug use, stress, and chemical exposure. Our medical foods are effective for the dietary
management of such conditions by supplying the specific and distinctive nutrients that the patient needs. The core products that
are actively promoted by the Company include medical foods for the nutrient management of pain syndromes, the nutrient management
of sleep disorders, the nutrient management of cognitive disorders and the nutrient management of symptoms related to forms of
arthritis.
Medical
foods do not require approval from the FDA before marketing, thereby significantly reducing the entry cost compared to pharmaceuticals
using neurotransmitter mechanisms. We market our medical foods as physician supervised products, requiring continuous physician
supervision.
The
manufacture of our medical foods is outsourced in its entirety to one manufacturer. We currently market ten core medical food
products listed below, each of which have a shelf life of three years.
Disease
Management with Medical Foods |
AppTrim |
|
Metabolic
Syndrome/obesity |
AppTrim-D |
|
Metabolic
Syndrome/obesity |
GABAdone |
|
Sleep
Disorders associated with anxiety |
Hypertensa |
|
Hypertension |
Lister-V |
|
Viral
infections |
Sentra
AM |
|
Cognitive
disorders/fatigue |
Sentra
PM |
|
Sleep
disorders associated with depression, fibromyalgia, and PTSD |
Theramine |
|
Pain
disorders and inflammatory conditions/Fibromyalgia |
Trepadone |
|
Osteoarthritis,
joint disorders |
Percura
|
|
Peripheral
Neuropathy |
Our
product, Theramine accounted for more than 33% of product sales in the year ended December 31, 2014 and 39% in the year
ended December 31, 2013. Pain is a complex process that is mediated by neurotransmitters which transmit signals originating from
a pain-inducing stimulus to specific centers in the brain where it is perceived. Pain is exacerbated by the presence of inflammation
which increases sensitivity to pain-inducing stimuli. Patients with pain syndromes benefit from increased availability of the
specific neurotransmitters involved in modulating the pain process complemented by antioxidants and anti-inflammatory agents that
reduce inflammation. Theramine is formulated to provide specific neurotransmitters with well-defined roles in the modulation
of pain and a blend of antioxidants, anti-inflammatory agents, and immunomodulators to moderate the effects of inflammation on
the pain response.
Theramine
provides neurotransmitters that address the pain cycle and the inflammatory cascade and target the neurotransmitters nitric
oxide, GABA, serotonin and glutamate that have primary effects on inhibition of pain cycles. Theramine also targets the
inflammatory cascade through the histidine/histamine axis, which provides anti-inflammatory ACTH release from the pituitary gland,
with subsequent release of anti-inflammatory molecules. Theramine results in inhibition of the inflammatory cascade at
its proximal portions. Thus, the complete cascade of the inflammatory systems is inhibited, including anti-inflammatory prostaglandins
and T cell long-term inflammatory markers. NSAIDS such as ibuprofen, naproxen and Celebrex inhibit only prostaglandins.
In
2009, the Company completed a double-blind-controlled trial of patients with chronic established back pain. In this trial,
Theramine was compared to naproxen both alone and with co-administration of the two agents. Theramine was shown to
be more effective than naproxen in reducing back pain, and the two agents were better than naproxen alone. In addition, this trial
showed that Theramine reduced the inflammatory marker C-reactive protein, while naproxen in low dose actually increased
inflammatory markers. Reduction of back pain, using the Roland Morris index, was more than 76%, compared to no change with low
dose naproxen.
The
Company has completed a double blind controlled trial of Theramine and ibuprofen in 128 patients with chronic established
back pain. There were three groups randomly assigned treatment. The groups included ibuprofen 200 mg daily alone, Theramine
two capsules twice daily and Theramine with ibuprofen. The study duration was 28 days per patient. Ibuprofen reduced
back pain by 20%, Theramine by 60% and Theramine with ibuprofen by over 80%. Ibuprofen increased both C-reactive
protein and interleukin-6, inflammatory markers, while Theramine reduced these inflammatory markers. Ibuprofen inhibited
amino acid uptake reducing amino acid turnover while Theramine improved amino acid uptake. Ibuprofen treatment increased
the need for increased amino acid administration while Theramine improved amino acid utilization. Ibuprofen increased the
nutritional requirement of back pain syndromes.
These
data indicate that Theramine is both a potent pain reduction agent and an inhibitor of inflammation. The double-blind placebo-controlled
data show there is no significant side effects of Theramine. We also completed an analysis of gastrointestinal hemorrhage
associated with Theramine administration. A significant complication of the use of non-steroidal anti-inflammatory agents
such as naproxen and ibuprofen is gastrointestinal hemorrhage that are expensive to treat and can cause death. We have shown that
in more than 46 million individual administrations of Theramine alone or in combination with other pain agents such as
non-steroidal anti-inflammatory agents there has not been a single reported case of gastrointestinal hemorrhage. The elimination
or significant reduction of gastrointestinal hemorrhage when Theramine is used compared to use of non-steroidal anti-inflammatory
agents such as naproxen and ibuprofen could significantly reduce health care costs.
In
addition to Theramine, which is our leading product in terms of gross product sales, the products Sentra PM and
GABAdone, both of which address chronic sleep disorders, are second and third, respectively, in terms of gross product
sales. These two products elicit the production of serotonin, acetylcholine and GABA, the primary neurotransmitters responsible
for the initiation and maintenance of sleep. The concentrations and proportion of the formula do not result in morning grogginess
or memory loss common with the use of pharmaceutical sleep aids. A significant portion of Company sales arise from Sentra AM,
a product that increases acetylcholine, the central neurotransmitter associated with alertness, cognitive function and memory.
It is also a central neurotransmitter associated with amelioration of the symptoms of fibromyalgia.
Medical
foods and generic pharmaceuticals
We
have completed three multicenter double blind controlled trials examining the use of a medical food and a low dose pharmaceutical.
These three studies have demonstrated that medical foods could be used with a low dose generic pharmaceutical with significant
efficacy and would allow physicians to use lower doses of pharmaceuticals and potentially reduce side effect profiles when compared
to using higher doses.
The
results of the first of these trials were published in the American Journal of Therapeutics online in November 2010 and in print
in March 2012. The study, which is discussed above, examined Theramine versus naproxen. A second study, which is discussed above,
looked at Theramine versus ibuprofen. The data from this trial were published in American Journal of Therapeutics in September
2014. In both of these multicenter double-blind trials, Theramine was found to be superior to the NSAID in both relieving pain
and reducing inflammation as measured by C-Reactive Protein (“CRP”) in patients with chronic low back
pain. Additionally, patients taking the medications together had an additive pain relieving effect. A third multicenter, double
blind placebo controlled trial looking at Sentra PM versus trazodone in patients with sleep disturbance showed that Sentra PM
was superior to trazodone in terms of quality of sleep and did not cause daytime grogginess like trazodone. In addition the patients
taking combination therapy slept even better and longer and the daytime grogginess seen in patients taking trazodone alone disappeared.
These three double blind controlled trials indicated the safety and efficacy of using a medical food as both a standalone medication
and in combination with a low dose prescription pharmaceutical. In these trials, drug side effects were reduced at the lowered
drug doses. We have also performed a cost effectiveness analysis of gastrointestinal side-effect reduction comparing Theramine
to NSAIDS. The analysis shows that substantial savings to the health care system can be achieved by shifting pain management to
Theramine base management and reducing the incidence of gastrointestinal hemorrhage that is associated with NSAID administration.
PDRx
Software Dispensing Program
We
have developed PDRx to facilitate physician dispensing, provide inventory control and assist regulatory reporting. The
dispensed products include medical foods and generic pharmaceuticals. PDRx directly communicates dispensing data from the
physicians’ offices to our management servers in real-time. This allows businesses to use PDRx from computers or
smart devices with internet access. This technology is hosted on company-owned and managed servers and accessed only through a
secure gateway, allow for compliance with all laws and regulations relating to protected health information.
PDRx
also allows information to be delivered directly to us for purposes of future sales and educational content. Each physician’s
use of controlled substances is documented and reported to the Drug Enforcement Administration as required by law. No fee is charged
for the use of the PDRx software. Although the Company derives no revenue from a physician client’s use of the
PDRx software, it enables CCPI to more efficiently process claims on behalf of a physician client.
A
physician’s office can dispense a one-month supply of medications complete with dispensing label and patient instructions
in approximately ten seconds. We have automatic surveillance programs that monitor physician dispensing rates and inventory. Using
a max-min system, we can then generate a flag to physicians to reorder product as necessary.
Billing
and Collections
CCPI
is our wholly-owned subsidiary that provides billing and collection services relating to our products on behalf of dispensing
physician clients to private insurance and workers’ compensation insurance. CCPI retains a percentage of all collections
made for claims made on behalf of physicians in accordance with our billing services agreement and recognizes revenue upon collection
of the claim. CCPI’s billing and collection services aid the physician in obtaining reimbursement for dispensed products.
The physician is entitled to the residual amount of a claim after deducting CCPI’s fee and TMP’s product invoice.
This business model allows physicians to participate in the revenue stream from dispensing of pharmaceuticals. Our billing system
utilizes a combination of two unique identifying numbers and a computer recognition algorithm to bill third party payers on behalf
of the physician. The following two patent applications for this process have been submitted:
1.
US Pat. Application. No. 11/804,085 Filing date: May 17, 2007 Status: Request for Continued Examination and Response to office
action filed on December 27, 2010. US Pat. No. 8,370,172 was issued February 5, 2013.
2.
US Pat. Application. No. 12/966,720 (pending) Filing date: December 13, 2010 Status: The Company responded to an office action
and is awaiting the next communication from USPTO, which is expected within the next six months. The functional utility of this
system is currently protected by trade secret and by issued US Pat. No. 8,370,172 and this patent application and by US Pat. Application
No. 13/759,007 filed February 4, 2013.
On
November 20, 2012, TMP entered into an agreement with Cambridge Medical Funding Group (“CMFG”) to assign
physicians account receivables under California Workman’s Compensation (“CMFG #1”). Subject to
physician’s approval, Cambridge will pay 23% of the California Workman’s Compensation Fee Schedule on all approved
claims. 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
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 23% advance payment, where such payment is without recourse or future obligation
for TMP to repay the 23% 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 approximately 41% 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. Under
this model, physicians are paid on every dispensement rather than having to wait until claims are paid. Physicians have the option
of remaining on the traditional Physician Managed model or switching to the CMFG #1 model. The CMFG #1 agreement contains a 30-day
termination clause within the first 6 months that either party can exercise. It is possible that either party may cancel the agreement,
which could adversely affect the Company’s cash flow and revenue.
Technology
and Intellectual Property
Proprietary
Technology
The
proprietary Targeted Cellular TechnologyTM (“TCT”) platform allows reduced concentrations
of amino acids to generate effective amounts of nerve and brain cell messengers, known as neurotransmitters, to target specific
cells in the body to optimize cell function. Amino acids are the building blocks of protein that allow the body to produce these
neurotransmitters that regulate most bodily functions. Increasing the body’s own neurotransmitter production allows for
improved sleep function, improved cognitive function, mitigation of pain, blood pressure regulation, improved lung function, appetite
regulation and amelioration of complex medical syndromes with minimal potential for adverse effects. Our medical food products
have effects similar to drugs in addressing the specific accelerated nutritional requirements of diseases. These products can
be administrated alone or with traditional pharmaceuticals under medical supervision. Eight years of clinical use and three double
blind clinical trials have demonstrated that the adjunctive use of a medical food product with a traditional pharmaceutical can
provide optimum drug dose that conforms to the lowest FDA labeled dose. We have received six patents on the TCT process, one on
the CCPI claims billing and processing of medication claims by point-of-care physicians technology, and eight pending patent applications
covering our TCT technology and CCPI claims billing and processing of medication claims by point-of-care physicians technology,
and we maintain trademarks, trade secrets, and proprietary methods, as further set forth below.
Patents
The
nutrient-based and pharmaceutical product development process involves extensive trade secrets and pending and issued patent protections.
The patents related to the Targeted Cellular Technology platform were assigned from the inventors, Elizabeth Charuvastra,
RN and William Shell M.D., who are also, respectively, former Chairman of our Board of Directors and former Chairman of our Board
of Directors and Chief Executive Officer.
The
Company filed three patent applications at the USPTO covering technology for stimulating in vivo differentiation of stem and progenitor
cells for producing red blood cells, growth hormone, and testosterone. Specifically, these three patent applications cover compositions
and methods for augmenting and sustaining amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells
for producing red blood cells, growth hormone, and testosterone. Further, these three patent applications include additional disclosure
covering other embodiments for stimulating in vivo differentiation of stem and progenitor cells to produce additional tissue and
cell types. Additionally, the Company has recently filed a continuation patent application claiming benefit to the original CCPI
claims billing and processing of medication claims by point-of-care physicians patent application to seek allowed claims for additional
systems and methods directed to this technology. Further, the Company has filed a pending patent application covering additional
embodiments of the CCPI claims billing and processing of medication claims by point-of-care physicians technology. This patent
application claims priority benefit to the recently issued patent technology contained in issued US Pat. No. 8,370,172.
We
currently own or have exclusive rights to the following issued patents and pending patent applications:
Pat.
No./App. |
|
|
|
|
|
Product(s)/Product |
|
|
Serial
No. |
|
Title |
|
Owner |
|
Candidate(s) |
|
Expiration |
7,674,482
(USA) |
|
Method and compositions
for potentiating pharmaceuticals with amino acid based medical foods |
|
TMP |
|
Medical foods
for producing acetylcholine and serotonin for improved sleep |
|
3/22/2026 |
|
|
|
|
|
|
|
|
|
7,601,369
(USA) |
|
Composition
and method to augment and sustain neurotransmitter production |
|
TMP |
|
Method
for enhancing epinephrine and norepinephrine neurotransmitter activity |
|
8/27/2022 |
|
|
|
|
|
|
|
|
|
7,595,067
(USA) |
|
Composition
and method to augment and sustain neurotransmitter production |
|
TMP |
|
Method
for stimulating nitric oxide production and white blood cell production for improved antiviral activity |
|
8/27/2022 |
|
|
|
|
|
|
|
|
|
7,582,315
(USA) |
|
Composition and
method to augment and sustain neurotransmitter production |
|
TMP |
|
Method for enhancing
serotonin neurotransmitter activity |
|
8/27/2022 |
|
|
|
|
|
|
|
|
|
7,585,523
(USA) |
|
Composition and
method to augment and sustain neurotransmitter production |
|
TMP |
|
Method for enhancing
acetylcholine neurotransmitter activity |
|
8/27/2022 |
|
|
|
|
|
|
|
|
|
8,370,172
(USA) |
|
System and method
for submitting medication claims by point-of-care physicians |
|
TMP |
|
CCPI claims billing
and processing of medication claims by point-of-care physicians |
|
4/2/2032 |
|
|
|
|
|
|
|
|
|
4719832
(Japan) |
|
Composition and
method to augment and sustain neurotransmitter production |
|
TMP |
|
Composition for
stimulating nitric oxide production and white blood cell production in order to produce antiviral activity |
|
8/18/2023 |
|
|
|
|
|
|
|
|
|
2010-79658
(Japan
pending) |
|
Composition and
method to augment and sustain neurotransmitter production |
|
TMP |
|
Omnibus claim
commensurate with specification |
|
N/A(2) |
|
|
|
|
|
|
|
|
|
07753759.5
(Europe
pending) |
|
Method and compositions
for potentiating pharmaceuticals with amino acid based medical foods |
|
TMP |
|
Composition for
use in a method for the treatment of viral infections by stimulating nitric oxide and white blood cell production |
|
N/A(1) |
|
|
|
|
|
|
|
|
|
2009-501565
(Japan
pending) |
|
Method and compositions
for potentiating pharmaceuticals with amino acid based medical foods |
|
TMP |
|
Medical food for
enhancing neurotransmitter activity |
|
N/A(2) |
|
|
|
|
|
|
|
|
|
12/966,720
(USA
pending) |
|
System and methods
for submitting medication claims by point-of-care physicians |
|
TMP |
|
CCPI claims billing
and processing of medication claims by point-of-care physicians |
|
N/A(3) |
|
|
|
|
|
|
|
|
|
13/759,007
(USA
pending) |
|
System and methods
for submitting medication claims by point-of-care physicians |
|
TMP |
|
CCPI claims billing
and processing of medication claims by point-of-care physicians |
|
N/A(4) |
13/115,963
(USA
pending) |
|
Composition
and Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells |
|
TMP |
|
Products
to augment and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce
red blood cells. |
|
N/A(5) |
|
|
|
|
|
|
|
|
|
13/115,965
(USA
pending) |
|
Composition and
Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells |
|
TMP |
|
Products to augment
and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce growth hormone. |
|
N/A(5) |
|
|
|
|
|
|
|
|
|
13/115,967
(USA
pending) |
|
Composition and
Method to Augment and Sustain Amino Acid Delivery for Stimulating In Vivo Differentiation of Stem and Progenitor Cells |
|
TMP |
|
Products to augment
and sustain amino acid delivery for stimulating in vivo differentiation of stem and progenitor cells to produce testosterone. |
|
N/A(5) |
(1)
The Company’s foreign counsel in Europe report that the patent application is in good order and an examination report
for this patent application is expected within the next 3-6 months.
(2)
The Company filed a response to an office action that was issued by the Japanese Patent Office (“JPO”). The
Company is awaiting the next communication from the JPO.
(3)
A request to reconsider current USPTO decision was filed and the Company is awaiting the next communication from USPTO,
which is expected within the next 3-6 months. This patent application contains method claims relating to the CCPI claims billing
and processing of medication claims by point-of-care physicians technology.
(4)
This patent application was filed on February 4, 2013 and is a continuation patent application of the issued parent patent
application (U.S. Pat. No. 8,370,172). It contains computer system and method claims that claim priority to the parent patent
application. It also claims priority benefit to the parent patent application filing date. The Company is awaiting examination
communication from USPTO, which is expected within the coming months.
(5)
The Company expects to receive a communication from the USPTO on or before June 15, 2015.
Trademarks
We
utilize trademarks on all current products and believe that having distinguishing marks is an important factor in marketing our
products. Currently, we have nine U.S. registered trademarks on the principal register at the United States Patent and Trademark
Office (“USPTO”) and we have three common law trademarks. These marks are listed below. We believe that
having distinctive marks for any additional products that we develop will also be an important marketing characteristic. We have
not sought any foreign trademark protection for our products or product candidates at this time. U.S. trademark registrations
generally are for fixed, but renewable, terms.
We
currently own, or have exclusive rights to, the following registered or pending trademarks:
Registration
No/ |
|
|
|
|
|
Product(s)/Product |
Serial
No. |
|
Mark |
|
Owner |
|
Candidate(s) |
3053172 |
|
PHYSICIAN
THERAPEUTICS |
|
TMP |
|
Medical
foods |
3156064 |
|
APPTRIM |
|
TMP |
|
AppTrim |
3515912 |
|
THERAMINE |
|
TMP |
|
Theramine |
3569823 |
|
SENTRA
AM |
|
TMP |
|
Sentra
AM |
3569826 |
|
SENTRA
PM |
|
TMP |
|
Sentra
PM |
3569829 |
|
HYPERTENSA |
|
TMP |
|
Hypertensa |
3569820 |
|
TREPADONE |
|
TMP |
|
Trepadone |
3569818 |
|
GABADONE |
|
TMP |
|
GABAdone |
We
currently own, or have exclusive rights to, the following common law trademarks:
|
|
|
|
Product(s)/Product |
Mark |
|
Owner |
|
Candidate(s) |
PHYSICIAN
THERAPEUTICS |
|
TMP |
|
Wholesale
distributorships featuring dietary supplements and medical foods; Wholesale distributor
of medical foods
|
|
|
|
|
|
|
TMP |
|
Wholesale distributor of
medical foods |
TARGETED CELLULAR TECHNOLOGY |
|
TMP
|
|
Pharmaceutical
preparations, foods for medically restricted diets, and dietary supplements of biological,
nutrient, or botanical origin for use in targeted biologic therapy, to provide activation
of specific neurotransmitters and cellular mechanisms in the treatment of obesity, insulin
resistance, diabetes, fibromyalgia, asthma, pulmonary hypertension, hyptertension, depression,
anxiety, mood disorders, arthritis, pain syndromes, viral infections, headaches, jet
lag, injuries, age-related degeneration, stress, fatigue and increased health and wellness
|
Copyrights
We
have developed a number of properties that we believe qualify for exclusivity in terms of the U.S. Copyright Act, among them:
Software
Programs
| ● | PDRx:
PDRx is a proprietary computer system to facilitate point-of-care dispensing in
the physician client’s office. The system is a cloud-based system using Citrix
interfaces, Hewlett Packard terminals and Microsoft cloud computing software. The dispensing
program resides on our virtual servers and is distributed to physicians through virtual
desktops using a Citrix system. The program operates on a thin client portal, which is
a small computer in the physician client’s office dedicated to the PDRx
system and allows physicians to dispense medications in their office, track inventory,
initiate orders, initiate insurance claims, provide reports to regulatory authorities
and manage receivables through our servers. The servers including the virtual servers
are located in a hardened datacenter with co-location to our central servers. The co-location
of mirrored servers at a dedicated and secured data site provides redundancy and security
of dispensing data. |
| ● | Clinical
Trial Software: We have developed proprietary software, known as ActiveTrials.com,
that allows users to capture and manage clinical trial data online through any modern
web browser. ActiveTrials.com allows for new study protocols to be defined, sites
and studies created, events scheduled, and case report forms added for online completion.
ActiveTrials.com also includes administration tools for oversight, auditing, configuration
and reporting. The ActiveTrials.com software is password-protected with 256-bit encryption,
and access based on user roles. All study participants are assigned random IDs by the
software and remain anonymous at all times. |
| | |
| ● | CCPI
Software: A computer system for initiating, managing and transmitting claims relating
to our products to insurance companies. This program has extensive reporting mechanisms
for physicians and distributors. |
Publications
| ● | Product
Monographs: Each of our products is backed by a detailed product monograph created by
clinicians and food scientists that outlines the accelerated nutritional requirements
of a particular disease or condition. Extensive peer reviewed references from the published
medical and scientific literature are cited. |
Billing
and Collections
CCPI
is our wholly-owned subsidiary that provides billing and collection services relating to our products on behalf of dispensing
physician clients to private insurance and workers’ compensation insurance. CCPI retains a percentage of all collections
made for claims made on behalf of physicians in accordance with our billing services agreement and recognizes revenue upon collection
of the claim. CCPI’s billing and collection services aid the physician in obtaining reimbursement for dispensed products.
The physician is entitled to the residual amount of a claim after deducting CCPI’s fee and TMP’s product invoice.
This business model allows physicians to participate in the revenue stream from dispensing of pharmaceuticals. Our billing system
utilizes a combination of two unique identifying numbers and a computer recognition algorithm to bill third party payers on behalf
of the physician. The following patent and pending patent applications for this technology have been filed or issued:
| 1. | US
Pat. No. 8,370,172; Issue date: February 5, 2013. |
| | |
| 2. | US
Pat. Application. No. 12/966,720 (pending); Filing date: December 13, 2010; Status: A
request to reconsider current USPTO decision was filed and the Company is awaiting the
next communication from USPTO, which is expected within the next six months. This patent
application contains method claims relating to the CCPI claims billing and processing
of medication claims by point-of-care physicians technology. The functional utility of
this system is currently protected by the issued trade secret and by issued US Pat. No.
8,370,172 and this patent application and the following patent application. |
| | |
| 3. | US
Pat. Application No.: 13/759,007; Filing date: February 4, 2013; Status: Recently filed
and awaiting first communication from USPTO, which is expected within four months This
patent application contains method claims relating to the CCPI claims billing and processing
of medication claims by point-of-care physicians technology. |
Medical
Foods Manufacturing and Sources and Availability of Raw Materials
We
outsource the manufacturing of our medical food products to a cGMP registered producer, Global Health Industries (“GHI”).
We have vetted several other manufacturing facilities and have determined that we could immediately transfer manufacturing without
a significant disruption in the business in the event that there is a disruption at our current manufacturing facility. cGMP refers
to the current Good Manufacturing Practice Regulations promulgated by the FDA under the authority of the Food, Drug, and Cosmetic
Act of 1938. These regulations, which have the force of law, require that manufacturers, processors, and packagers of drugs, medical
devices, some food, and blood take proactive steps to ensure that their products are safe, pure, and effective. cGMP regulations
address issues including recordkeeping, personnel qualifications, sanitation, cleanliness, equipment verification, process validation,
and complaint handling. Currently, we provide the manufacturer with a formula and manufacturing specifications. GHI sources and
purchases raw ingredients and manufactures the products to our specifications. All raw materials are subject to rigorous testing
at the time of acquisition and during the manufacturing process for purity. Stability testing is also performed by the manufacturer.
Products are then shipped to the distribution center.
The
raw materials used in the manufacture of our medical foods are primarily amino acids, which are used in multiple products and
are readily available from various sources. Small amounts of botanicals are used in formulations as co-factors. The raw ingredients
for our medical foods are sourced from multiple vendors and we have not experienced any shortages in these materials.
Research
and Development
We
develop candidate formulas for potential medical food products in a process that involves extensive translational research of
the existing medical and scientific literature and their applicability to various diseases. We have developed a database that
contains in excess of 150,000 peer-reviewed published articles, which we have extracted from various national and international
databases and identified as useful in our process of commercializing developments in neuroscience over the past 30 years.
With
the database as the basis for formula development, our team of scientists then develops formulas and manufactures prototypes that
undergo laboratory testing for safety and efficacy. One of our strengths is the selection of appropriate and relevant testing
methodologies. Once a prototype has been created, a small batch is produced and crossover clinical trials are then performed to
assess the ability of the new product to produce neurotransmitters using physiologic endpoints. Double blind controlled trials
are then performed. The clinical trials are outsourced to an independent contract research organization (“CRO”)
that indentifies and contracts with independent sites throughout the United States that gather appropriate data. Our Scientific
Advisory Board reviews data analysis and supervises writing and publication of trial results. All clinical trials are performed
with independent Institutional Review Board (“IRB”) approval. In addition, all trial protocols are submitted
to the FDA for review. However, medical foods do not require FDA pre-approval and our products are comprised of ingredients that
have been categorized as GRAS by the FDA.
While
there is no pre-approval mechanism at the FDA for medical food products, all such products must have validation of their effectiveness
prior to being marketed. Because all medical food products are required to contain ingredients that are GRAS, there are no safety
testing requirements. We validate the effectiveness of our products by clinical testing, including double blind, randomized clinical
trials.
We
file patents for new inventions through our scientists. We also publish both peer-reviewed and internally-generated publications.
There are eight pending patent applications including six using TCT technology and two pending patent applications on the billing
process. Three of the pending patent applications using TCT technology are foreign applications to extend the intellectual property
protection beyond the United States where these five patents have already been issued.
Our
research and development includes performance of early clinical studies and double blind placebo controlled trials. (Studies on
therapeutic treatments for pain in human subjects do not permit IRB approval for the use of a placebo arm in clinical trials due
to ethical considerations). We maintain an in-house research staff and outsource double-blind trials to an independent clinical
research organization. All clinical trials are performed in the United States.
Sales
and Marketing
We
distribute products through a network of distributors and an internal sales force that sells products directly to dispensing physician
clients. There are currently five distributors and one Hybrid customer selling our products to their networks and six internal
sales representatives who sell directly to physicians. Physicians purchase products from PTL for dispensing directly to their
patients. Physician Therapeutics also, in limited circumstances, distributes generic pharmaceuticals to physicians that it purchases
from wholesalers. This process is referred to as “point-of-care dispensing.” We believe that physicians find these
solutions attractive because incorporating these systems into their office work flow can increase efficiency and profitability
for the practice, reduce medication errors, improve patient compliance and improve the quality of patient care by reducing drug
side effects.
Our
propriety dispensing system, PDRx, allows physicians to dispense prescription products and generic pharmaceuticals directly
to patients using the hardware and software provided in the PDRx system rather than by the patient taking a paper prescription
to a pharmacy. In addition, physicians can elect to utilize CCPI’s billing and collection services relating to our products
to collect reimbursement from private insurance and workers’ compensation.
BUSINESS
MODEL
Revenue
Models
TMP
markets medical foods and generic pharmaceuticals through employed sales representatives, independent distributors, online services
and pharmacies. Product sales are invoiced upon shipment at AWP, with varying rapid pay discounts, under six models: Physician
Direct Sales, Distributor Direct Sales, Physician Managed, Hybrid, Online Cash and CMFG #1 Models.
| ● | Physician
Direct Sales Model: Under this model, a physician purchases products from TMP, but
does not retain CCPI’s services. |
| | |
| ● | Distributor
Direct Sales Model: Under this model, a distributor purchases products from TMP,
sells those products to a physician, and the physician does not retain CCPI’s services. |
| | |
| ● | Physician
Managed Model: Under this model, a physician purchases products from TMP and retains
CCPI’s services. |
| | |
| ● | Hybrid
Model: Under this model, a distributor purchases products from TMP and sells those
products to a physician and the physician retains CCPI’s services. |
| | |
| ● | Online
Cash Model: Under this model, healthcare providers and pharmacies can purchase for
re-sale medical foods and dietary supplements at a discounted rate from our online store
www.medicalfoodorders.com. Providers must be approved by TMP prior to making their
first purchase. In this model, credit card payments are processed online at the point
of sale. Certain patients are also able to access our products directly online at www.store.medicalfoods.com.
Prior to purchasing, patients are required to furnish information about their physician
and confirm that they are under the ongoing supervision of a physician. |
| | |
| ● | CMFG
#1 – WC Receivable Purchase Assignment Model: Under this model, physicians
who purchase products from TMP under the Company’s Physician Managed model 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. |
Revenue
Recognition
Under
the following revenue models product sale revenues are recognized upon shipment:
| ● | Physician
Direct Sales Model; |
| | |
| ● | Distributor
Direct Sales Model; |
| | |
| ● | Online
Cash Model; and |
| | |
| ● | CMFG
#1 – Workers’ Compensation (“WC”) Receivable Purchase
Assignment Model (“CMFG #1”) |
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.
| ● | Physician
Managed Model; and |
| | |
| ● | Hybrid
Model |
In
the years ended December 31, 2014 and December 31, 2013, the Company issued billings (net of applicable discounts) to Physician
Managed and Hybrid model customers aggregating $3.8 million and $5.7 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 these billings and billings to our direct and distributor customers are expensed as incurred in each reporting period. Direct
costs associated with all billings aggregating $0.6 million and $1.1 million, were expensed in the accompanying consolidated financial
statements at the time of such billings. However, in accordance with the revenue recognition policy described above, the Company
recognized revenues from certain of the Physician Managed and Hybrid model customers when cash was collected aggregating $3.2
million and $5.0 million in 2014 and 2013, respectively.
Revenue
recognized in any given year is comprised of cash received on all claims settled in that year regardless of the year in which
the customer was billed or the claim originated. As of December 31, 2014, the Company had unrecognized revenue and accounts receivables
from its Physician Managed and Hybrid Model customers totaling $7.5 million which are not reflected in the accompanying consolidated
financial statements.
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, Hybrid and CMFG #1 Models, CCPI has a billing and claims processing service agreement
with the physician. That agreement includes a service fee defined as a percentage of collections on all claims. Because fees are
only earned by CCPI upon collection of the claim and the fee is not determinable until the amount of the collection of the claim
is known, CCPI recognizes revenue at the time that collections are received.
No
returns of products are allowed except products damaged in shipment, which has been insignificant.
The
rapid pay discounts to the AWP 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 historical 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 models above, we recognize provisions for rapid pay discounts in the same period in which the related revenue is recorded.
These rapid pay discounts, have typically ranged from 40% to 88% of AWP and we have monitored our experience ratio periodically
over the prior twelve months and have made adjustments as appropriate.
Allowance
for doubtful accounts
Trade
accounts receivable are stated at the amount management expects to collect from outstanding balances. Currently accounts receivable
are comprised totally of amounts due from distributor customers, amounts due from Cambridge pursuant to our CMFG #1 model and
receivables for our PDRx equipment. 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. We individually review all accounts
receivable balances and based on an assessment of current creditworthiness, estimate the portion, if any, of the balance that
will not be collected. We provide for probable uncollectible amounts through a charge to earnings and a credit to a valuation
allowance based on our assessment of the current status of individual accounts. Balances that are still outstanding after we have
used reasonable collection efforts are written off. Based on an assessment as of December 31, 2014 of the collectability of invoices
120 days or more past their due dates we established an allowance for doubtful accounts of $55,773.
Under
the Company’s Physician Managed and Hybrid models, 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. Approximately 25% of claims are settled within
one year of claim billed date and approximately 50% cumulatively are settled within four years of claim billed date. The majority
of claims outstanding over four years are still active. Due to the uncertainty as to the timing and the amount of claims settlement
and collections we do not recognize revenue until cash is received. Cash received and revenue recognized in any given year from
our Physician Managed and Hybrid models is comprised of collections on claims from that year and all prior years as applied to
outstanding invoices.
The
physician remains personally liable for purchases of product from TMP and, during this long collection cycle, TMP retains a security
interest in all products sold to the physician along with the claims receivable that result from sales of the products. CCPI maintains
an accounting of all managed accounts receivable on behalf of the physician and regularly reports to the physician. As described
above, due to uncertainties as to the timing and collectability of revenues derived from these models, revenue is recorded when
payment is received therefore no allowance for doubtful accounts is necessary.
In
addition to the bad debt recognition policy above, it is also TMP’s policy to write down uncollectible loans and trade receivables
when the payer is no longer in existence, is in bankruptcy or is otherwise insolvent. In such instances our policy is to reduce
accounts receivable by the uncollectible amount and to proportionally reduce the allowance for doubtful accounts.
U.S.
Distribution
There
are currently five distributors and one Hybrid customer selling our products to their networks and six internal sales representative
employees who sell directly to physicians. The initial sales of our products were in the California workers compensation market.
Our
sales currently are primarily in California (approximately 84% of total sales), but we also sell to physicians and distributors
in Arizona, Colorado, Connecticut, Florida, Georgia, Hawaii, Maryland, Mississippi, Missouri, Nevada, Ohio, Oregon, Pennsylvania,
South Carolina, Texas and Washington. The Company has a small presence in each of these states and is actively marketing through
either distributors or sales representatives in these states. Marketing efforts entail print, digital, e-mail, and social media
marketing, which focuses on the distribution of medical food education materials, published clinical data and program information.
We primarily market to orthopedic surgeons, integrative doctors, naturopathic doctors, chiropractors, nurse practitioners, pain
specialists, rheumatologists, and physical medicine specialists. With the initiation of physician dispensing and insurance reimbursement
into the private insurance market, we have begun to address internal medicine, primary care medicine, and psychiatry, as well.
Marketing
plans also include localized, region-specific Web sites for awareness and education about medical foods with links to the Company’s
main Web site for more in-depth education. In addition, the Company is preparing press kits, which include information about the
Company, management and product backgrounds. The Company is also developing presentations for use in varied mobile applications,
such as flash drives, briefing dossiers, conference materials and iPad sales support. In addition, the Company has compiled road
show and briefing materials on the Company’s medical food products to be presented by the Company’s Chief Executive
Officer and other senior executives to invited medical groups and for one-on-one briefings with media personnel. The Company is
also evolving its use of online media through the creation of small-space advertisements, quick advertisements linking back to
the Company’s Web sites and for use in targeted online publications.
We
have been collecting reimbursement from the workers compensation systems in California and Florida since 2004. Revenue from our
physician customers under PMM plus our distributors utilizing CCPI’s services for their physician customers under our Hybrid
Model accounts for approximately 81% of our product revenue for the year ended December 31, 2014 and 73% of our product revenue
for year ended December 31, 2013 while accounting for product billings of 88% and 79% of total product billings, respectively.
The
Company’s initial sales efforts were to physician clients practicing within the workers’ compensation market because
of the initial connections made with physicians in that market and because there were existing mechanisms for reimbursement. Workers’
compensation physicians were already performing in office dispensing of drugs and were amenable to introducing a new product line.
Since 2009, we have developed a framework, business processes and technical infrastructure for obtaining reimbursement in the
much larger commercial insurance reimbursement market. We have found success in this market over the last year and intend to focus
our efforts toward this market in the coming year. We believe that we will see the mix of workers’ compensation to commercial
move toward a more even split, especially as the Company expands its business out of California. California is one of the only
states where physicians have workers’ compensation-only practices. The majority of physicians will treat a mixture of patients
covered by various payers. As we expand our business into additional states, we expect to target physicians treating patients
covered by private insurance by focusing on media outlets and conferences of particular interest to those types of practices.
Government
Regulation
Statutory
Definition and One FDA Regulation
Under
the Federal Food, Drug, and Cosmetic Act of 1938 (“FFDCA”), products are regulated on the basis of their
intended use. Their intended use is determined by the objective factors surrounding their use. Numerous categories and subcategories
of products exist under the FFDCA, such as food, food additive, dietary supplement, GRAS food component, new drug, GRAS and Effective
(“GRAS/E”) drug for over the counter use, and GRAS/E drug for use under the supervision of a physician.
The categories overlap and products can fall within more than one category depending on their intended use.
The
FDA has provided little guidance on the regulation of medical foods, as it is still a relatively new and evolving category of
product under the FFDCA.
Our
medical food products are defined and regulated by the FDA. The term medical food, as defined in Section 5(b) of the Orphan Drug
Act is a “food which is formulated to be consumed or administered enterally, or by mouth, under the supervision of a physician
and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements,
based on recognized scientific principles, are established by medical evaluation.” The FDA advises that it considers the
statutory definition of medical foods to “narrowly” constrain the types of products that fit within the category of
food (see May 2007 Guidance, and Food Labeling; Reference Daily Intakes and Daily Reference Values; Mandatory Status of Nutrition
Labeling and Nutrition Content Revision proposed rule.) This is a Final Rule, binding regulation, on nutrition labeling for conventional
foods.
The
one FDA regulation pertaining to medical foods exempts them from the nutrition labeling requirements that apply to conventional
foods, but they are subject to special labeling requirements. Under 21 C.F.R. sec. 101.9 (j)(8),
(j) The following foods
are exempt from this section or are subject to special labeling requirements:
(8) Medical foods
as defined in section 5(b) of the Orphan Drug Act. A medical food is a food which is formulated to be consumed or administered
enterally under the supervision of a physician and which is intended for the specific dietary management of a disease or condition
for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.
A food is subject to this exemption only if: (i) It is a specially formulated and processed product (as opposed to a naturally
occurring foodstuff used in its natural state) for the partial or exclusive feeding of a patient by means of oral intake or enteral
feeding by tube; (ii) It is intended for the dietary management of a patient who, because of therapeutic or chronic medical needs,
has limited or impaired capacity to ingest, digest, absorb, or metabolize ordinary foodstuffs or certain nutrients, or who has
other special medically determined nutrient requirements, the dietary management of which cannot be achieved by the modification
of the normal diet alone; (iii) It provides nutritional support specifically modified for the management of the unique nutrient
needs that result from the specific disease or condition, as determined by medical evaluation; (iv) It is intended to be used
under medical supervision; and (v) It is intended only for a patient receiving active and ongoing medical supervision wherein
the patient requires medical care on a recurring basis for, among other things, instructions on the use of the medical food.
Unlike
for drugs and for dietary supplements, there is no overall regulatory schema for medical foods, or even a pending proposed rule,
meaning that no FDA rulemaking is in progress. However, a very detailed Advanced Notice of Proposed Rulemaking (“ANPR”)
entitled “Regulation of Medical Foods,” was published in the Federal Register on Nov. 29, 1996. This ANPR never progressed
to a proposed rule, the Notice and Comment procedure, and an eventual Final Rule (binding regulation). However, in the view of
our attorneys, it still represents (in conjunction with the May 2007 and August 2013 Draft Guidance) FDA’s position and
policy on medical foods. This ANPR was in effect withdrawn, because on April 22, 2003, the FDA published a proposal to withdraw
numerous long-pending proposed rules, including this ANPR. The FDA cited as its reasons for withdrawal, first, that the subjects
are not a regulatory priority, and agency resources are limited, second, the proposed rules have become outdated due to advances
in the science or changes in the products or the industry regulated, or changes in legal or regulatory contexts; and, third, to
eliminate uncertainty, so that the FDA or the private sector may resolve underlying issues in ways other than those in the proposals.
In May 2007, the FDA issued its Guidance to Industry, presumably because the medical foods sector was growing, but it did not
engage in a formal rulemaking procedure, either because it did not have the resources and/or because the medical foods category
is still lower priority than drugs and medical devices. A third draft guidance was issued in August 2013 further attempting to
clarify the FDA’s position on medical foods. The guidance has not been formalized but we maintain compliance with said draft
guidance.
Regulatory
Requirements
Overview: Medical
foods are FDA-regulated, but there is no complete set or schema of regulations. There is no pre-market approval, or even pre-market
notification to the FDA required. Rather, it is the responsibility of the manufacturer and marketer to test for safety and efficacy
before marketing and selling. The developer of a medical food must adhere closely to the statutory definition, and to the descriptions
of a medical food in the one regulation regarding exemption from nutrition labeling, and in the May 2007 Guidance and the August
2013 Draft Guidance. (The parameters for a valid medical food are also spelled out in several FDA Warning Letters, such as those
sent to Metagenics, Nestle Healthcare.) In the absence of a specific regulatory schema, we and our regulatory counsel have paid
close attention to the numerous contrasts with both dietary supplements and with prescription drugs. (See regulation, FDA May
2007 Guidance, FDA August 2013 Draft Guidance and the Warning Letter to Garden of Life.) All elements of the medical food product
must indicate that the “intended use” of the product is for the dietary management of a disease, and not for the cure
or prevention of a disease.
Threshold
Issue: The manufacturer must demonstrate that the disease or condition to be targeted, scientifically and medically, is a
disease with distinctive (or unique) nutritional requirements (ANPR 1996). The FDA has stated that this is a “narrow category,”
(2007 Guidance, recent Warning Letter to Bioenergy) and that whether a product is valid for this category depends on the published
medical science of the disease and its origins. The targeted disease or condition may be, or caused by, a metabolic imbalance
or deficiency or the accelerated requirements for a certain nutrient caused by a disease state. Thus, we and our Scientific Advisory
Committee begin with a comprehensive in-house report documenting the distinctive nutritional requirements of the disease as the
crucial first step in research and development.
Formulation:
A medical food may not be a single ingredient formula - otherwise, that product would be a dietary supplement for a nutrient
deficiency. (FDA Field Guides) A medical food formula must go beyond a mere modification of the diet. (FDA regulation; 2007 Guidance,
2013 Draft Guidance) The formula must meet/satisfy the distinctive nutritional requirements, not merely ameliorate the symptoms.
For example, Glucosamine or MSM, or an herb’s “active” constituent may indeed help osteoarthritis. But first
the Company must demonstrate that these nutrients are the distinctive nutritional requirements for osteoarthritis. The test is:
Does this formula bring the patient from the abnormal condition or disease state (with distinctive nutritional requirements) back
to the equilibrium of a healthy state?
Safety:
There are no particular or mandated FDA pre-market safety studies required of the formula as a whole. However, all ingredients
must be either GRAS or approved food-additives. (See FDA letter to Industry (2001) regarding no botanicals or “novel”
ingredients permitted in “functional foods”; and the ANPR. Since medical foods are typically taken with prescription
drugs, the developer must assess whether any medical food/drug interactions pose a risk assessment. Many ingredients have been
determined by the FDA to be GRAS and are listed as such by regulation. Other ingredients may achieve self-affirmed GRAS status
through a panel of experts on that particular substance that author a GRAS Report. The standard for an ingredient to achieve GRAS
status requires not only technical demonstration of non-toxicity and safety, but also general recognition and agreement on that
safety by experts in the field. All ingredients used us in our medical foods are either FDA-approved food additives or have GRAS
status. Note that the GRAS requirement for ingredients (above) is arguably a higher safety standard than the risk/benefit analysis
required for pharmaceuticals. Like any evolving area, especially where no premarket approval is required, the FDA reserves the
right to raise questions about the qualification of products within any category as well as the labeling and manufacturing safety
of those products. A variety of informal and formal legal options exist for the Agency to raise these issues. For medical foods,
the FDA has taken little regulatory action, although questions about the manufacture and labeling of such products have arisen.
Efficacy:
No particular FDA pre-market efficacy studies are required by the FDA or by Congressional statute, similar to or comparable to
Phase 2 & 3 trials for prescription drugs. But a company must have clinical trials or other tests to demonstrate that the
formula, when taken as directed, meets the distinctive nutritional requirements of the particular disease. The test for effectiveness
may be amelioration of the “endpoints of the disease”. In terms of the standard for substantiation of claims, the
FDA has stated that the level of evidence must be at least as high as that to support an unqualified health claim, which is “significant
scientific agreement.”
Manufacturing:
There are no “good manufacturing practice” (“GMP”) regulations for medical foods in
particular. Drug GMPs are not required, nor are the relatively new dietary supplement GMPs required; only food GMPs are required.
But note the “medical foods paradox” spelled out in the ANPR. The paradox is that medical foods are intended for a
vulnerable patient population, under a physician’s care, and yet there are no specific FDA regulations for this category
of product, whereas there are very specific and rigorous regulations and requirements for the manufacture and labeling of conventional
foods. The manufacture of our medical foods is outsourced in its entirety. We use a state of the art facility, which manufactures
only nutritional supplements and medical foods.
Labeling:
As for all food labels, printing must be legible, and many required elements must be conspicuous:
| ● | Statement
of Identity: is MEDICAL FOOD for the dietary management of _______. |
| | |
| ● | Must
include: “Must be administered under the supervision of a physician.” |
| | |
| ● | An
accurate statement of the net quantity of contents. |
| | |
| ● | Ingredient
listing (in the absence of both a required Nutrition Facts box or a Supplement Facts
box - no complete set of labeling regulations for medical foods exist yet). See 2007
Guidance: |
“Medical
foods are foods and therefore their label must contain a statement of identity (the common or usual name of the product) (21 CFR
101.3), an accurate statement of the net quantity of contents (21 CFR 101.105), the name and place of business of the manufacturer,
packer, or distributor (21 CFR 101.5), and a complete list of ingredients, listed by their common or usual name and in descending
order of predominance (21 CFR 101.4). In addition, all words, statements, and other information required by or under authority
of the Federal Food, Drug, and Cosmetic Act (FFDCA) to appear on a label or labeling of a medical food must appear with prominence
and conspicuousness (21 CFR 101.15). . . . Medical foods also must be labeled in conformance with the principal display panel
requirements (21 CFR 101.1), the information panel requirements (21 CFR.101.2), and the misbranding of food requirements (21 CFR
101.18).”
| ● | Distributed
by: [Co. Name and Mailing Address] (2007 Guidance). Reporting of serious adverse events
is voluntary, not required; so a toll-free number is not required. |
| | |
| ● | If
the formula contains or is derived from any of the 8 major allergens, the ingredient
list must contain or be followed by a prominent caution, e.g., CONTAINS WHEAT. (Food
Allergen Labeling and Consumer Protection Act of 2004, and May 2007 FDA Guidance). |
| | |
| ● | The
Directions must be clear and precise, e.g., Take 2 capsules in the morning with other
food, or as directed by your physician. (2007 Guidance). |
| | |
| ● | The
label should not contain Rx only or the NDC (National Drug Code) (August 2013 Draft Guidance) |
| | |
| ● | Many
companies include a package insert or prescribing information in the box (but there is
no law on this issue). |
Marketing:
A medical food is a food product thus, the FDA does not regulate advertisements and promotional activities according to the
pharmaceutical statutes and regulations; there is no side effects Disclaimer or fair balancing required, e.g., in DTC advertising
of drugs on television. However, the FDA has a very broad definition of “labeling”; thus all promotional materials,
including websites, are under the authority, monitoring and enforcement of FDA. The Federal Trade Commission (“FTC”)
also has joint jurisdiction with the FDA over food products, per a 1983 Memorandum of Understanding. Thus, all advertising claims,
both express and implied, must be true, accurate, well-substantiated, and not misleading. All websites, print ads, infomercials,
exhibit booth materials, testimonials, and endorsements must be reviewed by the regulatory counsel with both an FDA and an FTC
perspective. A company must be careful re-disseminating “off-label use” materials, i.e., as a drug or a drug alternative.
Enforcement:
Enforcement is post-market, mostly via annual FDA inspections of food facilities, including packaging, distribution facilities,
and fulfillment houses, as well as the manufacturer. (Field Guides for Compliance) But see FDA Warning Letters sent to Efficas:
FDA also gathers material at trade shows/ conferences, and examines websites. FTC has joint jurisdiction, and performs sophisticated
Internet searches, both randomly and at the request of the FDA or of a competitor.
Medical
Foods and Pharmaceuticals
Medical
foods are distinguished from the broader category of foods for special dietary use and from foods that make health claims by the
requirement that medical foods be intended to meet distinctive nutritional requirements of a disease or condition, be used under
medical supervision and intended for the specific dietary management of a disease or condition. To be considered a medical food,
a product must, at a minimum, meet the following criteria: the product must be a food for oral or tube feeding; the product must
be labeled for the dietary management of a specific medical disorder, disease or condition for which there are distinctive nutritional
requirements; and the product must be intended to be used under medical supervision (see regulation, above). Additionally, we
are licensed by the FDA as a pharmaceutical re-packager and the Company is permitted to purchase and re-distribute scheduled medications
and package and re-label products. We are subject to periodic inspections of facilities, marketing materials and products by FDA
inspectors; these are routine inspections conducted without prior notice every one or two years.
Claims
for both medical foods and drugs must be supported by scientific data or clinical data. Medical foods may also have intrinsic
safety obtained through GRAS status of the ingredients, including the common use of the food or food component in people. For
GRAS/E products that have been used for a material time and extent or under the supervision of a physician the support for the
use can be provided by scientific or clinical data. No premarket approval by FDA is required. By contrast, the safety and therapeutic
claims of a product labeled for a new drug use, one that is not GRAS/E, must be pre-approved by the FDA through extensive clinical
testing in animals and then humans.
Thus,
for a medical food the FDA requires scientific data and often human clinical studies to substantiate claims but preapproval by
the Agency to market the product is not required. Claims for both medical foods and drugs must be supported by solid laboratory
and clinical data. Medical foods have intrinsic safety obtained through GRAS status of the ingredients, including use of the food
or food additive in millions of people. By contrast, the safety and therapeutic claims of a product labeled a drug must be pre-approved
by the FDA through extensive clinical testing in animals and then humans.
For
a medical food, the FDA implies that human clinical studies are required, per the FDA’s ANPR (above), and based on the manufacturer’s
and marketer’s responsibility that any health/medical product be demonstrated to be efficacious before it is marketed and
sold. This is a fundamental principle under both the FDA and the FTC, for all health-related products.
Medical
foods are administered and supervised by physicians, allowing a range of existing human studies to be used to support claims.
The standard for medical foods allows use of published science from a variety of sources to support disease and nutritional functional
deficiency claims. Our ingredients and formulas are well-researched and supported by voluminous scientific literature, in-house
Monographs, and clinical trials.
We
have followed the regulatory compliance counsel from the beginning of its research and development on medical foods.
Point-of-Care
Dispensing by Physicians
In
44 out of 50 states in the U.S., physician dispensing of prescription drugs is legal subject to specified regulations. In six
other states, there are restrictions on this practice and, in Utah, Texas, Montana and New York, the restrictions are severe enough
that, in practical terms, physician dispensing is effectively prohibited altogether. Massachusetts and New Jersey have limitations
on the number of units that may be dispensed at any one time.
Many
of the states allowing physician dispensing for profit have regulations relating to licensure, storage, labeling, record keeping
and the degree of supervision required by the physician over support personnel who assist in the non-judgmental tasks associated
with physician dispensing, such as retrieving medication bottles and affixing labels. We regularly monitor these laws and regulations,
in consultation with legal counsel and the governing agencies, to assist customers in understanding them so that they can materially
comply.
Stark
II
Congress
enacted significant prohibitions against physician self-referrals in the Omnibus Budget Reconciliation Act of 1993. This law commonly
referred to as “Stark II,” applies to physician dispensing of outpatient prescription drugs that are reimbursable
by Medicare or Medicaid. Stark II, however, includes an exception for the provision of in-office ancillary services, including
a physician’s dispensing of outpatient prescription drugs, provided that the physician meets the requirements of the exception.
Good
Manufacturing Practices
The
Company is subject to regulation by and licensure with the FDA, the DEA and various state agencies. Among the regulations applicable
to the Company are the FDA’s good manufacturing practices. Medical foods must comply with all applicable requirements for
the manufacture of foods, including the Current Good Manufacturing Practices regulations and Registration of Food Facilities requirements.
Ingredients used in medical foods must be approved food additives or a food additive that is subject to an exemption for investigational
use if the ingredients are not GRAS.
Anti-Kickback
Statute and HIPAA Criminal Laws
We
are subject to various federal and state laws pertaining to health care fraud and abuse. The federal Anti-Kickback Statute makes
it illegal for any person, including a pharmaceutical, biologic, or medical device company (or a party acting on its behalf),
to knowingly and willfully solicit, offer, receive or pay any remuneration, directly or indirectly, in exchange for, or to induce,
the referral of business, including the purchase, ordering or prescription of a particular item or service, or arranging for the
purchase, ordering, or prescription of a particular item or service for which payment may be made under federal healthcare programs
such as Medicare and Medicaid. In 1996, under the Health Insurance Portability and Accountability Act (“HIPAA”),
the Anti-Kickback Statute was expanded to be made applicable to most federal and state-funded health care programs. The definition
of remuneration has been broadly interpreted to include any item or service of value, including but not limited to gifts, discounts,
the furnishing of free supplies or equipment, commercially unreasonable credit arrangements, cash payments, waivers of payments
or providing anything at less than its fair market value. Several courts have interpreted the Anti-Kickback Statute’s intent
requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of business reimbursable
by a federal healthcare program, the statute has been violated. Penalties for violations include criminal penalties, civil sanctions
and administrative actions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federally-funded
healthcare programs. In addition, some kickback allegations have been held to violate the federal False Claims Act, which is discussed
in more detail below.
The
federal Anti-Kickback Statute is broad and prohibits many arrangements and practices that may be lawful in businesses outside
of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous and
beneficial arrangements, Congress created several exceptions in the Social Security Act and has authorized the U.S. Department
of Health and Human Services (“HHS”) to publish regulatory “safe harbors” that exempt certain
practices from enforcement action under the Anti-Kickback Statute prohibitions. For example, there are safe harbors available
for certain discounts to purchasers, personal services arrangements and various other types of arrangements. However, safe harbor
protection is only available for transactions that satisfy all of the narrowly defined safe harbor provisions applicable to the
particular remunerative relationship. We seek to comply with such safe harbors whenever possible. Conduct and business arrangements
that do not strictly comply with all the provisions of an applicable safe harbor, while not necessarily illegal, face an increased
risk of scrutiny by government enforcement authorities and an ongoing risk of prosecution.
In
addition, many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to
referral of patients for healthcare services reimbursed by any third-party payer, not only the Medicare and Medicaid programs
or other governmental payers. At least one state, California, also has adopted a law requiring pharmaceutical companies to implement
compliance programs to prevent and deter conduct that may violate fraud and abuse laws that comply with the voluntary industry
guidelines and the Office of Inspector General (“OIG”) compliance guidance. While we believe we have
structured our business arrangements to comply with these laws, it is possible that the government could find that such arrangements
violate these laws, which could have a material adverse effect on our business, results of operations and financial condition.
HIPAA
created two new federal crimes: health care fraud and false statements relating to health care matters. The health care fraud
statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private payers.
A violation of this statute is a felony and may result in fines, imprisonment or exclusion from federal and state health care
programs such as Medicare and Medicaid. The false statements statute prohibits knowingly and willfully falsifying, concealing
or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery
of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines or
imprisonment. Additionally, HIPAA granted expanded enforcement authority to HHS and the U.S. Department of Justice (“DOJ”)
and provided enhanced resources to support the activities and responsibilities of the OIG and DOJ by authorizing large increases
in funding for investigating fraud and abuse violations relating to health care delivery and payment.
HIPAA
Compliance and Privacy Protection
HIPAA
established for the first time comprehensive federal protection for the privacy and security of health information. The HIPAA
standards apply to three types of organizations, or Covered Entities: health plans, health care clearing houses, and health care
providers who conduct certain health care transactions electronically. Covered Entities must have in place administrative, physical
and technical standards to guard against the misuse of individually identifiable health information. Additionally, some state
laws impose privacy protections more stringent than HIPAA’s. There are also international privacy laws, such as the European
Data Directive, that impose restrictions on the access, use, and disclosure of health information. All of these laws may impact
our business. We are a Covered Entity subject to HIPAA privacy and security standards. Our activities must also comply with other
applicable privacy laws. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability
to obtain tissue specimens and associated patient information could significantly impact our business and our future business
plans. We maintain strict procedures and policies to remain compliant with these patient confidentiality requirements.
HITECH
Act
The
Health Information Technology for Economic and Clinical Health (“HITECH”) Act promotes the adoption
and meaningful use of health information technology. The HITECH Act addresses the privacy and security concerns associated with
the electronic transmission of health information, in part, through several provisions that strengthen the civil and criminal
enforcement of the HIPAA rules.
The
HITECH Act establishes four categories of violations that reflect increasing levels of culpability and four corresponding tiers
of penalty amounts that significantly increase the minimum penalty amount of each violation. The maximum penalty amount is $1,500,000
for repeated violations of the same provision. In addition, the HITECH Act permits the imposition of penalties if the Covered
Entity did not know, and with the exercise of reasonable diligence, would not have known, of the violation. Such violations are
now punishable under the lowest tier of penalties. In addition, the HITECH Act prohibits the imposition of penalties for violations
corrected within a 30-day period so long as those violations were not due to willful neglect.
False
Claims Laws
Pursuant
to various federal and state false claims laws, the submission of false or fraudulent claims for payment may lead to civil money
penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded
health care programs. These false claims statutes include the federal False Claims Act, which allows the federal government or
private individuals to bring suit alleging that an entity or person knowingly submitted (or caused another person or entity to
submit or conspired to submit) a false or fraudulent claim for payment to the federal government or knowingly used (or caused
to be used) a false record or statement to obtain payment from the federal government. The federal False Claims Act may also be
violated if a person files a false statement in order to reduce, avoid, or conceal an obligation to pay money to the federal government,
or engages in conduct that may violate the Anti-Kickback Statute. Several pharmaceutical and medical device companies have settled
claims based on the federal False Claims Act for conduct involving, among other examples, providing free product to purchasers
with the exception that federally-funded health programs would be billed for the product, or instances in which a manufacturer
has marketed its product for unapproved and non-reimbursable purposes. A person who files suit may be able to share in amounts
recovered by the government in connection with such suits. Such suits, known as qui tam actions, have increased significantly
in recent years and have increased the risk that a health care company will have to defend a false claims action, enter into settlements
that may include corporate integrity agreements requiring disclosures to the federal government, pay fines or be excluded from
the Medicare and/or Medicaid programs as a result of an investigation arising out of such an action. The scope of the federal
false Claims Act was significantly expanded in both the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21 (2009),
and in the Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010). In addition, a number of states have
enacted similar laws prohibiting the submission of false or fraudulent claims to a state government. We are not aware of any qui
tam actions pending against us. However, no assurance can be given that such actions may not be filed against us in the future,
or that any non-compliance with such laws would not have a material adverse effect on our business, results of operations and
financial condition.
State
Regulatory Requirements
Each
state has its own regulations concerning physician dispensing, restrictions on the corporate practice of medicine, anti-kick back
and false claim regulations. In addition, each state has a board of pharmacy that regulates the sale and distribution of drugs
and other therapeutic agents. Some states require that a physician obtain a license to dispense prescription products. When considering
the commencement of business in a new state, we solicit the opinion of healthcare counsel regarding the expansion of operations
into that statement and utilize local counsel when necessary.
Other
United States Regulatory Requirements
In
the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are subject
to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and
Medicaid Services (formerly the Health Care Financing Administration), other divisions of the United States Department of Health
and Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States
Attorney offices within the Department of Justice, and state and local governments. Pricing and rebate programs must comply with
the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each
as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration,
additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection,
unfair competition, and other laws. In addition, we may be subject to federal and state laws requiring the disclosure of financial
arrangements with health care professionals.
California
Board of Pharmacy
We
maintain an active Wholesale Pharmacy License in California. A wholesaler permit is required before any company selling dangerous
drugs or devices for resale or distribution in California may do business in California.
Foreign
Regulatory Requirements
We
may be subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials,
manufacture, product registration and approval, and pharmaceutical sales. Whether or not FDA approval has been obtained, we must
obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement
of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement
criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA
approval.
Reimbursement
and Pricing Controls
In
many of the markets where we would commercialize a product, the prices of pharmaceutical products are subject, by law, to direct
price controls and to drug reimbursement programs with varying price control mechanisms. Public and private health care payers
control costs and influence drug pricing through a variety of mechanisms, including the setting of reimbursement amounts for drugs
and biological products covered by Medicare Part B based on their Average Sales Prices calculated by manufacturers in accordance
with the Medicare Prescription Drug, Improvement, and Modernization Act, as amended, through negotiating discounts with the manufacturers,
and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within
a therapeutic class. Payers also set other criteria to govern the uses of a drug that will be deemed medically appropriate and
therefore reimbursed or otherwise covered. In particular, many public and private health care payers limit reimbursement and coverage
to the uses of a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published
medical literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical
evidence for particular drug products and identify which uses of a drug are supported or not supported by the available evidence,
whether or not such uses have been approved by the FDA. For example, in the case of Medicare coverage for physician-administered
oncology drugs, the Omnibus Budget Reconciliation Act of 1993, with certain exceptions, prohibits Medicare carriers from refusing
to cover unapproved uses of an FDA-approved drug if the unapproved use is supported by one or more citations in the American Hospital
Formulary Service Drug Information, the American Medical Association Drug Evaluations, or the United States Pharmacopoeia Drug
Information. Another commonly cited compendium, for example under Medicaid, is the DRUGDEX Information System.
The
foregoing description of laws and regulations affecting health care companies is not meant to be an all-inclusive discussion of
aspects of federal and state fraud and abuse laws that may affect our business, results of operations and financial condition.
Health care companies operate in a complicated regulatory environment. These or other statutory or regulatory initiatives may
affect our revenues or operations. No assurance can be given that our practices, if reviewed, would be found to be in compliance
with applicable fraud and abuse laws (including false claims laws and anti-kickback prohibitions), as such laws ultimately may
be interpreted, or that any non-compliance with such laws or government investigations of alleged non-compliance with such laws
would not have a material adverse effect on our business, results of operations and financial condition.
Employees
The
Company had 43 full-time employees as of March 28, 2015 of whom 28 were in product development, operations and engineering, 7
in sales and marketing and 8 in general, administrative and executive management and 2 part time employees. It is general practice
in our industry to retain the services of independent contractors to perform tasks related to computer programming and network
administration. None of our employees is covered by a collective bargaining agreement and our management considers relations with
employees to be good.
Facilities
We
lease approximately 6,994 square feet of office space and 500 square feet of storage space in Los Angeles, California to house
our administrative, marketing and product development activities. We pay $21,007 per month in base rent in Los Angeles, under
a lease that expires February 28, 2018. In addition, we are required to pay for all insurance, repairs and maintenance and any
increases in real property taxes over the lease period on the facility. In general, we believe that our properties are well-maintained,
adequate and suitable for their purposes.
Item
1A. Risk Factors.
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K 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. 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”. 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. We undertake no obligation to update any forward-looking statements except as required by
law.
Risks
Related to Our Business
Our
recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.
Our
recurring operating losses raise substantial doubt about our ability to continue as a going concern. As a result, our independent
registered public accounting firm included an explanatory paragraph in their report on our financial statements as of and for
the years ended December 31, 2014 and December 31, 2013 with respect to this uncertainty. The perception of our ability to continue
as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result
in the loss of confidence by investors, suppliers and employees.
We
have significant working capital requirements and have historically experienced negative working capital balances. If we experience
such negative working capital balances in the future, it could have a material adverse effect on our business, financial condition
and results of operations.
As
a result of our continued losses, the Company’s current liabilities significantly exceed current assets, resulting in negative
working capital of $11,815,621. Consequently, the Company will be dependent upon additional financing to meet capital needs and
repay outstanding debt. Since January of 2011 the Company has relied on loans from related parties to fund its operating cash
flow deficits. There is no assurance that we will generate the necessary net income or operating cash flows to meet our working
capital requirements and pay our debt as it becomes due in the future due to a variety of factors, including the cyclical nature
of the staffing industry and other factors discussed in this “Risk Factors” section. If we are unable to do so, our
liquidity would be adversely affected and we would consider taking a variety of actions, including attempting to reduce fixed
costs (for example, further reducing the size of our administrative work force), curtailing or reducing planned capital additions,
raising additional equity, borrowing additional funds, refinancing existing indebtedness or taking other actions. There can be
no assurance, however, that we will be able to successfully take any of these actions, including adjusting expenses sufficiently
or in a timely manner, or raising additional equity, increasing borrowings or completing a refinancing on any terms or on terms
that are acceptable to us. Our inability to take these actions as and when necessary would materially adversely affect our liquidity,
results of operations and financial condition.
Our significant level of debt could
limit cash flows available for our operations, adversely affect our financial health and prevent us from fulfilling our obligations
under our credit facilities and other accrued liabilities.
As of December 31,
2014, we had total notes payable of $4,027,970, which included $2,504,411 payable to related parties and $1,523,559 payable to
Raven Asset-Based Opportunity Fund I LP. The related party notes are held by William E. Shell, M.D., our former Chief Executive
Officer and a former director, Lisa Liebman, the wife of Dr. Shell, and the William Shell Survivor’s Trust (collectively,
the “Related Party Notes”). Dr. Shell’s employment with the Company terminated on January
9, 2015, and he resigned as a member of the Board on February 26, 2015. On March 13, 2015, we received a written demand
for repayment of all principal and interest outstanding on the Related Party Notes. The Company disputes the enforceability
of the demand and the validity of the June 2012 amendments that modified the Related Party Notes issued to the Trust and to Ms.
Liebman prior to June 22, 2012, from five-year notes to demand notes.
However, if the Related
Party Notes are determined to be immediately due and payable, together with accrued interest, and immediate full or partial repayment
of such Related Party Notes is required, we cannot assure you that we would have access to sufficient funds or other assets to
pay the amounts due. Further, if we were required to use a large portion of our cash flows to pay principal and interest
on borrowings under the Related Party Notes, or our other accrued liabilities, it would reduce the availability of cash to fund
working capital, capital expenditures, research and development and other business activities. If these actions were to
occur, it would materially adversely affect our liquidity, results of operations and financial condition.
Our
products and facility and the facilities of our manufacturers are subject to federal laws and regulations. Failure to comply with
any law or regulation could result in penalties and restrictions on our manufacturers’ ability to manufacture and our ability
to distribute products. If any such action were to be imposed, it could have a material adverse effect on our business and results
of operations.
Although
medical foods do not require pre-market approval by the FDA, manufacturers of medical foods must be registered with the FDA under
a provision promulgated by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the “Bioterrorism
Act”). Manufacturers of medical foods are subject to periodic inspection by the FDA. The manufacture of our medical
foods is outsourced in its entirety to a third party manufacturer. We are evaluating additional manufacturers for selection as
second source or back-up providers. Our medical foods have been reviewed by the FDA on several occasions. The inspection process
includes a review of our facility, sampling of our products and a review of labeling and other patient and promotional materials
related to our products. The most recent routine facilities inspection by the Southwest Regional Office of the FDA was conducted
in December 2014. No deficiencies in the facility or operations were noted during the inspection. Although the results of the
current inspection were positive, there is no certainty that the FDA will favorably review new medical food products we introduce
or our manufacturers’ facilities in the future. If the outcome of the inspection had been negative or if we or our manufacturers
fail to comply with any law or regulation, we could be subject to penalties and restrictions on our manufacturers’ ability
to manufacture and distribute products. Any such action may result in a material adverse effect on our business and results of
operations. For a more complete discussion of the laws and regulations to which we are subject, please see the section of this
report titled “Description of Business - Government Regulation”.
If
we are unable to secure reimbursement for our products from insurance companies on behalf of our physician clients, or if the
collection cycle is protracted, revenue and cash flow from product sales by PTL and the billing and collection fee CCPI charges
to our physician clients may be adversely affected.
The collection cycle in
the workers’ compensation portion of our business, which has historically accounted for up to approximately 75% of claims
managed by CCPI, may take from 45 days to in excess of five years after the initial submission of a claim by CCPI and may involve
denials and an extensive appeals process. In the event a reimbursement claim is denied and we appeal the denial, there can be
no assurance that we will be successful in such appeal. In the event a reimbursement is delayed, we may be required to wait in
excess of five years before we are paid for the cost of product sold to our physician clients or may never receive reimbursement.
In addition, because PMM, Hybrid Model and CCPI fee revenue is dependent on collections from insurance companies for physician
clients, delays or difficulties with these collections will reduce collection revenue. In addition, collection issues on behalf
of our physician clients may lead to dissatisfaction of our clients in our collection program and curtailed use of our products
in their practice, which may adversely affect the growth of our business and our results of operations.
Since
the collection cycle for the reimbursement of our products has been protracted, cash flow from the products sold and support services
provided to our physician clients may be adversely affected and we may be unable to sustain the growth of our Company at its current
rate without additional financing.
In
the event the collection cycle for the reimbursement claims we make on behalf of our physician clients continues to be protracted,
revenue from the products sold and support services provided to physician clients, which is the most lucrative part of our business,
may be adversely affected. A prolonged collection cycle also reduces our cash flow and requires us to seek additional financing
to support our operations. Such additional financing may not be available on terms acceptable to us or at all. If we raise funds
by issuing additional securities, the newly issued securities may further dilute your ownership interest. If adequate funds are
not available, then we may be required to delay, reduce or eliminate product development or marketing programs. Our inability
to take advantage of opportunities in the industry because of capital constraints may have a material adverse effect on our business
and our prospects.
A
significant portion of the Company’s billings and revenues are derived from the sale of a single product.
In
the years ended December 31, 2014, 2013 and 2012, the Company derived 33%, 39%, and 42% of its billings respectively from the
sale of Theramine. While we continue to see a significant demand for Theramine from our physician clients we cannot
assure you that the demand will continue. A decline in sales of Theramine to our physician clients may have an immediate
adverse effect on our financial results.
A
substantial portion of the Company’s billings and revenues are derived from a limited number of physician clients and the
loss of any one or more of them may have an immediate adverse effect on our financial results.
In
the years ended December 31, 2014, 2013 and 2012, 14%, 11% and 36%, respectively, of the Company’s billings were derived
from individual customers representing 10% or more of the total billings. The Company does not receive purchase volume commitments
from clients and physicians may stop purchasing our products and services with little or no warning. The loss of any one or more
of these customers may have an immediate adverse effect on our financial results.
There
is no certainty that our products will continue to be reimbursed by private insurance and workers compensation insurers. If these
entities do not continue to reimburse for the costs of our products, this could have a material adverse effect on our business
and results of operations.
In
order for private insurance and workers compensation insurers to reimburse the cost of our products, we must, among other things,
maintain registration of the products in the major drug databases, maintain our re-labeler license, maintain our company formulary
approval by Pharmacy Benefits Managers and maintain recognition by insurance companies that our products are covered by various
agencies. There is no certainty that we will be able to maintain these requirements for insurance reimbursement of our products.
If our physician clients do not continue to be reimbursed for dispensing our products, they may choose not to purchase them and
our business and results of operations may be adversely affected. If physician clients are unable to obtain adequate reimbursement
for dispensing our products, they may not be able to pay us for outstanding product invoices currently included in our accounts
receivable. While the physician client remains responsible for payment of product invoices in accordance with our agreement regardless
of reimbursement, pursuing legal remedies for the collection of these amounts may be costly and take considerable time and we
would likely lose some physician clients as customers.
If
we are forced to reduce our prices, our business, financial condition and results of operations may suffer.
We
may be subject to pricing pressures with respect to our future sales arising from various sources, including practices of health
insurance companies, Internet pharmacies, and pharmacy benefits managers, including those operating outside the United States.
Our physician clients and the other entities with which we have a business relationship are affected by changes in regulations
and limitations in governmental spending for Medicare and Medicaid programs. Recent government actions could limit government
spending for the Medicare and Medicaid programs, limit payments to physicians and other providers and increase emphasis on competition
and other programs that potentially could have an adverse effect on our customers and the other entities with which we have a
business relationship. If our pricing experiences significant downward pressure, our business will be less profitable and our
results of operations may be adversely affected. In addition, because cash from sales funds our working capital requirements,
reduced profitability could require us to raise additional capital to support our operations.
If
we are unable to successfully introduce new products or services or fail to keep pace with medical advances and developments in
billing services, our business, financial condition and results of operations may be adversely affected.
The
successful implementation of our business model depends on our ability to adapt to evolving technologies and industry standards
and introduce new products and services. We cannot assure you that we will be able to introduce new products on schedule, or at
all, or that such products will achieve market acceptance. Moreover, competitors may develop competitive products that could adversely
affect our results of operations. A failure by us to introduce planned products or other new products or to introduce these products
on schedule may have an adverse effect on our business, financial condition and results of operations.
If
we cannot adapt to changing technologies, our products and services may become obsolete, and our business could suffer. Because
the Internet and healthcare information markets are characterized by rapid technological change, we may be unable to anticipate
changes in our current and potential customers’ requirements that could make our existing technology obsolete. Our success
will depend, in part, on our ability to continue to enhance our existing products and services, develop new technology that addresses
the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological
advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary
technology entails significant technical and business risks. We may not be successful in using new technologies effectively or
adapting our proprietary technology to evolving customer requirements or emerging industry standards, and, as a result, our business
may suffer.
If
physicians do not accept our products and services, or delay in deciding whether to purchase our products and services, our business,
financial condition and results of operations may be adversely affected.
Our
business model depends on our ability to sell our products and services. Acceptance of our products and services requires physicians
to adopt different behavior patterns and new methods of conducting business and exchanging information. We cannot assure you that
physicians will integrate our products and services into their workflow or those participants in the healthcare market will accept
our products and services as a replacement for traditional methods of delivering pharmaceutical therapies and billing for those
products. Achieving market acceptance for our products and services will require substantial sales and marketing efforts and the
expenditure of significant financial and other resources to create awareness and demand by participants in the healthcare industry.
If we fail to achieve broad acceptance of our products and services by physicians, and other healthcare industry participants
or if we fail to position our products and services as a preferred therapies and medication management and pharmaceutical healthcare
delivery, our business, financial condition and results of operations may be adversely affected.
If
our principal suppliers fail or are unable to perform their contracts with us, we may be unable to meet our commitments to our
customers. As a result, our reputation and our relationships with our customers may be damaged and our business and results of
operations may be adversely affected.
We
currently purchase a majority of the generic pharmaceuticals that we sell from H.J. Harkins Co., Inc. (“Pharma Pac”)
and manufacture all our medical food products at Global Health Industries. These companies are subject to FDA regulation and they
are responsible for compliance with current Good Manufacturing Practices. Although our agreements provide that our suppliers will
abide by the FDA manufacturing requirements, we cannot control their compliance. If they fail to comply with FDA manufacturing
requirements, the FDA could prevent Global Health Industries from manufacturing our products or, in the case of Pharma Pac, from
selling its products to us. Although we believe that there are a number of other sources of supply of medications and manufacturers
of medical food products, if these suppliers are unable to perform under our agreements, particularly at certain critical times
such as when we add new physician clients that will require a large production of one or more products, we may be unable to meet
our commitments to our customers. If this were to happen, our reputation as well as our relationships with our customers may suffer
and our business and results of operations may be adversely affected. We have evaluated several additional manufacturers for selection
as second source or back-up providers.
If
our software products fail to perform properly due to undetected errors or similar problems, our business could suffer.
Complex
software such as our PDRx system often contains undetected defects or errors. It is possible that such errors may be found
after introduction of new software or enhancements to existing software. We continually introduce new solutions and enhancements
to our products, and, despite testing by us, it is possible that errors might occur in our software. If we detect any errors before
we introduce an upgrade or an enhancement, we might have to delay deployment for an extended period of time while we address the
problem. If we do not discover errors that affect software or any upgrades or enhancements until after they are deployed, we would
need to provide revisions to correct such errors. Errors in our software could result in harm to our reputation, lost sales, delays
in commercial release, product liability claims, delays in or loss of market acceptance of our products and services and unexpected
expenses and diversion of resources to remedy errors. Furthermore, our customers might use our products and software together
with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem
and errors might cause us to incur significant costs, divert the attention of our technical personnel from our solution development
efforts, impact our reputation and cause significant customer relations problems.
Factors
beyond our control could cause interruptions in our operations, which may adversely affect our reputation in the marketplace and
our business, financial condition and results of operations.
To
succeed, we must be able to distribute our products and operate our support systems without interruption. We use certain third
party suppliers to manufacture, supply and ship our medical food and generic drug products to customers. If these third party
suppliers fail to perform, we could experience an interruption in supplying our products to physician clients. In addition, although
we have established a co-location site for our support services and we have disaster recovery programs in place, our operations
could be vulnerable to interruption by damage from a variety of sources, many of which are not within our control, including without
limitation: (1) power loss and telecommunications failures; (2) software and hardware errors, failures or crashes; (3) computer
viruses and similar disruptive problems; and (4) fire, flood and other natural disasters. Any significant interruptions in the
provision of our products or our services may damage our reputation in the marketplace and have a negative impact on our business,
financial condition and results of operations.
If
our security is breached, we could be subject to liability, and customers could be deterred from using our services.
The
Health Information Technology for Economic and Clinical Health (“HITECH”) Act of 2009 controls all protocols
for securely transmitting protected healthcare information over the Internet, via email and facsimile, including information protected
by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). Our business relies on
using the Internet to transmit protected healthcare information. Regulations change rapidly and, if we cannot adapt our systems
in a timely fashion, we could be liable for civil and criminal penalties. The HITECH Act provides a tiered system for assessing
the level of each HIPAA privacy violation and, therefore, its penalty:
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Tier
A is for violations in which the offender didn’t realize he or she violated HIPAA and would have handled the matter
differently if he or she had. A Tier A violation results in a $100 fine for each violation, and the total imposed for such
violations cannot exceed $25,000 for the calendar year. |
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Tier
B is for violations due to reasonable cause, but not “willful neglect.” The result is a $1,000 fine for each violation,
and the fines cannot exceed $100,000 for the calendar year. |
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Tier
C is for violations due to willful neglect that the organization ultimately corrected. The result is a $10,000 fine for each
violation, and the fines cannot exceed $250,000 for the calendar year. |
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Tier
D is for violations of willful neglect that the organization did not correct. The result is a $50,000 fine for each violation,
and the fines cannot exceed $1,500,000 for the calendar year. |
The
HITECH Act also allows states’ attorneys general to levy fines and seek attorney’s fees from covered entities on behalf
of victims. Courts now have the ability to award costs.
It
is also possible that third parties could penetrate our network security or otherwise misappropriate patient information and other
data. If this happens, our operations could be interrupted, and we may be subject to liability and regulatory action. We may need
to devote significant additional financial and other resources to protect against security breaches or to alleviate problems caused
by breaches. We could face financial loss, litigation and other liabilities to the extent that our activities or the activities
of third-party contractors involve the storage and transmission of confidential information like patient records or credit information.
We
may be liable for use of data we provide. If the data is incorrect, we could be liable for product liability or other claims that
may be in excess of, or not covered by, our product liability insurance. This may harm our business, financial condition and results
of operations.
We
provide data for use by healthcare providers in treating patients. Third-party contractors provide us with some of this data.
If this data is incorrect or incomplete, adverse consequences may occur and give rise to product liability and other claims against
us. In addition, certain of our services provide applications that relate to patient clinical information, and a court or government
agency may take the position that our delivery of health information directly to licensed practitioners exposes us to liability
for wrongful delivery or handling of health information. While we maintain product liability insurance coverage in an amount that
we believe is sufficient for our business, we cannot assure you that this coverage will prove to be adequate or will continue
to be available on acceptable terms, if at all. A claim brought against us that is uninsured or under-insured could harm our business,
financial condition and results of operations. Even unsuccessful claims could result in substantial costs and diversion of management
resources.
If
we incur costs exceeding our insurance coverage in lawsuits that are brought against us in the future, it could adversely affect
our business, financial condition and results of operations.
If
we were to become a defendant in any lawsuits involving the manufacture and sale of our products and if our insurance coverage
were inadequate to satisfy these liabilities, it may have an adverse effect on our business, financial condition and results of
operations.
Our
business depends on our intellectual property rights, and if we are unable to protect them, our competitive position may suffer.
Our
business plan is predicated on our proprietary systems and technology. Accordingly, protecting our intellectual property rights
is critical to our continued success and our ability to maintain our competitive position. We protect our proprietary rights through
a combination of patents, trademark, trade secret and copyright law, confidentiality agreements and technical measures. We generally
enter into non-disclosure agreements with our employees and consultants and limit access to our trade secrets and technology.
We cannot assure you that the steps we have taken will prevent misappropriation of our technology. Misappropriation of our intellectual
property would have an adverse effect on our competitive position. In addition, we may have to engage in litigation in the future
to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial
costs and the diversion of management’s time and attention as a result.
If
we are deemed to infringe on the proprietary rights of third parties, we could incur unanticipated expense and be prevented from
providing our products and services.
We
could be subject to intellectual property infringement claims as the number of our competitors grows and our products and applications’
functionality overlaps with competitive products. While we do not believe that we have infringed or are infringing on any proprietary
rights of third parties, we cannot assure you that infringement claims will not be asserted against us or that those claims will
be unsuccessful. We could incur substantial costs and diversion of management resources defending any infringement claims whether
or not such claims are ultimately successful. Furthermore, a party making a claim against us could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products
or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required
for our products or services will be available on commercially reasonable terms, or at all.
We
may not be able to protect our Intellectual Property.
The
Company has 7 issued patents and 8 additional pending patent applications related to its products. Our success, competitive position,
and future revenues will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes,
and other technologies; to preserve our trade secrets; to obtain trademarks for our name, logo and products; to prevent third
parties from infringing our proprietary rights; and to operate without infringing the proprietary rights of third parties. To
counter infringement or unauthorized use by third parties, we may be required to file infringement claims, which can be expensive
and time-consuming. If we infringe the rights of third parties, we could be prevented from selling our products, forced to pay
damages, and forced to incur substantial costs in defending litigations.
The
patent process is subject to numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting
our products by obtaining and defending patents. These risks and uncertainties include the following:
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Claims
of issued patents, and the claims of any patents which may issue in the future and be owned by or licensed to the Company
may be challenged by third parties, resulting in patents being deemed invalid, unenforceable, or narrowed in scope, a third
party may circumvent any such issued patents, or such issued patents may not provide any significant commercial protection
against competing products. |
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Our
competitors, many of which have substantially greater resources than we do and many of which have made significant investments
in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our
ability to make, use, and sell our potential products either in the United States or in international markets. |
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The
legal systems of some foreign countries do not encourage the aggressive enforcement of patents, and countries other than the
United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign competitors
the ability to exploit these laws to create, develop, and market competing products. Thus, the Company’s foreign patents
may not be enforceable to the same extent as the counterpart U.S. patents. |
In
addition, the United States Patent and Trademark Office, and patent offices in other jurisdictions have often required that patent
applications concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only
the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges.
Thus, even if we or any of our licensors are able to obtain patents, the patents may be substantially narrower than anticipated.
If
we are unable to maintain existing relationships and create new relationships with pharmacy benefit managers and managed care
payers, our business, financial condition and results of operations may be adversely affected.
We
rely on pharmacy benefits managers to reimburse our physician clients for prescription medications dispensed in their offices.
While many of the leading pharmacy benefit managers currently reimburse our physicians for in-office dispensing, none of these
payers is under a long-term obligation to do so. If we are unable to increase the number of pharmacy benefits managers that reimburse
for in-office dispensing, or if some or all of the payers who currently reimburse physicians decline to do so in the future, utilization
of our products and services would decrease and, therefore, our business, financial condition and results of operations may be
adversely affected.
Our
business depends in part on and will continue to depend in part on our ability to establish and maintain additional strategic
relationships. Our failure to establish and maintain these relationships could make it more difficult to expand the reach of our
products, which may have a material adverse effect on our business.
To
be successful, we must continue to maintain our existing strategic relationships, such as our relationship with Global Health
Industries, which manufactures our medical food products, and Pharma Pac, which provides our generic pharmaceuticals, and distributor
relationships. We also must continue to establish additional strategic relationships with leaders in a number of pharmaceutical,
healthcare and healthcare information technology industry segments. This is critical to our success because we believe that these
relationships contribute towards our ability to extend the reach of our products and services to a larger number of physicians
and physician groups and to other participants in the healthcare industry; develop and deploy new products and services; further
enhance the Physician Therapeutics brand in the U.S. and the Targeted Medical Pharma brand internationally; and generate additional
revenue and cash flows. Entering into strategic relationships is complicated because strategic partners may decide to compete
with us in some or all of our markets. In addition, we may not be able to maintain or establish relationships with key participants
in the healthcare industry if we conduct business with their competitors. We depend, in part, on our strategic partners’
ability to generate increased acceptance and use of our products and services. If we lose any of these strategic relationships
or fail to establish additional relationships, or if our strategic relationships fail to benefit us as expected, we may not be
able to execute our business plan, and our business, financial condition and results of operations may suffer.
We
must attract quality management in order to manage our growth. Failure to do so may result in slower expansion.
In
order to support the growth of our business, we will need to expand our senior management team. We have an active recruitment
program for managers, middle managers and senior managers. There is no assurance that we will be capable of attracting quality
managers and integrating those individuals into our management system. Without experienced and talented management, the growth
of our business may be adversely impacted.
Competition
for our employees is intense, and we may not be able to attract and retain the highly skilled employees we need to support our
business. Without skilled employees, the quality of our product development and services could diminish and the growth of our
business may be slowed, which may have a material adverse effect on our business, financial condition and results of operations.
Our
ability to provide high-quality products and services to our clients depends in large part upon our employees’ experience
and expertise. We must attract and retain highly qualified personnel with a deep understanding of the pharmaceutical and healthcare
information technology industries. In addition, we invest significant time and expense in training our employees, increasing their
value to clients as well as to competitors who may seek to recruit them, which increases the cost of replacing them. If we fail
to retain our employees, the quality of our product development and services could diminish and the growth of our business may
be slowed. This may have a material adverse effect on our business, financial condition and results of operations.
If
we lose the services of our key personnel, we may be unable to replace them, and our business, financial condition and results
of operations may be adversely affected.
On
January 9, 2015, the Board voted to terminate Dr. Shell’s employment with the Company and remove him as Chairman of the
Board. At the time of his termination, Dr. Shell was the Company’s Chief Executive Officer and Chief Scientific Officer.
On February 26, 2015, Dr. Shell resigned as a member of the Board of Directors. In connection with the termination of Dr. Shell’s
employment, the Board appointed Kim Giffoni as the Company’s Interim Chief Executive Officer. Our success largely depends
on the continued skills, experience, efforts and policies of our management and other key personnel and our ability to continue
to attract, motivate and retain highly qualified employees. In particular, the services of Kim Giffoni, our Chief Executive Officer,
David S. Silver, M.D., our Chief Medical Officer, and William B. Horne, our Chief Financial Officer, are integral to the execution
of our business strategy. We believe that the loss of the services of any of these executive officers could adversely affect our
business, financial condition and results of operations. We cannot assure you that these executive officers will continue to provide
services to the Company. We do not maintain key man insurance for any of our key employees.
Our
failure to compete successfully could cause our revenue or market share to decline.
The
market for our products and services is competitive and is characterized by rapidly evolving industry standards, technology and
user needs and the frequent introduction of new products and services. Some of our competitors, which include major pharmaceutical
companies with alternatives to our products, may be more established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than us. Moreover, we expect that competition will continue to increase as
a result of consolidation in both the pharmaceutical and healthcare industries. If one or more of our competitors or potential
competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely
affect our ability to compete effectively. We compete on the basis of several factors, including distribution of products and
services, reputation, scientific validity, reliability, accuracy and security, client service, price, and industry expertise and
experience. We also face competition from providers of other medication repackaging services and bulk pharmaceutical distributors.
There can be no assurance that we will be able to compete successfully against current and future competitors or that the competitive
pressures that we face will not materially adversely affect our business, financial condition and results of operations.
Our
future success depends upon our ability to grow, and if we are unable to manage our growth effectively, we may incur unexpected
expenses and be unable to meet our customers’ requirements.
We
will need to expand our operations if we successfully achieve market acceptance for our products and services. We cannot be certain
that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Our future
operating results will depend on the ability of our officers and key employees to manage changing business conditions and to implement
and improve our technical, administrative, financial control and reporting systems. We may not be able to expand and upgrade our
systems and infrastructure to accommodate these increases. Difficulties in managing any future growth could have a significant
negative impact on our business, financial condition and results of operations because we may incur unexpected expenses and be
unable to meet our customers’ requirements.
In
order to expand our business into additional states, we will need to comply with regulatory requirements specific to such state
and there can be no assurance that we will be able to initially meet such requirements or that we will be able to maintain compliance
on an on-going basis.
Each
state has its own regulations concerning physician dispensing, restrictions on the corporate practice of medicine, anti-kick back
and false claims. In addition, each state has a board of pharmacy that regulates the sale and distribution of drugs and other
therapeutic agents. Some states require a physician to obtain a license to dispense prescription products. When considering the
commencement of business in a new state, we solicit the opinion of healthcare counsel regarding the expansion of operations into
that state and utilize local counsel when necessary. However, there can be no assurance that we will be able to comply with the
regulations of particular states into which we intend to expand or that we will be able to maintain compliance with the states
in which we currently distribute our products. Our inability to maintain compliance with the regulations of states into which
we currently ship our products or expand our business into additional states may adversely affects our results of operations.
Our
agreement with the Cambridge Medical Funding Group may be terminated by either party upon 30-day notice within the first six months.
The
Cambridge Medical Funding Group agreement allows for payment within 7 to 10 days for all products dispensed and billed for participating
physicians in California Workers’ Compensation. The agreement between Cambridge Medical Funding Group, the Company and the
physician contains a 30-day termination clause pursuant to which either party may terminate within the first 6 months. It is possible
that either party may cancel the agreement, which could adversely affect the Company’s cash flow and revenue.
Risks
Related to Our Industry
We
and our suppliers and manufacturers are subject to a number of existing laws, regulations and industry initiatives and the regulatory
environment of the healthcare industry is continuing to change. If it is determined that we or our suppliers or manufacturers
are not in compliance with the laws and regulations to which we are subject, our business, financial condition and results of
operations may be adversely affected.
As
a participant in the healthcare industry, our operations and relationships, and those of our customers, are regulated by a number
of federal, state and local governmental entities and our products must be capable of being used by our customers in a manner
that complies with those laws and regulations. Inability of our customers to do so could affect the marketability of our products
or our compliance with our customer contracts, or even expose us to direct liability on a theory that we had assisted our customers
in a violation of healthcare laws or regulations. Because of our direct business relationships with physicians and because the
healthcare technology industry as a whole is relatively young, the application of many state and federal regulations to our business
operations is uncertain. Indeed, there are federal and state fraud and abuse laws, including anti-kickback laws and limitations
on physician referrals and laws related to off-label promotion of prescription drugs that may be directly or indirectly applicable
to our operations and relationships or the business practices of our customers. It is possible that a review of our business practices
or those of our customers by courts or regulatory authorities could result in a determination that may adversely affect us. In
addition, the healthcare regulatory environment may change in a way that restricts our existing operations or our growth. The
healthcare industry is expected to continue to undergo significant changes for the foreseeable future, which could have an adverse
effect on our business, financial condition and results of operations. We cannot predict the effect of possible future legislation
and regulation.
Any
failure to comply with all applicable federal and state confidentiality requirements for the protection of patient information
may result in fines and other liabilities, which may adversely affect our results of operations.
As
part of the operation of our business, our physician clients provide to us patient-identifiable medical information. HIPAA grants
a number of rights to individuals as to their identifiable confidential medical information (called “Protected Health
Information”) and restricts the use and disclosure of Protected Health Information. Failure to comply with these
confidentiality requirements may result in penalties and sanctions. In addition, certain state laws may impose independent obligations
upon us and our physician clients with respect to patient-identifiable medical information. Moreover, various new laws relating
to the acquisition, storage and transmission of patient medical information have been proposed at both the federal and state level.
Any failure to comply may result in fines and other liabilities, which may adversely affect our results of operations.
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Electronic
Prescribing. The use of our software by physicians to perform a variety of functions, including electronic prescribing,
electronic routing of prescriptions to pharmacies and dispensing, is governed by state and federal law, including fraud and
abuse laws. States have differing prescription format requirements. Many existing laws and regulations, when enacted, did
not anticipate methods of e-commerce now being developed. While federal law and the laws of many states permit the electronic
transmission of prescription orders, the laws of several states neither specifically permit nor specifically prohibit the
practice. Given the rapid growth of electronic transactions in healthcare, and particularly the growth of the Internet, we
expect the remaining states to directly address these areas with regulation in the near future. In addition, on November 7,
2005, the Department of Health and Human Services published its final “E-Prescribing and the Prescription Drug Program”
regulations (E-Prescribing Regulations). These regulations are required by the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) and became effective beginning on January 1, 2006. The E-Prescribing Regulations consist of
detailed standards and requirements, in addition to the HIPAA and HITECH standards discussed above, for prescription and other
information transmitted electronically in connection with a drug benefit covered by the MMA’s Prescription Drug Benefit.
These standards cover not only transactions between prescribers and dispensers for prescriptions but also electronic eligibility
and benefits inquiries and drug formulary and benefit coverage information. The standards apply to prescription drug plans
participating in the MMA’s Prescription Drug Benefit. Aspects of our clinical products are affected by such regulation
because of the need of our customers to comply, as discussed above. Compliance with these regulations could be burdensome,
time-consuming and expensive. We also could become subject to future legislation and regulations concerning the development
and marketing of healthcare software systems. For example, regulatory authorities such as the U.S. Department of Health and
Human Services’ Center for Medicare and Medicaid Services may impose functionality standards with regard to electronic
prescribing and electronic health record (“EHR”) technologies. These could increase the cost and time necessary
to market new services and could affect us in other respects not presently foreseeable. |
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Electronic
Health Records. A number of important federal and state laws govern the use and content of electronic health record systems,
including fraud and abuse laws that may affect providing such technology without cost to third parties. As a company that
provides dispensing software systems to a variety of providers of healthcare, our systems and services must be designed in
a manner that facilitates our customers’ compliance with these laws. Because this is a topic of increasing state and
federal regulation, we must continue to monitor legislative and regulatory developments that might affect our business practices
as they relate to regulatory developments that might affect our business practices as they relate to EHR technologies and
pharmaceutical dispensing software systems. We cannot predict the content or effect of possible future regulation on our business
practices. |
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Claims
Transmission. Our system electronically transmits claims for prescription medications dispensed by physicians to patients’
payers for approval and reimbursement. Federal law provides that it is both a civil and a criminal violation for any person
to submit, or cause to be submitted, a claim to any payer, including, without limitation, Medicare, Medicaid and all private
health plans and managed care plans, seeking payment for any services or products that overbills or bills for items that have
not been provided to the patient. If we do not follow those procedures and policies, or they are not sufficient to prevent
inaccurate claims from being submitted, we could be subject to liability. As discussed above, the HIPAA Transaction Standards
and the HIPAA Security Standards also affect our claims transmission services, since those services must be structured and
provided in a way that supports our customers’ HIPAA and HITECH compliance obligations. Furthermore, to the extent that
there is some type of security breach it could have a material adverse effect. |
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Licensure
and Physician Dispensing. As a manufacturer of medical food products and a re-packager and distributor of drugs, we are
subject to regulation by and licensure with the FDA, the Drug Enforcement Agency (DEA) and various state agencies that regulate
wholesalers or distributors. Among the regulations applicable to our repackaging operation are the FDA’s “good
manufacturing practices.” We are subject to periodic inspections of our facilities by regulatory authorities to confirm
that we have policies and procedures in place in order to comply with applicable legal requirements. If we do not maintain
all necessary licenses, if the FDA decides to substantially modify the manner in which it has historically enforced its good
manufacturing practice regulations or the FDA or DEA finds any violations during one of their periodic inspections, we could
be subject to liability, and our operations could be shut down. In addition to registration/licensure and “good manufacturing
practices” compliance issues, federal and certain state laws require recordkeeping and a drug pedigree when a company
is involved in the distribution of prescription drugs. Under the pedigree requirements, each person who is engaged in the
wholesale distribution of a prescription drug in interstate commerce, who is not the manufacturer or an authorized distributor
of record for that drug, must provide to the person who receives the drug, a pedigree for that drug. A drug pedigree is a
statement of origin that identifies each prior sale, purchase, or trade of a drug. State laws in this area are not consistent
with respect to their requirements, and thus we needs to carefully monitor legal developments in this area. To the extent
we are found to violate any applicable federal or state law related to drug pedigree requirements, any such violation could
adversely affect our business. |
While
physician dispensing of medications for profit is allowed in most states, it is limited in a few states. It is possible that certain
states may enact further legislation or regulations prohibiting, restricting or further regulating physician dispensing. Similarly,
while in a July 2002 Opinion the American Medical Association’s Council on Ethical and Judicial Affairs (CEJA) provides,
in relevant part, that “Physicians may dispense drugs within their office practices provided such dispensing primarily benefits
the patient.” Although the AMA Code of Medical Ethics does not have the force of law, a negative opinion could in the future
adversely affect our business, financial condition and results of operations.
Congress
enacted significant prohibitions against physician self-referrals in the Omnibus Budget Reconciliation Act of 1993. This law,
commonly referred to as “Stark II,” applies to physician dispensing of outpatient prescription drugs that are reimbursable
by Medicare or Medicaid. Stark II, however, includes an exception for the provision of in-office ancillary services, including
a physician’s dispensing of outpatient prescription drugs, provided that the physician meets specified requirements. We
believe that the physicians who use our system or dispense drugs distributed by us are aware of these requirements, but we do
not monitor their compliance and have no assurance that the physicians are in material compliance with Stark II. If it were determined
that the physicians who use our system or dispense pharmaceuticals purchased from us were not in compliance with Stark II, it
could have an adverse effect on our business, financial condition and results of operations.
As
a distributor of prescription drugs to physicians, we are subject to the federal anti-kickback statute, which applies to Medicare,
Medicaid and other state and federal programs. The federal anti-kickback statute prohibits the solicitation, offer, payment or
receipt of remuneration in return for referrals or the purchase, or in return for recommending or arranging for the referral or
purchase, of goods, including drugs, covered by the programs. The federal anti-kickback statute provides a number of statutory
exceptions and regulatory “safe harbors” for particular types of transactions. We believe that our arrangements with
our customers are in material compliance with the anti-kickback statute and relevant safe harbors. Many states have similar fraud
and abuse laws, and we believe that we are in material compliance with those laws. If, however, it were determined that we, as
a distributor of prescription drugs to physicians, were not in compliance with the federal anti-kickback statute, we could be
subject to liability, and our operations could be curtailed. Moreover, if the activities of our customers or other entity with
which we have a business relationship were found to constitute a violation of the federal anti-kickback law and we, as a result
of the provision of products or services to such customer or entity, were found to have knowingly participated in such activities,
we could be subject to sanction or liability under such laws, including civil and/or criminal penalties, as well as exclusion
from government health programs. As a result of exclusion from government health programs, neither products nor services could
be provided to any beneficiaries of any federal healthcare program.
Increased
government involvement in healthcare could adversely affect our business.
U.S.
healthcare system reform under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Patient Protection
and Affordable Care Act of 2010. U.S. and other initiatives at both the federal and state level, could increase government involvement
in healthcare, lower reimbursement rates and otherwise change the business environment of our customers and the other entities
with which we have a business relationship. While no federal price controls are included in the Medicare Prescription Drug, Improvement
and Modernization Act, any legislation that reduces physician incentives to dispense medications in their offices could adversely
affect physician acceptance of our products. We cannot predict whether or when future healthcare reform initiatives at the federal
or state level or other initiatives affecting our business will be proposed, enacted or implemented or what impact those initiatives
may have on our business, financial condition or results of operations. Our customers and the other entities with which we have
a business relationship could react to these initiatives and the uncertainty surrounding these proposals by curtailing or deferring
investments, including those for our products and services. Additionally, government regulation could alter the clinical workflow
of physicians, hospitals and other healthcare participants, thereby limiting the utility of our products and services to existing
and potential customers and curtailing broad acceptance of our products and services. Additionally, new safe harbors to the federal
Anti-Kickback Statute and corresponding exceptions to such law may alter the competitive landscape, as such new safe harbors and
exceptions allow hospitals and certain other donors to donate certain items and services used in electronic prescription systems
and electronic health records systems. These new safe harbors and exceptions are intended to accelerate the adoption of electronic
prescription systems and electronic health records systems, and therefore provide new and attractive opportunities for us to work
with physicians’ offices. In addition, the federal government and state governments, including Florida, have imposed or
may in the future impose pedigree requirements for pharmaceutical distribution. Our medications business is required to comply
with any current regulations relating to pharmaceutical distribution and will be required to comply with any future regulations
and such compliance may impose additional costs on our business.
Consolidation
in the healthcare industry could adversely affect our business, financial condition and results of operations.
Many
healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power.
As provider networks and pharmacy benefits managers consolidate, thus decreasing the number of market participants, competition
to provide products and services like ours will become more intense, and the importance of establishing relationships with key
industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions
for our products and services. Further, consolidation of management and billing services through integrated delivery systems may
decrease demand for our products. If we were forced to reduce our prices, our business would become less profitable unless we
were able to achieve corresponding reductions in our expenses.
Risks
Related to Our Common Stock
There
is an active public trading market for our common stock, however the market is illiquid. Until an active, liquid public trading
market is established, you may not be able to sell your common stock if you need to liquidate your investment.
Our
common stock is currently trading on the OTCQB tier of the over-the-counter securities market under the symbol “TRGM,”
however the public market for our common stock is illiquid. A liquid trading market may not develop or, if developed, may not
be sustained. The lack of a liquid market may impair your ability to sell your shares of common stock at the time you wish to
sell them or at a price that you consider reasonable. The lack of a liquid market may also reduce the market value of your common
stock and increase the volatility of prices paid for shares of our common stock. An illiquid market may also impair our ability
to raise capital by selling shares of common stock and may impair our ability to acquire other companies or assets by using shares
of our common stock as consideration.
In
the event a liquid market develops for our common stock, the market price of our common stock may be volatile and may decline
in value.
In
the event a liquid market develops for our common stock, the market price of our common stock may be volatile and may decline
in value. Some of the factors that may materially affect the market price of our common stock are beyond our control, such as
changes in financial estimates by industry and securities analysts, conditions or trends in the industry in which we operate or
sales of our common stock. These factors may materially adversely affect the market price of our common stock, regardless of our
performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility
has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
Between the commencement of trading on October 17, 2012 and March 30, 2015 our stock has traded as high as $5.75 and as low as
$0.02 per share.
We
have incurred increased costs as a public company which may affect our profitability. These costs are still substantial and have
added to our losses. The fees paid to outside board members and the incremental audit and legal costs make up the majority of
these costs currently.
As a public company, we
incur significant legal, accounting and other expenses that we did not incur as a private company. We are subject to the SEC’s
rules and regulations relating to public disclosure. SEC disclosures generally involve a substantial expenditure of financial
resources. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, required changes
in corporate governance practices of public companies. Compliance with these rules and regulations has significantly increased
our legal and financial compliance costs and has made certain activities more time-consuming and costly. For example, we are required
to adopt policies regarding internal controls and disclosure controls and procedures. Management may need to increase compensation
for senior executive officers, engage senior financial officers who are able to adopt financial reporting and control procedures,
allocate a budget for an investor and public relations program, and increase our financial and accounting staff in order to meet
the demands and financial reporting requirements as a public reporting company. Such additional personnel, public relations, reporting
and compliance costs may negatively impact our financial results.
As
a result of being a fully reporting company, we are obligated to develop and maintain proper and effective internal controls over
financial reporting and we are subject to other requirements that are burdensome and costly. We may not complete our analysis
of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective,
which may adversely affect investor confidence in our Company and, as a result, the value of our common stock.
We
are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish reports by management on, among other things,
the effectiveness of our internal control over financial reporting for each fiscal year. These assessments need to include disclosure
of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement
that our auditors have issued an attestation report on our management’s assessment of our internal controls.
To
comply with these requirements, we may need to acquire or upgrade our systems, including information technology, implement additional
financial and management controls, reporting systems and procedures and hire additional legal, accounting and finance staff. If
we are unable to establish our financial and management controls, reporting systems, information technology and procedures in
a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to
reporting companies could be impaired. In addition, if we are unable to conclude that our internal control over financial reporting
is effective or that our disclosure controls and procedures are effective we could lose investor confidence in the accuracy and
completeness of our financial reports.
Failure
to comply with the new rules might make it more difficult for us to obtain certain types of insurance, including director and
officer liability insurance, and we might be forced to accept reduced policy limits and coverage and/or incur substantially higher
costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and
retain qualified persons to serve on our board of directors, on committees of our board of directors, or as executive officers.
Any
market that develops in shares of our common stock will be subject to the penny stock restrictions which will create a lack of
liquidity and make trading difficult or impossible.
SEC
Rule 15g-9 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that
has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number
of exceptions. If the price of our shares of common stock remain below $5.00 per share, our shares will continue to be considered
as penny stocks. This classification severely and adversely affects the market liquidity for our common stock. For any transaction
involving a penny stock, unless exempt, the penny stock rules require that a broker-dealer approve a person’s account for
transactions in penny stocks and the broker-dealer receive from the investor a written agreement to the transaction setting forth
the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker-dealer must obtain financial information
and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks
are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker-dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating
to the penny stock market, which sets forth:
|
● |
the
basis on which the broker-dealer made the suitability determination, and |
|
|
|
|
● |
that
the broker-dealer received a signed, written agreement from the investor prior to the transaction. |
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commissions
payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and
remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Our
stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary
businesses.
If
our future operations or acquisitions are financed through the issuance of equity securities, our stockholders could experience
significant dilution. In addition, securities issued in connection with future financing activities or potential acquisitions
may have rights and preferences senior to the rights and preferences of our common stock. We also established an incentive compensation
plan for our management and employees. We have granted and expect to grant options to purchase shares of our common stock to our
directors, employees and consultants and we will grant additional options in the future. The issuance of shares of our common
stock upon the exercise of these options will also result in dilution to our stockholders.
Our
outstanding options, warrants, and convertible debt may have an adverse effect on the market price of our common stock.
As
of December 31, 2014 we had outstanding options to purchase 2,421,041 shares of common stock and outstanding warrants to purchase
4,919,372 shares of common stock. Therefore, the sale, or even the possibility of the sale, of the shares of common stock underlying
these options and warrants could have an adverse effect on the market price for our securities or on our ability to obtain future
financing. If and to the extent these options and warrants are exercised, you may experience dilution in your holdings.
We
do not anticipate paying dividends in the foreseeable future; you should not buy our stock if you expect dividends.
We
currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate
paying any cash dividends on our common stock in the foreseeable future.
We
could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder
interests and impairing their voting rights, and provisions in our charter documents and under Delaware law could discourage a
takeover that stockholders may consider favorable.
Our
certificate of incorporation provides for the authorization to issue up to 20,000,000 shares of “blank check” preferred
stock with designations, rights and preferences as may be determined from time to time by our board of directors. Our board of
directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion,
voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance
of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example,
it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company.
Provisions
in our charter documents and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing
to pay in the future for our common stock and could entrench management.
We
are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these
provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for our securities.
Our
current management can exert significant influence over us and make decisions that are not in the best interests of all stockholders.
As
of December 31, 2014 our executive officers and directors beneficially own as a group approximately 61.6% of our outstanding shares
of common stock, which excludes 2,586,872 shares of common stock issuable upon exercise of warrants and 2,032,546 shares of common
stock issuable upon exercise of options held by our officers and directors, of which 2,586,872 warrants and 1,920,046 options
are currently exercisable. As discussed above, on January 9, 2015, the Board voted to terminate Dr. Shell’s employment with
the Company and on February 26, 2015, Dr. Shell resigned as a member of the Board of Directors. Excluding Dr. Shell, our executive
officers and directors beneficially own as a group approximately 20.7% of our outstanding shares of common stock, which excludes
1,782,546 shares of common stock issuable upon exercise of options held by our officers and directors, of which 1,670,046 options
are currently exercisable. As a result, these stockholders will be able to assert significant influence over all matters requiring
stockholder approval, including the election and removal of directors and any change in control. In particular, this concentration
of ownership of our outstanding shares of common stock could have the effect of delaying or preventing a change in control, or
otherwise discouraging or preventing a potential acquirer from attempting to obtain control. This, in turn, could have a negative
effect on the market price of our common stock. It could also prevent our stockholders from realizing a premium over the market
prices for their shares of common stock. Moreover, the interests of the owners of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders and, accordingly, could cause us to enter into transactions
or agreements that we would not otherwise consider.
Item
1B. Unresolved Staff Comments.
Not
applicable.
Item
2. Properties.
The
Company leases approximately 6,994 square feet of general office space and 500 square feet of storage space at 2980 Beverly Glen
Circle, Los Angeles, CA 90077. The Company and its subsidiary’s principal executive offices are located in such space. In
general, we believe that our properties are well-maintained, adequate and suitable for their purposes.
Item
3. Legal Proceedings.
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 both the enforceability of the demand and the validity of the June 2012 amendment
that modified the terms of all notes that were issued to both the Family Trust and to Ms. Liebman prior to June 22, 2012 from
five year term notes to demand notes. See Item 13. “Certain Relationships and Related Transactions, and Director Independence”
for a summary of all related party notes.
On
March 18, 2015, an interim award in the amount of $1.17 million dollars was issued against TMP for breach of contract, and in
favor of PDR Medical Management, LLC, a former distributor of the Company’s products, at an Arbitration through JAMS. The
amount of the award represented the balance of unpaid amounts due to PDR and was previously included in the Company’s financial
statements as “Due to Physicians” during the periods that the liability was incurred.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market
Information
The
Company’s common stock is quoted on the OTCQB tier of the over-the-counter securities market under the symbol “TRGM”.
The Company’s common stock began trading on the OTCQB on October 17, 2012. The following table sets forth the high and low
bid information for the period since the Company’s common stock began trading:
| |
High | | |
Low | |
Year Ended December 31, 2014 | |
| | | |
| | |
First Quarter | |
$ | 1.00 | | |
$ | 0.61 | |
Second Quarter | |
$ | 0.84 | | |
$ | 0.60 | |
Third Quarter | |
$ | 0.84 | | |
$ | 0.65 | |
Fourth Quarter | |
$ | 0.75 | | |
$ | 0.20 | |
| |
| | | |
| | |
Year Ended December 31, 2013 | |
| | | |
| | |
First Quarter | |
$ | 2.46 | | |
$ | 1.00 | |
Second Quarter | |
$ | 4.95 | | |
$ | 0.65 | |
Third Quarter | |
$ | 1.20 | | |
$ | 0.77 | |
Fourth Quarter | |
$ | 1.09 | | |
$ | 0.49 | |
As
of April 13, 2015, the Company’s common stock was trading at $0.20.
Record
Holders
As
of April 13, 2015, there were approximately 300 stockholders of record of our shares of common stock. A number of holders of TMP
common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other
financial institutions.
Dividends
The
Company has not declared any cash dividends since inception and does not anticipate paying any dividends in the foreseeable future.
The payment of dividends is within the discretion of the Board of Directors and will depend on the Company’s earnings, capital
requirements, financial condition, and other relevant factors. There are no restrictions that currently limit the Company’s
ability to pay dividends on its common stock other than those generally imposed by applicable state law.
Recent
Sales of Unregistered Securities
On
March 21, 2014, the Company entered into a subscription agreement with Ultera Pty Ltd ATF MPS Superannuation Fund (“Ultera”).
Dr. Wenkart, a director of the Company, is the owner and director of Ultera. The Company issued and sold to Ultera 400,000 shares
of its common stock. The issuance resulted in aggregate gross proceeds to the Company of $240,000. These securities were sold
in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act and the safe harbor of Rule 506 under Regulation
D promulgated under the Securities Act.
Between
July 15, 2014 and August 1, 2014, the Company issued a total of 500,000 warrants, at an average exercise price of $0.26 per share,
to several consultants for financial advisory and investor relations services. The warrants were valued at $376,411 and will be
amortized as expense over the requisite service period. These securities will be issued pursuant to Section 4(a)(2) of the Securities
Act. These warrants were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.
On
August 13, 2014, the Company issued 162,907 warrants to William E. Shell, M.D., the Company’s former Chief Executive Officer,
in connection with the July 24, 2014 loan to the Company. The warrants were valued at $44,867 and were expensed at the time of
issuance as non-cash interest expense using the effective interest method. These securities will be issued pursuant to Section
4(a)(2) of the Securities Act. These warrants were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities
Act.
During
the year ended December 31, 2014, the Company issued an aggregate of 627,575 shares of its common stock pursuant to agreements
with its directors and consultants to the Company. The shares were valued at $398,750, an average of $0.64 per share. These shares
were issued in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act.
Issuer
Repurchases of Equity Securities
Not
applicable.
Item
6. Selected Financial Data.
Not
applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K 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 Annual Report on Form 10-K.
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” in this 10-K, 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 Annual Report
on Form 10-K. We undertake no obligation to update any forward-looking statements or other information contained herein unless
required by law.
Information
regarding market and industry statistics contained in this Annual 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
We
filed amended tax returns for 2010 in June of 2012. We understood that filing such returns would likely result in tax audits on
the part of both the Internal Revenue Service (“IRS”) and California Franchise Tax Board (“FTB”).
The IRS commenced an audit of the Company’s 2010 income tax return in November 2012. In March 2014 the IRS completed its
examination. The IRS did not accept the Company’s assertion that certain sales did not meet the criteria of a sale for tax
purposes, however; in part as a result of the utilization of NOL’s generated during 2011 and 2012, the IRS concluded that
the Company’s aggregate federal income tax liability for tax years 2010 through 2012 was $26,000. In July 2014 the FTB completed
its examination for the tax years 2010 through 2012. The FTB determined that the Company’s state income tax liability for
the years under examination was $39,704. Both the IRS and FTB income tax liabilities were paid in prior years.
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”). Dr. Wenkart, M.D. 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.
On
February 23, 2015, the Company entered into an unsecured promissory note, pursuant to which the Company received the principal
amount of $1.2 million, from Shlomo Rechnitz (the “Lender”). The promissory note accrues interest at
4% per annum, throughout its term, and has a maturity date of February 22, 2017. Principal and interest on the promissory note
is payable in monthly installments of $52,109.91, beginning on March 22, 2015, and continuing until February 22, 2017. The loan
closed on February 24, 2015.
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 disputes both the enforceability of the demand and the validity
of the June 2012 amendment that modified the terms of all notes that were issued to both the Family Trust and to Ms. Liebman prior
to June 22, 2012 from five year term notes to demand notes. See Item 13. “Certain Relationships and Related Transactions,
and Director Independence” for a summary of all related party notes.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
For
the Years Ended December 31, 2014 and 2013
| |
| | |
%
of | | |
| | |
%
of | |
| |
2014 | | |
Sales | | |
2013 | | |
Sales | |
| |
| | |
| | |
| | |
| |
REVENUES | |
| | | |
| | | |
| | | |
| | |
Product
revenue | |
$ | 6,467,084 | | |
| 90.9 | % | |
$ | 8,505,667 | | |
| 89.0 | % |
Service
revenue | |
| 645,275 | | |
| 9.1 | % | |
| 1,049,895 | | |
| 11.0 | % |
Total
revenue | |
$ | 7,112,359 | | |
| 100.0 | % | |
$ | 9,555,562 | | |
| 100.0 | % |
COST OF SALES | |
| | | |
| | | |
| | | |
| | |
Cost
of product sold | |
| 569,570 | | |
| 8.0 | % | |
| 1,054,194 | | |
| 11.0 | % |
Cost
of services sold | |
| 1,646,958 | | |
| 23.2 | % | |
| 1,935,111 | | |
| 20.3 | % |
Total
cost of sales | |
| 2,216,528 | | |
| 31.2 | % | |
| 2,989,305 | | |
| 31.3 | % |
Gross
profit | |
| 4,895,831 | | |
| 68.8 | % | |
| 6,566,257 | | |
| 68.7 | % |
| |
| | | |
| | | |
| | | |
| | |
OPERATING
EXPENSES | |
| | | |
| | | |
| | | |
| | |
Research
and development | |
| 158,370 | | |
| 2.2 | % | |
| 228,605 | | |
| 2.4 | % |
Selling,
general and administrative | |
| 7,348,412 | | |
| 103.3 | % | |
| 10,178,598 | | |
| 106.5 | % |
Total
operating expenses | |
| 7,506,782 | | |
| 105.5 | % | |
| 10,407,203 | | |
| 108.9 | % |
Loss
from operations | |
| (2,610,951 | ) | |
| (36.7 | %) | |
| (3,840,946 | ) | |
| (40.2 | %) |
OTHER
INCOME (EXPENSES) | |
| | | |
| | | |
| | | |
| | |
Interest
income (expense) | |
| (1,229,289 | ) | |
| (17.3 | %) | |
| 10,889 | | |
| 0.1 | % |
Change
in fair value of warrant liability | |
| 11,059 | | |
| 0.2 | % | |
| 159,341 | | |
| 1.7 | % |
Total
other income (expenses) | |
| (1,218,230 | ) | |
| (17.1 | %) | |
| 170,230 | | |
| 1.8 | % |
Loss
before income taxes | |
| (3,829,181 | ) | |
| (53.8 | %) | |
| (3,670,716 | ) | |
| (38.4 | %) |
Income
tax expense | |
| 65,828 | | |
| 0.9 | % | |
| 5,666,902 | | |
| 59.3 | % |
NET
LOSS | |
$ | (3,895,009 | ) | |
| (54.7 | %) | |
$ | (9,337,618 | ) | |
| (97.7 | %) |
Revenue
During
the years ended December 31, 2014 and 2013, the Company recognized total revenue of $7,112,359 and $9,555,562, 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:
| |
Years
Ended December 31, | |
| |
2014 | | |
%
of
total
revenue | | |
2013 | | |
%
of
total
revenue | |
Total
product revenue | |
$ | 6,467,084 | | |
| 90.9 | % | |
$ | 8,505,667 | | |
| 89.0 | % |
Total
service revenue | |
| 645,275 | | |
| 9.1 | % | |
| 1,049,895 | | |
| 11.0 | % |
Total
revenue | |
$ | 7,112,359 | | |
| 100.0 | % | |
$ | 9,555,562 | | |
| 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 year ended December 31, 2014 and 2013, of $6,467,084 and $8,505,667, respectively.
The distribution of product revenue between the Cash Method and the Accrual Method of revenue recognition is as follows:
| |
Years
Ended December 31, | |
Revenue
recognition method | |
2014 | | |
%
of
product
revenue | | |
2013 | | |
%
of
product
revenue | |
Cash
method | |
$ | 3,179,673 | | |
| 49.2 | % | |
$ | 5,037,003 | | |
| 59.2 | % |
Accrual
method | |
| 3,287,411 | | |
| 50.8 | % | |
| 3,468,664 | | |
| 40.8 | % |
Total
product revenue | |
$ | 6,467,084 | | |
| 100.0 | % | |
$ | 8,505,667 | | |
| 100.0 | % |
The
decrease in total product revenue is primarily attributed to 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). 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 years ended December 31, 2014 and 2013, the Company shipped product to its cash method customers
with product billings of $3,849,298 and $5,723,552, respectively. The 32.7% decrease in product shipments to customers that, for
purposes of revenue recognition, are accounted for as cash method customers is the primary cause of the overall decrease in product
revenue.
| |
Years
Ended December 31, | |
Actual billings | |
2014 | | |
2013 | | |
$
Change | | |
%
Change | |
Cash method | |
$ | 3,849,298 | | |
$ | 5,723,552 | | |
$ | (1,874,254 | ) | |
| (32.7 | %) |
Accrual method | |
| 3,287,411 | | |
| 3,468,664 | | |
| (181,253 | ) | |
| (5.2 | %) |
Total product billings | |
$ | 7,136,709 | | |
$ | 9,192,216 | | |
$ | (2,055,507 | ) | |
| (22.4 | %) |
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 years ended December 31, 2014 and
2013, of $645,275 and $1,049,895, 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 of the claim, and the fee is not determinable until the amount of the collection
of 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 $404,620 (from $1,049,895 for the year ended December 31, 2013 to $645,275 for the year ended December 31,
2014) is due to a combination of an overall decrease in aggregate collections and a decrease in the service fee percentage that
CCPI receives on gross collections. Historically, the Company charged a service fee between 15% and 20% of gross collections.
However, as the Company has concentrated on sales with a greater certainty of payment, the Company has reduced the service fee
percentage.
Cost
of Product Sold
The
reported cost of product sold for the year ended December 31, 2014 decreased $484,624 to $569,570 from $1,054,194 for the year
ended December 31, 2013. The cost of product sold as a percentage of reported product revenue decreased to 8.8% for the year ended
December 31, 2014, compared to 12.4% for the year ended December 31, 2013. 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 year ended December 31, 2014, was 8.0% compared with 11.5%
in the year ended December 31, 2013. The decrease in product cost as a percent of product billings is attributed to an overall
change in the composition of the Company’s customer base. As previously noted, the Company has concentrated on sales with
a greater certainty of payment. Furthermore, the Company has also focused on eliminating historical accounts that offered significant
rapid pay discounts. These changes have resulted in a reduction in actual billings and greater average per unit product revenue,
thereby reducing our cost of product sold as a percent of product billings.
The
following table illustrates the timing impact of the Company’s revenue recognition policy on cost of product sold:
| |
Years
Ended December 31, | |
| |
2014 | | |
2013 | |
Derived from consolidated statements of operations: | |
| | | |
| | |
Reported product revenue | |
$ | 6,467,084 | | |
$ | 8,505,667 | |
Cost of product sold | |
$ | 569,570 | | |
$ | 1,054,194 | |
| |
| | | |
| | |
Cost of product sold as a % of reported revenue | |
| 8.8 | % | |
| 12.4 | % |
| |
| | | |
| | |
Derived from actual billings (net of rapid pay discounts): | |
| | | |
| | |
Cash method billings | |
$ | 3,849,298 | | |
$ | 5,723,552 | |
| |
| | | |
| | |
Accrual method billings | |
| 3,287,411 | | |
| 3,468,664 | |
Total actual billings | |
$ | 7,136,709 | | |
$ | 9,192,216 | |
Cost of product sold | |
$ | 569,570 | | |
$ | 1,054,194 | |
| |
| | | |
| | |
Cost of product sold as a % of actual billings | |
| 8.0 | % | |
| 11.5 | % |
Cost
of Services Sold
The
cost of services sold for the year ended December 31, 2014, decreased $288,153 to $1,646,958 from $1,935,111 for the year ended
December 31, 2013. Cost of services sold consists primarily of salaries and employee benefits. During the year ended December
31, 2014 and 2013, salaries and employee benefits were $1,246,240 and $1,514,047, respectively, a decrease of $267,807. The decrease
in salaries and employee benefits was the result of an approximate 20% reduction in personnel at the Company’s billing and
collections subsidiary.
Operating
Expenses
Operating
expenses for the year ended December 31, 2014, decreased $2,900,421 to $7,506,782 from $10,407,203 for the year ended December
31, 2013. Operating expenses as a percentage of total revenue decreased from 109% of revenue to 106% of revenue in part due to
decreased cash collections and expenses. Operating expenses consist of research and development expense (which decreased $70,235),
and selling, general and administrative expenses (which decreased $2,830,186). Changes in these items are further described below.
Research
and Development Expense
Research
and development expenses for the year ended December 31, 2014, decreased $70,235, to $158,730 from $228,605 for the year ended
December 31, 2013. 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 year ended December
31, 2014 approximated the activity during the year ended December 31, 2013.
During
the year ended December 31, 2014, two clinical studies were being conducted. 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. The total financial obligations of $283,000 related to this study were being
expensed upon the occurrence of predetermined milestones. During the year ended December 31, 2014, the Company recorded $88,000
in expense related to this study. Since the inception of this study, the Company has recorded an aggregate of $157,000 in direct
costs related to this study. In October 2014 the Company elected to terminate this study. The Company was responsible for providing
product for use in the University of Cincinnati study. The Company provided Theramine at the inception of the study and therefore
did not incur any product costs during the year ended December 31, 2014. During the year ended December 31, 2013, the Company
expensed $31,450 for the cost of Theramine that was used in this study. The second study is 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. This study, which commenced during the quarter ended June 30, 2014, is being conducted on the effectiveness of Theramine
for the treatment of acute or sub-acute lower back pain due to injury. The total financial obligations of $248,000 related to
this study are being expensed upon the occurrence of predetermined milestones. The study is expected to be completed in approximately
24 to 30 months. The cost associated with this study resulted in an expense of $15,000 during the year ended December 31, 2014.
The financial obligations attributed to these two clinical studies comprise the majority of the Company’s research and development
expenses. The remaining items that comprise the balance of research and development expenses are individually immaterial.
Selling,
General and Administrative Expense
Selling,
general and administrative expenses (“SG&A”) were $7,348,412 and $10,178,598 for the year ended
December 31, 2014 and 2013, respectively. As reflected in the table below, the decrease in SG&A for the year ended December
31, 2014, when compared to the year ended December 31, 2013, was primarily the result of various fluctuations in the following
expense categories: salaries and employee benefits, professional fees, insurance and general and administrative expenses.
| |
Years
Ended December 31, | |
| |
2014 | | |
2013 | | |
$
Change | | |
%
Change | |
| |
| | |
| | |
| | |
| |
Salaries and employee benefits | |
$ | 4,360,693 | | |
$ | 6,357,436 | | |
$ | (1,996,743 | ) | |
| (31.4 | %) |
Professional fees | |
| 1,360,743 | | |
| 1,499,939 | | |
| (139,196 | ) | |
| (9.3 | %) |
Rent | |
| 259,381 | | |
| 245,763 | | |
| 13,618 | | |
| 5.5 | % |
Insurance | |
| 285,013 | | |
| 479,432 | | |
| (194,419 | ) | |
| (40.6 | %) |
Depreciation & amortization | |
| 205,867 | | |
| 207,500 | | |
| (1,633 | ) | |
| (0.8 | %) |
General and administrative | |
| 876,715 | | |
| 1,388,528 | | |
| (511,813 | ) | |
| (36.9 | %) |
Total selling,
general and administrative expenses | |
$ | 7,348,412 | | |
$ | 10,178,598 | | |
$ | (2,830,186 | ) | |
| (27.8 | %) |
The
$1,996,743 decrease in salaries and employee benefits is partially attributed to a reduction in stock based compensation expense
of $702,014, severance agreements of $407,000, and temporary labor of $265,877. These three expense categories represent an aggregate
reduction in salaries and employee benefits of $1,374,891. The remaining decrease of $621,852 is 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 33 employees at December 31, 2013 to 23 employees at December 31, 2014, a 30% reduction.
During
the years ended December 31, 2014 and 2013, the Company recorded $49,804 and $751,818, respectively, related to the grants of
stock options and restricted stock awards to our employees and non-employee directors. The decrease in stock based compensation
of $702,014 is primarily due to the timing of when stock options are granted combined with the time period in which the stock
options become vested. During the year ended December 31, 2013, the Company granted options to purchase 1,198,300 shares of the
Company’s common stock, the majority of which were vested immediately. Conversely,
no options were granted during the year ended December 31, 2014 and only a relatively limited number vested.
The
Company entered into severance agreements with three former employees during the year ended December 31, 2013. As a result of
these severance agreements, the Company recognized $407,000 in compensation expense, all of which was expensed as incurred. Conversely,
the Company did not incur any additional expense related to severance agreements during the year ended December 31, 2014.
During
the year ended December 31, 2013, the Company incurred $265,877 in expense related to temporary labor. The Company has generally
discontinued the use of temporary labor and during the year ended December 31, 2014, did not incur any expense related to temporary
labor.
The
second largest component of our SG&A is professional fees which, compared to the year ended December 31, 2013, decreased by
$139,196. During the year ended December 31, 2014, the Company experienced a decrease in professional fees as a result of multiple
factors.
|
● |
First,
in prior years the Company had outsourced many services that are now performed internally. During the year ended December
31, 2013, the Company incurred $183,231 in expenses related to information technology consulting services. The Company has
generally discontinued the use of temporary labor and during the year ended December 31, 2014, only incurred $12,815 in information
technology consulting fees. |
|
|
|
|
● |
Second,
during 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 year ended December 31, 2013, the Company recognized
$120,000 in fees related to this consulting contract as opposed to $30,000 in fees during the year ended December 31, 2014.
|
|
|
|
|
● |
Third,
during the year ended December 31, 2013, the Company filed a Form S-1 registration statement, which was declared effective
on April 19, 2013. The cost associated with the Company’s Form S-1 accounted for a decrease in legal fees of $100,000.
|
In
aggregate, these three factors resulted in a decrease in professional fees of $360,416, which was partially offset by an increase
in financial advisory and investor relations services of $297,667.
|
● |
During
the year ended December 31, 2014, primarily as a result of five different consulting agreements for financial advisory and
investor relations services, the Company incurred $649,834 in fees for financial advisory and investor relations services,
of which $503,996 was stock-based compensation from the issuance of warrants and common stock. During the year ended December
31, 2013, the Company incurred $352,167 for similar consulting services that were paid in cash. |
The
remaining variance in professional fees is due to various types of professional fees, none of which are significant individually.
Insurance
expense decreased by $194,419 during the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease
is primarily related to a decrease in premiums associated with the Company’s Directors and Officers insurance policy. During
January 2014 the Company changed its insurance company and modified the coverage amounts of its Directors and Officers insurance
policy. As a result of these changes the annual premium decreased by approximately $140,000.
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 year ended December 31, 2014, as reflected in the Company’s consolidated statements of
cash flows, depreciation and amortization remained relatively unchanged. The slight decrease in depreciation and amortization
that is included in SG&A, of $1,633, is primarily attributed to the timing of when assets were placed in service.
General
and administrative expense experienced a decrease of $511,813 during the year ended December 31, 2014 over the year ended December
31, 2013. During the year ended December 31, 2014, 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 warrant derivative liability. During the year ended December 31, 2014, the Company reported other expense of $1,218,230
compared with income of $170,230 during the year ended December 31, 2013.
Interest
expense increased by $1,240,178, resulting in interest expense of $1,229,289 in the year ended December 31, 2014, as compared
to income of $10,889 in the year ended December 31, 2013. During the year ended December 31, 2013, upon the successful resolution
of the IRS examination of its 2010 through 2012 income tax returns, the Company wrote off $752,281 in interest and penalties that
had been previously accrued. Thus, the actual increase in interest expense, after eliminating the effect of the $752,281 reversal
of accrued income tax interest and penalties, is $487,897. The increase was primarily due to the $3.2 million loan with Cambridge
Medical Funding Group (the “Cambridge Note”) that was completed on October 1, 2013. During the year
ended December 31, 2014, the Company incurred interest expense from the Cambridge Note of $409,059 and recorded non-cash interest
expense of $385,634 based on the estimated fair value of the warrants issued in connection with the Cambridge Note. During the
year ended December 31, 2013, the Company incurred interest expense from the Cambridge Note of $144,188 and recorded non-cash
interest expense of $231,380. The $419,125 increase in interest expense attributed to the Cambridge Note was partially offset
by a reduction in interest expense on notes payable to related parties of $77,512.
Changes
in the fair value of the Company’s warrant derivative liability resulted in income of $11,059 in the year ended December
31, 2014, compared with income of $159,341 in the year ended December 31, 2013. At December 31, 2014 and 2013, 95,000 warrants
with anti-dilution ratcheting provisions were outstanding. The income in the years ended December 31, 2013 and 2014, represents
a decrease in the warrant derivative liability in connection with the remaining 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 recorded
income tax expense in the year ended December 31, 2013 of $5,666,902 and did not record an income tax benefit during the year
ended December 31, 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 year ended December 31, 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 $8,745,804.
Net
Loss
Net
loss for the year ended December 31, 2014, was $3,895,009 compared to a net loss of $9,337,618 for the year ended December 31,
2013. The decreased net loss was a result of a combination of decreased revenues and expenses and the absence of a significant
income tax expense as described above.
As
reflected in the Company’s consolidated statement of cash flows for the years ended December 31, 2014 and 2013, the Company’s
reported net loss is comprised of non-cash charges of $1,543,434 and $7,044,756, respectively. A summary of these non-cash charges
is as follows:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Depreciation of property and equipment | |
$ | 128,401 | | |
$ | 142,500 | |
Amortization of intangible assets | |
| 273,497 | | |
| 269,400 | |
Amortization of debt discount | |
| 430,501 | | |
| 381,119 | |
Stock-based compensation to employees and directors | |
| 49,804 | | |
| 657,849 | |
Stock-based compensation to consultants | |
| 606,462 | | |
| 87,605 | |
Income tax expense | |
| 65,828 | | |
| 5,665,624 | |
Change in fair value of warrant
derivative liability | |
| (11,059 | ) | |
| (159,341 | ) |
Non-cash
items included in net loss | |
$ | 1,543,434 | | |
$ | 7,044,756 | |
FINANCIAL
CONDITION
Our
negative working capital of $11,815,621 as of December 31, 2014 increased $3,184,516 from our December 31, 2013 negative working
capital of $8,631,105. Our operating losses during the year ended December 31, 2014 were funded primarily by proceeds from the
sale of our common stock of $240,000, refunds from the IRS and FTB and from our beginning cash balance at December 31, 2013, of
$491,806.
Unrecognized
Accounts Receivable
As
of December 31, 2014, we have approximately $7.5 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 three months ended December 31, 2014, 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 December 31, 2014, the Company determined that collections on
its unrecognized accounts receivable would approximate $7.5 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 December 31, 2014, cumulative payments made to CMFG and Raven pursuant to CMFG #2 were $2.2 million. The Company allocated
these payments as debt repayment of $1,676,441 and interest expense of $523,559. Thus, at December 31, 2014, the remaining principal
amount due to CMFG was $1,523,559. 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 $7.5 million in unrecognized accounts receivable, the
Company expects to retain approximately $4.2 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 provided by operating
activities for the year ended December 31, 2014, was $780,314 as opposed to net cash used in operating activities of $2,046,586
during the year ended December 31, 2013. During the years ended December 31, 2014 and 2013, the Company reported a net loss of
$3,895,009 and $9,337,618, respectively. During the year ended December 31, 2014, the Company generated net cash from operating
activities by increasing its accrued liabilities and reducing its current assets such as prepaid income taxes. Cash used in investing
activities for the year ended December 31, 2014 and 2013, was nil and $121,420, respectively. During the year ended December 31,
2013, we incurred internal software development costs for our PDRx claims management and collection system of $83,430 and
purchased property and equipment of $37,990. Historically, capital expenditures have been financed by cash from operating activities,
equity transactions and related party loans.
Net
proceeds from the sale of common stock of $240,000 combined with our positive cash flows provided by operating activities partially
offset the negative cash flows from debt repayment activities. Ultimately, we experienced a decrease in cash of $480,067 in the
year ended December 31, 2014. 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 year ended December 31, 2014. 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.
The Company has issued
promissory notes to various individuals and entities. The aggregate principal amount due under the promissory notes is $4,027,970,
of which only $122,290 is due in 1 – 3 years.
CRITICAL
ACCOUNTING POLICIES
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.
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. Actual results could differ from those estimates.
Revenue
Recognition
Please
refer to the “Business Model” section above for discussion on revenue recognition.
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 Model, distributor customers and receivables from our PDRx equipment. 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 December 31, 2014, of the collectability of invoices, we established an allowance for doubtful accounts of $55,773.
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 revenues 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.
In
addition to the bad debt recognition policy above, it is also TMP’s policy to write down uncollectible loans and trade receivables
when the payer is no longer in existence, is in bankruptcy or is otherwise insolvent. In such instances our policy is to reduce
accounts receivable by the uncollectible amount and to proportionally reduce the allowance for doubtful accounts.
Inventory
valuation
Inventory
is valued at the lower of cost (first in, first out) or market and consists primarily of finished goods.
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 December 31, 2014 and 2013, 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.
No impairment indicators existed at December 31, 2014 and 2013, so no intangible asset impairment was recorded.
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 value of the warrant. Warrants
issued with ratcheting provisions 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.
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 December
31, 2014, 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.
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.
Since
the effects of outstanding options and warrants 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 and warrants as of December 31, 2014
and 2013:
| |
December
31, | |
| |
2014 | | |
2013 | |
Warrants | |
| 4,919,372 | | |
| 4,256,465 | |
Stock options | |
| 2,421,041 | | |
| 2,794,841 | |
| |
| 7,340,413 | | |
| 7,051,306 | |
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 on our behalf, 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. Most contract research agreements include a ten year records retention and maintenance
requirement. Typically, we expense 50% of the contract amount upon completion of the clinical trials and 50% over the remainder
of the record retention requirements under the contract research organization contract.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
8. Financial Statements.
TARGETED
MEDICAL PHARMA, INC.
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Audit Committee of the
Board
of Directors and Shareholders
of
Targeted Medical Pharma, Inc.
We
have audited the accompanying consolidated balance sheets of Targeted Medical Pharma, Inc. (the “Company”) as of December
31, 2014 and 2013, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and
cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Targeted Medical Pharma, Inc., as of December 31, 2014 and December 31, 2013, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate continuation of the Company as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant net losses since its inception. The Company had an accumulated
deficit of $26,917,416 and negative working capital of $11,815,621 as of December 31, 2014. In addition, the Company has incurred
net losses since inception and incurred a net loss of $3,895,009 for the year ended December 31, 2014. The foregoing matters raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these
matters are also described in Note 2. These consolidated financial statements do not include any adjustment that might result
from the outcome of this uncertainty.
/s/ Marcum LLP
Marcum llp
Irvine,
CA
April 14,
2015
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Consolidated
Balance Sheets
| |
December
31, | |
| |
2014 | | |
2013 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Cash | |
$ | 11,739 | | |
$ | 491,806 | |
Accounts receivable, net | |
| 203,348 | | |
| 268,834 | |
Inventories | |
| 127,183 | | |
| 595,753 | |
Prepaid income taxes | |
| — | | |
| 900,863 | |
Other current assets | |
| 191,689 | | |
| 372,262 | |
TOTAL
CURRENT ASSETS | |
| 533,959 | | |
| 2,629,518 | |
| |
| | | |
| | |
Property and equipment, net | |
| 107,185 | | |
| 235,586 | |
Intangible assets, net | |
| 1,859,152 | | |
| 2,132,649 | |
TOTAL
ASSETS | |
$ | 2,500,296 | | |
$ | 4,997,753 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
CURRENT
LIABILITIES | |
| | | |
| | |
| |
| | | |
| | |
Accounts payable | |
$ | 1,460,352 | | |
$ | 1,497,425 | |
Accrued liabilities | |
| 7,273,980 | | |
| 5,654,682 | |
Notes payable, current portion - related parties | |
| 2,504,411 | | |
| 2,621,067 | |
Notes payable, current portion | |
| 1,092,762 | | |
| 1,458,315 | |
Derivative liability | |
| 18,075 | | |
| 29,134 | |
TOTAL
CURRENT LIABILITIES | |
| 12,349,580 | | |
| 11,260,623 | |
| |
| | | |
| | |
Notes payable, less current
portion, net | |
| 122,290 | | |
| 754,828 | |
TOTAL
LIABILITIES | |
| 12,471,870 | | |
| 12,015,451 | |
| |
| | | |
| | |
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; 26,768,756 shares issued and outstanding as of December 31, 2014; 25,741,181 shares issued and outstanding as
of December 31, 2013 | |
| 26,769 | | |
| 25,741 | |
Additional paid-in capital | |
| 16,919,073 | | |
| 15,978,968 | |
Accumulated deficit | |
| (26,917,416 | ) | |
| (23,022,407 | ) |
TOTAL
STOCKHOLDERS’ DEFICIT | |
| (9,971,574 | ) | |
| (7,017,698 | ) |
| |
| | | |
| | |
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
$ | 2,500,296 | | |
$ | 4,997,753 | |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Consolidated
Statements of Operations
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
REVENUES | |
| | | |
| | |
Product revenue | |
$ | 6,467,084 | | |
$ | 8,505,667 | |
Service revenue | |
| 645,275 | | |
| 1,049,895 | |
Total
revenue | |
| 7,112,359 | | |
| 9,555,562 | |
| |
| | | |
| | |
COST
OF SALES | |
| | | |
| | |
Cost of product sold | |
| 569,570 | | |
| 1,054,194 | |
Cost of services sold | |
| 1,646,958 | | |
| 1,935,111 | |
Total
cost of sales | |
| 2,216,528 | | |
| 2,989,305 | |
| |
| | | |
| | |
Gross
profit | |
| 4,895,831 | | |
| 6,566,257 | |
| |
| | | |
| | |
OPERATING
EXPENSES | |
| | | |
| | |
Research and development | |
| 158,370 | | |
| 228,605 | |
Selling, general and administrative | |
| 7,348,412 | | |
| 10,178,598 | |
Total
operating expenses | |
| 7,506,782 | | |
| 10,407,203 | |
| |
| | | |
| | |
Loss
from operations | |
| (2,610,951 | ) | |
| (3,840,946 | ) |
| |
| | | |
| | |
OTHER
INCOME (EXPENSES) | |
| | | |
| | |
Interest income (expense) | |
| (1,229,289 | ) | |
| 10,889 | |
Change in
fair value of warrant liability | |
| 11,059 | | |
| 159,341 | |
Total
other income (expenses) | |
| (1,218,230 | ) | |
| 170,230 | |
| |
| | | |
| | |
Loss
before income taxes | |
| (3,829,181 | ) | |
| (3,670,716 | ) |
| |
| | | |
| | |
Income
tax expense | |
| 65,828 | | |
| 5,666,902 | |
| |
| | | |
| | |
NET
LOSS | |
$ | (3,895,009 | ) | |
$ | (9,337,618 | ) |
| |
| | | |
| | |
Basic
and diluted net loss per common share | |
$ | (0.15 | ) | |
$ | (0.39 | ) |
| |
| | | |
| | |
Basic
and diluted weighted average common shares outstanding | |
| 26,385,517 | | |
| 23,828,693 | |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (3,895,009 | ) | |
$ | (9,337,618 | ) |
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities: | |
| | | |
| | |
Depreciation | |
| 128,401 | | |
| 142,500 | |
Amortization | |
| 273,497 | | |
| 269,400 | |
Amortization of debt discount | |
| 430,501 | | |
| 381,119 | |
Stock-based compensation to employees
and directors | |
| 49,804 | | |
| 657,849 | |
Stock-based compensation to consultants | |
| 606,462 | | |
| 87,605 | |
Deferred income tax benefit | |
| — | | |
| 5,665,624 | |
Change in fair value of warrant
derivative liability | |
| (11,059 | ) | |
| (159,341 | ) |
Changes in operating assets and
liabilities: | |
| | | |
| | |
Accounts receivable | |
| 65,486 | | |
| 85,159 | |
Inventories | |
| 468,570 | | |
| (117,254 | ) |
Prepaid income taxes | |
| 900,863 | | |
| — | |
Other current assets | |
| 180,573 | | |
| 123,242 | |
Other assets | |
| — | | |
| 26,679 | |
Accounts payable | |
| (37,073 | ) | |
| (663,596 | ) |
Accrued
liabilities | |
| 1,619,298 | | |
| 792,046 | |
| |
| | | |
| | |
Net cash
provided by (used in) operating activities | |
| 780,314 | | |
| (2,046,586 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Acquisition of intangible assets | |
| — | | |
| (83,430 | ) |
Purchase
of property and equipment | |
| — | | |
| (37,990 | ) |
| |
| | | |
| | |
Net cash
used in investing activities | |
| — | | |
| (121,420 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of common
stock | |
| 240,000 | | |
| 250,000 | |
Proceeds from notes payable - related
parties | |
| 130,000 | | |
| — | |
Payments on notes payable - related
parties | |
| (246,656 | ) | |
| (659,675 | ) |
Proceeds from notes payable, net | |
| — | | |
| 3,035,600 | |
Payments
on notes payable | |
| (1,383,725 | ) | |
| (292,716 | ) |
| |
| | | |
| | |
Net cash
(used in) provided by financing activities | |
| (1,260,381 | ) | |
| 2,333,209 | |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (480,067 | ) | |
| 165,203 | |
| |
| | | |
| | |
Cash at beginning of period | |
| 491,806 | | |
| 326,603 | |
| |
| | | |
| | |
Cash at end of period | |
$ | 11,739 | | |
$ | 491,806 | |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Consolidated
Statements of Cash Flows (Continued)
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during the
period for interest | |
$ | 514,218 | | |
$ | 375,571 | |
| |
| | | |
| | |
Non cash investing and financing activities: | |
| | | |
| | |
Escrow receivable | |
| — | | |
$ | 123,047 | |
Deferred loan fees | |
| — | | |
$ | 164,400 | |
Note discount from issuance of
warrant in connection with notes payable | |
$ | 44,867 | | |
$ | 925,521 | |
Amortization of note discount | |
$ | 385,634 | | |
$ | 381,119 | |
| |
| | | |
| | |
Issuance of common stock from conversion of notes payable,
related parties | |
| — | | |
$ | 2,287,648 | |
Issuance of common stock in connection with prepaid
services | |
| — | | |
$ | 136,000 | |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
Consolidated
Statements of Stockholders’ Equity (Deficit)
Years
Ended December 31, 2013 and December 31, 2014
| |
Common
Stock Issued | | |
Paid-In | | |
Accumulated | | |
Total
Shareholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity (Deficit) | |
| |
| | |
| | |
| | |
| | |
| |
BALANCES, December 31, 2012 | |
| 23,008,782 | | |
| 23,009 | | |
| 11,659,744 | | |
| (13,684,789 | ) | |
| (2,002,036 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for services | |
| 258,455 | | |
| 258 | | |
| 222,282 | | |
| — | | |
| 222,540 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for cash | |
| 416,667 | | |
| 417 | | |
| 249,583 | | |
| | | |
| 250,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock on conversion of debt | |
| 2,057,277 | | |
| 2,057 | | |
| 2,285,591 | | |
| — | | |
| 2,287,648 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Compensation expense due to stock option issuances | |
| — | | |
| — | | |
| 601,309 | | |
| — | | |
| 601,309 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Compensation expense due to warrant issuances | |
| — | | |
| — | | |
| 34,938 | | |
| — | | |
| 34,938 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued in connection with debt financings | |
| — | | |
| — | | |
| 925,521 | | |
| — | | |
| 925,521 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (9,337,618 | ) | |
| (9,337,618 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCES, December 31, 2013 | |
| 25,741,181 | | |
| 25,741 | | |
| 15,978,968 | | |
| (23,022,407 | ) | |
| (7,017,698 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for services | |
| 627,575 | | |
| 628 | | |
| 398,122 | | |
| — | | |
| 398,750 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for cash | |
| 400,000 | | |
| 400 | | |
| 239,600 | | |
| — | | |
| 240,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Compensation expense due to stock option issuances | |
| — | | |
| — | | |
| 49,804 | | |
| — | | |
| 49,804 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Compensation expense due to warrant issuances | |
| — | | |
| — | | |
| 207,712 | | |
| — | | |
| 207,712 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued in connection with debt financings
from related party | |
| — | | |
| — | | |
| 44,867 | | |
| — | | |
| 44,867 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (3,895,009 | ) | |
| (3,895,009 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCES, December 31, 2014 | |
| 26,768,756 | | |
| 26,769 | | |
| 16,919,073 | | |
| (26,917,416 | ) | |
| (9,971,574 | ) |
The
accompanying notes are an integral part of these consolidated financial statements.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 nutrient
and pharmaceutical based therapeutic systems. On July 30, 2007, the Company formed Complete Claims Processing, Inc. (“CCPI”),
a wholly owned subsidiary which provides billing and collection services on behalf of physicians for claims to insurance companies,
governmental agencies, and other medical payers.
Segment
Information:
The
Company did not recognize revenue outside of the United States during the years ended December 31, 2014 and 2013. The Company’s
operations are organized into two reportable segments: TMP and CCPI.
● |
TMP:
This segment includes PTL. TMP develops and distributes nutrient based therapeutic products and distributes pharmaceutical
products from other manufacturers through employed sales representatives and distributors. 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 years ended December 31, 2014 and 2013, are reflected in the table below:
For the
year ended December 31,
| |
Total | | |
TMP | | |
CCPI | |
2014 | |
| | |
| | |
| |
Gross sales | |
$ | 7,112,359 | | |
$ | 6,467,084 | | |
$ | 645,275 | |
Gross profit (loss) | |
$ | 4,895,831 | | |
$ | 5,897,514 | | |
$ | (1,001,683 | ) |
Net loss | |
$ | (3,895,009 | ) | |
$ | (2,893,326 | ) | |
$ | (1,001,683 | ) |
Total assets | |
$ | 2,500,296 | | |
$ | 2,467,304 | | |
$ | 32,992 | |
| |
| | | |
| | | |
| | |
2013 | |
| | | |
| | | |
| | |
Gross sales | |
$ | 9,555,562 | | |
$ | 8,505,667 | | |
$ | 1,049,895 | |
Gross profit (loss) | |
$ | 6,566,257 | | |
$ | 7,451,473 | | |
$ | (885,216 | ) |
Net loss | |
$ | (9,337,618 | ) | |
$ | (8,452,402 | ) | |
$ | (885,216 | ) |
Total assets | |
$ | 4,997,753 | | |
$ | 4,670,390 | | |
$ | 327,363 | |
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 reported losses for the year ended December 31, 2014, totaling $3,895,009 as well as an accumulated deficit as of
December 31, 2014, amounting to $26,917,416. As a result of our continued losses, at December 31, 2014, the Company’s current
liabilities significantly exceed current assets, resulting in negative working capital of $11,815,621. Further, the Company does
not have adequate cash to cover projected operating costs for the next 12 months. As of December 31, 2014, the Company also owes
approximately $875,000 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.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SIGNIFICANT
ACCOUNTING POLICIES
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.
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.
Cash
Equivalents
The
Company considers all highly liquid investments purchased with an original or 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 December 31, 2014 and 2013, the Company had no cash equivalents.
Considerations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable.
Revenue
Recognition
TMP
markets medical foods and generic pharmaceuticals 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 (3% of product revenues for the year ended December 31, 2014): 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.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Distributor
Direct Sales Model (16% of product revenues for the year ended December 31, 2014): 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 (38% of product revenues for the year ended December 31, 2014): 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.
Hybrid
Model (10% of product revenues for the year ended December 31, 2014): 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.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CMFG
#1 – WC Receivable Purchase Assignment Model (“CMFG #1”) (33% of product revenues for the
year ended December 31, 2014): 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 years ended December 31, 2014 and 2013, the Company issued billings to Physician Managed and Hybrid model customers aggregating
$3.8 million and $5.7 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 $569,570 and $1,054,194, 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 $4,525,978 and $5,037,003
during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, we had approximately $7.5 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.
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 of the claim, and the fee is not determinable until the amount
of the collection of the claim 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 historical 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.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 December 31, 2014 and 2013, of the collectability of invoices, we established an allowance for doubtful accounts of $55,773
and $81,171, 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 revenues 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 finished goods.
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.
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 December 31, 2014 and 2013, 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 an impairment has occurred, 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.
No impairment indicators existed at December 31, 2014 and 2013, so no intangible asset impairment was recorded for the years ended
December 31, 2014 and 2013.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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. The estimated fair value of warrants classified
as derivative liabilities is 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 warrants classified as
derivative liabilities is 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 December 31, 2014, 95,000 warrants
were classified as derivative liabilities. Each reporting period the warrants are re-valued and adjusted through the caption “change
in fair value of warrant liability” 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.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 December
31, 2014, 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.
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 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.
Since
the effects of outstanding options and warrants 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.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following sets forth the number of shares of common stock underlying outstanding options and warrants as of December 31, 2014
and 2013:
| |
December
31, | |
| |
2014 | | |
2013 | |
Warrants | |
| 4,919,372 | | |
| 4,256,465 | |
Stock options | |
| 2,421,041 | | |
| 2,794,841 | |
| |
| 7,340,413 | | |
| 7,051,306 | |
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 expense 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. ASU 2014-09 is effective for interim and
annual reporting periods beginning after December 15, 2016 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.
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.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4.
PROPERTY AND EQUIPMENT
Property
and equipment, net are as follows:
| |
December
31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Computer equipment | |
$ | 661,322 | | |
$ | 710,907 | |
Furniture and fixtures | |
| 164,451 | | |
| 245,616 | |
Leasehold improvements | |
| 254,102 | | |
| 254,102 | |
Total property and equipment, gross | |
| 1,079,875 | | |
| 1,210,625 | |
Less: accumulated depreciation | |
| (972,690 | ) | |
| (975,039 | ) |
Total property and equipment,
net | |
$ | 107,185 | | |
$ | 235,586 | |
Depreciation
expense for the years ended December 31, 2014 and 2013 was $128,401 and $142,500, respectively. Depreciation included in Cost
of Services for the years ended December 31, 2014 and 2013 was $67,568 and $75,578, respectively. No depreciation is recorded
in Cost of Product Sales since all production for TMP is outsourced to a third party and stored at an outsourced facility. The
remaining depreciation is recorded as part of general and administrative expenses.
5.
INTANGIBLE ASSETS
Intangible assets consist of the following:
| |
December
31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Patents | |
$ | 355,630 | | |
$ | 355,630 | |
Internally developed software | |
| 1,577,367 | | |
| 1,577,367 | |
Total, at cost | |
| 1,932,997 | | |
| 1,932,997 | |
Accumulated amortization | |
| (1,374,845 | ) | |
| (1,101,348 | ) |
Net intangible assets | |
| 558,152 | | |
| 831,649 | |
Intangible asset with indefinite life: | |
| | | |
| | |
URL medicalfoods.com | |
| 1,301,000 | | |
| 1,301,000 | |
Total intangible assets | |
$ | 1,859,152 | | |
$ | 2,132,649 | |
Future
amortization for years ending after December 31, 2014 is as follows:
2015 | |
$ | 175,409 | |
2016 | |
$ | 76,468 | |
2017 | |
$ | 41,919 | |
2018 | |
$ | 15,735 | |
2019 | |
$ | 12,463 | |
Thereafter | |
$ | 236,158 | |
| |
$ | 558,152 | |
Amortization
expense for the years ended December 31, 2014 and 2013 was $273,497 and $269,400, respectively.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.
INCOME TAXES
During
the quarter ended June 30, 2013, the Company determined to fully reserve the net deferred income tax assets by taking a full valuation
allowance against these assets. As a result of this decision, during the year ended December 31, 2014, the Company did not recognize
any income tax benefit as a result of its net loss. The table below shows the balances for the deferred income tax assets and
liabilities as of the dates indicated.
| |
December
31, 2014 | | |
December
31, 2013 | |
Deferred income tax asset-short-term | |
$ | 1,517,270 | | |
$ | 1,402,031 | |
Allowance | |
| (1,517,270 | ) | |
| (1,402,031 | ) |
Deferred income tax asset-short-term, net | |
| — | | |
| — | |
| |
| | | |
| | |
Deferred income tax asset-long-term | |
| 8,303,462 | | |
| 7,145,404 | |
Deferred income tax liability-long-term | |
| (1,074,928 | ) | |
| (1,177,716 | ) |
Deferred income tax asset-long-term | |
| 7,228,534 | | |
| 5,967,688 | |
Allowance | |
| (7,228,534 | ) | |
| (5,967,688 | ) |
Deferred income tax asset-long-term, net | |
| — | | |
| — | |
| |
| | | |
| | |
Total deferred tax asset, net | |
| — | | |
| — | |
The
IRS and FTB completed their respective examinations of the Company’s income tax returns for the tax years 2010 through 2012
in March 2014 and July 2014, respectively. The IRS concluded that the Company’s aggregate federal income tax liability for
these tax years was $26,124 and the FTB determined that the Company’s state income tax liability for the years under examination
was $39,704. As a result of these examinations, the Company recorded $65,828 in income tax expense during the year ended December
31, 2014. During the year ended December 31, 2013, the Company recognized income tax expense of $5,666,902. Income tax expense
resulted from a valuation allowance for net deferred income tax assets of $7,369,719. The $7,369,719 valuation allowance includes
the income tax benefit derived by the Company during the year ended December 31, 2013, of $1,704,095. As such, the effect of the
valuation allowance attributed to $5,665,624 of the Company’s aggregate income tax expense. The remaining income tax expense,
of $1,278, was due to state minimum taxes.
The components
of the income tax provision are as follows:
| |
December
31, 2014 | | |
December
31, 2013 | |
Current: | |
| | | |
| | |
Federal | |
$ | 26,124 | | |
$ | — | |
State | |
| 39,704 | | |
| 1,278 | |
Total current | |
| 65,828 | | |
| 1,278 | |
Deferred: | |
| | | |
| | |
Federal | |
| — | | |
| 4,436,445 | |
State | |
| — | | |
| 1,229,179 | |
Total deferred | |
| — | | |
| 5,665,624 | |
Income tax expense | |
$ | 65,828 | | |
$ | 5,666,902 | |
The
Company’s effective tax rates were 1.7% and 154.4% for the years ended December 31, 2014 and 2013, respectively. During
the years ended December 31, 2014, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change
in the valuation allowance and final resolution of the Company’s Federal and state income tax audits for years 2010 through
2012, which resulted in $65,828 of income tax expense. In the previous year, management had decided to fully reserve the net deferred
income tax assets by taking a full valuation allowance against these assets. During the year ended December 31, 2013, the effective
tax rate differed primarily due to the change in the valuation allowance. The reconciliation of income tax attributable to operations
computed at the U.S. Federal statutory income tax rate of 35% for 2014 and for 2013 to income tax expense is as follows:
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Statutory
Federal tax rate | |
| (35.0 | %) | |
| (35.0 | %) |
Increase
(decrease) in tax rate resulting from: | |
| | | |
| | |
Allowance
against deferred tax assets | |
| 34.7 | % | |
| 200.8 | % |
Derivative
revaluation expense and other | |
| 7.5 | % | |
| 0.2 | % |
Penalties
and fines | |
| — | | |
| (6.3 | %) |
State
taxes, net of federal benefit | |
| (5.7 | %) | |
| (5.8 | %) |
Nondeductible
meals & entertainment expense | |
| 0.2 | % | |
| 0.5 | % |
Effective
tax rate | |
| 1.7 | % | |
| 154.4 | % |
Deferred
tax components are as follows:
| |
December
31, 2014 | | |
December
31, 2013 | |
Deferred tax assets: | |
| | | |
| | |
Deferred revenue | |
$ | 3,075,550 | | |
$ | 2,972,470 | |
Net operating loss | |
| 3,356,001 | | |
| 2,405,950 | |
Stock compensation expense | |
| 1,416,290 | | |
| 1,311,363 | |
Accrued liability for payroll and vacation | |
| 883,901 | | |
| 746,606 | |
Other accrued liabilities | |
| 610,644 | | |
| 595,943 | |
R&D credits | |
| 455,621 | | |
| 455,621 | |
Bad debt reserve | |
| 22,725 | | |
| 59,482 | |
Total deferred tax assets | |
| 9,820,732 | | |
| 8,547,435 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Depreciation | |
| (549,266 | ) | |
| (641,198 | ) |
Loss on sale of accounts receivable | |
| (525,662 | ) | |
| (536,518 | ) |
Total deferred tax liabilities | |
| (1,074,928 | ) | |
| (1,177,716 | ) |
Valuation allowance | |
| (8,745,804 | ) | |
| (7,369,719 | ) |
| |
| | | |
| | |
Net deferred tax assets | |
$ | — | | |
$ | — | |
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 established a valuation allowance for the current year.
At
December 31, 2014, the Company had total domestic Federal and state net operating loss carryovers of approximately $7,596,539
and $10,545,802, 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 in 2014 or 2013.
The
2013 and 2014 tax years remain open to examination by the Internal Revenue Service and California Franchise Tax Board. The IRS
and FTB have the authority to examine those tax years until the applicable statute of limitations expire.
During
the year ended December 31, 2013, as a result of the conclusion of the IRS examination of the Company’s 2010 through 2012
income tax returns, the Company reversed $752,281 of interest and penalties which were initially recorded during 2011.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7.
STOCK-BASED COMPENSATION
In
January 2011 the Company’s stockholders approved the Company’s 2011 Stock Incentive Plan (the “Plan”),
which provided for the issuance of a maximum of three million (3,000,000) shares of the Company’s common stock to be offered
to the Company’s directors, officers, employees, and consultants. On August 26, 2013, the Company’s Board of Directors
approved a two million (2,000,000) share increase in the number of shares issuable under the Plan, which was approved by the Company’s
stockholders on June 6, 2014. Options granted under the Plan have an exercise price equal to or greater than the fair market 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 year ended December 31, 2014, the Company had stock-based compensation expense of $49,804, related to issuances to the Company’s
employees and directors, included in reported net loss. The total amount of stock-based compensation to employees and directors
for the year ended December 31, 2014, related solely to the issuance of stock options. During the year ended December 31, 2013,
the Company had stock-based compensation expense included in reported net loss of $734,349. The total amount of stock-based compensation
for the year ended December 31, 2013, included restricted stock grants valued at $133,040 and stock options valued at $601,309.
A
summary of stock option activity for the years ended December 31, 2014 and December 31, 2013, 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, 2012 | |
| 865,556 | | |
| 1,770,437 | | |
$ | 2.31 | | |
| 8.10 | | |
$ | 1,113,383 | |
Amendment of 2011 SIP | |
| 2,000,000 | | |
| — | | |
| | | |
| | | |
| | |
Grants | |
| (1,198,300 | ) | |
| 1,198,300 | | |
$ | 1.28 | | |
| | | |
| | |
Cancellations and forfeitures | |
| 173,896 | | |
| (173,896 | ) | |
$ | 2.01 | | |
| | | |
| | |
Restricted stock awards | |
| (48,455 | ) | |
| — | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2013 | |
| 1,792,697 | | |
| 2,794,841 | | |
$ | 1.89 | | |
| 7.03 | | |
$ | — | |
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 | | |
$ | — | |
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 years ended December
31, 2013 or 2014.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All
options that the Company granted during the years ended December 31, 2014 and 2013, were 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 utilized the Black-Scholes option pricing model. The Company did not issue any options during the year ended December
31, 2014. The assumptions used for the year ended December 31, 2013 are as follows:
| |
Year
Ended December 31, 2013 | |
Weighted average risk free interest rate | |
| 0.51%
– 1.32 | % |
Weighted average life (in years) | |
| 3.5
– 5.0 | |
Volatility | |
| 68%
- 87 | % |
Expected dividend yield | |
| 0 | % |
Weighted average grant-date fair value per share of options granted | |
$ | 0.74 | |
A
summary of the changes in the Company’s nonvested options during the year ended December 31, 2014, is as follows:
| |
Number
of
Non-vested
Options | | |
Weighted
Average Fair
Value at Grant
Date | | |
Intrinsic
Value | |
| |
| | |
| | |
| |
Non-vested at December 31, 2013 | |
| 250,000 | | |
$ | 0.60 | | |
$ | — | |
Vested in 12 months ended December 31, 2014 | |
| 79,167 | | |
$ | 0.65 | | |
$ | — | |
Non-vested at December 31, 2014 | |
| 170,833 | | |
$ | 0.57 | | |
$ | — | |
Exercisable at December 31, 2014 | |
| 2,250,608 | | |
$ | 0.93 | | |
$ | — | |
Outstanding at December 31, 2014 | |
| 2,421,441 | | |
$ | 0.91 | | |
$ | — | |
As
of December 31, 2014, total unrecognized compensation cost related to unvested stock options was $62,576. The cost is expected
to be recognized over a weighted average period of 2.32 years.
8.
WARRANTS
During
the year ended December 31, 2013, the Company issued a total of 1,832,500 warrants, at an average exercise price of $2.01 per
share. Included in this amount are 1,412,500 warrants issued to James Giordano, CEO of CMFG, and 400,000 warrants to Raven Asset-Based
Opportunity Fund I LP, in connection with the June 28, 2013 loan to the Company by CMFG (See Note 10). 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 10), and 500,000 warrants to several consultants for financial advisory and investor
relations services.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
Company utilized the Black-Scholes option pricing model and the assumptions used for each period are as follows:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Weighted average risk free interest rate | |
| 1.67%
– 1.72 | % | |
| 0.75%
- 2.66 | % |
Weighted average life (in years) | |
| 5.0 | | |
| 5.0
– 10.0 | |
Volatility | |
| 67 | % | |
| 71%
- 86 | % |
Expected dividend yield | |
| 0 | % | |
| 0 | % |
Weighted average grant-date fair value per share of warrants granted | |
$ | 0.67 | | |
$ | 0.75 | |
The
following table summarizes information about common stock warrants outstanding at December 31, 2014:
Outstanding | | |
Exercisable | |
| |
| | |
Weighted | | |
| | |
| | |
| |
| |
| | |
Average | | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Remaining | | |
Average | | |
| | |
Average | |
Exercise | |
Number | | |
Contractual | | |
Exercise | | |
Number | | |
Exercise | |
Price | |
Outstanding | | |
Life
(Years) | | |
Price | | |
Exercisable | | |
Price | |
$0.01 | |
| 495,000 | | |
| 4.19 | | |
$ | 0.01 | | |
| 345,000 | | |
$ | 0.01 | |
$0.80 | |
| 162,907 | | |
| 4.62 | | |
$ | 0.80 | | |
| 162,907 | | |
$ | 0.80 | |
$1.00 | |
| 1,715,000 | | |
| 3.25 | | |
$ | 1.00 | | |
| 1,715,000 | | |
$ | 1.00 | |
$2.00 | |
| 1,812,500 | | |
| 8.55 | | |
$ | 2.00 | | |
| 1,812,500 | | |
$ | 2.00 | |
$2.60 | |
| 20,000 | | |
| 3.35 | | |
$ | 2.60 | | |
| 20,000 | | |
$ | 2.60 | |
$3.38 | |
| 713,965 | | |
| 2.06 | | |
$ | 3.38 | | |
| 713,965 | | |
$ | 3.38 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
$0.01 - 3.38 | |
| 4,919,372 | | |
| 5.17 | | |
$ | 1.61 | | |
| 4,769,372 | | |
$ | 1.66 | |
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 December 31, 2014 and 2013, the value of the related liability
was $18,075 and $29,134, respectively. Changes in these values are recorded as income or expense during the reporting period that
the change occurs.
9.
ACCRUED LIABILITIES
Accrued
liabilities at December 31, 2014, and December 31, 2013, are comprised of the following:
| |
December
31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Due to physicians | |
$ | 2,659,698 | | |
$ | 2,580,855 | |
Accrued salaries and director fees | |
| 3,996,901 | | |
| 2,567,847 | |
Other | |
| 617,381 | | |
| 505,980 | |
Total accrued liabilities | |
$ | 7,273,980 | | |
$ | 5,654,682 | |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.
NOTES PAYABLE
Notes
payable at December 31, 2014, and December 31, 2013, are comprised of the following:
| |
December
31, | |
| |
2014 | | |
2013 | |
Notes payable to William Shell Survivor’s
Trust (a) | |
$ | 1,874,411 | | |
$ | 2,007,820 | |
Notes payable to William Shell (b) | |
| 130,000 | | |
| — | |
Notes payable to Giffoni Family Trust (c) | |
| — | | |
| 113,247 | |
Notes payable to Lisa Liebman (d) | |
| 500,000 | | |
| 500,000 | |
Note payable to Cambridge Medical Funding Group, LLC
(e) | |
| 1,523,559 | | |
| 2,907,284 | |
Total notes payable | |
| 4,027,970 | | |
| 5,528,351 | |
Less: debt discount | |
| (308,507 | ) | |
| (694,141 | ) |
| |
| 3,719,463 | | |
| 4,834,210 | |
Less: current portion | |
| (3,597,173 | ) | |
| (4,079,382 | ) |
Notes payable – long-term
portion | |
$ | 122,290 | | |
$ | 754,828 | |
(a) | Between
January 2011 and December 2012, William E. Shell, M.D., the Company’s Chief Executive
Officer, Chief Scientific Officer, greater than 10% shareholder and a 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”). 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. The principal on
the WS Trust Notes is payable on demand and interest is payable on a quarterly basis. |
| |
| During
the years ended December 31, 2014 and 2013, the Company incurred interest expense of
$87,286 and $155,348, respectively, on the WS Trust Notes. At December 31, 2014 and 2013,
accrued interest on the WS Trust Notes totaled $21,316 and nil, respectively. |
| |
(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 year ended December 31, 2014, the Company incurred interest expense of $49,426,
including amortization of debt discount of $44,867, on the Shell Note. At December 31,
2014, accrued interest on the Shell Note totaled $1,938. |
| |
(c) | Between
January 2011 and December 2012, Kim Giffoni the Company’s Executive Vice President
of Foreign Sales and Investor Relations, greater than 10% shareholder and a director,
loaned $300,000 to the Company. As consideration for the loans, the Company issued promissory
notes in the aggregate principal amount of $300,000 (the “Giffoni Notes”).
The Giffoni Notes accrued interest at rates ranging between 3.25% and 6.0% per annum.
During the years ended December 31, 2014 and 2013, the Company incurred interest expense
of $1,171 and $9,251, respectively, on the Giffoni Notes. At December 31, 2014 and 2013,
there was no accrued interest on the Giffoni Notes. |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(d) | 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 principal
and interest on the Liebman Notes is payable on demand. During the years ended December
31, 2014 and 2013, the Company incurred interest expense on the Liebman Notes of $19,190
and $19,090, respectively. At December 31, 2014 and 2013, accrued interest on the Liebman
Notes totaled $4,837 and $21,044, respectively. |
| |
(e) | 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. |
| | |
| ● | 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. |
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 years ended December 31, 2014 and 2013, interest expense of $385,634 and $231,380, respectively, was recorded from
the debt discount amortization.
During
the years ended December 31, 2014 and 2013, the Company incurred interest expense, excluding amortization of debt discount, of
$409,059 and $114,500, respectively, pursuant to CMFG #2.
11.
RELATED PARTY TRANSACTIONS
Notes
Payable
As
of December 31, 2014, and December 31, 2013, the Company has notes payable agreements issued to related parties with aggregate
outstanding principal balances of $2,504,411 and $2,621,067, respectively (See Note 10).
12.
CONCENTRATIONS
A
significant portion of the Company’s billings and revenues are derived from the sale of a single product.
In
both of the years ended December 31, 2014 and 2013, the Company derived 39% of its billings from the sale of Theramine.
While demand remains strong for Theramine, we cannot assure you it will continue in the future. If demand were to decrease
for Theramine it may have a material adverse effect on the Company’s operating results.
A
substantial portion of the Company’s billings and revenues are derived from a limited number of physician clients and the
loss of any one or more of them may have an immediate adverse effect on our financial results.
In
both of the years ended December 31, 2014 and 2013, 11% of the Company’s billings were derived from individual customers
representing 10% or more of the total sales. The Company does not receive purchase volume commitments from clients and physicians
may stop purchasing our products and services with little or no warning. The loss of any one or more of these customers may have
an immediate adverse effect on our financial results.
Major
Vendor
The
Company purchases its medical food manufacturing services from a single source. The Company is dependent on the ability of this
vendor to provide inventory on a timely basis. The loss of this vendor or a significant reduction in product availability and
quality could have a material adverse effect on the Company. While the Company keeps at least a two months inventory on hand,
it could take between two and five months to set up and test a new supplier, leading to up to four months of product backorder.
The Company’s relationship with this vendor is in good standing. We have vetted several other manufacturing facilities and
have determined that we could immediately transfer manufacturing without a significant disruption in the business in the event
that there is a disruption at our current manufacturing facility.
13.
LEASE COMMITMENTS
The
Company leases its operating facility under a lease agreement expiring February 28, 2018. 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. The Company’s net rent expenses for the years ended December 31, 2014, and December 31, 2013, were approximately
$252,000 and $240,000.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Minimum
annual rentals on the operating facility for the fiscal years ending December 31 are as follows:
2015 | |
$ | 252,084 | |
2016 | |
| 252,084 | |
2017 | |
| 252,084 | |
2018 | |
| 42,014 | |
Total | |
$ | 798,266 | |
14.
EQUITY TRANSACTIONS
On
April 22, 2013, AFH Holding converted $287,648, which represented the remaining principal balance of its notes, into 287,648 shares
of the Company’s common stock. 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.
On
December 20, 2013, the Company entered into a subscription agreement with an accredited investor in a private placement exempt
from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).
The Company issued and sold to the accredited investor 416,667 shares of its common stock. The issuance resulted in aggregate
gross proceeds to the Company of $250,000.
During
the year ended December 31, 2013, the Company issued an aggregate of 258,455 shares of its common stock pursuant to agreements
with former employees and consultants to the Company. The shares were valued at $222,540, an average of $0.86 per share based
on the fair value of the common stock on the date of issuance.
On
March 21, 2014, the Company entered into a subscription agreement with Ultera Pty Ltd ATF MPS Superannuation Fund (“Ultera”).
Dr. Wenkart, a director of the Company, is the owner and director of Ultera. The Company issued and sold to Ultera 400,000 shares
of its common stock. The issuance resulted in aggregate gross proceeds to the Company of $240,000.
During
the year ended December 31, 2014, the Company issued an aggregate of 627,575 shares of its common stock pursuant to agreements
with its directors and consultants to the Company. The shares were valued at $398,750, an average of $0.64 per share. As a result
of these issuances, the Company recorded an expense of $130,500 and a reduction in its liabilities of $268,250.
15.
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 matter at this time.
On
or about January 31, 2011, Steven B. Warnecke was hired as the Company’s Chief Financial Officer and resigned less than
five (5) months later. At the time he resigned, he cited personal reasons for his resignation. He subsequently claimed that the
Company breached its Employment Agreement with him. Mr. Warnecke commenced an arbitration proceeding (the “Arbitration”).
In December 2013, the Company entered into a confidential settlement with Mr. Warnecke, reached as a result of a confidential
mediation with a retired Justice of the California Court of Appeal, and subsequent confidential settlement discussions. The Company
recorded an expense of $255,000 as a result of the settlement.
TARGETED
MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16.
SUBSEQUENT EVENTS
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. The financing closed
on January 15, 2015.
On
February 23, 2015, the Company entered into an unsecured promissory note, pursuant to which the Company received the principal
amount of $1.2 million, from Shlomo Rechnitz (the “Lender”). The promissory note accrues interest at
4% per annum, throughout its term, and has a maturity date of February 22, 2017. Principal and interest on the promissory note
is payable in monthly installments of $52,109.91, beginning on March 22, 2015, and continuing until February 22, 2017. The loan
closed on February 24, 2015. The Company plans to use the proceeds of the loan for working capital and general corporate purposes.
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 both the enforceability of the demand and the validity of the June 2012 amendment
that modified the terms of all notes that were issued to both the Family Trust and to Ms. Liebman prior to June 22, 2012 from
five year term notes to demand notes.
On
March 18, 2015, an interim award in the amount of $1.17 million dollars was issued against TMP for breach of contract, and in
favor of PDR Medical Management, LLC, a California Limited Liability Company, a former distributor of the Company’s products,
at an Arbitration through JAMS. The amount of the award was for sums previously included in the Company’s financial statements
as “Due to Physicians” (See Note 9).
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not
applicable.
Item
9A. Controls and Procedures.
We
carried out an evaluation required by Rule 13a-15 of the Exchange Act under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation
of Targeted Medical Pharma, Inc.’s “disclosure controls and procedures” and “internal control over financial
reporting” as of the end of the period covered by this Annual Report.
The
evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting included a
review of our objectives and processes, implementation by us and the effect on the information generated for use in this Annual
Report. In the course of this evaluation and in accordance with Section 302 of the Sarbanes Oxley Act of 2002, we sought to identify
material weaknesses in our controls, to determine whether we had identified any acts of fraud involving personnel who have a significant
role in our internal control over financial reporting that would have a material effect on our consolidated financial statements,
and to confirm that any necessary corrective action, including process improvements, were being undertaken. Our evaluation of
our disclosure controls and procedures is done quarterly and management reports the effectiveness of our controls and procedures
in our periodic reports filed with the Securities and Exchange Commission. Our internal control over financial reporting is also
evaluated on an ongoing basis by individuals in our organization. The overall goals of these evaluation activities are to monitor
our disclosure controls and procedures and internal control over financial reporting and to make modifications as necessary. We
periodically evaluate our processes and procedures and make improvements as required.
Because
of inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect
misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management applies its judgment in assessing the benefits of controls 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. The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
December 31, 2014.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed 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 and includes those policies and procedures that (a) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements
in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only
in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect
on the financial statements.
Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based
on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2014.
Changes
in Internal Controls over Financial Reporting
During
the most recent fiscal quarter 2014 (the fourth fiscal quarter of 2014) there were no significant changes in our internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected
or are reasonably likely to materially affect our internal control over financial reporting.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
Directors
The
following table sets forth information regarding our current directors as of April 13, 2015.
|
|
|
|
Position
and Offices |
|
Served
as a |
Name
|
|
Age
|
|
Held
with the Company |
|
Director
Since |
Kim
Giffoni |
|
63 |
|
Chief Executive
Officer and Director |
|
1999 |
David
S. Silver, M.D. |
|
49 |
|
Chief Medical
Officer and Director |
|
2011 |
Maurice
J. DeWald |
|
75 |
|
Director |
|
2011 |
Thomas
Wenkart, M.D. |
|
71 |
|
Director |
|
2014 |
Kerry
N. Weems (1) |
|
58 |
|
Director and Non-Executive
Chairman |
|
2014 |
(1)
Mr. Weems served as a director of the Company from August 2012 to May 2013. Mr. Weems also served as the Chairman of the
Nominating and Corporate Governance Committee, a member of the Audit Committee and a member of the Compensation Committee.
Kim
Giffoni
Mr.
Giffoni was appointed Chief Executive Officer of the Company on January 9, 2015. Mr. Giffoni is a founder of the Company and served
as Executive Vice President of Foreign Sales and Investor Relations from December 2010 to January 2015 and as President and Chief
Operating Officer of the Company from December 1999 to December 2010 (Mr. Giffoni also acted as a director through this time).
Prior to assuming his current responsibilities, from April 1996 to May 1999, Mr. Giffoni served as president of NutraCorp Scientific,
Inc., a dietary supplement company marketing and selling nutritional products worldwide. From January 1983 to March 1996, Mr.
Giffoni founded and served as president of Giffoni Development Company. Under Mr. Giffoni’s direction the company profitably
developed and sold multi-million dollar residences in Southern California. From 1980 through 1983 Mr. Giffoni served as an advertising
manager of Herald Community Newspapers supervising advertising insert flow into fifteen local newspapers throughout Southern California.
Prior to working for the Los Angeles based Herald Community Newspapers, from 1972 through 1979, Mr. Giffoni served as advertising
director of the Las Virgenes Enterprise Newspaper Group and co-founded the weekly newspaper Malibu Surfside News. Mr. Giffoni
earned a Bachelor of Arts in Communications from California State University at Northridge. Mr. Giffoni is a former professional
baseball player for the Kansas City Royals Professional Baseball Club and is a commercially-rated helicopter pilot. Mr. Giffoni’s
qualifications to serve as a director include his role as a founding member of the Company, his experience in sales and marketing
and his background in business development.
David
Silver, M.D.
Dr.
Silver was appointed Chief Medical Officer of the Company on January 9, 2015. Dr. Silver served as President and Chief Operating
Officer of the Company from March 2013 to December 2014 and as Executive Vice President of Medical and Scientific Affairs from
December 2011 to March 2013. Dr. Silver has been a director since October 2011. Dr. Silver is a practicing board certified rheumatologist
and internist with privileges at Cedars-Sinai Medical Center in Los Angeles, California and served as clinical chief of rheumatology
at Cedars Sinai from October 2000 to September 2004. Since June 1993, Dr. Silver has taught at the University of California at
Los Angeles School of Medicine in various capacities and in July 2004 was named an associate clinical professor. From December
1994 to October 2008, Dr. Silver served as the director of the Chronic Pain Rehabilitation Program at Cedars-Sinai Medical Center
and, since January 1993, Dr. Silver has served as associate medical director of the Osteoporosis Medical Center, a non-profit
research corporation in Beverly Hills, California. From May 2003 to April 2006, Dr. Silver served as member of the scientific
advisory committee of the American College of Rheumatology and, from May 2000 to April 2002, he served as a member of the awards
and grants committee. Dr. Silver has written a book entitled Playing Through Arthritis: How to Conquer Pain and Enjoy Your
Favorite Sports and Activities. Dr. Silver has also been granted several research grants to study osteoarthritis, osteoporosis,
fibromyalgia, rheumatoid arthritis and epicondylitis. Dr. Silver is the author of numerous publications in peer-reviewed journals
and has regularly accepted speaking engagements on various topics in rheumatology. Dr. Silver also serves as peer reviewer for
Arthritis and Rheumatism, Clinical Rheumatology, Osteoporosis International, Journal of Osteoporosis and
American Journal of Managed Care. Dr. Silver received a Bachelor of Arts degree in medical sciences with a minor in economics
from Boston University and a medical degree from the Boston University School of Medicine. He did his residency training in internal
medical at Northwestern University School of Medicine and his fellowship in Rheumatology at Cedars Sinai Medical Center. Dr.
Silver’s qualifications to serve as a director include his extensive background in medicine, his experience as a practicing
physician prescribing our products, and his prior leadership in managing our Company.
Maurice
J. DeWald
Mr. DeWald has served
as a director since February 2011. Mr. DeWald had also served as Chairman of the Board of Directors from October 2011 to June
2014. Since June 1992, Mr. DeWald has served as the chairman and chief executive officer of Verity Financial Group, Inc., a financial
advisory firm with a primary focus on the healthcare and technology sectors. Mr. DeWald also serves as a director of Healthcare
Trust of America, Inc. Mr. DeWald also previously served as a director of Tenet Healthcare Corporation, ARV Assisted Living, Inc.,
Quality Systems, Inc., Mizuho Corporate Bank of California, and as non-executive Chairman of Integrated Healthcare Holdings, Inc.
From 1962 to 1991, Mr. DeWald worked with the international accounting and auditing firm of KPMG, LLP, where he served at various
times as an audit partner, a member of the board of directors and managing partner of the Orange County, California, Los Angeles,
California and Chicago offices. Mr. DeWald has served as chairman and director of both the United Way of Greater Los Angeles and
the United Way of Orange County California. Mr. DeWald holds a Bachelor of Arts degree in Accounting and Finance from the University
of Notre Dame and is a member of its Mendoza School of Business Advisory Council. Mr. DeWald is a Certified Public Accountant
(inactive), and is a member of the California Society of Certified Public Accountants and the American Institute of Certified
Public Accountants. Mr. DeWald’s qualifications to serve as a director include his experience as a director of companies
focused on health care, which familiarized him with the regulatory framework within which we work, as a financial advisor to the
healthcare industry as well as his education and experience in accounting.
Thomas
R. Wenkart, M.D.
Dr.
Wenkart has served as a director since March 2014. Dr. Wenkart established Macquarie Health Corporation in Sydney, Australia in
1976 and currently serves as its Chief Executive Officer and Chairman of the Board. Macquarie Health Corporation operates a hospital
services division and a medical equipment division. With 5 private hospitals, Macquarie Health Corporation is one of the largest
private hospital operators in Sydney. The medical equipment division is the technology arm of Macquarie and is active in research,
design, manufacture and sale of ECG monitoring equipment and other innovative products in Australia with worldwide distribution
including Europe, China and South-East Asia. Dr. Wenkart received a medical degree from the Sydney University School of Medicine
in 1968. He went to Royal Newcastle Hospital and entered General Practice and the world of medical computing in 1970. Dr. Wenkart’s
qualifications to serve as a director include his extensive background in medical computing, electronic health records, biomedical
technology, operations and management systems combined with his experience as the founder of Macquarie Health Corporation.
Kerry
N. Weems
Mr.
Weems has served as a director since June 2014 and as Chairman of the Board of Directors since January 9, 2015. Further, Mr. Weems
had previously served as a director of the Company from August 7, 2012 to May 8, 2013. Mr. Weems has been Chief Executive Officer
of TwinMed, LLC since December 16, 2013. Mr. Weems previously served as the vice president and general manager of Health Solutions
Sector at General Dynamics Information Technology, Inc. from October 2011 to November 2013. In this position, Mr. Weems provided
executive leadership to more than 4,500 health and health information technology professionals providing solutions in fraud detection
and prevention, quality and pay for performance, system and infrastructure modernization, integrated contact centers and data
analytics. Prior to joining General Dynamics Information Technology, Mr. Weems led Vangent, Inc.’s (“Vangent”)
Health Division from August 2009 to December 2009. Vangent was acquired by General Dynamics in September 2011 after which he took
on his current title at General Dynamics. Prior to Vangent, Mr. Weems served 28 years with the federal government and served as
an Administrator of the Centers for Medicare and Medicaid Services and Vice Chairman of the American Health Information Community,
where he implemented the Medicare e-prescribing program, began pilot projects for electronic health records and personal health
records, and instituted a number of landmark payment reforms, including non-payment for certain medical errors. Mr. Weems served
in a number of senior positions at the Department of Health and Human Services, including Deputy Chief of Staff, Chief Financial
Officer and Chief Budget Officer, where he oversaw a budget exceeding $700 billion. While at HHS, he led the implementation of
the largest and most successful automated financial management system in government, the Unified Financial Management System.
Mr. Weems served in both Republican and Democratic administrations and received the highest award for civilian employees, the
Presidential Rank award, from Presidents Clinton and Bush. Mr. Weems has a Masters of Business Administration from the University
of New Mexico and Bachelor degrees in Philosophy and Management from New Mexico State University. Mr. Weems’ qualifications
to serve as a director include his extensive background in the private and public healthcare sector, as well as his education
and experience in finance and administration.
Executive
Officers
The following table sets
for information about our current executive officers as of April 13, 2015.
|
|
|
|
Position
and Offices |
|
Served
as an |
Name
|
|
Age
|
|
Held
with the Company |
|
Officer
Since |
Kim
Giffoni |
|
63 |
|
Chief Executive
Officer and Director |
|
1999 |
David
S. Silver, M.D. |
|
49 |
|
Chief Medical
Officer and Director |
|
2011 |
William
B. Horne |
|
46 |
|
Chief Financial
Officer |
|
2013 |
Douglas
P. Gintz |
|
48 |
|
Chief Technology
Officer |
|
2012 |
Kim Giffoni
For
additional information about Mr. Giffoni, please see information regarding the Company’s Directors above.
David
S. Silver, M.D.
For
additional information about Dr. Silver, please see information regarding the Company’s Directors above.
William
B. Horne
Mr.
Horne has served as the Chief Financial Officer since August 2013. Mr. Horne previously held the position of Chief Financial Officer
in various companies in the healthcare and high-tech field, including OptimisCorp, from January 2008 to May 2013, a privately
held, diversified healthcare technology company located in Los Angeles, California. Mr. Horne served as the Chief Financial Officer
of Patient Safety Technologies, Inc. (OTCBB: PSTX), a medical device company located in Irvine, California, from June 2005 to
October 2008 and as the interim Chief Executive Officer from January 2007 to April 2008. In his dual role at Patient Safety Technologies,
Mr. Horne was directly responsible for structuring the divestiture of non-core assets, capital financings and debt restructuring.
Mr. Horne held the position of Managing Member & Chief Financial Officer of Alaska Wireless Communications, LLC, a privately
held, advanced cellular communications company, from its inception in May 2002 until November 2007. Mr. Horne was responsible
for negotiating the sale of Alaska Wireless to General Communication Inc. (NASDAQ: GNCMA). From November 1996 to December 2001,
Mr. Horne held the position of Chief Financial Officer of The Phoenix Partners, a venture capital limited partnership located
in Seattle, Washington. Mr. Horne has also held supervisory positions at Price Waterhouse, LLP and has a Bachelor of Arts Magna
Cum Laude in Accounting from Seattle University.
Douglas
P. Gintz
Mr.
Gintz has served as the Chief Technology and Information Officer since January 2012. Mr. Gintz has broad experience delivering
technology and content solutions to a wide audience for over 26 years. Specializing in emerging technologies, he’s developed
adaptive manufacturing compliance systems and native web applications for Fortune 500 companies and health care. Mr. Gintz also
has hands-on experience bringing retail products to market from concept, planning, programming, and package design to marketing.
Prior to joining Targeted Medical Pharma, Mr. Gintz founded Global Web Applications LLC where he served as its Chief Executive
Officer and lead developer from August 2002 to January 2012. His clientele ranged from start-ups to multinational corporations
including Dress Barn (NASDAQ: DBRN) and Roxio, Inc. (NASDAQ: ROXI). From August 1996 to July 2002, Mr. Gintz was employed at Nova
Development Corp as a developer and key strategist where he held the positions of Directory of Strategy and Planning, Product
Manager and Creative Director. Mr. Gintz oversaw development of their Window’s creativity product lines sold in leading
US retail chains including BestBuy, Staples and Costco. During his employ, Mr. Gintz managed the Web and Design Departments, Product
Marketing Group while supervising domestic and overseas programmers. Mr. Gintz has earned a Bachelor of Arts from California State
University, Northridge with an emphasis in Design.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act, requires that our directors and executive officers and persons who beneficially own more than 10% of
our Common Stock (referred to herein as the “Reporting Persons”) file with the SEC various reports as
to their ownership of and activities relating to our Common Stock. Such Reporting Persons are required by the SEC regulations
to furnish us with copies of all Section 16(a) reports they file. Based solely upon our review of the copies of the forms we have
received and representations that no other reports were required, we believe that all Reporting Persons complied on a timely basis
with all filing requirements applicable to them with respect to transactions during fiscal year 2014 except as stated below.
| |
Number | | |
Transactions | | |
Known | |
| |
of
late | | |
not
timely | | |
failures
to file | |
Name
and Relationship | |
reports | | |
reported | | |
a
required form | |
William
E. Shell, M.D., Officer & Director | |
| 2 | | |
| 5 | | |
| 0 | |
Thomas
R. Wenkart, M.D., Director | |
| 1 | | |
| 1 | | |
| 0 | |
Corporate
Governance
Director
Independence
Although
the Company’s securities are not listed on any national securities exchange and we are therefore not required to have a
majority of independent directors, we apply the Nasdaq Stock Market LLC’s (“Nasdaq”) standard
for independent directors to determine which, if any, of our directors are independent pursuant to such definition. Nasdaq defines
an independent director generally as a person other than an officer or employee of the company or its subsidiaries or any other
individual having a relationship, which, in the opinion of the Board would interfere with the director’s exercise of independent
judgment in carrying out the responsibilities of a director.
Our
Board has determined that Maurice J. DeWald, Dr. Thomas Wenkart, and Kerry N. Weems are “independent directors” as
such term is defined by Nasdaq Marketplace Rule 5605(a)(2).
Board
Committees
There
are three permanent committees of the Board: the Audit Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee, each of which is described below. Each committee is composed of Messrs. DeWald, Weems and Dr. Wenkart.
Audit
Committee
We
have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). In addition, our Board adopted a written charter for the
Audit Committee which is available, free of charge, from the Company by writing to the Secretary at Targeted Medical Pharma, Inc.,
at 2980 Beverly Glen Circle, Suite 301, Los Angeles, CA 90077, calling (310) 474-9809 or visiting our website at www.tmedpharma.com/docs/ir-docs/TMP-Charter_of_the_Audit_Committee_1_2013.pdf.
Mr.
DeWald serves as Chairperson of the Audit Committee and Mr. Weems and Dr. Wenkart serve as members of the Audit Committee. Our
Board has determined that Mr. DeWald is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of
Regulation S-K and the Nasdaq Capital Market listing standards. The Audit Committee is required to report regularly to the Board
to discuss any issues that arise with respect to the quality or integrity of our financial statements, compliance with legal or
regulatory requirements, or the performance and independence of the independent auditors.
Compensation
Committee
The
Compensation Committee is responsible for establishing and reviewing the appropriate compensation of our directors and executive
officers, for reviewing employee compensation plans and for considering and making grants and awards under, and administering,
our equity incentive plans. Dr. Wenkart serves as chairperson of the Compensation Committee and Messrs. DeWald, and Weems serve
as members on the Compensation Committee. Among other functions, the Compensation Committee oversees the compensation of our chief
executive officer and other executive officers and senior management, including plans and programs relating to cash compensation,
incentive compensation, equity-based awards and other benefits and perquisites and administers any such plans or programs as required
by the terms thereof.
The
Compensation Committee has adopted a written charter, a copy of which is available, free of charge, from the Company by writing
to our Secretary at Targeted Medical Pharma, Inc., at 2980 Beverly Glen Circle, Suite 301, Los Angeles, CA 90077, calling (310)
474-9809 or by visiting our website at www.tmedpharma.com/docs/ir-docs/TMP-Charter-of-the-Compensation-Committee.pdf.
Nominating
and Corporate Governance Committee
Mr.
Weems serves as Chairperson of the Nominating and Corporate Governance Committee and Mr. DeWald and Dr. Wenkart serve as members
of the Nominating and Corporate Governance Committee. The principal duties and responsibilities of our nominating committee are
to identify qualified individuals to become board members, recommend to the Board individuals to be designated as nominees for
election as directors at the annual meetings of stockholders, and develop and recommend to the Board our corporate governance
guidelines. The Corporate Governance and Nominating Committee has adopted a written charter, a copy of which is available, free
of charge, from the Company by writing to our Secretary at Targeted Medical Pharma, Inc., at 2980 Beverly Glen Circle, Suite 301,
Los Angeles, CA 90077, calling (310) 474-9809 or by visiting our website at www.tmedpharma.com/docs/ir-docs/TMP-2013_Nominating_and_Corporate_Governance_Committee_Charter.pdf.
Code
of Ethics and Code of Conduct for Executive Officers and Directors
We
adopted a Code of Ethics and a Code of Conduct for Executive Officers and Directors, both of which are available on our internet
web site (at www.tmedpharma.com/corporate-governance) and will be provided in print without charge to any stockholder who
submits a request in writing to Targeted Medical Pharma, Inc., 2980 Beverly Glen Circle, Suite 301, Los Angeles, CA 90077, Attention:
Secretary. The Code of Conduct for Executive Officers and Directors applies to each director and executive officer, including
the Chief Financial Officer and Chief Executive Officer. This Code of Ethics provides principles to which these executive officers
are expected to adhere and which they are expected to advocate. The principles of the Code of Ethics are aligned to and apply
to those officers in addition to the Code of Conduct.
Item
11. Executive Compensation.
The
following table sets forth compensation paid by us for the years indicated to the individuals who served as our Chief Executive
Officer and Chief Scientific Officer, President and Chief Operating Officer, Executive Vice President of Foreign Sales and Investor
Relations, Chief Financial Officer and Chief Technology Officer during the year ended December 31, 2014. These individuals are
referred to as our “Named Executive Officers.”
SUMMARY
COMPENSATION TABLE
Name and principal
position | |
Year | |
Salary
($) | | |
Bonus
($) | | |
Stock
Awards
($) | | |
Option
Awards (1)
($) | | |
All
Other
Compensation
($) | | |
Total
($) | |
William
E. Shell, MD, Chief Executive Officer and | |
2014 | |
| 480,958 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 480,958 | |
Chief
Scientific Officer (2) | |
2013 | |
| 476,218 | | |
| 0 | | |
| 0 | | |
| 131,766 | | |
| 0 | | |
| 607,984 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
David S. Silver, MD, | |
2014 | |
| 440,427 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 181,000 | | |
| 621,427 | |
President
and Chief Operating Officer (3) | |
2013 | |
| 437,750 | | |
| 0 | | |
| 0 | | |
| 303,291 | | |
| 181,000 | | |
| 922,041 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Kim
Giffoni, Executive Vice President of Foreign | |
2014 | |
| 484,556 | | |
| | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 484,556 | |
Sales and Investor
Relations (2) | |
2013 | |
| 476,218 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 476,218 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
William B. Horne, | |
2014 | |
| 275,000 | | |
| 50,000 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 325,000 | |
Chief
Financial Officer (4) | |
2013 | |
| 69,519 | | |
| 0 | | |
| 0 | | |
| 72,558 | | |
| 0 | | |
| 142,077 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Douglas
P. Gintz, Chief Technology Officer and Chief | |
2014 | |
| 207,692 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 207,692 | |
Information Officer
(5) | |
2013 | |
| 180,000 | | |
| 0 | | |
| 0 | | |
| 73,829 | | |
| 0 | | |
| 253,829 | |
|
(1) |
Represents
the grant date fair value determined in accordance with Accounting Standards Codification (“ASC”)
718 Share Based Payments, for the stock option awards granted to our named executive officers for the periods presented. |
|
|
|
|
(2) |
During
December 2012 Dr. Shell and Mr. Giffoni began deferring the payment of their salaries. During 2013 and 2014 Dr. Shell deferred
$476,218 and $166,210, respectively. During 2013 and 2014 Mr. Giffoni deferred $413,719 and $342,258, respectively. |
|
|
|
|
(3) |
Other
compensation for Dr. Silver for 2013 and 2014 includes $175,000 in non-recoverable base commission payments and $6,000 for
an automobile allowance. During 2014 Dr. Silver deferred salary and commissions of $40,923. |
|
|
|
|
(4) |
Mr.
Horne’s employment with the Company began on August 19, 2013. During 2014 Mr. Horne deferred salary and bonus of $75,961. |
|
|
|
|
(5) |
During
2014 Mr. Gintz deferred salary of $13,731. |
Agreements
with Company Insiders
We
entered into employment agreements with each of Dr. Shell and Mr. Giffoni (the “Company Insiders”),
each dated June 1, 2010 and amended on January 31, 2011, pursuant to which they served as our Chief Executive Officer and Executive
Vice President of Foreign Sales and Investor Relations, respectively. Each of the Company Insiders employment agreements expired
on December 31, 2014.
The
agreements provided for each Company Insider to receive an initial annual base salary of $450,000, subject to cost of living increases
not to exceed 5% annually. In addition, the employment agreements provided that the Company Insiders’ annual base salary
shall be subject to increase in the event stated EBITDA thresholds are achieved. The Company Insiders were also eligible for discretionary
annual cash bonuses as determined by the Board.
Each
employment agreement with the Company Insiders also contained an indemnification provision wherein we promised to defend, indemnify,
and hold the employee harmless to the fullest extent permitted by law against any and all liabilities incurred by the employee
in connection with the Company Insider’s good faith performance of such individual’s employment.
Each
employment agreement contained customary non-competition provisions that extend to twelve months following the termination of
the Company Insider’s employment with us. The Company Insiders have also agreed to customary terms regarding the protection
and confidentiality of trade secrets, proprietary information and technology, designs and inventions.
On
January 9, 2015, the Company’s Board of Directors (the “Board”) voted to terminate Dr. Shell’s
employment with the Company and remove him as Chairman of the Board. At the time of his termination, Dr. Shell was the Company’s
Chief Executive Officer and Chief Scientific Officer. In connection with the termination of Dr. Shell’s employment, the
Board appointed Kim Giffoni as the Company’s Interim Chief Executive Officer.
David
S. Silver, MD
On
December 21, 2011, we entered into an employment agreement (the “Silver Employment Agreement”) with
David Silver, MD, a director of the Company, pursuant to which Dr. Silver began to serve as Executive Vice President of Medical
and Scientific Affairs of the Company for a term (the “Silver Term”) that commenced on November 28,
2011 (the “Silver Effective Date”) and which expired on December 31, 2014. Dr. Silver served as President
and Chief Operating Officer of the Company from March 2013 to December 2014. In connection with the termination of Dr. Shell’s
employment, the Board appointed Dr. Silver as the Company’s Chief Medical Officer. The Company does not currently have an
employment agreement with Dr. Silver.
Pursuant
to the Silver Employment Agreement, Dr. Silver received an initial base salary (the “Silver Base Salary”)
of $425,000 per year and a non-recoverable Base Commission of $175,000 per year (the “Silver Base Commission”).
Effective January 1, 2013 and for each calendar year of the Silver Term thereafter, the Silver Base Salary was increased by the
greater of (i) 3% or such greater percentage as determined by the Board of Directors and (ii) an annual inflation adjustment equivalent
to the inflation adjustment applied to the base salary of the Chief Executive Officer. Dr. Silver also received a monthly car
allowance of $500 and was entitled to participate in benefit plans available to all employees of the Company.
In
connection with the execution of the Silver Employment Agreement, Dr. Silver was granted ten-year options to purchase 400,000
shares of Common Stock (the “Silver Options”) with an exercise price equal to the fair market value
per share (as determined in accordance with Section 409A of the Internal Revenue Code). The Silver Options vested as to 50% of
the grant on the Effective Date and vested as to the remaining 50% on the one-year anniversary of the Effective Date.
The
Silver Employment Agreement contained an indemnification provision wherein the Company promised to defend, indemnify, and hold
Dr. Silver harmless to the fullest extent permitted by law against any and all liabilities incurred by Dr. Silver in connection
with his good faith performance of his duties and obligations pursuant to the Silver Employment Agreement. Dr. Silver has also
agreed to customary terms regarding the protection and confidentiality of trade secrets, proprietary information and technology,
designs and inventions.
William
B. Horne
On
August 15, 2013, we entered into an employment agreement with William B. Horne pursuant to which Mr. Horne would serve as our
Chief Financial Officer. On December 20, 2013, the Company and Mr. Horne entered into an amendment to the employment agreement
between the Company and Mr. Horne (collectively, the “Horne Employment Agreement”). The Horne Employment
Agreement expired on August 13, 2014. Pursuant to the Horne Employment Agreement, Mr. Horne was entitled to receive a base salary
(the “Horne Base Salary”) of $275,000 per year. Mr. Horne was also eligible to earn a cash or equity bonus (the “Horne
Bonus”) for each calendar year of his employment. If the Company maintained predetermined cash balances or there was a successful
resolution of the pending examination of the Company’s 2010 Federal and State Income tax returns, then Mr. Horne was entitled
to a one-time cash bonus of $50,000. Mr. Horne was entitled to participate in any of the Company’s benefit plans in effect
from time to time for employees of the Company. Mr. Horne was entitled to three weeks of paid vacation, to be scheduled and taken
in accordance with the Company’s standard vacation policies. In addition, Mr. Horne was entitled to sick leave and holidays
at full pay in accordance with the Company’s policies established and in effect from time to time.
In
connection with the execution of the Horne Employment Agreement, Mr. Horne was granted a seven–year options to purchase
150,000 shares of Common Stock (the “Horne Options”) with an exercise price equal to the fair market
value per share (as determined in accordance with Section 409A of the Internal Revenue Code). The Horne Options will vest over
four years, 25% per year, on the anniversary of the effective date, August 19, 2013.
The
Horne Employment Agreement contained an indemnification provision wherein the Company promised to defend, indemnify, and hold
Mr. Horne harmless to the fullest extent permitted by law against any and all liabilities incurred by Mr. Horne in connection
with his good faith performance of his duties and obligations pursuant to the Horne Employment Agreement. Mr. Horne has also agreed
to customary terms regarding the protection and confidentiality of trade secrets, proprietary information and technology, designs
and inventions.
Douglas
P. Gintz
On
January 6, 2012, we entered into a letter agreement with Douglas P. Gintz pursuant to which Mr. Gintz would serve as our Chief
Technology and Information Officer. On January 20, 2014, we increased Mr. Gintz’ annual base salary from $180,000 to $210,000.
Mr. Gintz is entitled to participate in any of the Company’s benefit plans in effect from time to time for employees of
the Company. Mr. Gintz is entitled to three weeks of paid vacation, to be scheduled and taken in accordance with the Company’s
standard vacation policies. In addition, Mr. Gintz is entitled to sick leave and holidays at full pay in accordance with the Company’s
policies established and in effect from time to time.
Outstanding
Equity Awards for Named Executive Officers
The
following table provides information regarding outstanding equity awards held by our Named Executive Officers as of December 31,
2014. Market value for stock options is calculated by taking the difference between the closing price of Targeted Medical common
stock on December 31, 2014 ($0.20) and the option exercise price, and multiplying it by the number of outstanding stock options.
OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2014
OPTION
AWARDS |
Name | |
Number
of Securities Underlying Unexercised Options (#) Exercisable | | |
Number
of Securities Underlying Unexercised Options (#) Unexercisable | | |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | |
Option
Exercise Price ($) | | |
Option
Expiration Date | | |
Market
Value of Unexercised Options ($) | |
William E. Shell, M.D. | |
| 100,000 | | |
| — | | |
| — | | |
| 1.00 | | |
| 6/22/2022 | | |
| — | |
| |
| 150,000 | | |
| — | | |
| — | | |
| 1.50 | | |
| 3/7/2020 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
David Silver, M.D. | |
| 275,077 | | |
| — | | |
| — | | |
| 0.77 | | |
| 5/1/2017 | | |
| — | |
| |
| 177,469 | | |
| — | | |
| — | | |
| 3.38 | | |
| 3/20/2020 | | |
| — | |
| |
| 400,000 | | |
| — | | |
| — | | |
| 3.38 | | |
| 12/21/2021 | | |
| — | |
| |
| 100,000 | | |
| — | | |
| — | | |
| 1.00 | | |
| 6/22/2022 | | |
| — | |
| |
| 150,000 | | |
| — | | |
| — | | |
| 1.50 | | |
| 3/7/2020 | | |
| — | |
| |
| 300,000 | | |
| — | | |
| — | | |
| 1.14 | | |
| 8/6/2023 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
William B. Horne | |
| 37,500 | | |
| 112,500 | (1) | |
| — | | |
| 0.88 | | |
| 12/10/2020 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Douglas P. Gintz | |
| 5,000 | | |
| — | | |
| — | | |
| 1.50 | | |
| 3/7/2020 | | |
| — | |
| |
| 50,000 | | |
| 25,000 | (2) | |
| — | | |
| 1.50 | | |
| 3/18/2020 | | |
| — | |
(1) | Unexercisable
Options vest over three years, 1/3 per year, on August 19, 2015, 2016 and 2017. |
| |
(2) | Unexercisable
Options vest on February 1, 2015. |
Director
Compensation
Our
Board of Directors has determined not to pay any cash fees to our non-independent directors, nor will we pay their expenses for
attending board meetings. In fiscal 2014 independent directors earned an annual fee of $24,000, $2,000 for each board meeting
they attended, of which there were four, $1,000 for each in-person board committee meeting attended, of which there were three,
and $750 for each telephonic board or committee meeting, of which there were thirteen. Mr. DeWald earned $3,750 for acting as
Non-executive Chairman of the Board and for acting as Chairman of the audit committee from June 6 to December 31, 2014, Mr. Nemiroff
earned $1,250 for acting as Chairman of the audit committee from January 1, 2014 through June 6, 2014, Mr. Webster earned $750
for acting as Chairman of the nominating committee from January 1, 2014 through June 6, 2014, Mr. Weems earned $1,500 for acting
as Chairman of the nominating committee from June 6, 2014 to December 31, 2014, Mr. Wenkart earned $2,250 for acting as Chairman
of the compensation committee from March 4, 2014 to December 31, 2014 and Paul Pelosi, Jr. earned $17,832 for acting as an Independent
Director of the Board from June 6, 2014 to December 31, 2014.
| |
Fees
earned | | |
| | |
| | |
All
other | | |
| |
| |
or
paid in | | |
Stock | | |
Option | | |
compensation | | |
| |
Name | |
cash
($) | | |
awards
($) | | |
awards
($) | | |
($) | | |
Total
($) | |
Maurice J. DeWald | |
| 46,250 | | |
| — | | |
| — | | |
| — | | |
| 46,250 | |
Donald J. Webster (1) | |
| 14,500 | | |
| — | | |
| — | | |
| — | | |
| 14,500 | |
Arthur R. Nemiroff (1) | |
| 15,750 | | |
| — | | |
| — | | |
| — | | |
| 15,750 | |
Kerry Weems | |
| 26,750 | | |
| — | | |
| — | | |
| — | | |
| 26,750 | |
Thomas Wenkart | |
| 42,500 | | |
| — | | |
| — | | |
| — | | |
| 42,500 | |
Paul F. Pelosi, Jr. (2) | |
| 17,832 | | |
| — | | |
| — | | |
| — | | |
| 17,832 | |
(1) | The
Company held its 2014 annual meeting of stockholders on June 6, 2014 (the “Annual
Meeting”). At the Annual Meeting, Messers. Webster and Nemiroff were not
elected to serve on the Company’s board of directors for an additional term. |
| |
(2) | Mr.
Pelosi resigned from the Board on February 2, 2015. |
Outstanding
Equity Awards for Directors
OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2014
OPTION
AWARDS |
Name | |
Number
of Securities Underlying Unexercised Options (#) Exercisable | | |
Number
of Securities Underlying Unexercised Options (#) Unexercisable | | |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | |
Option
Exercise Price ($) | | |
Option Expiration
Date | |
Market
Value of Unexercised Options ($) | |
Maurice J. DeWald | |
| 50,000 | | |
| — | | |
| — | | |
| 2.55 | | |
2/11/2021 | |
| — | |
| |
| 25,000 | | |
| — | | |
| — | | |
| 1.00 | | |
8/6/2022 | |
| — | |
| |
| 50,000 | | |
| — | | |
| — | | |
| 1.50 | | |
3/7/2023 | |
| — | |
| |
| 25,000 | | |
| — | | |
| — | | |
| 1.02 | | |
7/22/2023 | |
| — | |
Limitation
of Liability and Indemnification of Directors and Officers
Our
amended and restated certificate of incorporation limits the liability of our directors and officers for any liability arising
from an action to which such persons were party by reason of the fact that they were serving our company or another enterprise
at our request to the fullest extent permitted by Section 145 of the DGCL.
The
first paragraph of Article Tenth of the Company’s amended and restated certificate of incorporation provides: “To
the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of
expenses to) directors, officers and agent of the Corporation (and any other persons to which General Corporation Law permits
the Corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders
or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of
the General Corporation Law.” Our amended and restated bylaws further provide that any indemnification shall be made by
us in connection with a proceeding (or part thereof) initiated by a director or officer with a right to indemnification only if
(i) such proceeding (or part thereof) was authorized or ratified by our Board of Directors, (ii) such indemnification is expressly
required to be made by law, and (iii) we provide the indemnification, in our sole discretion, pursuant to the powers vested in
us under applicable law.
Pursuant
to our amended and restated bylaws, our directors and officers shall, to the fullest extent not prohibited by law, also have the
right to receive an advancement of expenses incurred in defending any proceeding in advance of its final disposition. To the extent
required under the DGCL, an advancement of expenses incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by such individual, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to us of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there
is no further right to appeal that such director or officer is not entitled to be indemnified for such expenses.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Beneficial
Ownership of Certain Beneficial Owners.
The
following table sets forth certain information regarding beneficial ownership of our common stock as of April 13, 2015 (1) by
each person who is known by us to own beneficially more than 5% of our outstanding common stock, (2) by each of our directors,
(3) by each Named Executive Officer identified above in the "Summary Compensation Table," and (4) by all of our executive
officers and directors as a group.
Beneficial
ownership has been determined in accordance with SEC rules, which generally attribute beneficial ownership of securities to each
person who possesses, either solely or shared with others, the power to vote or dispose of those securities.
SEC
rules also treat as beneficially owned all shares that a person would receive upon exercise or conversion of stock options, warrants
or other securities or rights held by that person that are immediately exercisable or convertible, or exercisable or convertible
within 60 days of the determination date, which in our case is April 13, 2015. Such shares are deemed to be outstanding for the
purpose of computing the number of shares beneficially owned and the percentage ownership of the person holding such options,
warrants securities or other rights, but these shares are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. On April 13, 2015, there were 26,768,756 shares of our common stock issued and outstanding and
no shares of preferred stock issued and outstanding.
| |
Beneficial
Ownership | |
| |
| | |
| | |
Number
of Shares | |
| |
| | |
| | |
Subject
to Options | |
| |
Number
of | | |
| | |
and
Warrants | |
| |
shares
of | | |
| | |
Exercisable
as of | |
| |
Common
Stock | | |
| | |
April
13, 2015 or | |
| |
Beneficially | | |
| | |
which
become | |
| |
Owned
as of | | |
Percent | | |
Exercisable
within | |
Greater
than 5% Beneficial Owners: (1) | |
April
13, 2015 | | |
of
Class | | |
60
Days of this Date | |
William
Shell, M.D. (2) | |
| 13,578,393 | | |
| 45.9 | % | |
| 2,836,872 | |
Thomas
R. Wenkart, M.D. (3) | |
| 4,610,089 | | |
| 15.9 | % | |
| 2,166,666 | |
Kim
Giffoni (4) | |
| 2,731,269 | | |
| 10.2 | % | |
| — | |
David
S. Silver, M.D. (5) | |
| 1,723,169 | | |
| 6.1 | % | |
| 1,402,546 | |
| |
| | | |
| | | |
| | |
Directors
and Named Executive Officers: (1) | |
| | | |
| | | |
| | |
Thomas
R. Wenkart, M.D. (3) | |
| 4,610,089 | | |
| 15.9 | % | |
| 2,166,666 | |
Kim
Giffoni (4) | |
| 2,731,269 | | |
| 10.2 | % | |
| — | |
David
S. Silver, M.D. (5) | |
| 1,723,169 | | |
| 6.1 | % | |
| 1,402,546 | |
Maurice
J. DeWald (6) | |
| 204,000 | | |
| * | | |
| 150,000 | |
Douglas
P. Gintz (7) | |
| 80,000 | | |
| * | | |
| 80,000 | |
William
B. Horne (8) | |
| 37,500 | | |
| * | | |
| 37,500 | |
All directors and named executive officers as a group
(6 persons) | |
| 9,386,027 | | |
| 30.7 | % | |
| 3,836,712 | |
* |
Less than 1% of
outstanding shares of common stock. |
|
|
(1) |
Unless
otherwise indicated, the business address of each of the individuals is c/o Targeted Medical Pharma, Inc., 2980 Beverly Glen
Circle, Suite 301, Los Angeles, California 90077. |
|
|
(2) |
Includes
600 shares held by William E. Shell, 6,300,215 shares held by the William Shell Survivor’s Trust, 3,422,748 shares held
by the Elizabeth Charuvastra Marital Trust, 295,473 shares held by the Elizabeth Charuvastra Exemption Trust, 506,077 shares
held by the Elizabeth Charuvastra and William Shell Family Trust, 216,408 shares of Common Stock beneficially owned by family
and friends of Dr. Shell over which the Elizabeth Charuvastra and William Shell Family Trust holds voting control; also includes
options to purchase 250,000 shares of Common Stock and warrants to purchase 2,423,965 shares of Common Stock held by William
Shell Survivor’s Trust and warrants to purchase 162,907 shares of Common Stock held by William E. Shell. Dr. Shell is
the Trustee of the afore-mentioned trusts in this footnote and he is the beneficial owner insofar as voting rights and control
thereof. |
|
|
(3) |
Includes
2,023,423 shares held by Derma Medical Systems, Inc. (“Derma”), 400,000 shares of which are held
by Ultera Pty Ltd ATF MPS Superannuation Fund (“Ultera”) and 20,000 shares of which are held by
Throven PTY Ltd. (“Throven”). Also includes 2,166,666 shares of Common Stock issuable upon conversion
of a convertible debenture in the principal amount of $650,000 held by Derma. The address of Derma, Ultera and Throven is
301 Catherine Street Leichhardt NSW 2040 Australia. Dr. Wenkart is the owner and President of Derma and owner and Director
of Ultera and Throven. Dr. Wenkart is the beneficial owner insofar as voting rights and control thereof. |
|
|
(4) |
Includes
76,021 shares held by Kim Giffoni. Includes 2,655,248 shares held by the Giffoni Family Trust Dated September 26, 2008 (“Giffoni
Family Trust”). The address of the Giffoni Family Trust is 245 Paradise Cove Road, Malibu, California 90265. Mr. Giffoni
and Ms. Olena B. Giffoni are the Co-Trustees of the Giffoni Family Trust and may both be considered to have beneficial ownership
of the Giffoni Family Trust’s interests in the Company. Mr. Giffoni and Ms. Giffoni may be deemed to share voting and
dispositive control with respect to the securities owned by the Giffoni Family Trust. Each of Mr. Giffoni and Ms. Giffoni
disclaim beneficial ownership of any shares in which each does not have a pecuniary interest. |
|
|
(5) |
Includes
options to purchase 1,402,546 shares of Common Stock. Includes 182,623 shares held by the Silver Family Trust and 138,000
shares held by Dr. Silver’s children. Dr. Silver has voting and dispositive control with respect to all these shares.
Dr. Silver disclaims beneficial ownership of any shares in which he does not have a pecuniary interest. |
|
|
(6) |
Includes
options to purchase 150,000 shares of Common Stock. |
|
|
(7) |
Includes
options to purchase 80,000 shares of Common Stock. |
|
|
(8) |
Includes
options to purchase 37,500 shares of Common Stock. |
Securities
Authorized for Issuance Under Equity Compensation Plans
| |
Number
of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | |
Weighted
average exercise price of outstanding options, warrants and rights (b) | | |
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
(a)) | |
| |
| | |
| | |
| |
Equity
compensation plans approved by security holders | |
| 2,421,041 | | |
$ | 1.77 | | |
| 2,091,497 | |
Equity
compensation plans not approved by security holders | |
| 4,919,372 | | |
$ | 1.61 | | |
| — | |
Total | |
| 7,340,413 | | |
$ | 1.67 | | |
| 2,091,497 | |
In
January 2011 the Company’s stockholders approved the Company’s 2011 Stock Incentive Plan (the “Plan”),
which provided for the issuance of a maximum of three million (3,000,000) shares of the Company’s common stock to be offered
to the Company’s directors, officers, employees, and consultants. On August 26, 2013, the Company’s Board of Directors
approved a two million (2,000,000) share increase in the number of shares issuable under the Plan, which was approved by the Company’s
stockholders on June 6, 2014. As of December 31, 2014, there were 2,421,041 options outstanding and 2,091,497 shares available
for future issuance.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
Certain
Relationships and Related Transactions
The
following is a description of transactions that were entered into with our executive officers, directors or 5% stockholders during
the past two fiscal years. We believe that all of the transactions described below were made on terms no less favorable to us
than could have been obtained from unaffiliated third parties. All future related party transactions will be approved by our audit
committee or a majority of our independent directors who do not have an interest in the transaction and who will have access,
at our expense, to our independent legal counsel. Information about employment agreements, including grants of options to purchase
our common stock, entered into with our executive officers is included in the section of this Annual Report titled “Executive
Compensation”.
As
of April 8, 2015, 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. The warrants are reflected
in the following table:
| |
| |
Number
of | | |
Exercise | | |
Expiration |
Issue
Date | |
Issued
to (a) | |
Warrants | | |
Price | | |
Date |
| |
| |
| | |
| | |
|
8/19/2011 | |
William Shell Survivor’s Trust | |
| 43,568 | | |
$ | 3.38 | | |
8/9/2016 |
9/1/2011 | |
William Shell Survivor’s Trust | |
| 23,237 | | |
$ | 3.38 | | |
9/1/2016 |
9/23/2011 | |
William Shell Survivor’s Trust | |
| 15,104 | | |
$ | 3.38 | | |
9/23/2016 |
9/28/2011 | |
William Shell Survivor’s Trust | |
| 58,091 | | |
$ | 3.38 | | |
9/28/2016 |
10/17/2011 | |
William Shell Survivor’s Trust | |
| 50,296 | | |
$ | 3.38 | | |
10/17/2016 |
10/20/2011 | |
William Shell Survivor’s Trust | |
| 36,982 | | |
$ | 3.38 | | |
10/20/2016 |
11/8/2011 | |
William Shell Survivor’s Trust | |
| 35,503 | | |
$ | 3.38 | | |
11/8/2016 |
11/22/2011 | |
William Shell Survivor’s Trust | |
| 41,420 | | |
$ | 3.38 | | |
11/22/2016 |
12/7/2011 | |
William Shell Survivor’s Trust | |
| 34,024 | | |
$ | 3.38 | | |
12/7/2016 |
1/4/2012 | |
William Shell Survivor’s Trust | |
| 8,876 | | |
$ | 3.38 | | |
1/4/2017 |
1/18/2012 | |
William Shell Survivor’s Trust | |
| 7,396 | | |
$ | 3.38 | | |
1/18/2017 |
1/19/2012 | |
William Shell Survivor’s Trust | |
| 29,586 | | |
$ | 3.38 | | |
1/19/2017 |
1/31/2012 | |
William Shell Survivor’s Trust | |
| 59,172 | | |
$ | 3.38 | | |
1/31/2017 |
2/1/2012 | |
William Shell Survivor’s Trust | |
| 73,964 | | |
$ | 3.38 | | |
2/1/2017 |
2/15/2012 | |
William Shell Survivor’s Trust | |
| 59,172 | | |
$ | 3.38 | | |
2/15/2017 |
2/29/2012 | |
William Shell Survivor’s Trust | |
| 71,006 | | |
$ | 3.38 | | |
3/1/2017 |
3/15/2012 | |
William Shell Survivor’s Trust | |
| 22,189 | | |
$ | 3.38 | | |
3/15/2017 |
3/28/2012 | |
William Shell Survivor’s Trust | |
| 44,379 | | |
$ | 3.38 | | |
3/28/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 250,000 | | |
$ | 1.00 | | |
4/11/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 100,000 | | |
$ | 1.00 | | |
4/19/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 200,000 | | |
$ | 1.00 | | |
4/26/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 150,000 | | |
$ | 1.00 | | |
5/2/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 110,000 | | |
$ | 1.00 | | |
5/10/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 220,000 | | |
$ | 1.00 | | |
5/24/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 190,000 | | |
$ | 1.00 | | |
5/25/2017 |
6/22/2012 | |
William Shell Survivor’s Trust | |
| 175,000 | | |
$ | 1.00 | | |
6/13/2017 |
6/27/2012 | |
William Shell Survivor’s Trust | |
| 220,000 | | |
$ | 1.00 | | |
6/27/2017 |
7/5/2012 | |
William Shell Survivor’s Trust | |
| 95,000 | | |
$ | 0.01 | | |
7/5/2017 |
7/24/2014 | |
William Shell, M.D. | |
| 162,907 | | |
$ | 0.80 | | |
7/24/2019 |
| |
Total | |
| 2,586,872 | | |
| | | |
|
(a)
On December 21, 2012, the Elizabeth Charuvastra and William Shell Family Trust dated July 27, 2006 and amended September
29, 2006 assigned 100% of its interests in the warrants to the William Shell Survivor’s Trust. William E. Shell, M.D. is
the former Chief Executive Officer of the Company.
The
warrant issued to Dr. Shell on July 14, 2014 (the “2014 Warrant”) was the only warrant that we issued
to a related party during the past two fiscal years. During the year ended December 31, 2014, the fair value of the 2014 Warrant,
which was issued in connection with a loan made to the Company by Dr. Shell, was determined using the Black Scholes Option Pricing
Model with the following assumptions:
Stock price | |
$ | 0.76 | |
Risk free interest rate | |
| 1.72 | % |
Expected life (in years) | |
| 5 | |
Volatility | |
| 67 | % |
Expected dividend yield | |
| 0 | % |
The
following table summarizes the status of the Company’s outstanding notes with related parties as of April 8, 2015.
| |
| |
Original | | |
Outstanding | | |
| | |
| | |
|
| |
| |
Note | | |
Note | | |
Principal | | |
Interest | | |
Date |
Date | |
Issued
to (a) | |
Amount | | |
Amount | | |
Payments | | |
Rate | | |
Payable |
| |
| |
| | |
| | |
| | |
| | |
|
01/31/11 | |
William Shell Survivor’s Trust | |
$ | 293,334 | | |
$ | — | | |
$ | 293,334 | | |
| 6.00 | % | |
On Demand |
01/31/11 | |
Giffoni Family Trust | |
| 146,666 | | |
| — | | |
| 146,666 | | |
| 6.00 | % | |
12/01/12 |
05/04/11 | |
William
Shell Survivor’s Trust (b) | |
| 200,000 | | |
| — | | |
| 200,000 | | |
| 3.25 | % | |
On Demand |
05/04/11 | |
Giffoni Family Trust | |
| 100,000 | | |
| — | | |
| 100,000 | | |
| 3.25 | % | |
05/04/16 |
06/12/11 | |
William
Shell Survivor’s Trust (b) | |
| 200,000 | | |
| — | | |
| 200,000 | | |
| 3.25 | % | |
On Demand |
06/12/11 | |
Giffoni Family Trust | |
| 100,000 | | |
| — | | |
| 100,000 | | |
| 3.25 | % | |
06/12/16 |
06/18/11 | |
William
Shell Survivor’s Trust (b) | |
| 150,000 | | |
| — | | |
| 150,000 | | |
| 3.25 | % | |
On Demand |
08/19/11 | |
William
Shell Survivor’s Trust (b) | |
| 150,000 | | |
| — | | |
| 150,000 | | |
| 3.95 | % | |
On Demand |
09/01/11 | |
Lisa
Liebman (d) | |
| 80,000 | | |
| 80,000 | | |
| — | | |
| 3.25 | % | |
On Demand |
09/23/11 | |
William Shell Survivor’s Trust | |
| 52,000 | | |
| — | | |
| 52,000 | | |
| 3.95 | % | |
On Demand |
09/28/11 | |
William
Shell Survivor’s Trust (b) | |
| 200,000 | | |
| — | | |
| 200,000 | | |
| 3.95 | % | |
On Demand |
10/17/11 | |
Lisa
Liebman (d) | |
| 170,000 | | |
| 170,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
10/20/11 | |
William Shell Survivor’s Trust | |
| 125,000 | | |
| — | | |
| 125,000 | | |
| 3.95 | % | |
On Demand |
11/10/11 | |
Lisa Liebman | |
| 120,000 | | |
| 120,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
11/22/11 | |
William Shell Survivor’s Trust | |
| 140,000 | | |
| — | | |
| 140,000 | | |
| 3.95 | % | |
On Demand |
12/07/11 | |
William Shell Survivor’s Trust | |
| 115,000 | | |
| — | | |
| 115,000 | | |
| 3.95 | % | |
On Demand |
01/04/12 | |
Lisa
Liebman (d) | |
| 30,000 | | |
| 30,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
01/18/12 | |
William
Shell Survivor’s Trust (b) | |
| 25,000 | | |
| — | | |
| 25,000 | | |
| 3.95 | % | |
On Demand |
01/19/12 | |
Lisa
Liebman (d) | |
| 100,000 | | |
| 100,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
01/31/12 | |
William
Shell Survivor’s Trust (c) | |
| 200,000 | | |
| — | | |
| 200,000 | | |
| 3.95 | % | |
On Demand |
02/01/12 | |
William
Shell Survivor’s Trust (c) | |
| 250,000 | | |
| — | | |
| 250,000 | | |
| 3.95 | % | |
On Demand |
02/15/12 | |
William
Shell Survivor’s Trust (c) | |
| 200,000 | | |
| — | | |
| 200,000 | | |
| 3.95 | % | |
On Demand |
02/29/12 | |
William Shell Survivor’s Trust | |
| 240,000 | | |
| 207,411 | | |
| 32,589 | | |
| 3.95 | % | |
On Demand |
03/15/12 | |
William
Shell Survivor’s Trust (b) | |
| 75,000 | | |
| — | | |
| 75,000 | | |
| 3.95 | % | |
On Demand |
03/28/12 | |
William
Shell Survivor’s Trust (c) | |
| 150,000 | | |
| — | | |
| 150,000 | | |
| 3.95 | % | |
On Demand |
04/11/12 | |
William Shell Survivor’s Trust | |
| 250,000 | | |
| 250,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
04/19/12 | |
William Shell Survivor’s Trust | |
| 100,000 | | |
| 100,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
04/26/12 | |
William
Shell Survivor’s Trust (c) | |
| 200,000 | | |
| — | | |
| 200,000 | | |
| 3.95 | % | |
On Demand |
05/02/12 | |
William Shell Survivor’s Trust | |
| 150,000 | | |
| 150,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
05/10/12 | |
William Shell Survivor’s Trust | |
| 110,000 | | |
| 110,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
05/24/12 | |
William Shell Survivor’s Trust | |
| 220,000 | | |
| 220,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
05/25/12 | |
William Shell Survivor’s Trust | |
| 190,000 | | |
| 190,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
06/13/12 | |
William Shell Survivor’s Trust | |
| 175,000 | | |
| 175,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
06/27/12 | |
William Shell Survivor’s Trust | |
| 220,000 | | |
| 220,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
07/05/12 | |
William Shell Survivor’s Trust | |
| 95,000 | | |
| 95,000 | | |
| — | | |
| 3.95 | % | |
On Demand |
07/20/12 | |
AFH
Holding and Advisory, LLC (e) | |
| 585,448 | | |
| — | | |
| 585,448 | | |
| 8.50 | % | |
07/20/14 |
10/12/12 | |
William Shell Survivor’s Trust | |
| 7,000 | | |
| 7,000 | | |
| — | | |
| 12.00 | % | |
On Demand |
12/04/12 | |
William Shell Survivor’s Trust | |
| 50,000 | | |
| 50,000 | | |
| — | | |
| 12.00 | % | |
On Demand |
12/07/12 | |
William Shell Survivor’s Trust | |
| 100,000 | | |
| 100,000 | | |
| — | | |
| 12.00 | % | |
On Demand |
07/24/14 | |
William Shell, M.D. | |
| 130,000 | | |
| 130,000 | | |
| — | | |
| 8.00 | % | |
On Demand |
01/13/15 | |
Derma Medical Systems, Inc. | |
| 650,000 | | |
| 650,000 | | |
| — | | |
| 4.00 | % | |
01/12/18 |
| |
| |
$ | 6,844,448 | | |
$ | 3,154,411 | | |
$ | 3,690,037 | | |
| | | |
|
|
(a) |
On
December 21, 2012, the Elizabeth Charuvastra and William Shell Family Trust Dated July
27, 2006 and Amended September 29, 2006 (the “Family Trust”)
assigned 100% of its interest in its notes to the William Shell Survivor’s
Trust (the “Survivor’s Trust”). The Survivor's Trust
then assigned its interest in certain of the notes to Lisa Liebman. The notes assigned
to Lisa Liebman represent $500,000 in original note amount. William E. Shell was the
former Chief Executive Officer and a former director of the Company.
|
|
|
|
|
(b) |
These
notes were converted into an aggregate of 584,795 shares of the Company’s common stock on June 3, 2013. |
|
|
|
|
(c) |
These
notes were converted into an aggregate of 1,184,834 shares of the Company’s common stock on November 25, 2013. |
|
|
|
|
(d) |
Lisa
Liebman is married to William E. Shell. M.D., the former Chief Executive Officer and
a former director of the Company.
|
|
|
|
|
(e) |
Mr.
Amir F. Heshmatpour is the managing partner of AFH Holding and Advisory and may be considered to have beneficial ownership
of AFH Advisory’s interests in the Company. A portion of this promissory note, in the amount of $287,648, was converted
into 287,648 shares of the Company’s common stock on April 12, 2013. |
On
June 22, 2012 the terms of all notes originally payable to the Family Trust were modified to make the principal payable on demand
and accrued interest payable on a quarterly basis. The Company recorded any remaining note discount as of June 22, 2012. As noted
above those notes were assigned by a successor trust to the Survivor’s Trust. On December 21, 2012 the Survivor’s
Trust assigned notes totaling $500,000 in original note amount to his wife Lisa Liebman.
On
March 13, 2015, we received from counsel for Dr. Shell, Ms. Liebman, the Family Trust and the Survivors’ Trust, a written
demand for repayment of all principal and interest outstanding on all outstanding notes. The Company disputes the enforceability
of the demand.
Item
14. Principal Accounting Fees and Services.
Fees
Paid to Independent Registered Public Accountants for 2014(1) and 2013(2)
The
following table sets forth fees billed to us by our independent registered public accounting firms during the fiscal years ended
December 31, 2014 and December 31, 2013 for: (i) services rendered for the audit of our annual financial statements and the review
of our quarterly financial statements; (ii) services by our independent registered public accounting firms that are reasonably
related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees; (iii) services
rendered in connection with tax compliance, tax advice and tax planning; and (iv) all other fees for services rendered.
| |
December
31, 2014 | | |
December
31, 2013 | |
Audit Services | |
$ | 133,364 | | |
$ | 206,303 | |
Audit Related Services | |
$ | — | | |
$ | 1,000 | |
Tax Services | |
$ | 8,651 | | |
$ | 23,350 | |
All Other Services | |
$ | 1,260 | | |
$ | 1,950 | |
Total | |
$ | 143,275 | | |
$ | 232,603 | |
|
(1) |
Information
regarding the fees billed to the Company for the year ended December 31, 2014 are primarily related to services provided by
Marcum LLP (“Marcum”). The amounts attributable to Marcum for Audit Services and Tax Services during
2014 were $129,154 and $8,651, respectively. The amounts attributable to EFP Rotenberg, LLP (“EFP”)
for Audit Services and Tax Services during 2014 were $4,210 and nil, respectively. Further, Audit Related Services and All
Other Services were solely attributable to Marcum during 2014. |
|
|
|
|
(2) |
Information
regarding the fees billed to the Company for the year ended December 31, 2013 are based on services provided by EFP
from 1/1/13 to 6/6/13 and services provided by Marcum from 6/10/13 to 12/31/13. The amounts attributable to EFP for
Audit Services and Tax Services during 2013 were $101,500 and $4,200, respectively. The amounts attributable to Marcum for
Audit Services and Tax Services during 2013 were $104,803 and $19,150, respectively. Further, Audit Related Services and All
Other Services were solely attributable to Marcum during 2013. |
Audit
Services. This category includes fees billed for professional services rendered for the audit of our annual financial statements,
review of financial statements included in our Form 10-Q quarterly reports, and services that are typically provided by the independent
registered public accounting firms in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-Related
Services. This category includes fees billed for assurance and related services that are reasonably related to the performance
of the audit or review of our financial statements, and are not included in the fees reported in the table above under “Audit
Services.” These services include attest services that are not required by statute or regulation and consultations concerning
financial accounting and reporting standards.
Tax
Services. This category includes tax services provided with respect to tax consulting, tax compliance, and tax audit assistance.
All
Other Services. This category consists of services that are not included in the category descriptions defined above under
“Audit Services,” “Audit-Related Services,” or “Tax Services.”
Policies
and Procedures Relating to Approval of Services by our Independent Registered Public Accountants
The
Audit Committee is solely responsible for the approval in advance of all audit and permitted non-audit services to be provided
by our independent registered public accounting firms (including the fees and other terms thereof), subject to the de minimus
exceptions for non-audit services provided by Section 10A(i)(1)(B) of the Exchange Act, which services are subsequently approved
by the Audit Committee prior to the completion of the audit. None of the fees listed above are for services rendered pursuant
to such de minimus exceptions.
PART
IV.
Item
15. Exhibits.
Exhibit
Number |
|
Description |
2.11 |
|
Agreement
and Plan of Reorganization (Incorporated by reference to Exhibit 2.1 of the Company’s current report on Form 8-K filed
with the Securities and Exchange Commission on February 3, 2011) |
|
|
|
3.1 |
|
Amended
and Restated Certificate of Incorporation of Targeted Medical Pharma, Inc. (Incorporated by reference to Exhibit 3.1 of the
Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2011) |
|
|
|
3.2 |
|
Amended
and Restated Bylaws of Targeted Medical Pharma, Inc. (Incorporated by reference to Exhibit 3.2 of the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2011) |
|
|
|
4.1 |
|
Specimen
common stock certificate (Incorporated by reference to Exhibit 4.1 of the Company’s current report on Form 8-K filed
with the Securities and Exchange Commission on April 22, 2011) |
|
|
|
10.1 |
|
Employment
Agreement, dated June 1, 2010, by and between Targeted Medical Pharma, Inc. and William E. Shell, MD (Incorporated by reference
to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February
3, 2011) |
|
|
|
10.2 |
|
Employment
Agreement, dated June 1, 2010, by and between Targeted Medical Pharma, Inc. and Kim Giffoni (Incorporated by reference to
Exhibit 10.3 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February
3, 2011) |
|
|
|
10.3 |
|
Amendment
No. 1 to Employment Agreement, dated January 31, 2011, by and between Targeted Medical Pharma, Inc. and William Shell, MD
(Incorporated by reference to Exhibit 10.9 of the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on February 3, 2011) |
|
|
|
10.4 |
|
Amendment
No. 1 to Employment Agreement, dated January 31, 2011, by and between Targeted Medical Pharma, Inc. and Kim Giffoni (Incorporated
by reference to Exhibit 10.11 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission
on February 3, 2011) |
|
|
|
10.5 |
|
Employment
Agreement, effective as of November 28, 2011, by and between Targeted Medical Pharma, Inc. and David Silver, M.D. (Incorporated
by reference to Exhibit 10.2 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission
on December 28, 2011) |
|
|
|
10.6 |
|
Employment
Agreement, effective as of August 19, 2013, by and between Targeted Medical Pharma, Inc. and William B. Horne (Incorporated
by reference to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission
on August 22, 2013) |
|
|
|
10.7 |
|
Amendment
to Employment Agreement, dated December 20, 2013, by and between Targeted Medical Pharma, Inc. and William B. Horne (Incorporated
by reference to Exhibit 10.2 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission
on January 3, 2014) |
|
|
|
10.8 |
|
Targeted
Medical Pharma, Inc. 2011 Stock Incentive Plan (Incorporated by reference to Exhibit 10.12 of the Company’s current
report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2011) |
Exhibit
Number |
|
Description |
10.9 |
|
Form
of Non-qualified Stock Option Agreement (Time-based and Performance-based Vesting) under the Targeted Medical Pharma, Inc.
2011 Stock Incentive Plan (Incorporated by reference to Exhibit 10.13 of the Company’s current report on Form 8-K filed
with the Securities and Exchange Commission on February 3, 2011) |
|
|
|
10.10 |
|
Form
of Non-qualified Stock Option Agreement (Time-based Vesting) under the Targeted Medical Pharma, Inc. 2011 Stock Incentive
Plan (Incorporated by reference to Exhibit 10.14 of the Company’s current report on Form 8-K filed with the Securities
and Exchange Commission on February 3, 2011) |
|
|
|
10.11 |
|
Form
of Restricted Stock Agreement (Time-based and Performance-based Vesting) under the Targeted Medical Pharma, Inc. 2011 Stock
Incentive Plan (Incorporated by reference to Exhibit 10.15 of the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on February 3, 2011) |
|
|
|
10.12 |
|
Form
of Restricted Stock Agreement (Time-based Vesting) under the Targeted Medical Pharma, Inc. 2011 Stock Incentive Plan (Incorporated
by reference to Exhibit 10.16 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission
on February 3, 2011) |
|
|
|
10.13 |
|
Targeted
Medical Pharma, Inc. Profit Sharing Plan (Incorporated by reference to Exhibit 10.17 of the Company’s current report
on Form 8-K filed with the Securities and Exchange Commission on February 3, 2011) |
|
|
|
10.14 |
|
Amended
and Restated Office Lease, dated May 1, 2014, by and between Targeted Medical Pharma, Inc. and Circle Partnership, a limited
partnership |
|
|
|
10.15 |
|
Registration
Rights Agreement, dated January 31, 2011 (Incorporated by reference to Exhibit 10.19 of the Company’s current report
on Form 8-K filed with the Securities and Exchange Commission on February 3, 2011) |
|
|
|
10.16 |
|
Purchase
Agreement, dated April 7, 2010, by and between Targeted Medical Pharma, Inc. and Global Med Management LLC (Incorporated by
reference to Exhibit 10.23 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission
on February 3, 2011) |
|
|
|
10.17 |
|
Purchase
Agreement, dated October 20, 2008, by and between Targeted Medical Pharma, Inc. and Global Med Management LLC (Incorporated
by reference to Exhibit 10.24 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission
on February 3, 2011) |
|
|
|
10.18 |
|
Form
of Physician Purchase Agreement (Incorporated by reference to Exhibit 10.28 of Amendment No. 1 to Form S-1 filed with the
Securities and Exchange Commission on April 22, 2011) |
|
|
|
10.19 |
|
Form
of Billing and Claims Processing Services Agreement (Products Purchased from TMP) (Incorporated by reference to Exhibit 10.29
of Amendment No. 1 to Form S-1 filed with the Securities and Exchange Commission on April 22, 2011) |
|
|
|
10.20 |
|
Form
of Distributor Purchase Agreement (Incorporated by reference to Exhibit 10.30 of Amendment No. 1 to Form S-1 filed with the
Securities and Exchange Commission on April 22, 2011) |
|
|
|
10.21 |
|
Form
of Billing and Claims Processing Services Agreement (Products Purchased from Distributor) Processing (Incorporated by reference
to Exhibit 10.31 of Amendment No. 1 to Form S-1 filed with the Securities and Exchange Commission on April 22, 2011) |
|
|
|
10.22 |
|
Workers’
Compensation Receivables Funding, Assignment and Security Agreement, effective as of June 27, 2013 (Incorporated by reference
to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on July
3, 2013) |
Exhibit
Number |
|
Description |
10.28 |
|
First
Amendment to Workers’ Compensation Receivables Funding, Assignment and Security Agreement, effective as of October 1,
2013 (Incorporated by reference to Exhibit 10.2 of the Company’s quarterly report on Form 10-Q filed with the Securities
and Exchange Commission on November 13, 2013) |
|
|
|
10.29 |
|
Second
Amendment to Workers’ Compensation Receivables Funding, Assignment and Security Agreement, effective as of October 23,
2013 (Incorporated by reference to Exhibit 10.3 of the Company’s quarterly report on Form 10-Q filed with the Securities
and Exchange Commission on November 13, 2013) |
|
|
|
10.30 |
|
Form
of Securities Purchase Agreement, dated January 13, 2015, by and between Targeted Medical Pharma, Inc. and Derma Medical Systems,
Inc. (Incorporated by reference to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the Securities
and Exchange Commission on January 20, 2015) |
|
|
|
10.31 |
|
Form
of Senior Secured Convertible Debenture, dated January 13, 2015, by and between Targeted Medical Pharma, Inc. and Derma Medical
Systems, Inc. (Incorporated by reference to Exhibit 10.2 of the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on January 20, 2015) |
|
|
|
10.32 |
|
Form
of Security Agreement, dated January 13, 2015, by and between Targeted Medical Pharma, Inc. and Derma Medical Systems, Inc.
(Incorporated by reference to Exhibit 10.3 of the Company’s current report on Form 8-K filed with the Securities and
Exchange Commission on January 20, 2015) |
|
|
|
10.33 |
|
Promissory
Note, dated February 23, 2015, by and between Targeted Medical Pharma, Inc. and Shlomo Rechnitz (Incorporated by reference
to Exhibit 10.1 of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February
27, 2015) |
|
|
|
14 |
|
Code
of Ethics (Incorporated by reference to Exhibit 14 of Amendment No. 1 to Form S-1 filed with the Securities and Exchange Commission
on April 22, 2011) |
|
|
|
21 |
|
List
of Subsidiaries (Incorporated by reference to Exhibit 21 of Amendment No. 1 to Form S-1 filed with the Securities and Exchange
Commission on April 22, 2011) |
|
|
|
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.
1
The parties to the Merger Agreement have made to each other representations, warranties and covenants, which are qualified
by information in confidential disclosure schedules delivered together with the Merger Agreement. While the Registrant does not
believe that these schedules contain information that the securities laws require it to publicly disclose and therefore are not
filed herewith, other than information that has already been so disclosed, the disclosure schedules do contain information that
modifies, qualifies and creates exceptions to the representations, warranties and covenants set forth in the Merger Agreement.
Accordingly, the representations, warranties and covenants should not be relied on as characterizations of the actual state of
facts, since they may be modified by the disclosure schedules.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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:
April 14, 2015 |
By: |
/s/
Kim Giffoni |
|
|
Kim Giffoni |
|
|
Chief Executive
Officer and |
|
|
Principal
Executive Officer |
Date:
April 14, 2015 |
By: |
/s/
William B. Horne |
|
|
William
B. Horne |
|
|
Chief Financial
Officer and |
|
|
Principal
Accounting Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/
Kerry N. Weems |
|
/s/
David S. Silver |
Kerry N.
Weems |
|
David S.
Silver, MD |
Chairman
of the Board and Director |
|
Chief Medical
Officer and |
April 14, 2015 |
|
Director |
|
|
April 14, 2015 |
|
|
|
/s/
Kim Giffoni |
|
/s/
Maurice J. DeWald |
Kim Giffoni |
|
Maurice
J. DeWald |
Director |
|
Director |
April 14, 2015 |
|
April 14, 2015 |
|
|
|
/s/
Thomas Wenkart |
|
|
Thomas
Wenkart, MD |
|
|
Director |
|
|
April 14, 2015 |
|
|
Exhibit
31.1
CERTIFICATIONS
I,
Kim Giffoni, as Chief Executive Officer of Targeted Medical Pharma, Inc., certify that:
1. |
I
have reviewed this annual report on Form 10-K of Targeted Medical Pharma, Inc. for the year ended December 31, 2014; |
|
|
2. |
Based
on my knowledge, this 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 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: April
14, 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 annual report on Form 10-K of Targeted Medical Pharma, Inc. for the year ended December 31, 2014; |
|
|
2. |
Based
on my knowledge, this 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 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: April
14, 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 annual report on Form 10-K of Targeted Medical Pharma, Inc. (the “Company”) for
the year ended December 31, 2014, 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:
April 14, 2015 |
By:
|
/s/
Kim Giffoni |
|
|
Kim Giffoni |
|
|
Chief Executive
Officer |
|
|
|
Date: April 14,
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-K 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.
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