As filed with the Securities and
Exchange Commission on July 21, 2017
Table of Contents
File No. 000-27945
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
DOUGHERTY’S PHARMACY, INC.
(Exact name of Registrant as specified in
its charter)
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Delaware
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75-2900905
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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16250 Dallas Parkway, Suite 102, Dallas, Texas
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75248
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including
area code:
972-250-0945
Securities to be registered pursuant to Section 12(b)
of the Act
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Title of each class
to be so registered
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Name of each exchange on which
Each class is to be registered
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None
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None
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Securities to be registered pursuant to Section 12(g)
of the Act:
Common Stock, par value $0.0001
(Title of class)
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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☒
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
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TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Registration Statement and other documents
that we file or furnish with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts
and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we,
or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company’s website
or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts,
phone calls, conference calls and other communications.
Statements that are not historical facts are
forward-looking statements, including, without limitation, those regarding estimates of and goals for future financial and operating
performance as well as forward-looking statements concerning the expected execution and effect of our business strategies. Words
such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,”
“would,” “could,” “should,” “can,” “will,” “project,”
“intend,” “plan,” “goal,” “guidance,” “continue,” “sustain,”
“synergy,” “believe,” “seek,” “estimate,” “anticipate,” “may,”
“possible,” “assume,” and variations of such words and similar expressions are intended to identify such
forward-looking statements.
These forward-looking statements are not guarantees
of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results
to vary materially from those indicated or anticipated, including, but not limited to the following:
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We have limited funds and may require additional financing;
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We may not be able to effectively integrate and manage our current and anticipated growth strategies;
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We could be subject to unforeseen costs associated with our Pharmacy Acquisitions which could reduce our profitability;
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We may enter into additional leveraged transactions in connection with future Pharmacy Acquisitions;
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We may be negatively affected by restrictive terms and covenants in our existing credit facility;
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We may be required to perform as a co-guarantor on certain indebtedness obligations, and if such event were
to occur, we do not anticipate that we would have sufficient cash resources to meet such obligations;
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We are substantially dependent on a single supplier of pharmaceutical products;
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We must maintain sufficient sales to qualify for favorable pricing under our long term supply contract;
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We may be affected by the introduction of new brand name and generic prescription drugs, the conversion rate and mix of prescriptions
filled, the reimbursement rate by third party payors of prescriptions and increases in the cost to procure those drugs;
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We are subject to considerable uncertainty as to how current Health Reform Laws will affect our business and operations;
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We could be negatively affected by future legislative or regulator policies designed to manage healthcare costs or alter healthcare
financing practices; and
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We handle confidential healthcare information for our customers and are subject to the risk in securing such confidential information
and protecting it from cyber-attacks.
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These and other risks, assumptions and uncertainties
are described in Item 1A. “Risk Factors”. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking
statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as
of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation
to update publicly any forward-looking statement after the date the statement.
Our Business
Dougherty’s Pharmacy, Inc. (“Dougherty’s,”
which is also referred to in this Registration Statement as “we,” “us,” or “the Company”)
is a value oriented company focused on successfully acquiring, managing and growing community based pharmacies in
the Southwest Region. Dougherty’s was incorporated as Ascendant Solutions, Inc. in Delaware on August 8, 2000. On May 10th,
2017, the Company amended its Certificate of Incorporation to change its name from “Ascendant Solutions, Inc.” to
“Dougherty’s Pharmacy, Inc.” to reflect the current focus and operating structure from the previous focus on
making equity investments in underperforming or distressed U.S. lower middle-market businesses in the manufacturing, distribution,
service, healthcare, finance and retail industries. Since December 31, 2013, the Company investments included its wholly owned subsidiary
Dougherty’s Holdings, Inc. (“DHI”), under which it operates its retail pharmacy business; its wholly owned subsidiary
ASDS of Orange County, Inc. which operated as a holding company for the investment in CRESA Partners of Orange County, Inc., a
tenant representation and real estate advisory services company that was liquidated on February 7, 2017, and a 5.8% partnership
interest in Fairways Frisco, L.P., a mixed-use real estate development services company for which it ceased reporting effective
December 31, 2016, since the previous equity method investment balance remained at zero since 2008 and the partnership is in the
process of dissolution.
Effective December 31, 2013, the Company
changed its focus to acquire, manage, and grow community-based pharmacies in the Southwest Region of the United States, and since
then has engaged in a number of acquisition transactions to expand our pharmacy business and to minimize and ultimately divest
our other business interests.
On August 4, 2014, DHI acquired the
patient prescription files of Family Pharmacy located in Lewisville, Texas.
On September 2, 2014, DHI acquired
Northeast Compounding Pharmacy, LP (d/b/a Thrifty Health and Compounding Pharmacy), located in Humble,
Texas. On May 6, 2017, the Company sold this pharmacy and received total cash proceeds of $274,000 related to this transaction.
The revenues and earnings of the pharmacy are not significant to the consolidated financial statements taken as a whole.
On January 5, 2015, DHI acquired McCrory’s
Pharmacy located in El Paso, Texas.
On June 29, 2015, DHI acquired Medicine
Shoppe Pharmacy, located in McAlester, Oklahoma.
On August 31, 2015, DHI acquired Springtown
Drug Pharmacy located in Springtown, Texas.
On February 7, 2017,
CRESA Partners of Orange County, L.P., an affiliate of Cresa Partners-West, Inc. was acquired by Savills Studley, Inc.
liquidating the partnership interest held by ASDS of Orange County, Inc. in its entirety. As of December 31, 2016, the
estimated value of this investment was recorded at $1,295,000, which represents the estimated future cash payments for this
transaction. The Company received $367,500 at closing, recorded $320,000 as a short term other receivable, and recorded the
remainder of the Closing Price as a long term receivable due in three increments over 49 months, contingent on certain
milestones expected to be achieved.
Current Operations
Our
wholly owned subsidiary, Dougherty’s Holdings, Inc., owns and operates multiple Dougherty’s Pharmacies, which we
operate as a single segment in our financial reporting. The flagship store, Dougherty’s Pharmacy, is a turn-key
multi-service pharmacy located in a highly prestigious area of Dallas, Texas. Centrally located, we believe that
Dougherty’s Pharmacy continues to provide a level of service not typically provided by national pharmacy chain stores.
We fulfill virtually any prescription need, from the simplest to the most complex compounding prescriptions. Most national
pharmacy chains do not provide complex pharmacy prescription services. We specialize in providing solutions for our retail
customers’ pharmacy needs and also for our customers residing in assisted living facilities. Dougherty’s long
history began in 1929 and continues today as one of Dallas’s oldest, largest and best-known full-service pharmacies,
which also includes durable medical equipment, home healthcare products services, and health and wellness supplements. We
have a customer service oriented philosophy and typically do not attempt to compete solely based on price, as is the case
with most of the national pharmacy chains.
Additional community pharmacies are
located in Dallas, El Paso, and Springtown, Texas and in McAlester, Oklahoma.
Most Recent Acquisitions
On January 5, 2015, June 29, 2015,
and August 31, 2015, we acquired McCrory’s Pharmacy located in El Paso, Texas, Medicine Shoppe Pharmacy, located in McAlester,
Oklahoma, and Springtown Drug Pharmacy located in Springtown Texas, respectively, for a total purchase price of $5,640,000 of which
$4,413,000 was financed with notes payable with the remainder paid in cash funded from the revolving line of credit.
Plans for Future Acquisitions.
Dougherty’s plans for its
future growth through continued strategic acquisitions of independent pharmacies (a) that meet our acquisition criteria
(“Pharmacy Acquisition Opportunities”), (b) for which we have or can obtain sufficient cash resources to acquire,
and (c) which meet with the approval of our lenders, specifically the First National Bank of Omaha.
Acquisition Criteria
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We value and seek community based Pharmacy Acquisition Opportunities that place high value in customer service and patient
care. We believe that as we identify and evaluate Pharmacy Acquisition Opportunities, Dougherty’s can offer a unique exit
strategy for independent pharmacy owners as they consider their options in selling their pharmacies and monetizing the time and
resources that they have deployed in developing their businesses. We believe that our commitment to ensuring that customers of
such Pharmacy Acquisition Opportunities continue to receive individualized, personal, and local customer service is a significant
factor in independent pharmacy owners’ decision whether to sell, and to whom to sell, their existing businesses.
Our criteria when evaluating Pharmacy Acquisition
Opportunities, may include, but not necessarily be limited to, the following criteria:
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Annual revenues of $5-10 million
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Stable history of profitability and positive cash flow
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Strong management team committed to the business
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Established location and customer base
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Single and or multiple store operations
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Businesses, or situations, where we can most effectively deploy our net operating loss carryforwards
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We will continue to look for Pharmacy
Acquisition Opportunities and to identify, negotiate, and consummate the purchase of Pharmacy Acquisition Opportunities that meet
our acquisition criteria, present synergies with our prior acquisitions, and whose acquisition would reasonably be expected to
increase stockholder value (each a “Pharmacy Acquisition”); however, our current cash resources are limited. Therefore,
we will be required to expend significant executive time to close any purchase of a Pharmacy Acquisition and to handle the transition
of ownership and the on-going management of any such Pharmacy Acquisition. We will continue seeking to (1) most effectively deploy
our remaining cash and debt capacity (if any), (2) capitalize on the experience and contacts of our officers and directors, and
(3) explore other Pharmacy Acquisition Opportunities.
Industry Overview
The pharmacy industry is highly competitive
and has been experiencing consolidation in recent years. Prescription drugs play a significant role in healthcare and constitute
a first line of treatment for many medical conditions. We believe the long-term outlook for prescription drug utilization is strong
due, in part, to aging populations, increases in life expectancy, increases in the availability and utilization of generic drugs,
the continued development of innovative drugs that improve quality of life and control healthcare costs, and increases in the number
of persons with insurance coverage for prescription drugs, including, in the United States, the expansion of healthcare insurance
coverage under the Patient Protection and Affordable Care Act (the “ACA”) and “baby boomers” increasingly
becoming eligible for the federally funded Medicare Part D prescription program. Pharmaceutical wholesalers act as a vital link
between drug manufacturers and pharmacies and healthcare providers in supplying pharmaceuticals to patients.
The pharmacy industry
relies significantly on private and governmental third party payors. Many private organizations throughout the healthcare
industry, including pharmacy benefit management (“PBM”) companies and health insurance companies, have
consolidated in recent years to create larger healthcare enterprises with greater bargaining power. Third party payors, including
the Medicare Part D plans and the state-sponsored Medicaid and related managed care Medicaid agencies can change eligibility
requirements or reduce certain reimbursement rates. Changes in law or regulation also can impact reimbursement rates and
terms. For example, the ACA seeks to reduce federal spending by altering the Medicaid reimbursement formula
(“AMP”) for multi-source drugs in the United States. These changes generally are expected to reduce Medicaid
reimbursements. State Medicaid programs are also expected to continue to seek reductions in reimbursements independent of
AMP. When third party payors or governmental authorities take actions that restrict eligibility or reduce prices or
reimbursement rates, sales and margins in the pharmacy industry could be reduced, which would adversely affect industry
profitability. In some cases, these possible adverse effects may be partially or entirely offset by controlling inventory
costs and other expenses, dispensing more higher margin generics, finding new revenue streams through pharmacy services or
other offerings and/or dispensing a greater volume of prescriptions.
Generic prescription drugs have continued to
help lower overall costs for customers and third party payors. We expect the utilization of generic pharmaceuticals to continue
to increase. In general, generic versions of drugs generate lower sales dollars per prescription, but higher gross profit dollars,
as compared with patent-protected brand name drugs. The positive impact on pharmacy gross profit dollars can be significant in
the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally
referred to as a “generic conversion”. In any given year, the number of major brand name drugs that undergo a conversion
from branded to generic status can vary and the timing of generic conversions can be difficult to predict, which can have a significant
impact on retail pharmacy sales and gross profit dollars.
We expect that market demand, government regulation,
third-party reimbursement policies, government contracting requirements and other pressures will continue to cause the industries
in which we compete to evolve. Pharmacists are on the frontlines of the healthcare delivery system, and we believe rising healthcare
costs and the limited supply of primary care physicians present new opportunities for pharmacists and retail pharmacies to play
an even greater role in driving positive outcomes for patients and payors through expanded service offerings such as immunizations
and other preventive care, healthcare clinics, pharmacist-led medication therapy management and chronic condition management.
Pharmacy Revenue
Our sales, and gross profit are impacted by,
among other things, both the percentage of prescriptions that we fill that are generic and the rate at which new generic drugs
are introduced to the market. Because any number of factors outside of our control can affect timing for a generic conversion,
we face substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future
periods. The current environment of our pharmacy business also includes ongoing reimbursement pressure and a shift in pharmacy
mix towards 90-day at retail (one prescription that is the equivalent of three 30-day prescriptions) and Medicare Part D prescriptions.
Further consolidation among generic manufacturers coupled with changes in the number of major brand name drugs anticipated to undergo
a conversion from branded to generic status may also result in gross margin pressures within the industry.
We continuously face reimbursement pressure
from PBM companies, health maintenance organizations, managed care organizations and other commercial third party payors; our agreements
with these payors are regularly subject to expiration, termination or renegotiation. In addition, plan changes with rate adjustments
often occur in January and our reimbursement arrangements may provide for rate adjustments at prescribed intervals during their
term. We experienced lower reimbursement rates in fiscal 2016 as compared to the same period in the prior year. Further, we accepted
lower Medicare Part D reimbursement rates for calendar 2016 compared to calendar 2015 in order to secure preferred relationships
with Medicare Part D plans serving senior patients with significant pharmacy needs. We expect this trend to continue.
Our 90-day at retail prescription drug offering
is typically at a lower margin than comparable 30-day prescriptions, but provides us with the opportunity to increase business
with patients with chronic prescription needs while offering increased convenience, helping facilitate improved prescription adherence
and resulting in a lower cost to fill the 90-day prescription.
Seasonal variations in business
Our business is affected by a number of factors
including, among others, our sales performance during holiday periods (including particularly the winter holiday season) and during
the cough, cold and flu season (the timing and severity of which is difficult to predict), significant weather conditions, the
timing of our own or competitor discount programs and pricing actions, and the timing of changes in levels of reimbursement from
governmental agencies and other third party payors.
Sources and availability of materials
We source substantially all of our
generic and branded pharmaceutical drugs to fill prescriptions from a single supplier, Cardinal Health 110, Inc. and Cardinal
Health 411, Inc. (“Cardinal Health”). We purchase products from Cardinal Health under a long-term prime vendor agreement
that was amended in November of 2016. The current agreement extends through April 30, 2019, and provides the Company with tiered
reduced pricing based on minimum purchase volume in the form of rebates. The minimum purchase commitment includes at least 90%
of our pharmaceutical product requirements (if carried by Cardinal Health) and at least 90% of our generic pharmaceutical product
be purchased from the Cardinal Health Generic Source Product Program. We received in 2017, and are scheduled to receive in 2018,
certain cash prepayments from Cardinal Health that we are obligated to repay if the agreement is terminated before we have accrued
rebate credits in excess of such prepayments. As of June 30, 2017, we had no prepayment liabilities under the 2017 advance.
Alternative sources for most generic and brand name pharmaceuticals we sell are readily available, and, if necessary, we believe
that we could obtain and qualify for a comparative agreement with another national primary vendor for substantially all of the
prescription drugs we sell; however we can offer no assurances that losing Cardinal Health, as our majority supplier, would
not result in supply disruptions as we focused on a transition to one or more substitute suppliers, or that such transition would
not have a material adverse effect on our business and our results of operations. We purchase our non-pharmaceutical retail
merchandise from numerous manufacturers and wholesalers.
Working capital practices
Effective inventory management is important
to our operations. We use various inventory management techniques, including demand forecasting and planning and various forms
of replenishment management. Our working capital needs typically are greater in the months leading up to the winter holiday season.
We generally finance our inventory and expansion needs with internally generated funds and short-term borrowings. For additional
information, see the Liquidity and Capital Resources section in Management’s Discussion and Analysis of Financial Condition
and Results of Operations below.
Customers
We sell primarily to retail customers. No single
customer accounted for more than 10% of the Company’s consolidated sales for any of the periods presented. No single payor
accounted for more than 10% of retail prescription revenues in fiscal 2016.
Regulation
In the states in which we do business, we are
subject to national, state and local laws, regulations, and administrative practices concerning retail and wholesale pharmacy operations,
including regulations relating to our participation in Medicare, Medicaid and other publicly financed health benefit plans; regulations
prohibiting kickbacks, beneficiary inducement and the submission of false claims; the Health Insurance Portability and Accountability
Act (“HIPAA”); the ACA; licensure and registration requirements concerning the operation of pharmacies and the practice
of pharmacy; and regulations of the U.S. Food and Drug Administration, the U.S. Federal Trade Commission, the U.S. Drug Enforcement
Administration and the U.S. Consumer Product Safety Commission, as well as regulations promulgated by comparable state and local
governmental authorities concerning the operation of our business. We are also subject to laws and regulations relating to licensing,
tax, intellectual property, privacy and data protection, currency, political and other business restrictions.
We are also governed by federal, state and
local laws of general applicability in the states in which we do business, including laws regulating matters of working conditions,
health and safety and equal employment opportunity. In connection with the operation of our business, we are subject to laws and
regulations relating to the protection of the environment and health and safety matters, including those governing exposure to,
and the management and disposal of, hazardous substances.
Environmental protection requirements did not have a material effect
on our results of operations or capital expenditures in fiscal 2016.
Competitive conditions
The industry in which we operate is highly
competitive, and we compete with various local, regional, national pharmacy companies, including chain and independent pharmacies,
mail order prescription providers, grocery stores, convenience stores, mass merchants, online and omni-channel pharmacies and retailers,
warehouse clubs, dollar stores and other discount merchandisers.
Intellectual Property; Research
and Development
The Company has obtained a registered
service mark for the Dougherty’s Pharmacy name to protect its branding, but otherwise has no material intellectual property
necessary for our current operations, through copyright or otherwise. The Company has not, and does not expect to, make expenditures
on research and development efforts.
Employees
We had the following full time and
part-time employees as of March 31, 2017:
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Full-Time Employees
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108
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Part-Time Employees
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11
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Total Employees
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119
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In addition to our own employees, we use from
time to time, and are dependent upon, various outside consultants or contractors to perform various support services including,
technology, legal and accounting services.
We have limited funds and may require
additional financing.
We have limited funds, and such funds may not
be adequate to take advantage of available Pharmacy Acquisition Opportunities or fund our current Pharmacy Acquisitions. Our ultimate
success will likely depend upon our ability to raise additional capital. We have not investigated the availability, source, or
terms that might govern the acquisition of additional capital and we do not expect to do so until we determine a more definitive
and specific need for additional financing. Our access to capital is limited since our stock is not currently traded on any national
exchange and the fact that we have incurred significant debt resulting in approximately $7.2M in long term notes payable as of
March 31, 2017. We expect to incur additional debt for future Pharmacy Acquisitions. If additional capital is needed, there is
no assurance that funds will be available from any source or, if available, that they can be obtained on terms acceptable to us.
If not available, our operations will be limited to our current Pharmacy Acquisitions and any additional Pharmacy Acquisitions
that can be financed with our existing capital.
We may not be able to effectively integrate
and manage our current and anticipated growth strategies.
Our failure to effectively manage our recent
and anticipated future growth could strain our management infrastructure and other resources and adversely affect our results of
operations. We expect our recent and anticipated future growth to present management, infrastructure, systems, and other operating
issues and challenges. These issues include controlling expenses, retention of employees, the diversion of management attention,
the development and application of consistent internal controls and reporting processes, the integration and management of a geographically
diverse group of employees, and the monitoring of third parties.
Any change in management may make it more difficult
to integrate an acquired business with our existing operations. Any failure to address these issues at a pace consistent with our
business could cause inefficiencies, additional operating expenses and inherent risks and financial reporting difficulties.
We are dependent upon management.
We currently have two individuals who are serving
as management, our President and Chief Financial Officer and President of Pharmacy Operations. We are heavily dependent upon our
management’s skills, talents and abilities to implement our business plan. Because investors will not be able to evaluate
the merits of our future Pharmacy Acquisition Opportunities, they should critically assess the information concerning our management
and Board of Directors. In addition to our own employees, we use from time to time, and are dependent upon, various consultants
or contractors to perform various support services including, technology, legal and accounting.
We are dependent on a small staff to
execute our business plan.
Because of the limited size of our staff, each
Pharmacy Acquisition becomes more difficult to integrate. Furthermore, it is difficult to maintain a complete segregation of duties
related to the authorization, recording, processing and reporting of all such transactions. In addition, our strategy of pursuing
Pharmacy Acquisitions will require our management and other personnel to devote significant amounts of time to integrating the
acquired businesses with our existing operations. These efforts may temporarily distract their attention from day-to-day business
and other business opportunities.
Unforeseen costs associated with Pharmacy
Acquisitions could reduce our profitability.
We have implemented our business strategy and
made Pharmacy Acquisitions that may not prove to be successful over time. It is likely that we will encounter unanticipated difficulties
and expenditures relating to our Pharmacy Acquisitions, including contingent liabilities, or needs for significant management attention
that would otherwise be devoted to our general business strategies related to our other Pharmacy Acquisitions. These factors may
negatively affect our results of operations. Unforeseen costs at our Pharmacy Acquisitions and potentially upon the closing of
the purchase of future Pharmacy Acquisition Opportunities, which have significant liabilities and commitments, could result in
our inability to make required payments on our indebtedness, which would have a material adverse affect on our ability to implement
our pursuit of Pharmacy Acquisition Opportunities, manage our existing Pharmacy Acquisitions, retain Pharmacy Acquisitions for
which outstanding payment obligations remain, or continue our business as a going concern.
We may enter into additional leveraged
transactions in connection with a Pharmacy Acquisition Opportunity.
Based on our current cash position, it is likely
that if we enter into any additional Pharmacy Acquisitions, such acquisitions will be leveraged, i.e., we may finance the acquisition
of the business opportunity by borrowing against the assets of the Pharmacy Acquisition, or against the projected future revenues
or profits of the Pharmacy Acquisition. This could increase our exposure to larger losses. A Pharmacy Acquisition Opportunity acquired
through a leveraged transaction is profitable only if it generates enough cash flow to cover the related debt and expenses. Failure
to make payments on the debt incurred to complete the Pharmacy Acquisition could result in the loss of a portion or all of the
assets acquired. There is no assurance that any Pharmacy Acquisition effected through a leveraged transaction will generate sufficient
cash flow to cover the related debt and expenses.
The terms and covenants relating to our
existing credit facility could adversely impact our financial performance and liquidity.
Our existing credit facility contains covenants
requiring us to, among other things, provide financial and other information reporting, provide notice upon certain events, and
maintain cash management arrangements. These covenants also place restrictions on our ability to incur additional indebtedness,
pay dividends or make other distributions, redeem or repurchase capital stock, make investments and loans, and enter into certain
transactions, including selling assets, engaging in mergers or acquisitions, or engaging in transactions with affiliates. If we
fail to satisfy one or more of the covenants under our credit facility, we would be in default thereunder, and may be required
to repay such debt with capital from other sources or otherwise not be able to draw down against our line of credit. Under such
circumstances, other sources of capital may not be available to us on reasonable terms or at all.
Any debt service obligations relating
to any future indebtedness for future Pharmacy Acquisitions will reduce the funds available for other business purposes.
To the extent we incur significant debt in
the future for Pharmacy Acquisitions, capital expenditures, working capital, or otherwise, we will be subject to risks typically
associated with debt financing, such as insufficient cash flow to meet required debt service payment obligations and the inability
to refinance existing indebtedness.
We are restricted in our use of net operating
loss carryforwards.
Our federal net operating loss (“NOL”)
carryforwards permit us the opportunity to offset net operating losses from prior years to taxable income in future years in order
to reduce our tax liability. The use of these losses to reduce future income taxes will depend on the generation of sufficient
taxable income prior to the expiration of the NOL carryforwards.
The federal net operating loss carryforwards,
if not fully utilized, will expire between 2020 and 2035. Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)
imposes an annual limitation on the portion of our federal NOL carryforwards that may be used to offset taxable income.
In order to preserve our NOL carryforwards,
we must ensure that there has not been a “change of control” of our Company. A “change of control” includes
a more than 50 percentage point increase in the ownership of our company by certain equity holders who are defined in Section 382
of the Internal Revenue Code as “5 percent stockholders”. Calculating whether an ownership change has occurred is subject
to uncertainty, both because of the complexity of Section 382 of the Code and because of limitations on a publicly-traded company’s
knowledge as to the ownership of, and transactions in, its securities. Therefore, the calculation of the amount of our NOL carryforwards
may be changed as a result of a challenge by a governmental authority or our learning of new information about the ownership of,
and transactions in, our securities. Our ability to fully utilize our NOL could be limited if there have been past ownership changes
or if there are future ownership changes resulting in a change of control for Code Section 382. Additionally, future changes in
tax legislation could negatively affect our ability to use the tax benefits associated with our net operating losses. Therefore,
we can provide no assurance that a change in ownership of the Company would allow for the transfer of our existing NOL’s
to the surviving entity.
We are controlled by our principal stockholders,
officers and directors.
Our principal stockholders, officers and directors,
and affiliates beneficially own approximately 17.8% of our Common Stock. As a result, such persons may have the ability to control
and direct our affairs and business, perhaps in ways contrary to the interests of the Company’s other stockholders. Such
concentration of ownership may also have the effect of delaying, deferring or preventing a change in control or other transaction
that could benefit the Company’s stockholders.
Certain provisions of the Company’s
charter and rights plan may make a takeover of our company difficult even if such takeover could be beneficial to some of the Company’s
stockholders
The Company’s restated articles of incorporation
authorize the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined
from time to time by the Company’s board of directors. Accordingly, the Company’s board is empowered, without further
stockholder action, to issue shares or series of preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights, including the ability to receive dividends, of the Company’s
common stockholders. The issuance of such preferred stock could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control.
Our stock is not listed on
a National Securities Exchange.
Our stock is currently traded on the Pink Sheets.
Such a security is not listed or traded on a national securities exchange, and issuers of securities quoted on the Pink Sheets
are not subject to periodic filing requirements with the Securities and Exchange Commission or other regulatory authority. We are
filing this Form 10-Registration Statement to voluntarily register the shares of our common stock under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), which will require the Company to file the periodic and current
reports required under Section 13(d) of the Exchange Act.
In addition, our common stock is subject to
penny stock regulations, which could cause fewer brokers and market makers to execute trades in our common stock. This is likely
to hamper our common stock trading with sufficient volume to provide liquidity and could cause our stock price to further decrease.
The penny stock regulations require that broker-dealers who recommend penny stocks to persons other than institutional accredited
investors must make a special suitability determination for the purchaser, receive the purchaser’s written consent to the
transaction prior to the sale, and provide the purchaser with risk disclosure documents which identify risks associated with investing
in penny stocks. These requirements have historically resulted in reducing the level of trading activity in securities that become
subject to the penny stock rules. Holders of our common stock may find it difficult to sell their shares of common stock, which
is expected to have an adverse effect on the market price of the common stock.
Should we be required to perform as a
co-guarantor on an indebtedness obligation, we do not anticipate that we would have sufficient current cash
resources to meet such obligation.
We may be required to make payment
as co-guarantor on a promissory note issued by a bank in favor of an individual who was previously, through August 2008, a
related party of the Company (discussed further in Note 13 of the Dougherty’s Consolidated Financial Statements
contained herein) and as set forth in the Guarantee and the subsequent Forbearance Agreement included, respectively, as
Exhibits 10.11 and 10.12 to this Registration Statement, in the total principal amount as of July 15, 2017, of $1,887,884
(the “Guarantee Payment”) and as the co-guarantor, the Company could be liable for the entire amount of the
Guarantee Payment. We currently do not have cash on hand in sufficient amounts that would permit us to make the Guarantee
Payment, and should we be required to make the Guarantee Payment, we would be required to obtain funding to meet this
obligation, which the Company sees as doubtful. Therefore, if we became obligated to make the Guarantee Payment, such
obligation would significantly impair the Company’s ability to continue as a going concern or to even be able to
continue operations.
Our industry is highly litigious and
future litigation or other proceedings could subject us to significant monetary damages or penalties or require us to change our
business practices, which could impair our reputation and result in a material adverse effect on our business.
We are subject to risks relating to litigation,
enforcement actions, regulatory proceedings, government inquiries and investigations, and other similar actions in connection with
our business operations, including the dispensing of pharmaceutical products by pharmacies, claims, and complaints related to the
various regulations to which we are subject and services rendered in connection with business activities. While we are currently
not subject to any material litigation of this nature, such litigation is not unusual in our industry. Further, while certain costs
are covered by insurance, we may incur uninsured costs related to the defense of such proceedings that could be material to our
financial performance. In addition, as a public company, any material decline in the market price of our common stock may expose
us to purported class action lawsuits that, even if unsuccessful, could be costly to defend or indemnify (to the extent not covered
by insurance) and a distraction to management. Furthermore, unexpected volatility in insurance premiums or retention requirements
or claims in excess of our insurance coverage could have a material adverse effect on our business and results of operations.
Risks Related to Our Business and Industry
Our business is subject to extensive
regulation.
Our pharmacists and pharmacies are
required to be licensed by State Boards of Pharmacy. The pharmacies are also registered with the federal Drug Enforcement
Administration. By virtue of these license and registration requirements, the entities owned by us are obligated to observe
certain rules and regulations, and a violation of such rules and regulations could result in fines and/or in a suspension or
revocation of a license or registration.
In addition, a portion of our revenue is derived
from high-end, technical pharmacy services, such as compounded prescriptions and pain management products that are not typically
offered by chain drug stores, grocery pharmacies or mass merchandise pharmacies. Additional federal and/or state regulations could
also affect our business by putting additional burdens on us.
If we do not adequately respond to competitive
pressures, demand for our products and services could decrease.
Our retail pharmacies operate in a highly competitive
industry. The markets we serve are subject to relatively few barriers to entry. These pharmacies compete primarily on the basis
of customer service; convenience of location; and store design, price and product mix and selection. Some of our competitors have
greater financial, technical, marketing, and managerial resources than we have. Local, regional, and national companies are currently
competing in many of the health care markets we serve and others may do so in the future. In addition to traditional competition
from independent pharmacies and other drugstore and pharmacy chains, our pharmacies face competition from discount stores, supermarkets,
combination food and drugstores, mass merchants, warehouse clubs, mail order prescription providers online and omni-channel pharmacies
and retailers, hospitals and health maintenance organizations (“HMOs”). These other formats have experienced significant
growth in their market share of the prescription and over-the-counter drug business. Consolidation among our competitors, such
as pharmacy benefit managers (PBM’s) and regional and national pharmacy providers could result in price competition and other
competitive factors that could cause a decline in our revenue and profitability.
We expect to continue to encounter competition
in the future that could limit our ability to grow revenue and/or maintain acceptable pricing levels.
Risk related to third party payors.
Our revenues and profitability are affected
by the continuing efforts of all third-party payors, including but not limited to HMOs, managed care organizations, PBMs and government
programs (which are subject to statutory and regulatory requirements, administrative rulings, interpretations of policy, implementation
of reimbursement procedures, retroactive payment adjustments, governmental funding restrictions and changes to existing legislation
such as Medicare, Medicaid and other federal and state funded programs) to contain or reduce the costs of health care by lowering
reimbursement rates, narrowing the scope of covered services, increasing case management review of services and negotiating reduced
contract pricing. Any changes in reimbursement levels from these third-party payor sources and any changes in applicable government
regulations could have a material adverse effect on our revenues and profitability. While manufacturers have increased the price
of drugs, payors have generally decreased reimbursement rates as a percentage of drug cost. We expect pricing pressures from third-party
payors to continue given the high and increasing costs of pharmaceutical drugs. Changes in the mix of pharmacy prescriptions covered
by third party payors among Medicare, Medicaid and other payor sources may also impact our revenues and profitability. There can
be no assurance that we will continue to maintain the current payor, revenue or profitability mix.
Collectability of accounts receivable.
Our failure to maintain controls and processes
over billing and collecting, or the deterioration of the financial condition of our payors, could have a significant negative impact
on our results of operations and financial condition. The collection of accounts receivable is one of our most significant challenges
and requires constant focus and involvement by management and ongoing enhancements to information systems and billing center operating
procedures. Further some of our payors and/or patients may experience financial difficulties, or may otherwise not pay accounts
receivable when due, resulting in increased write-offs. There can be no assurance that we will be able to maintain our current
levels of collectability and days sales outstanding in future periods. If we are unable to properly bill and collect our accounts
receivable, our operating results will be adversely affected.
We are substantially dependent on a single
supplier of pharmaceutical products to sell products to us on satisfactory terms. A disruption in our relationship with this supplier
could have a material adverse effect on our business.
We obtain a majority
of our total merchandise, including over 83% of our pharmaceuticals, from a single supplier,
Cardinal
Health
110, Inc. and Cardinal Health 411, Inc. (“Cardinal Health”), with whom we have a long-term supply contract. Any significant
disruptions in our relationship with Cardinal Health, or deterioration in Cardinal Health’s financial condition, could have
a material adverse effect on us.
Failure to maintain sufficient sales
to qualify for favorable pricing under our long term supply contract could increase the costs of our products.
Our long term supply agreement with
Cardinal Health, as amended in November 2016, provides us with pricing and credit terms that are improved from those previously
provided by Cardinal Health. The minimum purchase commitment includes at least 90% of pharmaceutical product requirements (if
carried by Cardinal Health) and at least 90% of generic pharmaceutical product be purchased from the Cardinal Health Generic Source
Product Program.
If we are unable to satisfy these minimum purchase requirements, we may be required
to purchase our pharmaceutical products on less favorable pricing and credit terms.
Our business is seasonal in nature, and adverse events
during the holiday and cough, cold and flu seasons could adversely impact our operating results.
Our business is seasonal in nature, with the
months of December, January and February typically generating a higher proportion of retail sales and earnings than other months.
Adverse events, such as deteriorating economic conditions, higher unemployment, higher gas prices, public transportation disruptions,
or unanticipated adverse weather, could result in lower-than-planned sales during key selling months. For example, frequent or
unusually heavy snowfall, ice storms, rainstorms, windstorms or other extreme weather conditions could make it difficult for our
customers to travel to our stores. This could lead to lower sales, thus negatively impacting our financial condition and results
of operations. In addition, both prescription and non-prescription drug sales are affected by the timing and severity of the cough,
cold and flu season, which can vary considerably from year to year.
The amount of direct and indirect remuneration
fees charged by payors, as well as the timing of assessing such fees and the non-transparent methodology in calculating such fees,
may have a material adverse impact on our financial performance and, to the extent such fees are material, may limit our ability
to provide accurate financial guidance for future periods.
Some payors charge certain direct and indirect
remuneration fees (“DIR fees”), often calculated and charged several months after adjudication of a claim, which adversely
impacts our profitability. DIR fees is a term used to address price concessions that ultimately impact the prescription drug costs
of Medicare Part D plans, but are not captured at the point of sale; however, this term is used to capture a number of different
types of fees assessed after adjudication of a claim. In particular, the methodology and transparency around how PBMs are applying
these DIR fees changed materially in 2016 and commenced to result in significant DIR fees assessed in beginning in 2017 and may
materially impact our financial performance in the future.
Our operating results may fluctuate significantly,
which makes our future operating results difficult to predict and could cause our operating results to fall below expectations
or our guidance.
Our quarterly and annual operating results,
and in particular our revenues, have fluctuated in the past and may fluctuate significantly in the future. These fluctuations make
it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many
of which are outside of our control and are difficult to predict, including the following:
|
|
·
|
changes in the reimbursement policies of payors;
|
|
|
·
|
the effect of the expiration of drug patents and the introduction of generic drugs;
|
|
|
·
|
whether revenues and margins on sales of drugs that come to market are properly estimated;
|
|
|
·
|
expenditures that we will or may incur to acquire or develop additional capabilities; and
|
|
|
·
|
timing of increases in drug costs by manufacturers; and the amount of DIR fees and the timing for
assessing us for such fees.·
|
These factors, individually or in the aggregate,
could result in large fluctuations and unpredictability in our quarterly and annual operating results. Thus, comparing our operating
results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our
future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry
or financial analysts or investors for any period.
We could be adversely affected by a decrease in the introduction
of new brand name and generic prescription drugs as well as increases in the cost to procure prescription drugs.
New brand name drugs can result in increased
drug utilization and associated sales, while the introduction of lower priced generic alternatives typically results in relatively
lower sales, but relatively higher gross profit margins. Accordingly, a decrease in the number or magnitude of significant new
brand name drugs or generics successfully introduced, or delays in their introduction, could materially and adversely affect our
results of operations.
In addition, if we experience an increase
in the amounts we pay to procure pharmaceutical drugs, including generic drugs, it could have a material adverse effect on our
results of operations. Our gross profit margins would be adversely affected to the extent we are not able to offset such cost
increases. Any failure to fully offset any such increased prices and costs or to modify our activities to mitigate the impact
could have a material adverse effect on our results of operations. Additionally, any future changes in drug prices could be significantly
different than our projections.
We may experience a significant disruption in our computer
systems.
We rely extensively on our computer systems
to manage our ordering, pricing, point-of-sale, pharmacy fulfillment, inventory replenishment, finance and other processes. Our
systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security
breaches, cyber-attacks, vandalism, natural disasters, catastrophic events and human error, and our disaster recovery planning
cannot account for all eventualities. If any of our systems are damaged, fail to function properly or otherwise become unavailable,
we may incur substantial costs to repair or replace them, and may experience loss or corruption of critical data and interruptions
or disruptions and delays in our ability to perform critical functions, which could materially and adversely affect our business
and results of operations. In addition, we are currently making, and expect to continue to make, substantial investments in our
information technology systems and infrastructure, some of which are significant. Upgrades involve replacing existing systems with
successor systems, making changes to existing systems, or cost-effectively acquiring new systems with new functionality. Implementing
new systems carries significant potential risks, including failure to operate as designed, potential loss or corruption of data
or information, cost overruns, implementation delays, disruption of operations, and the potential inability to meet business and
reporting requirements. While we are aware of inherent risks associated with replacing these systems and believe we are taking
reasonable action to mitigate known risks, there can be no assurance that we will not experience significant issues with our existing
systems prior to implementation, that our technology initiatives will be successfully deployed as planned or that they will be
timely implemented without significant disruption to our operations. We also could be adversely affected by any significant disruption
in the systems of third parties we interact with, including key payors and vendors.
We outsource certain operations of our
business to third-party vendors, which could leave us vulnerable to data security failures of third parties.
We outsource certain operations to third-party
vendors to achieve efficiencies. Such outsourced functions include but are not limited to pharmacy system software updates and
maintenance, payment processing, prescription data processing, and technology services. Although we expect our business partners
to maintain the same vigilance as we do with respect to data security, we cannot control the operations of these third parties.
While we engage in certain actions to reduce the exposure resulting from outsourcing, vulnerabilities in the information security
infrastructure of our business partners could make us vulnerable to attacks or disruptions in service.
Possible changes in industry pricing
benchmarks.
It is possible that the pharmaceutical industry
or regulators may evaluate and/or develop an alternative pricing reference to replace average wholesale price (“AWP”),
which is the pricing reference used for many pharmaceutical purchase agreements, retail network contracts, specialty payor agreements,
and other contracts with third party payors in connection with the reimbursement of specialty drug payments. Future changes to
the use of AWP or to other published pricing benchmarks used to establish pharmaceutical pricing, including changes in the basis
for calculating reimbursement by federal and state health programs and/or other payors, could impact our pricing arrangements.
The effect of these possible changes on our business cannot be predicted at this time.
Legislative or regulatory policies in
the U.S. designed to manage healthcare costs or alter healthcare financing practices or changes to government policies in general
may adversely impact our business and results of operations.
Currently, there are numerous congressional,
legislative and/or regulatory proposals which seek to amend and or replace the Affordable Care Act (“ACA”), including
proposals to manage the cost of healthcare, including prescription drug cost. Such proposals may include changes in reimbursement
rates, restrictions on rebates and discounts, restrictions on access or therapeutic substitution, limits on more efficient delivery
channels, taxes on goods and services, price controls on prescription drugs, and other significant healthcare reform proposals,
including their repeal or replacement. Further, more exacting regulatory policies and requirements specific to the pharmacy sector
may cause a rise in costs, labor, and time to meet all such requirements. We are unable to predict whether any such policies or
proposals will be enacted, or the specific terms thereof. Certain of these policies or proposals, if enacted, could have a material
adverse impact on our business.
Our business operations involve the substantial
receipt and use of confidential health information concerning individuals. A failure to adequately protect any of this information
could result in severe harm to our reputation and subject us to significant liabilities, each of which could have a material adverse
effect on our business.
Most of our activities involve the receipt
or use of personal health information (“PHI”) concerning individuals. There is substantial regulation at the federal
and state levels addressing the use, disclosure, and security of patient identifiable health information. At the federal level,
HIPAA and the regulations issued thereunder impose extensive requirements governing the transmission, use, and disclosure of health
information by all participants in health care delivery, including physicians, hospitals, insurers, and other payors. Many of these
obligations were expanded under Health Information Technology for Economic and Clinical Health, passed as part of the American
Recovery and Reinvestment Act of 2009. Failure to comply with standards issued pursuant to federal or state statutes or regulations
may result in criminal penalties and civil sanctions. In addition to regulating privacy of individual health information, HIPAA
includes several anti-fraud and abuse laws, extends criminal penalties to private health care benefit programs and, in addition
to Medicare and Medicaid, to other federal health care programs, and expands the Office of Inspector General’s authority
to exclude persons and entities from participating in the Medicare and Medicaid programs. Further, future regulations and legislation
that severely restrict or prohibit our use of patient identifiable or other information could limit our ability to use information
critical to the operation of our business. If we violate a patient’s privacy or are found to have violated any federal or
state statute or regulation with regard to confidentiality or dissemination or use of PHI, we could be liable for significant damages,
fines, or penalties and suffer severe reputational harm, each of which could have a material adverse effect on our reputation,
our business, our results of operations, and our future prospects.
Our business, financial position, and
operations could be adversely affected by environmental regulations, and health and safety laws and regulations applicable to our
business.
Certain federal, state, and local environmental
regulations and health and safety laws and regulations are applicable to our business, including the management of hazardous substances,
storage, and transportation of possible hazardous materials, and various other disclosure and procedure requirements that may be
promulgated by the Occupational Safety and Health Administration or the Environmental Protection Agency that may apply to our operations.
Violations of these laws and regulations could result in substantial statutory penalties, sanctions, and, in certain circumstances,
a private right of action by consumers, employees, or the general public.
Health Reform Legislation
Congress passed major health reform legislation, including the Patient
Protection and ACA, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Health Reform Laws”).
This legislation affects virtually every aspect of health care in the U.S. In addition to establishing the framework for every
individual to have health coverage beginning in 2014, the Health Reform Laws enacted a number of significant health care reforms.
President Donald Trump has stated his intentions to support the repeal and possible replacement of the Health Reform Laws during
his term of office and on May 4, 2017, the House of Representatives passed the American Health Care Act as the first proposed change
to health reform legislation. While not all of these reforms, or their repeal or replacement, affect our business directly, they
could affect the coverage and plan designs that are or will be provided by many of our health plan clients. As a result, these
reforms, or their repeal or replacement, could impact many of our services and business practices. There is considerable uncertainty
as to the continuation of these reforms, their repeal, or their replacement.
Current economic conditions may adversely affect our industry,
business and results of operations.
The United States economy is continuing to
feel the impact of the economic downturn that began in late 2007, and the future economic environment may not fully recover to
levels prior to the downturn. This economic uncertainty has and could further lead to reduced consumer spending. If consumer spending
decreases or does not grow, we may not be able to sustain or grow sales. In addition, reduced or flat consumer spending may drive
us and our competitors to offer additional products at promotional prices, which would have a negative impact on our gross profit.
A continued softening or slow recovery in consumer spending may adversely affect our industry, business and results of operations.
Reduced revenues as a result of decreased consumer spending may also reduce our liquidity and otherwise hinder our ability to implement
our long term strategy.
Certain risks are inherent in providing
pharmacy services, and our insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in
the packaging and distribution of pharmaceuticals and other health care products. Although we maintain professional liability
and errors and omissions liability insurance, we cannot assure you that the coverage limits under our insurance programs will
be adequate to protect us against future claims, or that we will maintain this insurance on acceptable terms in the future.
|
ITEM 2.
|
FINANCIAL INFORMATION
|
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Key measures used by the Company’s
management to evaluate business performance include revenue, gross profit, selling, general and administrative expense
(“SG&A”) and EBITDA. EBITDA is calculated as net income before deducting interest, taxes, depreciation and
amortization. EBITDA is a non-GAAP measure that Company’s management considers to best present the results of
ongoing operations and is useful when comparing the performance between different reporting periods. In certain instances, we
have presented EBITDA (Adjusted) which also excludes certain one-time, non-recurring, non-operating losses or impairments, as
the Company considers excluding these adjustments necessary to derive the results of ongoing operations. In those instances,
we have identified when the Company is presenting adjusted EBITDA. Although EBITDA or EBITDA (Adjusted) is not a measure
of actual cash flow because it does not consider changes in assets and liabilities that may impact cash balances, the Company
believes it is a useful metric to evaluate operating performance and has therefore included such measures in the discussion
of operating results below.
The Company also tracks prescriptions sold
to assess operational performance.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31,
2016 to the Year Ended December 31, 2015 (000’s omitted).
Revenue
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
42,786
|
|
|
$
|
40,952
|
|
|
$
|
1,834
|
|
|
Cost of sales (exclusive of depreciation and amortization
shown separately below)
|
|
|
31,736
|
|
|
|
29,654
|
|
|
|
2,082
|
|
|
Gross profit
|
|
|
11,050
|
|
|
|
11,298
|
|
|
|
(248
|
)
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,449
|
|
|
|
10,628
|
|
|
|
(179
|
)
|
|
Depreciation and amortization
|
|
|
1,052
|
|
|
|
771
|
|
|
|
281
|
|
|
Dividend income
|
|
|
84
|
|
|
|
88
|
|
|
|
(4
|
)
|
|
Other income
|
|
|
1
|
|
|
|
5
|
|
|
|
(4
|
)
|
|
Interest expense
|
|
|
443
|
|
|
|
336
|
|
|
|
107
|
|
|
Investments impairment
|
|
|
4,008
|
|
|
|
–
|
|
|
|
4,008
|
|
|
Income tax provision
|
|
|
42
|
|
|
|
52
|
|
|
|
(10
|
)
|
|
Net loss
|
|
$
|
(4,859
|
)
|
|
$
|
(396
|
)
|
|
$
|
(4,463
|
)
|
|
plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
443
|
|
|
$
|
336
|
|
|
$
|
107
|
|
|
Depreciation and amortization
|
|
|
1,052
|
|
|
|
771
|
|
|
|
281
|
|
|
Investments impairment
|
|
|
4,008
|
|
|
|
–
|
|
|
|
4,008
|
|
|
Income tax provision
|
|
|
42
|
|
|
|
52
|
|
|
|
(10
|
)
|
|
EBITDA (Adjusted)
|
|
$
|
686
|
|
|
$
|
763
|
|
|
$
|
(77
|
)
|
|
Prescriptions sold
|
|
|
443,467
|
|
|
|
375,505
|
|
|
|
67,962
|
|
Total revenues increased $1,834 during the
year ended December 31, 2016 to $42,786. This represents a 4.5% increase over revenue of $40,952 in 2015. The increase includes
an 18.1% increase in the number of retail pharmacy prescriptions sold and increased sales of front end merchandise. $4,457
of the increase in revenue was attributable to a full year of results for two pharmacies acquired at the end of the second quarter
of 2015 offset by $2,623 of decreases in revenue attributable to the change in mix of prescriptions.
Gross Profit
Gross profit decreased $248 for the year ended
December 31, 2016 to $11,050, or 25.8% of revenue. Gross profit was $11,298 or 27.6% of sales in 2015. The overall decrease in
gross profit is primarily due to lower reimbursement rates. Gross profit includes all direct costs related to the sale of prescriptions.
Operating Expense
SG&A expense decreased $179 for the year
ended December 31, 2016, to $10,449 from $10,628 in 2015. SG&A expense represented 24.4% of revenue in 2016 as compared to 26.0%
of revenue in 2015. The decrease in SG&A as a percentage of revenue is due primarily to cost savings implemented to counter
the expected lower gross profit. Depreciation and amortization increased $281 for the year ended December 31, 2016, to $1,052 from
$771 in 2015, attributable to a full year of results for two pharmacies acquired at the end of the second quarter of 2015.
Interest Expense
Interest expense increased $107 for the year
ended December 31, 2016, to $443 from $336 in 2015. The increase in interest expense is attributable to the financing on the two
pharmacies acquired at the end of the second quarter of 2015.
Earnings Before Interest, Taxes, Depreciation
and Amortization
The one time non-operating investments impairment
of $4,008, of which $3,812 is described in Note 13 of the Dougherty’s Consolidated Financial Statements contained herein,
is added back to income to calculate EBITDA (Adjusted) for the year ended December 31, 2016. The $3,812 charge is related
to the liquidation of a partnership interest located in California that performs real estate advisory services to corporate clients
around the United States. The investments impairments are not a result of ongoing operations and added back by management to derive
comparative results year over year. EBITDA (Adjusted) decreased by $77 to EBITDA (Adjusted) of $686 in for the year
ended December 31, 2016, from EBITDA of $763 in 2015. This overall decrease is due primarily to lower gross margin noted above.
Results of Operations: Comparison of the
Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016 (000’s Omitted)
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
Revenue
|
|
$
|
10,055
|
|
|
$
|
10,816
|
|
|
$
|
(761
|
)
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below)
|
|
|
7,268
|
|
|
|
7,894
|
|
|
|
(626
|
)
|
|
Gross profit
|
|
|
2,787
|
|
|
|
2,922
|
|
|
|
(135
|
)
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,576
|
|
|
|
2,761
|
|
|
|
(185
|
)
|
|
Depreciation and amortization
|
|
|
266
|
|
|
|
261
|
|
|
|
5
|
|
|
Other income
|
|
|
–
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
Interest expense
|
|
|
102
|
|
|
|
107
|
|
|
|
(5
|
)
|
|
Income tax provision
|
|
|
11
|
|
|
|
10
|
|
|
|
1
|
|
|
Net loss
|
|
$
|
(168
|
)
|
|
$
|
(216
|
)
|
|
$
|
48
|
|
|
plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
102
|
|
|
$
|
107
|
|
|
$
|
(5
|
)
|
|
Depreciation and amortization
|
|
|
266
|
|
|
|
261
|
|
|
|
5
|
|
|
Income tax provision
|
|
|
11
|
|
|
|
10
|
|
|
|
1
|
|
|
EBITDA
|
|
$
|
211
|
|
|
$
|
162
|
|
|
$
|
49
|
|
|
Prescriptions sold
|
|
|
108,596
|
|
|
|
111,071
|
|
|
|
(2,475
|
)
|
Revenues
Total revenues decreased $761 during the first
quarter of 2017 to $10,055. This represents a 7% decrease over revenue of $10,816 in the first quarter of 2016. The decrease
includes a 2.2% decrease in the number of retail pharmacy prescriptions sold.
Gross profit
Gross profit decreased $135 as a result
of the factors discussed in Revenues above. Gross profit improved to 27.7% of revenue in the first quarter of 2017 as compared
to 27.0% of revenue in the first quarter of 2016 as a result of the improved pricing secured in the November 2016 pricing
agreement with Cardinal Health, offset by DIR fees of $37 that commenced in January of 2017.
Operating expenses
SG&A expenses decreased $185 from $2,761
in the first quarter of 2016 to $2,576 in the first quarter of 2017. The decrease in operating expenses is due primarily to cost
reduction initiatives that were implemented during 2016.
Earnings Before Interest, Taxes, Depreciation
and Amortization
EBITDA increased by $49 to EBITDA of $211 in
the first quarter of 2017 from EBITDA of $162 in the first quarter of 2016, or an improvement of or 30.2%. This overall increase
is due primarily to the cost improvements realized over prior year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2017, we had
working capital of approximately $2.3 million as compared to working capital of approximately $1.9 million at December 31,
2016. This net increase is primarily due to cash proceeds received upon the disposition of CPOC of $0.6 million.
As of March 31, 2017, we had cash and
restricted cash of approximately $826,000, of which $303,000 was restricted, as compared to approximately $361,000, of which $303,000
was restricted, at December 31, 2016. The increase in cash for the three months ended March 31, 2017, of $465,000 was primarily
the result of cash proceeds received upon the disposition of the CPOC investment of $617,000.
For the three months ended March
31, 2017, net cash flow provided by operating activities of $554,000 primarily reflects the net loss of $168,000, the
add-back of non-cash depreciation and amortization expense of $266,000, the add-back of stock-based compensation of $12,000,
and changes in operating assets and liabilities of positive $269,000 for accounts receivable, negative $102,000
for inventory, negative $25,000 for prepaid expenses and other assets, positive $238,000 for accounts payable and
positive $64,000 for accrued liabilities.
Net cash flow provided by investing
activities was $576,000. Cash used to purchase property and equipment was $41,000 and cash provided by the proceeds of the disposition
of CPOC was $617,000.
Net cash flow used in financing activities
was $665,000. For the three months ended March 31, 2017, borrowings of $4,418,000 and payments of $4,739,000 were made on the
revolving credit facility. Payments of $344,000 were made on notes payable.
As of March 31, 2017, the Company had
cash and restricted cash of $826,000; total current assets of $6,406,000 and total current liabilities of $4,115,000 creating working capital
in the amount of $2,291,000. Net cash provided by operating activities was $554,000 and $1,019,000 for the three months ended March 31, 2017
and 2016, respectively. Current assets as of March 31, 2017, consisted of $826,000 of cash and restricted cash, $1,632,000 of accounts
receivable net of allowance, $225,000 of other receivables, $12,000 of receivables from affiliates, $3,442,000 of inventory net of reserve,
and $269,000 of prepaid expenses.
As of December 31, 2016, the
Company had $361,000 of cash and restricted cash; total current assets of $6,013,000, and total current liabilities of $4,065,000,
creating working capital in the amount of $1,948,000. Current assets as of December 31, 2016, consisted of $361,000 of cash and
restricted cash, $1,901,000 of accounts receivable net of allowance, $113,000 of other receivables, $12,000 of receivables from
affiliates, $3,340,000 inventory net of reserve, and $286,000 of prepaid expenses.
We had negative cash flow of $10,000 during
the year ended December 31, 2016, and positive cash flow of $465,000 for the three months ended March 31, 2017 as compared to a positive
cash flow of $61,000 for the year ended December 31, 2015, and negative cash flow of $3,000 for the three months ended March 31, 2016.
Our principal indebtedness at March
31, 2017 consists of the following:
|
|
·
|
A
number of term notes in favor of Cardinal Health in the aggregate amount of $3,859,000, secured
by certain retail pharmacy assets, and maturing between August 2019 and August 2020;
|
|
|
·
|
A
revolving credit facility in the principal amount of $4,750,000, of which the Company
has currently borrowed $3,850,000 on the revolving credit facility, leaving $900,000
available for future borrowings;
|
|
|
·
|
A
number of notes payable to sellers of acquired pharmacies in the aggregate amount of
$256,000, unsecured, and maturing on or before September 18, 2018.
|
In addition, the Company may be required
to make payment as co-guarantor on a promissory note issued by a bank in favor of an individual who was previously, through August
of 2008, a related party of the Company (as set forth in the Guarantee and the subsequent Forbearance Agreement included, respectively,
as Exhibits 10.11 and 10.12 to this Registration Statement). The total principal amount due and owing under the promissory note
as of July 15, 2017, of $1,887,884 (the “Guarantee Payment”), and as the co-guarantor, the Company could be liable
for the entire amount of the Guarantee Payment. We currently do not have cash on hand in sufficient amounts that would permit
us to make the Guarantee Payment, and should we be required to make the Guarantee Payment, we would be required to obtain funding
to meet this obligation, which the Company sees as doubtful. Therefore, if we became obligated to make the Guarantee Payment,
such obligation would significantly impair the Company’s ability to continue as a going concern or to even be able to continue
operations.
Our future capital needs are uncertain.
Management anticipates funding our capital needs through a combination of projected positive cash flow after debt service and
available borrowings under our revolving line of credit; however cash flow projections are based on anticipated operations of
our business, for which we can provide no assurance. Additionally, if we were to make additional acquisitions, we would likely
need additional capital to fund all, or a portion, of those acquisitions. If the company does not generate the necessary cash
flow, the Company will need additional financing in excess of our current revolving line of credit to fund operations in the future.
We do not know whether additional financing will be available when needed, or that, if available, we will be able to obtain financing
on terms favorable, or even acceptable, to the Company.
Tax Loss Carryforwards
At December 31, 2016, we
had approximately $48 million of federal NOL carryforwards available to offset future taxable income, which, if not
utilized, will fully expire from 2020 to 2035. We believe that the issuance of shares of our common stock pursuant to our
initial public offering on November 15, 1999 caused an “ownership change” for purposes of Section 382 of the
Internal Revenue Code of 1986, as amended. Consequently, we believe that the portion of our federal NOL carryforwards
attributable to the period prior to November 16, 1999 is subject to an annual limitation pursuant to Section 382. Our total
deferred tax assets have been fully reserved as a result of the uncertainty of future taxable income, except for $3 million
that is estimated to offset future taxable income from pharmacy operations and or the sale of pharmacy businesses. The
estimated deferred tax asset is consistent with the prior year, accordingly, no tax benefit has been recognized in
the periods presented.
Off Balance Sheet Arrangements
We do not have any unconsolidated special purpose
entities and, except as described herein, we do not have significant exposure to any off-balance sheet arrangements. The term “off-balance
sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated
with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable
interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as
credit, liquidity or market risk support for such assets.
Please see Note 13 of the Dougherty’s
Consolidated Financial Statements contained herein.
|
|
|
Contractual Obligations As of December 31,
2016
|
|
|
|
|
Payments due by Period ($-000’s omitted)
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
4-5
|
|
|
More than
|
|
|
|
|
|
|
|
1 year
|
|
|
Years
|
|
|
Years
|
|
|
5 years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations
|
|
|
621
|
|
|
|
761
|
|
|
|
325
|
|
|
|
535
|
|
|
|
2,242
|
|
|
Notes payable
|
|
|
1,129
|
|
|
|
6,180
|
|
|
|
1,427
|
|
|
|
–
|
|
|
|
8,736
|
|
|
Total
|
|
$
|
1,750
|
|
|
$
|
6,941
|
|
|
$
|
1,752
|
|
|
$
|
535
|
|
|
$
|
10,978
|
|
Critical Accounting Policies
The consolidated financial statements are prepared
in accordance with accounting principles generally accepted in the United States of America and include amounts based on management’s
prudent judgments and estimates. Actual results may differ from these estimates. Management believes that any reasonable deviation
from those judgments and estimates would not have a material impact on our consolidated financial position or results of operations.
To the extent that the estimates used differ from actual results, however, adjustments to the statement of earnings and corresponding
balance sheet accounts would be necessary. These adjustments would be made in future periods. Some of the more significant estimates
include intangible asset impairment, cost method investments and income taxes. We use the following methods to determine our estimates:
Accounts Receivable
Receivables recorded in the financial statements
represent valid claims against debtors for services rendered or other charges arising on or before the balance sheet date. Management
makes estimates of the collectability of accounts receivable. Specifically, management analyzes accounts receivable and historical
bad debts, customer credit-worthiness, current economic trends, and changes in customer payment terms and collections trends when
evaluating the adequacy of the allowance for doubtful accounts. Any change in the assumptions used in analyzing accounts receivable
may result in additional allowances for doubtful accounts being recognized in the periods in which the change in assumptions occurs.
Inventories
Inventories consist of health care product
finished goods held for resale, valued at the lower of cost using the first-in, first-out method or market. The Company maintains
an estimated reserve against inventory for excess, slow-moving, and obsolete inventory as well as inventory for which carrying
value is in excess of its net realizable value.
Intangible Assets
Intangible assets with finite lives are being
amortized on the straight-line basis over seven years. Such assets are periodically evaluated as to the recoverability of their
carrying values.
Cost Method Investments
Cost method investments represent investments
in limited partnerships accounted for using the cost method of accounting. None of these investments are investments in publicly
traded companies. The cost method is used because the Company does not have a controlling interest and does not have significant
influence over the operations of the respective companies. Accordingly, the Company does not record its proportionate share of
the income or losses generated by the limited partnerships in the consolidated statement of operations. The Company recognizes
as income dividends that are distributed from net accumulated earnings of the investees since the date of acquisition. The investments
are recorded at carrying value and based on information obtained from the entities in which the Company owns these interests, and
management does not believe these to be impaired.
Revenue Recognition
Revenues generated by the retail pharmacy operations
are reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional
health care providers and others. The Company recognizes revenue from the sale of pharmaceutical products and retail merchandise
as transactions occur and product is delivered to the customer. Revenue from product sales is recognized at the point of sale and
service revenue is recognized at the time services are provided.
Cost of Sales
Cost of sales includes the purchase
price of goods sold, prescription packaging, compounded prescription direct labor, inventory obsolescence, freight costs, cash
discounts and vendor rebates. Rebates or refunds received by the Company from its suppliers are considered as an adjustment of
the prices of the supplier’s products purchased by the Company.
Income Taxes
The Company accounts for income taxes in accordance
with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components
of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period
by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines
deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability
is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in
tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred
tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of
evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Tax positions are recognized if it is more-likely-than-not,
based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not
means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or
litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing
authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not
recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s
judgment.
The physical properties used by the Company
are summarized below:
|
Property Type
|
Owned/Leased
|
|
Number
|
|
Location
|
|
Approximate
Square Feet
|
|
Retail pharmacy
|
Leased
|
|
1
|
|
Dallas, TX
|
|
13,000
|
|
Retail pharmacies
|
Leased
|
|
3
|
|
Texas
|
|
9,000
|
|
Retail pharmacy
|
Leased
|
|
1
|
|
Oklahoma
|
|
3,000
|
|
Corporate office
|
Leased
|
|
1
|
|
Dallas, TX
|
|
3,000
|
|
ITEM 4.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
|
Beneficial Ownership of Certain Stockholders, Directors and Executive
Officers
The following table sets forth information with respect to the beneficial
ownership of our common stock at May 1, 2017, by:
|
|
·
|
each of our named executive officers and directors;
|
|
|
·
|
all of our executive officers and directors as a group; and
|
|
|
·
|
each person or group of affiliated persons, known to us to own beneficially more than 5% of our common stock
|
In accordance with the rules of the SEC, the table gives effect
to the shares of common stock that could be issued upon the vesting of outstanding restricted share units within 60 days of May
1, 2017. Unless otherwise noted in the footnotes to the table, and subject to community property laws where applicable, the individuals
listed in the table have sole voting and investment control with respect to the shares beneficially owned by them. Unless otherwise
noted in the footnotes to the table, the address of each stockholder, executive officer and director is c/o Dougherty’s Pharmacy,
Inc., 16250 Dallas Parkway, Suite 102, Dallas, Texas 75248. We have calculated the percentages of shares beneficially owned based
on 22,476,346 shares of common stock outstanding at May 1, 2017.
|
|
|
Shares of Common Stock Beneficially Owned *
|
|
|
Person or Group
|
|
Number
|
|
|
|
|
Percentage
|
|
|
Directors and Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
James C. Leslie (Director & Chairman of the Board)
|
|
|
1,708,483
|
|
|
(1)
|
|
|
7.60%
|
|
|
Anthony J. LeVecchio (Director)
|
|
|
335,801
|
|
|
(2)
|
|
|
1.50%
|
|
|
Will Cureton (Director)
|
|
|
40,955
|
|
|
(3)
|
|
|
*
|
|
|
Mark Heil (President and Chief Financial Officer)
|
|
|
185,041
|
|
|
(4)
|
|
|
*
|
|
|
Andrew Komuves
|
|
|
21,098
|
|
|
(5)
|
|
|
*
|
|
|
All Executive Officers and Directors as a Group
|
|
|
2,291,378
|
|
|
(6)
|
|
|
10.20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than Five Percent Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
Troy Phillips
|
|
|
3,705,630
|
|
|
|
|
|
16.50%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Denotes less than one percent.
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes 10,150 shares represented by restricted stock units that are scheduled to
vest on or before July 1, 2107. Also Includes 77,686 shares held in trust for the benefit of James Josiah Leslie, and 77,273 shares
held in trust for the benefit of Jenna L. Leslie. Mr. Leslie disclaims beneficial ownership for all 154,959 of these
shares.
|
|
(2)
|
|
Includes 10,150 shares represented by restricted stock units that are scheduled to
vest on or before July 1, 2017.
|
|
(3)
|
|
Includes 10,150 shares represented by restricted stock units that are scheduled to
vest on or before July 1, 2017.
|
|
(4)
|
|
Includes 10,100 shares represented by restricted stock units that are scheduled to
vest on or before July 1, 2017.
|
|
(5)
|
|
Includes 7,575 shares represented by restricted stock units that are scheduled to
vest on or before July 1, 2017.
|
|
(6)
|
|
Includes 48,125 shares represented by restricted stock units that are scheduled to
vest on or before July 1, 2017.
|
Change in Control Arrangements.
There are no arrangements, known to the Company,
including any pledge by any person of the Company’s securities or any of its parents, the operation of which
may at a subsequent date result in a change in control of the Company.
|
ITEM 5.
|
DIRECTORS AND EXECUTIVE OFFICERS
|
DIRECTORS AND EXECUTIVE OFFICERS
Our business affairs are managed under the direction of
the board of directors, or the Board, consisting, as of the date of this Registration Statement, of three persons, divided
into two of three classes. Currently, there are no Class A directors, and the Board will be evaluating whether and how to
replace one or both Class A Directors; one Class A Director resigned in 2017 and the other in 2012. The Company’s Bylaws provide that a majority of the members of
the Board may designate a successor to fill the unexpired term of a vacancy on the Board without a vote, or the approval, of
the Company’s stockholders. Members of each class serve offset terms of three years so that only one class is elected
each year. The following table sets forth each class, the directors comprising each class and their respective terms:
|
CLASS
|
|
DIRECTORS
|
|
TERM EXPIRING
|
|
Class A
|
|
Two Positions Open
|
|
2018 Annual Meeting
|
|
Class B
|
|
Will Cureton
|
|
2019 Annual Meeting
|
|
|
Anthony J. LeVecchio
|
|
|
Class C
|
|
James C. Leslie
|
|
2020 Annual Meeting
|
Based on its review of the applicable rules of The NASDAQ Global
Market, the Board believes that Messrs. Cureton and LeVecchio are "independent" within the meaning of The NASDAQ Global
Market listing standards. According to these standards, the Board believes Mr. Leslie is not “independent”.
Will Cureton,
Age
66, director since 2005.
Mr. Cureton
is a partner in Ascension Development, LLC, a development firm focusing on multifamily projects. From 1997 to 2013, Mr. Cureton
was a member and manager of CLB Holdings, LLC, a Texas limited liability company and general partner of CLB Partners, Ltd., a Texas
limited partnership ("CLB") engaged in real estate development and which he co-founded in 1997. Prior to co-founding
CLB, Mr. Cureton was Chief Operating Officer of Columbus Realty Trust, a real estate investment trust, from 1993 to 1997. In 1987
Mr. Cureton co-founded Texana, a commercial real estate investment and property management company, and served as its President
and Chief Executive Officer until 1993. From 1981 to 1987, Mr. Cureton served as an executive officer with The DicoGroup, Inc.,
a Dallas based real estate investment company. Mr. Cureton started his career with Coopers & Lybrand, where he worked from
1974 to 1981. Mr. Cureton received a Bachelor of Business Administration degree in accounting from East Texas State University
(now known as Texas A&M University - Commerce).
Mr. Cureton was selected
to serve on our Board because of his extensive business dealings.
Anthony J. LeVecchio
,
Age 70, director since 2004.
Mr.
LeVecchio has been the President and Principal of The James Group, a general business consulting firm that has advised clients
across a range of high-tech industries, since 1988. Prior to forming The James Group in 1988, Mr. LeVecchio was the Senior Vice
President and Chief Financial Officer for VHA Southwest, Inc., a regional healthcare system. Mr. LeVecchio currently serves as
director, advisor and executive of private and public companies in a variety of industries. He currently serves as Co-Chairman
of the Board of Directors of UniPixel, Inc. (UNXL) an industrial film design and manufacturing firm in Santa Clara, California
that is listed on The NASDAQ Global Market, and serves on the Audit Committee. He also currently serves as Chairman of the Board
of Directors and as Chairman of the Audit Committee for LegacyTexas Bank (LTXB), a community bank based in Plano, Texas that is
listed on The NASDAQ Global Select Market. His prior public company boards include Microtune, Inc., DG FastChannel, Inc., and Maxum
Health, Inc. Mr. LeVecchio holds a Bachelor of Economics and a M.B.A. in Finance from Rollins College where he serves on the Board
of Trustees. Mr. LeVecchio is a lecturing professor for financial statement analysis classes at the University of Texas, Dallas.
Mr LeVecchio was selected to serve on our Board and as the Chairman of the Audit Committee because of his standing as a financial
expert and corporate governance expert.
James C. Leslie
,
Age 61, director since July 2001 and Chairman of the Board since March 2002.
Mr. Leslie has served as Chairman of Dougherty’s
since March 2002 and as a Director since July 2001. Mr. Leslie held the position of Chief Executive Officer of CRESA, a national
tenant representation and real estate advisory services firm headquartered in Boston, Massachusetts from 2012 to 2015, after serving
on its Board for 10 years. From 2001 to 2011, Mr. Leslie focused primarily on managing his personal investments. Mr. Leslie has
positions in one or more of our subsidiaries or affiliates. From 1996 through 2001, Mr. Leslie served as President and Chief Operating
Officer of The Staubach Company, a full-service international real estate strategy and services firm. From 1988 through March 2001,
Mr. Leslie also served as a director of The Staubach Company. Mr. Leslie was President of Staubach Financial Services from 1992
until 1996. From 1982 until 1992, Mr. Leslie served as Chief Financial Officer of The Staubach Company. Mr. Leslie serves on boards
of several private companies. Mr. Leslie holds a B.S. degree from The University of Nebraska and an M.B.A. degree from The University
of Michigan Graduate School of Business. Mr Leslie was selected to serve as Chairman of the Board because of his leadership, financial
and management experience as well as his ability to provide guidance and valuable insight through his involvement with entrepreneurs
and emerging companies consistently during his career.
Mark S. Heil
, 55, President since 2014, Chief Financial
Officer since 2007.
Mr. Heil was named President of Dougherty’s in April 2014, and he has served as Chief Financial
Officer since 2007. Mr. Heil has significant experience in finance and accounting matters having served in various executive positions,
including various chief financial officer roles and chief operating officer capacities along with consulting experience in the
executive services field. Prior to joining Dougherty’s, Mr. Heil served as a consulting associate at Tatum LLC, which provides
financial consulting and executive services to its clients. Previous to Tatum, Mr. Heil held various Chief Financial Officer positions
at The Loomis Agency, a full service advertising company and at American Excelsior Company, a manufacturing and distribution company.
In addition, he held the position of Chief Operating Officer of American Excelsior's Earth Science Division during his tenure with
this firm. Mr. Heil began his career in the audit division of KPMG. Mr. Heil graduated from the University of Texas with a BBA
in Accounting. He also served on the board of directors of American Excelsior Company. He is a Certified Public Accountant in the
State of Texas and is a member of the Financial Executives International (FEI).
Andrew J. Komuves, Jr.
RPh, FIACP
55, President Pharmacy
Operations since 2013.
Mr. Komuves joined Dougherty’s Pharmacy Inc. in 2012 with over 26 years of experience as a compounding
pharmacist and pharmacy owner. Prior to joining Dougherty’s Mr. Komuves served as executive with Horizon Pharmacies, a 52
store drug chain. Mr. Komuves serves as a board member for the Alliance of Independent Pharmacists of Texas and Cardinal Health’s
National and Regional Retail Advisory Board. Mr. Komuves has previously served as a board member for the International Academy
of Compounding Pharmacists and the North Texas Red Cross. In addition to, Mr. Komuves holds a BBA degree from Texas Christian University,
a Bachelor’s of Science in Pharmacy from the University of Houston and completed a fellowship in pharmaceutical compounding
conferred by the International Academy of Compounding Pharmacists.
There are no family relationships among
the executive officers or directors. There are no arrangements or understandings pursuant to which any of these persons were
elected as an executive officer or director. No director or officer has been involved in any legal proceedings required to be
disclosed under Item 401(f) of Regulation SK, but for a personal bankruptcy filed in 2013 by one of our directors, Mr. Will
Cureton.
COMPENSATION OF DIRECTORS
Non Employee Director Compensation
As of December 31, 2016
|
Annual Cash Retainer
|
|
Per Meeting Fees
|
|
Annual Restricted Stock Grant
|
Non-Employee Director
$10,000; $2,500 per quarter
|
|
In person $500,
telephonic $250
|
|
20,000 shares vesting
over four years
|
Non-Employee Director and Committee Chairman
$20,000; $2,500 per quarter
|
|
In person $500,
telephonic $250
|
|
20,000 shares vesting
over four years
|
Non-Employee Director and Chairman of the Board
$120,000; $10,000 per month
|
|
In person $500,
telephonic $250
|
|
20,000 shares vesting
over four years
|
Note:
All payment terms were effective as of January 1, 2013.
Annual Restricted Stock Grant as approved by the Compensation Committee.
2016 Director Compensation Table
|
Name
|
|
Fees Earned or
Paid in Cash
|
|
|
Nonqualified Deferred Compensation Earnings
|
|
|
Total
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
James C. Leslie
|
|
$
|
120,000
|
|
|
$
|
3,253
|
|
|
$
|
123,253
|
|
|
Anthony J. LeVecchio
|
|
$
|
22,000
|
|
|
$
|
3,253
|
|
|
$
|
25,253
|
|
|
Will Cureton
|
|
$
|
11,500
|
|
|
$
|
3,253
|
|
|
$
|
14,753
|
|
Note: Nonqualified deferred compensation earnings represents the
market value of vested shares under our Restricted Share Unit (“RSU”) Incentive Plan. For a description of the RSU
Incentive Plan, please see Item 6. "Executive Compensation."
CORPORATE GOVERNANCE
Committees of the Board of Directors; Meetings
The Board has two standing committees, the
Audit Committee and the Compensation Committee. The Board does not have a separate Nominating Committee and performs all of the
functions of that committee.
The Audit Committee
The Audit Committee has as its primary responsibilities
the appointment of the independent auditor for the Company, the pre-approval of all audit and non-audit services, and assistance
to the Board in monitoring the integrity of our financial statements, the independent auditor's qualifications, independence and
performance and our compliance with legal requirements. The Audit Committee operates under a written charter adopted by the Board,
a copy of which is available on the Company's website at www.doughertys.com (the contents of such website are not incorporated
into this Registration Statement). Anthony J. LeVecchio is the current member and Chairman of the Audit Committee.
The Securities and Exchange Commission ("SEC")
has adopted rules to implement certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public company audit committees.
One of the rules adopted by the SEC requires a company to disclose whether the members of its Audit Committee are "independent."
Since we are not a "listed" company, we are not subject to rules requiring the members of our Audit Committee to be independent.
The SEC also requires a company to disclose whether it has an "Audit Committee Financial Expert" serving on its audit
committee.
Based on its review of the
applicable rules of The NASDAQ Global Market governing audit committee membership, the Board believes that Mr. LeVecchio
is "independent" within the meaning of The NASDAQ Global Market listing standards. The Board does believe that
the current member of the Audit Committee satisfies the general definition of an independent director under The NASDAQ
Marketplace Rule 4200.
Based on its review of the criteria of an Audit
Committee Financial Expert under the rule adopted by the SEC, the Board, after reviewing all of the relevant facts, circumstances
and attributes, has determined that Mr. LeVecchio, the Chairman of the Audit Committee is qualified as an "audit committee
financial expert" on the Audit Committee.
Compensation Committee
The Compensation Committee recommends to the
Board annual salaries for executive management and reviews all company benefit plans. The Compensation Committee operates under
a written charter adopted by the Board, a copy of which is available on the Company's website at www.doughertys.com (the contents
of such website are not incorporated into this Registrations Statement). The Chairman of the Compensation Committee position is
open. The current member of the Compensation Committee is Anthony J. LeVecchio. After a review of the applicable rules of The NASDAQ
Global Market governing compensation committee membership, the Board believes that Mr. LeVecchio is “independent” within
the meaning of The NASDAQ Global Market Listing Standards.
Nomination Process
The Board does not have a separate Nominating
Committee or Charter and performs all of the functions of that committee. The Board believes that it does not need a separate nominating
committee because the full Board is relatively small, has the time to perform the functions of selecting Board nominees, and in
the past has acted unanimously in regard to nominees.
In view of Dougherty’s size,
resources and limited scope of operations, the Board has determined that it will not increase the size of the Board from its
current size of five members, including the current vacancies in the Class A director positions that the Board intends to fill. In
the future, the Board may determine that increased size, scope of operations or other factors would make it advisable to add
additional directors. In considering an incumbent director whose term of office is to expire, the Board reviews
the director's overall service during the person's term, the number of meetings attended, level of participation and quality
of performance. In the case of new directors, the directors will consider suggestions from many sources, including
stockholders, regarding possible candidates for directors. The Board may engage a professional search firm to locate nominees
for the position of director of the Company. However, to date the Board has not engaged professional search firms for this
purpose. A selection of a nominee by the Board requires a majority vote of the Company's directors.
The Board seeks candidates for nomination to
the position of director who have excellent decision-making ability, business experience, personal integrity and a high reputation
and who meet such other criteria as may be set forth in a writing adopted by a majority vote of the Board of Directors. The committee
will use the same criteria in evaluating candidates suggested by stockholders as for candidates suggested by other sources.
Pursuant to a policy adopted by the Board,
the directors will take into consideration a director nominee submitted to the Company by a stockholder; provided that the stockholder
submits the director nominee and reasonable supporting material concerning the nominee by the due date for a stockholder proposal
to be included in the Company's proxy statement for the applicable annual meeting as set forth in the rules of the Securities and
Exchange Commission then in effect.
Director Attendance at Annual Meetings
We do not have a policy regarding attendance by members of the Board
of Directors at our annual meeting of stockholders. The Board has always encouraged its members to attend its annual meeting.
|
ITEM 6.
|
EXECUTIVE COMPENSATION
|
Summary compensation
The following table provides summary information
concerning compensation paid by us to our principal executive officers and each person who served as our principal financial
officer in 2016. In 2016, no other person who served as an executive officer of Dougherty’s at any time during the year had
total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Other
|
|
|
Nonqualified Deferred Compensation Earnings
|
|
|
Total
|
|
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)
|
|
|
Mark S. Heil
|
|
2016
|
|
$
|
204,615
|
|
|
|
–
|
|
|
$
|
8,223
|
|
|
$
|
6,383
|
|
|
$
|
219,221
|
|
|
President and Chief Financial Officer
|
|
2015
|
|
$
|
220,000
|
|
|
$
|
49,750
|
|
|
$
|
10,262
|
|
|
$
|
4,949
|
|
|
$
|
284,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew J. Komuves, Jr.,
|
|
2016
|
|
$
|
209,615
|
|
|
$
|
13,701
|
|
|
$
|
8,791
|
|
|
$
|
1,667
|
|
|
$
|
233,774
|
|
|
President Pharmacy Operations
|
|
2015
|
|
$
|
225,000
|
|
|
$
|
65,790
|
|
|
$
|
12,817
|
|
|
$
|
–
|
|
|
$
|
303,607
|
|
(1) Fully vested m
atching
contributions to the Company’s 401(k) plan, which all participating employees receive.
(2) Nonqualified deferred compensation earnings
represents the market value of vested shares under our RSU Incentive Plan.
Restricted Share Unit Incentive Plan
On November 13, 2013, the Board of Directors
approved and adopted the RSU Incentive Plan. The plan has not been approved by the stockholders. Under the plan the Company can
award RSUs to employees and non-employee directors and consultants pursuant to restricted stock agreements contingent upon continuous
service. Under the restricted stock agreements, the restricted shares will vest annually over a four-year period and will be payable
in stock, valued at the fair market value on the grant date. There is not a limit on the number of shares that can be issued from
the plan and shares are issued from available common stock. As of December 31, 2016, there were 50,000,000 shares authorized, 23,447,679
shared issued and 22,417,679 shares outstanding. The Board considers the number of shares outstanding adequate for purposes of
administering the plan.
As of December 31, 2016, the following shares
had been issued under the 2013 RSU Plan
|
Year of Issuance:
|
|
Number of
Shares
|
|
|
Fair Value
at Date of
Grant
|
|
|
Shares
Vested
|
|
|
Non-
Vested
|
|
|
2013
|
|
|
120,000
|
|
|
$
|
26,400
|
|
|
|
90,000
|
|
|
|
30,000
|
|
|
2014
|
|
|
122,100
|
|
|
$
|
30,946
|
|
|
|
61,200
|
|
|
|
60,900
|
|
|
2015
|
|
|
150,000
|
|
|
$
|
39,000
|
|
|
|
37,500
|
|
|
|
112,500
|
|
|
|
|
|
392,100
|
|
|
$
|
96,346
|
|
|
|
188,700
|
|
|
|
203,400
|
|
Option Grants in Last Fiscal Year
As of December 31, 2016, the Company does not
currently have a stock option plan and there are no outstanding options.
Vested Share Units in Last Fiscal Year and
Fiscal Year-End Share Unit Values
The following table provides information regarding
outstanding restricted stock awards granted to the directors and named executive officers under the RSU Incentive Plan that were
still outstanding as of December 31, 2016 and the values of those awards. The value is based on the market price of 21 cents as
of December 31, 2016.
|
OUTSTANDING EQUITY AWARDS AT YEAR-END
|
|
|
|
Stock Awards
|
|
|
|
|
Equity Incentive Plan Awards
|
|
|
|
|
Number of Unearned Units That Have Not Vested
|
|
|
Market or Payout Value of Unearned Units That Have Not Vested
|
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
James C. Leslie
|
|
|
30,150
|
|
|
$
|
6,332
|
|
|
Anthony J. LeVecchio
|
|
|
30,150
|
|
|
$
|
6,332
|
|
|
Will Cureton
|
|
|
30,150
|
|
|
$
|
6,332
|
|
|
Mark S. Heil
|
|
|
60,300
|
|
|
$
|
12,663
|
|
|
Andrew J. Komuves, Jr.
|
|
|
22,500
|
|
|
$
|
4,725
|
|
The following table provides information, for
the directors and named executive officers, on restricted stock awards vested during 2016.
|
STOCK VESTED
|
|
|
|
Stock Awards
|
|
|
|
|
Equity Incentive Plan Awards
|
|
|
|
|
Number of Share Units Received on Vesting
|
|
|
Value of Share Units Received on Vesting
|
|
|
Name
|
|
(#)
|
|
|
($)
|
|
|
James C. Leslie
|
|
|
15,250
|
|
|
$
|
3,253
|
|
|
Anthony J. LeVecchio
|
|
|
15,250
|
|
|
$
|
3,253
|
|
|
Will Cureton
|
|
|
15,250
|
|
|
$
|
3,253
|
|
|
Mark S. Heil
|
|
|
30,400
|
|
|
$
|
6,383
|
|
|
Andrew J. Komuves, Jr.
|
|
|
7,575
|
|
|
$
|
1,667
|
|
Potential Payments Upon Termination Or Change In Control
The Company’s President and Chief Financial Officer, Mr. Mark
Heil, is entitled to continued salary payments for the four months following a termination “without cause,” which would
have equaled an aggregate payment over four months equal to $48,750 if such termination had occurred on December 31, 2016. Mr.
Heil serves without a formal, written employment agreement.
The Company’s President of Pharmacy Operations, Mr. Andrew
Komuves, is entitled to continue salary payments for the six months following a termination “without cause,” which
would have equaled an aggregate payment over six months equal to $100,000 if such termination had occurred on December 31, 2016.
Mr. Komuves serves without a formal, written employment agreement.
The Company could terminate either Mr. Heil’s or Mr. Komuves’
employment “without cause” for the following:
|
|
·
|
gross negligence or willful misconduct or malfeasance or the commission of an act constituting dishonesty or other act of material
misconduct by the executive that affects the Company, its business, the executive’s employment or his business reputation;
|
|
|
·
|
any violation of the non-disclosure and invention agreement in place between the executive, provided that the Company acts
in a bona fide manner;
|
|
|
·
|
any other intentional and material breach, including but not limited to, the material failure of the executive to perform the
duties reasonably assigned to him, which is not cured without 30 days of written notice of such breach.
|
|
ITEM 7.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE.
|
Through May 31, 2015, the Company’s
Chairman of the Board, James C. Leslie, was a limited partner in the entity that owned and controlled the building in which our
corporate offices were located and which we also shared office space with the Company’s Chairman in this building. We remitted
monthly rent of approximately $5,200 and certain shared office costs (primarily administrative services)
of approximately $1,300 monthly to the entity controlled by the Company’s Chairman.
The Company subleased certain
shared office space for approximately $2,200 per month and pays certain operating expenses (primarily outsourced technology
and communications services) of the other entities sharing its office space for which Mr. Leslie is an affiliate:
Amerrock Partners L.P., Fairways Equities, LLC, and Wolverine Interests, LLC. Effective June 1, 2015, in conjunction with the
sale of the building, the Chairman relocated within the building under a revised lease that included the previous space for
which we remitted monthly rent of $7,000 from June 2015 through June 2017, and shared office costs of $1,000 from January
2016 through June 2017. At December 31, 2016 and 2015, the Company had the following receivables due from these affiliates
for rent and operating expenses totaling approximately $12,000 and $42,000 in 2015 and 2016 respectively: Amerrock Partners,
L.P ($2,800 and $30,367, respectively); Fairways Equities, LLC ($4,875 and $5,282, respectively), and Wolverine Interests,
LLC ($4,347 and $6,089, respectively). The receivables due from these affiliates are classified in current assets based on
the agreements with the various affiliates for repayment.
|
ITEM 8.
|
LEGAL PROCEEDINGS
|
From time to time, the Company may be subject
to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims
that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or
results of operations.
|
ITEM 9.
|
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
Our stock is quoted and traded on the
Pink Sheets (“Pink Sheets: MYDP”), having changed its symbol from ASDS to reflect its recent name change to Dougherty’s
Pharmacy, Inc. A Pink Sheet security is not listed or traded on a national securities exchange. Issuers quoted on the Pink
Sheets are not subject to periodic filing requirements with the Securities and Exchange Commission or other regulatory authority.
Upon the effectiveness of this Registration Statement, we expect to apply for listing on the OTCQB, which would require the Company
stay current with all Exchange Act filings after the effectiveness of this Registration Statement.
The following is a summary of our stock’s
quarterly market price ranges for the two most recent fiscal years and for the quarter ended March 31, 2017. The price quotations
noted herein represent prices between dealers, without retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
|
Fiscal year 2015:
|
|
High
|
|
|
Low
|
|
|
First quarter*
|
|
$
|
0.30
|
|
|
$
|
0.25
|
|
|
Second quarter*
|
|
|
0.29
|
|
|
|
0.20
|
|
|
Third quarter*
|
|
|
0.27
|
|
|
|
0.18
|
|
|
Fourth quarter*
|
|
|
0.27
|
|
|
|
0.20
|
|
|
Fiscal year 2016:
|
|
|
|
|
|
|
|
First quarter*
|
|
$
|
0.26
|
|
|
$
|
0.18
|
|
|
Second quarter*
|
|
|
0.24
|
|
|
|
0.20
|
|
|
Third quarter*
|
|
|
0.30
|
|
|
|
0.20
|
|
|
Fourth quarter*
|
|
|
0.24
|
|
|
|
0.18
|
|
|
Fiscal year 2017:
|
|
|
|
|
|
|
|
First quarter*
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
*These quotations represent high and low bid
prices for our stock as reported by the Pink Sheets.
At May 1, 2017, there were approximately 113
holders of record of our common stock.
The aggregate market value of the voting stock
held by non-affiliates of the Company, based upon the closing price for our common stock on the Pink Sheets on June 30, 2016, the
last trading date of our most recently completed second fiscal quarter was approximately $3.7 million.
On December 12, 2016 and December 14, 2015,
the Company issued a 1 percent per share dividend to stockholders of record on December 5, 2016 and December 7, 2015, respectively.
Based on the number of common shares outstanding on the record date, the Company issued 221,948 and 216,560 new shares at a fair
market value of $44,000 and $43,000, respectively, which was charged to accumulated deficit.
|
ITEM 10.
|
RECENT SALES OF UNREGISTERED SECURITIES
|
None
|
ITEM 11.
|
DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED.
|
Description of Capital Stock
Our authorized capital stock consists of 50,000,000
shares of common stock, par value $.0001 per share, and 7,500,000 shares of preferred stock, $.0001 par value per share. As of
the date of this Registration Statement, there is no preferred stock issued or outstanding; there are:
|
|
·
|
22,428,221 shares of common stock outstanding, held of record by 114 holders; and
|
|
|
·
|
48,125 shares of common stock to be issued pursuant to unvested RSUs.
|
The following summary of the material provisions
of our common stock, preferred stock, amended and restated articles of incorporation and bylaws is qualified by reference to the
provisions of applicable law and to our amended restated articles of incorporation and bylaws included as exhibits to this Registration
Statement.
Common Stock
The holders of common stock are entitled to
one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, that may be declared from
time to time by the board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or
winding-up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of holders of preferred stock, if any. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
"Blank Check" Preferred. Our board
of directors has the authority to issue preferred stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further
vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by our stockholders and may adversely affect the voting, dividend and other
rights of the holders of common stock. As further discussed below, the issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. At present,
we have no shares of preferred stock issued and outstanding.
|
ITEM 12.
|
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
|
Item 6. Indemnification of Directors and
Officers.
Section 145 of the Delaware General Corporation
Law ("DGCL") permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or
agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlements actually and reasonably incurred
by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith
and in a manner that they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In a derivative action (i.e.,
one by or in right of the corporation), indemnification may be made only for expenses actually and reasonably incurred by directors,
officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests
of the corporation, except that no indemnification shall be made if such persons shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the
defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnify for such expenses, despite such
adjudication or liability.
Section 102(b)(7) of the DGCL permits a corporation
organized under Delaware law to eliminate or limit the personal liability of a director to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director subject to certain limitations.
Article Seventh of the Company's Certificate
of Incorporation provides the following:
"No director of the Corporation shall
be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director
of the Corporation; PROVIDED, HOWEVER, that the foregoing is not intended to eliminate or limit the liability of a director of
the Corporation for (i) any breach of a director's duty of loyalty to the Corporation or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) a violation of Section 174 of the
DGCL, or (iv) any transaction from which the director derived an improper personal benefit. If the DGCL is hereafter amended to
authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. No amendment to
or repeal of this Article SEVENTH shall apply to or have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal."
Article Eighth of the Company's Certificate
of Incorporation and Article XI of the Company's Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by the DGCL.
The Company currently has in effect a directors
and officers liability insurance policy covering the directors and executive officers of the Company.
The Company has entered into various Indemnification
Agreements with each of its directors and executive officers that provide for indemnification and expense advancement to the fullest
extent permitted under the DGCL.
As a result of these provisions or agreements,
the Company and its stockholders may be unable to obtain monetary damages from a director or officer for breach of the duty of
care. Although stockholders may continue to seek injunctive or other equitable relief for an alleged breach of fiduciary duty by
a director or officer, stockholders may not have any effective remedy against the challenged conduct if equitable remedies are
unavailable.
|
ITEM 13.
|
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Set forth below is a list of our audited financial
statements included in this Registration Statement.
|
ITEM 14.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
|
|
(a)
|
The Financial Statements listed in the Index to Consolidated Financial Statements are filed as
part of this Registration Statement, see Item 13, "Consolidated Financial Statements and Supplementary Data."
|
|
|
(b)
|
The Exhibits listed in the accompanying Exhibit Index are attached and incorporated herein by reference
and filed as part of this report.
|
SIG
NATURES
Pursuant to the requirements of Section 12
of the Securities Exchange Act of 1934, the registrant has duly caused this Registrations Statement to be signed on its behalf
by the undersigned, thereunto duly authorized on July 21, 2017.
|
|
DOUGHERTY’S PHARMACY, INC.
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Mark S. Heil
|
|
|
|
Mark S. Heil
|
|
|
|
President and Chief Financial Officer (Duly Authorized Principal Executive Officer and Principal Financial Officer)
|
|
|
|
|
EXHIBIT INDEX
|
Exhibit Number
|
|
Description
|
|
|
|
|
|
3.1
|
|
Certificate of Incorporation of The Registrant filed on August 8, 2000
(1)
|
|
3.2
|
|
Certificate of Ownership and Merger of ASD Systems, Inc. (a Texas corporation) with and into Ascendant Solutions, Inc. (a Delaware corporation and wholly owned subsidiary of ASD Systems, Inc.) filed on October 19, 2000.
(1)
|
|
3.3
|
|
Certificate of Amendment to the Certificate of Incorporation of the Registrant filed on May 10, 2017.
(1)
|
|
3.4
|
|
Bylaws of The Registrant.
(1)
|
|
4.1
|
|
Specimen of The Registrant Common Stock Certificate
(1)
|
|
4.2
|
|
Floating Rate Term Note
dated February 9, 2012, by and between Dougherty’s Holdings, Inc. and Cardinal Health, Inc.
(1)
|
|
4.3
|
|
Security Agreement dated
February 9, 2012, by and between Dougherty’s Pharmacy Forest Park Dallas, LLC and Cardinal Health, Inc.
(1)
|
|
4.4
|
|
Security Agreement dated
February 9, 2012, by and between the Registrant and Cardinal Health, Inc.
(1)
|
|
4.5
|
|
Security Agreement dated
February 9, 2012, by and between Dougherty’s Holdings, Inc. and Cardinal Health, Inc.
(1)
|
|
4.6
|
|
Security Agreement dated
February 9, 2012, by and between Dougherty’s Pharmacy, Inc. and Cardinal Health, Inc.
(1)
|
|
4.7
|
|
Unconditional Guaranty
dated February 9, 2012, by and among the Registrant; Dougherty’s Pharmacy, Inc.; Dougherty’s Pharmacy Forest Park
Dallas, LLC; and Cardinal Health, Inc.
(1)
|
|
4.8
|
|
Floating Rate Term Note
dated August 1, 2014 by and between Dougherty’s Holdings, Inc. and Cardinal Health, Inc.
(1)
|
|
4.9
|
|
Unconditional Guaranty
dated August 1, 2014, by and between the Registrant; Dougherty’s Pharmacy, Inc.; and Dougherty’s Pharmacy Forest
Park Dallas, LLC; and Cardinal Health, Inc.
(1)
|
|
4.10
|
|
Floating Rate Term Note
dated August 29, 2104, by and between Dougherty’s Holdings, Inc. and Cardinal Health, Inc.
(1)
|
|
4.11
|
|
Unconditional Guaranty
dated August 29, 2014, by the Registrant, Dougherty’s Pharmacy, Inc., Dougherty’s Pharmacy Forest Park Dallas,
LLC, Dougherty’s Pharmacy Humble, LLC, and Cardinal Health, Inc.
(1)
|
|
4.12
|
|
Floating Rate Term Note
dated January 2, 2015, between Dougherty’s Holdings, Inc. and Cardinal Health, Inc.
(1)
|
|
4.13
|
|
Unconditional Guaranty
dated January 2, 2015, by the Registrant, Dougherty’s Pharmacy, Inc.; Dougherty’s Pharmacy Forest Park Dallas,
LLC; Dougherty’s Pharmacy Humble, LLC; Dougherty’s Pharmacy El Paso, LLC; and Cardinal Health, Inc.
(1)
|
|
4.14
|
|
Floating Term Note dated
June 26, 2015, by and between Dougherty’s Holdings, Inc. and Cardinal Health, Inc.
(1)
|
|
4.15
|
|
Unconditional Guaranty
dated June 26, 2015, by the Registrant, Dougherty’s Pharmacy, Inc.; Dougherty’s Pharmacy Forest Park Dallas, LLC;
Dougherty’s Pharmacy Humble, LLC; Dougherty’s Pharmacy El Paso, LLC; Dougherty’s Pharmacy McAlester, LLC;
and Cardinal Health, Inc.
(1)
|
|
4.16
|
|
Floating Rate Term Note
dated August 27, 2015, by and between Dougherty’s Holdings, Inc., Dougherty’s Pharmacy Springtown, LLC, and
Cardinal Health, Inc.
(1)
|
|
4.17
|
|
Unconditional Guaranty
dated August 27, 2015, by the Registrant; Dougherty’s Pharmacy, Inc.; Dougherty’s Pharmacy Forest Park Dallas,
LLC; Dougherty’s Pharmacy Humble, LLC; Dougherty’s Pharmacy El Paso, LLC; Dougherty’s Pharmacy McAlester,
LLC; and Cardinal Health, Inc.
(1)
|
|
4.18
|
|
Promissory Note dated
July 1, 2016, by and between Dougherty’s Holdings, Inc.; Dougherty’s Pharmacy, Inc.; Dougherty’s Pharmacy
El Paso, LLC; Dougherty’s Pharmacy Humble, LLC; Dougherty’s Pharmacy McAlester, LLC; Dougherty’s Pharmacy
Forest Park Dallas, LLC; Dougherty’s Pharmacy Springtown, LLC; and First National Bank of Omaha.
(1)
|
|
4.19
|
|
Promissory Note dated
July 1, 2016, by and between Dougherty’s Holdings, Inc.; Dougherty’s Pharmacy, Inc.; Dougherty’s Pharmacy
El Paso, LLC; Dougherty’s Pharmacy Humble, LLC; Dougherty’s Pharmacy McAlester, LLC; Dougherty’s Pharmacy
Forest Park Dallas, LLC; Dougherty’s Pharmacy Springtown, LLC; and First National Bank of Omaha.
(1)
|
|
4.20
|
|
Commercial Security
Agreement dated July 1, 2016, by and among Dougherty’s Holdings, Inc.; Dougherty’s Pharmacy, Inc.;
Dougherty’s Pharmacy El Paso, LLC; Dougherty’s Pharmacy Humble, LLC; Dougherty’s Pharmacy McAlester, LLC;
Dougherty’s Pharmacy Forest Park Dallas, LLC; and Dougherty’s Pharmacy Springtown, LLC (as
“Grantors”) and First National Bank of Omaha.
(1)
|
|
4.21
|
|
Business Loan Agreement
dated July 1, 2016, by and among Dougherty’s Holdings, Inc.; Dougherty’s Pharmacy, Inc.; Dougherty’s
Pharmacy El Paso, LLC; Dougherty’s Pharmacy Humble, LLC; Dougherty’s Pharmacy McAlester, LLC; Dougherty’s
Pharmacy Forest Park Dallas, LLC; and Dougherty’s Pharmacy Springtown, LLC (as “Borrower”) and First
National Bank of Omaha.
(1)
|
|
4.22
|
|
Commercial Guaranty
dated July 1, 2016, by and between the Registrant and First National Bank of Omaha.
(1)
|
|
4.23
|
|
Amended and Restated Fixed Rate Note dated March 31, 2017, by and between Dougherty Holdings, Inc. and Cardinal Health 100, LLC.
(1)
|
|
4.24
|
|
Security Agreement dated
March 31, 2017, by and between Dougherty’s Pharmacy El Paso, LLC and Cardinal Health 110, LLC.
(1)
|
|
4.25
|
|
Security Agreement dated
March 31, 2017, by and between Dougherty’s Pharmacy Humble, LLC and Cardinal Health 110, LLC.
(1)
|
|
4.26
|
|
Security Agreement dated
March 31, 2017, by and between Dougherty’s Pharmacy McAlester, LLC and Cardinal Health 110, LLC.
(1)
|
|
4.27
|
|
Unconditional Guaranty
dated March 31, 2017 by and among the Registrant, Dougherty’s Pharmacy, Inc., and Dougherty’s Pharmacy Forest
Park, LLC, Dougherty’s Pharmacy Humble, LLC, Dougherty’s Pharmacy El Paso, LLC, and Dougherty’s Pharmacy
McAlester, LLC (the “Guarantors”) in favor of Cardinal Health 110, LLC.
(1)
|
|
4.28
|
|
Loan Extension Agreement, by and among Dougherty’s Holdings, Inc.;
Dougherty’s Pharmacy, Inc.; Dougherty’s Pharmacy El Paso, LLC; Dougherty’s Pharmacy McAlester,
LLC; Dougherty’s Pharmacy Forest Park Dallas, LLC; and Dougherty’s Pharmacy Springtown, LLC and First
National Bank of Omaho, dated July 1, 2017.
(2)
|
|
10.1
|
|
Form of Director and Officers Indemnification Agreement
(1)
|
|
10.2
|
|
Restricted Share Unit Incentive Plan
(1)
|
|
10.3
|
|
Specimen of the Restricted Share Unit Plan Agreement
(1)
|
|
10.4
|
|
Prime Vendor Agreement by and between Cardinal Health 110, LLC and Cardinal Health 411, Inc. and the Registrant, dated
May 1, 2014
(1)(2) (3)
|
|
10.5
|
|
First Amendment to the Prime Vendor Agreement by and between Cardinal Health 220, LLC and Cardinal Health 411, Inc. and
the Registrant, dated May 1, 2015.
(1) (3)
|
|
10.6
|
|
Second Amendment to the Prime Vendor Agreement by and between Cardinal Health 220, LLC and Cardinal Health 411, Inc. and the Registrant, dated July 1, 2015.
(1) (3)
|
|
10.7
|
|
Third Amendment to the Prime Vendor Agreement by and between Cardinal Health 220, LLC and Cardinal Health 411, Inc. and the Registrant, dated October 1, 2015.
(1) (3)
|
|
10.8
|
|
Fourth Amendment to the Prime Vendor Agreement by and between Cardinal Health 220, LLC and Cardinal Health 411, Inc. and the Registrant, dated January 1, 2016.
(1) (3)
|
|
10.9
|
|
Fifth Amendment to the Prime Vendor Agreement by and between Cardinal Health 220, LLC and Cardinal Health 411, Inc. and the Registrant, dated November 1, 2016.
(1) (3)
|
|
10.10
|
|
Sixth Amendment to the
Prime Vendor Agreement by and between Cardinal Health 220, LLC and Cardinal Health 411, Inc. and the Registrant, dated
December 1, 2016.
(3)
|
|
10.11
|
|
Commercial Guaranty
dated May 4, 2011 by and between the Registrant and Sunwest Bank.
(1)
|
|
10.12
|
|
Forbearance Agreement
dated December 30, 2016, by and among Kevin H. Hayes, Sr., Alice H. Hayes, the Registrant, and Sunwest Bank.
(1)
|
|
21
|
|
Subsidiaries of The Registrant
(1)
|
|
23.1
|
|
Consent of Whitley Penn LLP
(2)
|
|
(1)
|
Filed as the corresponding Exhibit Number with the Company’s Registration Statement on Form 10, File Number 000-27945
filed with the Commission on June 2, 2017.
|
|
(3)
|
Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
|
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
of
Ascendant Solutions, Inc.
We have audited the accompanying consolidated
balance sheets of Ascendant Solutions, Inc. (the “Company”), as of December 31, 2016 and 2015, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years then ended. The Company’s management is
responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company, as of December 31,
2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Whitley Penn LLP
Dallas, Texas
March 21, 2017
Ascendant Solutions, Inc.
Consolidated Balance Sheets
December 31, 2016 and 2015
(000’s omitted, except par value and
share amounts)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
58
|
|
|
$
|
69
|
|
|
Restricted cash
|
|
|
303
|
|
|
|
302
|
|
|
Trade accounts receivable, net
|
|
|
1,901
|
|
|
|
1,967
|
|
|
Other receivables
|
|
|
113
|
|
|
|
160
|
|
|
Receivable from affiliates
|
|
|
12
|
|
|
|
42
|
|
|
Inventories, net
|
|
|
3,340
|
|
|
|
3,547
|
|
|
Prepaid expenses
|
|
|
286
|
|
|
|
329
|
|
|
Total current assets
|
|
|
6,013
|
|
|
|
6,416
|
|
|
Property and equipment, net
|
|
|
1,386
|
|
|
|
1,406
|
|
|
Intangible assets, net
|
|
|
3,681
|
|
|
|
4,377
|
|
|
Investments carried at cost
|
|
|
1,295
|
|
|
|
5,107
|
|
|
Deferred tax asset
|
|
|
3,000
|
|
|
|
3,000
|
|
|
Total assets
|
|
$
|
15,375
|
|
|
$
|
20,306
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,643
|
|
|
$
|
1,959
|
|
|
Accrued liabilities
|
|
|
293
|
|
|
|
300
|
|
|
Notes payable, current portion
|
|
|
1,129
|
|
|
|
1,088
|
|
|
Total current liabilities
|
|
|
4,065
|
|
|
|
3,347
|
|
|
Notes payable, long-term portion
|
|
|
7,607
|
|
|
|
8,418
|
|
|
Total liabilities
|
|
|
11,672
|
|
|
|
11,765
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 7,500,000 shares authorized: none issued
and outstanding
|
|
|
–
|
|
|
|
–
|
|
|
Common stock, $0.0001 par value; 50,000,000 shares authorized; 23,447,679
shares issued and 22,417,679 shares outstanding at December 31, 2016;23,126,756 shares issued and 22,096,756
shares outstanding at December 31, 2015
|
|
|
2
|
|
|
|
2
|
|
|
Additional paid-in capital
|
|
|
60,144
|
|
|
|
60,079
|
|
|
Accumulated deficit
|
|
|
(56,046
|
)
|
|
|
(51,143
|
)
|
|
Treasury stock, at cost, 1,030,000 shares
|
|
|
(397
|
)
|
|
|
(397
|
)
|
|
Total stockholders' equity
|
|
|
3,703
|
|
|
|
8,541
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
15,375
|
|
|
$
|
20,306
|
|
See Notes to Consolidated
Financial Statements
Ascendant Solutions, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2016 and 2015
(000’s omitted, except share and per
share amounts)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
42,786
|
|
|
$
|
40,952
|
|
|
Cost of sales
(exclusive of depreciation
and amortization shown separately below)
|
|
|
31,736
|
|
|
|
29,654
|
|
|
Gross profit
|
|
|
11,050
|
|
|
|
11,298
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
10,428
|
|
|
|
10,608
|
|
|
Non-cash stock compensation
|
|
|
21
|
|
|
|
20
|
|
|
Depreciation and amortization
|
|
|
1,052
|
|
|
|
771
|
|
|
Total operating expenses
|
|
|
11,501
|
|
|
|
11,399
|
|
|
Operating loss
|
|
|
(451
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
84
|
|
|
|
88
|
|
|
Other income
|
|
|
1
|
|
|
|
5
|
|
|
Interest expense
|
|
|
(443
|
)
|
|
|
(336
|
)
|
|
Investments impairment
|
|
|
(4,008
|
)
|
|
|
–
|
|
|
Loss before provision for income tax
|
|
|
(4,817
|
)
|
|
|
(344
|
)
|
|
Income tax provision
|
|
|
(42
|
)
|
|
|
(52
|
)
|
|
Net loss
|
|
$
|
(4,859
|
)
|
|
$
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(0.22
|
)
|
|
$
|
(0.02
|
)
|
|
Weighted-average number of shares-Basic and diluted
|
|
|
22,161,920
|
|
|
|
21,855,168
|
|
See Notes to Consolidated
Financial Statements
Ascendant Solutions, Inc.
Consolidated Statements of Stockholders’
Equity
Years Ended December 31, 2016 and 2015
(000’s omitted, except share amounts)
|
|
Class A
|
|
|
|
|
|
Treasury
|
|
|
|
|
|
Shares
|
|
Amount
|
|
APIC
|
|
Accumulated
Deficit
|
|
Shares
|
|
Amount
|
|
Total
|
|
|
Balance at December 31, 2014
|
|
22,847,596
|
|
$
|
2
|
|
$
|
60,015
|
|
$
|
(50,703
|
)
|
|
(1,030,000
|
)
|
$
|
(397
|
)
|
$
|
8,917
|
|
|
Amortization of restricted stock units
|
|
–
|
|
|
–
|
|
|
6
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
6
|
|
|
Issue vested restricted stock units
|
|
60,600
|
|
|
–
|
|
|
14
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
14
|
|
|
Issue stock dividend
|
|
218,560
|
|
|
–
|
|
|
44
|
|
|
(44
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Net loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(396
|
)
|
|
–
|
|
|
–
|
|
|
(396
|
)
|
|
Balance at December 31, 2015
|
|
23,126,756
|
|
$
|
2
|
|
$
|
60,079
|
|
$
|
(51,143
|
)
|
|
(1,030,000
|
)
|
$
|
(397
|
)
|
$
|
8,541
|
|
|
Issue vested restricted stock units
|
|
98,975
|
|
|
–
|
|
|
21
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
21
|
|
|
Issue stock dividend
|
|
221,948
|
|
|
–
|
|
|
44
|
|
|
(44
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Net loss
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(4,859
|
)
|
|
–
|
|
|
–
|
|
|
(4,859
|
)
|
|
Balance at December 31, 2016
|
|
23,447,679
|
|
$
|
2
|
|
$
|
60,144
|
|
$
|
(56,046
|
)
|
|
(1,030,000
|
)
|
$
|
(397
|
)
|
$
|
3,703
|
|
See Notes to Consolidated
Financial Statements
Ascendant Solutions, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2016 and 2015
(000’s omitted)
|
|
|
2016
|
|
|
2015
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,859
|
)
|
|
$
|
(396
|
)
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
91
|
|
|
|
29
|
|
|
Depreciation and amortization
|
|
|
1,052
|
|
|
|
771
|
|
|
Stock-based compensation
|
|
|
21
|
|
|
|
20
|
|
|
Investments impairment
|
|
|
4,008
|
|
|
|
–
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2
|
)
|
|
|
(695
|
)
|
|
Inventories
|
|
|
207
|
|
|
|
(66
|
)
|
|
Prepaid expenses and other assets
|
|
|
179
|
|
|
|
59
|
|
|
Accounts payable
|
|
|
684
|
|
|
|
441
|
|
|
Accrued liabilities
|
|
|
(7
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,374
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(447
|
)
|
|
|
(526
|
)
|
|
Cash paid in acquisitions
|
|
|
–
|
|
|
|
(1,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(447
|
)
|
|
|
(1,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(25,123
|
)
|
|
|
(29,909
|
)
|
|
Proceeds from notes payable
|
|
|
24,186
|
|
|
|
31,618
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(937
|
)
|
|
|
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(10
|
)
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of year
|
|
|
371
|
|
|
|
310
|
|
|
Cash, end of year
|
|
$
|
361
|
|
|
$
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
43
|
|
|
$
|
44
|
|
|
Cash paid for interest
|
|
$
|
441
|
|
|
$
|
329
|
|
|
Notes payable incurred for insurance obligations
|
|
$
|
167
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Cash to the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
58
|
|
|
$
|
69
|
|
|
Restricted cash
|
|
|
303
|
|
|
|
302
|
|
|
Total cash
|
|
$
|
361
|
|
|
$
|
371
|
|
See Notes to Consolidated
Financial Statements
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. Organization
and Significant Accounting Policies
Description of Business
Ascendant Solutions, Inc. (“Ascendant”
or the “Company”) is a value oriented investment firm focused on successfully acquiring, managing and growing community
based pharmacies in the Southwest Region. Ascendant was incorporated in Delaware on August 8, 2000.
A summary of the Company’s investments
at December 31, 2016, is shown in the table below:
|
Date
|
Entity
|
|
Transaction Description
|
%
Ownership
|
|
|
|
|
|
|
|
March 2004
|
Dougherty’s Holdings, Inc. and subsidiaries (“DHI”)
|
|
Acquisition of retail pharmacy
|
100%
|
|
|
|
|
|
|
|
September 2010
|
ASDS of Orange County, Inc. (“ASDS”),
CRESA Partners of Orange County, L.P. (“CPOC”)
|
|
Investment in tenant representation and other real estate advisory services company
|
100%
and
8%
|
On January 5, 2015, June 29, 2015 and August
31, 2015, DHI acquired McCrory’s Pharmacy located in El Paso, Texas, Medicine Shoppe Pharmacy, located in McAlester, Oklahoma
and Springtown Drug Pharmacy located in Springtown, Texas, respectively, for a total purchase price of $5,640,000 of which $4,413,000
was financed with notes payable with the remainder paid in cash funded from the revolving line of credit (see Note 9). The excess
of the purchase price over the fair value of the net tangible assets of $1,330,000 for property, equipment and inventory of $4,310,000
has been allocated to intangible assets as patient prescriptions (see Note 6).
Certain transactions related to business activities
are more fully described in Notes 7 and 14 of these consolidated financial statements. The Company’s consolidated financial
statements include the operating results of each business from the date of acquisition.
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include
the accounts of Ascendant and all subsidiaries for which the Company has a controlling financial interest. Ascendant uses the equity
method of accounting to recognize investments in and income from entities where Ascendant has significant influence, but not a
controlling interest. Other investments where Ascendant does not have significant influence are accounted for using the cost method
of accounting. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated 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.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. Organization
and Significant Accounting Policies (Continued)
Concentration of
Credit Risk
The Company’s credit risk relates primarily
to its trade accounts receivables and its receivables from affiliates, along with cash deposits maintained at financial institutions
in excess of federally insured limits on interest bearing accounts. Management performs continuing evaluations of debtors’
financial condition and maintains an allowance for uncollectible accounts as determined necessary.
Accounts Receivable
Receivables recorded in the financial statements
represent valid claims against debtors for services rendered or other charges arising on or before the balance sheet date. Management
makes estimates of the collectability of accounts receivable. Specifically, management analyzes accounts receivable and historical
bad debts, customer credit-worthiness, current economic trends, and changes in customer payment terms and collections trends when
evaluating the adequacy of the allowance for doubtful accounts. Any change in the assumptions used in analyzing accounts receivable
may result in additional allowances for doubtful accounts being recognized in the periods in which the change in assumptions occurs.
At December 31, 2016 and 2015, 100% of the
trade accounts receivable is from retail pharmacy operations.
Inventories
Inventories consist of health care product
finished goods held for resale, valued at the lower of cost using the first-in, first-out method or market. The Company maintains
an estimated reserve against inventory for excess, slow-moving, and obsolete inventory as well as inventory for which carrying
value is in excess of its net realizable value.
Property and Equipment
Property and equipment is carried at cost.
Depreciation and amortization are provided over the estimated useful lives of the assets (generally three to seven years) using
the straight-line method. Leasehold improvements are amortized on a straight-line basis over the lesser of either the lease term
or the estimated useful life of the asset.
Long-Lived Assets
The Company evaluates the recoverability of
the carrying value of its long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable.
If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the
use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value
and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Intangible Assets
Intangible assets with finite lives are being amortized on the straight-line
basis over seven years. Such assets are periodically evaluated as to the recoverability of their carrying values.
Treasury Stock
Common stock shares repurchased are recorded
at cost. Cost of shares retired or reissued is determined using the first-in, first-out method.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. Organization and
Significant Accounting Policies (Continued)
Cost Method Investments
Cost method investments represent investments
in limited partnerships accounted for using the cost method of accounting. None of these investments are investments in publicly
traded companies. The cost method is used because the Company does not have a controlling interest and does not have significant
influence over the operations of the respective companies. Accordingly, the Company does not record its proportionate share of
the income or losses generated by the limited partnerships in the consolidated statement of operations. The Company recognizes
as income dividends that are distributed from net accumulated earnings of the investees since the date of acquisition. The investments
are recorded at carrying value and based on information obtained from the entities in which the Company owns these interests, management
does not believe these to be impaired. Transactions related to the cost method investments are more fully described in Notes 7
and 15.
Revenue Recognition
Revenues generated by the retail pharmacy operations
are reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional
health care providers and others. The Company recognizes revenue from the sale of pharmaceutical products and retail merchandise
as transactions occur and product is delivered to the customer. Revenue from product sales is recognized at the point of sale and
service revenue is recognized at the time services are provided.
Revenues generated from investments in real
estate transactions are recognized upon the Company’s receipt of their proportionate share of funds in accordance with the
contract.
Sales and similar taxes collected from clients
are excluded from revenues. The obligation is included in accounts payable until the taxes are remitted to the appropriate taxing
authorities.
Substantially all revenues earned during the
years ended December 31, 2016 and 2015, were earned from the retail pharmacy business.
Cost of Sales
Cost of sales includes the purchase price
of goods sold, prescription packaging, compounded prescription direct labor, inventory obsolescence, freight costs, cash discounts
and vendor rebates. Rebates or refunds received by the Company from its suppliers are considered as an adjustment of the prices
of the supplier’s products purchased by the Company.
Income Taxes
The Company accounts for income taxes in accordance
with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components
of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period
by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines
deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability
is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in
tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred
tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of
evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Tax positions are recognized if it is more-likely-than-not,
based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not
means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or
litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing
authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not
recognition threshold considers the facts, circumstances and information available
at the reporting date and is subject to management’s judgment.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. Organization
and Significant Accounting Policies (Continued)
Income Taxes (Continued)
Interest and penalties on income tax related
items are included within the income tax provision and are recorded in income tax expense. The Company did not incur any interest
and penalties during the years ended December 31, 2016 and 2015.
With a few exceptions, the Company is no longer
subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2012.
Advertising Expense
Advertising expense is comprised of media,
agency, coupon, trade shows and other promotional expenses. Advertising expenses are charged to operations during the period incurred,
except for expenses related to the development of a major commercial or media campaign that are charged to operations during the
period in which the advertisement or campaign is first presented by the media. Advertising expenses totaled $109,000 in 2016 and
$152,000 in 2015.
Stock-Based Compensation
The Company recognizes compensation expense
for equity awards over the requisite service period (usually the vesting period) based on their grant date fair value. See Note
11 for additional information on stock-based compensation.
Earnings per Share
Basic earnings per share is computed by dividing
net loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed
by dividing net loss and unrecognized stock based-based compensation by the weighted-average number of common shares outstanding
during the period and the unvested restricted stock units. The unrecognized stock based compensation for 2016 and 2015 is $32,000
and $55,000, respectively; the unvested restricted stock units is 203,400 and 301,500, respectively. Due to the net losses for
both years, restricted stock units for 2016 and 2015 were anti-dilutive.
New Accounting Pronouncements
ASU No. 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842)
("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of
more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy
election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a finance
lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize
the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective
approach and becomes effective on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on
its financial position, results of operations and cash flows.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. Organization
and Significant Accounting Policies (Continued)
New Accounting Pronouncements
(Continued)
Accounting Standards Update ("ASU") No. 2014-09 "Revenue
from Contracts with Customers (Topic 606)”
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts
with Customers (Topic 606), an update to ASU 2014-09. This ASU amends ASU 2014-09 to defer the effective date by one year for annual
reporting periods beginning after December 15, 2017. Subsequently, the FASB has also issued accounting standards updates which
clarify the guidance. This ASU removes inconsistencies, complexities and allows transparency and comparability of revenue transactions
across entities, industries, jurisdictions and capital markets by providing a single comprehensive principles-based model with
additional disclosures regarding uncertainties. The principles-based revenue recognition model has a five-step analysis of transactions
to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. Early adoption is permitted for annual reporting periods beginning after December 15,
2016. In transition, the ASU may be applied retrospectively to each prior period presented or retrospectively with the cumulative
effect recognized as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance including
the transition method.
2. Trade
Accounts Receivable
Trade accounts receivable consist of the following
at December 31:
|
|
|
2016
|
|
|
2015
|
|
|
Trade accounts receivable-retail pharmacy
|
|
$
|
1,930,000
|
|
|
$
|
2,000,000
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(29,000
|
)
|
|
|
(33,000
|
)
|
|
|
|
$
|
1,901,000
|
|
|
$
|
1,967,000
|
|
3. Inventories
Inventories consist of the following at December 31:
|
|
|
2016
|
|
|
2015
|
|
|
Inventories - retail pharmacy
|
|
$
|
3,372,000
|
|
|
$
|
3,581,000
|
|
|
Less: Inventory reserves
|
|
|
(32,000
|
)
|
|
|
(34,000
|
)
|
|
|
|
$
|
3,340,000
|
|
|
$
|
3,547,000
|
|
4. Prepaid
Expenses
Prepaid expenses consist of the following at
December 31:
|
|
|
2016
|
|
|
2015
|
|
|
Prepaid insurance
|
|
$
|
195,000
|
|
|
$
|
204,000
|
|
|
Other prepaid expenses
|
|
|
91,000
|
|
|
|
125,000
|
|
|
|
|
$
|
286,000
|
|
|
$
|
329,000
|
|
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
5. Property
and Equipment, Net
Property and equipment, net consist of the
following at December 31:
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
2016
|
|
|
2015
|
|
|
Computer equipment and software
|
|
3 to 5 years
|
|
$
|
1,483,000
|
|
|
$
|
1,389,000
|
|
|
Furniture, fixtures and equipment
|
|
5 to 7 years
|
|
|
1,106,000
|
|
|
|
1,049,000
|
|
|
Leasehold improvements
|
|
Life of lease
|
|
|
|
|
|
|
|
|
|
|
|
(generally 15 years)
|
|
|
1,373,000
|
|
|
|
1,237,000
|
|
|
|
|
|
|
|
3,962,000
|
|
|
|
3,675,000
|
|
|
Less accumulated depreciation
|
|
|
|
|
(2,576,000
|
)
|
|
|
(2,269,000
|
)
|
|
|
|
|
|
$
|
1,386,000
|
|
|
$
|
1,406,000
|
|
Depreciation expense was $356,000 and $309,000
for the years ended December 31, 2016 and 2015, respectively.
6. Intangible
Assets, Net
Intangible assets, net consist of the following
at December 31:
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
2016
|
|
|
2015
|
|
|
Patient prescriptions
|
|
7 years
|
|
$
|
4,870,000
|
|
|
$
|
4,870,000
|
|
|
Less accumulated amortization
|
|
|
|
|
(1,189,000
|
)
|
|
|
(493,000
|
)
|
|
|
|
|
|
$
|
3,681,000
|
|
|
$
|
4,377,000
|
|
Amortization expense was $696,000 and $462,000
for the years ended December 31, 2016 and 2015, respectively.
Amortization expense for the years ended December
31, are as follows:
|
2017
|
|
$
|
696,000
|
|
|
2018
|
|
|
696,000
|
|
|
2019
|
|
|
696,000
|
|
|
2020
|
|
|
696,000
|
|
|
2021
|
|
|
664,000
|
|
|
Thereafter
|
|
|
233,000
|
|
|
|
|
$
|
3,681,000
|
|
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
7. CRESA
Partners of Orange County, L.P.
Effective May 1, 2004, the Company acquired
through ASDS all of the issued and outstanding stock of CPOC, pursuant to a Stock Purchase Agreement dated March 23, 2004, between
the sole stockholder and Chairman of CPOC (the “Seller”), and ASDS for $6.9 million, plus closing costs. CPOC is located
in Newport Beach, California, and provides performance based corporate real estate advisory services to corporate clients around
the United States, such as tenant representation services to commercial and industrial users of real estate.
The acquisition of CPOC assets in 2004 were
accounted for using the purchase method of accounting, and the purchase price was allocated to identifiable assets, including intangible
assets, and liabilities at their fair market value at the date of acquisition.
Pursuant to the partnership agreement, upon
the payoff of the original acquisition debt by CPOC, which was paid in full on August 31, 2010, the Company’s residual interest
in CPOC became 10% and the principles of consolidation for financial reporting purposes were no longer satisfied. As of August
31, 2010, the Company deconsolidated the results of operations of CPOC and recognized the Company’s remaining investment
in CPOC at estimated fair value. The continuing investment is accounted for on the cost method of accounting as the Company does
not have significant influence over CPOC. Distributions of $84,000 and $88,000 were recognized as dividend income during the years
ended December 31, 2016 and 2015, respectively.
The carrying value of the investment in CPOC
as of December 31, 2015 was $5,107,000. During February, 2017, the partnership agreement was dissolved in its entirety in conjunction
with the sale to Savills Studley, Inc. As a result, the Company recorded a $3,812,000 loss on impairment to write down the investment
to the estimated value to be received from the sale of $1,295,000 (see Note 15).
8. Accrued
Liabilities
Accrued liabilities consist of the following at December 31:
|
|
|
2016
|
|
|
2015
|
|
|
Accrued payroll and related costs
|
|
$
|
186,000
|
|
|
$
|
143,000
|
|
|
Accrued expenses - other
|
|
|
14,000
|
|
|
|
12,000
|
|
|
Accrued rent
|
|
|
32,000
|
|
|
|
59,000
|
|
|
Accrued property, federal, state and sales taxes
|
|
|
61,000
|
|
|
|
86,000
|
|
|
|
|
$
|
293,000
|
|
|
$
|
300,000
|
|
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
9. Notes
Payable
Notes payable consist of the following at December 31:
|
|
|
2016
|
|
|
2015
|
|
|
First National Bank of Omaha Credit Facility and Promissory Note secured by certain retail pharmacy assets
|
|
|
|
|
|
|
|
|
|
Revolving line of credit in the principal amount of $4,750,000, interest at LIBOR plus 3.25% (3.79% at December 31, 2016)
|
|
$
|
4,179,000
|
|
|
$
|
4,126,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $150,000 with interest payable at LIBOR plus 3.25% (3.79% at December 31, 2016) per annum payable in monthly installments of $10,000 plus all accrued and unpaid interest due. Paid in full February 8, 2017.
|
|
|
100,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardinal Health Term Notes, secured by certain retail pharmacy assets
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,500,000 with interest payable at prime plus 2.75 (6.5% at December 31, 2016) per annum payable in monthly installments of $17,861 plus interest, a final payment of $446,533 plus all accrued and unpaid interest due in full on February 20, 2017.
|
|
|
447,000
|
|
|
|
661,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (6.35% at December 31, 2016) per annum payable in monthly installments of $15,232 plus interest, a final payment of $929,157 plus all accrued and unpaid interest due in full on July 10, 2020.
|
|
|
1,553,000
|
|
|
|
1,736,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (6.35% at December 31, 2016) per annum payable in monthly installments of $10,344 plus interest, a final payment of $638,850 plus all accrued and unpaid interest due in full on January 10, 2020.
|
|
|
993,000
|
|
|
|
1,117,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (6.13% at December 31, 2016) per annum payable in monthly installments of $6,200 plus interest, a final payment of $378,251 plus all accrued and unpaid interest due in full on August 10, 2020.
|
|
|
645,000
|
|
|
|
719,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (6.15% at December 31, 2016) per annum payable in monthly installments of $2,545 plus interest, a final payment of $155,220 plus all accrued and unpaid interest due in full on August 10, 2019.
|
|
|
231,000
|
|
|
|
262,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $168,350 with interest payable at prime plus 2.6% (6.35% at December 31, 2016) per annum payable in monthly installments of $2,004 plus interest, a final payment of $50,356 plus all accrued and unpaid interest due in full on September 10, 2019.
|
|
|
112,000
|
|
|
|
136,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Notes Payable, unsecured
|
|
|
|
|
|
|
|
|
|
Notes payable to sellers of acquired pharmacies with varying monthly payments with interest at 5.5% due through September 2018.
|
|
|
309,000
|
|
|
|
514,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance notes payable, secured by the respective insurance policies
|
|
|
|
|
|
|
|
|
|
Notes payable for the Company’s insurance policy premiums with varying monthly payments due through September 2017. Interest rates vary up to 3.68%
|
|
|
167,000
|
|
|
|
173,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment notes payable, secured by the respective equipment
|
|
|
|
|
|
|
|
|
|
Notes payable for equipment purchased with varying monthly payments due through August 2016. Interest rates vary up to 9.88%
|
|
|
–
|
|
|
|
62,000
|
|
|
|
|
|
8,736,000
|
|
|
|
9,506,000
|
|
|
Less current portion
|
|
|
(1,129,000
|
)
|
|
|
(1,088,000
|
)
|
|
|
|
$
|
7,607,000
|
|
|
$
|
8,418,000
|
|
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
9. Notes Payable
(Continued)
Future maturities of notes payable at December 31, 2016 are as follows:
|
2017
|
|
$
|
1,129,000
|
|
|
2018
|
|
|
4,943,000
|
|
|
2019
|
|
|
1,237,000
|
|
|
2020
|
|
|
1,427,000
|
|
|
|
|
$
|
8,736,000
|
|
The revolving line of credit is secured by
the accounts receivable, inventory, and the fixed assets of the Borrowers as well as the stock of Dougherty’s Pharmacy, Inc.
and includes nonfinancial and financial covenants including debt service coverage and funded debt to operating EBITDA ratios. As
of December 31, 2016 the Borrowers were in compliance with these financial covenants via waiver letter by the lender. This revolving
line of credit is scheduled to mature in July 2017; however, the Company believes this revolving line of credit will be extended
with the same lender for another term of one year or greater. Accordingly, the revolving line of credit has been excluded from
current liabilities in the accompanying 2016 consolidated balance sheet.
The Company is in the process of refinancing
the Cardinal Health Term Note due February 20, 2017 to a term of 36 months at 7.95% fixed rate interest.
In conjunction with pharmacy acquisitions discussed
in Note 1, DHI secured term notes payable to Cardinal Health, its primary vendor (see Note 13), and promissory notes to the sellers
as described above.
10. Income
Taxes
The provision for income taxes is reconciled
with the federal statutory rate for the years ended December 31 is as follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Provision computed at federal statutory rate
|
|
$
|
(1,638,000
|
)
|
|
$
|
(117,000
|
)
|
|
State income taxes, net of federal tax effect
|
|
|
30,000
|
|
|
|
40,000
|
|
|
Other permanent differences
|
|
|
6,000
|
|
|
|
5,000
|
|
|
Change in valuation allowance
|
|
|
1,645,000
|
|
|
|
685,000
|
|
|
Change in current year estimate and other
|
|
|
(1,000
|
)
|
|
|
(561,000
|
)
|
|
Income tax provision
|
|
$
|
42,000
|
|
|
$
|
52,000
|
|
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
10. Income
Taxes (Continued)
Significant components of the net deferred
tax assets at December 31 are as follows:
|
|
|
2016
|
|
|
2015
|
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
10,000
|
|
|
$
|
11,000
|
|
|
Inventory reserves
|
|
|
11,000
|
|
|
|
12,000
|
|
|
Income from Pass-through
|
|
|
32,000
|
|
|
|
63,000
|
|
|
UNICAP - Sec 263A
|
|
|
30,000
|
|
|
|
41,000
|
|
|
Accrued liabilities
|
|
|
25,000
|
|
|
|
20,000
|
|
|
Net current deferred income tax assets
|
|
|
108,000
|
|
|
|
147,000
|
|
|
Valuation allowance
|
|
|
(108,000
|
)
|
|
|
(147,000
|
)
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Non-current deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
16,348,000
|
|
|
$
|
14,777,000
|
|
|
Alternative minimum tax credit
|
|
|
223,000
|
|
|
|
220,000
|
|
|
Other
|
|
|
252,000
|
|
|
|
142,000
|
|
|
Non-current deferred income tax assets
|
|
|
16,823,000
|
|
|
|
15,139,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(13,823,000
|
)
|
|
|
(12,139,000
|
)
|
|
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
As of December 31, 2016, the Company had approximately
$223,000 of alternative minimum tax credits available to offset future federal income taxes. The credits have no expiration date.
The Company also has unused operating loss carryforwards of $48,042,000, which expire between 2020 and 2035.
The realization of the deferred tax assets,
including net operating loss carryforwards, is subject to the Company’s ability to generate sufficient taxable income during
the periods in which the temporary differences become realizable. In evaluating whether a valuation allowance is required, management
considered all available positive and negative evidence, including prior operating results, the nature and reason of any losses,
the forecast of future taxable income and the dates on which any deferred tax assets are expected to expire. These assumptions
require a significant amount of judgment, including estimates of future taxable income. The estimates are based on management’s
best judgment at the time made based on current and projected circumstances and conditions. The estimate of the realizability of
the net deferred tax asset is a significant estimate that is subject to change in the near term. Management’s estimate of
the use of net operating losses includes the estimated gain or loss resulting from the ultimate sale of the pharmacy businesses.
Management believes that the issuance of shares
of common stock pursuant to the initial public offering on November 15, 1999, caused an “ownership change” for purposes
of Section 382 of the Code on such date. Consequently, the Company believes that utilization of the portion of the Company’s
federal net operating loss carryforwards attributable to the period prior to November 16, 1999, is limited by Section 382 of the
Code. If an “ownership change” is determined to have occurred at a date after November 15, 1999, additional federal
net operating loss carryforwards would be limited by Section 382 of the Code.
In addition, an “ownership change”
may occur in the future as a result of future changes in the ownership of the Company’s stock, including the issuance by
the Company of stock in connection with the acquisition of a business by the Company. A future “ownership change” would
result in Code Section 382 limiting the Company’s deduction of federal operating loss carryforwards attributable to periods
before the future ownership change.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
11. Stock
and Share-Based Compensation
Preferred Stock
The Company has authorized preferred stock as follows:
|
|
|
Number of
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $.0001 par value
|
|
|
1,111,111
|
|
|
Series B redeemable preferred stock, $.0001 par value
|
|
|
1,111,111
|
|
|
Series C non-voting preferred stock, $.0001 par value
|
|
|
3,200,000
|
|
|
“Blank Check” preferred stock, $.0001 par value
|
|
|
2,077,778
|
|
|
Total
|
|
|
7,500,000
|
|
No preferred stock was outstanding at December
31, 2016 or 2015.
Stock Dividend
On December 12, 2016 and December 14, 2015,
the Company issued a $.0001 per share dividend to stockholders of record on December 5, 2016 and December 7, 2015, respectively.
Based on the number of common shares outstanding on the record date, the Company issued 221,948 and 216,560 new shares at a fair
market value of $44,000 and $43,000, respectively, which was charged to accumulated deficit.
Restricted Share Unit Incentive Plan
On November 13, 2013, the Board of Directors
approved and adopted the Restricted Share Unit (“RSU”) Incentive Plan. Under the plan the Company can award RSUs to
employees and non-employee directors and consultants pursuant to restricted stock agreements contingent upon continuous service.
Under the restricted stock agreements, the restricted shares will vest annually over a four-year period and will be payable in
stock, valued at the fair market value on the grant date.
As of December 31, 2016, the following shares
had been issued under the 2013 RSU Plan:
Year of
Issuance:
|
|
Number of
Shares
|
|
|
Fair Value
at Date of
Grant
|
|
|
Shares
Vested
|
|
|
Non-
Vested
|
|
|
2013
|
|
|
120,000
|
|
|
$
|
26,400
|
|
|
|
90,000
|
|
|
|
30,000
|
|
|
2014
|
|
|
122,100
|
|
|
$
|
30,946
|
|
|
|
61,200
|
|
|
|
60,900
|
|
|
2015
|
|
|
150,000
|
|
|
$
|
39,000
|
|
|
|
37,500
|
|
|
|
112,500
|
|
|
|
|
|
392,100
|
|
|
$
|
96,346
|
|
|
|
188,700
|
|
|
|
203,400
|
|
During 2016 and 2015, non-cash compensation
expense of $21,000 and $20,000, respectively, was recognized for vested shares awarded in stock.
12. Employee
Benefit Plan
The Company has an employee benefit plan which
is subject to ERISA guidelines and contains a safe harbor match in which the Company matches 100% on the first 4% of eligible compensation
that participant’s contribute and vest 100% upon contribution. For the years ended December 31, 2016 and 2015, the Company
made matching contributions totaling $140,000 and $129,000, respectively.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
13. Commitments
and Contingencies
Prime Vendor Agreement
On April 10, 2012, DHI entered into agreements
with Cardinal Health 110, Inc. and Cardinal Health 411, Inc. (“Cardinal Health”) for a three-year period pursuant to
which DHI and its subsidiaries agreed to purchase substantially all of their prescription pharmaceutical drugs, generic and over-the-counter
pharmaceutical products. The Prime Vendor Agreement provides for minimum annual and aggregate net purchase volumes, certain percentage
participation in vendor programs, bi-monthly payment terms, pricing discounts and volume rebates. Subsequent amendments provide
for improved pricing and rebates due to increased volume; the amendment dated November 1 2016, extended the agreement through April
30, 2019. For the years ended December 31, 2016 and 2015, DHI purchased approximately $28,457,000 and $26,484,000 of its pharmaceutical
products from Cardinal Health. All minimum commitments were made pursuant to these agreements during 2016 and 2015.
Operating Leases
The Company leases their pharmacy, corporate
offices and certain pharmacy equipment under non-cancelable operating lease agreements. Certain leases contain renewal options
and provide that the Company pay taxes, insurance, maintenance and other operating expenses. Total rent expense for operating leases
was approximately $996,000 and $984,000 for the years ended December 31, 2016 and 2015, respectively.
Minimum lease payments under all non-cancelable
operating lease agreements for the years ended December 31, are as follows:
|
2017
|
|
$
|
621,000
|
|
|
2018
|
|
|
542,000
|
|
|
2019
|
|
|
219,000
|
|
|
2020
|
|
|
186,000
|
|
|
2021
|
|
|
139,000
|
|
|
Thereafter
|
|
|
535,000
|
|
|
|
|
$
|
2,242,000
|
|
Legal Proceedings
The Company is occasionally involved in other
claims and proceedings, which are incidental to its business. It is the opinion of management that the disposition or ultimate
resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results
of operations and cash flows of the Company.
Guarantee
The Company is a co-guarantor on a
promissory note with a bank in the amount of $2,024,800. The borrower, who at the time the note was entered into was a
related party of the Company, has secured the loan with collateral. On February 13, 2013, the lender renegotiated the terms of
the promissory note with the borrower which included a requirement for the Company to provide assignments of deposits
totaling $200,000 during 2013, $50,000 during 2014 and $50,000 during 2015 as additional collateral. These deposits are
recorded in restricted cash on the accompanying consolidated balance sheets. The Company’s guarantee is in effect
through the December 2018 maturity date of the note, which was delinquent and renegotiated in conjunction with the
liquidation of the related party’s partnership interest in CPOC (see Note 15). Upon repayment by the borrower, the
deposits will be returned to the Company. Should the Company be obligated to perform under the guarantee agreement, the
Company may seek recourse from the related party in the form of the loan collateral. No liability has been recorded as of
December 31, 2016 or 2015, related to this guarantee.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
14. Related
Party Transactions
Through May 31, 2015, the Company’s Chairman
and one of the Company’s directors were limited partners in the entity that owned and controlled the building in which the
Ascendant and DHI corporate offices are located. Ascendant and DHI shared office space with the Company’s Chairman in the
building. Ascendant remitted monthly rent of approximately $5,200 and certain shared office costs of approximately $1,300 monthly
to the entity controlled by the Company’s Chairman. The Company subleased certain shared office space for approximately $2,200
per month and pays certain operating expenses of the other entities sharing its office space and that are controlled by the Company’s
Chairman and records receivables due from these entities. Effective June 1, 2015, in conjunction with the sale of the building,
the Chairman relocated within the building under a revised lease that includes the previous space for which Ascendant and DHI now
remits monthly rent of $7,000 and effective January 1 2016, shared office costs of $1,000. At December 31, 2016 and 2015, the Company
had receivables due from these affiliates totaling approximately $12,000 and $42,000, respectively. The receivables due from affiliates
are classified in current assets based on the agreements with the affiliates for repayment.
During the years ended December 31, 2016 and
2015, the Company paid fees to its directors of $56,000 for their roles as members of the Board of Directors and its related committees.
Fees paid to the Company’s Chairman totaled $120,000 for management and other services provided.
See also the guarantee agreement with a partner
of CPOC described in Note 13.
15. Subsequent
Events
On February 7, 2017, CRESA Partners of
Orange County, L.P., an affiliate of Cresa Partners-West, Inc. was acquired by Savills Studley, Inc. liquidating the
partnership interest in its entirety held by ASDS of Orange County, Inc. As of December 31, 2016, the estimated value of this
investment was recorded at $1,295,000, which represents the estimated future cash payments for this transaction. The Company
received $367,500 at closing, recorded $320,000 as a short term other receivable, and recorded the remainder as a long
term receivable due in three increments over 49 months, contingent on certain milestones expected to be achieved.
The Company has evaluated subsequent events
through March 15, 2017, the date which the consolidated financial statements were available to be issued.
ASCENDANT SOLUTIONS, INC.
Consolidated Financial Statements
March 31, 2017 and 2016
|
|
Page
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016
|
F-22
|
|
|
|
|
Consolidated Statements of Operations for the
Three Months Ended March 31, 2017 and 2016
|
F-23
|
|
|
|
|
Consolidated Statements
of Cash Flows for the Three Months Ended March 31, 2017 and 2016
|
F-24
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-25
|
Ascendant Solutions, Inc.
Consolidated Balance Sheets
(000’s omitted, except par value and
share amounts)
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
523
|
|
|
$
|
58
|
|
|
Restricted cash
|
|
|
303
|
|
|
|
303
|
|
|
Trade accounts receivable, net
|
|
|
1,632
|
|
|
|
1,901
|
|
|
Other receivables
|
|
|
225
|
|
|
|
113
|
|
|
Receivable from affiliates
|
|
|
12
|
|
|
|
12
|
|
|
Inventories, net
|
|
|
3,442
|
|
|
|
3,340
|
|
|
Prepaid expenses
|
|
|
269
|
|
|
|
286
|
|
|
Total current assets
|
|
|
6,406
|
|
|
|
6,013
|
|
|
Long term receivable
|
|
|
608
|
|
|
|
–
|
|
|
Property and equipment, net
|
|
|
1,335
|
|
|
|
1,386
|
|
|
Intangible assets, net
|
|
|
3,507
|
|
|
|
3,681
|
|
|
Investments carried at cost
|
|
|
–
|
|
|
|
1,295
|
|
|
Deferred tax asset
|
|
|
3,000
|
|
|
|
3,000
|
|
|
Total assets
|
|
$
|
14,856
|
|
|
$
|
15,375
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,881
|
|
|
$
|
2,643
|
|
|
Accrued liabilities
|
|
|
357
|
|
|
|
293
|
|
|
Notes payable, current portion
|
|
|
877
|
|
|
|
1,129
|
|
|
Total current liabilities
|
|
|
4,115
|
|
|
|
4,065
|
|
|
Notes payable, long-term portion
|
|
|
7,194
|
|
|
|
7,607
|
|
|
Total liabilities
|
|
|
11,309
|
|
|
|
11,672
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value; 7,500,000 shares authorized: none issued
and outstanding
|
|
|
–
|
|
|
|
–
|
|
|
Common stock, $0.0001 par value; 50,000,000 shares authorized; 23,447,921
shares issued and 22,417,921 shares outstanding at March 31, 2017;23,447,679 shares issued and 22,417,679 shares outstanding
at December 31, 2016
|
|
|
2
|
|
|
|
2
|
|
|
Additional paid-in capital
|
|
|
60,156
|
|
|
|
60,144
|
|
|
Accumulated deficit
|
|
|
(56,214
|
)
|
|
|
(56,046
|
)
|
|
Treasury stock, at cost, 1,030,000 shares
|
|
|
(397
|
)
|
|
|
(397
|
)
|
|
Total stockholders' equity
|
|
|
3,547
|
|
|
|
3,703
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
14,856
|
|
|
$
|
15,375
|
|
See Notes to Consolidated Financial Statements
Ascendant Solutions, Inc.
Consolidated Statements of Operations
(000’s omitted, except share and per share
amounts)
(Unaudited)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,055
|
|
|
$
|
10,816
|
|
|
Cost of sales
(exclusive of depreciation
and amortization shown separately below)
|
|
|
7,268
|
|
|
|
7,894
|
|
|
Gross profit
|
|
|
2,787
|
|
|
|
2,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,572
|
|
|
|
2,755
|
|
|
Non-cash stock compensation
|
|
|
4
|
|
|
|
6
|
|
|
Depreciation and amortization
|
|
|
266
|
|
|
|
261
|
|
|
Total operating expenses
|
|
|
2,842
|
|
|
|
3,022
|
|
|
Operating loss
|
|
|
(55
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
–
|
|
|
|
1
|
|
|
Interest expense
|
|
|
(102
|
)
|
|
|
(107
|
)
|
|
Loss before provision for income tax
|
|
|
(157
|
)
|
|
|
(206
|
)
|
|
Income tax provision
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
Net loss
|
|
$
|
(168
|
)
|
|
$
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to common
stockholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
Weighted-average number of shares-Basic and diluted
|
|
|
22,417,760
|
|
|
|
22,096,756
|
|
See Notes to Consolidated Financial Statements
Ascendant Solutions, Inc.
Consolidated Statements of Cash Flows
(000’s omitted)
(Unaudited)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(168
|
)
|
|
$
|
(216
|
)
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
266
|
|
|
|
261
|
|
|
Stock-based compensation
|
|
|
12
|
|
|
|
6
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
269
|
|
|
|
(118
|
)
|
|
Inventories
|
|
|
(102
|
)
|
|
|
(97
|
)
|
|
Prepaid expenses and other assets
|
|
|
(25
|
)
|
|
|
93
|
|
|
Accounts payable
|
|
|
238
|
|
|
|
973
|
|
|
Accrued liabilities
|
|
|
64
|
|
|
|
117
|
|
|
Net cash provided by operating activities
|
|
|
554
|
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(41
|
)
|
|
|
(102
|
)
|
|
Cash proceeds from disposition of CPOC
|
|
|
617
|
|
|
|
–
|
|
|
Net provided by (used in) investing activities
|
|
|
576
|
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(5,083
|
)
|
|
|
(7,472
|
)
|
|
Proceeds from notes payable
|
|
|
4,418
|
|
|
|
6,552
|
|
|
Net cash (used in) financing activities
|
|
|
(665
|
)
|
|
|
(920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) increase in cash
|
|
|
465
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
361
|
|
|
|
371
|
|
|
Cash, end of period
|
|
$
|
826
|
|
|
$
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
1
|
|
|
$
|
2
|
|
|
Cash paid for interest
|
|
$
|
100
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Cash to the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
523
|
|
|
$
|
66
|
|
|
Restricted cash
|
|
|
303
|
|
|
|
302
|
|
|
Total cash
|
|
$
|
826
|
|
|
$
|
368
|
|
See Notes to Consolidated
Financial Statements
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
1. Organization
and Significant Accounting Policies
Description of Business
Ascendant Solutions, Inc. (“Ascendant”
or the “Company”) is a value oriented investment firm focused on successfully acquiring, managing and growing community
based pharmacies in the Southwest Region. Ascendant was incorporated in Delaware on August 8, 2000.
A summary of the Company’s investments
at March 31, 2017, is shown in the table below:
|
Date
|
Entity
|
|
Transaction Description
|
%
Ownership
|
|
|
|
|
|
|
|
March 2004
|
Dougherty’s Holdings, Inc. and subsidiaries (“DHI”)
|
|
Acquisition of retail pharmacy
|
100%
|
|
|
|
|
|
|
|
September 2010
|
ASDS of Orange County, Inc. (“ASDS”),
|
|
Holding company for Investment in CRESA Partners of Orange County, L.P. (“CPOC”)
|
100%
|
On February 7, 2017, CRESA Partners of
Orange County, L.P., an affiliate of Cresa Partners-West, Inc. was acquired by Savills Studley, Inc. liquidating the
partnership interest in its entirety held by ASDS of Orange County, Inc. As of December 31, 2016, the estimated value of this
investment was recorded at $1,295,000, which represents the estimated future cash payments for this transaction. The Company
has received payments of $617,000 and recorded $70,000 included in short term other receivables with the remainder as a long
term receivable due in three increments over 49 months, contingent on certain milestones expected to be achieved.
Certain transactions related to business activities
are more fully described in the Company’s consolidated financial statements included in the Company’s Audited Financial
Statements for 2016 and 2015.
Significant Accounting Policies
Basis of Presentation
The
consolidated financial statements include the accounts of Ascendant and all subsidiaries for which the Company has a
controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation. The
accompanying unaudited consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared
by the Company, in accordance with accounting principles generally accepted in the United States (“GAAP”) for
interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation
S-X, and have not been audited. Accordingly, these unaudited consolidated financial statements do not include all of the
information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 included in the
Company’s Form 10. In the opinion of management, the interim unaudited consolidated financial statements included
herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the
Company’s financial position, the results of operations and cash flows for the periods presented. Due to seasonality,
the results of operations for the three months ended March 31, 2017, are not necessarily indicative of the results to be
expected for any future interim period for the year ending December 31, 2017.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with GAAP 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.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
1. Organization
and Significant Accounting Policies (Continued)
Concentration of
Credit Risk
The Company’s credit risk relates primarily
to its trade accounts receivables and its receivables from affiliates, along with cash deposits maintained at financial institutions
in excess of federally insured limits on interest bearing accounts. Management performs continuing evaluations of debtors’
financial condition and maintains an allowance for uncollectible accounts as determined necessary.
Accounts Receivable
Receivables recorded in the financial statements
represent valid claims against debtors for services rendered or other charges arising on or before the balance sheet date. Management
makes estimates of the collectability of accounts receivable. Specifically, management analyzes accounts receivable and historical
bad debts, customer credit-worthiness, current economic trends, and changes in customer payment terms and collections trends when
evaluating the adequacy of the allowance for doubtful accounts. Any change in the assumptions used in analyzing accounts receivable
may result in additional allowances for doubtful accounts being recognized in the periods in which the change in assumptions occurs.
At March 31, 2017 and 2016, 100% of the trade
accounts receivable is from retail pharmacy operations.
Inventories
Inventories consist of health care product
finished goods held for resale, valued at the lower of cost using the first-in, first-out method or market. The Company maintains
an estimated reserve against inventory for excess, slow-moving, and obsolete inventory as well as inventory for which carrying
value is in excess of its net realizable value.
Long-Lived Assets
The Company evaluates the recoverability of
the carrying value of its long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable.
If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the
use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value
and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Revenue Recognition
Revenues generated by the retail pharmacy operations
are reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional
health care providers and others. The Company recognizes revenue from the sale of pharmaceutical products and retail merchandise
as transactions occur and product is delivered to the customer. Revenue from product sales is recognized at the point of sale and
service revenue is recognized at the time services are provided.
Sales and similar taxes collected from clients
are excluded from revenues. The obligation is included in accounts payable until the taxes are remitted to the appropriate taxing
authorities.
All revenues earned during the three months
ended March 31, 2017 and 2016, were earned from the retail pharmacy business.
Cost of Sales
Cost of sales includes the purchase price
of goods sold, prescription packaging, compounded prescription direct labor, inventory obsolescence, freight costs, cash discounts
and vendor rebates. Rebates or refunds received by the Company from its suppliers are considered as an adjustment of the prices
of the supplier’s products purchased by the Company.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
Income Taxes
The Company accounts for income taxes in accordance
with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components
of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period
by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines
deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability
is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in
tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes
in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the
weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Tax positions are recognized if it is more-likely-than-not,
based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not
means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or
litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing
authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not
recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s
judgment.
Earnings per Share
Basic earnings per share is computed by dividing
net loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed
by dividing net loss and unrecognized stock based-based compensation by the weighted-average number of common shares outstanding
during the period and the unvested restricted stock units. The unrecognized stock based compensation as of March 31, 2017 and 2016
is $146,000 and $58,000, respectively; the unvested restricted stock units is 766,400 and 301,500 respectively. Due to the net
losses for both years, restricted stock units for 2017 and 2016 were anti-dilutive.
Accounting Pronouncements
Not Yet Adopted
ASU No. 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with
lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting
policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a
finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize
the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective
approach and becomes effective on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on
its financial position, results of operations and cash flows.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
Accounting Standards Update ("ASU") No. 2014-09 "Revenue
from Contracts with Customers (Topic 606)”
In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606), an update to ASU 2014-09. This ASU amends ASU 2014-09 to defer the effective
date by one year for annual reporting periods beginning after December 15, 2017. Subsequently, the FASB has also issued accounting
standards updates which clarify the guidance. This ASU removes inconsistencies, complexities and allows transparency and comparability
of revenue transactions across entities, industries, jurisdictions and capital markets by providing a single comprehensive principles-based
model with additional disclosures regarding uncertainties. The principles-based revenue recognition model has a five-step analysis
of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. Early adoption is permitted for annual reporting periods beginning
after December 15, 2016. In transition, the ASU may be applied retrospectively to each prior period presented or retrospectively
with the cumulative effect recognized as of the date of adoption. The Company is evaluating the effect of adopting this new accounting
guidance including the transition method.
2. Notes
Payable
Remainder of this page left blank intentionally.
Note 2 continues on the next page.
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
Notes payable consist of the following:
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
First National Bank of Omaha Credit Facility and Promissory Note secured by certain retail pharmacy assets
|
|
|
|
|
|
|
|
|
|
Revolving line of credit in the principal amount of $4,750,000, interest at LIBOR plus 3.25% (4.04% at March 31, 2017)
|
|
$
|
3,850,000
|
|
|
$
|
4,179,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $150,000 with interest payable at LIBOR plus 3.25% (4.04% at March 31, 2017) per annum payable in monthly installments of $10,000 plus all accrued and unpaid interest due. Paid in Full February 8, 2017.
|
|
|
–
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardinal Health Term Notes, secured by certain retail pharmacy assets
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,500,000 with interest payable at prime plus 2.75 (6.75% at March 31, 2017) per annum payable in monthly installments of $17,861 plus interest, a final payment of $446,533 plus all accrued and unpaid interest due in full on February 20, 2017. Refinanced March 31, 2017.
|
|
|
–
|
|
|
|
447,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $432,859 at fixed interest rate of 8.11% per annum payable in 36 monthly installments of $13,641. Final payment plus accrued and unpaid interest due in full on April 10, 2020.
|
|
|
433,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (6.6% at March 31, 2017) per annum payable in monthly installments of $15,232 plus interest, a final payment of $929,157 plus all accrued and unpaid interest due in full on July 10, 2020.
|
|
|
1,508,000
|
|
|
|
1,553,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (6.6% at March 31, 2017) per annum payable in monthly installments of $10,344 plus interest, a final payment of $638,850 plus all accrued and unpaid interest due in full on January 10, 2020.
|
|
|
962,000
|
|
|
|
993,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (6.38% at March 31, 2017) per annum payable in monthly installments of $6,200 plus interest, a final payment of $378,251 plus all accrued and unpaid interest due in full on August 10, 2020.
|
|
|
626,000
|
|
|
|
645,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (6.4% at March 31, 2017) per annum payable in monthly installments of $2,545 plus interest, a final payment of $155,220 plus all accrued and unpaid interest due in full on August 10, 2019.
|
|
|
224,000
|
|
|
|
231,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $168,350 with interest payable at prime plus 2.6% (6.6% at March 31, 2017) per annum payable in monthly installments of $2,004 plus interest, a final payment of $50,356 plus all accrued and unpaid interest due in full on September 10, 2019.
|
|
|
106,000
|
|
|
|
112,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Notes Payable, unsecured
|
|
|
|
|
|
|
|
|
|
Notes payable to sellers of acquired pharmacies with varying monthly payments with interest at 5.5% due through September 2018.
|
|
|
256,000
|
|
|
|
309,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance notes payable, secured by the respective insurance policies
|
|
|
|
|
|
|
|
|
|
Notes payable for the Company’s insurance policy premiums with varying monthly payments due through September 2017. Interest rates vary up to 3.68%
|
|
|
106,000
|
|
|
|
167,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,071,000
|
|
|
|
8,736,000
|
|
|
Less current portion
|
|
|
(877,000
|
)
|
|
|
(1,129,000
|
)
|
|
|
|
$
|
7,194,000
|
|
|
$
|
7,607,000
|
|
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
2. Notes Payable
(Continued)
Future maturities of notes payable at March 31, 2017 are as follows:
|
2017
|
|
$
|
877,000
|
|
|
2018
|
|
|
4,639,000
|
|
|
2019
|
|
|
1,192,000
|
|
|
2020
|
|
|
1,363,000
|
|
|
|
|
$
|
8,071,000
|
|
The revolving line of credit is secured by
the accounts receivable, inventory, and the fixed assets of the Borrowers as well as the stock of Dougherty’s Pharmacy, Inc.
and includes nonfinancial and financial covenants including debt service coverage and funded debt to operating EBITDA ratios. As
of March 31, 2017 the Borrowers were in compliance with these financial covenants via waiver letter by the lender. This revolving
line of credit is scheduled to mature in July 2017; however, the Company believes this revolving line of credit will be extended
with the same lender for another term of one year or greater. Accordingly, the revolving line of credit has been excluded from
current liabilities in the accompanying 2017 and 2016 consolidated balance sheets.
The Company refinanced the Cardinal Health
Term Note due February 20, 2017 to a term of 36 months at 8.11% fixed rate interest.
3. Stock
and Share-Based Compensation
Restricted Share Unit Incentive Plan
On November 13, 2013, the Board of Directors
approved and adopted the Restricted Share Unit (“RSU”) Incentive Plan. Under the plan the Company can award RSUs to
employees and non-employee directors and consultants pursuant to restricted stock agreements contingent upon continuous service.
Under the restricted stock agreements, the restricted shares will vest annually over a four-year period and will be payable in
stock, valued at the fair market value on the grant date.
As of March 31, 2017, the following shares
had been issued under the 2013 RSU Plan:
|
Year of Issuance:
|
|
Number of
Shares
|
|
|
Fair Value
at Date of
Grant
|
|
|
Shares
Vested
|
|
|
Non-
Vested
|
|
|
2013
|
|
|
120,000
|
|
|
$
|
26,400
|
|
|
|
90,000
|
|
|
|
30,000
|
|
|
2014
|
|
|
122,100
|
|
|
$
|
30,946
|
|
|
|
61,200
|
|
|
|
60,900
|
|
|
2015
|
|
|
150,000
|
|
|
$
|
39,000
|
|
|
|
37,500
|
|
|
|
112,500
|
|
|
2016
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
2017
|
|
|
563,000
|
|
|
$
|
118,230
|
|
|
|
–
|
|
|
|
563,000
|
|
|
|
|
|
955,100
|
|
|
$
|
214,576
|
|
|
|
188,700
|
|
|
|
766,400
|
|
Ascendant Solutions, Inc.
Notes to Consolidated Financial Statements
4. Commitments
and Contingencies
Operating Leases
The Company leases their pharmacy, corporate
offices and certain pharmacy equipment under non-cancelable operating lease agreements. Certain leases contain renewal options
and provide that the Company pay taxes, insurance, maintenance and other operating expenses. Effective January 1, 2017, the Company
extended the lease for the flagship pharmacy located at the intersection of Preston and Royal in Dallas, Texas, that would have
expired in December 2018, until December 2028.
Minimum lease payments under all non-cancelable
operating lease agreements for the twelve months ended March 31, are as follows:
|
2017
|
|
$
|
666,000
|
|
|
2018
|
|
|
527,000
|
|
|
2019
|
|
|
786,000
|
|
|
2020
|
|
|
707,000
|
|
|
2021
|
|
|
663,000
|
|
|
Thereafter
|
|
|
4,625,000
|
|
|
|
|
$
|
7,974,000
|
|
Legal Proceedings
The Company is occasionally involved in other
claims and proceedings, which are incidental to its business. It is the opinion of management that the disposition or ultimate
resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results
of operations and cash flows of the Company.
5. Related
Party Transactions
During the three months ended March 31, 2017
and 2016, the Company paid fees to its directors of $13,000 for their roles as members of the Board of Directors and its related
committees. Fees paid to the Company’s Chairman totaled $30,000 for management and other services provided.
6. Subsequent
Events
On May 6, 2017, the Company sold its pharmacy
in Humble, Texas, acquired in September 2014, and received total cash proceeds of $274,000 related to this transaction. The revenues
and earnings of the pharmacy are not significant to the consolidated financial statements taken as a whole.
On May 10, 2017, the Company amended its Certificate
of Incorporation to change its name from “Ascendant Solutions, Inc.” to “Dougherty’s Pharmacy, Inc.”
On July 1, 2017, the Company obtained
an extension of the revolving line of credit discussed in Note 2 through September 1, 2017, and is in the process of
obtaining an additional term with the same lender for another term of greater than one year.