UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013.
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 incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2980 Beverly Glen Circle, Los Angeles, California
 
90077
(Address of principal executive offices)
 
(Zip Code)
 
(310) 474-9809
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   þ    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   ¨
Accelerated filer   ¨
Non-accelerated filer   ¨
Smaller reporting company   þ
 
 
(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  þ
Shares outstanding of the Registrant’s common stock:
 
Class
Outstanding as of November 13, 2013
Common stock, $0.001 par value
24,164,680
 
 
 
TARGETED MEDICAL PHARMA, INC.
 
FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 2013
 
TABLE OF CONTENTS
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Financial Statements
1
 
Condensed Consolidated Balance Sheets
1
 
Condensed Consolidated Statements of Operations
2
 
Condensed Consolidated Statements of Cash Flows
3
 
Notes to Condensed Consolidated Financial Statements
5
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
34
ITEM 4.
Controls and Procedures
34
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
ITEM 1.
Legal Proceedings
35
ITEM 1A.
Risk Factors
35
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35
ITEM 3.
Defaults Upon Senior Securities
36
ITEM 4.
Mine Safety Disclosures
36
ITEM 5.
Other Information
36
ITEM 6.
Exhibits
36
 
 
 
SIGNATURES
 
37
 
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements.
 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
167,873
 
$
326,603
 
Accounts receivable, net
 
 
397,236
 
 
353,993
 
Inventories
 
 
603,812
 
 
478,499
 
Prepaid income taxes
 
 
900,863
 
 
900,863
 
Deferred income tax asset
 
 
 
 
251,436
 
Escrow receivable
 
 
123,047
 
 
 
Other current assets
 
 
252,354
 
 
217,771
 
 
 
 
 
 
 
 
 
TOTAL CURRENT ASSETS
 
 
2,445,185
 
 
2,529,165
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
259,615
 
 
340,096
 
Intangible assets, net
 
 
2,226,468
 
 
2,318,619
 
Deferred income tax asset
 
 
 
 
5,414,188
 
Other assets
 
 
 
 
26,679
 
 
 
 
 
 
 
 
 
TOTAL ASSETS
 
$
4,931,268
 
$
10,628,747
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
2,237,157
 
$
2,161,021
 
Accrued liabilities
 
 
7,743,144
 
 
4,862,636
 
Notes payable, current portion, net
 
 
3,997,286
 
 
5,032,942
 
Derivative liability
 
 
44,755
 
 
188,475
 
 
 
 
 
 
 
 
 
TOTAL CURRENT LIABILITIES
 
 
14,022,342
 
 
12,245,074
 
 
 
 
 
 
 
 
 
Notes payable, less current portion, net
 
 
 
 
385,709
 
 
 
 
 
 
 
 
 
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;
 
 
 
 
 
 
 
24,004,680 shares issued and outstanding as of September 30, 2013;
 
 
 
 
 
 
 
23,008,782 shares issued and outstanding at December 31, 2012
 
 
24,005
 
 
23,009
 
Additional paid-in capital
 
 
14,404,616
 
 
11,659,744
 
Accumulated deficit
 
 
(23,519,695)
 
 
(13,684,789)
 
 
 
 
 
 
 
 
 
TOTAL STOCKHOLDERS' DEFICIT
 
 
(9,091,074)
 
 
(2,002,036)
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
4,931,268
 
$
10,628,747
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
1

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
REVENUES
 
 
 
 
 
 
 
 
 
 
 
 
 
Product revenue
 
$
1,949,844
 
$
1,812,306
 
$
6,076,219
 
$
4,416,121
 
Service revenue
 
 
244,550
 
 
264,226
 
 
846,694
 
 
483,822
 
Total revenue
 
 
2,194,394
 
 
2,076,532
 
 
6,922,913
 
 
4,899,943
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COST OF SALES
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of product sold
 
 
195,033
 
 
639,071
 
 
843,963
 
 
1,008,742
 
Cost of services sold
 
 
438,040
 
 
477,225
 
 
1,423,254
 
 
1,363,549
 
Total cost of sales
 
 
633,073
 
 
1,116,296
 
 
2,267,217
 
 
2,372,291
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
1,561,321
 
 
960,236
 
 
4,655,696
 
 
2,527,652
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
103,604
 
 
36,816
 
 
169,717
 
 
94,089
 
Selling, general and administrative
 
 
2,962,346
 
 
2,431,049
 
 
8,316,928
 
 
7,209,421
 
Total operating expenses
 
 
3,065,950
 
 
2,467,865
 
 
8,486,645
 
 
7,303,510
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(1,504,629)
 
 
(1,507,629)
 
 
(3,830,949)
 
 
(4,775,858)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSES)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
(239,102)
 
 
(326,587)
 
 
(480,775)
 
 
(2,269,244)
 
Change in fair value of warrant liability
 
 
22,344
 
 
10,777
 
 
143,720
 
 
10,777
 
Total other expenses
 
 
(216,758)
 
 
(315,810)
 
 
(337,055)
 
 
(2,258,467)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss before income taxes
 
 
(1,721,387)
 
 
(1,823,439)
 
 
(4,168,004)
 
 
(7,034,325)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
 
 
1,278
 
 
(581,996)
 
 
5,666,902
 
 
(1,992,142)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET LOSS
 
$
(1,722,665)
 
$
(1,241,443)
 
$
(9,834,906)
 
$
(5,042,183)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per common share
 
$
(0.07)
 
$
(0.06)
 
$
(0.42)
 
$
(0.23)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted weighted average common shares outstanding
 
 
23,947,343
 
 
22,010,446
 
 
23,454,877
 
 
21,970,014
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
   
 
2

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net loss
 
$
(9,834,906)
 
$
(5,042,183)
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
Depreciation
 
 
107,758
 
 
139,467
 
Amortization
 
 
201,399
 
 
185,700
 
Amortization of debt discount
 
 
303,993
 
 
2,133,847
 
Stock-based compensation to employees and directors
 
 
690,751
 
 
662,981
 
Stock-based compensation to consultants
 
 
17,469
 
 
 
Deferred income tax benefit
 
 
(1,606,673)
 
 
(1,992,142)
 
Allowance against deferred tax assets
 
 
7,272,297
 
 
 
Change in fair value of warrant derivative liability
 
 
(143,720)
 
 
(10,777)
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
 
(43,243)
 
 
345,440
 
Inventories
 
 
(125,313)
 
 
(358,381)
 
Prepaid income taxes
 
 
 
 
(102,000)
 
Other current assets
 
 
6,667
 
 
(54,365)
 
Other assets
 
 
26,679
 
 
(20,000)
 
Accounts payable
 
 
76,136
 
 
1,514,400
 
Accrued liabilities
 
 
2,880,508
 
 
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
 
 
(170,198)
 
 
(2,598,013)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Acquisition of intangible assets
 
 
(109,248)
 
 
(145,779)
 
Purchase of property and equipment
 
 
(27,277)
 
 
(111,862)
 
 
 
 
 
 
 
 
 
Net cash used in investing activities
 
 
(136,525)
 
 
(257,641)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from notes payable - related parties
 
 
 
 
2,980,000
 
Payments and decrease on notes payable - related parties
 
 
(437,710)
 
 
 
Proceeds from notes payable, net
 
 
585,703
 
 
 
Payments due to related parties
 
 
 
 
(267,500)
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
 
 
147,993
 
 
2,712,500
 
 
 
 
 
 
 
 
 
Net decrease in cash
 
 
(158,730)
 
 
(143,154)
 
 
 
 
 
 
 
 
 
Cash at beginning of period
 
 
326,603
 
 
147,364
 
 
 
 
 
 
 
 
 
Cash at end of period
 
$
167,873
 
$
4,210
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
 
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
 
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
Cash paid during the period for interest
 
$
353,299
 
 
 
Cash paid during the period for income taxes
 
 
 
$
102,000
 
 
 
 
 
 
 
 
 
Non cash investing and financing activities:
 
 
 
 
 
 
 
Cambridge Medical Funding Group:
 
 
 
 
 
 
 
Escrow receivable
 
$
123,047
 
 
 
Deferred loan fees
 
$
41,250
 
 
 
Note discount from issuance of warrant in connection with notes payable
 
$
750,000
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock from conversion of notes payable, related parties
 
$
1,287,648
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited
 
1. DESCRIPTION OF BUSINESS
 
Targeted Medical Pharma, Inc. (the “Company”), also doing business as Physician Therapeutics (“PTL”), is a specialty pharmaceutical company that develops and commercializes nutrient and pharmaceutical based therapeutic systems.  The Company also does business as Laboratory Industry Services (“LIS”), which is a facility for the performance of diagnostic testing.  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 had no revenue outside of the United States for the nine months ended September 30, 2013 and 2012, respectively.  The Company’s operations are organized into two reportable segments: TMP and CCPI.
 
      TMP: This segment includes PTL and LIS.  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, generic and branded products.  The TMP segment also manages contracts and chargebacks.
 
      CCPI: This segment provides point-of-care dispensing solutions and billing and collections services.
 
Results for the three and nine months ended September 30, 2013 and 2012, are reflected in the table below:
 
For the three months ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
TMP
 
CCPI
 
2013 (unaudited)
 
 
 
 
 
 
 
 
 
 
Gross sales
 
$
2,194,394
 
$
1,949,844
 
$
244,550
 
Gross profit (loss)
 
$
1,561,321
 
$
1,754,811
 
$
(193,490)
 
Net loss
 
$
(1,722,665)
 
$
(1,529,175)
 
$
(193,490)
 
Total assets
 
$
4,931,268
 
$
4,536,294
 
$
394,974
 
 
 
 
 
 
 
 
 
 
 
 
2012 (unaudited)
 
 
 
 
 
 
 
 
 
 
Gross sales
 
$
2,076,532
 
$
1,812,306
 
$
264,226
 
Gross profit (loss)
 
$
960,236
 
$
1,173,235
 
$
(212,999)
 
Net loss
 
$
(1,241,443)
 
$
(1,028,444)
 
$
(212,999)
 
Total assets
 
$
11,063,776
 
$
11,023,061
 
$
40,715
 
 
For the nine months ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
TMP
 
CCPI
 
2013 (unaudited)
 
 
 
 
 
 
 
 
 
 
Gross sales
 
$
6,922,913
 
$
6,076,219
 
$
846,694
 
Gross profit (loss)
 
$
4,655,696
 
$
5,232,255
 
$
(576,559)
 
Net loss
 
$
(9,834,906)
 
$
9,258,347
 
$
(576,559)
 
Total assets
 
$
4,931,268
 
$
4,536,294
 
$
394,974
 
 
 
 
 
 
 
 
 
 
 
 
2012 (unaudited)
 
 
 
 
 
 
 
 
 
 
Gross sales
 
$
4,899,943
 
$
4,416,121
 
$
483,822
 
Gross profit (loss)
 
$
2,527,652
 
$
3,407,379
 
$
(879,727)
 
Net loss
 
$
(5,042,183)
 
$
(4,162,456)
 
$
(879,727)
 
Total assets
 
$
11,063,776
 
$
11,023,061
 
$
40,715
 
 
 
5

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
2. LIQUIDITY AND GOING CONCERN
 
The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.  The Company reported losses for the nine months ended September 30, 2013, totaling $9,834,906 as well as an accumulated deficit as of September 30, 2013, amounting to $23,519,695.  Contributing to this loss was the Company's decision to fully reserve the net deferred tax assets of $6,650,826 during the quarter ended June 30, 2013.  Further, the Company does not have adequate cash to cover projected operating costs for the next 12 months.  Additionally, as detailed at Note 10, the Company has an open audit with the IRS related to the 2010 amended tax returns. Until such matter is resolved with the IRS, the IRS has issued a customary general lien on the assets of the Company.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  In October 2013, the Company completed a debt financing in which it raised $2.45 million (See Note 11).  However, 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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by accounting principles generally accepted in the United States of America.  The Company has made estimates and judgments affecting the amounts reported in our condensed consolidated financial statements and the accompanying notes.  The actual results experienced by the Company may differ materially from our estimates.  The condensed consolidated financial information is unaudited but reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented.  The condensed consolidated balance sheet as of December 31, 2012 was derived from the Company’s audited financial statements.  The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  Results of the three and nine months ended September 30, 2013, are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
 
Principles of Consolidation
 
The condensed consolidated financial statements include accounts of TMP and its wholly owned subsidiary, CCPI (collectively referred to as "the Company").  All significant intercompany accounts and transactions have been eliminated in consolidation.  In addition, TMP and CCPI share the common operating facility, certain employees and various costs.  Such expenses are principally paid by TMP.  Due to the nature of the parent and subsidiary relationship, the individual financial position and operating results of TMP and CCPI may be different from those that would have been obtained if they were autonomous.
 
Cash Equivalents
 
The Company considers all highly liquid investments 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 market value.  As of September 30, 2013 and 2012, 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.
 
 
6

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
Revenue Recognition
 
TMP markets medical foods and generic and branded 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 six models: Physician Direct Sales, Distributor Direct Sales, Physician Managed, Hybrid Models, and the two Cambridge Medical Funding Group Models.
 
Under the following revenue models, product sales are invoiced upon shipment:
 
Physician Direct Sales Model (4% of product revenues for the nine months ended September 30, 2013): 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 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.  The physician is responsible for payment directly to TMP.
 
Distributor Direct Sales Model (22% of product revenues for the nine months ended September 30, 2013): 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 (37% of product revenues for the nine months ended September 30, 2013): 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 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.
 
Hybrid Model (24% of product revenues for the nine months ended September 30, 2013): 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.
 
 
7

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
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 two separate agreements with Cambridge Medical Funding Group, LLC (“CMFG”) related to California Workers’ Compensation (“WC”) benefit claims.  Under each 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 when payment is received, which is upon collection of the claim as described below.
 
CMFG #1 – WC Receivable Purchase Assignment Model (“CMFG #1”) (13% of product revenues for the nine months ended September 30, 2013): 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 23% 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 fees, 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 payment is received 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 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.
 
CMFG #2 – WC Receivables Funding Assignment Model (“CMFG #2”) (0% of product revenues for the nine months ended September 30, 2013): Under this model, 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, to CMFG.  These accounts receivables were originally generated from either the Company’s Physician Managed Model or the Hybrid Model.  Since these accounts receivable originated from the Company’s Physician Managed Model or the Hybrid Model, CCPI’s services are also retained.  As further detailed at Note 7, CMFG agreed to pay the Company $3.2 million for such assignment, which is considered a loan to the Company from CMFG secured by the future proceeds of these receivables.  The balance of $2.45 million due from CMFG was funded on October 1, 2013.  As detailed in Note 7, actual amounts collected on the claims receivable is shared between CMFG and the Company based upon a predetermined schedule, until the $3.2 million secured loan is paid back to CMFG.  Further collections are shared at a ratio of 55:45, where 55% is retained by the Company and 45% disbursed to CMFG.  The Company recognizes revenue when payment is received from the insurance carriers or the California State Compensation Insurance Fund.
 
During the nine months ended September 30, 2013 and 2012, the Company issued billings to Physician Managed, Hybrid, and CMFG #1 model customers aggregating $6.7 million and $10.0 million, respectively, which were not recognized as revenues or accounts receivable in the accompanying condensed consolidated financial statements at the time of such billings.  Direct costs associated with the above billings are expensed as incurred.  Direct costs associated with these billings, aggregating $843,963 and $1,008,742, respectively, were expensed in the accompanying condensed 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 $4,290,417 and $2,892,866 during the nine months ended September 30, 2013 and 2012, respectively.  The $4,290,417 of Physician Managed and Hybrid model revenue recognized during the nine months ended September 30, 2013, includes $837,771 of revenue recognized under CMFG #1 and includes no revenue under CMFG #2.  As of September 30, 2013, and December 31, 2012, we had $14.8 million and $34.4 million, respectively, 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.  The current balance of $14.8 million in unrecorded accounts receivable is net of estimated amounts of future proceeds belonging to CMFG pursuant to CMFG #2.
 
 
8

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
CCPI receives no revenue in the Physician Direct or Distributor Direct models because it does not provide collection and billing services to these customers.  In the Physician Managed and Hybrid models, including CMFG #2, 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 23% 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
 
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 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 are still outstanding after we have used reasonable collection efforts will be written off.  Based on an assessment as of December 31, 2012, of the collectability of invoices, we established an allowance for doubtful accounts of $215,346.  There was no change to this allowance in the nine months ended September 30, 2013.
 
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.
 
 
9

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
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, 2012, or September 30, 2013, so no long-lived asset impairment was recorded for the year ended December 31, 2012, or the nine months ended September 30, 2013.
 
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, 2012, or September 30, 2013, so no intangible asset impairment was recorded for the year ended December 31, 2012, or the nine months ended September 30, 2013.
 
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.
 
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.
 
 
10

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
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 September 30, 2013, 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.
 
For the period ended September 30, 2013, the Company performed its regular analysis of outstanding invoices comprising unrecognized accounts receivables.  This analysis takes into account the 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.  The analysis as of September 30, 2013, also took into account the impact on future collections of the agreements with CMFG, particularly the agreement of June 28, 2013, as amended.  In exchange for loans of $3.2 million the Company assigned its interest in certain pre-2013 workers compensation claims and agreed to share approximately 50% of future collections proceeds from settlement of such claims.  The unrecognized accounts receivable of $14.8 million was the result of this updated and expanded analysis.  The June 28, 2013, CMFG agreement comprises 61% of the decrease in unrecognized accounts receivables in the nine months ended September 30, 2013.  The $14.8 million in unrecognized accounts receivable is net of estimated amounts of future proceeds belonging to CMFG pursuant to CMFG #2.
 
As a result of this analysis and taking into account other information that could delay the Company’s ability to utilize its net deferred tax assets during the quarter ended June 30, 2013, the Company decided to fully reserve the net deferred income tax assets by taking a full valuation allowance against these assets.  The table below shows the balances for the deferred income tax assets and liabilities as of the dates indicated.
 
 
11

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
 
 
September 30, 2013
 
December 31, 2012
 
Deferred income tax asset-short-term
 
$
638,298
 
$
321,084
 
Deferred income tax liability-short-term
 
 
(17,412)
 
 
(69,648)
 
Deferred income tax asset-short-term
 
 
620,886
 
 
251,436
 
Allowance
 
 
(620,886)
 
 
-
 
Deferred income tax asset, net
 
 
-
 
 
251,436
 
 
 
 
 
 
 
 
 
Deferred income tax asset-long-term
 
 
7,667,931
 
 
6,491,153
 
Deferred income tax liability-long-term
 
 
(1,016,520)
 
 
(1,076,965)
 
Deferred income tax asset-long-term
 
 
6,651,411
 
 
5,414,188
 
Allowance
 
 
(6,651,411)
 
 
-
 
Deferred income tax asset, net
 
 
-
 
 
5,414,188
 
 
 
 
 
 
 
 
 
Total deferred tax asset, net
 
$
-
 
$
5,665,624
 
 
During the three and nine months ended September 30, 2013, the Company recognized income tax expense of $1,278 and $5,666,902, respectively.  Income tax expense was primarily due to the total valuation allowance of $7,272,297.  The $7,272,297 valuation allowance includes the income tax benefit derived by the Company during the three and nine months ended September 30, 2013, of $621,471 and $1,606,673, respectively.  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, which was incurred during the three months ended September 30, 2013, was due to the FTB’s annual minimum tax.
 
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 September 30, 2013, 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.
 
 
12

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued) 
 
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, warrants, and the conversion of convertible debt are anti-dilutive in all periods presented, shares of common stock underlying these instruments have been excluded from the computation of loss per common share.
 
The following sets forth the number of shares of common stock underlying outstanding options, warrants, and convertible debt as of September 30, 2013, and December 31, 2012:
 
 
 
September 30,
 
 
 
2013
 
2012
 
Warrants
 
 
3,856,465
 
 
3,487,946
 
Stock options
 
 
2,669,641
 
 
2,008,091
 
Convertible promissory notes
 
 
 
 
335,448
 
 
 
 
6,526,106
 
 
5,831,485
 
 
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.  Most contract research agreements include a ten year records retention and maintenance requirement.  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.
 
Use of 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 amounts reported in the financial statements and accompanying notes.  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.  The actual results could differ from management’s estimates.
 
Reclassifications
 
Certain prior year amounts have been reclassified to conform to the 2013 presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.
 
 
13

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)
 
Recent Accounting Pronouncements
 
In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which allows an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform a quantitative impairment test for that asset.  Entities are required to test indefinite-lived assets for impairment at least annually, and more frequently if indicators of impairment exist.  The Company adopted this ASU on February 3, 2013, as early adoption is permitted.  The adoption of this ASU did not have a significant effect on our results of operations or financial position.

4. 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, subject to stockholder approval, the Company’s Board of Directors approved a two million (2,000,000) share increase in the number of shares issuable under the Plan.  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 three and nine months ended September 30, 2013, the Company had stock-based compensation expense of $302,508 and $690,751, respectively, related to issuances to the Company’s employees and directors, included in reported net loss.  The total amount of stock-based compensation for the nine months ended September 30, 2013, of $690,751, included expenses related to restricted stock grants valued at $133,040 and stock options valued at $557,711.  During the three and nine months ended September 30, 2012, the Company had stock-based compensation expense included in reported net loss of $273,949 and $662,981, respectively.  The total amount of stock-based compensation for the nine months ended September 30, 2013, of $662,981, included restricted stock grants valued at $100,000 and stock options valued at $562,981.
 
A summary of stock option activity for the nine months ended September 30, 2013, is presented below:
 
 
 
 
 
 
Outstanding Options
 
 
 
 
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
 
 
 
Weighted
 
Average
 
 
 
 
 
 
Shares
 
 
 
 
Average
 
Remaining
 
Aggregate
 
 
 
Available for
 
Number of
 
Exercise
 
Contractual
 
Intrinsic
 
 
 
Grant
 
Shares
 
Price
 
Life (years)
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
1,400,909
 
 
1,583,091
 
$
2.73
 
 
8.68
 
$
489,637
 
Grants
 
 
(435,353)
 
 
435,353
 
$
1.06
 
 
 
 
 
 
 
Net exercises
 
 
 
 
(248,007)
 
$
2.82
 
 
 
 
 
 
 
Restricted stock awards
 
 
(100,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
865,556
 
 
1,770,437
 
$
2.31
 
 
8.10
 
$
1,113,383
 
Amendment of 2011 SIP
 
 
2,000,000
 
 
 
 
 
 
 
 
 
 
 
 
Grants
 
 
(1,048,300)
 
 
1,048,300
 
$
1.34
 
 
 
 
 
 
 
Cancellations and forfeitures
 
 
149,096
 
 
(149,096)
 
$
2.13
 
 
 
 
 
 
 
Restricted stock awards
 
 
(123,455)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
1,842,897
 
 
2,669,641
 
$
1.94
 
 
7.28
 
$
90,771
 
 
 
14

 
TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Unaudited (Continued)