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Document and Entity Information

v2.4.0.6
Document and Entity Information
3 Months Ended
Mar. 31, 2012
May 15, 2012
Document Information [Line Items]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2012  
Document Fiscal Year Focus 2012  
Document Fiscal Period Focus Q1  
Entity Registrant Name Targeted Medical Pharma, Inc.  
Entity Central Index Key 0001420030  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   21,949,576

CONSOLIDATED BALANCE SHEETS

v2.4.0.6
CONSOLIDATED BALANCE SHEETS (USD $)
Mar. 31, 2012
Dec. 31, 2011
Current Assets:    
Cash and Cash Equivalents $ 10,847 $ 147,364
Inventory 847,974 495,821
Accounts Receivable 621,285 899,493
Loans Receivable - Employees 21,774 23,360
Prepaid Expenses - Short Term 453,728 241,208
Prepaid Taxes 792,301 792,301
Deferred Tax Asset - Short Term 271,476 300,170
Total Current Assets 3,019,385 2,899,717
Property and Equipment - Net of Accumulated Depreciation 378,066 411,823
Intangible Assets - Net of Accumulated Amortization 2,364,380 2,387,801
Prepaid Expenses - Long Term 101,848 111,259
Deferred Tax Asset - Long Term 3,646,307 2,951,857
Other Assets 46,000 26,000
Total Assets 9,555,986 8,788,457
Liabilities:    
Accounts Payable and Accrued Expenses warrants issued 5,292,058 5,035,086
Other Amounts due to Related Parties 602,948 602,948
Deferred Tax Liability - Current 171,577 171,577
Total Current Liabilities 6,066,583 5,809,611
Notes Payable-Related Parties net of $1,178,249 discount on warrants issued 2,433,707 1,775,561
Deferred Income Taxes 983,646 988,980
Total Liabilities 9,483,936 8,574,152
Shareholders' Equity:    
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, 21,949,576 and 21,949,576 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively 21,950 21,950
Additional Paid-In Capital 5,517,757 4,684,095
Accumulated Deficit (5,467,657) (4,491,740)
Total Shareholders' Equity 72,050 214,305
Total Liabilities and Shareholders' Equity (Deficit) $ 9,555,986 $ 8,788,457

CONSOLIDATED BALANCE SHEETS (Parenthetical)

v2.4.0.6
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Mar. 31, 2012
Dec. 31, 2011
Notes Payable-Related Parties, discount on warrants issued $ 1,178,249 $ 1,178,249
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 21,949,576 21,949,576
Common stock, shares outstanding 21,949,576 21,949,576

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

v2.4.0.6
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Revenues:    
Product Sales $ 1,272,810 $ 1,881,377 [1]
Service Revenue 102,375 153,948
Total Revenue 1,375,185 2,035,325
Cost of Product Sold 189,993 283,660
Cost of Services Sold 444,742 373,339
Total Cost of Sales 634,735 656,999
Total Gross Profit 740,450 1,378,326
Operating Expenses:    
Research and Development 27,264 36,748
Selling, General and Administrative 2,284,354 2,863,968 [1]
Total Operating Expenses 2,311,618 2,900,716
Net Income (Loss) before Other Income and Expense (1,571,168) (1,522,390)
Other Income and Expense:    
Interest Income (Expense) (75,839)  
Investment Income (Loss)   7,625
Total Other Income and (Expense) (75,839) 7,625
Net Income (Loss) before Taxes (1,647,007) (1,514,765)
Deferred Income Tax Expense (Benefit) (671,090) (585,975) [1]
Net Income (Loss) before Comprehensive Income (975,917) (928,790) [1]
Reclassification for losses included in Net Income   (3,209)
Comprehensive Income (Loss) $ (975,917) $ (931,999) [1]
Basic and Diluted Loss Per Share $ (0.04) $ (0.05) [1]
Basic and Diluted Weighted Average Number of Common Shares Outstanding 21,949,576 20,693,676
[1] Restated

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

v2.4.0.6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $)
Total
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Accumulated Other Comprehensive Income (Loss)
Beginning Balance at Dec. 31, 2010 [1] $ 2,898,142 $ 18,309 $ 3,191,314 $ (314,690) $ 3,209
Beginning Balance (in shares) at Dec. 31, 2010 [1]   18,308,576      
Stock Issued for Services (in shares)   16,000      
Stock Issued for Services 40,800 16 40,784    
Shares issued to existing shell shareholders in the reorganization (in shares)   3,625,000      
Shares issued to existing shell shareholders in the reorganization (500,000) 3,625 (503,625)    
Reclassification of Gains to Net Income (3,209)       (3,209)
Warrants Issued in connection with loans from related party 591,702   591,702    
Stock Option Expense 1,363,920   1,363,920    
Net Income (Loss) (4,177,050)     (4,177,050)  
Ending Balance at Dec. 31, 2011 214,305 21,950 4,684,095 (4,491,740)  
Ending Balance (in shares) at Dec. 31, 2011   21,949,576      
Warrants Issued in connection with loans from related party 657,332   657,332    
Stock Option Expense 176,330   176,330    
Net Income (Loss) (975,917)     (975,917)  
Ending Balance at Mar. 31, 2012 $ 72,050 $ 21,950 $ 5,517,757 $ (5,467,657)  
Ending Balance (in shares) at Mar. 31, 2012   21,949,576      
[1] The stockholders' equity has been recapitalized to give effect to the shares exchanged by existing shareholders pursuant to the merger agreement dated January 31, 2011, more fully discussed in Note 7 to these financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

v2.4.0.6
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Cash Flows from Operating Activities:    
Net Income $ (975,917) $ (928,790) [1]
Adjustments:    
Depreciation and Amortization 111,236 105,789
Stock Option Compensation 176,330 471,628
Stock Issued for Services   40,800
Deferred Income Taxes (671,090) (585,975) [1]
Bad Debts Expense      
Changes:    
Inventory (352,153) 87,551
Accounts Receivable 278,208 261,850
Loans Receivable - Employees 1,586 2,592
Prepaid Expenses (203,109) (80,977)
Prepaid Taxes      
Deferred Tax Asset   (51,520)
Other Assets (20,000)  
Accounts Payable and Accrued Expenses 302,810 299,027
Taxes Payable      
Deferred Tax Liability   12,592
Net Cash Flows from Operating Activities (1,352,099) (365,433)
Cash Flows from Investing Activities:    
Net Sales or (Purchases) of Investments   241,207
Acquisition of Intangible Assets (26,552) (147,006)
Purchases of Property and Equipment (27,866) (77,459)
Net Cash Flows from Investing Activities (54,418) 16,742
Cash Flows from Financing Activities:    
Proceeds from Issuance of Common Stock      
Notes Payable-Related Parties 1,270,000  
Due to Related Parties      
Net Cash Flows from Financing Activities 1,270,000  
Net Change in Cash and Cash Equivalents (136,517) (348,691)
Cash and Cash Equivalents - Beginning of Year 147,364 795,914
Cash and Cash Equivalents - End of Period 10,847 447,223
Supplemental Disclosure of Cash Flow Information    
Interest Paid      
Interest Expense $ 10,400  
[1] Restated

CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)

v2.4.0.6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)
3 Months Ended
Mar. 31, 2011
Supplemental Disclosure of Non-Cash Investing and Financing Activities  
Note payable issued to Companies Founders in partial payment of stock purchase $ 440,000
Accrued Expenses related to stock purchase 60,000
Shares issued to existing shell shareholders in the reorganization $ 500,000

Business Activity

v2.4.0.6
Business Activity
3 Months Ended
Mar. 31, 2012
Business Activity

Note 1: Business Activity

 

TARGETED MEDICAL PHARMA, INC. (“Company”), also doing business as Physician Therapeutics (“PTL”), is a specialty pharmaceutical company that develops and commercializes nutrient- and pharmaceutical-based therapeutic systems. The Company also does business as Laboratory Industry Services (“LIS”), which is a facility for the performance of diagnostic testing. On July 30, 2007, the Company formed the wholly owned subsidiary, Complete Claims Processing, Inc. (“CCPI”), which provides billing and collection services on behalf of physicians for claims to insurance companies, governmental agencies and other medical payers.

 

Segment Information :

 

The Company had revenue outside of the United States of $0 and $93,684 for the three months ended March 31, 2012 and 2011, respectively. The Company’s operations are organized into two reportable segments: Targeted Medical Pharma (“TMP”) and CCPI.

 

· TMP : This segment includes PTL and LIS as described above. This segment 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 and is responsible for research and development relating to medical food products and the development of software used for the dispensation and billing of medical foods, generic and branded products. The TMP segment also manages contracts and chargebacks.

 

· CCPI : This segment provides point-of-care dispensing solutions and billing and collections services. It is responsible for the research and development of billing software and methodologies and the customization of hardware that supports dispensing, billing and collection operations.

 

Segment Information for the three months ended March 31,                  
                   
2012 (unaudited)   Total     TMP     CCPI  
Gross Sales   $ 1,375,185     $ 1,272,810     $ 102,375  
Gross Profit (Loss)   $ 740,450     $ 1,082,817     $ (342,367 )
Comprehensive Income (Loss)   $ (975,917 )   $ (633,550 )   $ (342,367 )
Total Assets   $ 9,555,986     $ 9,796,010     $ (240,024 )
less Eliminations   $ -     $ (210,231 )   $ 210,231  
Net Total Assets   $ 9,555,986     $ 9,585,779     $ (29,793 )
                         
2011 (Unaudited and restated)                        
Gross Sales   $ 2,035,325     $ 1,881,377     $ 153,948  
Gross Profit (Loss)   $ 1,378,326     $ 1,597,717     $ (219,391 )
Comprehensive Income (Loss)   $ (931,999 )   $ (416,030 )   $ (515,969 )
Total Assets   $ 5,756,268     $ 7,879,489     $ (2,123,221 )
less Eliminations   $ -     $ (2,273,346 )   $ 2,273,346  
Net Total Assets   $ 5,756,268     $ 5,606,143     $ 150,125  

Summary of Significant Accounting Policies

v2.4.0.6
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2012
Summary of Significant Accounting Policies

Note 2: Summary of Significant Accounting Policies

 

Going concern : – The 2011 audited consolidated financial statements were prepared on the basis that the Company would continue as a going concern. The Company has losses for the year ended December 31, 2011 totaling $4,177,050 as well as accumulated deficit amounting to $4,491,740. Further the Company appeared to have inadequate cash and cash equivalents of $147,364 as of December 31, 2011 to cover projected operating costs for the next 12 months. The loss for the three months ended March 31, 2012 was $975,917 which increased the accumulated deficit to $5,467,654. As a result, the Company is dependent upon further financing, development of revenue streams with shorter collection times and accelerating collections on our physician managed and hybrid revenue streams.

 

These factors raise substantial doubt about the ability of the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise any necessary additional funds through loans and/or additional sales of its common stock development of revenue streams with shorter collection times and accelerating collections on our physician managed and hybrid revenue streams. There is no assurance that the Company will be successful in raising additional capital.

 

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

 

Accounting estimates: The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash Equivalents: The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less when purchased to be cash equivalents. The recorded carrying amounts of the Company’s cash and cash equivalents approximate their fair market value.

 

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

 

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

 

Revenue Recognition :

 

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

 

· Physician Direct Sales Model (2% of revenue for the three months ended March 31, 2012): Under this model, a physician purchases products from TMP but does not retain CCPI’s services. TMP invoices the physician upon shipment under terms which allow a significant rapid pay discount off AWP for payment within discount terms in accordance with the product purchase agreement. The physicians dispense the product and perform their own claims processing and collections. TMP recognizes revenue under this model on the date of shipment at the gross invoice amount less the anticipated rapid pay discount offered in the product purchase agreement. In the event payment is not received within the term of the agreement, the amount payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% may be applied to the outstanding balance. The physician is responsible for payment directly to TMP.

 

· Distributor Direct Sales Model (39% of revenue for the three months ended March 31, 2012): Under this model, a distributor purchases products from TMP and 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.

 

Due to substantial uncertainties as to the timing and collectability of revenues derived from our Physician Managed and Hybrid models described below, which can take in excess of four years to collect, we have determined that these revenues did not meet the criteria for recognition in accordance with SAB Topic 13, Revenue Recognition . These revenues are therefore required to be recorded when collectability is reasonably assured, which the Company has determined is when the payment is received.

 

· Physician Managed Model (48% of revenue for the three months ended March 31, 2012): Under this model, a physician purchases products from TMP and retains CCPI’s services. TMP invoices physician upon shipment to physician under terms which allow a significant rapid pay discount for payment received within terms in accordance with the product purchase agreement which includes a security interest for TMP in the products and receivables generated by the dispensing of the products. The physician also executes a billing and claims processing services agreement with CCPI for billing and collection services relating to our products (discussed below). CCPI submits a claim for reimbursement on behalf of the physician client. The CCPI fee and product invoice amount are deducted from the reimbursement received by CCPI on behalf of the physician client before the reimbursement is forwarded to the physician client. In the event the physician fails to pay the product invoice within the agreed term, we can deduct the payment due from any of the reimbursements received by us on behalf of the physician client as a result of the security interest we obtained in the products we sold to the physician client and the receivables generated by selling the products in accordance with our agreement. In the event payment is not received within the term of the agreement, the amount payable for the purchased TMP products reverts to the AWP. In addition, if payment is not received within the agreed-upon term, a late payment fee of up to 20% is applied to the outstanding balance. However, 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 beyond the initial term of the invoice until the invoice is paid and not to apply a late payment fee to the outstanding balance. TMP recognizes revenue under this model on the date payment is received at the gross invoice amount less the applicable rapid pay discount offered in the product purchase agreement

 

· Hybrid Model (11% of revenue for the three months ended March 31, 2012): Under this model, a distributor purchase products from TMP and sell 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% is applied to the outstanding balance. However, 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 beyond the initial term of the invoice until the invoice is paid and not to apply a late payment fee to the outstanding balance. TMP recognizes revenue under this model on the date payment is received at the net invoice amount.

 

In the three months ended March 31, 2012 and 2011 the Company issued billings to Physician Managed and Hybrid model customers aggregating $3.0 million and $4.2 million, respectively, which were not recognized as revenues or accounts receivable in the accompanying consolidated financial statements at the time of such billings. Direct costs associated with these revenues are expensed as incurred. Direct costs associated with these billings aggregating $189,993 and $283,660, respectively, were expensed in the accompanying consolidated financial statements at the time of such billings. However, in accordance with the revenue recognition policy described above, the Company recognized revenues from certain of these customers when cash was collected aggregating $763,745 and $949,019 in the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, the Company had contractual receivables from its Physician Managed and Hybrid model customers totaling $31,429,375 which are not reflected in the accompanying consolidated balance sheet as of such dates and will be recorded as revenue only when payment is made.

 

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. That agreement includes a service fee defined as a percentage of collections on all claims. Because fees are only earned by CCPI upon collection of the claim and the fee is not determinable until the amount of the collection of the claim is known, CCPI recognizes revenue at the time that collections are received.

 

No returns of products are allowed except products damaged in shipment, which has been insignificant.

 

The rapid pay discounts to the AWP offered to the physician or distributor, under the models described above, vary based upon the expected payment term from the physician or distributor. The discounts are derived from the Company’s historical experience of the collection rates from internal sources and updated for facts and circumstances and known trends and conditions in the industry, as appropriate. As described in the models above, we recognize provisions for rapid pay discounts in the same period in which the related revenue is recorded. 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 Average Wholesale Price and we have monitored our experience ratio periodically over the prior twelve months and have made adjustments as appropriate.

 

Allowance for doubtful accounts : Under the direct sales to physician and direct sales to distributor models, product is sold under terms that allow substantial discounts (40-88%) for payment within terms. With such substantial discounts, it is rare that an invoice is not paid within terms. We have not experienced any write offs associated with these revenue models.

 

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 four years. The physician remains personally liable for purchases of product from TMP and, during this long collection cycle, TMP retains a security interest in all products sold to the physician along with the claims receivable that result from sales of the products. CCPI maintains an accounting of all managed accounts receivable on behalf of the physician and regularly reports to the physician. As described above, due to uncertainties as to the timing and collectability of revenues derived from these models, revenue is recorded when payment is received therefore no allowance for doubtful accounts is necessary.

 

In addition to the bad debt recognition policy above, it is also TMP’s policy to write down uncollectible loans and trade receivables when the payer is no longer in existence, is in bankruptcy or is otherwise insolvent. In such instances our policy is to reduce accounts receivable by the uncollectible amount and to proportionally reduce the allowance for doubtful accounts.

 

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 amortized 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 asset impairment was recorded for the three months ended March 31, 2012 or 2011.

 

Intangible assets : Intangible assets with finite lives, including patents and internally developed software (primarily the Company’s PDRx Software), are stated at cost and are amortized over their useful lives. Patents are amortized on a straight line basis over their statutory lives, usually fifteen to twenty years. Internally developed software is amortized over three to five years. Intangible assets with indefinite lives are tested annually for impairment, during the fiscal fourth quarter and between annual periods, and more often when events indicate that an impairment may exist. If impairment indicators exist the intangible assets are written down to fair value as required. No asset impairment was recorded for the three months ended March 31, 2012 or 2011. 

  

Fair value of financial instruments : The Company’s financial instruments are accounts receivable, accounts payable and notes payable. The recorded values of accounts receivable, accounts payable, and notes payable approximate their values based on their short term nature.

 

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.

 

Stock-Based Compensation : The Company accounts for stock option awards in accordance with ASC 718. Under ASC 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 ASC 505-50. 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.

 

Income Per Share : The Company utilizes ASC 260, “Earnings per Share”. Basic income (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding. Diluted income (loss) per share is computed similar to basic income (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. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.

 

The following potential common shares have been excluded from the computation of diluted net income (loss) per share for the periods presented where the effect would have been anti-dilutive:

 

    March 31, 2012     March 31, 2011  
Options shares excluded     941,357       291,347  

 

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

 

Reclassification

Certain accounts in the prior-year consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current-year financial statements.

Stock Based Compensation

v2.4.0.6
Stock Based Compensation
3 Months Ended
Mar. 31, 2012
Stock Based Compensation

Note 3: Stock Based Compensation

 

For the three months ended March 31, 2012 and 2011, the Company recorded compensation costs for options amounting to $176,330 and $471,628 respectively. A deduction is not allowed for income tax purposes until nonqualified options are exercised. The amount of this deduction will be the difference between the fair value of the Company’s common stock and the exercise price at the date of exercise. Accordingly, there is a deferred tax asset recorded for the tax effect of the financial statement expense recorded. The tax effect of the income tax deduction in excess of the financial statement expense, if any, will be recorded as an increase to additional paid-in capital. No tax deduction is allowed for incentive stock options (ISO). Accordingly no deferred tax asset is recorded for GAAP expense related to these options.

 

Management has valued the options at their date of grant utilizing the Black Scholes option pricing model. As of the issuance of these consolidated financial statements, there was not a public market for the Company shares. Accordingly, the fair value of the underlying shares 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 depending on the date of the grant and expected life of the options. 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 following table summarizes the status of the Company’s aggregate stock options granted:

 

    Number of Shares Remaining Options     Weighted Average Exercise Price  
                 
Outstanding at December 31, 2011     1,583,091     $ 2.73  
Exercisable at December 31, 2011     1,147,909     $ 2.49  
Options granted during 2012     0          
Options exercised during 2012     0          
Options forfeited during 2012     0          
Outstanding at March 31, 2012     1,583,091     $ 2.73  
Exercisable at March 31, 2012     1,297,559     $ 2.59  

 

The following table summarizes the status of the Company’s aggregate non-vested shares

 

    Number of Non-vested Shares     Weighted Average fair Value at Grant Date  
Non-vested at December 31, 2011     435,182       $1.66  
Exercisable at December 31, 2011     1,147,909       $1.30  
Outstanding at December 31, 2011     1,583,091       $1.40  
Granted in three months ended March 31, 2012     -          
Forfeited in three months ended March 31, 2012     -          
Vested in three months ended March 31, 2012     149,650       $1.18  
Non-vested at March 31, 2012     285,532       $1.78  
Exercisable at March 31, 2012     1,297,559       $1.31  
Outstanding at March 31, 2012     1,583,091       $1.40  

 

Per employment agreements with each of Dr. Shell and Mr. Giffoni (the “TMP Insiders”), each dated September 1, 2010 and amended on January 31, 2011, the TMP Insiders are entitled to 500,000 shares of common stock and annual base salary and benefits for the longer of the remaining term of the employment agreement or 30 months in the event the TMP Insider is terminated without cause by us or with cause by the TMP Insider. We would have “cause” to terminate the employment relationship upon (i) a TMP Insider’s conviction of or a plea of nolo contendere for the commission of a felony or (ii) the TMP Insider’s willful failure to substantially perform the TMP Insider’s duties under the employment agreement. A TMP Insider will have “cause” to terminate the employment relationship with us in the event any of the following circumstances are not remedied within 30 days of our receipt of a notice of termination from the TMP Insider: (i) a material change in the TMP Insider’s duties or a material limitation of the TMP Insider’s powers; (ii) a failure to elect the TMP Insider to the management position specified in such TMP Insider’s employment agreement or a reduction of the TMP Insider’s annual base salary; (iii) our failure to continue in effect any benefit plan in effect upon the execution of the initial employment agreement, (iv) a material breach by us of the employment agreement and (v) a change in control (which is defined in the TMP Insiders’ employment agreements). Amendment No. 1 to each of the TMP Insiders’ employment agreements deleted the change in control provisions.

 

Pursuant to the employment agreements, the TMP Insiders are also entitled to receive incentive stock options ranging from 7,394 options to 110,917 options, each at an exercise price of $3.49 per share (which numbers have been adjusted for the Reorganization), in the event we achieve certain EBITDA targets ranging from $50,000,000 to $250,000,000. The Company will grant additional incentive stock options upon achievement of each milestone set forth below. Milestone levels shall be based upon EBIDTA reported in the financial statements during any calendar year. EBIDTA is defined as earnings before taxes, interest, depreciation, and amortization.

 

EBIDTA     Options
$ 50,000,000     an option to purchase 5,000 shares Common Stock.
$ 60,000,000     an option to purchase 7,500 shares Common Stock.
$ 80,000,000     an option to purchase 7,500 shares Common Stock.
$ 100,000,000     an option to purchase 10,000 shares Common Stock.
$ 125,000,000     an option to purchase 10,000 shares Common Stock.
$ 150,000,000     an option to purchase 10,000 shares Common Stock.
$ 175,000,000     an option to purchase 15,000 shares Common Stock.
$ 200,000,000     an option to purchase 50,000 shares Common Stock.
$ 250,000,000     an option to purchase 75,000 shares Common Stock.

 

The fair value of warrants issued in connection with certain loans made by related parties during the three months ended March 31, 2012 was determined using the Black Scholes Option Pricing Model with the following assumptions:

 

  · Stock price of $2.55
  · Exercise price of $3.38
  · Volatility factor of 96.66% based on similar companies;
  · Expected term of 5 years based on the term of the warrant;
  · A dividend rate of zero; and
  · The risk free rate of 0.90%

 

The following table summarizes the status of the Company’s outstanding warrants

 

    Note     Interest     Number of     Value of     Discounted  
Date   Amount     Rate     Warrants     Warrant     Note Value  
                                         
08/19/11   $ 150,000       3.95 %     43,568     $ 76,220     $ 73,780  
09/01/11   $ 80,000       3.95 %     23,237     $ 40,651     $ 39,349  
09/23/11   $ 52,000       3.95 %     15,104     $ 26,423     $ 25,577  
09/28/11   $ 200,000       3.95 %     58,091     $ 101,627     $ 98,373  
10/17/2011   $ 170,000       3.95 %     50,296     $ 87,989     $ 82,011  
10/20/2011   $ 125,000       3.95 %     36,982     $ 64,698     $ 60,302  
11/8/2011   $ 120,000       3.95 %     35,503     $ 62,110     $ 57,890  
11/22/2011   $ 140,000       3.95 %     41,420     $ 72,462     $ 67,538  
12/7/2011   $ 115,000       3.95 %     34,024     $ 59,522     $ 55,478  
1/4/2012   $ 30,000       3.95 %     8,876     $ 15,528     $ 14,472  
1/18/2012   $ 25,000       3.95 %     7,396     $ 12,940     $ 12,060  
1/19/2012   $ 100,000       3.95 %     29,586     $ 51,758     $ 48,242  
1/31/2012   $ 200,000       3.95 %     59,172     $ 103,517     $ 96,483  
2/1/2012   $ 250,000       3.95 %     73,964     $ 129,396     $ 120,604  
2/15/2012   $ 200,000       3.95 %     59,172     $ 103,517     $ 96,483  
2/29/2012   $ 240,000       3.95 %     71,006     $ 124,220     $ 115,780  
3/15/2012   $ 75,000       3.95 %     22,189     $ 38,819     $ 36,181  
3/28/2012   $ 150,000       3.95 %     44,379     $ 77,638     $ 72,362  
    $ 2,422,000               713,964     $ 1,249,033     $ 1,172,967  
Cumulative Amortization of Note Discount                           $ (70,784 )   $ 70,784  
Total Notes with Warrants March 31, 2012   $ 2,422,000               713,964     $ 1,178,249     $ 1,243,751  

Notes Payable - Related Parties

v2.4.0.6
Notes Payable - Related Parties
3 Months Ended
Mar. 31, 2012
Notes Payable - Related Parties

Note 4:  Notes Payable – Related Parties

 

On December 12, 2010, the Company issued a promissory note to the Targeted Medical Pharma, Inc. Profit Sharing Plan (the “Plan”) in the amount of $300,000 (the “Plan Note”).  The note bears interest at a rate of 8.0 percent per annum and was payable on June 12, 2011.

 

On January 31, 2011, the Company issued promissory notes to each of William Shell, our Chief Executive Officer, Chief Scientific Officer, interim Chief Financial Officer and a director, Elizabeth Charuvastra, our Chairman, Vice President of Regulatory Affairs and a director, and Kim Giffoni, our Executive Vice President of Foreign Sales and Investor Relations and a director, in an aggregate amount of $440,000.  The notes bear interest at a rate of 6% per annum and are payable on the earlier of December 1, 2012 or the consummation of the Company’s initial public offering.

 

On May 4, 2011, the Company issued a promissory note to the Elizabeth Charuvastra and William Shell Family Trust dated July 27, 2006 and Amended September 29, 2006 (the “EC and WS Family Trust”) in the amount of $200,000.  The note bears interest at a rate of 3.25% per annum and is payable on May 4, 2016.

 

On May 4, 2011, the Company issued a promissory note to the Giffoni Family Trust Dated September 26, 2008 (the “Giffoni Family Trust”)  in the amount of $100,000.  The note bears interest at a rate of 3.25% per annum and is payable on May 4, 2016.

 

On June 12, 2011, the Company, the Plan, William E. Shell, Elizabeth Charuvastra, Kim Giffoni, the EC and WS Family Trust and the Giffoni Family Trust entered into an agreement  (the “Note Agreement”) pursuant to which the Plan assigned the Plan Note to Dr. Shell, Ms. Charuvastra and Mr. Giffoni in an amount of $100,000 each.  Moreover, pursuant to the Note Agreement, each of Dr. Shell and Ms. Charuvastra assigned their respective interests in the Plan Note to the EC and WS Family Trust.  In accordance with the Note Agreement, in connection with the assignments, the Plan Note was amended to extend the maturity date to December 15, 2015 and to reduce the interest rate from 8.0% per annum to 3.25% per annum.  The Company issued new notes to each of the WC and WS Family Trust (in the amount of $200,000) and to Mr. Giffoni (in the amount of $100,000) to memorialize the amendments pursuant to the Note Agreement.

 

On June 18, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $150,000.  The note bears interest at a rate of 3.25% per annum and is payable on June 18, 2016.

 

August 19, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $150,000.  The note bears interest at a rate of 3.95% per annum and is payable on August 19, 2016. As an inducement to make this loan the EC and WS Family Trust was issued a warrant for 43,568 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated November 7, 2011 and expires five years from date of issue.

 

On September 1, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $80,000.  The note bears interest at a rate of 3.95% per annum and is payable on September 1, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 23,237 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated November 7, 2011 and expires five years from date of issue.

 

On September 23, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $52,000.  The note bears interest at a rate of 3.95% per annum and is payable on September 23, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 15,104 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated November 7, 2011 and expires five years from date of issue.

 

On September 28, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $200,000.  The note bears interest at a rate of 3.95% per annum and is payable on September 28, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 58,091 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated November 7, 2011 and expires five years from date of issue.

 

On October 17, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $170,000.  The note bears interest at a rate of 3.95% per annum and is payable on October 17, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 50,296 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated October 17, 2011 and expires five years from date of issue.

 

On October 20, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $125,000.  The note bears interest at a rate of 3.95% per annum and is payable on October 20, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 36,982 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated October 20, 2011 and expires five years from date of issue.

 

On November 8, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $120,000.  The note bears interest at a rate of 3.95% per annum and is payable on November 8, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 35,503 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated November 8, 2011 and expires five years from date of issue.

 

On November 22, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $140,000.  The note bears interest at a rate of 3.95% per annum and is payable on November 22, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 41,420 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated November 22, 2011 and expires five years from date of issue.

 

On December 7, 2011, the Company issued a promissory note to the EC and WS Family Trust in the amount of $115,000.  The note bears interest at a rate of 3.95% per annum and is payable on December 7, 2016. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 34,024 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated December 7, 2011 and expires five years from date of issue.

 

On January 4, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $30,000.  The note bears interest at a rate of 3.95% per annum and is payable on January 4, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 8,876 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share. This warrant is dated January 4, 2012 and expires five years from date of issue.

 

On January 18, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $25,000.  The note bears interest at a rate of 3.95% per annum and is payable on January 18, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 7,396 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated January 18, 2012 and expires five years from date of issue.

 

On January 19, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $100,000.  The note bears interest at a rate of 3.95% per annum and is payable on January 19, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 29,586 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated January 19, 2012 and expires five years from date of issue.

 

On January 31, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $200,000.  The note bears interest at a rate of 3.95% per annum and is payable on January 31, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 59,172 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated January 31, 2012 and expires five years from date of issue.

 

On February 1, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $250,000.  The note bears interest at a rate of 3.95% per annum and is payable on February 1, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 73,964 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated February 1, 2012 and expires five years from date of issue.

 

On February 15, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $200,000.  The note bears interest at a rate of 3.95% per annum and is payable on February 15, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 59,172 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated February 15, 2012 and expires five years from date of issue.

 

On February 29, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $240,000.  The note bears interest at a rate of 3.95% per annum and is payable on February 29, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 71,006 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated February 29, 2012 and expires five years from date of issue.

 

On March 15, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $75,000.  The note bears interest at a rate of 3.95% per annum and is payable on March 15, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 22,189 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated March 15, 2012 and expires five years from date of issue.

 

On March 28, 2012, the Company issued a promissory note to the EC and WS Family Trust in the amount of $150,000.  The note bears interest at a rate of 3.95% per annum and is payable on March 28, 2017. As an inducement to make this loan the EC and WS Family Trust  was issued a warrant for 44,739 shares of Targeted Medical Pharma, Inc. common stock at an exercise price of $3.38 per share This warrant is dated March 28,2012 and expires five years from date of issue.

Recently Issued Accounting Pronouncements

v2.4.0.6
Recently Issued Accounting Pronouncements
3 Months Ended
Mar. 31, 2012
Recently Issued Accounting Pronouncements

Note 5: Recently Issued Accounting Pronouncements 

 

Presentation of Comprehensive Income: In June 2011, the FASB issued ASU No.  2011-05, “Presentation of Comprehensive Income” ( ASU 2011-05). The provisions of ASU 2011-05 amend FASB ASC Topic 220 “Comprehensive Income” to eliminate the current option to present the components of other comprehensive income in the statement of changes in equity, and require the presentation of net income and other comprehensive income (and their respective components) either in a single continuous statement or in two separate but consecutive statements. The amendments do not alter any current recognition or measurement requirements with respect to items of other comprehensive income. The provisions of ASU 2011-05 are effective for the Company’s first reporting period beginning on January 1, 2012, with early adoption permitted. The adoption of ASU 2011-05 did not have a material impact on the Company’s condensed consolidated financial statements.

 

Fair Value Measurement and Disclosure: In May 2011, the FASB issued ASC Update 2011-04, “Fair Value Measurement: (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASC Update 2011-04 amends current U.S. GAAP to create more commonality with IFRS by changing some of the wording used to describe requirements for measuring fair value and for disclosing information about fair value measurements. This update is effective for the first interim or annual reporting period beginning after December 15, 2011. The Company began application of ASC 2011-04 on January 1, 2012, which is not expected to have any effect on results of operations, financial position, and cash flows.

Reorganization

v2.4.0.6
Reorganization
3 Months Ended
Mar. 31, 2012
Reorganization

Note 6: Reorganization

 

Pursuant to an Agreement and Plan of Reorganization (the “Merger Agreement”), by and among AFH Acquisition III, Inc. (“AFH”), TMP Merger Sub, Inc. (“TMP Merger Sub”), AFH Merger Sub, Inc. (“AFH Merger Sub”), AFH Holding and Advisory, LLC (“AFH Advisory”), Targeted Medical Pharma, Inc. (“Old TMP”), William E. Shell, MD, Elizabeth Charuvastra and Kim Giffoni, on January 31, 2011, TMP Merger Sub merged (the “TMP Merger”) with and into Old TMP with Old TMP continuing as the surviving entity . Immediately after the TMP Merger, AFH merged (the “AFH Merger” and, together with the TMP Merger, the “Reorganization”) with and into AFH Merger Sub with AFH continuing as the surviving entity (the surviving entity of the AFH Merger, the “Subsidiary”). As a result of the Reorganization, the Subsidiary is the Company’s wholly-owned subsidiary.

 

Upon consummation of the TMP Merger, (i) each outstanding share of Old TMP common stock was exchanged for approximately 1.48 shares of AFH common stock and (ii) each outstanding TMP option, which was exercisable for one share of Old TMP common stock, was exchanged for an option exercisable for 1.48 shares of AFH common stock. Upon consummation of the AFH Merger, which occurred immediately upon consummation of the TMP Merger, each outstanding share of AFH common stock and each outstanding option to purchase AFH common stock were exchanged for one share of the Company’s common stock and one option to purchase one share of the Company’s common stock. As a result of the Reorganization, holders of Old TMP common stock and options received 18,308,576 of the Company’s shares of common stock and options to purchase 566,424 of the Company’s shares, or 83.89% of the Company’s issued and outstanding common stock on a fully diluted basis. Former shareholders of AFH Advisory received 3,625,000 of the Company’s shares of common stock.

 

The exchange of shares between TMP and AFH has been accounted for as a recapitalization of the companies. Pursuant to the accounting for a recapitalization, the historical carrying value of the assets and liabilities of TMP carried over to the surviving company. The reorganization was reflected in the statements as of the earliest period presented.

 

Pursuant to the Merger Agreement, the TMP Insiders agreed that up to 1,906,768 of the Company’s shares of common stock they hold in the aggregate would be subject to forfeiture and cancellation to the extent that the Company fails to achieve $22,000,000 in Adjusted EBITDA (the “Make Good Target”) for the fiscal year ended December 31, 2011. For purposes of the Merger Agreement, “Adjusted EBITDA” means the Company’s consolidated net earnings before interest expense, income taxes, depreciation, amortization and non-recurring expenses (as defined below) for the applicable period and as calculated on a consistent basis. Net earnings excludes, among other things, expenses incurred in connection with the Company’s public offering of its common stock (including the preparation of the registration statement) and the preparation of the Current Report on Form 8-K related to the Reorganization.

 

On October 17, 2011, the Company, AFH Holding and Advisory, LLC, William E. Shell, MD, the Estate of Elizabeth Charuvastra and Kim Giffoni entered into Amendment No. 1 (the “Amendment”) to the Merger Agreement. Pursuant to the Amendment, the “Make Good Period” was changed from the fiscal year ended December 31, 2011 to the twelve months following the consummation of a financing resulting in gross proceeds of $20 million to the Company.

 

Amounts due AFH resulting from this transaction totaling $602,948 and $602,948 as of March 31, 2012 and December 31, 2011 respectively are reflected as Other Amounts due to Related Parties.

Subsequent Events

v2.4.0.6
Subsequent Events
3 Months Ended
Mar. 31, 2012
Subsequent Events

Note 7: Subsequent Events

 

Since March 31, 2012, the EC and WS Family Trust has made additional loans to the Company in the aggregate amount of $700,000. In connection with such loans, the Company issued to the EC and WS Family Trust five year notes bearing interest at 3.95 percent per annum and five-year warrants to purchase 207,101 shares of the Company’s common stock at an exercise price of $3.38 per share.

Restatement

v2.4.0.6
Restatement
3 Months Ended
Mar. 31, 2012
Restatement

Note 8: Restatement

 

The Company restated its previously issued consolidated financial statements to correct its error in the application of an accounting principal concerning revenue recognition. Due to substantial uncertainties as to the amount of and timing and collectability of revenues derived from our Physician Managed Model (PMM) and Hybrid Model, which can take in excess of four years to collect, it was determined that these revenues did not meet the criteria for recognition in accordance with SAB Topic 13, Revenue Recognition. These revenues are required to be recorded when collectability is reasonably assured, which in the case of this business model, is when the payment is received and any applicable rapid pay discount offered in the product purchase agreement is applied to the original gross invoice. We have recorded revenues for the three months ended March 31, 2012 and 2011 on this basis and restated revenues for the year three months ended March 31, 2011. The effect of the restatement on results of operations and financial position as of and for the three months ended March 31, 2011 were as follows:

 

    Reported     Restatement     Restated  
    March 31, 2011     Adjustment     March 31, 2011  
Accounts Receivable-Net of Allowance for Doubtful Accounts   $ 23,866,140     $ (23,672,532 ) (1) $ 193,608  
Allowance for Doubtful Accounts     (521,016 )     521,016   (1)    -  
Deferred Tax Asset - Short Term     261,738       (167,314 ) (2)    94,424  
Prepaid Taxes     -       167,301   (1)    167,301  
Total Current Assets     25,081,993       (23,672,545 )     1,409,448  
Long-term accounts receivable     2,456,178       (2,456,178 ) (1)    -  
Deferred Tax Asset-Long Term     258,996       1,011,179   (2)    1,270,175  
Total Assets     30,873,814       (25,117,546 )     5,756,268  
Taxes Payable     5,716,289       (5,716,289 ) (2)    -  
Deferred Tax Liability - Current     1,288,278       (1,116,701 ) (2)    171,577  
Total Current Liabilities     9,622,404       (6,792,989 )     2,829,415  
Deferred Income Taxes     2,887,562       (1,939,283 ) (2)    948,279  
Total Liabilities     12,549,966       (8,772,272 )     3,777,694  
Retained Earnings (Accumulated Deficit)     15,101,797       (16,345,274 )     (1,243,477  
Total Liabilities and Shareholder Equity     30,873,814       (25,117,546 )     5,756,268  
Product Sales     5,593,435       (3,712,058 ) (3)    1,881,377  
Selling, General and Administrative     2,915,404       (51,436 ) (4)    2,863,968  
Income Taxes     697,338       (697,338 ) (2)    -  
Deferred Income Tax (Benefit)     33,050       (619,025 ) (2)    (585,975  
Net Income (Loss)     1,415,469       (2,344,259 )     (928,790  
Comprehensive Income (Loss)     1,412,260       (2,344,259 )     (931,999  
Basic Earnings (Loss) per Share   $ 0.07     $ (0.11 )   $ (0.05  
Diluted Earnings (Loss) per Share   $ 0.07     $ (0.11 )   $ (0.05  

   

(1) To restate Accounts Receivable and related accounts for the removal of Q1 2011 and historical unrecognized revenues.

(2) To restate Income Taxes to reflect the affect of the change in unrecognized revenues.

(3) To restate Product Sales for the removal of Q1 2011 unrecognized revenues.

(4) To restate Operating Expenses for the removal of Q1 2011 Bad Debt Expense associated with the removal of Q1 2011 unrecognized revenues.