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Document and Entity Information

v2.4.0.8
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Mar. 28, 2014
Jun. 30, 2013
Document And Entity Information      
Entity Registrant Name Targeted Medical Pharma, Inc.    
Entity Central Index Key 0001420030    
Document Type 10-K    
Document Period End Date Dec. 31, 2013    
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filer No    
Entity Current Reporting Status Yes    
Entity Filer Category Smaller Reporting Company    
Entity Public Float     $ 12,151,915
Entity Common Stock, Shares Outstanding   26,332,847  
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2013    

Consolidated Balance Sheets

v2.4.0.8
Consolidated Balance Sheets (USD $)
Dec. 31, 2013
Dec. 31, 2012
CURRENT ASSETS    
Cash $ 491,806 $ 326,603
Accounts receivable, net 268,834 353,993
Inventories 595,753 478,499
Prepaid income taxes 900,863 900,863
Deferred income tax asset    251,436
Other current assets 372,262 217,771
TOTAL CURRENT ASSETS 2,629,518 2,529,165
Property and equipment, net 235,586 340,096
Intangible assets, net 2,132,649 2,318,619
Deferred income tax asset    5,414,188
Other assets    26,679
TOTAL ASSETS 4,997,753 10,628,747
CURRENT LIABILITIES    
Accounts payable 1,497,425 2,161,021
Accrued liabilities 5,654,682 4,862,636
Notes payable, current portion - related parties 2,621,067 5,032,942
Notes payable, current portion 1,458,315   
Derivative liability 29,134 188,475
TOTAL CURRENT LIABILITIES 11,260,623 12,245,074
Notes payable, less current portion, net 754,828 385,709
TOTAL LIABILITIES 12,015,451 12,630,783
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; 25,741,181 shares issued and outstanding as of December 31, 2013; 23,008,742 shares issued and outstanding at December 31, 2012 25,741 23,009
Additional paid-in capital 15,978,968 11,659,744
Accumulated deficit (23,022,407) (13,684,789)
TOTAL STOCKHOLDERS' DEFICIT (7,017,698) (2,002,036)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,997,753 $ 10,628,747

Consolidated Balance Sheets (Parenthetical)

v2.4.0.8
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2013
Dec. 31, 2012
Statement of Financial Position [Abstract]    
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, shares authorized 20,000,000 20,000,000
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 25,741,181 23,008,742
Common stock, shares outstanding 25,741,181 23,008,742

Consolidated Statements of Operations

v2.4.0.8
Consolidated Statements of Operations (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
REVENUES    
Product revenue $ 8,505,667 $ 6,440,058
Service revenue 1,049,895 856,343
Total revenue 9,555,562 7,296,401
COST OF SALES    
Cost of product sold 1,054,194 1,336,874
Cost of services sold 1,935,111 1,864,517
Total cost of sales 2,989,305 3,201,391
Gross profit 6,566,257 4,095,010
OPERATING EXPENSES    
Research and development 228,605 133,840
Selling, general and administrative 10,178,598 10,100,979
Total operating expenses 10,407,203 10,234,819
Loss from operations (3,840,946) (6,139,809)
OTHER INCOME (EXPENSES)    
Interest expense 10,889 (2,199,577)
Change in fair value of warrant liability 159,341 (4,432,734)
Total other income (expenses) 170,230 (6,632,311)
Loss before income taxes (3,670,716) (12,772,120)
Income tax expense (benefit) 5,666,902 (3,185,938)
NET LOSS $ (9,337,618) $ (9,586,182)
Basic and diluted net loss per common share $ (0.39) $ (0.43)
Basic and diluted weighted average common shares outstanding 23,828,693 22,154,650

Consolidated Statements of Cash Flows

v2.4.0.8
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities:    
Net loss $ (9,337,618) $ (9,586,182)
Adjustments to reconcile net loss to net cash used in operating activities:    
Depreciation 142,500 187,260
Amortization 269,400 248,510
Amortization of debt discount 381,119 1,994,941
Stock-based compensation to employees and directors 657,849 1,154,212
Stock-based compensation to consultants 87,605   
Bad debt expense    215,346
Deferred taxes 5,665,624 (3,180,976)
Change in fair value of warrant derivative liability (159,341) 4,432,734
Changes in operating assets and liabilities:    
Accounts receivable 85,159 330,154
Loan receivables - employees    (206,731)
Inventories (117,254) 17,322
Prepaid income taxes    (108,562)
Other current assets 123,242 114,050
Other assets 26,679 26,000
Accounts payable (663,596) 1,988,521
Accrued liabilities 792,046   
Net cash used in operating activities (2,046,586) (2,373,401)
Cash flows from investing activities:    
Acquisition of intangible assets (83,430) (179,328)
Purchase of property and equipment (37,990) (115,532)
Net cash used in investing activities (121,420) (294,860)
Cash flows from financing activities:    
Proceeds from issuance of common stock 250,000   
Proceeds from notes payable - related parties    3,137,000
Payments on notes payable - related parties (659,675) (22,000)
Proceeds from notes payable, net 3,035,600   
Payments and decrease on notes payable (292,716)   
Payments due to related parties    (267,500)
Net cash provided by financing activities 2,333,209 2,847,500
Net decrease in cash 165,203 179,239
Cash at beginning of period 326,603 147,364
Cash at end of period 491,806 326,603
Supplemental disclosures of cash flow information:    
Cash paid during the period for interest 375,571   
Cash paid during the period for income taxes     
Non cash investing and financing activities:    
Escrow receivable 123,047   
Deferred loan fees 164,400   
Note discount from issuance of warrant in connection with notes payable 925,521   
Issuance of common stock from conversion of notes payable, related parties 2,287,648   
Issuance of common stock in connection with prepaid services $ 136,000   

Consolidated Statements of Stockholders' Equity (Deficit)

v2.4.0.8
Consolidated Statements of Stockholders' Equity (Deficit) (USD $)
Common Stock Issued [Member]
Paid-In Capital [Member]
Accumulated Deficit [Member]
Total
Balance at Dec. 31, 2011 $ 21,950 $ 4,684,095 $ (4,098,607) $ 607,438
Balance, shares at Dec. 31, 2011 21,949,576      
Issuance of common stock for services 100 99,900    100,000
Issuance of common stock for services, shares 100,000      
Removal of derivative liability for warrants exercise    4,681,658    4,681,658
Exercise of warrants 851 (851)      
Exercise of warrants, shares 851,185      
Exercise of stock options 108 (108)      
Exercise of stock options, shares 108,021     (248,007)
Compensation expense due to stock option issuances    1,054,212    1,054,212
Warrants issued in connection with debt financings from related party    1,140,838   1,140,838
Net loss     (9,586,182) (9,586,182)
Balance at Dec. 31, 2012 23,009 11,659,744 (13,684,789) (2,002,036)
Balance, shares at Dec. 31, 2012 23,008,782      
Issuance of common stock for services 258 222,282    222,540
Issuance of common stock for services, shares 258,455      
Compensation expense due to stock option issuances   601,309   601,309
Warrants issued in connection with debt financings from related party   925,521   925,521
Issuance of common stock for cash 417 249,583    250,000
Issuance of common stock for cash, shares 416,667      
Issuance of common stock on conversion of debt 2,057 2,285,591    2,287,648
Issuance of common stock on conversion of debt, shares 2,057,277      
Compensation expense due to warrant issuances    34,938    34,938
Net loss     (9,337,618) (9,337,618)
Balance at Dec. 31, 2013 $ 25,741 $ 15,978,968 $ (23,022,407) $ (7,017,698)
Balance, shares at Dec. 31, 2013 25,741,181      

Description of Business

v2.4.0.8
Description of Business
12 Months Ended
Dec. 31, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business

1. DESCRIPTION OF BUSINESS

 

Targeted Medical Pharma, Inc. (the “Company” or “TMP”), also doing business as Physician Therapeutics (“PTL”), is a specialty pharmaceutical company that develops and commercializes nutrient and pharmaceutical based therapeutic systems. On July 30, 2007, the Company formed Complete Claims Processing, Inc. (“CCPI”), a wholly owned subsidiary which provides billing and collection services on behalf of physicians for claims to insurance companies, governmental agencies, and other medical payers.

 

Segment Information:

 

The Company recognized $32,455 in revenue outside of the United States for the year ended December 31, 2012 and no revenue outside of the United States for the year ended December 31, 2013. The Company’s operations are organized into two reportable segments: TMP and CCPI.

 

  TMP: This segment includes PTL. TMP develops and distributes nutrient based therapeutic products and distributes pharmaceutical products from other manufacturers through employed sales representatives and distributors. TMP also performs the administrative, regulatory compliance, sales and marketing functions of the corporation, owns the corporation’s intellectual property, is responsible for research and development relating to medical food products and development of software used for the dispensation and billing of medical foods, 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 years ended December 31, 2013 and 2012, are reflected in the table below:

 

For the years ended December 31,                  
                   
2013   Total     TMP     CCPI  
Gross sales   $ 9,555,562     $ 8,505,667     $ 1,049,895  
Gross profit (loss)   $ 6,566,257     $ 7,451,470     $ (885,216 )
Net loss   $ (9,337,618 )   $ (8,452,402 )   $ (885,216 )
Total assets   $ 4,997,753     $ 4,670,390     $ 327,363  
                         
2012                        
Gross sales   $ 7,296,401     $ 6,440,058     $ 856,343  
Gross profit (loss)   $ 4,095,010     $ 5,103,184     $ (1,008,174 )
Net loss   $ (9,586,182 )   $ (8,578,008 )   $ (1,008,174 )
Total assets   $ 10,628,747     $ 10,601,120     $ 27,627  

Liquidity and Going Concern

v2.4.0.8
Liquidity and Going Concern
12 Months Ended
Dec. 31, 2013
Liquidity And Going Concern Abstract [Abstract]  
Liquidity and Going Concern

2. LIQUIDITY AND GOING CONCERN

 

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company reported losses for the year ended December 31, 2013, totaling $9,337,618 as well as an accumulated deficit as of December 31, 2013, amounting to $23,022,407. Contributing to this loss was the Company’s decision to fully reserve its net deferred tax assets, which resulted in an income tax expense of $5,666,902 for the year ended December 31, 2013. Further, the Company does not have adequate cash to cover projected operating costs for the next 12 months. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In order to ensure the continued viability of the Company, either future equity financings must be obtained or profitable operations must be achieved in order to repay the existing short-term debt and to provide a sufficient source of operating capital. No assurances can be made that the Company will be successful obtaining the equity financing needed to continue to fund its operations, or that the Company will achieve profitable operations and positive cash flow. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Significant Accounting Policies

v2.4.0.8
Significant Accounting Policies
12 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Significant Accounting Policies

3. SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include accounts of TMP and its wholly owned subsidiary, CCPI (collectively referred to as “the Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, TMP and CCPI share the common operating facility, certain employees and various costs. Such expenses are principally paid by TMP. Due to the nature of the parent and subsidiary relationship, the individual financial position and operating results of TMP and CCPI may be different from those that would have been obtained if they were autonomous.

 

Accounting Estimates

 

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting policies that include significant judgement and estimates include revenue recognition, share based compensation, recoverability of intangibles, valuation of derivatives, and valuation of deferred income taxes. Actual results could differ from those estimates.

 

Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less when purchased to be cash equivalents. The recorded carrying amounts of the Company’s cash and cash equivalents approximate their fair value. As of December 31, 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 two Cambridge Medical Funding Group Models.

 

Under the following revenue models, product sales are invoiced upon shipment:

 

Physician Direct Sales Model (3% of product revenues for the year ended December 31, 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 (20% of product revenues for the year ended December 31, 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 due from the distributor for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Physician Managed Model (38% of product revenues for the year ended December 31, 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 due from the physician for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Hybrid Model (24% of product revenues for the year ended December 31, 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”) (15% of product revenues for the year ended December 31, 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 financial obligations due to CCPI for the physician’s use of the Company’s medical billing and claims processing services, and the physician’s financial obligation due to TMP for the cost of the product. The Company recognizes revenue on the date that payment is due from CMFG. Under CMFG #1, the Company only receives the 23% advance payment, where such payment is without recourse or future obligation for TMP to repay the 23% advanced amount back to CMFG or the physician. Actual amounts collected on the assigned accounts receivable are shared between CMFG and the physician, where the first 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 year ended December 31, 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 10, CMFG paid 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. As detailed in Note 10, 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 years ended December 31, 2013 and 2012, the Company issued billings to Physician Managed and Hybrid model customers aggregating $5.7 million and $11.9 million, respectively, which were not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings. Direct costs associated with the above billings are expensed as incurred. Direct costs associated with these billings, aggregating $1,054,194 and $1,336,874, respectively, were expensed in the accompanying consolidated financial statements at the time of such billings. In accordance with the Company’s revenue recognition policy, the Company recognized revenues from certain of these customers when cash was collected, aggregating $5,037,003 and $4,427,828 during the years ended December 31, 2013 and 2012, respectively. The $5,037,003 of Physician Managed and Hybrid model revenue recognized during the years ended December 31, 2013, includes $393,959 of revenue recognized under CMFG #2. As of December 31, 2013, we had $8.3 million in unrecorded accounts receivable that potentially will be recorded as revenue in the future as our CCPI subsidiary secures claims payments on behalf of our PMM and Hybrid Customers. All unpaid invoices underlying claims assigned to CMFG pursuant to CMFG #1 are excluded from unrecorded accounts receivable.

 

CCPI receives no revenue in the Physician Direct or Distributor Direct models because it does not provide collection and billing services to these customers. In the Physician Managed and Hybrid models, 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 CMFG #1, distributor customers and other miscellaneous receivables. The carrying amounts of accounts receivable are reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. The Company individually reviews all accounts receivable balances and based upon an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. An allowance is recorded for those accounts that are determined to likely be uncollectible through a charge to earnings and a credit to a valuation allowance. Balances that are still outstanding after we have used reasonable collection efforts will be written off. Based on an assessment as of December 31, 2013, of the collectability of invoices, we established an allowance for doubtful accounts of $81,171.

 

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, 2013 and 2012, so no long-lived asset impairment was recorded.

 

Intangible Assets

 

Intangible assets with finite lives, including patents and internally developed software (primarily the Company’s PDRx Software), are stated at cost and are amortized over their useful lives. Patents are amortized on a straight line basis over their statutory lives, usually fifteen to twenty years. Internally developed software is amortized over three to five years. Intangible assets with indefinite lives are tested annually for impairment, during the fiscal fourth quarter and between annual periods, and more often when events indicate that an impairment may exist. If impairment indicators exist, the intangible assets are written down to fair value as required. The Company has one intangible asset with an indefinite life which is a domain name for medical foods. No impairment indicators existed at December 31, 2013 and 2012, so no intangible asset impairment was recorded. 

 

Fair Value of Financial Instruments

 

The Company’s financial instruments are accounts receivable, accounts payable, notes payable, and warrant derivative liability. The recorded values of accounts receivable and accounts payable approximate their values based on their short term nature. Notes payable are recorded at their issue value or if warrants are attached at their issue value less the value of the warrant. Warrants issued with ratcheting provisions are revalued using the Black-Scholes model each quarter based on changes in the market value of our common stock and unobservable level 3 inputs.

 

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable:

 

Level 1: Quoted prices in active markets for identical assets or liabilities.

 

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 assumptions: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities including liabilities resulting from imbedded derivatives associated with certain warrants to purchase common stock.

 

Derivative Financial Instruments

 

Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC Topic 815-40 Derivatives and Hedging – Contracts in Entity’s own Equity (“ASC 815-40”). Pursuant to ASC 815-40, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as a derivative liability instead of as equity. The estimated fair value of warrants classified as derivative liabilities is determined using the Black-Scholes option pricing model. The model utilizes Level 3 unobservable inputs to calculate the fair value of the warrants at each reporting period. The Company determined that using an alternative valuation model such as a Binomial-Lattice model would result in minimal differences. The fair value of warrants classified as derivative liabilities is adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded as other income or expense in the consolidated statement of operations. As of December 31, 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.

 

The Company recognizes tax liabilities by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized and also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. U.S. GAAP also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of December 31, 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 December 31, 2013 and 2012:

 

    December 31,  
    2013     2012  
Warrants     4,256,465       2,423,965  
Stock options     2,794,841       1,770,437  
Convertible promissory notes           335,448  
      7,051,306       4,529,850  

 

Research and Development

 

Research and development costs are expensed as incurred. In instances where we enter into agreements with third parties for research and development activities, we may prepay fees for services at the initiation of the contract. We record the prepayment as a prepaid asset and amortize the asset into research and development expense over the period of time the contracted research and development services are performed. Typically, we expense 50% of the contract amount within the first two years of the contract and 50% over the remainder of the record retention requirements under the contract based on our experience on how long the clinical trial service is provided.

 

Reclassifications

 

Certain prior year amounts have been reclassified for comparative purposes to conform to the current-year financial statement presentation. These reclassifications had no effect on previously reported results of operations.

 

Recent Accounting Pronouncements

 

In February 2013, the FASB issued guidance on disclosure requirements for items reclassified out of accumulated other comprehensive income. This new guidance requires entities to present (either on the face of the statement of operations or in the notes to the financial statements) the effects on the line items in the statement of operations for amounts reclassified out of accumulated other comprehensive income. The new guidance will be effective for us beginning in the first quarter of fiscal 2014. The adoption of the guidance will not impact our financial statement presentation and/or our disclosures, our financial position, results of operations or cash flows.

Property and Equipment

v2.4.0.8
Property and Equipment
12 Months Ended
Dec. 31, 2013
Property, Plant and Equipment [Abstract]  
Net Property and Equipment

4. PROPERTY AND EQUIPMENT

 

Property and equipment, net at year-ends was as follows:

 

    December 31,  
    2013     2012  
             
Computer equipment   $ 710,907     $ 679,011  
Furniture and fixtures     245,616       239,423  
Leasehold improvements     254,102       254,202  
Total property and equipment, gross     1,210,625       1,172,636  
Less: accumulated depreciation     (975,039 )     (832,540 )
Total property and equipment, net   $ 235,586     $ 340,096  

 

Depreciation expense for the years ended December 31, 2013 and 2012 was $142,500 and $187,259, respectively. Depreciation included in Cost of Services for the years ended December 31, 2013 and 2012 was $75,578 and $93,686, respectively. No depreciation is recorded in Cost of Product Sales since all production for TMP is outsourced to a third party and stored at an outsourced facility. The remaining depreciation is recorded as part of general and administrative expenses.

Intangible Assets

v2.4.0.8
Intangible Assets
12 Months Ended
Dec. 31, 2013
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets

5. INTANGIBLE ASSETS

 

    December 31,  
    2013     2012  
             
Patents   $ 355,630     $ 360,341  
Internally developed software     1,577,367       1,489,226  
Total, at cost     1,932,997       1,849,567  
Accumulated amortization     (1,101,348 )     (831,948 )
Net intangible assets     831,649       1,017,619  
Intangible assets with indefinite life                
URL medicalfoods.com     1,301,000       1,301,000  
Total intangible assets   $ 2,132,649     $ 2,318,619  

 

Future amortization for years ending after December 31, 2013 is as follows:

 

2014   $ 269,153  
2015   $ 175,156  
2016   $ 76,222  
2017   $ 41,673  
2018   $ 15,489  
Thereafter   $ 831,649  

 

Amortization expense for the years ended December 31, 2013 and 2012 was $269,400 and $248,510, respectively.

Income Taxes

v2.4.0.8
Income Taxes
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Income Taxes

6. INCOME TAXES

  

As a result of the Company’s analysis of its unrecognized accounts receivable, including the effects of its assignment of future proceeds of accounts receivable of WC benefit claims with dates of service between the year 2007 and December 31, 2012, pursuant to CMFG #2, 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.

 

    December 31, 2013     December 31, 2012  
Deferred income tax asset-short-term   $ 1,402,031     $ 321,084  
Deferred income tax liability-short-term           (69,648 )
Deferred income tax asset-short-term     1,402,031       251,436  
Allowance     (1,402,031 )      
Deferred income tax asset, net           251,436  
                 
Deferred income tax asset-long-term     7,145,404       6,491,153  
Deferred income tax liability-long-term     (1,177,716 )     (1,076,965 )
Deferred income tax asset-long-term     5,967,688       5,414,188  
Allowance     (5,967,688 )      
Deferred income tax asset, net           5,414,188  
                 
Total deferred tax asset, net   $     $ 5,665,624  

 

During the year ended December 31, 2013, the Company recognized income tax expense of $5,666,902. Income tax expense was primarily due to the total valuation allowance of $7,369,719. The $7,369,719 valuation allowance includes the income tax benefit derived by the Company during the year ended December 31, 2013, of $1,704,095. As such, the effect of the valuation allowance attributed to $5,665,624 of the Company’s aggregate income tax expense. The remaining income tax expense, of $1,278, was due to state minimum taxes.

 

The components of the income tax provision are as follows:

 

    December 31, 2013     December 31, 2012  
Current:                
Federal   $     $ (3,926 )
State     1,278       (1,036 )
Total current           (4,962 )
Deferred:                
Federal     4,436,445       (2,490,852 )
State     1,229,179       (690,124 )
Total deferred     5,665,624       (3,180,976 )
Income tax expense (benefit)   $ 5,666,902     $ (3,185,938 )

 

The reconciliation of income tax attributable to operations computed at the U.S. Federal statutory income tax rate of 35% for 2013 and for 2012 to income tax expense is as follows:

 

    Year Ended December 31,  
    2013     2012  
Statutory Federal tax rate     (35.0 %)     (35.0 %)
Increase (decrease) in tax rate resulting from:                
Allowance against deferred tax assets     200.8 %      
Derivative Revaluation Expense and other     0.2 %     16.0 %
Penalties and Fines     (6.3 %)      
State taxes, net of federal benefit     (5.8 %)     (5.8 %)
Nondeductible meals & entertainment expense     0.5 %     (0.1 %)
Effective tax rate     154.4 %     (24.9 %)

 

Deferred tax components are as follows:

 

    December 31, 2013     December 31, 2012  
Deferred tax assets:                
Deferred revenue   $ 2,972,470     $  
Net operating loss     2,405,950       5,299,027  
Stock compensation expense     1,311,363       1,052,118  
Accrued liability for payroll and vacation     746,606       259,748  
Other accrued liabilities     595,943        
R&D credits     455,621       140,008  
Bad debt reserve     59,482       61,336  
Total deferred tax assets     8,547,435       6,812,237  
                 
Deferred tax liabilities:                
Depreciation     (641,198 )     (1,076,965 )
Loss on sale of accounts receivable     (536,518 )      
481(a) Adjustment - cash to accrual           (69,648 )
Total deferred tax liabilities     (1,177,716 )     (1,146,613 )
Valuation allowance     (7,369,719 )      
                 
Net deferred tax assets   $     $ 5,665,624  

 

The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences and net operating loss carryovers are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryover years, projected future taxable income, available tax planning strategies, and other factors in making this assessment. Based on available evidence, management believes it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company has established a valuation allowance for the current year.

 

At December 31, 2013 and 2012, the Company had total domestic Federal and state net operating loss carryovers of approximately $5,286,440 and $8,136,403, respectively. Federal and state net operating loss carryovers expire at various dates between 2024 and 2032.

  

Under the Tax Reform Act of 1986, as amended, the amounts of and benefits from net operating loss carryovers and research and development credits may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The Company does not believe that such an ownership change has occurred in 2013 or 2012.

 

The 2010 through 2013 tax years remain open to examination by the Internal Revenue Service. The IRS has the authority to examine those tax years until the applicable statute of limitations expire.

 

During the year ended December 31, 2013, as a result of the conclusion of the IRS examination of the Company’s 2010 through 2012 income tax returns, the Company reversed $752,281 of interest and penalties which were initially recorded during 2011.

Stock Based Compensation

v2.4.0.8
Stock Based Compensation
12 Months Ended
Dec. 31, 2013
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock Based Compensation

7. STOCK-BASED COMPENSATION

 

In January 2011 the Company’s stockholders approved the Company’s 2011 Stock Incentive Plan (the “Plan”), which provided for the issuance of a maximum of three million (3,000,000) shares of the Company’s common stock to be offered to the Company’s directors, officers, employees, and consultants. On August 26, 2013, 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 year ended December 31, 2013, the Company had stock-based compensation expense of $657,849 related to issuances to the Company’s employees and directors included in reported net loss. The total amount of stock-based compensation to employees and directors for the year ended December 31, 2013, included stock-based compensation expense related to restricted stock grants valued at $56,540 and stock options valued at $601,309. During the year ended December 31, 2012, the Company had stock-based compensation expense included in reported net loss of $1,154,212. The total amount of stock-based compensation for the year ended December 31, 2012, included restricted stock grants valued at $100,000 and stock options valued at $1,054,212.

 

A summary of stock option activity for the years ended December 31, 2013 and December 31, 2012, is presented below:

 

          Outstanding Options  
    Shares Available for Grant     Number of Shares     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (years)     Aggregate Intrinsic Value  
                               
December 31, 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     (1,198,300 )     1,198,300     $ 1.28                  
Cancellations and forfeitures     173,896       (173,896 )   $ 2.01                  
Restricted stock awards     (48,455 )                              
                                         
December 31, 2013     1,792,697       2,794,841     $ 1.89       7.03     $  

 

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 year ended December 31, 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 years ended December 31, 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:

 

    Years Ended December 31,  
    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     68% – 87%       97%  
Expected dividend yield     0%       0%  
Weighted average grant-date fair value per share of options granted     $0.74       $0.43  

 

A summary of the changes in the Company’s nonvested options during the year ended December 31, 2013, is as follows:

 

    Number of
Non-vested
Options
    Weighted
Average Fair
Value at Grant
Date
    Intrinsic
Value
 
                         
Non-vested at December 31, 2012     157,045     $ 0.65     $ 187,500  
Granted in 12 months ended December 31, 2013     1,198,300     $ 0.74     $  
Forfeited in 12 months ended December 31, 2013     39,615     $ 1.23     $  
Vested in 12 months ended December 31, 2013     1,065,730     $ 0.74     $  
Non-vested at December 31, 2013     250,000     $ 0.60     $  
Exercisable at December 31, 2013     2,544,841     $ 1.00     $  
Outstanding at December 31, 2013     2,794,841     $ 0.96     $  

 

As of December 31, 2013, total unrecognized compensation cost related to unvested stock options was $124,865. The cost is expected to be recognized over a weighted average period of 2.86 years.

Warrants

v2.4.0.8
Warrants
12 Months Ended
Dec. 31, 2013
Notes to Financial Statements  
Warrants

8. WARRANTS

 

During the year ended December 31, 2013, a total of 1,832,500 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, and 400,000 to Raven Asset-Based Opportunity Fund I LP, in connection with the June 28, 2013 loan to the Company by CMFG (See Note 8). 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% – 2.66%, five to ten years and 70.82% – 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 December 31, 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       3.48     $ 1.00       1,710,000     $ 1.00  
$2.00     1,812,500       4.55     $ 2.00       1,412,500     $ 2.00  
$2.60     20,000       4.35     $ 2.60       15,000     $ 2.60  
$3.38     713,965       3.03     $ 3.38       713,965     $ 3.38  
                                         
$1.00 - 3.38     4,256,465       3.87     $ 1.83       3,851,465     $ 1.82  

  

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 December 31, 2013, and December 31, 2012, the value of the related liability was $29,133 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
12 Months Ended
Dec. 31, 2013
Payables and Accruals [Abstract]  
Accrued Liabilities

9. ACCRUED LIABILITIES

 

Accrued liabilities at December 31, 2013, and December 31, 2012, are comprised of the following:

 

    December 31,  
    2013     2012  
             
Due to physicians   $ 2,580,855     $ 1,800,525  
Accrued salaries and director fees     2,567,847       1,430,965  
Accrued income tax penalties and interest           752,281  
Other     505,980       878,864  
Total accrued liabilities   $ 5,654,682     $ 4,862,636  

Notes Payable

v2.4.0.8
Notes Payable
12 Months Ended
Dec. 31, 2013
Debt Disclosure [Abstract]  
Notes Payable

10. NOTES PAYABLE

 

Notes payable at December 31, 2013, and December 31, 2012, are comprised of the following:

 

    December 31, 2013     December 31, 2012  
Notes payable to William Shell Survivor’s Trust (a)   $ 2,007,820     $ 4,396,276  
Notes payable to Giffoni Family Trust (b)     113,247       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)     2,907,284        
Total notes payable     5,528,351       5,568,390  
Less: debt discount     (694,141 )     (149,739 )
      4,834,210       5,418,651  
Less: current portion     (4,079,382 )     (5,032,942 )
Notes payable – long-term portion   $ 754,828     $ 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 years ended December 31, 2013 and 2012, interest expense of nil and $2,066,275, respectively, was recorded from the debt discount amortization.

 

During the years ended December 31, 2013 and 2012, the Company incurred interest expense, excluding amortization of debt discount, of $155,348 and $146,602, respectively, on the WS Trust Notes. At December 31, 2013 and 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 six months with bi-weekly payments of $10,000. During the years ended December 31, 2013 and 2012, the Company incurred interest expense of $9,251 and $15,333, respectively, on the Giffoni Notes. At December 31, 2013 and 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 years ended December 31, 2013, and 2012, the Company incurred interest expense on the Liebman Notes of $19,090 and $19,024, respectively. At December 31, 2013, and 2012, accrued interest on the Liebman Notes totaled $21,044 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 years ended December 31, 2013, and 2012, the Company incurred interest expense of $6,029 and $12,811, respectively, on the AFH Holding promissory note. 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, 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 became exercisable during December 2013. The exercisable amount is limited to the average trading volume for the ten days prior to the date of exercise.

 

  Professional Services and Consulting Agreement with Mr. Giordano – The Company entered into a consulting arrangement with Mr. Giordano for consulting services relating to medical receivable billing, billing/management strategies, and areas related to financing. Mr. Giordano’s only form of compensation for his consulting services was the issuance of the Giordano Warrant. The consulting agreement terminates at such time as all the obligations or contemplated transactions detailed in the Giordano Warrant have been satisfied.
     
  Professional Services and Consulting Agreement with CMFG – The Company entered into a consulting arrangement with CMFG for consulting services relating to medical receivable billing, billing/management strategies, and areas related to financing. The agreement calls for the Company to pay a one-time fee of $64,000 upon execution of the agreement.

 

On June 28, 2013, CMFG funded $750,000, net of an escrow amount of $123,047 and loan origination fees in the amount of $41,250. On October 1, 2013, simultaneous with an assignment of the Workers’ Compensation Receivables Funding, Assignment and Security Agreement, 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 “Raven Warrant”). The warrants are exercisable April 1, 2014. Further, the exercisable amount is limited to the average trading volume for the ten days prior to the date of exercise. The Company accounted for the additional issuance of warrants as a modification of the original award issued June 28, 2013.

 

The Company recorded 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 Company recorded debt discount in the amount of $925,521 based on the estimated fair value of the Giordano and Raven Warrants. The debt discount will be amortized as non-cash interest expense over the term of the debt using the effective interest method. During the year ended December 31, 2013, interest expense of $231,380 was recorded from the debt discount amortization.

 

The following table shows the allocation of loans under the Funded Receivables agreement:

 

    Total  
       
Cash advanced   $ 3,035,600  
Deferred loan fees     164,400  
Notes payable     3,200,000  
Discount     (925,521 )
Notes payable, net   $ 2,274,479  

Related Party Transactions

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12 Months Ended
Dec. 31, 2013
Related Party Transactions [Abstract]  
Related Party Transactions

11. RELATED PARTY TRANSACTIONS

 

Notes Payable

 

As of December 31, 2013, and December 31, 2012, the Company has notes payable agreements issued to related parties with aggregate outstanding principal balances of $2,621,067 and $5,568,390, respectively (See Note 10).

Concentrations

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12 Months Ended
Dec. 31, 2013
Risks and Uncertainties [Abstract]  
Concentrations

12. CONCENTRATIONS

 

A significant portion of the Company’s billings and revenues are derived from the sale of a single product.

 

In the years ended December 31, 2013 and 2012, the Company derived 39%, and 42% of its billings respectively from the sale of Theramine. Following the receipt of the FDA warning letter, the Company voluntarily stopped shipping completed Theramine convenience packs and instead began providing physician clients with the components of the convenience pack, which physician clients could determine to package together for a patient’s use. We have found that providing the various components and permitting our physician clients to assemble the convenience packs at the time they are dispensed to the patient is more convenient and cost effective. While we continue to sell the components of the convenience packs we cannot assure you that shifting the assembly of Theramine to our physician clients will not have a material adverse effect on the Company’s operating results.

 

A substantial portion of the Company’s billings and revenues are derived from a limited number of physician clients and the loss of any one or more of them may have an immediate adverse effect on our financial results.

 

In the years ended December 31, 2013 and 2012, 11% and 36%, respectively, of the Company’s billings were derived from individual customers representing 10% or more of the total sales. The Company does not receive purchase volume commitments from clients and physicians may stop purchasing our products and services with little or no warning. The loss of any one or more of these customers may have an immediate adverse effect on our financial results.

 

Major Vendor

 

The Company purchases its medical food manufacturing services from a single source. The Company is dependent on the ability of this vendor to provide inventory on a timely basis. The loss of this vendor or a significant reduction in product availability and quality could have a material adverse effect on the Company. While the Company keeps at least a two months inventory on hand, it could take between two and twelve months to set up and test a new supplier, leading to up to four months of product backorder. The Company’s relationship with this vendor is in good standing and the expiration date of the contract is December 31, 2016. We have vetted a second manufacturing facility and have determined that we could immediately transfer manufacturing without a significant disruption in the business in the event that there is a disruption at our current manufacturing facility.

Lease Commitments

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12 Months Ended
Dec. 31, 2013
Leases [Abstract]  
Lease Commitments

13. LEASE COMMITMENTS

 

The Company leases its operating facility under a lease agreement expiring February 28, 2015 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. The Company’s net rent expenses for the years ended December 31, 2013, and December 31, 2012, were approximately $240,000 and $228,000.

 

Minimum annual rentals on the operating facility for the fiscal years ending December 31 are as follows:

 

2014   $ 158,202  
2015     26,367  
Total   $ 184,569  

Defined Contribution Plans

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Defined Contribution Plans
12 Months Ended
Dec. 31, 2013
Compensation and Retirement Disclosure [Abstract]  
Defined Contribution Plans

14. DEFINED CONTRIBUTION PLANS

 

The Company formerly had a profit sharing plan for the benefit of eligible employees. The Company made contributions to the plan out of its net profits in such amounts as the Board of Directors determined. The contribution each year in no event exceeds the maximum amount allowable under applicable provisions of the Internal Revenue Code. No contributions were made to the plan for the years ended December 31, 2013 and 2012. The profit sharing plan was dissolved on October 17, 2012 and distributions were made to plan participants. TMP also sponsors a 401(k) plan. The Company does not match employee contributions.

Equity Transactions

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12 Months Ended
Dec. 31, 2013
Equity [Abstract]  
Equity Transactions

15. EQUITY TRANSACTIONS

 

On April 22, 2013, AFH Holding converted $287,648, which represented the remaining principal balance of its notes, into 287,648 shares of the Company’s common stock. Additionally, between June 4, 2013, and November 25, 2013, the William Shell Survivor’s Trust converted $2,000,000 of its notes into 1,769,629 shares of the Company’s common stock.

 

On November 6, 2013, the Company issued 160,000 shares of common stock as a deposit on a service contract. The shares were valued at $0.85 per share based on the fair market value of the common stock on the date of issuance. As a result of this issuance, the Company recorded a prepaid asset of $136,000, which is being amortized over twelve months.

 

On December 20, 2013, the Company entered into a subscription agreement with an accredited investor in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Company issued and sold to the accredited investor 416,667 shares of its common stock. The issuance resulted in aggregate gross proceeds to the Company of $250,000.

 

During the year ended December 31, 2013, the Company issued an aggregate of 98,455 shares of its common stock pursuant to agreements with former employees and consultants to the Company. These issuances resulted in aggregate expense to the Company of $86,540.

Commitments and Contingencies

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Commitments and Contingencies
12 Months Ended
Dec. 31, 2013
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contigencies

16. 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. The 2010 federal and state tax returns reflected an amount owed to the IRS and California Franchise Tax Board of approximately $3,600,000 and $1,000,000, respectively. The Company had entered into agreements with the Internal Revenue Service and the California Franchise Tax Board to extend the payment of these taxes over a mutually agreeable period of time. In aggregate, we have paid $550,000 to the IRS and $350,000 to the California Franchise Tax Board.

 

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 through 2012 tax liabilities and determined that no income taxes were owed for any of the years.

 

We filed amended tax returns for 2010 in June of 2012. We understood that filing such returns would likely result in tax audits on the part of both agencies. The IRS commenced its audit in November 2012. In March 2014 the IRS completed its examination. The IRS did not accept the Company’s assertion that certain sales did not meet the criteria of a sale for tax purposes, however; in part as a result of the utilization of NOL’s generated during 2011 and 2012, the IRS concluded that the Company’s aggregate tax liability for tax years 2010 through 2012 was only $26,000. In February 2013, the FTB notified the Company by letter that it would take no action on our amended California return until the IRS 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 the eventual audit. As a result of the completion of the IRS examination the Company will initiate discussions with the FTB. There can be no assurances that the FTB will accept the conclusion of the IRS 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 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.

 

Although it is likely that the FTB will arrive at the same conclusion as the IRS, we cannot predict the outcome of the FTB examination. If our position is rejected we would owe approximately $650,000 plus additional interest and penalties and would likely incur liabilities for income taxes in subsequent years. As of December 31, 2013, we have recorded $900,863 in prepaid federal and state income taxes on our balance sheet. As a result of the successful conclusion of the IRS examination, the Company expects to receive a refund from the IRS of approximately $550,000. If the outcome of the FTB examination is favorable to the Company then we anticipate a refund of the remaining prepaid taxes. If not, then prepaid state taxes would be removed from our balance sheet.

 

Legal Proceedings

 

The Company is a party to various legal proceedings. At present, the Company believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, results of operations, cash flows, or overall trends. However, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable resolutions could include substantial monetary damages. Were unfavorable resolutions to occur, the possibility exists for a material adverse impact on our business, results of operations, financial position, and overall trends. Management might also conclude that settling one or more such matters is in the best interests of our stockholders, employees, and customers, and any such settlement could include substantial payments. However, the Company has not reached this conclusion with respect to any particular matter at this time.

 

On or about January 31, 2011, Steven B. Warnecke was hired as the Company’s Chief Financial Officer and resigned less than five (5) months later. At the time he resigned, he cited personal reasons for his resignation. He subsequently claimed that the Company breached its Employment Agreement with him. Mr. Warnecke commenced an arbitration proceeding (the “Arbitration”). In December 2013, the Company entered into a confidential settlement with Mr. Warnecke, reached as a result of a confidential mediation with a retired Justice of the California Court of Appeal, and subsequent confidential settlement discussions. The Company recorded an expense of $255,000 as a result of the settlement.

Subsequent Events

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12 Months Ended
Dec. 31, 2013
Subsequent Events [Abstract]  
Subsequent Events

17. SUBSEQUENT EVENTS

 

On March 24, 2014, the Company entered into a subscription agreement with an accredited investor in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Company issued and sold to the accredited investor 400,000 shares of its common stock. The issuance resulted in aggregate gross proceeds to the Company of $240,000.

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2013
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

 

The consolidated financial statements include accounts of TMP and its wholly owned subsidiary, CCPI (collectively referred to as “the Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, TMP and CCPI share the common operating facility, certain employees and various costs. Such expenses are principally paid by TMP. Due to the nature of the parent and subsidiary relationship, the individual financial position and operating results of TMP and CCPI may be different from those that would have been obtained if they were autonomous.

Accounting Estimates

Accounting Estimates

 

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s critical accounting policies that include significant judgement and estimates include revenue recognition, share based compensation, recoverability of intangibles, valuation of derivatives, and valuation of deferred income taxes. Actual results could differ from those estimates.

Cash Equivalents

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 December 31, 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 two Cambridge Medical Funding Group Models.

 

Under the following revenue models, product sales are invoiced upon shipment:

 

Physician Direct Sales Model (3% of product revenues for the year ended December 31, 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 (20% of product revenues for the year ended December 31, 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 due from the distributor for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Physician Managed Model (38% of product revenues for the year ended December 31, 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 due from the physician for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Hybrid Model (24% of product revenues for the year ended December 31, 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”) (15% of product revenues for the year ended December 31, 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 financial obligations due to CCPI for the physician’s use of the Company’s medical billing and claims processing services, and the physician’s financial obligation due to TMP for the cost of the product. The Company recognizes revenue on the date that payment is due from CMFG. Under CMFG #1, the Company only receives the 23% advance payment, where such payment is without recourse or future obligation for TMP to repay the 23% advanced amount back to CMFG or the physician. Actual amounts collected on the assigned accounts receivable are shared between CMFG and the physician, where the first 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 year ended December 31, 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 10, CMFG paid 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. As detailed in Note 10, 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 years ended December 31, 2013 and 2012, the Company issued billings to Physician Managed and Hybrid model customers aggregating $5.7 million and $13.1 million, respectively, which were not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings. Direct costs associated with the above billings are expensed as incurred. Direct costs associated with these billings, aggregating $1,054,194 and $1,336,874, respectively, were expensed in the accompanying consolidated financial statements at the time of such billings. In accordance with the Company’s revenue recognition policy, the Company recognized revenues from certain of these customers when cash was collected, aggregating $5,037,003 and $4,427,828 during the years ended December 31, 2013 and 2012, respectively. The $5,037,003 of Physician Managed and Hybrid model revenue recognized during the years ended December 31, 2013, includes $393,959 of revenue recognized under CMFG #2. As of December 31, 2013, we had $8.3 million in unrecorded accounts receivable that potentially will be recorded as revenue in the future as our CCPI subsidiary secures claims payments on behalf of our PMM and Hybrid Customers. All unpaid invoices underlying claims assigned to CMFG pursuant to CMFG #1 are excluded from unrecorded accounts receivable.

 

CCPI receives no revenue in the Physician Direct or Distributor Direct models because it does not provide collection and billing services to these customers. In the Physician Managed and Hybrid models, 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 CMFG #1, distributor customers and other miscellaneous receivables. The carrying amounts of accounts receivable are reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. The Company individually reviews all accounts receivable balances and based upon an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. An allowance is recorded for those accounts that are determined to likely be uncollectible through a charge to earnings and a credit to a valuation allowance. Balances that are still outstanding after we have used reasonable collection efforts will be written off. Based on an assessment as of December 31, 2013, of the collectability of invoices, we established an allowance for doubtful accounts of $81,171.

 

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, 2013 and 2012, so no long-lived asset impairment was recorded.

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, 2013 and 2012, so no intangible asset impairment was recorded.

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 December 31, 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.

 

The Company recognizes tax liabilities by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized and also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. U.S. GAAP also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of December 31, 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 December 31, 2013 and 2012:

 

    December 31,  
    2013     2012  
Warrants     4,256,465       2,423,965  
Stock options     2,794,841       1,770,437  
Convertible promissory notes           335,448  
      7,051,306       4,529,850  

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. 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.

Reclassification

Reclassifications

 

Certain prior year amounts have been reclassified for comparative purposes to conform to the current-year financial statement presentation. These reclassifications had no effect on previously reported results of operations.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In February 2013, the FASB issued guidance on disclosure requirements for items reclassified out of accumulated other comprehensive income. This new guidance requires entities to present (either on the face of the statement of operations or in the notes to the financial statements) the effects on the line items in the statement of operations for amounts reclassified out of accumulated other comprehensive income. The new guidance will be effective for us beginning in the first quarter of fiscal 2014. The adoption of the guidance will not impact our financial statement presentation and/or our disclosures, our financial position, results of operations or cash flows.

Description of Business (Tables)

v2.4.0.8
Description of Business (Tables)
12 Months Ended
Dec. 31, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Summary of Segment Information

Results for the years ended December 31, 2013 and 2012, are reflected in the table below:

 

For the years ended December 31,                  
                   
2013   Total     TMP     CCPI  
Gross sales   $ 9,555,562     $ 8,505,667     $ 1,049,895  
Gross profit (loss)   $ 6,566,257     $ 7,451,470     $ (885,216 )
Net loss   $ (9,337,618 )   $ (8,452,402 )   $ (885,216 )
Total assets   $ 4,997,753     $ 4,670,390     $ 327,363  
                         
2012                        
Gross sales   $ 7,296,401     $ 6,440,058     $ 856,343  
Gross profit (loss)   $ 4,095,010     $ 5,103,184     $ (1,008,174 )
Net loss   $ (9,586,182 )   $ (8,578,008 )   $ (1,008,174 )
Total assets   $ 10,628,747     $ 10,601,120     $ 27,627  

Significant Accounting Policies (Tables)

v2.4.0.8
Significant Accounting Policies (Tables)
12 Months Ended
Dec. 31, 2013
Significant Accounting Policies Tables  
Schedule of Common Stock Underlying Outstanding options warrants and Convertible Debt

The following sets forth the number of shares of common stock underlying outstanding options, warrants, and convertible debt as of December 31, 2013 and 2012:

 

    December 31,  
    2013     2012  
Warrants     4,256,465       2,423,965  
Stock options     2,794,841       1,770,437  
Convertible promissory notes           335,448  
      7,051,306       4,529,850  

Property and Equipment (Tables)

v2.4.0.8
Property and Equipment (Tables)
12 Months Ended
Dec. 31, 2013
Property, Plant and Equipment [Abstract]  
Schedule of Property and Equipment

Property and equipment, net at year-ends was as follows:

 

    December 31,  
    2013     2012  
             
Computer equipment   $ 710,907     $ 679,011  
Furniture and fixtures     245,616       239,423  
Leasehold improvements     254,102       254,202  
Total property and equipment, gross     1,210,625       1,172,636  
Less: accumulated depreciation     (975,039 )     (832,540 )
Total property and equipment, net   $ 235,586     $ 340,096  

Intangible Assets (Tables)

v2.4.0.8
Intangible Assets (Tables)
12 Months Ended
Dec. 31, 2013
Goodwill and Intangible Assets Disclosure [Abstract]  
Summary of Intangible Assets

    December 31,  
    2013     2012  
             
Patents   $ 355,630     $ 360,341  
Internally developed software     1,577,367       1,489,226  
Total, at cost     1,932,997       1,849,567  
Accumulated amortization     (1,101,348 )     (831,948 )
Net intangible assets     831,649       1,017,619  
Intangible assets with indefinite life                
URL medicalfoods.com     1,301,000       1,301,000  
Total intangible assets   $ 2,132,649     $ 2,318,619  

Summary of Amortization Over Periods

Future amortization for years ending after December 31, 2013 is as follows:

 

2014   $ 269,153  
2015   $ 175,156  
2016   $ 76,222  
2017   $ 41,673  
2018   $ 15,489  
Thereafter   $ 831,649  

Income Taxes (Tables)

v2.4.0.8
Income Taxes (Tables)
12 Months Ended
Dec. 31, 2013
Income Tax Disclosure [Abstract]  
Schedule of Deferred Income Tax Assets and Liabilities

The table below shows the balances for the deferred income tax assets and liabilities as of the dates indicated.

 

    December 31, 2013     December 31, 2012  
Deferred income tax asset-short-term   $ 1,402,031     $ 321,084  
Deferred income tax liability-short-term           (69,648 )
Deferred income tax asset-short-term     1,402,031       251,436  
Allowance     (1,402,031 )      
Deferred income tax asset, net           251,436  
                 
Deferred income tax asset-long-term     7,145,404       6,491,153  
Deferred income tax liability-long-term     (1,177,716 )     (1,076,965 )
Deferred income tax asset-long-term     5,967,688       5,414,188  
Allowance     (5,967,688 )      
Deferred income tax asset, net           5,414,188  
                 
Total deferred tax asset, net   $     $ 5,665,624  

 

Components of Income Tax Provision

The components of the income tax provision are as follows:

 

    December 31, 2013     December 31, 2012  
Current:                
Federal   $     $ (3,926 )
State     1,278       (1,036 )
Total current           (4,962 )
Deferred:                
Federal     4,436,445       (2,490,852 )
State     1,229,179       (690,124 )
Total deferred     5,665,624       (3,180,976 )
Income tax expense (benefit)   $ 5,666,902     $ (3,185,938 )

Reconciliation of Income Tax Expense

The reconciliation of income tax attributable to operations computed at the U.S. Federal statutory income tax rate of 35% for 2012 and for 2011 to income tax expense is as follows:

 

    Year Ended December 31,  
    2013     2012  
Statutory Federal tax rate     (35.0 %)     (35.0 %)
Increase (decrease) in tax rate resulting from:                
Allowance against deferred tax assets     194.6 %      
Derivative Revaluation Expense and other     6.4 %     16.0 %
Penalties and Fines     (6.3 %)      
State taxes, net of federal benefit     (5.8 %)     (5.8 %)
Nondeductible meals & entertainment expense     0.5 %     (0.1 %)
Effective tax rate     154.4 %     -24.9 %

Components of Deferred Tax Assets

Deferred tax components are as follows:

 

    December 31, 2013     December 31, 2012  
Deferred tax assets:                
Deferred revenue   $ 2,972,470     $  
Net operating loss     2,405,950       5,299,027  
Stock compensation expense     1,311,363       1,052,118  
Accrued liability for payroll and vacation     746,606       259,748  
Other accrued liabilities     595,943        
R&D credits     455,621       140,008  
Bad debt reserve     59,482       61,336  
Total deferred tax assets     8,547,435       6,812,237  
                 
Deferred tax liabilities:                
Depreciation     (641,198 )     (1,076,965 )
Loss on sale of accounts receivable     (536,518 )      
481(a) Adjustment - cash to accrual           (69,648 )
Total deferred tax liabilities     (1,177,716 )     (1,146,613 )
Valuation allowance     (7,369,719 )      
                 
Net deferred tax assets   $     $ 5,665,624  

Stock Based Compensation (Tables)

v2.4.0.8
Stock Based Compensation (Tables)
12 Months Ended
Dec. 31, 2013
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Summary of Aggregate Stock Options Granted

A summary of stock option activity for the years ended December 31, 2013 and December 31, 2012, is presented below:

 

          Outstanding Options  
    Shares Available for Grant     Number of Shares     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (years)     Aggregate Intrinsic Value  
                               
December 31, 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     (1,198,300 )     1,198,300     $ 1.28                  
Cancellations and forfeitures     173,896       (173,896 )   $ 2.01                  
Restricted stock awards     (48,455 )                              
                                         
December 31, 2013     1,792,697       2,794,841     $ 1.89       7.03     $  

Schedule of Option Pricing Model

 

The Company utilized the Black-Scholes option pricing model and the assumptions used for each period are as follows:

 

    Years Ended December 31,  
    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     68% – 87%       97%  
Expected dividend yield     0%       0%  
Weighted average grant-date fair value per share of options granted     $0.74       $0.43  

Summary of Aggregate Non-Vested Shares

A summary of the changes in the Company’s nonvested options during the year ended December 31, 2013, is as follows:

 

    Number of
Non-vested
Options
    Weighted
Average Fair
Value at Grant
Date
    Intrinsic
Value
 
                         
Non-vested at December 31, 2012     157,045     $ 0.65     $ 187,500  
Granted in 12 months ended December 31, 2013     1,198,300     $ 0.74     $  
Forfeited in 12 months ended December 31, 2013     39,615     $ 1.23