Form 8-K for SMSA GAINESVILLE ACQUISITION CORP.
6-Oct-2014
Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits
Item 1.01 Entry into a Material Definitive Agreement
The information contained in Item 2.01 under the caption "Purchase and Sale Agreement" is incorporated herein by reference.
Item 2.01 Completion of Acquisition or Disposition of Assets
On September 30, 2014, the Company entered into and closed the transactions contemplated by the Purchase and Sale Agreement (the "Purchase Agreement") with Preferred Rx, LLC, a Texas limited liability company, and JAS Pharmacy, Inc., Reginald Germain, Gary Foster, Mike Jackson, Judy Jackson, Bruce McAnally, Kayla Nicolau, Shayla Venkatesh and Sonya Russell (the "Equity Holders"). Pursuant to the terms of the Purchase Agreement, the Company acquired 100% of the issued and outstanding limited liability company membership interests of Preferred Rx from the Equity Holders in exchange for cash and contingent consideration (the "Share Purchase"). As a result of the Share Purchase, Preferred Rx became a wholly-owned subsidiary of the Company.
The Purchase Agreement contained customary representations and warranties and pre- and post-closing covenants of each party and customary closing conditions. Breaches of the representations and warranties will be subject to customary indemnification provisions.
As consideration for the limited liability company membership interests of Preferred Rx, the Equity Holders will receive earn-out payments in the form of 100% of Preferred Rx's actual EBITDA and EBITDA from any new customer or contract obtained by the Equity Holders associated with the call center operations of Preferred Rx for thirteen (13) months after the Closing Date (each such payment, an "Earn-out Payment"), net of cash previously paid. Each Earn-out Payment will be payable in arrears on the 20th day after the close of each calendar quarter. The minimum cumulative Earn-out Payments is equal to $200,000. "EBITDA" means the Company's earnings before interest, taxes, depreciation and amortization. The first Earn-out Payment made to the Equity Holders shall be reduced by $15,000, the amount of cash paid by the Company at Closing, including all applicable broker fees. The Company will not pay earn-out payments on any business or EBITDA originated by the Company.
The Company will also pay the Equity Holders $213,000 for all of Preferred Rx's current assets less current liabilities (excluding a $100,000 accrued liability) that existed as of the Closing Date ("Net Working Capital"). The Net Working Capital will be paid to each Equity Holder in an amount equal to the percentage of each Equity Holder's pro rata share of the Company's Net Working Capital in two equal installments on October 20, 2014 and November 20, 2014.
The Company was organized on September 9, 2009, as a Nevada corporation. On December 19, 2013, Titan Partners, LLC entered into a stock purchase agreement with former shareholders of the Company for the sale and purchase of 9,892,956 shares, or 98.92% of the then issued and outstanding common stock of the Company. After the completion of our forward stock split (see "Recent Significant Events - Forward Stock Split") Titan Partners, LLC owned 132,501,306 shares of our common stock.
Our authorized capital stock consists of 250,000,000 shares of common stock, $0.001 par value and 10,000,000 shares of preferred stock, $0.001 par value. As of October 3, 2014, 154,103,823 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding.
Prior to the acquisition of Preferred Rx on September 30, 2014, we were considered to be a shell company under the applicable rules of the Exchange Act. As a result of the acquisition of Preferred Rx, which was accounted for as a business combination effected by a share purchase, we ceased to be a shell company. The information contained in this Current Report constitutes the "Form 10 Information" required by Item 2.01 of Form 8-K.
Our current business plan is to acquire, develop, and operate pharmacies in various states across the United States, including, but not limited to Texas, Arizona, Maryland, New York, New Jersey, Connecticut, Massachusetts, District of Columbia, Virginia, Ohio, Illinois and Georgia. The acquisition of Preferred Rx is the first acquisition we effected pursuant to this business plan. Any pharmacy we acquire will most likely not continue to operate as it did prior to the acquisition by the Company. It is our intention such pharmacies will fill prescriptions primarily for non-sterile compounding medications. Compounding medications are "made from scratch" - individual ingredients are mixed together to create individual formulations targeting specific conditions. For example, we expect to compound transdermal pain creams, wound creams, burn creams, and migraine masks, using FDA-approved ingredients. We anticipate our owned and operated pharmacies will only fill individual patient prescriptions.
Once we begin to generate revenue by filling prescriptions, our plan is to retain the maximum amount of our earnings until we have at least $100 million in undepreciated net tangible assets. Retention of earnings is necessary to satisfy certain state-specific valuation thresholds that enable physicians to invest in public companies to which they refer patients. Notwithstanding the foregoing, the pharmacies owned and operated by us will not fill prescriptions referred by physician-shareholders unless such physician referral is permitted under applicable state and federal law. We do not intend to accept or fill prescriptions for any federally-funded beneficiaries until we have achieved (i) at least $50 million in undepreciated net tangible assets and (ii) shareholder equity exceeding $75 million. Our business plan also includes building a network of physicians, other providers, and distributors that can collaborate in the delivery of quality healthcare.
Preferred Rx's historical business is to provide pharmacy services to medical facilities and patients of the facilities, primarily the coordination of delivery of prescriptions to the facilities when their normal pharmacy is unavailable, such as nights, weekends and holidays. Preferred Rx also provides on-call and call center solutions, including remote order entry and verification services. Preferred Rx has pharmacy licenses in 39 states and its operations are conducted from its Arlington, Texas facility.
We believe that the compounding pharmacy will play a substantial role in prescription drug abuse prevention by offering alternatives to oral medicines. We expect to expand our "prevention platform" to include other services and products that play a role in the prevention of prescription drug abuse. Specifically, these services could include pharmacy tracking softwares, toxicology laboratories, and pharmacogenomic testing. In the future, we anticipate entering additional business segments of predictive healthcare related services such as nutraceuticals, cosmeceuticals, pathology laboratories, risk factor testing, surgical hardware, biologics, and other lines devoted to the improvement of patient care.
Historical Background
The Company was organized on September 9, 2009 as a Nevada corporation to effect the reincorporation of Senior Management Services of Gainesville, Inc., a Texas corporation (the "Predecessor"), mandated by the plan of reorganization for the Predecessor as confirmed by the U. S. Bankruptcy Court for the Northern District of Texas, Dallas Division, on August 1, 2007. Since our organization, we have not conducted any operations.
On August 4, 2010, the Company entered into a stock purchase agreement with Paul Interrante pursuant to which Mr. Interrante was issued 9,500,000 shares of our common stock for approximately $9,500 cash, or $0.001 per share. As a result of this transaction, the bankruptcy court concluded that the Predecessor had satisfied the requirements of its plan of reorganization. Thereafter, we filed a certificate of compliance with the bankruptcy court, confirming our view that the requirements of the Predecessor's plan of reorganization had been met. This action resulted in the granting of a final discharge by the bankruptcy court.
On December 19, 2013, Mr. Interrante, and Halter Financial Investments, L.P. ("HFI," together with Mr. Interrante, the "Sellers") entered into a stock purchase agreement with Titan Partners, LLC for the sale and purchase of 9,892,956 shares of common stock of the Company. At the time of transfer, these shares represented approximately 98.92% of the Company's issued and outstanding common stock.
In connection with this sale, Mr. Interrante resigned as a director of the Company and as our President, Chief Financial Officer, Treasurer and Secretary. Simultaneously with the effective date of Mr. Interrante's resignation as a director of the Company, Kamran Nezami was appointed as the sole director of the Company and Chairman of the Board of Directors. Mr. Nezami continues to serve on our Board of Directors with Mr. James York.
Recent Significant Events
Private Placement
On March 10, 2014, we commenced a private placement of our common stock pursuant to the exemption provided in Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder, soley to accredited investors who have an interest in or an understanding of the pharmacy industry (the "Private Placement"). Through October 3, 2014 we have sold an aggregate of 20,168,716 shares of common stock for proceeds of $1,008,484. As of October 3, 2014, the additional shares sold in the Private Placement represent approximately 13.1% of our issued and outstanding shares of common stock.
Forward Stock-Split
On June 27, 2014, our Board of Directors declared a stock dividend on the issued and outstanding shares of common stock of the Company to effect a 13.3935-to-1 forward stock split. The additional shares issued as a result of this stock split were distributed on July 7, 2014 to shareholders of record as of the close of business on June 23, 2014. As a result, immediately following this distribution, our post-split issued and outstanding shares of common stock were 141,960,131 shares. The impact of the forward stock-split has been reflected retrospectively in all periods and notes in this filing.
Change in Executive Officers
As previously disclosed, we have recently engaged a new executive officer group. On June 19, 2014, Chuck Talley was appointed as our Chief Financial Officer, Secretary, and Treasurer and on July 9, 2014, James York was appointed as a member of our Board of Directors and as our President and Chief Executive Officer. Information on the change in certain executive officers is incorporated by reference to our Form 8-K filed with the SEC on June 23, 2014 and July 14, 2014.
Engaged New Registered Independent Accounting Firm
On June, 19, 2014, our Board of Directors engaged BDO USA, LLP ("BDO") as our independent registered public accounting firm for the fiscal year ending December 31, 2014. Information on the engagement of the new accounting firm is incorporated by reference to our Form 8-K filed with the SEC on June 23, 2014.
Name Change to "Titanium Healthcare"
On August 4, 2014, our Board of Directors adopted resolutions approving a certificate of amendment to our Articles of Incorporation to change our corporate name to "Titanium Healthcare." This action was approved by the written consent of Titan Partners, LLC, which held 91.98% of the shares entitled to vote on the matter at the time of the consent. We filed a definitive information statement with the SEC on August 20, 2014 disclosing the actions being taken to amend our Articles of Incorporation to change our name. We intend to file the certificate of amendment with the Nevada Secretary of State promptly following the expiration of the 20-day period mandated by Regulation 14C of the Exchange Act and the provisions of the Nevada Revised Statutes. The certificate of amendment will become effective upon such filing. Following such filing, our corporate name will be "Titanium Healthcare."
Change in Shell Company Status
On September 30, 2014, upon closing the Purchase Agreement, we changed to an active business from a shell company. In connection with this change we have increased the valuation of our common stock.
Description of Business
Our current business plan is to acquire, develop, and operate pharmacies in various states across the United States, including, but not limited to Texas, Arizona, Maryland, New York, New Jersey, Connecticut, Massachusetts, District of Columbia, Virginia, Ohio, Illinois and Georgia. The acquisition of Preferred Rx is the first acquisition we effected pursuant to this business plan. Any pharmacy we acquire will most likely not continue to operate as it did prior to the acquisition by the Company. It is our intention such pharmacies will fill prescriptions primarily for non-sterile compounding medications. Compounding medications are "made from scratch" - individual ingredients are mixed together to create individual formulations targeting specific conditions. For example, we expect to compound transdermal pain creams, wound creams, burn creams, and migraine masks, using FDA-approved ingredients. Each of these compounded formulations include medications with alternative dosage strengths or unique dosage forms (such as topical creams or gels, suspensions or solutions with more tolerable drug delivery vehicles). We anticipate our owned and operated pharmacies will only fill individual patient prescriptions.
Once we begin generating revenue by filling prescriptions, our plan is to retain the maximum amount of our earnings until we have at least $100 million in undepreciated net tangible assets. Retention of earnings is necessary to satisfy certain state-specific valuation thresholds that enable physicians to invest in public companies to which they refer patients. Notwithstanding the foregoing, the pharmacies owned and operated by us will not fill prescriptions referred by physician-shareholders unless such physician referral is permitted under applicable state and federal law. We do not intend to accept or fill prescriptions for any federally-funded beneficiaries until we have achieved (i) at least $50 million in undepreciated net tangible assets and (ii) shareholder equity exceeding $75 million. Our business plan also includes building a network of physicians, other providers, and distributors that can collaborate in the delivery of quality healthcare.
We believe that the compounding pharmacy will play a substantial role in prescription drug abuse prevention by offering alternatives to oral medicines. We expect to expand our "prevention platform" to include other services and products that play a role in the prevention of prescription drug abuse. Specifically, these services could include pharmacy tracking softwares, toxicology laboratories, and pharmacogenomic testing. In the future, we anticipate entering additional business segments of predictive healthcare related services such as nutraceuticals, cosmeceuticals, pathology laboratories, risk factor testing, surgical hardware, biologics, and other lines devoted to the improvement of patient care.
The compounding pharmacy business is highly competitive. There are numerous compounding pharmacies in the United States that we will compete against. Some of these are small pharmacies owned by one or two individuals, others are larger privately-held companies (such as Bellevue Pharmacy) and others are owned by public companies such as CVS and Walgreens. Such companies may continue to engage in certain activities competitive with us and many of these competitors may have greater financial, marketing and technological resources. In addition, other companies may enter into the business and become increasingly competitive as there are no meaningful barriers to entry other than regulatory considerations. We believe the primary competitive factors in the industry include the ability to contract with managed care companies to ensure our pharmacies are an option to patients in need of compounded medications, the ability to negotiate discounts on compound ingredients with drug manufacturers, the ability to navigate the complexities of governmental reimbursed business and other healthcare regulations, the ability to manage cost and quality of compounded drugs, the ability to obtain one or more pharmacy licenses, the ability to retain qualified pharmacy staff, and the level of service we provide.
For the fiscal years ended December 31, 2013 and 2012, a single customer of Preferred Rx accounted for approximately 93% of Preferred Rx's revenue. This customer has historically utilized Preferred Rx's on-call and call center solutions, including remote order entry and verification services. As a result of our intent to focus on the pharmacy operations business, we do not expect this concentration to continue at Preferred Rx's historical levels.
Political, economic, and regulatory influences are subjecting physicians and other providers in the health care industry in the United States to fundamental changes. We anticipate Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include mandated basic health care benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, pay for performance systems, and other fundamental changes to the health care delivery system. Private sector providers and payors have embraced certain elements of reform, resulting in increased consolidation of health care providers and payors as those providers and payors seek to form alliances in order to provide cost-effective, quality care. Legislative debate is expected to continue in the future, and the Company cannot predict what impact the adoption of any federal or state health care reform measures or future private sector reform may have on its business.
Regulatory Considerations
Our pharmacy operations will require licensing, permits, and accreditation from various federal and state agencies as a condition to beginning operations including, but not limited to, licensure by state pharmacy boards. The process will include certain license applications or the acquisition of pharmacy operations with the appropriate licenses, permits and accreditations. Our growth, development and operations could be adversely affected if we are unable to obtain the necessary approvals, if changes in standards applicable to such approvals occur, or if obtaining required approvals result in significant delays and expenses. There is no assurance that the Company will be successful in obtaining such licenses and permits. Preferred Rx holds pharmacy licenses in 39 states.
In addition to required licenses and permits, our pharmacy operations are subject to a number of other federal and state statutes and regulations. The Drug Quality and Security Act was signed into law in 2013 and it addresses issues related to federal oversight of compounding pharmacies (which is voluntary and allows for registration as a regulated "outsourcing facility") and the establishment of a national track-and-trace system, which is subject to future FDA rulemaking.
Anti-Kickback Laws
Subject to certain statutory and regulatory exceptions (including exceptions relating to certain managed care, discount, bona fide employment arrangements, group purchasing and personal services arrangements), the federal "anti-kickback" law prohibits the knowing and willful offer or payment of any remuneration to induce the referral of an individual or the purchase, lease or order (or the arranging for or recommending of the purchase, lease or order) of healthcare items or services paid for in whole or in part by Medicare, Medicaid or other government-funded healthcare programs. Violation of the federal anti-kickback statute could subject us to criminal and/or civil penalties including suspension or exclusion from Medicare and Medicaid programs and other government-funded healthcare programs. A number of states also have enacted anti-kickback laws that sometimes apply not only to state-sponsored healthcare programs but also to items or services that are paid for by private insurance and self-pay patients. State anti-kickback laws can vary considerably in their applicability and scope and sometimes have fewer statutory and regulatory exceptions than does the federal law.
The federal anti-kickback law has been interpreted broadly by courts, the Office of the Inspector General and other administrative bodies. Because of the broad scope of those statutes, federal regulations establish certain safe harbors from liability. Safe harbors exist for certain properly reported discounts received from vendors, certain investment interests held by a person or entity, certain properly disclosed payments made by vendors to group purchasing organizations, payments made for leases of space and equipment and payments for personal services as well as for other transactions or relationships. Nonetheless, a practice that does not fall within a safe harbor is not necessarily unlawful, but may be subject to scrutiny and challenge. In the absence of an applicable exception or safe harbor, a violation of the statute may occur even if only one purpose of a payment arrangement is to induce patient referrals or purchases.
Governmental entities have also investigated pharmacies and their dealings with pharmaceutical manufacturers concerning, among other things, retail distribution, sales and marketing practices and product conversion or product switching programs. Governmental entities have also investigated pharmacies with respect to their relationships with physicians and other referral sources. There can be no assurance that we will not receive subpoenas or be requested to produce documents in pending investigations or litigation from time to time. In addition, we may be the target or subject of one or more such investigations or named parties in corresponding actions.
We believe we are in compliance with the legal requirements imposed by the anti-kickback laws and regulations. However, there can be no assurance that we will not be subject to scrutiny or challenge under such laws or regulations, or that any such challenge would not have a material adverse effect on us.
The Stark Laws
The federal self-referral law, commonly known as the "Stark Law," prohibits physicians from referring Medicare patients for "designated health services" (which include, among other things, outpatient prescription drugs, durable medical equipment and supplies and home health services) to an entity with which the physician, or an immediate family member of the physician, has a direct or indirect financial relationship, unless the financial relationship is structured to meet an applicable exception. Possible penalties for violation of the Stark Law include denial of payment, refund of amounts collected in violation of the statute, civil monetary penalties and program exclusion. Our management carefully considers the Stark Law and its accompanying regulations in structuring our financial relationships with physicians and our intention is to structure our operations to be in compliance therewith.
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