Download to XLS

Document and Entity Information

v2.4.0.8
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Apr. 13, 2015
Jun. 30, 2014
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, 2014    
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     $ 10,205,521
Entity Common Stock, Shares Outstanding   26,768,756  
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2014    

Consolidated Balance Sheets

v2.4.0.8
Consolidated Balance Sheets (USD $)
Dec. 31, 2014
Dec. 31, 2013
CURRENT ASSETS    
Cash $ 11,739 $ 491,806
Accounts receivable, net 203,348 268,834
Inventories 127,183 595,753
Prepaid income taxes    900,863
Other current assets 191,689 372,262
TOTAL CURRENT ASSETS 533,959 2,629,518
Property and equipment, net 107,185 235,586
Intangible assets, net 1,859,152 2,132,649
TOTAL ASSETS 2,500,296 4,997,753
CURRENT LIABILITIES    
Accounts payable 1,460,352 1,497,425
Accrued liabilities 7,273,980 5,654,682
Notes payable, current portion - related parties 2,504,411 2,621,067
Notes payable, current portion 1,092,762 1,458,315
Derivative liability 18,075 29,134
TOTAL CURRENT LIABILITIES 12,349,580 11,260,623
Notes payable, less current portion, net 122,290 754,828
TOTAL LIABILITIES 12,471,870 12,015,451
COMMITMENTS AND CONTINGENCIES (SEE NOTE 10)     
STOCKHOLDERS' DEFICIT    
Preferred stock, $0.001 par value: 20,000,000 shares authorized; no shares issued and outstanding      
Common stock, $0.001 par value: 100,000,000 shares authorized; 26,768,756 shares issued and outstanding as of December 31, 2014; 25,741,181 shares issued and outstanding as of December 31, 2013 26,769 25,741
Additional paid-in capital 16,919,073 15,978,968
Accumulated deficit (26,917,416) (23,022,407)
TOTAL STOCKHOLDERS' DEFICIT (9,971,574) (7,017,698)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,500,296 $ 4,997,753

Consolidated Balance Sheets (Parenthetical)

v2.4.0.8
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]    
Preferred stock, par value $ 0.001 $ 0.001
Preferred stock, shares authorized 20,000,000 20,000,000
Preferred stock, shares issued      
Preferred stock, shares outstanding      
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 26,768,756 25,741,181
Common stock, shares outstanding 26,768,756 25,741,181

Consolidated Statements of Operations

v2.4.0.8
Consolidated Statements of Operations (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
REVENUES    
Product revenue $ 6,467,084 $ 8,505,667
Service revenue 645,275 1,049,895
Total revenue 7,112,359 9,555,562
COST OF SALES    
Cost of product sold 569,570 1,054,194
Cost of services sold 1,646,958 1,935,111
Total cost of sales 2,216,528 2,989,305
Gross profit 4,895,831 6,566,257
OPERATING EXPENSES    
Research and development 158,370 228,605
Selling, general and administrative 7,348,412 10,178,598
Total operating expenses 7,506,782 10,407,203
Loss from operations (2,610,951) (3,840,946)
OTHER INCOME (EXPENSES)    
Interest income (expense) (1,229,289) 10,889
Change in fair value of warrant liability 11,059 159,341
Total other income (expenses) (1,218,230) 170,230
Loss before income taxes (3,829,181) (3,670,716)
Income tax expense 65,828 5,666,902
NET LOSS $ (3,895,009) $ (9,337,618)
Basic and diluted net loss per common share $ (0.15) $ (0.39)
Basic and diluted weighted average common shares outstanding 26,385,517 23,828,693

Consolidated Statements of Cash Flows

v2.4.0.8
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Cash flows from operating activities:    
Net loss $ (3,895,009) $ (9,337,618)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation 128,401 142,500
Amortization 273,497 269,400
Amortization of debt discount 430,501 381,119
Stock-based compensation to employees and directors 49,804 657,849
Stock-based compensation to consultants 606,462 87,605
Deferred income tax benefit    5,665,624
Change in fair value of warrant derivative liability (11,059) (159,341)
Changes in operating assets and liabilities:    
Accounts receivable 65,486 85,159
Inventories 468,570 (117,254)
Prepaid income taxes 900,863   
Other current assets 180,573 123,242
Other assets    26,679
Accounts payable (37,073) (663,596)
Accrued liabilities 1,619,298 792,046
Net cash provided by (used in) operating activities 780,314 (2,046,586)
Cash flows from investing activities:    
Acquisition of intangible assets    (83,430)
Purchase of property and equipment    (37,990)
Net cash used in investing activities    (121,420)
Cash flows from financing activities:    
Proceeds from issuance of common stock 240,000 250,000
Proceeds from notes payable - related parties 130,000   
Payments on notes payable - related parties (246,656) (659,675)
Proceeds from notes payable, net    3,035,600
Payments on notes payable (1,383,725) (292,716)
Net cash (used in) provided by financing activities (1,260,381) 2,333,209
Net (decrease) increase in cash (480,067) 165,203
Cash at beginning of period 491,806 326,603
Cash at end of period 11,739 491,806
Supplemental disclosures of cash flow information:    
Cash paid during the period for interest 514,218 375,571
Non cash investing and financing activities:    
Escrow receivable    123,047
Deferred loan fees    164,400
Note discount from issuance of warrant in connection with notes payable 44,867 925,521
Amortization of note discount 385,634 381,119
Issuance of common stock from conversion of notes payable, related parties    2,287,648
Issuance of common stock in connection with prepaid services    $ 136,000

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, 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    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      
Issuance of common stock for services 628 398,122    398,750
Issuance of common stock for services, shares 627,575      
Compensation expense due to stock option issuances   49,804    49,804
Warrants issued in connection with debt financings   44,867   44,867
Issuance of common stock for cash 400 239,600    240,000
Issuance of common stock for cash, shares 400,000      
Compensation expense due to warrant issuances   207,712    207,712
Net loss     (3,895,009) (3,895,009)
Balance at Dec. 31, 2014 $ 26,769 $ 16,919,073 $ (26,917,416) $ (9,971,574)
Balance, shares at Dec. 31, 2014 26,768,756      

Description of Business

v2.4.0.8
Description of Business
12 Months Ended
Dec. 31, 2014
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 did not recognize revenue outside of the United States during the years ended December 31, 2014 and 2013. The Company’s operations are organized into two reportable segments: TMP and CCPI.

 

TMP: This segment includes PTL. TMP develops and distributes nutrient based therapeutic products and distributes pharmaceutical products from other manufacturers through employed sales representatives and distributors. TMP also performs the administrative, regulatory compliance, sales and marketing functions of the corporation, owns the corporation’s intellectual property, is responsible for research and development relating to medical food products and development of software used for the dispensation and billing of medical foods and generic products. The TMP segment also manages contracts and chargebacks.
   
CCPI: This segment provides point-of-care dispensing solutions and billing and collections services.

 

Results for the years ended December 31, 2014 and 2013, are reflected in the table below:

 

For the year ended December 31,

 

    Total     TMP     CCPI  
2014                  
Gross sales   $ 7,112,359     $ 6,467,084     $ 645,275  
Gross profit (loss)   $ 4,895,831     $ 5,897,514     $ (1,001,683 )
Net loss   $ (3,895,009 )   $ (2,893,326 )   $ (1,001,683 )
Total assets   $ 2,500,296     $ 2,467,304     $ 32,992  
                         
2013                        
Gross sales   $ 9,555,562     $ 8,505,667     $ 1,049,895  
Gross profit (loss)   $ 6,566,257     $ 7,451,473     $ (885,216 )
Net loss   $ (9,337,618 )   $ (8,452,402 )   $ (885,216 )
Total assets   $ 4,997,753     $ 4,670,390     $ 327,363  

Liquidity and Going Concern

v2.4.0.8
Liquidity and Going Concern
12 Months Ended
Dec. 31, 2014
Liquidity And Going Concern  
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, 2014, totaling $3,895,009 as well as an accumulated deficit as of December 31, 2014, amounting to $26,917,416. As a result of our continued losses, at December 31, 2014, the Company’s current liabilities significantly exceed current assets, resulting in negative working capital of $11,815,621. Further, the Company does not have adequate cash to cover projected operating costs for the next 12 months. As of December 31, 2014, the Company also owes approximately $875,000 to the Internal Revenue Service (“IRS”) and the California Franchise Tax Board (“FTB”) for unpaid payroll taxes. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In order to ensure the continued viability of the Company, either future equity financings must be obtained or profitable operations must be achieved in order to repay the existing short-term debt and to provide a sufficient source of operating capital. No assurances can be made that the Company will be successful obtaining the equity financing needed to continue to fund its operations, or that the Company will achieve profitable operations and positive cash flow. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Significant Accounting Policies

v2.4.0.8
Significant Accounting Policies
12 Months Ended
Dec. 31, 2014
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 involve significant judgment and estimates include revenue recognition, share based compensation, recoverability of intangibles, valuation of derivatives, and valuation of deferred income taxes. Actual results could differ from those estimates.

 

Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less when purchased to be cash equivalents. The recorded carrying amounts of the Company’s cash and cash equivalents approximate their fair value. As of December 31, 2014 and 2013, the Company had no cash equivalents.

 

Considerations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable.

 

Revenue Recognition

 

TMP markets medical foods and generic pharmaceuticals through employed sales representatives, independent distributors, and pharmacies. Product sales are invoiced upon shipment at Average Wholesale Price (“AWP”), which is a commonly used term in the industry, with varying rapid pay discounts, under five models: Physician Direct Sales, Distributor Direct Sales, Physician Managed, Hybrid Models, and the Cambridge Medical Funding Group WC Receivable Purchase Assignment Model.

 

Under the following revenue models, product sales are invoiced upon shipment. However, revenues are not recorded until collectability is reasonably assured, which the Company has determined is when the payment is received:

 

Physician Direct Sales Model (3% of product revenues for the year ended December 31, 2014): Under this model, a physician purchases products from TMP, but does not retain CCPI’s services. TMP invoices the physician upon shipment under terms which allow a significant rapid pay discount off AWP for payment within discount terms, in accordance with the product purchase agreement. The physicians dispense the product and perform their own claims processing and collections. TMP recognizes revenue under this model on the date of shipment at the gross invoice amount less the anticipated rapid pay discount offered in the product purchase agreement. In the event payment is not received within the term of the agreement, the amount due from the physician for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance. The physician is responsible for payment directly to TMP.

 

Distributor Direct Sales Model (16% of product revenues for the year ended December 31, 2014): Under this model, a distributor purchases products from TMP, sells those products to a physician, and the physician does not retain CCPI’s services. TMP invoices distributors upon shipment under terms which include a significant discount off AWP. TMP recognizes revenue under this model on the date of shipment at the net invoice amount. In the event payment is not received within the term of the agreement, the amount payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Physician Managed Model (38% of product revenues for the year ended December 31, 2014): Under this model, a physician purchases products from TMP and retains CCPI’s services. TMP invoices the physician upon shipment under terms which allow a significant rapid pay discount for payment received within terms in accordance with the product purchase agreement, which includes a security interest for TMP in the products and receivables generated by the dispensing of the products. The physician also executes a billing and claims processing services agreement with CCPI for billing and collection services relating to our products (discussed below). CCPI submits a claim for reimbursement on behalf of the physician client. The CCPI fee and product invoice amount are deducted from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the physician client. In the event the physician fails to pay the product invoice within the agreed term, we can deduct the payment due from any of the reimbursements received by us on behalf of the physician client as a result of the security interest we obtained in the products we sold to the physician client and the receivables generated by selling the products in accordance with our agreement. In the event payment is not received within the term of the agreement, the amount due from the physician for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Hybrid Model (10% of product revenues for the year ended December 31, 2014): Under this model, a distributor purchases products from TMP and sells those products to a physician and the physician retains CCPI’s services. TMP invoices distributors upon shipment under terms which allow a significant rapid pay discount for payment received within terms in accordance with the product purchase agreements. The physician client of the distributor executes a billing and claims processing services agreement with CCPI for billing and collection services (discussed below). The distributor product invoice and the CCPI fee are deducted from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the distributor for further delivery to their physician clients. In the event payment is not received within the term of the agreement, the amount payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Since we are in the early stage of our business, as a courtesy to our physician clients, our general practice has been to extend the rapid pay discount from our Physician Managed and Hybrid models beyond the initial term of the invoice until the invoice is paid and not to apply a late payment fee to the outstanding balance.

 

Due to substantial uncertainties as to the timing and collectability of revenues derived from our Physician Managed and Hybrid models, which can take in excess of five years to collect, we have determined that these revenues do not meet the criteria for recognition, in accordance with The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. ASC 605, Revenue Recognition (“ASC 605”), upon shipment. These revenues are recorded when collectability is reasonably assured, which the Company has determined is when the payment is received, which is upon collection of the claim.

 

The Company has entered into an agreement with Cambridge Medical Funding Group, LLC (“CMFG”) related to California Workers’ Compensation (“WC”) benefit claims. Under this arrangement, we have determined that pursuant to FASB ASC Topic No. 860, Transfers of Financial Assets and ASC 605 we have met the criteria for revenue recognition on the date that payment is due from CMFG, which approximates the product shipment date.

 

CMFG #1 – WC Receivable Purchase Assignment Model (“CMFG #1”) (33% of product revenues for the year ended December 31, 2014): Under this model, physicians who purchase products from TMP under the Company’s Physician Managed Model will have the option to assign their accounts receivables (primarily those accounts receivables with dates of service starting with the year 2013) from California WC benefit claims to CMFG, at a discounted rate. Each agreement is executed among CMFG, TMP, and each individual physician, and serves as a master agreement for all assigned receivables by the physician to CMFG. Since these accounts receivable originated from the Company’s Physician Managed Model, CCPI’s services are also retained. The physician’s fees and financial obligations due to TMP, for the purchase of TMP product and use of CCPI’s services, are satisfied directly by CMFG, usually within seven (7) days of transmission of the accounts receivable to CMFG. CMFG has agreed to pay an amount equal to 20% of eligible assigned accounts receivable as an advance payment. CMFG makes this payment directly to TMP, on behalf of the physician. TMP applies this payment to the physician’s financial obligations due to CCPI for the physician’s use of the Company’s medical billing and claims processing services, and the physician’s financial obligation due to TMP for the cost of the product. The Company recognizes revenue on the date that payment is due from CMFG. Under CMFG #1, the Company only receives the 20% advance payment, where such payment is without recourse or future obligation for TMP to repay the 20% advanced amount back to CMFG or the physician. Actual amounts collected on the assigned accounts receivable are shared between CMFG and the physician, where the first 37% of amounts collected are disbursed to CMFG and additional amounts collected are shared at a ratio of 75:25, where 75% is disbursed to the physician and 25% is disbursed to CMFG.

 

During the years ended December 31, 2014 and 2013, the Company issued billings to Physician Managed and Hybrid model customers aggregating $3.8 million and $5.7 million, respectively, which were not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings. Direct costs associated with the above billings are expensed as incurred. Direct costs associated with all billings, aggregating $569,570 and $1,054,194, respectively, were expensed in the accompanying consolidated financial statements at the time of such billings. In accordance with the Company’s revenue recognition policy, the Company recognized revenues from certain of these customers when cash was collected, aggregating $4,525,978 and $5,037,003 during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, we had approximately $7.5 million in unrecorded accounts receivable that potentially will be recorded as revenue in the future as our CCPI subsidiary secures claims payments on behalf of our PMM and Hybrid Customers. All unpaid invoices underlying claims assigned to CMFG pursuant to CMFG #1 are excluded from unrecorded accounts receivable.

 

CCPI receives no revenue in the Physician Direct or Distributor Direct models because it does not provide collection and billing services to these customers. In the Physician Managed and Hybrid models CCPI has a billing and claims processing service agreement with the physician. The billing and claims processing agreement includes a service fee that is based upon a percentage of collections on all claims. Because fees are only earned by CCPI upon collection of the claim, and the fee is not determinable until the amount of the collection of the claim is known, CCPI recognizes revenue at the time claims are paid. Under CMFG #1 the Company recognizes revenue related to CCPI’s services upon receipt of the 20% advance payment from CMFG.

 

No returns of products are allowed except for products damaged in shipment, which historically have been insignificant.

 

The rapid pay discounts to the AWP amount offered to the physician or distributor vary based upon the expected payment term from the physician or distributor. The discounts are derived from the Company’s historical experience of the collection rates from internal sources and updated for facts and circumstances and known trends and conditions in the industry, as appropriate. As described in the various models, we recognize provisions for rapid pay discounts in the same period in which the related revenue is recorded. We believe that our current provisions appropriately reflect our exposure for rapid pay discounts. These rapid pay discounts have typically ranged from 40% to 88% of AWP.

 

Allowance for Doubtful Accounts

 

Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. Currently, accounts receivable are comprised of amounts due from our CMFG #1, distributor customers and other miscellaneous receivables. The carrying amounts of accounts receivable are reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. The Company individually reviews all accounts receivable balances and based upon an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. An allowance is recorded for those accounts that are determined to likely be uncollectible through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts will be written off. Based on an assessment as of December 31, 2014 and 2013, of the collectability of invoices, we established an allowance for doubtful accounts of $55,773 and $81,171, respectively.

 

Under the Company’s Physician Managed Model and Hybrid Model, CCPI performs billing and collection services on behalf of the physician client and deducts the CCPI fee and product invoice amount from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the physician client. Extended collection periods are typical in the workers compensation industry with payment terms extending from 45 days to in excess of five years. The physician remains personally liable for purchases of product from TMP and TMP retains a security interest in all products sold to the physician, and the resulting claims receivable from sales of the products. CCPI maintains an accounting of all managed accounts receivable on behalf of the physician. As described above, due to uncertainties as to the timing and collectability of revenues derived from these models, revenue is recorded when payment is received, there is no related accounts receivable, and therefore no allowance for doubtful accounts is necessary.

 

Inventory Valuation

 

Inventory is valued at the lower of cost (first in, first out) or market and consists primarily of finished goods.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets. Computer equipment is depreciated over three to five years. Furniture and fixtures are depreciated over five to seven years. Leasehold improvements are amortized over the shorter of fifteen years or term of the applicable property lease. Maintenance and repairs are expensed as incurred; major renewals and betterments that extend the useful lives of property and equipment are capitalized. When property and equipment is sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Amenities are capitalized as leasehold improvements.

 

Impairment of Long-Lived Assets

 

The long-lived assets held and used by the Company are reviewed for impairment no less frequently than annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed. No impairment indicators existed at December 31, 2014 and 2013, so no long-lived asset impairment was recorded.

 

Intangible Assets

 

Intangible assets with finite lives, including patents and internally developed software (primarily the Company’s PDRx Software), are stated at cost and are amortized over their useful lives. Patents are amortized on a straight line basis over their statutory lives, usually fifteen to twenty years. Internally developed software is amortized over three to five years. Intangible assets with indefinite lives are tested annually for impairment, during the fiscal fourth quarter and between annual periods, and more often when events indicate that an impairment may exist. If an impairment has occurred, the intangible assets are written down to fair value as required. The Company has one intangible asset with an indefinite life which is a domain name for medical foods. No impairment indicators existed at December 31, 2014 and 2013, so no intangible asset impairment was recorded for the years ended December 31, 2014 and 2013.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

Derivative Financial Instruments

 

Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC Topic 815-40 Derivatives and Hedging – Contracts in Entity’s own Equity (“ASC 815-40”). Pursuant to ASC 815-40, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as a derivative liability instead of as equity. The estimated fair value of warrants classified as derivative liabilities is determined using the Black-Scholes option pricing model. The model utilizes Level 3 unobservable inputs to calculate the fair value of the warrants at each reporting period. The Company determined that using an alternative valuation model such as a Binomial-Lattice model would result in minimal differences. The fair value of warrants classified as derivative liabilities is adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded as other income or expense in the consolidated statement of operations. As of December 31, 2014, 95,000 warrants were classified as derivative liabilities. Each reporting period the warrants are re-valued and adjusted through the caption “change in fair value of warrant liability” on the consolidated statements of operations. The Company’s remaining warrants are recorded to additional paid in capital as equity instruments.

 

Income Taxes

 

The Company determines its income taxes under the asset and liability method. Under the asset and liability approach, deferred income tax assets and liabilities are calculated and recorded based upon the future tax consequences of temporary differences by applying enacted statutory tax rates applicable to future periods for differences between the financial statements carrying amounts and the tax basis of existing assets and liabilities. Generally, deferred income taxes are classified as current or non-current in accordance with the classification of the related asset or liability. Those not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for significant deferred income tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company recognizes tax liabilities by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized and also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. U.S. GAAP also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of December 31, 2014, there are no uncertain tax positions taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.

 

Stock-Based Compensation

 

The Company accounts for stock option awards in accordance with FASB ASC Topic No. 718, Compensation-Stock Compensation. Under FASB ASC Topic No. 718, compensation expense related to stock-based payments is recorded over the requisite service period based on the grant date fair value of the awards. Compensation previously recorded for unvested stock options that are forfeited is reversed upon forfeiture. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.

 

The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC Topic No. 505-50, Equity Based Payments to Non-Employees. Accordingly, the measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

Loss per Common Share

 

The Company utilizes FASB ASC Topic No. 260, Earnings per Share. Basic loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted loss per common share reflects the potential dilution that could occur if options and warrants were to be exercised or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the entity.

 

Since the effects of outstanding options and warrants are anti-dilutive in all periods presented, shares of common stock underlying these instruments have been excluded from the computation of loss per common share.

 

The following sets forth the number of shares of common stock underlying outstanding options and warrants as of December 31, 2014 and 2013:

 

    December 31,  
    2014     2013  
Warrants     4,919,372       4,256,465  
Stock options     2,421,041       2,794,841  
      7,340,413       7,051,306  

 

Research and Development

 

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

 

Reclassifications

 

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

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The amendments (i) remove inconsistencies and weaknesses in revenue requirements, (ii) provide a more robust framework for addressing revenue issues, (iii) improve comparability of revenue recognition across entities, industries, jurisdictions, and capital markets, (iv) provide more useful information to users of financial statements through improved disclosure requirements, and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The new revenue recognition standard requires entities to recognize revenue in a way that reflects the transfer of promised goods or services to customers in an amount based on the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. The Company has not determined what transition method it will use and is currently assessing the impact that this guidance may have on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

Property and Equipment

v2.4.0.8
Property and Equipment
12 Months Ended
Dec. 31, 2014
Property, Plant and Equipment [Abstract]  
Property and Equipment

4. PROPERTY AND EQUIPMENT

 

Property and equipment, net are as follows:

 

    December 31,  
    2014     2013  
             
Computer equipment   $ 661,322     $ 710,907  
Furniture and fixtures     164,451       245,616  
Leasehold improvements     254,102       254,102  
Total property and equipment, gross     1,079,875       1,210,625  
Less: accumulated depreciation     (972,690 )     (975,039 )
Total property and equipment, net   $ 107,185     $ 235,586  

 

Depreciation expense for the years ended December 31, 2014 and 2013 was $128,401 and $142,500, respectively. Depreciation included in Cost of Services for the years ended December 31, 2014 and 2013 was $67,568 and $75,578, respectively. No depreciation is recorded in Cost of Product Sales since all production for TMP is outsourced to a third party and stored at an outsourced facility. The remaining depreciation is recorded as part of general and administrative expenses.

Intangible Assets

v2.4.0.8
Intangible Assets
12 Months Ended
Dec. 31, 2014
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets

5. INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

    December 31,  
    2014     2013  
             
Patents   $ 355,630     $ 355,630  
Internally developed software     1,577,367       1,577,367  
Total, at cost     1,932,997       1,932,997  
Accumulated amortization     (1,374,845 )     (1,101,348 )
Net intangible assets     558,152       831,649  
Intangible asset with indefinite life:                
URL medicalfoods.com     1,301,000       1,301,000  
Total intangible assets   $ 1,859,152     $ 2,132,649  

 

Future amortization for years ending after December 31, 2014 is as follows:

 

2015   $ 175,409  
2016   $ 76,468  
2017   $ 41,919  
2018   $ 15,735  
2019   $ 12,463  
Thereafter   $ 236,158  
    $ 558,152  

 

Amortization expense for the years ended December 31, 2014 and 2013 was $273,497 and $269,400, respectively.

Income Taxes

v2.4.0.8
Income Taxes
12 Months Ended
Dec. 31, 2014
Income Tax Disclosure [Abstract]  
Income Taxes

6. INCOME TAXES

 

During the quarter ended June 30, 2013, the Company determined to fully reserve the net deferred income tax assets by taking a full valuation allowance against these assets. As a result of this decision, during the year ended December 31, 2014, the Company did not recognize any income tax benefit as a result of its net loss. The table below shows the balances for the deferred income tax assets and liabilities as of the dates indicated.

 

    December 31, 2014     December 31, 2013  
Deferred income tax asset-short-term   $ 1,517,270     $ 1,402,031  
Allowance     (1,517,270 )     (1,402,031 )
Deferred income tax asset-short-term, net            
                 
Deferred income tax asset-long-term     8,303,462       7,145,404  
Deferred income tax liability-long-term     (1,074,928 )     (1,177,716 )
Deferred income tax asset-long-term     7,228,534       5,967,688  
Allowance     (7,228,534 )     (5,967,688 )
Deferred income tax asset-long-term, net            
                 
Total deferred tax asset, net            

 

The IRS and FTB completed their respective examinations of the Company’s income tax returns for the tax years 2010 through 2012 in March 2014 and July 2014, respectively. The IRS concluded that the Company’s aggregate federal income tax liability for these tax years was $26,124 and the FTB determined that the Company’s state income tax liability for the years under examination was $39,704. As a result of these examinations, the Company recorded $65,828 in income tax expense during the year ended December 31, 2014. During the year ended December 31, 2013, the Company recognized income tax expense of $5,666,902. Income tax expense resulted from a valuation allowance for net deferred income tax assets of $7,369,719. The $7,369,719 valuation allowance includes the income tax benefit derived by the Company during the year ended December 31, 2013, of $1,704,095. As such, the effect of the valuation allowance attributed to $5,665,624 of the Company’s aggregate income tax expense. The remaining income tax expense, of $1,278, was due to state minimum taxes.

 

The components of the income tax provision are as follows:

 

    December 31, 2014     December 31, 2013  
Current:                
Federal   $ 26,124     $  
State     39,704       1,278  
Total current     65,828       1,278  
Deferred:                
Federal           4,436,445  
State           1,229,179  
Total deferred           5,665,624  
Income tax expense   $ 65,828     $ 5,666,902  

 

The Company’s effective tax rates were 1.7% and 154.4% for the years ended December 31, 2014 and 2013, respectively. During the years ended December 31, 2014, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change in the valuation allowance and final resolution of the Company’s Federal and state income tax audits for years 2010 through 2012, which resulted in $65,828 of income tax expense. In the previous year, management had decided to fully reserve the net deferred income tax assets by taking a full valuation allowance against these assets. During the year ended December 31, 2013, the effective tax rate differed primarily due to the change in the valuation allowance. The reconciliation of income tax attributable to operations computed at the U.S. Federal statutory income tax rate of 35% for 2014 and for 2013 to income tax expense is as follows:

 

    Year Ended December 31,  
    2014     2013  
Statutory Federal tax rate     (35.0 %)     (35.0 %)
Increase (decrease) in tax rate resulting from:                
Allowance against deferred tax assets     34.7 %     200.8 %
Derivative revaluation expense and other     7.5 %     0.2 %
Penalties and fines           (6.3 %)
State taxes, net of federal benefit     (5.7 %)     (5.8 %)
Nondeductible meals & entertainment expense     0.2 %     0.5 %
Effective tax rate     1.7 %     154.4 %

 

Deferred tax components are as follows:

 

    December 31, 2014     December 31, 2013  
Deferred tax assets:                
Deferred revenue   $ 3,075,550     $ 2,972,470  
Net operating loss     3,356,001       2,405,950  
Stock compensation expense     1,416,290       1,311,363  
Accrued liability for payroll and vacation     883,901       746,606  
Other accrued liabilities     610,644       595,943  
R&D credits     455,621       455,621  
Bad debt reserve     22,725       59,482  
Total deferred tax assets     9,820,732       8,547,435  
                 
Deferred tax liabilities:                
Depreciation     (549,266 )     (641,198 )
Loss on sale of accounts receivable     (525,662 )     (536,518 )
Total deferred tax liabilities     (1,074,928 )     (1,177,716 )
Valuation allowance     (8,745,804 )     (7,369,719 )
                 
Net deferred tax assets   $     $  

 

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

 

At December 31, 2014, the Company had total domestic Federal and state net operating loss carryovers of approximately $7,596,539 and $10,545,802, respectively. Federal and state net operating loss carryovers expire at various dates between 2021 and 2032.

 

Under the Tax Reform Act of 1986, as amended, the amounts of and benefits from net operating loss carryovers and research and development credits may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The Company does not believe that such an ownership change has occurred in 2014 or 2013.

 

The 2013 and 2014 tax years remain open to examination by the Internal Revenue Service and California Franchise Tax Board. The IRS and FTB have the authority to examine those tax years until the applicable statute of limitations expire.

 

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

Stock-Based Compensation

v2.4.0.8
Stock-Based Compensation
12 Months Ended
Dec. 31, 2014
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, the Company’s Board of Directors approved a two million (2,000,000) share increase in the number of shares issuable under the Plan, which was approved by the Company’s stockholders on June 6, 2014. Options granted under the Plan have an exercise price equal to or greater than the fair market value of the underlying common stock at the date of grant and become exercisable based on a vesting schedule determined at the date of grant. The options expire between 5 and 10 years from the date of grant. Restricted stock awards granted under the Plan are subject to a vesting period determined at the date of grant.

 

During the year ended December 31, 2014, the Company had stock-based compensation expense of $49,804, related to issuances to the Company’s employees and directors, included in reported net loss. The total amount of stock-based compensation to employees and directors for the year ended December 31, 2014, related solely to the issuance of stock options. During the year ended December 31, 2013, the Company had stock-based compensation expense included in reported net loss of $734,349. The total amount of stock-based compensation for the year ended December 31, 2013, included restricted stock grants valued at $133,040 and stock options valued at $601,309.

 

A summary of stock option activity for the years ended December 31, 2014 and December 31, 2013, is presented below:

 

          Outstanding Options  
    Shares Available for Grant     Number of Shares     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (years)     Aggregate Intrinsic Value  
                               
December 31, 2012     865,556       1,770,437     $ 2.31       8.10     $ 1,113,383  
Amendment of 2011 SIP     2,000,000                                
Grants     (1,198,300 )     1,198,300     $ 1.28                  
Cancellations and forfeitures     173,896       (173,896 )   $ 2.01                  
Restricted stock awards     (48,455 )                              
                                         
December 31, 2013     1,792,697       2,794,841     $ 1.89       7.03     $  
Cancellations and forfeitures     373,800       (373,800 )   $ 2.62                  
Restricted stock awards     (75,000 )                              
                                         
December 31, 2014     2,091,497       2,421,041     $ 1.77       5.88     $  

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price on the respective date and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options. There have not been any options exercised during the years ended December 31, 2013 or 2014.

 

All options that the Company granted during the years ended December 31, 2014 and 2013, were granted at the per share fair value on the grant date. Vesting of options differs based on the terms of each option. The Company has valued the options at their date of grant utilizing the Black Scholes option pricing model. As of the issuance of these financial statements, there was not an active public market for the Company’s shares. Accordingly, the fair value of the underlying options was determined based on the historical volatility data of similar companies, considering the industry, products and market capitalization of such other entities. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options as calculated using the simplified method. The expected life of the options used was based on the contractual life of the option granted. Stock-based compensation is a non-cash expense because we settle these obligations by issuing shares of our common stock from our authorized shares instead of settling such obligations with cash payments.

 

The Company utilized the Black-Scholes option pricing model. The Company did not issue any options during the year ended December 31, 2014. The assumptions used for the year ended December 31, 2013 are as follows:

 

    Year Ended
December 31, 2013
 
Weighted average risk free interest rate     0.51% – 1.32 %
Weighted average life (in years)     3.5 – 5.0  
Volatility     68% - 87 %
Expected dividend yield     0 %
Weighted average grant-date fair value per share of options granted   $ 0.74  

 

A summary of the changes in the Company’s nonvested options during the year ended December 31, 2014, is as follows:

 

    Number of
Non-vested
Options
    Weighted
Average Fair
Value at Grant
Date
    Intrinsic
Value
 
                   
Non-vested at December 31, 2013     250,000     $ 0.60     $  
Vested in 12 months ended December 31, 2014     79,167     $ 0.65     $  
Non-vested at December 31, 2014     170,833     $ 0.57     $  
Exercisable at December 31, 2014     2,250,608     $ 0.93     $  
Outstanding at December 31, 2014     2,421,441     $ 0.91     $  

 

As of December 31, 2014, total unrecognized compensation cost related to unvested stock options was $62,576. The cost is expected to be recognized over a weighted average period of 2.32 years.

Warrants

v2.4.0.8
Warrants
12 Months Ended
Dec. 31, 2014
Warrants  
Warrants

8. WARRANTS

 

During the year ended December 31, 2013, the Company issued a total of 1,832,500 warrants, at an average exercise price of $2.01 per share. Included in this amount are 1,412,500 warrants issued to James Giordano, CEO of CMFG, and 400,000 warrants to Raven Asset-Based Opportunity Fund I LP, in connection with the June 28, 2013 loan to the Company by CMFG (See Note 10). During the year ended December 31, 2014, the Company issued a total of 662,907 warrants, at an average exercise price of $0.35 per share. Included in these issuances are 162,907 warrants issued to William E. Shell, M.D., the Company’s former Chief Executive Officer, in connection with the July 24, 2014 loan to the Company (See Note 10), and 500,000 warrants to several consultants for financial advisory and investor relations services.

 

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

 

    Year Ended December 31,  
    2014     2013  
Weighted average risk free interest rate     1.67% – 1.72 %     0.75% - 2.66 %
Weighted average life (in years)     5.0       5.0 – 10.0  
Volatility     67 %     71% - 86 %
Expected dividend yield     0 %     0 %
Weighted average grant-date fair value per share of warrants granted   $ 0.67     $ 0.75  

 

The following table summarizes information about common stock warrants outstanding at December 31, 2014:

 

Outstanding     Exercisable  
          Weighted                    
          Average     Weighted           Weighted  
          Remaining     Average           Average  
Exercise   Number     Contractual     Exercise     Number     Exercise  
Price   Outstanding     Life (Years)     Price     Exercisable     Price  
$0.01     495,000       4.19     $ 0.01       345,000     $ 0.01  
$0.80     162,907       4.62     $ 0.80       162,907     $ 0.80  
$1.00     1,715,000       3.25     $ 1.00       1,715,000     $ 1.00  
$2.00     1,812,500       8.55     $ 2.00       1,812,500     $ 2.00  
$2.60     20,000       3.35     $ 2.60       20,000     $ 2.60  
$3.38     713,965       2.06     $ 3.38       713,965     $ 3.38  
                                         
$0.01 - 3.38     4,919,372       5.17     $ 1.61       4,769,372     $ 1.66  

 

Included in the Company’s outstanding warrants are 2,586,872 warrants that were issued to a related party over the period from August 2011 through July 2014 at exercise prices ranging from $0.01 to $3.38. One of the related party warrants contains provisions that require it to be accounted for as a derivative security. As of December 31, 2014 and 2013, the value of the related liability was $18,075 and $29,134, respectively. Changes in these values are recorded as income or expense during the reporting period that the change occurs.

Accrued Liabilities

v2.4.0.8
Accrued Liabilities
12 Months Ended
Dec. 31, 2014
Payables and Accruals [Abstract]  
Accrued Liabilities

9. ACCRUED LIABILITIES

 

Accrued liabilities at December 31, 2014, and December 31, 2013, are comprised of the following:

 

    December 31,  
    2014     2013  
             
Due to physicians   $ 2,659,698     $ 2,580,855  
Accrued salaries and director fees     3,996,901       2,567,847  
Other     617,381       505,980  
Total accrued liabilities   $ 7,273,980     $ 5,654,682  

Notes Payable

v2.4.0.8
Notes Payable
12 Months Ended
Dec. 31, 2014
Debt Disclosure [Abstract]  
Notes Payable

10. NOTES PAYABLE

 

Notes payable at December 31, 2014, and December 31, 2013, are comprised of the following:

 

    December 31,  
    2014     2013  
Notes payable to William Shell Survivor’s Trust (a)   $ 1,874,411     $ 2,007,820  
Notes payable to William Shell (b)     130,000        
Notes payable to Giffoni Family Trust (c)           113,247  
Notes payable to Lisa Liebman (d)     500,000       500,000  
Note payable to Cambridge Medical Funding Group, LLC (e)     1,523,559       2,907,284  
Total notes payable     4,027,970       5,528,351  
Less: debt discount     (308,507 )     (694,141 )
      3,719,463       4,834,210  
Less: current portion     (3,597,173 )     (4,079,382 )
Notes payable – long-term portion   $ 122,290     $ 754,828  

 

(a) Between January 2011 and December 2012, William E. Shell, M.D., the Company’s Chief Executive Officer, Chief Scientific Officer, greater than 10% shareholder and a director, loaned $5,132,334 to the Company. As consideration for the loans, the Company issued promissory notes in the aggregate principal amount of (i) $4,982,334 to the Elizabeth Charuvastra and William Shell Family Trust dated July 27, 2006 and amended September 29, 2006 (the “Family Trust”), and (ii) $150,000 to the William Shell Survivor’s Trust (the “Survivor’s Trust”). On December 21, 2012, all notes issued to the Family Trust were assigned to the Survivor’s Trust (the “WS Trust Notes”) which in turn assigned certain promissory notes, in the aggregate principal amount of $500,000, to Lisa Liebman. The WS Trust Notes accrue interest at rates ranging between 3.25% and 12.0% per annum. The principal on the WS Trust Notes is payable on demand and interest is payable on a quarterly basis.
   
  During the years ended December 31, 2014 and 2013, the Company incurred interest expense of $87,286 and $155,348, respectively, on the WS Trust Notes. At December 31, 2014 and 2013, accrued interest on the WS Trust Notes totaled $21,316 and nil, respectively.
   
(b) On July 24, 2014, Dr. Shell loaned $130,000 to the Company. As consideration for the loan, the Company issued Dr. Shell a promissory note in the aggregate principal amount of $130,000 (the “Shell Note”). The Shell Note accrues interest at the rate of 8% per annum and is payable on demand. As additional consideration for entering into the loan agreement, Dr. Shell received 162,907 warrants to purchase shares of the Company’s common stock at an exercise price of $0.798 per share (the “Shell Warrant”). The Company recorded a debt discount in the amount of $44,867 based on the estimated fair value of the Shell Warrant. The debt discount was amortized as non-cash interest expense on the date of issuance using the effective interest method. During the year ended December 31, 2014, the Company incurred interest expense of $49,426, including amortization of debt discount of $44,867, on the Shell Note. At December 31, 2014, accrued interest on the Shell Note totaled $1,938.
   
(c) Between January 2011 and December 2012, Kim Giffoni the Company’s Executive Vice President of Foreign Sales and Investor Relations, greater than 10% shareholder and a director, loaned $300,000 to the Company. As consideration for the loans, the Company issued promissory notes in the aggregate principal amount of $300,000 (the “Giffoni Notes”). The Giffoni Notes accrued interest at rates ranging between 3.25% and 6.0% per annum. During the years ended December 31, 2014 and 2013, the Company incurred interest expense of $1,171 and $9,251, respectively, on the Giffoni Notes. At December 31, 2014 and 2013, there was no accrued interest on the Giffoni Notes.

 

(d) On December 21, 2012 the William Shell Survivor’s Trust assigned certain promissory notes, in the aggregate principal amount of $500,000, to Lisa Liebman (the “Liebman Notes”), a related party. Lisa Liebman is married to Dr. Shell. The Liebman Notes accrue interest at rates ranging between 3.25% and 3.95% per annum. The principal and interest on the Liebman Notes is payable on demand. During the years ended December 31, 2014 and 2013, the Company incurred interest expense on the Liebman Notes of $19,190 and $19,090, respectively. At December 31, 2014 and 2013, accrued interest on the Liebman Notes totaled $4,837 and $21,044, respectively.
   
(e) On June 28, 2013, the Company entered into an arrangement with CMFG which was governed pursuant to the terms of four contemporaneous agreements. On October 1, 2013, CMFG assigned its rights pursuant to the Workers’ Compensation Receivables Funding, Assignment and Security Agreement, to Raven Asset-Based Opportunity Fund I LP, a Delaware limited partnership (“Raven”). The components of the agreements are detailed as follows:

 

  Workers’ Compensation Receivables Funding, Assignment and Security Agreement, as amended (“CMFG #2”) – The Company has assigned the future proceeds of accounts receivable of WC benefit claims with dates of service between the year 2007 and December 31, 2012 (the “Funded Receivables”), to Raven. In exchange, the Company received a loan of $3.2 million. Prior to July 1, 2014, the monthly division of collections on Funded Receivables was distributed as follows: First, to CMFG as a servicing fee in an amount equal to five percent (5%) of the collections; Second, to Raven to pay off any shortfalls from previous months (a shortfall will have been deemed to occur if Raven receives less than $175,000 in a given month); Third, to Raven in an amount up to $175,000; Fourth, to the Company in an amount of $125,000; Fifth, to Raven and the Company, the remainder of the Funded Receivables split at a ratio of 50% to 50%. Effective July 1, 2014, the monthly division of collections on the Funded Receivables was modified and until such time as Raven has received payment of $3.95 million in collections from Funded Receivables, the Funded Receivables will be distributed as follows: First, to CMFG as a servicing fee in an amount equal to five percent (5%) of the collections; Second, to Raven to pay off any shortfalls from previous months (a shortfall will have been deemed to occur if Raven receives less than $125,000 in a given month); Third, to Raven in an amount up to $125,000; Fourth, to the Company in an amount of $125,000; Fifth, to Raven and the Company, the remainder of the Funded Receivables split at a ratio of 50% to 50%. Once Raven has received payment of $3.95 million in collections from Funded Receivables, the Funded Receivables will cease to be distributed as described above, and will instead be distributed as follows: First, to CMFG as a servicing fee in an amount equal to five percent (5%) of the collections; and Second, to Raven and the Company, the remainder of the Funded Receivables split at a ratio of 45% to 55%, respectively.
     
  Common Stock Warrant to James Giordano, CEO of CMFG – The Company issued a ten (10) year warrant to purchase 1,412,500 shares of common stock at an exercise price of $2.00 per share (the “Giordano Warrant”) as consideration for consulting services performed by Mr. Giordano, as described below. The warrants became exercisable during December 2013. The exercisable amount is limited to the average trading volume for the ten days prior to the date of exercise.
     
  Professional Services and Consulting Agreement with Mr. Giordano – The Company entered into a consulting arrangement with Mr. Giordano for consulting services relating to medical receivable billing, billing/management strategies, and areas related to financing. Mr. Giordano’s only form of compensation for his consulting services was the issuance of the Giordano Warrant. The consulting agreement terminates at such time as all the obligations or contemplated transactions detailed in the Giordano Warrant have been satisfied.
     
  Professional Services and Consulting Agreement with CMFG – The Company entered into a consulting arrangement with CMFG for consulting services relating to medical receivable billing, billing/management strategies, and areas related to financing. The agreement provided for the Company to pay a one-time fee of $64,000 upon execution of the agreement.

 

As additional consideration, Raven received a warrant to purchase 400,000 shares of the Company’s common stock at an exercise price of $2.00 per share (the “Raven Warrant”)(See Note 5). The warrants became exercisable April 1, 2014. However, the exercisable amount is limited to the average trading volume for the ten days prior to the date of exercise. The Company accounted for the additional issuance of warrants as a modification of the original award issued June 28, 2013.

 

The Company recorded a debt discount in the amount of $925,521 based on the estimated fair value of the Giordano and Raven Warrants. The debt discount is being amortized as non-cash interest expense over the term of the debt using the effective interest method. During the years ended December 31, 2014 and 2013, interest expense of $385,634 and $231,380, respectively, was recorded from the debt discount amortization.

 

During the years ended December 31, 2014 and 2013, the Company incurred interest expense, excluding amortization of debt discount, of $409,059 and $114,500, respectively, pursuant to CMFG #2.

Related Party Transactions

v2.4.0.8
Related Party Transactions
12 Months Ended
Dec. 31, 2014
Related Party Transactions [Abstract]  
Related Party Transactions

11. RELATED PARTY TRANSACTIONS

 

Notes Payable

 

As of December 31, 2014, and December 31, 2013, the Company has notes payable agreements issued to related parties with aggregate outstanding principal balances of $2,504,411 and $2,621,067, respectively (See Note 10).

Concentrations

v2.4.0.8
Concentrations
12 Months Ended
Dec. 31, 2014
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 both of the years ended December 31, 2014 and 2013, the Company derived 39% of its billings from the sale of Theramine. While demand remains strong for Theramine, we cannot assure you it will continue in the future. If demand were to decrease for Theramine it may have a material adverse effect on the Company’s operating results.

 

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

 

In both of the years ended December 31, 2014 and 2013, 11% of the Company’s billings were derived from individual customers representing 10% or more of the total sales. The Company does not receive purchase volume commitments from clients and physicians may stop purchasing our products and services with little or no warning. The loss of any one or more of these customers may have an immediate adverse effect on our financial results.

 

Major Vendor

 

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

Lease Commitments

v2.4.0.8
Lease Commitments
12 Months Ended
Dec. 31, 2014
Leases [Abstract]  
Lease Commitments

13. LEASE COMMITMENTS

 

The Company leases its operating facility under a lease agreement expiring February 28, 2018. The Company, as lessee, is required to pay for all insurance, repairs and maintenance and any increases in real property taxes over the lease period on the operating facility. The Company’s net rent expenses for the years ended December 31, 2014, and December 31, 2013, were approximately $252,000 and $240,000.

 

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

 

2015   $ 252,084  
2016     252,084  
2017     252,084  
2018     42,014  
Total   $ 798,266  

Equity Transactions

v2.4.0.8
Equity Transactions
12 Months Ended
Dec. 31, 2014
Equity [Abstract]  
Equity Transactions

14. EQUITY TRANSACTIONS

 

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

 

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

 

During the year ended December 31, 2013, the Company issued an aggregate of 258,455 shares of its common stock pursuant to agreements with former employees and consultants to the Company. The shares were valued at $222,540, an average of $0.86 per share based on the fair value of the common stock on the date of issuance.

 

On March 21, 2014, the Company entered into a subscription agreement with Ultera Pty Ltd ATF MPS Superannuation Fund (“Ultera”). Dr. Wenkart, a director of the Company, is the owner and director of Ultera. The Company issued and sold to Ultera 400,000 shares of its common stock. The issuance resulted in aggregate gross proceeds to the Company of $240,000.

 

During the year ended December 31, 2014, the Company issued an aggregate of 627,575 shares of its common stock pursuant to agreements with its directors and consultants to the Company. The shares were valued at $398,750, an average of $0.64 per share. As a result of these issuances, the Company recorded an expense of $130,500 and a reduction in its liabilities of $268,250.

Commitments and Contingencies

v2.4.0.8
Commitments and Contingencies
12 Months Ended
Dec. 31, 2014
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

15. COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

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

 

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

Subsequent Events

v2.4.0.8
Subsequent Events
12 Months Ended
Dec. 31, 2014
Subsequent Events [Abstract]  
Subsequent Events

16. SUBSEQUENT EVENTS

 

On January 13, 2015, the Company entered into a securities purchase agreement, pursuant to which the Company sold a senior secured convertible debenture (the “Debenture”) in the principal amount of $650,000, to Derma Medical Systems, Inc. (“Derma”). Thomas R. Wenkart, M.D., a director of the Company, is the owner and President of Derma. The Debenture accrues interest at 4% per annum, throughout the term of the Debenture, and unless earlier converted into shares of the Company’s common stock, has a maturity date of January 12, 2018. Interest on the Debenture is paid semi-annually, at the Company’s option, in either cash or shares of common stock. At Derma’s option, the principal amount of the Debenture is convertible into shares of common stock at a conversion price of $0.30, subject to adjustment. The financing closed on January 15, 2015.

 

On February 23, 2015, the Company entered into an unsecured promissory note, pursuant to which the Company received the principal amount of $1.2 million, from Shlomo Rechnitz (the “Lender”). The promissory note accrues interest at 4% per annum, throughout its term, and has a maturity date of February 22, 2017. Principal and interest on the promissory note is payable in monthly installments of $52,109.91, beginning on March 22, 2015, and continuing until February 22, 2017. The loan closed on February 24, 2015. The Company plans to use the proceeds of the loan for working capital and general corporate purposes.

 

On March 18, 2015, an interim award in the amount of $1.17 million dollars was issued against TMP for breach of contract, and in favor of PDR Medical Management, LLC, a California Limited Liability Company, a former distributor of the Company’s products, at an Arbitration through JAMS. The amount of the award was for sums previously included in the Company’s financial statements as “Due to Physicians” (See Note 9).

Significant Accounting Policies (Policies)

v2.4.0.8
Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2014
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 involve significant judgment and estimates include revenue recognition, share based compensation, recoverability of intangibles, valuation of derivatives, and valuation of deferred income taxes. Actual results could differ from those estimates.

Cash Equivalents

Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less when purchased to be cash equivalents. The recorded carrying amounts of the Company’s cash and cash equivalents approximate their fair value. As of December 31, 2014 and 2013, the Company had no cash equivalents.

Considerations of Credit Risk

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 pharmaceuticals through employed sales representatives, independent distributors, and pharmacies. Product sales are invoiced upon shipment at Average Wholesale Price (“AWP”), which is a commonly used term in the industry, with varying rapid pay discounts, under five models: Physician Direct Sales, Distributor Direct Sales, Physician Managed, Hybrid Models, and the Cambridge Medical Funding Group WC Receivable Purchase Assignment Model.

 

Under the following revenue models, product sales are invoiced upon shipment. However, revenues are not recorded until collectability is reasonably assured, which the Company has determined is when the payment is received:

 

Physician Direct Sales Model (3% of product revenues for the year ended December 31, 2014): Under this model, a physician purchases products from TMP, but does not retain CCPI’s services. TMP invoices the physician upon shipment under terms which allow a significant rapid pay discount off AWP for payment within discount terms, in accordance with the product purchase agreement. The physicians dispense the product and perform their own claims processing and collections. TMP recognizes revenue under this model on the date of shipment at the gross invoice amount less the anticipated rapid pay discount offered in the product purchase agreement. In the event payment is not received within the term of the agreement, the amount due from the physician for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance. The physician is responsible for payment directly to TMP.

 

Distributor Direct Sales Model (16% of product revenues for the year ended December 31, 2014): Under this model, a distributor purchases products from TMP, sells those products to a physician, and the physician does not retain CCPI’s services. TMP invoices distributors upon shipment under terms which include a significant discount off AWP. TMP recognizes revenue under this model on the date of shipment at the net invoice amount. In the event payment is not received within the term of the agreement, the amount payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Physician Managed Model (38% of product revenues for the year ended December 31, 2014): Under this model, a physician purchases products from TMP and retains CCPI’s services. TMP invoices the physician upon shipment under terms which allow a significant rapid pay discount for payment received within terms in accordance with the product purchase agreement, which includes a security interest for TMP in the products and receivables generated by the dispensing of the products. The physician also executes a billing and claims processing services agreement with CCPI for billing and collection services relating to our products (discussed below). CCPI submits a claim for reimbursement on behalf of the physician client. The CCPI fee and product invoice amount are deducted from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the physician client. In the event the physician fails to pay the product invoice within the agreed term, we can deduct the payment due from any of the reimbursements received by us on behalf of the physician client as a result of the security interest we obtained in the products we sold to the physician client and the receivables generated by selling the products in accordance with our agreement. In the event payment is not received within the term of the agreement, the amount due from the physician for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Hybrid Model (10% of product revenues for the year ended December 31, 2014): Under this model, a distributor purchases products from TMP and sells those products to a physician and the physician retains CCPI’s services. TMP invoices distributors upon shipment under terms which allow a significant rapid pay discount for payment received within terms in accordance with the product purchase agreements. The physician client of the distributor executes a billing and claims processing services agreement with CCPI for billing and collection services (discussed below). The distributor product invoice and the CCPI fee are deducted from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the distributor for further delivery to their physician clients. In the event payment is not received within the term of the agreement, the amount payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance.

 

Since we are in the early stage of our business, as a courtesy to our physician clients, our general practice has been to extend the rapid pay discount from our Physician Managed and Hybrid models beyond the initial term of the invoice until the invoice is paid and not to apply a late payment fee to the outstanding balance.

 

Due to substantial uncertainties as to the timing and collectability of revenues derived from our Physician Managed and Hybrid models, which can take in excess of five years to collect, we have determined that these revenues do not meet the criteria for recognition, in accordance with The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. ASC 605, Revenue Recognition (“ASC 605”), upon shipment. These revenues are recorded when collectability is reasonably assured, which the Company has determined is when the payment is received, which is upon collection of the claim.

 

The Company has entered into an agreement with Cambridge Medical Funding Group, LLC (“CMFG”) related to California Workers’ Compensation (“WC”) benefit claims. Under this arrangement, we have determined that pursuant to FASB ASC Topic No. 860, Transfers of Financial Assets and ASC 605 we have met the criteria for revenue recognition on the date that payment is due from CMFG, which approximates the product shipment date.

 

CMFG #1 – WC Receivable Purchase Assignment Model (“CMFG #1”) (33% of product revenues for the year ended December 31, 2014): Under this model, physicians who purchase products from TMP under the Company’s Physician Managed Model will have the option to assign their accounts receivables (primarily those accounts receivables with dates of service starting with the year 2013) from California WC benefit claims to CMFG, at a discounted rate. Each agreement is executed among CMFG, TMP, and each individual physician, and serves as a master agreement for all assigned receivables by the physician to CMFG. Since these accounts receivable originated from the Company’s Physician Managed Model, CCPI’s services are also retained. The physician’s fees and financial obligations due to TMP, for the purchase of TMP product and use of CCPI’s services, are satisfied directly by CMFG, usually within seven (7) days of transmission of the accounts receivable to CMFG. CMFG has agreed to pay an amount equal to 20% of eligible assigned accounts receivable as an advance payment. CMFG makes this payment directly to TMP, on behalf of the physician. TMP applies this payment to the physician’s financial obligations due to CCPI for the physician’s use of the Company’s medical billing and claims processing services, and the physician’s financial obligation due to TMP for the cost of the product. The Company recognizes revenue on the date that payment is due from CMFG. Under CMFG #1, the Company only receives the 20% advance payment, where such payment is without recourse or future obligation for TMP to repay the 20% advanced amount back to CMFG or the physician. Actual amounts collected on the assigned accounts receivable are shared between CMFG and the physician, where the first 37% of amounts collected are disbursed to CMFG and additional amounts collected are shared at a ratio of 75:25, where 75% is disbursed to the physician and 25% is disbursed to CMFG.

 

During the years ended December 31, 2014 and 2013, the Company issued billings to Physician Managed and Hybrid model customers aggregating $3.8 million and $5.7 million, respectively, which were not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings. Direct costs associated with the above billings are expensed as incurred. Direct costs associated with all billings, aggregating $569,570 and $1,054,194, respectively, were expensed in the accompanying consolidated financial statements at the time of such billings. In accordance with the Company’s revenue recognition policy, the Company recognized revenues from certain of these customers when cash was collected, aggregating $4,525,978 and $5,037,003 during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, we had approximately $7.5 million in unrecorded accounts receivable that potentially will be recorded as revenue in the future as our CCPI subsidiary secures claims payments on behalf of our PMM and Hybrid Customers. All unpaid invoices underlying claims assigned to CMFG pursuant to CMFG #1 are excluded from unrecorded accounts receivable.

 

CCPI receives no revenue in the Physician Direct or Distributor Direct models because it does not provide collection and billing services to these customers. In the Physician Managed and Hybrid models CCPI has a billing and claims processing service agreement with the physician. The billing and claims processing agreement includes a service fee that is based upon a percentage of collections on all claims. Because fees are only earned by CCPI upon collection of the claim, and the fee is not determinable until the amount of the collection of the claim is known, CCPI recognizes revenue at the time claims are paid. Under CMFG #1 the Company recognizes revenue related to CCPI’s services upon receipt of the 20% advance payment from CMFG.

 

No returns of products are allowed except for products damaged in shipment, which historically have been insignificant.

 

The rapid pay discounts to the AWP amount offered to the physician or distributor vary based upon the expected payment term from the physician or distributor. The discounts are derived from the Company’s historical experience of the collection rates from internal sources and updated for facts and circumstances and known trends and conditions in the industry, as appropriate. As described in the various models, we recognize provisions for rapid pay discounts in the same period in which the related revenue is recorded. We believe that our current provisions appropriately reflect our exposure for rapid pay discounts. These rapid pay discounts have typically ranged from 40% to 88% of AWP.

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 remain outstanding after we have used reasonable collection efforts will be written off. Based on an assessment as of December 31, 2014 and 2013, of the collectability of invoices, we established an allowance for doubtful accounts of $55,773 and $81,171, respectively.

 

Under the Company’s Physician Managed Model and Hybrid Model, CCPI performs billing and collection services on behalf of the physician client and deducts the CCPI fee and product invoice amount from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the physician client. Extended collection periods are typical in the workers compensation industry with payment terms extending from 45 days to in excess of five years. The physician remains personally liable for purchases of product from TMP and TMP retains a security interest in all products sold to the physician, and the resulting claims receivable from sales of the products. CCPI maintains an accounting of all managed accounts receivable on behalf of the physician. As described above, due to uncertainties as to the timing and collectability of revenues derived from these models, revenue is recorded when payment is received, there is no related accounts receivable, and therefore no allowance for doubtful accounts is necessary.

Inventory Valuation

Inventory 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, 2014 and 2013, 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 an impairment has occurred, the intangible assets are written down to fair value as required. The Company has one intangible asset with an indefinite life which is a domain name for medical foods. No impairment indicators existed at December 31, 2014 and 2013, so no intangible asset impairment was recorded for the years ended December 31, 2014 and 2013.

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 proportionate value of the warrant. Warrants issued with ratcheting provisions are classified as derivative liabilities and are revalued using the Black-Scholes model each quarter based on changes in the market value of our common stock and unobservable level 3 inputs.

 

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

 

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

 

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

 

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

Derivative Financial Instruments

Derivative Financial Instruments

 

Derivative liabilities are recognized in the consolidated balance sheets at fair value based on the criteria specified in FASB ASC Topic 815-40 Derivatives and Hedging – Contracts in Entity’s own Equity (“ASC 815-40”). Pursuant to ASC 815-40, an evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as a derivative liability instead of as equity. The estimated fair value of warrants classified as derivative liabilities is determined using the Black-Scholes option pricing model. The model utilizes Level 3 unobservable inputs to calculate the fair value of the warrants at each reporting period. The Company determined that using an alternative valuation model such as a Binomial-Lattice model would result in minimal differences. The fair value of warrants classified as derivative liabilities is adjusted for changes in fair value at each reporting period, and the corresponding non-cash gain or loss is recorded as other income or expense in the consolidated statement of operations. As of December 31, 2014, 95,000 warrants were classified as derivative liabilities. Each reporting period the warrants are re-valued and adjusted through the caption “change in fair value of warrant liability” on the consolidated statements of operations. The Company’s remaining warrants are recorded to additional paid in capital as equity instruments.

Income Taxes

Income Taxes

 

The Company determines its income taxes under the asset and liability method. Under the asset and liability approach, deferred income tax assets and liabilities are calculated and recorded based upon the future tax consequences of temporary differences by applying enacted statutory tax rates applicable to future periods for differences between the financial statements carrying amounts and the tax basis of existing assets and liabilities. Generally, deferred income taxes are classified as current or non-current in accordance with the classification of the related asset or liability. Those not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are provided for significant deferred income tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company recognizes tax liabilities by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized and also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. U.S. GAAP also requires management to evaluate tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely than not would not be sustained upon examination by applicable taxing authorities. Management of the Company has evaluated tax positions taken by the Company and has concluded that as of December 31, 2014, there are no uncertain tax positions taken, or expected to be taken, that would require recognition of a liability that would require disclosure in the financial statements.

Stock-Based Compensation

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 options and warrants were to be exercised or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the entity.

 

Since the effects of outstanding options and warrants are anti-dilutive in all periods presented, shares of common stock underlying these instruments have been excluded from the computation of loss per common share.

 

The following sets forth the number of shares of common stock underlying outstanding options and warrants as of December 31, 2014 and 2013:

 

    December 31,  
    2014     2013  
Warrants     4,919,372       4,256,465  
Stock options     2,421,041       2,794,841  
      7,340,413       7,051,306  

Research and Development

Research and Development

 

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

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 May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The amendments (i) remove inconsistencies and weaknesses in revenue requirements, (ii) provide a more robust framework for addressing revenue issues, (iii) improve comparability of revenue recognition across entities, industries, jurisdictions, and capital markets, (iv) provide more useful information to users of financial statements through improved disclosure requirements, and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The new revenue recognition standard requires entities to recognize revenue in a way that reflects the transfer of promised goods or services to customers in an amount based on the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. The Company has not determined what transition method it will use and is currently assessing the impact that this guidance may have on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

Description of Business (Tables)

v2.4.0.8
Description of Business (Tables)
12 Months Ended
Dec. 31, 2014
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Summary of Segment Information

Results for the years ended December 31, 2014 and 2013, are reflected in the table below:

 

For the year ended December 31,

 

    Total     TMP     CCPI  
2014                  
Gross sales   $ 7,112,359     $ 6,467,084     $ 645,275  
Gross profit (loss)   $ 4,895,831     $ 5,897,514     $ (1,001,683 )
Net loss   $ (3,895,009 )   $ (2,893,326 )   $ (1,001,683 )
Total assets   $ 2,500,296     $ 2,467,304     $ 32,992  
                         
2013                        
Gross sales   $ 9,555,562     $ 8,505,667     $ 1,049,895  
Gross profit (loss)   $ 6,566,257     $ 7,451,473     $ (885,216 )
Net loss   $ (9,337,618 )   $ (8,452,402 )   $ (885,216 )
Total assets   $ 4,997,753     $ 4,670,390     $ 327,363  

Significant Accounting Policies (Tables)

v2.4.0.8
Significant Accounting Policies (Tables)
12 Months Ended
Dec. 31, 2014
Accounting Policies [Abstract]  
Schedule of Common Stock Underlying Outstanding Options and Warrants

The following sets forth the number of shares of common stock underlying outstanding options and warrants as of December 31, 2014 and 2013:

 

    December 31,  
    2014     2013  
Warrants     4,919,372       4,256,465  
Stock options     2,421,041       2,794,841  
      7,340,413       7,051,306  

Property and Equipment (Tables)

v2.4.0.8
Property and Equipment (Tables)
12 Months Ended
Dec. 31, 2014
Property, Plant and Equipment [Abstract]  
Schedule of Property and Equipment

Property and equipment, net are as follows:

 

    December 31,  
    2014     2013  
             
Computer equipment   $ 661,322     $ 710,907  
Furniture and fixtures     164,451       245,616  
Leasehold improvements     254,102       254,102  
Total property and equipment, gross     1,079,875       1,210,625  
Less: accumulated depreciation     (972,690 )     (975,039 )
Total property and equipment, net   $ 107,185     $ 235,586  

Intangible Assets (Tables)

v2.4.0.8
Intangible Assets (Tables)
12 Months Ended
Dec. 31, 2014
Goodwill and Intangible Assets Disclosure [Abstract]  
Summary of Intangible Assets

Intangible assets consist of the following:

 

    December 31,  
    2014     2013  
             
Patents   $ 355,630     $ 355,630  
Internally developed software     1,577,367       1,577,367  
Total, at cost     1,932,997       1,932,997  
Accumulated amortization     (1,374,845 )     (1,101,348 )
Net intangible assets     558,152       831,649  
Intangible asset with indefinite life:                
URL medicalfoods.com     1,301,000       1,301,000  
Total intangible assets   $ 1,859,152     $ 2,132,649  

Summary of Future Amortization

Future amortization for years ending after December 31, 2014 is as follows:

 

2015   $ 175,409  
2016   $ 76,468  
2017   $ 41,919  
2018   $ 15,735  
2019   $ 12,463  
Thereafter   $ 236,158  
    $ 558,152  

Income Taxes (Tables)

v2.4.0.8
Income Taxes (Tables)
12 Months Ended
Dec. 31, 2014
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, 2014     December 31, 2013  
Deferred income tax asset-short-term   $ 1,517,270     $ 1,402,031  
Allowance     (1,517,270 )     (1,402,031 )
Deferred income tax asset-short-term, net            
                 
Deferred income tax asset-long-term     8,303,462       7,145,404  
Deferred income tax liability-long-term     (1,074,928 )     (1,177,716 )
Deferred income tax asset-long-term     7,228,534       5,967,688  
Allowance     (7,228,534 )     (5,967,688 )
Deferred income tax asset-long-term, net            
                 
Total deferred tax asset, net            

Components of Income Tax Provision

The components of the income tax provision are as follows:

 

    December 31, 2014     December 31, 2013  
Current:                
Federal   $ 26,124     $  
State     39,704       1,278  
Total current     65,828       1,278  
Deferred:                
Federal           4,436,445  
State           1,229,179  
Total deferred           5,665,624  
Income tax expense   $ 65,828     $ 5,666,902  

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 2014 and for 2013 to income tax expense is as follows:

 

    Year Ended December 31,  
    2014     2013  
Statutory Federal tax rate     (35.0 %)     (35.0 %)
Increase (decrease) in tax rate resulting from:                
Allowance against deferred tax assets     34.7 %     200.8 %
Derivative revaluation expense and other     7.5 %     0.2 %
Penalties and fines           (6.3 %)
State taxes, net of federal benefit     (5.7 %)     (5.8 %)
Nondeductible meals & entertainment expense     0.2 %     0.5 %
Effective tax rate     1.7 %     154.4 %

Components of Deferred Tax Assets

Deferred tax components are as follows:

 

    December 31, 2014     December 31, 2013  
Deferred tax assets:                
Deferred revenue   $ 3,075,550     $ 2,972,470  
Net operating loss     3,356,001       2,405,950  
Stock compensation expense     1,416,290       1,311,363  
Accrued liability for payroll and vacation     883,901       746,606  
Other accrued liabilities     610,644       595,943  
R&D credits     455,621       455,621  
Bad debt reserve     22,725       59,482  
Total deferred tax assets     9,820,732       8,547,435  
                 
Deferred tax liabilities:                
Depreciation     (549,266 )     (641,198 )
Loss on sale of accounts receivable     (525,662 )     (536,518 )
Total deferred tax liabilities     (1,074,928 )     (1,177,716 )
Valuation allowance     (8,745,804 )     (7,369,719 )
                 
Net deferred tax assets   $     $  

Stock-Based Compensation (Tables)

v2.4.0.8
Stock-Based Compensation (Tables)
12 Months Ended
Dec. 31, 2014
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Summary of Stock Options Activity

A summary of stock option activity for the years ended December 31, 2014 and December 31, 2013, is presented below:

 

          Outstanding Options  
    Shares Available for Grant     Number of Shares     Weighted Average Exercise Price     Weighted Average Remaining Contractual Life (years)     Aggregate Intrinsic Value  
                               
December 31, 2012     865,556       1,770,437     $ 2.31       8.10     $ 1,113,383  
Amendment of 2011 SIP     2,000,000                                
Grants     (1,198,300 )     1,198,300     $ 1.28                  
Cancellations and forfeitures     173,896       (173,896 )   $ 2.01                  
Restricted stock awards     (48,455 )                              
                                         
December 31, 2013     1,792,697       2,794,841     $ 1.89       7.03     $  
Cancellations and forfeitures     373,800       (373,800 )   $ 2.62                  
Restricted stock awards     (75,000 )                              
                                         
December 31, 2014     2,091,497       2,421,041     $ 1.77       5.88     $  

Schedule of Black-Scholes Option Pricing Model, Valuation Assumptions

The Company utilized the Black-Scholes option pricing model. The Company did not issue any options during the year ended December 31, 2014. The assumptions used for the year ended December 31, 2013 are as follows:

 

    Year Ended
December 31, 2013
 
Weighted average risk free interest rate     0.51% – 1.32 %
Weighted average life (in years)     3.5 – 5.0  
Volatility     68% - 87 %
Expected dividend yield     0 %
Weighted average grant-date fair value per share of options granted   $ 0.74  

Summary of Changes in Nonvested Options

A summary of the changes in the Company’s nonvested options during the year ended December 31, 2014, is as follows:

 

    Number of
Non-vested
Options
    Weighted
Average Fair
Value at Grant
Date
    Intrinsic
Value
 
                   
Non-vested at December 31, 2013     250,000     $ 0.60     $  
Vested in 12 months ended December 31, 2014     79,167     $ 0.65     $  
Non-vested at December 31, 2014     170,833     $ 0.57     $  
Exercisable at December 31, 2014     2,250,608     $ 0.93     $  
Outstanding at December 31, 2014     2,421,441     $ 0.91     $  

Warrants (Tables)

v2.4.0.8
Warrants (Tables)
12 Months Ended
Dec. 31, 2014
Warrants  
Schedule of Warrants Valuation Assumptions

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

 

    Year Ended December 31,  
    2014     2013  
Weighted average risk free interest rate     1.67% – 1.72 %     0.75% - 2.66 %
Weighted average life (in years)     5.0       5.0 – 10.0  
Volatility     67 %     71% - 86 %
Expected dividend yield     0 %     0 %
Weighted average grant-date fair value per share of warrants granted   $ 0.67     $ 0.75  

Summary of Status of Outstanding Warrants

The following table summarizes information about common stock warrants outstanding at December 31, 2014:

 

Outstanding     Exercisable  
          Weighted                    
          Average     Weighted           Weighted  
          Remaining     Average           Average  
Exercise   Number     Contractual     Exercise     Number     Exercise  
Price   Outstanding     Life (Years)     Price     Exercisable     Price  
$0.01     495,000       4.19     $ 0.01       345,000     $ 0.01  
$0.80     162,907       4.62     $ 0.80       162,907     $ 0.80  
$1.00     1,715,000       3.25     $ 1.00       1,715,000     $ 1.00  
$2.00     1,812,500       8.55     $ 2.00       1,812,500     $ 2.00  
$2.60     20,000       3.35     $ 2.60       20,000     $ 2.60  
$3.38     713,965       2.06     $ 3.38       713,965     $ 3.38  
                                         
$0.01 - 3.38     4,919,372       5.17     $ 1.61       4,769,372     $ 1.66