Item 1. Financial Statements
Dougherty’s Pharmacy, Inc.
Consolidated Balance Sheets
(000’s omitted, except par value and share
amounts)
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
448
|
|
|
$
|
58
|
|
|
Restricted cash
|
|
|
303
|
|
|
|
303
|
|
|
Trade accounts receivable, net
|
|
|
1,749
|
|
|
|
1,901
|
|
|
Other receivables
|
|
|
313
|
|
|
|
113
|
|
|
Receivable from affiliates
|
|
|
11
|
|
|
|
12
|
|
|
Inventories, net
|
|
|
3,443
|
|
|
|
3,340
|
|
|
Prepaid expenses
|
|
|
209
|
|
|
|
286
|
|
|
Total current assets
|
|
|
6,476
|
|
|
|
6,013
|
|
|
Long term receivable
|
|
|
608
|
|
|
|
–
|
|
|
Property and equipment, net
|
|
|
1,168
|
|
|
|
1,386
|
|
|
Intangible assets, net
|
|
|
3,227
|
|
|
|
3,681
|
|
|
Investments carried at cost
|
|
|
–
|
|
|
|
1,295
|
|
|
Deferred tax asset
|
|
|
3,000
|
|
|
|
3,000
|
|
|
Total assets
|
|
$
|
14,479
|
|
|
$
|
15,375
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,029
|
|
|
$
|
2,643
|
|
|
Accrued liabilities
|
|
|
369
|
|
|
|
293
|
|
|
Notes payable, current portion
|
|
|
783
|
|
|
|
1,129
|
|
|
Total current liabilities
|
|
|
4,181
|
|
|
|
4,065
|
|
|
Notes payable, long-term portion
|
|
|
7,053
|
|
|
|
7,607
|
|
|
Total liabilities
|
|
|
11,234
|
|
|
|
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; 23,506,821
shares issued and 22,476,821 shares outstanding at June 30, 2017; 23,447,679 shares issued and 22,417,679 shares
outstanding at December 31, 2016
|
|
|
2
|
|
|
|
2
|
|
|
Additional paid-in capital
|
|
|
60,159
|
|
|
|
60,144
|
|
|
Accumulated deficit
|
|
|
(56,519
|
)
|
|
|
(56,046
|
)
|
|
Treasury stock, at cost, 1,030,000 shares
|
|
|
(397
|
)
|
|
|
(397
|
)
|
|
Total stockholders' equity
|
|
|
3,245
|
|
|
|
3,703
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
14,479
|
|
|
$
|
15,375
|
|
See Notes to Consolidated Financial Statements
Dougherty’s Pharmacy, Inc.
Consolidated Statements of Operations
(000’s omitted, except share and per share
amounts)
(Unaudited)
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,211
|
|
|
$
|
10,998
|
|
|
$
|
20,266
|
|
|
$
|
21,814
|
|
|
Cost of sales
|
|
|
7,448
|
|
|
|
8,163
|
|
|
|
14,716
|
|
|
|
16,057
|
|
|
Gross profit
|
|
|
2,763
|
|
|
|
2,835
|
|
|
|
5,550
|
|
|
|
5,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
2,624
|
|
|
|
2,692
|
|
|
|
5,188
|
|
|
|
5,447
|
|
|
Non-cash stock compensation
|
|
|
3
|
|
|
|
4
|
|
|
|
15
|
|
|
|
10
|
|
|
Depreciation and amortization
|
|
|
254
|
|
|
|
267
|
|
|
|
520
|
|
|
|
528
|
|
|
Total operating expenses
|
|
|
2,881
|
|
|
|
2,963
|
|
|
|
5,723
|
|
|
|
5,985
|
|
|
Operating loss
|
|
|
(118
|
)
|
|
|
(128
|
)
|
|
|
(173
|
)
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
–
|
|
|
|
40
|
|
|
|
–
|
|
|
|
40
|
|
|
Interest expense
|
|
|
(100
|
)
|
|
|
(111
|
)
|
|
|
(202
|
)
|
|
|
(217
|
)
|
|
Loss on disposal of assets
|
|
|
(75
|
)
|
|
|
(114
|
)
|
|
|
(75
|
)
|
|
|
(114
|
)
|
|
Loss before provision for income tax
|
|
|
(293
|
)
|
|
|
(313
|
)
|
|
|
(450
|
)
|
|
|
(519
|
)
|
|
Income tax provision
|
|
|
(12
|
)
|
|
|
(10
|
)
|
|
|
(23
|
)
|
|
|
(20
|
)
|
|
Net loss
|
|
$
|
(305
|
)
|
|
$
|
(323
|
)
|
|
$
|
(473
|
)
|
|
$
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to
common stockholders
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
Weighted-average number of shares - Basic and diluted
|
|
|
22,455,471
|
|
|
|
22,126,281
|
|
|
|
22,436,615
|
|
|
|
22,111,519
|
|
See Notes to Consolidated Financial Statements
Dougherty’s Pharmacy, Inc.
Consolidated Statements of Cash Flows
(000’s omitted)
(Unaudited)
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(473
|
)
|
|
$
|
(539
|
)
|
|
Items not requiring (providing) cash
|
|
|
|
|
|
|
|
|
|
Loss from disposal of assets
|
|
|
75
|
|
|
|
114
|
|
|
Provision for doubtful accounts
|
|
|
–
|
|
|
|
28
|
|
|
Depreciation and amortization
|
|
|
520
|
|
|
|
528
|
|
|
Stock-based compensation
|
|
|
15
|
|
|
|
10
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
87
|
|
|
|
(233
|
)
|
|
Inventories
|
|
|
(140
|
)
|
|
|
(174
|
)
|
|
Prepaid expenses and other assets
|
|
|
(56
|
)
|
|
|
112
|
|
|
Accounts payable
|
|
|
367
|
|
|
|
1,084
|
|
|
Accrued liabilities
|
|
|
77
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
472
|
|
|
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(73
|
)
|
|
|
(461
|
)
|
|
Cash proceeds from disposition of pharmacy
|
|
|
274
|
|
|
|
–
|
|
|
Cash received upon disposition of investment
|
|
|
617
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Net provided by (used in) investing activities
|
|
|
818
|
|
|
|
(461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(10,326
|
)
|
|
|
(14,267
|
)
|
|
Proceeds from notes payable
|
|
|
9,426
|
|
|
|
13,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(900
|
)
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) increase in cash
|
|
|
390
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
361
|
|
|
|
371
|
|
|
Cash, end of period
|
|
$
|
751
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
40
|
|
|
$
|
42
|
|
|
Cash paid for interest
|
|
$
|
191
|
|
|
$
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Cash to the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
448
|
|
|
$
|
49
|
|
|
Restricted cash
|
|
|
303
|
|
|
|
302
|
|
|
Total cash
|
|
$
|
751
|
|
|
$
|
351
|
|
See Notes to Consolidated Financial Statements
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
1. Organization
and Significant Accounting Policies
Description of Business
Dougherty’s Pharmacy, Inc. (“Dougherty’s”
or the “Company”) is a value oriented investment firm focused on successfully acquiring, managing and growing community
based pharmacies in the Southwest Region.
A summary of the Company’s investments
at June 30, 2017, is shown in the table below:
|
Date
|
Entity
|
|
Transaction Description
|
%
Ownership
|
|
|
|
|
|
|
|
March 2004
|
Dougherty’s Holdings, Inc. and
subsidiaries (“DHI” or the “Borrowers”)
|
|
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.
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.
Significant Accounting Policies
Basis of Presentation
The consolidated financial
statements include the accounts of Dougherty’s 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 and six months ended June 30, 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.
Dougherty’s Pharmacy, 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 June 30, 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 and six
months ended June 30, 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.
Dougherty’s Pharmacy, 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 consider 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 June 30, 2017 and 2016
is $127,000 and $46,000, respectively; the unvested restricted stock units are 658,500 and 233,000, 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.
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.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
2. Notes
Payable
Notes payable consist of the following:
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
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% (4.31% at
June 30, 2017)
|
|
$
|
3,970,000
|
|
|
$
|
4,179,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $150,000 with interest payable at LIBOR plus 3.25% (4.31%
at June 30, 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 (7.0%
at June 30, 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.
|
|
|
402,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (6.85%
at June 30, 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.
|
|
|
1,462,000
|
|
|
|
1,553,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (6.85%
at June 30, 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.
|
|
|
931,000
|
|
|
|
993,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (6.63%
at June 30, 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.
|
|
|
607,000
|
|
|
|
645,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (6.65% at
June 30, 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.
|
|
|
216,000
|
|
|
|
231,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Term note in the principal amount of $168,350 with interest payable at prime plus 2.6% (6.85% at
June 30, 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.
|
|
|
–
|
|
|
|
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.
|
|
|
203,000
|
|
|
|
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%
|
|
|
45,000
|
|
|
|
167,000
|
|
|
|
|
|
7,836,000
|
|
|
|
8,736,000
|
|
|
Less current portion
|
|
|
(783,000
|
)
|
|
|
(1,129,000
|
)
|
|
|
|
$
|
7,053,000
|
|
|
$
|
7,607,000
|
|
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
2. Notes Payable
(Continued)
Future maturities of notes payable at June 30, 2017 are as follows:
|
2017
|
|
|
$
|
783,000
|
|
|
2018
|
|
|
|
4,652,000
|
|
|
2019
|
|
|
|
2,017,000
|
|
|
2020
|
|
|
|
384,000
|
|
|
|
|
|
|
$
|
7,836,000
|
|
The revolving line of credit (“the Revolver”)
with the First National Bank of Omaha (“the Lender”) is secured by, but not limited to, the accounts receivable, inventory,
and the fixed assets of the Borrowers and includes nonfinancial and financial covenants including debt service coverage and funded
debt to operating EBITDA ratios. As of June 30, 2017 the Borrowers were in compliance with these financial covenants via waiver
letter by the Lender. Subsequent to June 30, 2017, the Revolver was extended and renegotiated.(See Note 6, Subsequent Events) Accordingly,
the Revolver 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 June 30, 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
|
|
|
Cancelled
|
|
|
|
2013
|
|
|
|
120,000
|
|
|
$
|
26,400
|
|
|
|
90,000
|
|
|
|
25,000
|
|
|
|
5,000
|
|
|
|
2014
|
|
|
|
122,100
|
|
|
$
|
30,946
|
|
|
|
86,300
|
|
|
|
25,650
|
|
|
|
10,150
|
|
|
|
2015
|
|
|
|
150,000
|
|
|
$
|
39,000
|
|
|
|
70,000
|
|
|
|
65,000
|
|
|
|
15,000
|
|
|
|
2016
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2017
|
|
|
|
563,000
|
|
|
$
|
118,230
|
|
|
|
–
|
|
|
|
543,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
955,100
|
|
|
$
|
214,576
|
|
|
|
246,300
|
|
|
|
658,650
|
|
|
|
50,150
|
|
Dougherty’s Pharmacy, 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 June 30, 2017 are as follows:
|
2017
|
|
|
$
|
760,000
|
|
|
2018
|
|
|
|
782,000
|
|
|
2019
|
|
|
|
800,000
|
|
|
2020
|
|
|
|
678,000
|
|
|
2021
|
|
|
|
671,000
|
|
|
Thereafter
|
|
|
|
4,191,000
|
|
|
|
|
|
|
$
|
7,882,000
|
|
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 and six months ended June
30, 2017 and 2016, the Company paid fees to its directors of $14,000 and $28,000 respectively for their roles as members of the
Board of Directors and its related committees; fees paid to the Company’s Chairman totaled $30,000 and $60,000 for management
and other services provided.
6. Subsequent
Events
On July 1, 2017, the Company obtained an extension
of the Revolver, discussed in Note 2, through September 1, 2017. On August 9, 2017, the Company obtained an additional term for
the Revolver in the amount of $4,450,000 effective September 1, 2017, and then effective February 1, 2018, in the amount of $4,000,000.
Outstanding advances under the Revolver will bear interest at LIBOR plus 3.25% (4.49% at August 9 2017). Accrued and unpaid interest
on the Revolver is due monthly beginning on September 1, 2017. All outstanding principal under the Revolver plus all accrued and
unpaid interest thereon is due and payable in full on August 1, 2018. The Revolver is secured by certain retail pharmacy assets,
specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company.
The Revolver is subject to certain financial restrictions, subject to the Lender’s prior written approval, including, but
not limited to, capital expenditures not to exceed $200,000, additional indebtedness, acquisitions of entities and payment of dividends
and distributions. Furthermore, the loan agreement provides that the Borrowers will maintain a minimum debt service coverage ratio
of not less than 1.00 to 1.00, as defined.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operation
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Should one or more of these risks or uncertainties
materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected
in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.
The forward-looking statements contained in
this Form 10-Q 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:
|
|
·
|
We have limited funds and may require additional financing;
|
|
|
·
|
We may not be able to effectively integrate and manage our current and anticipated growth strategies;
|
|
|
·
|
We could be subject to unforeseen costs associated with our Pharmacy Acquisitions which could reduce our profitability;
|
|
|
·
|
We may enter into additional leveraged transactions in connection with future Pharmacy Acquisitions;
|
|
|
·
|
We may be negatively affected by restrictive terms and covenants in our existing credit facility;
|
|
|
·
|
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;
|
|
|
·
|
We are substantially dependent on a single supplier of pharmaceutical products;
|
|
|
·
|
We must maintain sufficient sales to qualify for favorable pricing under our long term supply contract;
|
|
|
·
|
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;
|
|
|
·
|
We are subject to considerable uncertainty as to how current Health Reform Laws will affect our business and operations;
|
|
|
·
|
We could be negatively affected by future legislative or regulator policies designed to manage healthcare costs or alter healthcare financing practices; and
|
|
|
·
|
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.
|
These and other risks, assumptions and uncertainties
are described in Item 1A. “Risk Factors” These risks and uncertainties include, but are not limited to, those factors
described in the “Risk Factors” sections of our Form 10-12G filed on June 2, 2017. 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.
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.
Overview of Our Business
Dougherty’s Pharmacy,
Inc. (“Dougherty’s,” which is also referred to in this Quarterly Report on Form 10-Q 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. 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion explains the material changes in our results
of operations for the three and six months ended June 30, 2017 and 2016, and the significant developments affecting our financial
condition since the Form 10-12G and Form 10-12G/A filed June 2, 2017 and July 21, 2017, respectively. We strongly recommend that
you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial
Condition and Results of Operations for the years ended December 31, 2016 and 2015 and the three months ended March 31, 2017 and
2016 filed in those reports, along with this report.
Comparison of the Three and Six Months
Ended June 30, 2017 to the Three and Six Months Ended June 30, 2016 (000’s Omitted)
|
|
|
Three Months ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,211
|
|
|
$
|
10,998
|
|
|
$
|
20,266
|
|
|
$
|
21,814
|
|
|
Cost of sales
|
|
|
7,448
|
|
|
|
8,163
|
|
|
|
14,716
|
|
|
|
16,057
|
|
|
Gross profit
|
|
|
2,763
|
|
|
|
2,835
|
|
|
|
5,550
|
|
|
|
5,757
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
|
|
|
2,627
|
|
|
|
2,696
|
|
|
|
5,203
|
|
|
|
5,457
|
|
|
Depreciation and amortization
|
|
|
254
|
|
|
|
267
|
|
|
|
520
|
|
|
|
528
|
|
|
Other income
|
|
|
–
|
|
|
|
40
|
|
|
|
–
|
|
|
|
40
|
|
|
Interest expense
|
|
|
100
|
|
|
|
111
|
|
|
|
202
|
|
|
|
217
|
|
|
Loss of disposal of assets
|
|
|
75
|
|
|
|
114
|
|
|
|
75
|
|
|
|
114
|
|
|
Income tax provision
|
|
|
12
|
|
|
|
10
|
|
|
|
23
|
|
|
|
20
|
|
|
Net loss
|
|
$
|
(305
|
)
|
|
$
|
(323
|
)
|
|
$
|
(473
|
)
|
|
$
|
(539
|
)
|
|
plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
100
|
|
|
$
|
111
|
|
|
$
|
202
|
|
|
$
|
217
|
|
|
Depreciation and amortization
|
|
|
254
|
|
|
|
267
|
|
|
|
520
|
|
|
|
528
|
|
|
Loss on disposal of assets
|
|
|
75
|
|
|
|
114
|
|
|
|
75
|
|
|
|
114
|
|
|
Income tax provision
|
|
|
12
|
|
|
|
10
|
|
|
|
23
|
|
|
|
20
|
|
|
EBITDA (Adjusted)
|
|
$
|
136
|
|
|
$
|
179
|
|
|
$
|
347
|
|
|
$
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prescription count
|
|
|
109,376
|
|
|
|
110,454
|
|
|
|
221,221
|
|
|
|
221,525
|
|
Revenues
Net revenues decreased approximately $787,000
or 7.2%, and $1.6 million, or 7.1% in the three and six months ended June 30, 2017.The decrease includes a less than 1% decrease
in the number of retail pharmacy prescriptions sold. The decline in revenues per prescription sold during the three and six months
ended June 30, 2017 as compared to the same periods for 2016 are due to lower revenues per prescription filled due to the brand
to generic conversion and lower generic selling prices as experienced during the first three months of 2017. Management expects
this trend will continue for the remainder of 2017, resulting in lower revenues filled due to brand to generic conversion and lower
generic selling prices in 2017. Prescriptions sold are expected to continue to remain consistent, with prior years.
Gross profit
Gross profit dollars decreased $72,000, or
2.5%, and $207,000, or 3.6% in the three and six months ended June 30, 2017, as compared to prior year. Gross profit as a percent
of revenues increased approximately 130 basis points for the three months ended June 30, 2017, to 27.1%, as compared to prior year.
Gross profit as a percentage of net revenues increased approximately 100 basis points in the six months ended June 30, 2017 to
27.4%, as compared to prior year. as a result of the improved pricing secured in the November 2016 pricing agreement with Cardinal
Health, offset by an increase in third party payor fees, as experienced during the first three months of 2017 and expected to continue
to occur during the remainder of 2017. Direct and Indirect Remuneration (“DIR”) fees charged to pharmacies that relate
to Medicare Part D plans, that commenced during the first quarter, continued to increase in the second quarter, to $83,000 for
the three months ended June 30, 2017, up from $50,000 in the first three months, to a total of $133,000 for the six months ended
June 30, 2017. Total adjudicated fees were $100,000 and $169,000 for the three and six months ended June 30, 2017, respectively,
compared to $17,000 and $36,000 for the same periods of 2016, or a 588% and 369% increase, respectively, because of the DIR fees.
DIR fees were 1.01% and 1.39% of total third party payor revenues for the three and six months ended June 30, 2017. DIR fees at
1.39% of total third party payor revenues should stabilize at this rate and Management expects the improved pricing from Cardinal
Health to continue to offset the fees for an improved gross margin as a percent of revenues for the remainder of 2017 as compared
to 2016.
SG&A expenses
SG&A expenses decreased $69,000, or 2.6%,
and $254,000, or 4.7% in the three and six months ended June 30, 2017, as compared to prior year. SG&A expenses as a percentage
of revenues for the three months ended June 30, 2017, increased to 25.7%, up 120 basis points from 24.5% for the same period prior
year and for the six months ended June 30, 2017, increased to 25.7%, up 70 basis points from 25.0% for the same period prior year.
The decrease in SG&A expenses is due primarily to cost reduction initiatives that were implemented during 2016. The increase
in operating expenses as a percentage of revenues is due to lower revenue as compared to prior year. Management continues to implement
cost reduction initiatives during 2017 to decrease SG&A expenses as a percentage of revenues.
Earnings Before Interest, Taxes, Depreciation
and Amortization (Adjusted)
EBITDA (Adjusted) decreased $43,000, or 24.0%,
and increased $7,000, or 2.1% in the three and six months ended June 30, 2017 as compared to prior year. EBITDA (Adjusted ) as
a percentage of revenues decreased approximately 30 basis points to 1.3% and increased 10 basis points to 1.7% for the three and
six months ended June 30, 2017, respectively, as compared to 1.6% for the three and six months ended in June 30, 2016. The decrease
in EBITDA (Adjusted) for the three months ended June 30, 2017 compared to prior year is primarily due to additional SG&A expense
incurred by the company related to the decision to file its Form 10. This overall increase in EBITDA (Adjusted) for the six months
ended June 30, 2017, compared to prior year is due primarily to the cost improvements realized over prior year.
LIQUIDITY AND CAPITAL RESOURCES
We maintain a level of liquidity sufficient to allow us to cover
our cash needs in the short-term. Over the long-term, we manage our cash and capital structure to maintain our financial position
and maintain flexibility for future strategic initiatives. We continuously assess our working capital needs, debt and leverage
levels, capital expenditure requirements, and future investments or acquisitions. We believe our operating cash flows, as well
as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives.
As of June 30, 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 June 30, 2017, we had cash and restricted
cash of approximately $751,000, 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 June 30, 2017, of $390,000 was primarily the
result of cash proceeds received upon the disposition of the CPOC investment of $617,000.
As of June 30, 2017, the Company had total
current assets of $6,476,000 and total current liabilities of $4,181,000 creating working capital of approximately $2,295,000 as
compared to total current assets of $6,013,000 and total current liabilities of $4,065,000 creating working capital of approximately
$1,948,000 at December 31, 2016. The increase in total cash of $390,000 and working capital of $347,000 is primarily due to cash
proceeds received upon the disposition of the Humble pharmacy of $274,000 and disposition of CPOC of $617,000 during the first
quarter of 2017, of which $100,000 of the proceeds were used to pay off a term note with our bank and the remainder was held in
cash. The change in total cash as of June 30, 2017, without the proceeds of $617,000 from the sale of CPOC would have been a decrease
of cash and working capital of $544,000.
The change in cash and cash equivalents is as follows:
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
472
|
|
|
$
|
958
|
|
|
Net provided by (used in) investing activities
|
|
|
818
|
|
|
|
(461
|
)
|
|
Net cash used in financing activities
|
|
|
(900
|
)
|
|
|
(517
|
)
|
|
Net increase (decrease) increase in cash
|
|
$
|
390
|
|
|
$
|
(20
|
)
|
Net cash provided by operating activities
was approximately $472,000 in the six months ended June 30, 2017, compared to $959,000 in the six months ended June 30, 2016. The
decrease of $486,000 was primarily due to changes in accounts receivable of an increase of $320,000 due to a reduction in accounts
receivable related to the decline in revenues discussed above, a decrease of $717,000 due to an increase in accounts payable related
to timing of payment of invoices and a decrease of $89,000 due to other net changes.
Net cash used in investing activities
was approximately $818,000 in the six months ended June 30, 2017, compared to a negative $461,000 in the six months ended June
30, 2016. Cash used to purchase property and equipment was $73,000 for the six months ended June 30, 2017 compared to $461,000
for the prior year. The decrease of $388,000 was primarily due to capital expenditures incurred during the six months ended June
31, 2016 related to the relocation of a pharmacy. For the six months ended June 30, 2017, cash proceeds from the disposition of
the Humble pharmacy were $274,000, and cash provided by the proceeds of the disposition of CPOC was $617,000.
Net cash used in financing activities
was $900,000 in the six months ended June 30, 2017, compared to net cash used in financing activities of $517,000 in the six months
ended June 30, 2016. For the six months ended June 30, 2017, borrowings of $9,426,000 and payments of $9,631,000 were made on the
revolving credit facility; payments of $695,000 were made on notes payable. For the six months ended June 30, 2016, borrowings
of $13,750,000 and payments of $13,662,000 were made on the revolving credit facility; payments of $605,000 were made on notes
payable.
Our principal indebtedness at June 30, 2017,
consists of the following:
|
|
·
|
A number of term notes in favor of Cardinal Health in the aggregate amount of $3,618,000, 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 $3,970,000 on the revolving credit facility, leaving $780,000 available for future borrowings;
|
|
|
·
|
A number of notes payable to sellers of acquired pharmacies in the aggregate amount of $203,000, unsecured, and maturing on or before September 18, 2018.
|
The material terms under these agreements include,
without limitation, notice requirements for certain material events, the provision of periodic financial statements, the maintenance
of certain financial ratios, maintaining certain minimum insurance requirements, as well as restrictions on our ability to incur
additional indebtedness, incur future capital expenditures, as well as restrictions on our ability purchase, create or acquire
any interest in any other pharmacy store or distributing company, or loan, invest in or advance money or assets to any other person,
enterprise or entity for the acquisition of a pharmacy store or distributing company without the prior written consent of the First
National Bank of Omaha.
In addition, the Company may be required to
make payment as a 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. 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, of which $136,000 payments have been made during
2017. The Company has received written assurance that the primary obligors are current in their payment obligations under the promissory
note as of August 1, 2017. The promissory note is collateralized by a property that is currently held for sale, is expected to
sell before the end of the calendar year and for which the proceeds will be sufficient and are expected to be used to pay off the
balance of the promissory note. Upon payment of the promissory note in full, the restricted cash balance of $303,000, for which
the Company was required to provide as escrow, and for which there are no additional escrow provisions, will be released and unrestricted
for use in operations, financing or investing as determined Management. As the co-guarantor, the Company could be liable for the
entire amount of the Guarantee Payment in the event of default, which management deems to be highly unlikely
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 net operating loss 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.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with
GAAP, which requires management to make certain estimates and apply judgment. We base our estimates and judgments on historical
experience, current trends and other factors that management believes to be important at the time the condensed consolidated financial
statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed
consolidated financial statements.
While we believe that the historical experience, current trends
and other factors considered support the preparation of our condensed consolidated financial statements in conformity with GAAP,
actual results could differ from our estimates and such differences could be material.
For a full description of our significant accounting policies, please
refer to the Notes to Consolidated Financial Statements in Item 1.