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TRGM > SEC Filings for TRGM > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for TARGETED MEDICAL PHARMA, INC.

Form 10-K for TARGETED MEDICAL PHARMA, INC.


31-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Such forward-looking statements include statements regarding, among others, (a) our expectations about possible business combinations, (b) our growth strategies, (c) our future financing plans, and (d) our anticipated needs for working capital. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "approximate," "estimate," "believe," "intend," "plan," "budget," "could," "forecast," "might," "predict," "shall" or "project," or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found in this Annual Report on Form 10-K.

Forward-looking statements are based on our current expectations and assumptions regarding our business, potential target businesses, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" in this 10-K, changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions and the following:

? Adverse economic conditions;

? inability to raise sufficient additional capital to operate our business;

? the commercial success and market acceptance of any of our products;

? the potential impact of our agreement with CMFG;

? the maintenance of our products in the FDA National Drug Code database;

? the timing and outcome of clinical studies;

? the outcome of potential future regulatory actions, including inspections from the FDA;

? unexpected regulatory changes, including unanticipated changes to workers compensation state laws and/or regulations;

? the expectation that we will be able to maintain adequate inventories of our commercial products;

? the results of our internal research and development efforts;

? the adequacy of our intellectual property protections and expiration dates on our patents and products;

? the inability to attract and retain qualified senior management and technical personnel;

? the potential impact, if any, of the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 on our business;

? our plans to develop other product candidates; and

? other specific risks referred to in the section entitled "Risk Factors ".

We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update any forward-looking statements or other information contained herein unless required by law.

Information regarding market and industry statistics contained in this Annual Report is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. Except as required by U.S. federal securities laws, we have no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. See the section entitled "Risk Factors" for a more detailed discussion of risks and uncertainties that may have an impact on our future results.

Recent Developments

On June 28, 2013, the Company entered into an agreement to secure $3.2 million from the securitization of certain aged receivables through an agreement with CMFG. CMFG funded $750,000 less fees and escrow amounts on June 29, 2013, and funded the balance on October 1, 2013. Based in Glen Rock, New Jersey, CMFG provides specialized finance solutions to hospitals, surgical centers and medical providers, funds receivables and provides guaranteed upfront payments to these providers.

We filed amended tax returns for 2010 in June of 2012. We understood that filing such returns would likely result in tax audits on the part of both the IRS and FTB. The IRS commenced an audit of the Company's 2010 income tax return in November 2012. In March 2014 the IRS completed its examination. The IRS did not accept the Company's assertion that certain sales did not meet the criteria of a sale for tax purposes, however; in part as a result of the utilization of NOL's generated during 2011 and 2012, the IRS concluded that the Company's aggregate tax liability for tax years 2010 through 2012 was only $26,000. As of December 31, 2013, we have recorded $900,863 in prepaid federal and state income taxes on our balance sheet. As a result of the successful conclusion of the IRS examination, the Company expects to receive a refund from the IRS of approximately $550,000.

The Company posted increased revenues, gross profit, net income and a reduction in net loss before interest, taxes, depreciation and amortization, stock based compensation, and non-recurring expenses (Adjusted EBITDA) from the prior quarter ended September 30, 2013.

Improved financial results from the prior quarter ended September 30, 2013

? Total revenue of $2.6 million, an increase of 20% over the third quarter of 2013.

? Total gross profit of $1.9 million, an increase of 22% over the third quarter of 2013.

? Total net income of $0.5 million, and increase of 129% over the third quarter of 2013.

? Adjusted EBITDA of $0.1 million, an improvement of 118% over the third quarter of 2013.

                  TARGETED MEDICAL PHARMA, INC. AND SUBSIDIARY

                     Consolidated Statements of Operations

                 For the Years Ended December 31, 2013 and 2012



                                                   % of                               % of
                                   2013            Sales             2012             Sales

REVENUES
Product revenue                $  8,505,667            89.0 %    $   6,440,058            88.3 %
Service revenue                   1,049,895            11.0 %          856,343            11.7 %
Total revenue                     9,555,562           100.0 %        7,296,401           100.0 %
COST OF SALES
Cost of product sold              1,054,194            11.0 %        1,336,874            18.3 %
Cost of services sold             1,935,111            20.3 %        1,864,517            25.6 %
Total cost of sales               2,989,305            31.3 %        3,201,391            43.9 %
Gross profit                      6,566,257            68.7 %        4,095,010            56.1 %

OPERATING EXPENSES
Research and development            228,605             2.4 %          133,840             1.8 %
Selling, general and
administrative                   10,178,598           106.5 %       10,100,979           138.4 %
Total operating expenses         10,407,203           108.9 %       10,234,819           140.2 %
Loss from operations             (3,840,946 )         (40.2 %)      (6,139,809 )         (84.1 %)
OTHER INCOME (EXPENSES)
Interest income (expense)            10,889             0.1 %       (2,199,577 )         (30.1 %)
Change in fair value of
warrant liability                   159,341             1.7 %       (4,432,734 )         (60.8 %)
Total other income
(expenses)                          170,230             1.8 %       (6,632,311 )         (90.9 %)
Loss before income taxes         (3,670,716 )         (38.4 %)     (12,772,120 )        (175.0 %)
Income tax expense (benefit)      5,666,902            59.3 %       (3,185,938 )         (43.7 %)
NET LOSS                       $ (9,337,618 )         (97.7 %)   $  (9,586,182 )        (131.3 %)

Revenue

During the years ended December 31, 2013 and 2012, the Company recognized total revenue of $9,555,562 and $7,296,401, respectively. Total revenue included product revenues from the Company's TMP segment and service revenues from the Company's CCPI segment. Total revenues were comprised as follows:

                                       Year Ended December 31,
                                          % of                         % of
                                         total                        total
                           2013         revenue         2012         revenue
Total product revenue   $ 8,505,667         89.0 %   $ 6,440,058         88.3 %
Total service revenue     1,049,895         11.0 %       856,343         11.7 %
Total revenue           $ 9,555,562        100.0 %   $ 7,296,401        100.0 %

Product sales are invoiced upon shipment at AWP under six models, as described in Note 3 to our consolidated financial statements: Physician Direct Sales, Distributor Direct Sales, Physician Managed, Hybrid, CMFG #1 and CMFG #2 Models (collectively, the "Cambridge Models"). Due to substantial uncertainties as to the timing and collectability of revenues derived from our Physician Managed, Hybrid and CMFG #2 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 ASC 605, upon shipment. These revenues are recorded when collectability is reasonably assured, which the Company has determined is when the payment is received, regardless of the year originally invoiced (the "Cash Method"). Conversely, product sales under the Company's Physician Direct Sales, Distributor Direct Sales and CMFG #1 Models are recognized upon shipment (the "Accrual Method"). As a result, the Company's basis of recognizing revenue is a hybrid of the cash and accrual methods.

The Company recognized product revenue for the years ended December 31, 2013 and 2012, of $8,505,667 and $6,440,058, respectively. The distribution of product revenue between the Cash Method and the Accrual Method of revenue recognition is as follows:

                                            Year Ended December 31,
                                               % of                         % of
                                             product                      product
Revenue recognition method      2013         revenue         2012         revenue
Cash method                  $ 5,037,003         59.2 %   $ 4,427,828         68.8 %
Accrual method                 3,468,664         40.8 %     2,012,230         31.2 %
Total product revenue        $ 8,505,667        100.0 %   $ 6,440,058        100.0 %

The increase in total product revenue is attributed to an increased emphasis on collection efforts at CCPI combined with an increase in customers. In addition to product revenue, which is recognized in the TMP segment, the Company also recognizes service revenue from billing and collection services in its CCPI segment. The Company recognized service revenue for the years ended December 31, 2013 and 2012, of $1,049,895 and $856,343, respectively. In each of the Physician Managed, Hybrid, and CMFG #2 Models, CCPI provides billing and collection services. In consideration for its services, CCPI receives a service fee that is based upon a percentage of gross collections. 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 the CMFG #1 Model (under which CCPI also provides billing and collection services) CCPI recognizes revenue upon receipt of the 23% advance payment from CMFG. The increase in service revenue of $193,552 (from $856,343 for the year ended December 31, 2012 to $1,049,895 for the year ended December 31, 2013) is attributed to an overall increase in aggregate collections which was slightly offset by a lesser amount of services fees earned pursuant to the CMFG #1 Model.

Cost of Product Sold

The reported cost of product sold for the year ended December 31, 2013 decreased $282,680 to $1,054,194 from $1,336,874 for the year ended December 31, 2012. The cost of product sold as a percentage of reported product revenue decreased to 12.4% for the year ended December 31, 2013, compared to 20.8% for the year ended December 31, 2012. This decreased percentage is primarily the result of two factors: (i) an increase in cash collections from our Physician Managed and Hybrid Models, and (ii) the acceptance of the CMFG #1 Model which resulted in lower margins on 15% of the Company's total revenues. Since the Company recognizes the cost of product sold on all products shipped, regardless of whether the sale resulted from a Cash Method or an Accrual Method customer, the cost of product sold as a percent of product billings (shipments) is more relevant for comparison purposes.

The actual cost of product sold as a percent of product billings during the year ended December 31, 2013, was 11.5% compared with 9.6% in the prior year due to the acceptance of the CMFG #1 Model. During the year ended December 31, 2013, the Company generated $1,334,086 in revenue under the CMGF #1 Model. If these revenues had been recognized under the Physician Managed or Hybrid Models the Company would have recognized approximately an additional $1,300,000. Thus, the existence of the CMFG #1 Model resulted in product sales with a lesser amount of gross profit. The difference between these figures and the 12.4% and 20.8% described above is attributable to the timing differences caused by our revenue recognition policy. The following table illustrates the timing impact of the Company's revenue recognition policy on cost of product sold:

                                                           Year Ended December 31,
                                                            2013             2012
Derived from Consolidated Statements of Operations:
Reported product revenue                                 $ 8,505,667     $  6,440,058
Cost of product sold                                     $ 1,054,194     $  1,336,874

Cost of product sold as a % of reported revenue                 12.4 %           20.8 %

Derived from Actual Billings/Shipments (net of rapid
pay discounts):
Cash method billings                                     $ 5,723,552     $ 11,944,880
Accrual method billings                                    3,468,664        2,012,230
Total actual billings                                    $ 9,192,216     $ 13,957,110
Cost of product sold                                     $ 1,054,194     $  1,336,874

Cost of product sold as a % of actual billings                  11.5 %            9.6 %

Cost of product sold as a % of reported revenue
attributable to timing differences from Cash Method
customers                                                        1.0 %           11.2 %

Cost of Services Sold

The cost of services sold for the year ended December 31, 2013, increased $70,594 to $1,935,111 from $1,864,517 for the year ended December 31, 2012. Cost of services sold consists primarily of salaries and employee benefits, which was relatively unchanged during the preceding two years. During the years ended December 31, 2013 and 2012, salaries and employee benefits were $1,514,047 and $1,516,959, respectively. The increase over the year ended December 31, 2012, is exclusively due to an increase in the utilization of third party collection services.

Operating Expenses

Operating expenses for the year ended December 31, 2013, increased $172,384 to $10,407,203 from $10,234,819 for the year ended December 31, 2012. Despite this increase, operating expenses as a percentage of total revenue decreased from 140% of revenue to 109% of revenue in part due to timing differences between the recognition of expenses and revenues. Operating expenses consist of research and development expense (which increased $94,765), and selling, general and administrative expenses (which increased $77,619). Changes in these items are further described below.

Research and Development Expense

Research and development expenses for the year ended December 31, 2013 increased $94,765, to $228,605 from $133,840 for the year ended December 31, 2012. The level of expense varies from year to year depending on the number of clinical trials that we have in progress. During the year ended December 31, 2013, the Company entered into a clinical study with the University of Cincinnati Physicians Company, LLC, an Ohio nonprofit, limited liability company, on the effects of Theramine in the prevention of migraine headaches. The financial obligations attributed to this clinical study were the primary cause of the increase in research and development expenses during the years.

Selling, General and Administrative Expense

Selling, general and administrative expenses ("SG&A") were $10,178,598 and $10,100,979 for the years ended December 31, 2013 and 2012, respectively. As reflected in the table below, the increase in SG&A for the year ended December 31, 2013, when compared to the year ended December 31, 2012, was primarily the result of various fluctuations in the following four expense categories:
salaries and employee benefits, professional fees, insurance and depreciation and amortization.

                                                  Years Ended December 31,
                                   2013             2012          $ Change         % Change

Salaries and employee
benefits                       $  6,357,136     $  6,440,892     $   (83,756 )           (1.3 %)
Professional fees                 1,499,939        1,495,259           4,680              0.3 %
Rent                                245,763          233,737          12,026              5.1 %
Insurance                           479,732          347,972         131,760             37.9 %
Depreciation & amortization         207,500          222,893         (15,393 )           (6.9 %)
General and administrative        1,388,528        1,360,226          28,302              2.1 %
Total selling, general and
administrative expenses        $ 10,178,598     $ 10,100,979     $    77,619              0.8 %

The $83,756 decrease in salaries and employee benefits is primarily attributed to a reduction in stock based compensation expense of $402,394 which is partially offset by an increase in compensation expense of $324,524 which is attributed to certain severance agreements.

During the years ended December 31, 2013 and 2012, we recorded $751,818 and $1,154,212, respectively, related to the grants of stock options and restricted stock awards to our employees and non-employee directors. Therefore, excluding the decrease of $402,394 ($1,154,212 - $751,818) from stock based compensation, salaries and employee benefits increased by $318,638.

The Company entered into severance agreements with two former employees during the year ended December 31, 2013. As a result of these severance agreements, the Company recognized $357,000 in compensation expense. At the same time, actual gross wages, inclusive of payroll taxes, for these two employees were $52,476 less during the year ended December 31, 2013. As a result, the net increase in salaries and employee benefits associated with these two employees was $304,524.

The second largest component of our SG&A is professional fees. During the year ended December 31, 2013, the Company experienced an increase in professional fees from three distinct projects. First, the Company filed a Form S-1 registration statement, which was declared effective on April 19, 2013. The cost associated with the Company's Form S-1 resulted in an increase in legal fees of $100,000. Second, in conjunction with entering into the June 28, 2013 agreement with CMFG, as amended, the Company incurred a $128,000 professional services fee. Finally, during January 2013, the Company engaged a consultant for assistance in attaining Medicaid approval of four of the Company's products:
Theramine®, Sentra AM®, Sentra PM® and AppTrim®. The Company expects that this consulting engagement will continue through the second quarter of 2014. During the year ended December 31, 2013, the Company recognized $120,000 in fees related to this consulting contract. The increase in professional fees related to these three projects of $348,000 was almost entirely offset by negotiated reductions in outstanding legal fees in excess of $300,000. As a result, professional fees remained relatively unchanged from the prior year.

Insurance expense increased by $131,760 during the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase is primarily related to an increase in premiums associated with the Company's Directors and Officers insurance policy, which increased by approximately $100,000 from the previous year.

Property and equipment are stated at cost and are depreciated using the straight line method over the estimated useful lives of the assets, which generally range between 3 and 7 years. During the year ended December 31, 2013, depreciation and amortization decreased by $15,393. The decrease in depreciation and amortization is attributed to the timing of when assets were placed in service.

General and administrative expense experienced an increase of $28,302 during the year ended December 31, 2013 over the prior year. Travel related expenses are a large component of general and administrative expenses and represented an increase of $152,076. During the year ended December 31, 2013, the Company's sales force made a significant effort to conduct in person meetings with existing and potential customers which resulted in an increase in the Company's travel expenses. The offsetting decrease in general and administrative expenses is a combination of several types of expenses, none of which are significant individually.

Other Income and Expenses

Other income and expense includes income from the reversal of interest and penalties relating to the Company's 2010 income tax returns, interest expense, amortization of discounts on notes payable and changes in the fair value of the Company's warrant derivative liability. During the year ended December 31, 2013, the Company reported other income of $170,230 compared with an expense of $6,632,311 during the prior year.

Interest expense decreased by $2,210,466, resulting in interest income of $10,889 in the year ended December 31, 2013, as compared to an expense of $2,199,577 in the year ended December 31, 2012. The decrease was primarily due to the expensing of discounts on notes payable issued with warrants, a non-cash expense, which decreased by $1,613,693 from $1,994,812 during the year ended December 31, 2012 to $381,119 during the year ended December 31, 2013. The remaining decrease in interest expense was due to the Company's reversal of $752,281 in interest and penalties relating to its 2010 income tax returns. As discussed in the "Recent Developments" section in Item 7 above, in March 2014 the IRS completed its examination. The IRS concluded that the Company's aggregate income tax liability for tax years 2010 through 2012 was approximately $26,000, significantly less than the $550,000 in prior year income tax payments. Accordingly, the Company reversed the interest and penalties that were recorded in the year ended December 31, 2011.

Changes in the fair value of the Company's warrant derivative liability resulted in income of $159,341 in the year ended December 31, 2013, compared with an expense of $4,432,734 in the prior year. In July 2012 the Company issued 1,158,981 warrants with anti-dilution ratcheting provisions. At December 31, 2012 and 2013, only 95,000 of these warrants were outstanding. This income represents a reduction in the warrant derivative liability during the year ended December 31, 2013, in connection with the remaining 95,000 warrants.

Current and Deferred Income Taxes

The Company filed its 2010 federal and state tax returns in April 2011 and June 2011, respectively, without including payment for amounts due and has not made estimated tax payments for the 2011 and 2012 tax years. The Company had entered into agreements with the Internal Revenue Service and the California Franchise Tax Board to extend the payment of these taxes over a mutually agreeable period of time. In aggregate, we have paid $550,000 to the IRS and $350,000 to the California Franchise Tax Board. Our 2010 federal and state tax returns reflected an amount owed to the IRS and California Franchise Tax Board of approximately $3,600,000 and $1,000,000, respectively. We were unable to pay the remaining installment payments.

As a result of our assessment that for certain sales' collectability at the time of the sale could not be reasonably assured, these sales did not meet the criteria of a sale for tax purposes. The Company recalculated its 2010 and 2011 tax liabilities and determined that no income taxes are owed for either year. We filed amended tax returns for 2010 in June of 2012 and in September 2012 filed our 2011 returns using a change in accounting method consistent with our financial results restatement. We understood that filing such returns would likely result in tax audits on the part of both agencies. The IRS commenced its audit in November 2012. In March 2014 the IRS completed its examination. The IRS did not accept the Company's assertion that certain sales did not meet the criteria of a sale for tax purposes, however; in part as a result of the utilization of NOL's generated during 2011 and 2012, the IRS concluded that the Company's aggregate tax liability for tax years 2010 through 2012 was only $26,000. In February 2013, the FTB notified the Company by letter that it would take no action on our amended California return until the IRS completed its examination. The FTB has not formally suspended collection and enforcement efforts but has continued to extend its Notice of Suspension deadlines on a quarterly basis pending the outcome of the eventual audit. As a result of the completion of the IRS examination the Company will initiate discussions with the FTB. There can be no assurances that the FTB will accept the conclusion of the IRS and will not pursue collection and enforcement efforts.

We had no current income tax benefit in the years ended December 31, 2013 or 2012, respectively. Deferred income tax expense for the years ended December 31, 2013, increased $8,852,840 to $5,666,902 from a benefit of $3,185,938 for the year ended December 31, 2012. The increase was the result of a decision by the Company to fully reserve its net deferred tax assets of $7,369,719.

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 less likely than not that all of the deferred tax assets will be . . .

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