Download to XLS

Document And Entity Information

v2.4.0.8
Document And Entity Information
9 Months Ended
Sep. 30, 2013
Nov. 13, 2013
Document Information [Line Items]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2013  
Document Fiscal Year Focus 2013  
Document Fiscal Period Focus Q3  
Trading Symbol TRGM  
Entity Common Stock, Shares Outstanding   24,164,680
Entity Registrant Name Targeted Medical Pharma, Inc.  
Entity Central Index Key 0001420030  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  

Condensed Consolidated Balance Sheets

v2.4.0.8
Condensed Consolidated Balance Sheets (USD $)
Sep. 30, 2013
Dec. 31, 2012
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 0 251,436
Escrow receivable 123,047 0
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 0 5,414,188
Other assets 0 26,679
TOTAL ASSETS 4,931,268 10,628,747
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 0 385,709
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

Condensed Consolidated Balance Sheets (Parenthetical)

v2.4.0.8
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, shares authorized 20,000,000 20,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 24,004,680 23,008,782
Common stock, shares outstanding 24,004,680 23,008,782

Condensed Consolidated Statements of Operations

v2.4.0.8
Condensed Consolidated Statements of Operations (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 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

Condensed Consolidated Statements of Cash Flows

v2.4.0.8
Condensed Consolidated Statements of Cash Flows (USD $)
9 Months Ended
Sep. 30, 2013
Sep. 30, 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 0
Deferred income tax benefit (1,606,673) (1,992,142)
Allowance against deferred tax assets 7,272,297 0
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 0 (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 0
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 0 2,980,000
Payments and decrease on notes payable - related parties (437,710) 0
Proceeds from notes payable, net 585,703 0
Payments due to related parties 0 (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
Supplemental disclosures of cash flow information:    
Cash paid during the period for interest 353,299 0
Cash paid during the period for income taxes 0 102,000
Non cash investing and financing activities:    
Escrow receivable 123,047 0
Deferred loan fees 41,250 0
Note discount from issuance of warrant in connection with notes payable 750,000 0
Issuance of common stock from conversion of notes payable, related parties $ 1,287,648 $ 0

DESCRIPTION OF BUSINESS

v2.4.0.8
DESCRIPTION OF BUSINESS
9 Months Ended
Sep. 30, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
DESCRIPTION OF BUSINESS
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
 

LIQUIDITY AND GOING CONCERN

v2.4.0.8
LIQUIDITY AND GOING CONCERN
9 Months Ended
Sep. 30, 2013
Liquidity And Going Concern Abstract [Abstract]  
LIQUIDITY AND GOING CONCERN
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.

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

v2.4.0.8
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 2013
Accounting Policies [Abstract]  
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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.
 
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.
 
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
 
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.
 
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.
 
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.
 
 
 
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.
 
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.
 
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.

STOCK-BASED COMPENSATION

v2.4.0.8
STOCK-BASED COMPENSATION
9 Months Ended
Sep. 30, 2013
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
STOCK-BASED COMPENSATION
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
 
 
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 nine months ended September 30, 2013.  During the year ended December 31, 2012, net exercises resulted in the issuance of 108,021 shares of common stock.
 
All options that the Company granted during the nine months ended September 30, 2013 and 2012, 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 and the assumptions used for each period are as follows:
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
 
2012
 
Weighted average risk free interest rate
 
 
0.51% – 1.32
%
 
 
0.65% - 1.03
%
Weighted average life (in years)
 
 
3.5 – 5.0
 
 
 
5
 
Volatility
 
 
71% - 87
%
 
 
97
%
Expected dividend yield
 
 
0
%
 
 
0
%
Weighted average grant-date fair value per
     share of options granted
 
$
1.11
 
 
$
0.73
 
 
A summary of the changes in the Company’s nonvested options during the nine months ended September 30, 2013, is as follows:
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Number of
 
Average Fair
 
 
 
 
 
 
Non-vested
 
Value at Grant
 
Intrinsic
 
 
 
Options
 
Date
 
Value
 
 
 
 
 
 
 
 
 
 
 
 
Non-vested at December 31, 2012
 
 
157,045
 
$
0.65
 
$
187,500
 
Granted in 9 months ended September 30, 2013
 
 
1,048,300
 
$
0.78
 
$
1,500
 
Forfeited in 9 months ended September 30, 2013
 
 
39,615
 
$
1.19
 
$
2,000
 
Vested in 9 months ended September 30, 2013
 
 
1,028,230
 
$
0.73
 
$
6,000
 
Non-vested at September 30, 2013
 
 
137,500
 
$
0.84
 
$
-
 
Exercisable at September 30, 2013
 
 
2,532,141
 
$
1.00
 
$
90,771
 
Outstanding at September 30, 2013
 
 
2,669,641
 
$
0.99
 
$
90,771
 
 
As of September 30, 2013, total unrecognized compensation cost related to unvested stock options was $100,749.  The cost is expected to be recognized over a weighted average period of 1.39 years.

WARRANTS

v2.4.0.8
WARRANTS
9 Months Ended
Sep. 30, 2013
Warrants and Rights Note Disclosure [Abstract]  
WARRANTS
5. WARRANTS
 
During the nine months ended September 30, 2013, a total of 1,432,500 warrants, at an average exercise price of $2.01 per share, were issued.  Included in this amount are 1,412,500 warrants issued to James Giordano, CEO of CMFG, in connection with the June 28, 2013 loan to the Company by CMFG (See Note 7).  The warrants were valued using the Black-Scholes valuation model assuming expected dividend yield, risk-free interest rate, expected life and volatility of 0%, 0.75% – 2.52%, five to ten years and 71.54% – 86.35%, respectively.  Warrants granted during the year ended December 31, 2012, were valued using an expected dividend yield, risk-free interest rate, expected life and volatility of 0%, 0.85% – 0.95%, five years and 96.66%, respectively.
 
The following table summarizes information about common stock warrants outstanding at September 30, 2013:
 
Outstanding
 
Exercisable
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average
 
Weighted
 
 
 
 
Weighted
 
 
 
 
 
 
Remaining
 
Average
 
 
 
 
Average
 
Exercise
 
Number
 
Contractual
 
Exercise
 
Number
 
Exercise
 
Price
 
Outstanding
 
Life (Years)
 
Price
 
Exercisable
 
Price
 
$1.00
 
 
1,710,000
 
 
3.74
 
$
1.00
 
 
1,710,000
 
$
1.00
 
$2.00
 
 
1,412,500
 
 
4.74
 
$
2.00
 
 
 
$
2.00
 
$2.60
 
 
20,000
 
 
4.60
 
$
2.60
 
 
15,000
 
$
2.60
 
$3.38
 
 
713,965
 
 
3.32
 
$
3.38
 
 
713,965
 
$
3.38
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$1.00 - 3.38
 
 
3,856,465
 
 
4.03
 
$
1.82
 
 
2,438,965
 
$
1.71
 
 
Included in the Company’s outstanding warrants are 2,423,964 warrants that were issued to a related party over the period from August 2011 through July 2012 at exercise prices ranging from $1.00 to $3.38.  One of the related party warrants contains provisions that require it to be accounted for as a derivative security.  As of September 30, 2013, and December 31, 2012, the value of the related liability was $44,755 and $188,475, respectively. Changes in these values are recorded as income or expense during the reporting period that the change occurs.

ACCRUED LIABILITIES

v2.4.0.8
ACCRUED LIABILITIES
9 Months Ended
Sep. 30, 2013
Accounts Payable and Accrued Liabilities [Abstract]  
ACCRUED LIABILITIES
6. ACCRUED LIABILITIES
 
Accrued liabilities at September 30, 2013, and December 31, 2012, are comprised of the following:
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
Due to physicians
 
$
3,795,640
 
$
1,800,525
 
Accrued salaries and director fees
 
 
2,704,367
 
 
1,430,965
 
Accrued income tax penalties and interest
 
 
752,281
 
 
752,281
 
Other
 
 
490,856
 
 
878,865
 
Total accrued liabilities
 
$
7,743,144
 
$
4,862,636
 

NOTES PAYABLE

v2.4.0.8
NOTES PAYABLE
9 Months Ended
Sep. 30, 2013
Notes Payable [Abstract]  
NOTES PAYABLE
7. NOTES PAYABLE
 
Notes payable at September 30, 2013, and December 31, 2012, are comprised of the following:
 
 
 
September 30, 2013
 
December 31, 2012
 
Notes payable to William Shell Survivor's Trust (a)
 
$
3,161,651
 
$
4,396,276
 
Notes payable to Giffoni Family Trust (b)
 
 
181,381
 
 
336,666
 
Notes payable to Lisa Liebman (c)
 
 
500,000
 
 
500,000
 
Note payable to AFH Holdings and Advisory, LLC (d)
 
 
 
 
335,448
 
Note payable to Cambridge Medical Funding Group, LLC (e)
 
 
750,000
 
 
 
Total notes payable
 
 
4,593,032
 
 
5,568,390
 
Less: debt discount
 
 
(595,746)
 
 
(149,739)
 
 
 
 
3,997,286
 
 
5,418,651
 
Less: current portion
 
 
(3,997,286)
 
 
(5,032,942)
 
Notes payable – long-term portion
 
$
 
$
385,709
 
 
(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.
 
An aggregate of 2,423,965 warrants to purchase shares of the Company’s common stock were either issued to or subsequently assigned to the Survivor’s Trust, at exercise prices ranging between $1.00 and $3.38 per share, as additional consideration for entering into the loan agreements.  The Company recorded debt discount in the amount of $2,091,538 as the estimated value of the warrants.  The debt discount was amortized as non-cash interest expense over the term of the debt using the effective interest method.  During the nine months ended September 30, 2013 and 2012, interest expense of nil and $2,066,275, respectively, was recorded from the debt discount amortization.
 
During the three and nine months ended September 30, 2013, the Company incurred interest expense, excluding amortization of debt discount, of $35,230 and $124,578, respectively, on the WS Trust Notes.  During the three and nine months ended September 30, 2012, the Company incurred interest expense, excluding amortization of debt discount, of $49,888 and $114,313, respectively.  At September 30, 2013, and December 31, 2012, accrued interest on the WS Trust Notes totaled nil and $182,067, respectively.
 
(b)  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 accrue interest at rates ranging between 3.25% and 6.0% per annum.  The principal and interest on the Giffoni Notes is payable over the next nine months with bi-weekly payments of $10,000.  During the three and nine months ended September 30, 2013, the Company incurred interest expense of $1,560 and $7,376, respectively, on the Giffoni Notes.  During the three and nine months ended September 30, 2012, the Company incurred interest expense of $3,856 and $11,485, respectively.  At September 30, 2013, and December 31, 2012, accrued interest on the Giffoni Notes totaled nil and $27,330, respectively.
 
(c)   On December 21, 2012 the William Shell Survivor’s Trust assigned certain promissory notes, in the aggregate principal amount of $500,000, to Lisa Liebman (the “Liebman Notes”), a related party.  Lisa Liebman is married to Dr. Shell.  The Liebman Notes accrue interest at rates ranging between 3.25% and 3.95% per annum.   The principal and interest on the Liebman Notes is payable on demand.  During the three and nine months ended September 30, 2013, the Company incurred interest expense on the Liebman Notes of $4,837 and $14,353, respectively.  At September 30, 2013, and December 31, 2012, accrued interest on the Liebman Notes totaled $36,307 and $21,954, respectively.
 
(d)   On July 20, 2012, the Company issued a $585,448 convertible promissory note to AFH Holding and Advisory, LLC, a Delaware limited liability company (“AFH Holding”) in consideration of amounts advanced by AFH Holding to the Company.  The AFH Holding promissory note accrued interest at a rate of 8.5% per annum and was convertible at a price equal to the lessor of (i) $1.00 or (ii) the average of the lowest three trading prices for the Company’s common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date.  On April 22, 2013, AFH Holding converted the remaining outstanding principal, of $287,648, into 287,648 shares of the Company’s common stock.  During the three and nine months ended September 30, 2013, the Company incurred interest expense of nil and $7,502, respectively, on the AFH Holding promissory note.  During the three and nine months ended September 30, 2012, the Company incurred interest expense of $5,624.  At December 31, 2012, accrued interest on the AFH Holding Note totaled $5,919.
 
(e)  On June 28, 2013, the Company and CMFG entered into four contemporaneous agreements and thus are considered one arrangement.  The components of the agreements are detailed as follows:
 
·     Workers’ Compensation Receivables Funding, Assignment and Security Agreement (CA), as amended – 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 CMFG.  In exchange, the Company received a loan of $3.2 million.  Until such time as CMFG has been repaid the entire $3.2 million, the monthly division of collections on 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 CMFG to pay off any shortfalls from previous months (a shortfall will have been deemed to occur if CMFG receives less than $175,000 in a given month); Third, to CMFG in an amount up to $175,000; Fourth, to the Company in an amount of $125,000; Fifth, to CMFG and the Company, the remainder of the Funded Receivables split at a ratio of 50% to 50%. Once CMFG has received payment of $3.2 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 CMFG 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 are exercisable on the latter of (i) six months from June 28, 2013, and (ii) the date on which the advance of $3.2 million is fully funded.  Further, the exercisable amount is limited to the average trading volume for the ten days prior to date of exercise (but cumulatively no more than 1,412,500 warrants).
 
·     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 calls for the Company to pay a one-time fee of $64,000 upon execution of the agreement. 
 
On June 28, 2013, of the $3.2 million, CMFG funded $750,000, net of an escrow amount of $123,047 and a share of loan origination fees in the amount of $41,250.   The remaining balance, including the release of the escrowed amount, was funded on October 1, 2013 (See Note 11).
 
The following table shows the allocation of the first $750,000 loan under the Funded Receivables agreement:
 
Cash advanced
 
$
585,703
 
Escrow receivable
 
 
123,047
 
Deferred loan fees
 
 
41,250
 
Notes payable
 
 
750,000
 
Estimated discount
 
 
(787,200)
 
Unapplied discount
 
 
(37,200)
 
Discount applied to initial note
 
 
(750,000)
 
Notes payable, net
 
$
-
 
 
The Company recorded debt discount in the amount of $750,000 based on the estimated fair value of the warrants issued to Mr. Giordano in connection with the Funded Receivables loan.   The balance of the estimated discount, of $37,200, will be deducted as an additional discount against the future advance.  The debt discount will be amortized as non-cash interest expense over the term of the debt using the effective interest method.  During the three and nine months ended September 30, 2013, interest expense of $154,253 was recorded from the debt discount amortization.

RELATED PARTY TRANSACTIONS

v2.4.0.8
RELATED PARTY TRANSACTIONS
9 Months Ended
Sep. 30, 2013
Related Party Transactions [Abstract]  
RELATED PARTY TRANSACTIONS
8. RELATED PARTY TRANSACTIONS
 
Notes Payable
 
As of September 30, 2013, and December 31, 2012, the Company has notes payable agreements issued to related parties with aggregate outstanding principal balances of $3,843,035 and $5,580,390, respectively (See Note 7).

EQUITY TRANSACTIONS

v2.4.0.8
EQUITY TRANSACTIONS
9 Months Ended
Sep. 30, 2013
Stockholders Equity Note [Abstract]  
EQUITY TRANSACTIONS
9. 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, on June 4, 2013, the William Shell Survivor’s Trust converted $1,000,000 of its notes into 584,795 shares of the Company’s common stock.

COMMITMENTS AND CONTINGENCIES

v2.4.0.8
COMMITMENTS AND CONTINGENCIES
9 Months Ended
Sep. 30, 2013
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES
10.  COMMITMENTS AND CONTINGENCIES
 
Income Taxes
 
The Company filed its 2010 federal and state tax returns in April 2011 and June 2011, respectively, without including payment for amounts due.
 
As a result of our assessment that for certain sales collectability at the time of the sale could not be reasonably assured, these sales did not meet the criteria of a sale for tax purposes.  The Company recalculated its 2010 and 2011 tax liabilities and determined that no income taxes were owed for either year.  We filed amended tax returns for 2010 in June of 2012.  We believed that filing such returns would suspend collection and enforcement efforts by both the IRS and the FTB.  We further understood that filing such returns would likely result in tax audits on the part of both agencies.  The IRS commenced its audit in November 2012 and meanwhile has suspended collection and enforcement efforts.  The FTB notified the Company by letter dated February 4, 2013, that it will take no action on our amended 2010 California return until the IRS has completed its examination.  The FTB has not formally suspended collection and enforcement efforts but has continued to extend its Notice of Suspension deadlines on a quarterly basis pending the outcome of its eventual audit.  There can be no assurances that the agencies will accept our amended returns and will not pursue collection and enforcement efforts.  If an initial adverse ruling were to occur, we would pursue the arbitration and appeal processes available to us under U.S. and California tax regulations.  If the ultimate disposition is unfavorable to the Company, we would likely not be in a position to pay the outstanding liabilities and could incur additional income tax liabilities for tax years subsequent to 2010.
 
We believe we have presented a compelling case in support of our amended 2010 tax returns but we cannot predict the outcome of the IRS examination or any examination by the FTB.  If our position is rejected we would owe $4.6 million plus additional interest and penalties and would likely incur liabilities for income taxes in subsequent years.  As of September 30, 2013, we have recorded $900,863 in prepaid taxes on our balance sheet which we expect to receive as refunds if the outcome of the examination is favorable to the Company.  If not, then this asset would be removed from our balance sheet.
 
Leases
 
The Company leases its operating facility under a lease agreement expiring February 28, 2015 at the rate of $13,900 per month and several smaller storage spaces on a month-to-month basis. 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.
 
Legal Proceedings
 
The Company is a party to various legal proceedings, including the one noted in this section.   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 has commenced an arbitration proceeding before JAMS, which is currently pending (the “Arbitration”).
 
The Company disputes these allegations, given that Mr. Warnecke resigned from his position.  The Company contends that Mr. Warnecke has been paid all undisputed wages and benefits owed as of the date of termination and is owed nothing further by Company.  The Company believes the lawsuit is without merit and vigorously defended itself, while pursuing reasonable efforts to achieve a resolution of this matter.  The Company is in the process of entering 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.  At this time, the Company estimates that the amount of loss will be $275,000.  During the quarter ended September 30, 2013, the Company recorded a $275,000 adjustment for the probable outcome of this uncertainty.
 
Legal costs to date of approximately $74,000 related to the above claim have been expensed as incurred.

SUBSEQUENT EVENTS

v2.4.0.8
SUBSEQUENT EVENTS
9 Months Ended
Sep. 30, 2013
Subsequent Events [Abstract]  
SUBSEQUENT EVENTS
11. SUBSEQUENT EVENTS
 
On October 1, 2013, simultaneous with an assignment of the Workers’ Compensation Receivables Funding, Assignment and Security Agreement (CA), dated June 27, 2013, as amended by a First Amendment, dated as of September 30, 2013, by CMFG to Raven Asset-Based Opportunity Fund I LP, a Delaware limited partnership (“Raven”), the Company received the balance due from the Funded Receivables agreement.  The Company received cash of $2,449,897, net of fees and a release of the escrow funds of $123,047.
 
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 Company accounted for the additional issuance of warrants as a modification of the original award issued June 28, 2013.   The Company recorded additional debt discount in the amount of $175,521 based on the estimated fair value of the Raven warrant and the unapplied discount on the Giordano Warrant.  The debt discount is being amortized as non-cash interest expense over the initial term of the debt using the effective interest method.
 
The following table shows the allocation of loans under the Funded Receivables agreement:
 
 
 
June 28, 2013
 
October 1, 2013
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Cash advanced
 
$
585,703
 
$
2,449,897
 
$
3,035,600
 
Escrow receivable
 
 
123,047
 
 
(123,047)
 
 
-
 
Deferred loan fees
 
 
41,250
 
 
123,150
 
 
164,400
 
Notes payable
 
 
750,000
 
 
2,450,000
 
 
3,200,000
 
Discount
 
 
(787,200)
 
 
(138,321)
 
 
(925,521)
 
Unapplied discount
 
 
(37,200)
 
 
37,200
 
 
-
 
Discount applied to note
 
 
(750,000)
 
 
(175,521)
 
 
(925,521)
 
Notes payable, net
 
$
-
 
$
2,274,479
 
$
2,274,479

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

v2.4.0.8
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Sep. 30, 2013
Accounting Policies [Abstract]  
Basis of Presentation
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
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
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
Considerations of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable.
Revenue Recognition
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.
 
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.
 
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
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.
Inventory Valuation
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
 
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
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
 
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
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.
 
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 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
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.
 
 
 
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
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
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
 
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
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
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.
Recent Accounting Pronouncements
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.