UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
For the Fiscal Year Ended December 31, 2006
OR
Commission File Number 000-27945
ASCENDANT SOLUTIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware(Mark One)
| | 75-2900905
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(State or other jurisdiction of incorporation or organization)ý
| | (I.R.S. Employer Identification No.)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| | | |
16250 Dallas Parkway, Suite 100, Dallas, TexasFOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
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| OR |
| | 75248
|
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 000-27945
Dougherty’s Pharmacy, Inc.
(Exact name of registrant as specified in its charter)
| DELAWARE | | 75-2900905 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | |
5924 Royal Lane, suite 250
Dallas, Texas | | 75230 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
972-250-0945(972) 250-0945Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value $0.0001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the precedingpast 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuantin response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as definedsmaller 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 Rule 12b-2).
Large accelerated filerAct:| Large Accelerated Filer o | | Accelerated Filer o |
| | |
| Non-Accelerated Filero | | Smaller reporting companyý |
| (Do not check if a smaller reporting company) | | |
| | Emerging growth company o |
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. o
Accelerated filer oNon-Accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the voting stockand non-voting common equity held by nonaffiliatesnon-affiliates of the registrant based uponcomputed by reference to the closing price forat which the registrant’s common stock onequity was last sold, or the OTC Bulletin Board onaverage bid and asked price of such common equity, as of June 30, 2006, the last trading date of registrant's most recently completed second fiscal quarter,2017, was approximately $6,239,000.
At April 9, 2007, 22,558,844$3.3 million.As of March 14, 2018, 23,087,164 shares of registrant’s common stockthe issuer’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement to be filed within 120 days of December 31, 2006 and delivered to stockholders in connection with the Registrant’s 2018 Annual Meeting of Stockholders to be held June 14, 2007 are incorporated by reference into Part III.
ASCENDANT SOLUTIONS, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2006
TableIII of Contents
this Annual Report on Form 10-K.DOUGHERTY’S PHARMACY, INC.
INDEX
PART I.
The following discussion of our business contains forward-looking statements that involve risks and uncertainties. IOur actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limitedBusiness
Dougherty’s Pharmacy, Inc. (“Dougherty’s,” which is also referred to those set forth below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Risk Factors,” and “Other Risks”, as well as elsewhere in this Annual Report on Form 10-K.
BACKGROUND
Ascendant Solutions, Inc. (“Ascendant” we also refer to Ascendant as “we,” “us,” or “the Company”) is a
diversified financial servicesvalue oriented company
which is seekingfocused 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
has investeddistressed U.S. lower middle-market businesses in
or acquired, healthcare,the manufacturing, distribution,
or service,
companies. We also conduct various real estate activities, performhealthcare, 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 and 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
for corporate clients,company that was liquidated on February 7, 2017.Effective December 31, 2013, the Company changed its focus to acquire, manage, and throughgrow 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 purchase real estate assets,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 principal investor.
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 followingflagship store, Dougherty’s Pharmacy, is a summaryturn-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 identifiable business segments, consolidated subsidiariesretail customers’ pharmacy needs and their related business activities:
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.
Business Segment
| Subsidiaries
| Principal Business Activity
|
Healthcare | Dougherty’s Holdings, Inc. and Subsidiaries | Healthcare products and services provided through retail pharmacies, including specialty compounding pharmacy services and home infusion therapy centers |
| | 1 | |
Real estate advisory services | CRESA Partners of Orange County, L.P.,
ASDS of Orange County, Inc.,
CRESA Capital Markets Group, L.P.
| Tenant representation, lease management services, capital markets advisory services and strategic real estate advisory services |
| | |
Corporate & other | Ascendant Solutions, Inc. and
ASE Investments Corporation
| Corporate administration, investments in Ampco Partners, Ltd., Fairways Frisco, L.P. and Fairways 03 New Jersey, L.P. |
During 2002, we madeindependent pharmacies (a) that meet our first investments, andacquisition criteria (“Pharmacy Acquisition Opportunities”), (b) for which we have continuedor can obtain sufficient cash resources to make additional investmentsacquire, and acquisitions throughout 2003, 2004 and 2005. A summary of our investment and acquisition activity is shown in(c) for which we have obtained the table below:
Date
| Entity
| Business Segment
| Transaction Description
| % Ownership
|
April 2002
| Ampco Partners, Ltd
| Corporate & other
| Investment in a non-sparking, non-magnetic safety tool manufacturing company
| 10%
|
August 2002
| VTE, L.P.
| Corporate & other
| Investment to acquire early stage online electronic ticket exchange company
| 23%
|
October 2002
| CRESA Capital Markets Group, L.P.,
ASE Investments Corporation
| Real estate advisory services
| Investment to form real estate capital markets and strategic advisory services companies
| 80%
|
November 2003
| Fairways 03 New Jersey, L.P.
| Corporate & other
| Investment in a single tenant office building
| 20%
|
March 2004
| Dougherty’s Holdings, Inc. and Subsidiaries
| Healthcare
| Acquisition of specialty pharmacies and infusion therapy centers
| 100%
|
April 2004
| Fairways 36864, L.P.
| Corporate & other
| Investment in commercial real estate properties
| 24.75%
|
May 2004
| CRESA Partners of Orange County, L.P., ASDS of Orange County, Inc. | Real estate advisory services
| Acquisition of tenant representation and other real estate advisory services company
| 99%
|
December 2004
| Fairways Frisco, L.P.
| Corporate & other
| Investment in a mixed-use real estate development
| 8.87%
|
These transactions and the business activity of our business segments are discussed in more detail below under “Description of Business Segments”. Also, certain of these transactions involved related parties or affiliates as more fully described in Note 16prior written consent of the Ascendant Consolidated Financial Statements.
Below. 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 summary of our investment portfolio performance by segment on a cash basis through December 31, 2006:
| | | Cumulative | | Cumulative | | Cumulative | |
| | | Cash | | Realized Cash | | Realized Cash | |
Segment | | Investments | | Returns | | Returns % | |
| | | | | | | | | | | |
| Healthcare | | $ | 1,500,000 | | $ | 812,000 | | | 54 | % |
| Real Estate Advisory Services | | | 64,000 | | | 1,434,000 | | | 2,241 | % |
| Corporate & Other | | | 1,992,000 | | | 2,310,000 | | | 116 | % |
| | | $ | 3,556,000 | | $ | 4,556,000 | | | 128 | % |
We face all of the risks of a business with limited capital, the special risks inherentsignificant factor in the acquisition or involvement in each of our particular new business opportunities,independent pharmacy owners’ decision whether to sell, and the added risks associated with the management of diverseto whom to sell, their existing businesses. There can be no assurances that our current or future investments or acquisitions will produce cash results similar to those shown in the table above.
Our future acquisition criteria when evaluating Pharmacy Acquisition Opportunities, may include, but not necessarily be limited to, the following criteria:
| · | Annual revenues of $5-100 million$5-10 million; |
| · | Stable history of profitability and positive cash flow with minimum EBITDA of $1 millionflow; |
| · | Strong management team committed to the businessbusiness; |
| ·Leadership | Established location and customer base; |
| · | Single and or proprietary position in either product line, technology, manufacturing, service offering or distributionmultiple store operations; and |
| ·Opportunity to grow internally and/or through strategic add-on acquisitions |
·Diversified customer base and product line
|
·Businesses, or situations, where we can most effectively deploy our net operating loss carryforwards
carryforwards. |
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 opportunities,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 andlimited. Therefore, we will be required to expend significant executive time to assistclose any purchase of a Pharmacy Acquisition and to handle the transition of ownership and the on-going management of our acquired businesses.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 acquisitionPharmacy Acquisition Opportunities.
Industry Overview
The pharmacy industry is highly competitive and investing opportunities.
In ourhas 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
acquisition efforts, we will not limit ourselves to a particular industry. At this time, alldevelopment of
our business is conducted withininnovative drugs that improve quality of life and control healthcare costs, and increases in the
United States. Most likely, the target business will continue to be primarily locatednumber of persons with insurance coverage for prescription drugs, including, in the United States,
although we may acquirethe 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
target businessvital 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 operations and/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 locations outsidereduce 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 seeking a target business, we will consider, without limitation, businesses (i) that offersome cases, these possible adverse effects may be partially or provideentirely offset by controlling inventory costs and other expenses, dispensing more higher margin generics, finding new revenue streams through pharmacy services or develop, manufacture other offerings and/or distribute productsdispensing 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 United States or abroad; or (ii)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 are engaged in wholesale or retail distribution among other potential target business opportunities and/or where our tax loss carryforwardsundergo a conversion from branded to generic status can vary and the timing of generic conversions can be utilized effectively. difficult to predict, which can have a significant impact on retail pharmacy sales and gross profit dollars.
We may also co-invest in certain real estate transactions along with Fairways Equities, LLC (“Fairways Equities”) or its principals.
We have acquired,expect that market demand, government regulation, third-party reimbursement policies, government contracting requirements and
may acquire inother pressures will continue to cause the
future, minority or other non-controlling investments in other companies or businesses. However, we do not intend to engage primarily in acquiring minority investments, as we prefer to control the businessesindustry in which we
invest. Specifically,compete to evolve. Pharmacists are on the frontlines of the healthcare delivery system, and we
intendbelieve rising healthcare costs and the limited supply of primary care physicians present new opportunities for pharmacists and retail pharmacies to
conductplay 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 activities socontrol 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 2017 as compared to avoid being classified as an “investment company”the same period in the prior year. Further, we accepted lower Medicare Part D reimbursement rates for fiscal 2017 compared to fiscal 2016 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 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 in 2018 we received, 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. We had no prepayment liabilities under the Investment Company Act of 1940,2017 advance. Alternative sources for most generic and therefore avoid application of the costlybrand name pharmaceuticals we sell are readily available, and, restrictive registrationif necessary, we believe that we could obtain and other provisions of that Act. We do not believe we are currently an “investment company.”
However, if in the future more than 40% of our assets are comprised of “investment securities” (which are generally, non-government securities other than securities of majority-owned and certain other controlled companies) we would, subject to certain transitional relief, be required to register as an investment company, which would involve our incurring significant registration and compliance costs under the Investment Company Act. We have obtained no formal determination nor have we requested any ruling or interpretation from the Securities and Exchange Commission as to our status or potential status under the Investment Company Act of 1940. Any violation by us of the Investment Company Act, whether intentional or inadvertent, could subject us to material adverse consequences.
Description of Business Segments
Information regarding the financial condition of each of the Company’s business segments can be found in the Company’s Consolidated Financial Statements in Item 8.
Healthcare Segment
Dougherty’s Holdings, Inc.
Description of Acquisition
On March 24, 2004, we acquired, throughqualify for a
newly formed wholly-owned subsidiary Dougherty’s Holdings, Inc. (“DHI”),comparative agreement with another national primary vendor for substantially all of the
assetsprescription 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
Park Pharmacy Corporation (the “Park Assets”) pursuantoperations. 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 First Amended Planwinter 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 Reorganization under Chapter 11Financial Condition and Results of Operations below.
Customers
We sell primarily to retail customers. No single customer accounted for more than 10% of the United States Bankruptcy Code Proposed by Park Pharmacy Corporation Inc.Company’s consolidated sales for any of the periods presented. No single payor accounted for more than 10% of retail prescription revenues in fiscal 2017.
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 Companysubmission of false claims; the Health Insurance Portability and Accountability Act (“Joint Plan”HIPAA”); the ACA; licensure and registration requirements concerning the operation of pharmacies and the Asset Purchase Agreement (the “Agreement”) entered into December 9, 2003 between Park Pharmacypractice of pharmacy; and DHI. Park Pharmacy had been operating as a debtor in possession since December 2, 2002. The purchased assets included allregulations of the cashU.S. Food and certain other assets of Park PharmacyDrug Administration, the U.S. Federal Trade Commission, the U.S. Drug Enforcement Administration and all equity interests of the following entities (each directly or indirectly wholly-ownedU.S. Consumer Product Safety Commission, as well as regulations promulgated by Park Pharmacy): (i) Dougherty’s Pharmacy, Inc., (ii) Park Operating GP, LLC, (iii) Park LP Holdings, Inc., (iv) Park-Medicine Man GP LLC (v) Park Infusion Services, L.P.,comparable state and (vi) Park-Medicine Man, L.P.
We acquiredlocal governmental authorities concerning the
Park Assets by investing, through DHI, an aggregate of approximately $1.5 million in cash, funded outoperation 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 capital,conditions, health and the assumption by DHI of approximately $6.3 million in debt associated with the Park Assets.
safety and equal employment opportunity. In connection with the acquisitionoperation of our business, we are subject to laws and regulations relating to the protection of the Park Assets, DHI also entered into a new credit facility with Bank of Texas, the prior lenderenvironment and health and safety matters, including those governing exposure to, Park Pharmacy Corporation. This facility provided for three notes, aggregating approximately $5.5 million. Each note bears interest at six percent and matures in three years. DHI is obligated to make monthly payments (consisting of both interest and principal payments, as applicable) to the bank of approximately $56,000. This credit facility was secured by substantially all of the assets of DHI, including the stock of its operating subsidiaries. This credit facility was paid in full in February 2007.
On February 20, 2007, Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP, each a wholly-owned subsidiary of DHI, entered into a loan agreement with Amegy Bank National Association (“Amegy Bank”) for a $2,000,000 revolving line of credit and a $2,200,000 term loan. Substantially all of the proceeds from the revolving line of credit and the term loan were used to retire the outstanding balance owed to Bank of Texas, N.A. under an existing credit facility. Please see Note 10 of the Ascendant Consolidated Financial Statements contained herein.
In connection with the acquisition of the Park Assets, DHI entered into a three year supply agreement with AmerisourceBergen Drug Corporation (“AmerisourceBergen”) pursuant to which DHI and our newly acquired indirect subsidiaries agreed to purchase prescription and over-the-counter pharmaceuticals from AmerisourceBergen through March 2007. This supply agreement provided us with pricing and payment terms that were improved from those previously provided by AmerisourceBergen to Park Pharmacy.
In exchange for these improved terms, DHI agreed to acquire 85% of its prescription pharmaceuticals and substantially all of its generic pharmaceutical products from AmerisourceBergen and agreed to minimum monthly purchases of $900,000 of all products in order to obtain new favorable pricing terms. AmerisourceBergen was a creditor of the operating non-debtor subsidiaries and, in connection with the Chapter 11 bankruptcy proceeding, AmerisourceBergen agreed to accept a cash payment of approximately $1.1 million and a promissory note in the amount of approximately $750,000 payable by DHI over a period of five years, using a 15-year amortization schedule and an interest rate of six percent with the last payment being a balloon payment of the outstanding principal and accrued but unpaid interest.
As of November 30, 2006, DHI entered into Amendment No. 1 (“Amendment”) to the supply agreement. The Amendment extends the supply agreement from March 24, 2007 to March 24, 2009. In addition, the Amendment (1) improves the pricing of goods purchased, (2) changes the minimum order volume from $30,000,000 to $50,000,000 over the life of the Agreement and (3) the percentage of generic drug purchases was changed from 2.50% to 6.0%. The Amendment also allows for the return of goods, in a saleable condition, within 180 days of the invoice date without a restocking fee and provides for a termination fee if DHI terminates the supply agreement before the expiration of the term of the agreement. The termination fee is a maximum of $50,000 but is reduced for each full month from December 1, 2006 until the date of termination. However, there is no termination fee if the minimum order volume has been satisfied. At December 31, 2006, DHI believes it has satisfied the minimum order volume.
The Amendment also provides for a rebate in the amount of $150,000 representing a 15.0% volume discount off the price of goods for the first $1,000,000 of net purchases purchased in the period after November 1, 2006 providing that DHI makes net purchases in excess of $1 million after November 1, 2006. In December 2006, DHI satisfied the net purchase requirement and received the $150,000 rebate.
The table below shows the balances of the debt assumed at the time of acquisition and as of December 31, 2006:
| | | | | | | Balance at | |
| | | Balance at | | Principal | | December 31, | |
| | | Acquisition | | Payments | | 2006 | |
| | | | | | | | |
| Bank of Texas Credit Facility * | | $ | 5,579,000 | | $ | (1,364,000 | ) | $ | 4,215,000 | |
| AmerisourceBergen Note | | | 750,000 | | | (92,000 | ) | | 658,000 | |
| Total debt assumed | | $ | 6,329,000 | | $ | (1,456,000 | ) | $ | 4,873,000 | |
* This facility has been replaced as of February 20, 2007 with a $2,000,000 revolving line of credit and a $2,200,000 term loan from Amegy Bank.
Description of Business
Dougherty’s Pharmacy
Dougherty’s Pharmacy is a turn-key multi-service pharmacy located in a highly prestigious area of Dallas. Centrally located, Dougherty’s continues to provide a level of service not provided by national pharmacy chain stores. We fulfill 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 customers’ pharmacy needs. 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 include durable medical equipment and its home healthcare and other pharmacy services. 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.
Medicine Man Pharmacies
Medicine Man Pharmacies operates three community pharmacies in a market south of Houston, Texas. Medicine Man Pharmacies started business in 1966, and it focuses on offering patient pharmacy care on a very personalized and individual basis. In addition to filling prescriptions, the Medicine Man Pharmacies also offer specialized Diabetic care departments; services in nutritional and homeopathic treatment, and carry an extensive line of vitamins. Two of the Medicine Man Pharmacies stores contain compounding labs to provide specialization in prescriptions for patients that have needs other than those readily available in manufactured versions. Like Dougherty’s Pharmacy, Medicine Man Pharmacies provide a high level of customer service and solutions for customer’s pharmacy needs that are typically absent in national pharmacy chain stores.
Park InfusionCare
Park InfusionCare is a specialty pharmacy company which specializes in full service home infusion therapy offering full nursing and pharmacy services for home infusion therapies. The infusion therapies include antibiotics, total parenteral nutrition, intravenous immunoglobulin and other intravenous therapies. The primary business referral sources include case managers from hospitals, insurance carriers as well as doctors, home health agencies and nursing homes. Park InfusionCare has three offices located in Dallas, Houston and San Antonio. Park InfusionCare’s business territory includes most of Texas. All three offices have infusion suites located in each office for the convenience of our clientele. The Dallas and San Antonio offices have been in business for over 10 years, whereas the Houston office began operations in January 2003.
As disclosed in a Current Report on Form 8-K filed on May 24, 2006, the board of directors decided to retain the operations of Park InfusionCare, which had previously been reported as a discontinued operation while the Company was pursuing a potential disposition or strategic transaction for its infusion therapy business. In connection with the decision to retain the operations of Park InfusionCare, DHI entered into an employment agreement on May 18, 2006 with Scott R. Holtmyer to be the Vice President of its Park InfusionCare infusion therapy business. As a result of the board of director’s decision to retain the operations of Park InfusionCare, the Company has reported the operating results of Park InfusionCare as part of continuing operations.
Real Estate Advisory Services Segment
CRESA Capital Markets Group, L.P.
In 2002, the Company formed a capital markets subsidiary, CRESA Capital Markets Group, L.P., (“Capital Markets”) and entered into a licensing and co-marketing agreement with CRESA Partners LLC, a national real estate services firm. Jim Leslie, our Chairman, also serves as an advisor to the Board of Directors of CRESA Partners, LLC. Kevin Hayes, Chairman of our consolidated subsidiary CRESA Partners of Orange County, LP, also served as the Chief Executive Officer of CRESA Partners, LLC from October 2005 to September 2006.
Capital Markets provides real estate financial advisory services and strategic real estate advisory services to corporate clients on a fee basis. These services include, but are not limited to, analysis, consulting, acquisition and/or disposition of property, capital placement and acquisition, contract negotiation, and other matters related to real estate finance. Capital Markets is accounted for as a consolidated entity in our consolidated financial statements.
We own 80% of Capital Markets through our 80% ownership of ASE Investments Corporation (“ASE Investments”) and our 100% ownership of Ascendant CRESA LLC, which is the 0.1% general partner in Capital Markets. ASE Investments owns the 99.9% limited partnership interest of Capital Markets. The remaining 20% of Capital Markets and ASE Investments is owned, directly or indirectly, by Brant Bryan, Cathy Sweeney and David Stringfield, who are principals in Capital Markets and shareholders in the Company.
Effective September 1, 2005, Capital Markets entered into an advisory services agreement with Fairways Equities (see below for more details on Fairways Equities) whereby Fairways Equities will provide all of the professional and administrative services required by Capital Markets. In exchange, Capital Markets will pay Fairways Equities an administrative fee of 25% of gross revenues and a compensation fee of 40% of gross revenues, as compensation to the principals working on the transaction that generated the corresponding revenues. Under the terms of the agreement, Fairways Equities assumed all of the administrative expenses, including payroll, of CRESA Capital Markets. Fairways Equities will only receive payments under the agreement if its principals close a real estate capital markets advisory transaction that generates revenue for Capital Markets. The impact of this agreement on Capital Markets is that it will have no administrative expenses or cash requirements unless it closes a revenue generating transaction. The principals in Capital Markets are also the four members of Fairways Equities. During the years ended December 31, 2006 and 2005, Capital Markets paid approximately $262,000 and $233,000, respectively of compensation fees to Fairways Equities under the advisory services agreement.
CRESA Partners of Orange County, L.P.
Description of Acquisition
Effective May 1, 2004, we acquired through ASDS of Orange County, Inc. (“ASDS”) all of the issued and outstanding stock of CRESA Partners of Orange County, Inc., a California corporation f/k/a The Staubach Company - West, Inc. (“CPOC”), pursuant to the Stock Purchase Agreement dated March 23, 2004 between Kevin Hayes, the sole stockholder of CPOC (the “Seller”), and ASDS for $6.9 million, plus closing costs. CPOC is located in Newport Beach, California and provides tenant representation services to commercial and industrial users of real estate, which include strategic real estate advisory services, lease management services, facility and site acquisition and disposition advice; design, construction and development consulting; and move coordination.
Pursuant to the terms of the Stock Purchase Agreement, the purchase price was paid pursuant to the terms of a $6.9 million promissory note (the “Acquisition Note”) payable to the Seller. The Acquisition Note was secured by a pledge of all of the personal property of CPOC, bears interest payable monthly at the prime rate of Northern Trust Bank plus 0.50% per annum, with principal generally payable quarterly in arrears over a three year period from the excess cash flow of ASDS, as defined, and was guaranteed by the Company. The then outstanding principal balance of the Acquisition Note was payable in full on May 1, 2006.
In June 2006, ASDS entered into a credit agreement with First Republic Bank for a $5.3 million term note and CPOC entered into a $500,000 revolving line of credit. The term note is being guaranteed by CPOC. The term note and revolving line of credit are also being personally guaranteed, subject to certain limits, by certain officers and minority limited partners of CPOC. The proceeds from the term note were used to retire the outstanding balance owed to Kevin Hayes under the Acquisition Note. The Acquisition Note was retired at a discount of approximately $100,000 to its outstanding principal balance of $ 5,400,000. Please see Note 10 of the Ascendant Consolidated Financial Statements contained herein.
The purchase price was subject to adjustment downward (by an amount not to exceed $1.9 million) to reflect the operating results of CPOC during the four year period ending December 31, 2007 if CPOC’s revenues are less than an aggregate of $34.0 million during such period. From the date of acquisition on May 1, 2004 through December 31, 2006, CPOC’s cumulative revenues were $35,565,000. As a result, there will be no adjustment to the purchase price.
Following the acquisition of CPOC, ASDS contributed the assets and liabilities of CPOC to CRESA Partners of Orange County, LP (the “Operating LP”) that is owned jointly by (i) CRESA Partners-Hayes, Inc., a California corporation f/k/a The Staubach Company of California, Inc. that is the general partner of the Operating LP (the “General Partner”), (ii) ASDS, a limited partner of the Operating LP, (iii) the Seller, a limited partner of the Operating LP, and (iv) a Delaware limited liability company controlled by the management and
key employeesdisposal of,
CPOC that ishazardous substances.Environmental protection requirements did not have a limited partner of the Operating LP (the “MGMT LLC”).
The General Partner is controlled by the management and key employees of CPOC. ASDS is entitled to receive 99% of the profits of the Operating LP until such time as ASDS has received cumulative distributions from the Operating LP equal to the Purchase Price plus a preferential return of approximately $1.7 million (total distributions equal to $8.6 million), at which time the allocation of the profits of the Operating LP shall become: 79.9% to MGMT LLC, 10% to ASDS, 10% to the Seller and 0.1% to the General Partner.
The following is a summary of distributions received by ASDS from the Operating LP and the use of those distributions:
| | | | | | | Acquisition | | | |
| | | Year Ended | | Year Ended | | Date to | | | |
| | | December 31, | | December 31, | | December 31, | | Total | |
| | | 2006 | | 2005 | | 2004 | | Distributions | |
| | | | | | | | | | | | | | |
| Interest payments on Acquisition Note | | $ | 201,000 | | $ | 480,000 | | $ | 211,000 | | $ | 892,000 | |
| Principal payments on Acquisition Note | | | 6,082,000 | | | 718,000 | | | - | | | 6,800,000 | |
| Proceeds from First Republic Bank note | | | (5,300,000 | ) | | - | | | - | | | (5,300,000 | ) |
| Interest payments on First Republic Bank note | | | 223,000 | | | - | | | - | | | 223,000 | |
| Principal payments on First Republic Bank note | | | 900,000 | | | - | | | - | | | 900,000 | |
| Total distributions received | | $ | 2,106,000 | | $ | 1,198,000 | | $ | 211,000 | | $ | 3,515,000 | |
The table below shows the balances of the debt assumed at the time of acquisition and as of December 31, 2006:
| | | Balance at | | Proceeds from | | Principal | | Principal | | December 31, | |
| | | Acquisition | | Notes Payable | | Payments | | Discount | | 2006 | |
| | | | | | | | | | | | |
| Acquisition Note | | $ | 6,900,000 | | $ | - | | $ | (6,800,000 | ) | $ | (100,000 | ) | $ | - | |
| First Republic Bank term note | | | - | | | 5,300,000 | | | (900,000 | ) | | - | | | 4,400,000 | |
| Line of credit & note payable to related party | | | 1,000,000 | | | - | | | (1,000,000 | ) | | - | | | - | |
| Total debt assumed | | $ | 7,900,000 | | $ | 5,300,000 | | $ | (8,700,000 | ) | $ | (100,000 | ) | $ | 4,400,000 | |
In connection with the acquisition of CPOC, the Company was entitled to receive a structuring fee of $690,000, plus interest thereon, of which $230,000 was paid at closing and $230,000 was paidmaterial effect on May 1, 2005. The remainder of $230,000, plus interest thereon was paid on May 1, 2006. The structuring fee has been eliminated in the consolidation of the Company with CPOC and the Operating LP in the consolidated financial statements of the Company.
Theour results of operations
of the Operating LP will be consolidated with ASDS and ultimately the Company,or capital expenditures in
accordance with FIN 46R “Consolidation of Variable Interest Entities”, until such time that ASDS has received cumulative distributions equal to the Purchase Price plus a preferential return of approximately $1.7 million (total distributions of $8.6 million). When and if the total distributions equal to $8.6 million are fully paid, our residual interest will become 10% and the principles of consolidation for financial reporting purposes will no longer be satisfied under FIN 46Rfiscal 2016 or
APB 18, “Equity Method for Investments2017.Competitive conditions
The industry in Common Stock”. Accordingly,which we would no longer consolidate the results of operations of the Operating LPoperate is highly competitive, and we would instead record our share of income from the Operating LP as “Investment Income” in our consolidated statements of income.
Description of Business
CPOC provides performance based corporate real estate advisory services to corporate clients around the United States. CPOC specializes in reducing corporate costs through deployment of seasoned professionalscompete with proven expertise in a broad range of integrated real estate services.
CPOC provides real estate services such as:
Strategic Planning - includes defining corporate goals, analysis of marketvarious local, regional, national pharmacy companies, including chain and trends, demographicindependent pharmacies, mail order prescription providers, grocery stores, convenience stores, mass merchants, online and labor studies, operating expense auditsomni-channel pharmacies and formulation of strategic options
Tenant Representation - management of tenant lease acquisitions and renewals, building purchases, and negotiations on behalf of tenant clients
Business and Economic Incentives - includes identification of incentive opportunities, cost/benefit analysis, negotiation of incentives, documentation and implementation of incentive strategies and ongoing administration of incentive packages
Compliance Audits- operating expense and lease compliance audits designed to minimize tenant costs that are not in compliance with negotiated lease terms
Project Management - management of various projects including building evaluation, space use plans, architect selection, development management and cost forecasts
Financing & Capital Markets - advisory services related to sale/leaseback transactions, purchase financing, real estate debt restructuring and real estate debt sourcing
Lease Portfolio Management - provides systems to manage client lease transactions and real estate portfolios including information tracking, workflow management, document management and portfolio reporting
CPOC competes on a local and national level with other real estate services firms that provide similar services, including Trammell Crow, Cushman & Wakefield, CB Richard Ellis, Voit Commercial, Grubb & Ellis and Lee & Associates.
The table below summarizes CPOC’s transaction activity for the years ended December 31, 2006, December 31, 2005 and for the period from the date of acquisition on May 1, 2004 to December 31, 2004:
| | | Year Ended | | Year Ended | | Acquisition Date | |
| | | December 31, 2006 | | December 31, 2005 | | to December 31, 2004 | |
| | | | | Approximate | | | | Approximate | | | | Approximate | |
| | | No. of | | Transaction | | No. of | | Transaction | | No. of | | Transaction | |
| | | Transactions | | Value | | Transactions | | Value | | Transactions | | Value | |
| Revenue | | | | | $ | 13,531,000 | | | | | $ | 13,176,000 | | | | | $ | 8,858,000 | |
| Lease transactions | | | 229 | | $ | 333 million | | | 229 | | $ | 432 million | | | 200 | | $ | 335 million | |
| Real estate sales transactions | | | 7 | | $ | 10 million | | | 10 | | $ | 44 million | | | 7 | | $ | 25 million | |
| Project management transactions | | | 71 | | $ | 85 million | | | 50 | | $ | 79 million | | | 60 | | $ | 45 million | |
In March 2006, CPOC purchased a minority interest of approximately 2.7% in CRESA Partners, LLC, a national real estate services firm. The amount paid for this investment was $160,000 and is accounted for under the cost method of accounting for investments. CPOC is a licensee of CRESA Partners, LLC. Jim Leslie, the Company’s Chairman, serves as an advisor to the Board of Directors of CRESA Partners, LLC and Kevin Hayes, Chairman of CPOC, served as the Chief Executive Officer of CRESA Partners, LLC from October 2005 to September 2006.
Corporate and Other Segment
Our Corporate and Other Segment includes our corporate and administrative activities as well as other investments that are not included in the Healthcare or Real Estate Advisory Services segments. Our corporate and administrative activities include finance and accounting, insurance and risk management, review of investment opportunitiesretailers, warehouse clubs, dollar stores and other
advisory services to our subsidiariesdiscount merchandisers.Intellectual Property; Research and affiliates. We receive a management fee from certain of our subsidiaries in exchange for these services.
During the years ended December 31, 2006 and 2005, we received approximately $343,000 and $315,000, respectively, of management fees which have been eliminated in the consolidated financial statements contained herein. We also receive periodic dividends or interest payments from one of our subsidiaries, which amounted to $112,000 in each of the years ended December 31, 2006 and 2005, respectively which have also been eliminated in consolidation.
Other investments which are not included in the Healthcare or Real estate advisory services segments are described below.
Ampco Partners, Ltd.
In 2002, we invested $400,000 for a 10% limited partnership interest in Ampco Partners, Ltd. (“Ampco”), a newly formed entity, which acquired the assets and intellectual property of the Ampco Safety Tools division of Ampco Metals Incorporated of Milwaukee, Wisconsin in a Chapter 11 bankruptcy proceeding. Ampco Safety Tools, founded in 1922, is a leading manufacturer of non-sparking, non-magnetic and corrosion resistant safety tools. These tools are designed to meet Occupational Safety and Health Administration and National Fire Protection Association requirements for use in locations where flammable vapors of combustible residues are present. Safety tools are used in industrial applications, primarily in manufacturing and maintenance operations. We receive quarterly distributions based upon 10% of Ampco’s reported quarterly earnings before interest, taxes, depreciation and amortization expense, or EBITDA. Our investment in Ampco is accounted for under the equity method. We recognize our proportionate share of Ampco’s net income, as “Equity in income (losses) of equity method investees” in the consolidated statements of income. If we receive distributions in excess of our equity in earnings, they are accounted for as a reduction of our investment in Ampco.
In June 2006, the Company entered into a term loan agreement with Ampco for a $500,000 demand note. The proceeds from the demand note were used for general working capital purposes. The demand note bears interest at the prime rate plus 4.00% per annum. The Company’s quarterly partnership cash distributions from Ampco are being, and will continue to be, applied to the interest and principal balances owed on the demand note. The remaining outstanding balance of the demand note is due on the earlier of demand or June 13, 2009. The demand note is secured by the Company’s limited partnership interest in Ampco
Our distributions from Ampco for the years ending December 31 are as follows:
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Equity in income (losses) of equity method investees | | $ | 96,000 | | $ | 100,000 | | $ | 82,000 | |
| Return of capital | | | 48,000 | | | 14,000 | | | 29,000 | |
| Payments on demand note | | | (60,000 | ) | | - | | | - | |
| Total distributions received | | $ | 84,000 | | $ | 114,000 | | $ | 111,000 | |
Fairways Equities, LLC
During the fourth quarter of 2003, we entered into a participation agreement (the “Participation Agreement”) with Fairways Equities LLC (“Fairways”), an entity controlled by Jim Leslie, our Chairman, and Brant Bryan, Cathy Sweeney and David Stringfield who are principals of Capital Markets and shareholders of the Company (“Fairways Members”), pursuant to which we will receive up to 20% of the profits realized by Fairways in connection with certain real estate acquisitions made by Fairways. Additionally, we will have an opportunity, but not the obligation, to invest in the transactions undertaken by Fairways, through our 80% owned subsidiary, ASE Investments. Our profit participation with Fairways was subject to modification or termination by Fairways at the end of 2005 in the event that the aggregate level of cash flow (as defined in the Participation Agreement) generated by our acquired operating entities did not reach $2 million for the twelve months ended December 31, 2005. For the twelve months ended December 31, 2005, the Company did not meet this cash flow requirement: however, there has been no action taken by the Fairways Members to terminate the Participation Agreement.
The Company is currently negotiating with the Fairways Members to modify the Participation Agreement, however, there can be no assurances that a mutually acceptable modification can be reached. We are unable to determine what real estate Fairways may acquire or the cost, type, location, or other specifics about such real estate. There can be no assurances that we will be able to generate the required cash flow to continue in the Participation Agreement after 2006, or that Fairways will be able to acquire additional real estate assets, that we will choose to invest in such real estate acquisitions or that there will be profits realized by such real estate investments. We do not have an investment in Fairways, but rather a profits interest through our Participation Agreement.
Fairways 03 New Jersey, LP
During December 2003, we made a capital contribution of $145,000 to Fairways 03 New Jersey, LP (“Fairways NJ”) which, through a partnership with an institutional investor, acquired the stock of a company whose sole asset was a single tenant office building and entered into a long-term credit tenant lease with the former owner of the building.
In December 2003, subsequent to the closing of this transaction, our capital contribution of $145,000 was distributed back to us. The Company received a distribution of approximately $680,000 on December 30, 2005 from Fairways NJ, which represented the Company’s share in the profit from the sale of a single tenant commercial real estate property interest, the sole asset held by Fairways NJ. In addition to the distribution, cash of $162,000, representing the Company’s share of the total escrow, was being held in escrow to fund any amounts owed by Fairways NJ to the purchaser, including any amounts owed for the representations and warranties made under the sale agreement. The balance of the escrow account was released in December 2006. Since the date of the property interest acquisition, the Company has received cumulative cash distributions of approximately $1,448,000 on its initial investment of $145,000 in Fairways NJ.
Fairways 36864, LP
In April 2004, we invested approximately $97,000 through ASE Investments for a 24.75% interest in Fairways 36864, LP, (whose other partners also included the Fairways Members) that participated in the development of and leaseback of single tenant commercial properties. In August and October 2004 these properties were sold and we recognized investment income of $84,000 in addition to the return of our original investment of $97,000.
Fairways Frisco, LP
On December 31, 2004, Fairways Frisco, L.P. (“Fairways Frisco”) acquired certain indirect interests in various partnerships (the “Frisco Square Partnerships”) that own properties (the “Properties”) in the Frisco Square mixed-use real estate development in Frisco, Texas. Frisco Square is planned to include approximately 4 million developed square feet, including retail, offices, hotel, multi-family residences and municipal space.
Under the terms of the amended Frisco Square Partnerships agreements, Fairways Equities is the sole general partner of the Frisco Square Partnerships and controls all operating activities, financing activities and development activities for the Frisco Square Partnerships.
As further described herein, the Company holds a limited partnership interest in Fairways Frisco. The Company is not involved in the development or management of Frisco Square; rather it is solely a limited partner. DevelopmentThe Company has invested $1,219,000 of cash into Fairways Frisco as of December 31, 2006. The Company has made no additional capital contributions subsequent to December 31, 2005. Fairways Frisco made two capital calls in 2006, which were not funded by the Company and thus diluted the Company’s limited partnership interest from 14% at December 31, 2005 to approximately 8.87% as of December 31, 2006. As of April 7, 2007, the general partner of the Frisco Square Partnerships indicated that they would be makingobtained a capital call of the limited partners in the amount of $4 million, the exact terms of which are currently being negotiated. The Company will not participate in this capital call. If this capital call is fully funded, the Company‘s limited partnership interest will be reduced.
Fairways Frisco is expected to request additional capital contributions from the limited partners. At present, the Company does not intend to fund any additional capital requested from Fairways Frisco. The Company expects its limited partnership interest will be reduced further as additional limited partner contributions are received and the Company does not fund its limited partnership share of such capital contributions into Fairways Frisco. As of December 31, 2006, Fairways Frisco owned, either directly or indirectly, 60% of the Frisco Square Partnerships and the remaining 40% is owned by CMP Family Limited Partnership (“CMP”), which is controlled by Cole McDowell. Under the terms of the amended Frisco Square Partnerships, Fairways Frisco also has a first priority distribution preference of $5.5 million, and it will receive its pro-rata partnership interest of the next $9.5 million of distributions from the Frisco Square Partnerships.
The table below summarizes the Frisco Square property partnerships as of December 31, 2006 and their respective appraised values and bank debt outstanding (the appraisals were performed by an independent third-party appraiser):
| | | | | (In millions) | |
Frisco Square Partnerships | | Property | | Appraised Value | | Bank Debt | | Net Appraised Value | |
| | | | | | | | | | |
| Frisco Square B1-6 F1-11, Ltd. | | 155,000 sf apartments/retail | $ | 22.0 | | $ | 17.3 | | $4.7 |
| Frisco Square B1-7 F1-10, Ltd. | | 61,400 sf office/retail | | 15.1 | | | 8.9 | | 6.3 |
| Frisco Square Properties, Ltd. | | 2.1 acres/undeveloped lots | | 3.3 | | | 2.0 | | 1.3 |
| Frisco Square Land, Ltd. | | 48.7 acres/undeveloped land | | 49.9 | | | 26.6 | | 23.2 |
| | | | | | | | | | |
Total | | | $ | 90.3 | | $ | 54.8 | | $35.5 |
Fairways Frisco’s share of the net appraised value in the table above would be approximately $30.9 million based upon the distribution terms and preferences in the Frisco Square Partnerships partnership agreements. The Company’s share of this amount would be approximately $2.5 million based on its ownership of 8.87% of the limited partnership interests at December 31, 2006. The net appraised value in the table above is based on an appraisal performed by an independent third party which is provided annually to its partners by the Frisco Square Partnerships pursuant to their partnership agreements. There can be no assurance that the real property held by the Frisco Square Partnerships could be sold at the net appraised value. The marketability and value of each property will depend upon many factors beyond our control and beyond the control of the Frisco Square Partnerships. Since investments in real property are generally illiquid, there is no assurance that there will be a marketregistered service mark for the Frisco Square Partnerships properties. Furthermore, the Company’s partnership interest in Fairways Frisco is illiquid and represents a minority interest in Fairways Frisco, which mayDougherty’s Pharmacy name to protect its branding, but otherwise has no material intellectual property necessary for our current operations, through copyright or may not be valued according to the liquidation value of the Frisco Square Partnerships. Any additional financing obtained by the Frisco Square Partnerships will, in all likelihood, further dilute the Company’s interest in Fairways Frisco.otherwise. The Company has not,
guaranteed any of the debt of the Frisco Square Partnerships or Fairways Frisco, L.P. The Company isand does not
involved with any management, financing or other operating activities of the Frisco Square Partnerships or Fairways Frisco. However, in May 2005, the Company entered into an agreement with Fairways Equities, pursuantexpect to,
which the Company is entitled to receive 25% of the fees paid to Fairways Equities pursuant to the Fairways Frisco partnership agreement. These fees, including a monthly management fee, represent compensation to the Company for supplying resources to execute the initial transaction with the Frisco Square Partnerships in December 2004. During the years ended December 31, 2006make expenditures on research and
2005, the Company received fees allocated from Fairways Equities of $28,000 and $64,000, respectively under this agreement. Fairways Frisco is currently negotiating with lenders to modify or extend certain bank loans which are reflected as current liabilities at December 31, 2006.development efforts.
Please see Note 2 of the Ascendant Consolidated Financial Statements contained herein and the audited consolidated financial statements of Fairways Frisco, L.P. and Subsidiaries for the years ended December 31, 2006 and 2005 filed hereto as Exhibit 99.8.
We had the following full time and part-time employees as of December 31, 2006:
2017:Business Segment
| | Full-Time Employees | |
Healthcare | | | 13094 | |
Real estate advisory servicesPart-Time Employees | | | 23 | |
Corporate and other | | | 211 | |
| Total Employees | | | 155105 | |
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.
Available Information
We need significant amounts of cash to service our debt. If we are unable to generate sufficient cash to service our debt, our liquidity, financial condition and results of operations could be negatively affected.
Our business requires us to rely on cash flow from operations and our debt agreements as our primary sources of funding for our liquidity needs. As of December 31, 2017, our outstanding debt totaled $7.4 million and our unrestricted cash totaled $86,000. Our level of indebtedness could have significant consequences. For example, it could:
Increase our vulnerability to adverse changes in economic and industry conditions;
| |
| • | Require us to dedicate a substantial portion of our cash flow from operations and proceeds from asset sales to pay or provide for our indebtedness, thus reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions, investments and other general corporate purposes; |
| |
| • | Limit our flexibility to plan for, or react to, changes in our business and the market in which we operate; |
| |
| • | Place us at a competitive disadvantage to our competitors that have less debt; and |
| |
| • | Limit our ability to borrow money to fund our working capital, capital expenditures, debt service requirements and other financing needs. |
Historically, much of our debt has been renewed or refinanced in the ordinary course of business. In the future we may not be able to obtain sufficient external sources of liquidity on attractive terms, if at all, or otherwise renew, extend or refinance a reporting companysignificant portion of our outstanding debt scheduled to become due in the near future. In addition, there can be no assurance that we will maintain cash reserves and generate sufficient cash flow from operations in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. Any of these occurrences may have a material adverse effect on our liquidity, financial condition and results of operations. For example, our inability to extend, repay or refinance our debt when it becomes due, including upon a default or acceleration event, could force us to sell properties on unfavorable terms or ultimately result in foreclosure on properties pledged as collateral, which could result in a loss of our investment and harm our reputation.
The terms of the agreements governing our indebtedness include restrictive covenants and require that certain financial ratios be maintained. Failure to comply with any of these covenants could result in a default that may, if not cured, accelerate the payment under the Exchange Actour debt obligations which would likely have a material adverse effect on our liquidity, financial condition and file annual, quarterly and special reports, proxy statements andresults of operations. Our ability to comply with our covenants will depend upon our future economic performance. These covenants may adversely affect our ability to finance our future operations or capital needs or to engage in other informationbusiness activities that may be desirable or advantageous to us. In order to maintain compliance with the United States Securitiescovenants in our debt agreements and Exchange Commission. We makecarry out our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendmentsbusiness plan, we may need to those reportsraise additional capital through equity transactions or obtain waivers or modifications of covenants from our lenders. Such additional funding may not be available on acceptable terms, if at all, when needed. We also may need to incur additional indebtedness in the future in the ordinary course of business to fund our development projects and our operations. There can be no assurance that such additional financing would be available when needed or, through our website (www.ascendantsolutions.com), free of charge, as soon as reasonably practicable after we have electronically filed or furnished such materialsif available, offered on acceptable terms. If new debt is added to current debt levels, the Securities and Exchange Commission. These filings are also available on the Securities and Exchange Commission's web site at www.sec.gov. In addition, you may read and copy any documents we file at the Securities and Exchange Commission’s public reference room at 100 F Street, N.E., Washington, D.C. 20549, and at the regional offices of the Securities and Exchange Commission located at 233 Broadway, New York, New York 10279, and at 175 West Jackson Blvd., Suite 900, Chicago, Illinois 60604. You may obtain information on the operation of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330.risks described above could intensify.
We have limited funds and may require additional financing.
We have very limited funds, and such funds may not be adequate to take advantage of available business opportunitiesPharmacy Acquisition Opportunities or fund the ones that we have acquired.our current Pharmacy Acquisitions. Our ultimate success maywill 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 willwe do not expect to do so until we determine a more definitive and specific need for additional financing. Our access to capital is more limited since our stock is no longer traded on the NASDAQ National Market, since there is limited trading activity in our stock, since we have incurred significant debt resulting in approximately a total of $3.6 million in notes payable as a result of our acquisitions in 2004, and since weDecember 31, 2017. We expect to incur additional debt in order to acquire entities in the future.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 thoseour current Pharmacy Acquisitions and any additional Pharmacy Acquisitions that can be financed with our existing capital.
We own subsidiaries that are highly leveraged.
Our subsidiaries are highly leveraged and, as a holding company, we depend on our subsidiaries’ revenues and cash flows to meet our obligations. Due to the high leverage, the availability of funds from these subsidiaries may be limited by contractual restrictions. Additionally, the degree to which our subsidiaries are leveraged has important consequences, including, but not limited to, the reduction in cash flow available to us for our operations and for future acquisitions, increased vulnerability to changes in economic conditions and the impairment of our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes.
We may not be able to effectively integrate and manage our operating subsidiaries.
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 individualsone individual who areis serving as management, including our Interim President and CEO, and our Interim Chief Financial Officer. 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 possible business acquisitions by us,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 acquisitionPharmacy 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 acquiring operating businessespursuing 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.
Certain of our subsidiaries account for a significant percentage of our revenues.
In 2006, DHI accounted for approximately 74.1% of our revenue. In the future, one or more of our subsidiaries may continue to account for a significant percentage of our revenue. The reliance on any of these subsidiaries for a significant percentage of our revenue and their subsequent failure could negatively affect our results of operations.
Unforeseen costs associated with the acquisition of new businessesPharmacy Acquisitions could reduce our profitability.
We have implemented our business strategy and made acquisitions of new businessesPharmacy Acquisitions that may not prove to be successful. We now own an interest in six businesses, operating in different industries and we do not have experience in some of these areas.successful over time. It is likely that we will encounter unanticipated difficulties and expenditures relating to our acquired businesses,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 businesses.Pharmacy Acquisitions. These costsfactors may negatively affect our results of operations. Unforeseen costs atof our recently acquiredPharmacy Acquisitions and to be acquired businesses,potentially upon the closing of the purchase of future Pharmacy Acquisition Opportunities, which may have significant liabilities and commitments, could result in theour inability to make required payments on our indebtedness, which could result inwould have a lossmaterial adverse affect on our ability to implement our pursuit of Pharmacy Acquisition Opportunities, manage our investments in these companies.
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 an acquisition opportunity.
a Pharmacy Acquisition Opportunity.Based on our current cash position, it is likely that if we enter into any additional acquisitions,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 business opportunity to be acquired,Pharmacy Acquisition, or against the projected future revenues or profits of the business opportunity.Pharmacy Acquisition. This could increase our exposure to larger losses. A business opportunityPharmacy Acquisition Opportunity acquired through a leveraged transaction is profitable only if it generates enough revenuescash flow to cover the related debt and expenses. Failure to make payments on the debt incurred to purchasecomplete the business opportunityPharmacy Acquisition could result in the loss of a portion or all of the assets acquired. There is no assurance that any business opportunity acquiredPharmacy Acquisition effected through a leveraged transaction will generate sufficient revenuescash 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 onin our use of net operating loss carryforwards.
At December 31, 2006, we had accumulated approximately $51 million ofOur federal net operating loss (“NOL”) carryforwards and approximately $2.9 million of statepermit us the opportunity to offset net operating loss carryforwards, which may be usedlosses from prior years to offset taxable income and reduce income taxes in future years.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 net operating lossNOL carryforwards.
The federal net operating loss carryforwards, if not fully utilized, will expire from 2018 to 2024between 2020 and the state net operating loss carryforwards will expire from 2007 to 2009.2035. Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) imposes an annual limitation on the portion of our federal net operating lossNOL carryforwards that may be used to offset taxable income. We believe
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 issuanceownership of sharesour company by certain equity holders who are defined in Section 382 of common stock pursuantthe Internal Revenue Code as “5 percent stockholders”. Calculating whether an ownership change has occurred is subject to uncertainty, both because of the initial public offering on November 15, 1999 caused an “ownership change” for purposescomplexity of Section 382 of the Code and because of limitations on such date. Consequently, we believe that utilizationa publicly-traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, the calculation of the portionamount of our federal net operating lossNOL carryforwards attributable to the period prior to November 16, 1999 is limited by Section 382 of the Code. The date of an “ownership change” is based upon a factual determination of the value of our stock on such date. If the “ownership change” was determined to have occurred at a date after November 15, 1999, additional federal net operating loss carryforwards wouldmay be limited by Section 382 of the Code. In addition, a second “ownership change” may occur in the futurechanged 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 stock, includingexisting NOL’s to the surviving entity.
We are controlled by our principal stockholders, officers and directors.
Our principal stockholders, officer and directors beneficially own approximately 25.3% 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.
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 14 of the Dougherty’s Consolidated Financial Statements contained herein) and as set forth in the Guarantee and the subsequent Forbearance Agreement included as Exhibits to the Form 10 Registration Statement, in the total principal amount including interestwas $1,917,440 (the “Guarantee Payment”) as of February 21, 2018, 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. 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 acquisitionbusiness 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 business. A second “ownership change” would resultpublic company, any material decline in Code Section 382 limiting our deductionthe market price of our future federal net operating loss carryforwards.
Ourcommon 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 are difficultoperations.Risks Related to predict.
Although we generated net income of $1,023,000, $65,000Our Business and $249,000 for the years ended December 31, 2006, 2005 and 2004 respectively, we have historically incurred net operating losses. There can be no assurance that we will continue to achieve profitability in the future.
RISKS SPECIFIC TO OUR OPERATING SUBSIDIARIES
Dougherty’s Holdings, Inc.
We may not be able to successfully operate our Park InfusionCare business.
On November 3, 2005, we issued a press release announcing that the board of directors of DHI committed to a plan to explore strategic alternatives for its infusion therapyIndustryOur business Park InfusionCare. On May 24, 2006, the board of directors decided to retain the operations of Park InfusionCare.
The infusion markets served by Park InfusionCare are highly competitive. Local, regional and national companies are currently competing in these markets and others may do so in the future. Some of our competitors have greater financial, technical, marketing and managerial resources than we have. This competition 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. In addition, the Park InfusionCare business may require additional working capital. If we are unable to successfully operate Park InfusionCare, our working capital position will be adversely affected and we could experience a decline in our revenue and profitability.
Our pharmacy subsidiary is subject to extensive regulation.
Our pharmacists and pharmacies are required to be licensed by the Texas State BoardBoards of Pharmacy. The pharmacies are also registered with the federalUnited States Drug Enforcement Administration. By virtue of these license and registration requirements, the entities owned by DHIus 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. We believe that the operating entities owned by DHI currently have all the regulatory approvals necessary to conduct its business. However, we can give no assurance that they will be able to maintain compliance with existing regulations.
In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. We cannot predict whether any federal or state health care reform legislation will eventually be passed, and if so, the impact thereof on DHI’s financial position or results of operations. Health care reform, if implemented, could adversely affect the pricing of prescription drugs or the amount of reimbursement from governmental agencies and managed care payors, and consequently could be adverse to DHI and therefore, to us. However, to the extent health care reform expands the number of persons receiving health care benefits covering the purchase of prescription drugs, it may also result in increased purchases of such drugs and could thereby have a favorable impact on both DHI and the drug industry in general. Nevertheless, there can be no assurance that any future federal or state health care reform legislation will not adversely affect us, including our subsidiary DHI, or the retail drugstore industry generally.
In addition, a portion of DHIour revenue is derived from high-end, technical pharmacy services, such as compounded prescriptions intravenous infusion, injectables and pain management products that are not typically offered by chain drug stores, grocery pharmacies or mass merchandise pharmacies. Recently, there has been some controversy about the lack of federal regulation of these services. 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,service; convenience of locationlocation; 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 distributors,prescription providers online and omni-channel pharmacies and retailers, hospitals and HMO’s.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 infusion pharmacy or specialty 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.
DHI’sOur 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 DHI’sour 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 patientspharmacy prescriptions covered by third party payors among Medicare, Medicaid and other payor sources may also impact DHI’sour revenues and profitability. There can be no assurance that DHIwe will continue to maintain the current payor, revenue or revenueprofitability mix.
CollectibilityCollectability of accounts receivable.
DHI’sOur failure to maintain its controls and processes over billing and collecting, or the deterioration of the financial condition of itsour payors, could have a significant negative impact on itsour results of operations and financial condition. The collection of accounts receivable is one of DHI’sour most significant challenges and requires constant focus and involvement by management and ongoing enhancements to information systems and billing center operating procedures.management. Further some of DHI’sour 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 DHIwe will be able to maintain itsour current levels of collectibilitycollectability and days sales outstanding in future periods. If DHI iswe are unable to properly bill and collect itsour accounts receivable, itsour 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 90%84% of our pharmaceuticals, from a single supplier, AmerisourceBergen,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 AmerisourceBergen,Cardinal Health, or deterioration in AmerisourceBergen’sCardinal 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 2006, with AmerisourceBergen2016, provides us with pricing and credit terms that are improved from those previously provided by AmerisourceBergen. In exchange for these improved terms, DHI has agreed to acquire 85%Cardinal Health. The minimum purchase commitment includes at least 90% of its prescription pharmaceuticalspharmaceutical product requirements (if carried by Cardinal Health) and substantially allat least 90% of its generic pharmaceutical productsproduct be purchased from AmerisourceBergen and to maintain certain minimum dollar monthly purchases.
the Cardinal Health Generic Source Product Program. If we are unable to satisfy
these minimum
monthly purchase requirements,
of $900,000, 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 ended December 31, 2006, we purchased over $23,858,000to year.
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 pharmaceutical products from AmerisourceBergen.
The currentcontrol 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 shortageperformance. This variability and unpredictability could also result in licensed pharmacists, nursesour 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 other cliniciansgeneric 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 business.
The health care industry is currently experiencingresults 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 shortagematerial adverse effect on our results of licensed pharmacists, nurses and other health care professionals. Consequently, hiring and retaining qualified personnel willoperations. Our gross profit margins would be difficult dueadversely affected to intense competition for
their services and employment.the extent we are not able to offset such cost increases. Any failure to
hirefully offset any such increased prices and costs or
retain pharmacists, nursesto 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 other health care professionals could impairinterruption 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 expandperform 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 maintaincost-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 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 PHI. 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 PHI, 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 Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010 (the “Health Reform Laws”), which enacted a number of significant healthcare reforms. Many of these reforms affect the coverage and plan designs that are provided by our health plan clients. As a result, these reforms impact a number of our services and business practices. President Donald Trump has stated his intentions to support the repeal and possible replacement of the Health Reform Laws during his term of office. While Congress has not passed repeal legislation, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Health Reform Laws on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” Congress may consider other legislation to repeal or replace elements of the Health Reform Laws. 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 future economic environment is uncertain. This economic uncertainty could 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 softening 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.
CRESA PartnersThe 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 | | 2,000 |
| Item 3. | Legal Proceedings. |
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of Orange County, L.P.
business. We have numerous significant competitors, someare not currently aware of which may have greater financial resources than we do.
We compete across a variety of business disciplines within the commercial real estate industry, including investment management, tenant representation, corporate services, construction and development management, property management, agency leasing, valuation and mortgage banking. In general, with respect to each of our business disciplines, we cannot assure youany such proceedings or claims that we believe will be able to continue to compete effectivelyhave, individually or maintain our current fee arrangements or margin levels or that we will not encounter increased competition. Each of the business disciplines in which we compete is highly competitive on an international, national, regional and local level. Depending on the product or service, we face competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting firms, many of which may have greater financial resources than we do. Many of our competitors are local or regional firms. We are also subject to competition from other large national and multi-national firms.
A significant portion of our operations are concentrated in southern California and our business could be harmed if the economic downturn continues in the southern California real estate markets.
During 2006 and 2005, a significant amount of our real estate advisory services segment revenue was generated from transactions originating in California. As a result of the geographic concentrations in California, the continuation of the economic downturn in the California commercial real estate markets and in the local economies in the Orange County area could further harm our results of operations.
Our results of operations vary significantly among quarters, which makes comparison of our quarterly results difficult.
The nature of our business does not allow for ready comparison of operating results from quarter to quarter. Our transaction fees are highly dependent on transactions that do not occur ratably over the course of a year.
Our success depends upon the retention of our senior management, as well as our ability to attract and retain qualified and experienced employees.
Our continued success is highly dependent upon the efforts of our executive officers and CPOC’s existing management team. The loss of one or more of our members of the senior management team could haveaggregate, a material adverse effect on CPOC.
If we fail to comply with laws and regulations applicable to real estate brokerage, we may incur significant financial penalties.
Due to the nature of our operations, we are subject to numerous federal, state and local laws and regulations specific to the services performed. For example, the brokerage of real estate sales and leasing transactions requires us to maintain brokerage licenses in each state in which we operate. If we fail to maintain our licenses or conduct brokerage activities without a license, we may be required to pay fines or return commissions received or have licenses suspended. Furthermore, the laws and regulations applicable to our business, also may change in ways that materially increase the cost of compliance.
We may have liabilities in connection with real estate brokerage activities.
As a licensed real estate broker, CRESA and its licensed employees are subject to statutory due diligence, disclosure and standard-of-care obligations. Failure to fulfill these obligations could subject CRESA or its employees to litigation from parties who purchased, sold or leased properties that CRESA or its employees brokered or managed. CRESA could become subject to claims by participants in real estate transactions claiming that CRESA did not fulfill its statutory obligations as a broker.
RISKS RELATED TO OUR INVESTMENTS IN REAL ESTATE
The success of real estate developments is dependant on tenants to generate lease revenues.
Real estate developments are subject to the risk that, upon the expiration of leases for space located in the properties, leases may not be renewed by existing tenants, the space may not be re-leased to new tenants or the terms of renewal or releasing (including the cost of required renovations or concessions to tenants) may be less favorable than current lease terms. A tenant may experience a down-turn in its business which may cause the loss of the tenant or may weaken its financial condition and result in the tenant’s failure to make rental payments when due, result in a reduction in percentage rent receivable with respect to retail tenants or require a restructuring that might reduce cash flow from the lease. In addition, a tenantresults of any of the properties may seek the protection of bankruptcy, insolvency, or similar laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in our available cash flow. Although we have not experienced material losses from tenant bankruptcies, no assurance can be given that tenants will not file for bankruptcy or similar protection in the future or, if any tenants file, that they will affirm their leases or continue to make rental payments in a timely manner.
Real estate development strategies entail certain risks.
Real estate development activities entail certain risks, including:
operations.· | the expenditure of funds on and devotion of management’s time to projects which may not come to fruition; |
· 12 | the risk that development or redevelopment costs of a project may exceed original estimates, possibly making the project uneconomic or causing the project to raise additional cash to fund such costs; |
· | the risk that occupancy rates and rents at a completed project will be less than anticipated or that there will be vacant space at the project; |
· | the risk that expenses at a completed development will be higher than anticipated; and |
· | the risk that permits and other governmental approvals will not be obtained. Because of the discretionary nature of these approvals and concerns which may be raised by various governmental officials, public interest groups and other interested parties during the approval and development process, our ability to develop properties and realize income from our projects could be delayed, reduced or eliminated. |
· | the Frisco Square Partnerships’ future growth and real estate development requires additional capital.. |
· | the risk that a significant amount of debt, which is due during 2007, will require significant additional capital if it cannot be refinanced. |
Based on the status of the Frisco Square development, the Frisco Square Partnerships will need to invest significant amounts of money over the next several years and currently anticipates real estate investments to be approximately $8.0 million for calendar 2007. The Frisco Square Partnerships could finance future expenditures from any of the following sources:
· | non-recourse, sale-leaseback or other financing |
· | private placements of debt or equity or |
· | some combination of the above. |
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 the Frisco Square Partnerships and their partners. If not available, Frisco Square’s development will be limited to that which can be financed with its existing capital.
Any additional financing obtained by the Frisco Square Partnerships will, in all likelihood, further dilute the Company’s interest in Fairways Frisco.
General economic conditions in the areas in which our properties are geographically concentrated may impact financial results.
Our real estate development investments are exposed to changes in the real estate market or in general economic conditions in Texas. Any changes may result in higher vacancy rates for commercial property and lower prevailing rents, lower sales prices or slower sales, lower absorption rates, and more tenant defaults and bankruptcies, which would negatively impact our financial performance. To the extent that weak economic conditions or other factors affect these regions more severely than other areas of the country, our financial performance could be negatively impacted.
Exposure of our assets to damage from natural occurrences such as earthquakes, and weather conditions that affect the progress of construction may impact financial results.
Natural disasters, such as earthquakes, floods or fires, or unexpected climactic conditions, such as unusually heavy or prolonged rain, may have an adverse impact on our ability to develop our properties and realize income from our projects.
Illiquidity of real estate and reinvestment risk may reduce economic returns to investors.
Real estate investments are relatively illiquid and, therefore, our ability to vary our portfolio quickly in response to changes in economic or other conditions is limited. Further, certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether the real property is producing any income.
OTHER RISKS
We are controlled by our principal stockholders, officers and directors.
Our principal stockholders, officers and directors, and affiliates beneficially own approximately 55% of our Common Stock. As a result, such persons may have the ability to control and direct our affairs and business. Such concentration of ownership may also have the effect of delaying, deferring or preventing a change in control.
We have certain relationships with related parties.
We have relationships or transactions with related parties or affiliates of ours. Please see Note 16 of the Ascendant Consolidated Financial Statements contained herein.
Our stock is not listed on The NASDAQ National Market.
PART II | Item 5. | Market for Common Equity and Related Stockholder Matters and Business Issuer Purchases of Equity Securities. |
Our stock is quoted and traded on the OTCBB. The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices, and volume information of OTC securities. An OTC security is not listed or traded on NASDAQ or a national securities exchange, and NASDAQ has no business relationship with the issuers quoted in the OTCBB. Issuers of all securities quoted on the OTCBB are subjectOTCQB (“OTCQB: MYDP”), having changed its symbol from ASDS to periodic filing requirements with the Securities and Exchange Commission or other regulatory authority. Even with OTCBB eligibility and trading, fewer investors have accessreflect its recent name change to trade our common stock, which will limit our abilityDougherty’s Pharmacy, Inc. Prior to raise capital through the sale of our securities.
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 causeAugust 29, 2017, 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 more difficult to sell their shares of common stock, which is expected to have an adverse effect on the market price of the common stock.
We may be subject to litigation in the future.
We may be subject to future litigation or claims in the normal course of business, with or without merit. These claims may result in substantial costs and divert management’s attention and resources, which may seriously harm our business, prospects, financial condition and results of operations and may also harm our reputation, all of which may have a material adverse effect on our ability to pursue various strategic and financial alternatives as well as have a material adverse effect on our stock price. We may be unable to pay expenses or liabilities that may arise out of any possible legal claims.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
The physical properties used by the Company and its significant business segments are summarized below:
| | | Approximate
|
Business Segment
| Property Type
| Owned/Leased
| Square Feet
|
Healthcare | Corporate offices, retail pharmacies and infusion therapy centers | Leased | 43,698 |
Real estate advisory services | Corporate offices | Leased | 22,173 |
Corporate and other | Corporate offices | Leased | - |
Mr. James C. Leslie, the Company’s Chairman, controls, and Mr. Will Cureton, one of our directors, is indirectly a limited partner in the entity that owns the building located in Dallas, Texas in which the corporate office space is sub-leased by Ascendant and DHI. Also, through August 2005, Capital Markets paid rent for office space in the same building to an entity controlled by Mr. Leslie. We consider all of these leases to be at or below market terms for comparable space in the same building.
Beginning on March 16, 2005 and ending on October 13, 2006, Ascendant subleased space from an unrelated third party for approximately $7,000 per month. In October 2006, Ascendant began sharing office space with DHI. During the year ended December 31, 2006, DHI subleased space from an unrelated third party for $6,000 per month. In addition, Ascendant incurred certain shared office costs with an entity controlled by Mr. Leslie, which gives rise to reimbursements from us to that entity. These costs were approximately $9,000 in 2006.
During the year ended December 31, 2005 and 2004, Ascendant and Capital Markets paid aggregate rent of approximately $26,000 and $67,200 directly to an entity controlled by Mr. Leslie. The remaining rent expense paid by Ascendant and DHI was paid under sublease agreements with an unrelated third party for approximately $13,000 monthly. We also incurred certain shared office costs with an entity controlled by Mr. Leslie, which gave rise to reimbursements from us to that entity. These costs were approximately $24,300 and $22,800 in 2005 and 2004, respectively.
In addition, we have other relationships or transactions with other related parties or affiliates of ours. Please see Note 16 to the Ascendant Consolidated Financial Statements contained herein.
ITEM 3. LEGAL PROCEEDINGS
In January 2004, Bishopsgate Corp. and T.E. Millard filed a lawsuit in the 192nd District Court of Dallas County, Texas against us, our officers and directors, and Park Pharmacy’s officers and directors claiming that we breached obligations to fund Bishopsgate’s proposed purchase of the Park Assets.
In August 2005, the Company, its officers and directors and Park Pharmacy’s officers and directors entered into a compromise and settlement agreement, which was approved by the bankruptcy court. Please see Note 15 to the Ascendant Consolidated Financial Statements contained herein for additional details.
Between January 23, 2001 and February 21, 2001, five putative class action lawsuits were filed in the United States District Court for the Northern District of Texas against us, certain of our directors, and a limited partnership of which a director is a partner. The five lawsuits assert causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, for an unspecified amount of damages on behalf of a putative class of individuals who purchased our common stock between various periods ranging from November 11, 1999 to January 24, 2000. In August 2005, the Company settled the lead plaintiffs’ remaining individual claims for a confidential amount, which was paid by the Company’s directors’ and officers’ insurance carrier.
Accordingly, the district court entered a final judgment dismissing the claims with prejudice in February 2006. Please see Note 15 to the Ascendant Consolidated Financial Statements contained herein for additional details.
In April 2006, we were notified by the Internal Revenue Service (“IRS”) that our federal income tax return for the 2004 tax year had been selected for review. In addition, in September 2006 we were notified by the IRS that the federal partnership income tax return of CPOC for the 2004 tax year had been selected for review. The IRS is currently conducting its reviews. At this time, we can make no representations or give any guidance regarding the potential outcome of this review and the impact, if any, it may have on our financial position. However, we are not aware of any potential issues that may cause adjustment to our filed tax returns.
In September 2006, the Chapter 7 trustee for the bankruptcy estate of Quantum North America, Inc. sought to enforce two default judgments against us for alleged preferential and fraudulent transfers to the Company's predecessor, ASD Systems, Inc. in the aggregate amount of approximately $150,000, plus interest and attorneys fees. The transfers at issue occurred in 2000. The adversary proceedings filed in the bankruptcy case were styled: David Gottlieb Trustee v. ASD Systems, Inc.; Adv. Nos. 1:02-ap-02131-GM and 1:02-ap-01948. We took the position that the judgments were void based on defective service and neither Ascendant nor ASD were afforded the opportunity to defend the claims. We also disputed the underlying claims and were prepared to fully defend the Trustee's suit once the judgments were set aside. After presenting the Trustee with our defenses, we were able to settle the claims for a nominal payment of $5,000. We have a settlement in principle with the Trustee which is pending approval by the Bankruptcy Court.
We are also occasionally involved in other claims and proceedings, which are incidental to our business. We cannot determine what, if any, material affect these matters will have on our future financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICES; RECORD HOLDERS AND DIVIDENDS
Our stock is quoted and traded on the OTC Bulletin Board (“OTCBB”). The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices, and volume informationPink Sheets. Upon the effectiveness of over-the-counter (“OTC”) securities. An OTC security is not listed or traded on NASDAQ or a national securities exchange, and NASDAQ has no business relationship with the issuers quoted in the OTCBB. Issuers of all securities quotedour Form 10 Registration Statement, we were approved to upgrade our listing on the OTCBB are subject to periodic filing requirements with the Securities and Exchange Commission or other regulatory authority. OTCBB requirements include, among other things, a broker-dealer acting as a market maker willing to enter a quote for the securities and requires us to remain current in our periodic filings under the Securities Exchange Act of 1934, as amended. Even with OTCBB eligibility and trading, our having been delisted adversely affects the ability or willingness of investors to purchase our common stock, which, in turn, severely affects the market liquidity of our securities.
OTCQB Venture Market.The following is a summary of our stock’s quarterly market price ranges for the two most recent fiscal years. 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 2005: | | High | | Low | |
| First quarter* | | $ | 1.43 | | $ | 0.85 | |
| Second quarter* | | | 1.77 | | | 1.20 | |
| Third quarter* | | | 1.40 | | | 0.70 | |
| Fourth quarter* | | | 0.93 | | | 0.51 | |
| | | | | | | | |
Fiscal year 2006: | | | | | | | |
| First quarter* | | $ | 0.85 | | $ | 0.47 | |
| Second quarter* | | | 0.80 | | | 0.51 | |
| Third quarter* | | | 0.62 | | | 0.33 | |
| Fourth quarter* | | | 0.60 | | | 0.25 | |
| Fiscal year 2016: | | High | | | Low | |
| 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 | |
| Second quarter* | | $ | 0.23 | | | $ | 0.15 | |
| Third quarter* | | $ | 0.27 | | | $ | 0.14 | |
| Fourth quarter | | $ | 0.20 | | | $ | 0.08 | |
*These quotations represent high and low bid prices for our stock as reported by OTCQB the OTCBB and Pink Sheets.
On March 30, 2007, the last reported sale price of our common stock on the OTCBB was $0.33 per share.
At March 30, 2007,14, 2018, there were approximately 1,800 registered and beneficial114 holders of record of our common stock.
TheAs of the closing price on March 14, 2018, the aggregate market value of the voting stock held by nonaffiliatesnon-affiliates of the Company, based upon the closing price for our common stock on the OTC Bulletin Board on June 30, 2006, the last trading date of our most recently completed second fiscal quarterOTCQB was approximately $6,239,000.
We have not paid any cash dividends$1.2 million.On December 27, 2017 and December 12, 2016, the Company issued a $.0002 and $.0001, respectively, per share dividend to stockholders of record on December 18, 2017 and December 5, 2016, respectively. Based on the number of common shares outstanding on the record date, the Company issued 470,881 and 221,948 new shares at a fair market value of $42,000 and $44,000, respectively, which was charged to accumulated deficit.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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 common stockbehalf, may make forward-looking statements in press releases or written statements, on the Company’s website or in our communications and do not anticipate declaring dividendsdiscussions with investors and analysts in the foreseeable future. Our current policy is to retain earnings, if any, to finance potential acquisitions and fund operations. The future paymentnormal course of dividends will depend on the results of operations, financial condition, capital expenditure plansbusiness through meetings, webcasts, phone calls, conference calls and other factorscommunications.
Statements that we deem relevant and will be at the sole discretion of our Board of Directors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAThe following selected consolidated financial data should be read in conjunction with the consolidated financial statements, the notes to such statements and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K, including the discussion therein of changes in our business under “Overview.” The consolidated statements of income data and the consolidated balance sheet data are derived from our audited consolidated financial statements.
| | | (in thousands, except per share data) | |
| | | December 31, | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
Statements of Operations Data: | | | | | | | | | | | |
| Revenues | | $ | 55,417 | | $ | 52,967 | | $ | 39,291 | | $ | 505 | | $ | - | |
| Cost of revenues | | | 36,452 | | | 34,722 | | | 25,055 | | | - | | | - | |
| Gross profit | | | 18,965 | | | 18,245 | | | 14,236 | | | 505 | | | - | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 16,230 | | | 16,991 | | | 13,112 | | | 1,540 | | | 998 | |
| Impairment charges | | | - | | | - | | | - | | | 112 | | | - | |
| Depreciation and amortization | | | 713 | | | 652 | | | 494 | | | 63 | | | 18 | |
| Total operating expenses | | | 16,943 | | | 17,643 | | | 13,606 | | | 1,715 | | | 1,016 | |
| Operating income (loss) | | | 2,022 | | | 602 | | | 630 | | | (1,210 | ) | | (1,016 | ) |
| Loss on disposal of assets | | | - | | | (1 | ) | | (32 | ) | | - | | | 1 | |
| Equity in income (losses) of equity method investees | | | (356 | ) | | 675 | | | 374 | | | 85 | | | 19 | |
| Other income | | | 155 | | | 73 | | | 19 | | | - | | | - | |
| Interest income (expense), net | | | (758 | ) | | (763 | ) | | (520 | ) | | 30 | | | 59 | |
| Minority interest | | | (65 | ) | | (50 | ) | | (56 | ) | | 277 | | | 209 | |
| Income tax provision | | | (205 | ) | | (241 | ) | | (166 | ) | | - | | | - | |
| Income (loss) from continuing operations | | | 793 | | | 295 | | | 249 | | | (818 | ) | | (728 | ) |
| Income (loss) from discontinued operations | | | 230 | | | (230 | ) | | - | | | - | | | - | |
| Net income (loss) | | $ | 1,023 | | $ | 65 | | $ | 249 | | $ | (818 | ) | $ | (728 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to common shareholders | | $ | 1,023 | | $ | 65 | | $ | 249 | | $ | (818 | ) | $ | (728 | ) |
| | | | | | | | | | | | | | | | | |
| Basic net income (loss) per share from: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.04 | | $ | 0.01 | | $ | 0.01 | | $ | (0.04 | ) | $ | (0.03 | ) |
| Discontinued operations | | $ | 0.01 | | $ | (0.01 | ) | $ | - | | $ | - | | $ | - | |
| | | $ | 0.05 | | | * | | $ | 0.01 | | $ | (0.04 | ) | $ | (0.03 | ) |
| Diluted net income (loss) per share | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 0.04 | | $ | 0.01 | | $ | 0.01 | | $ | (0.04 | ) | $ | 0.03 | |
| Discontinued operations | | $ | 0.01 | | $ | (0.01 | ) | $ | - | | $ | - | | $ | - | |
| | | $ | 0.05 | | | * | | $ | 0.01 | | $ | (0.04 | ) | $ | (0.03 | ) |
| * Less than $0.01 per share | | | | | | | | | | | | | | | | |
| Average common shares outstanding, basic | | | 22,410 | | | 22,007 | | | 21,804 | | | 21,557 | | | 21,231 | |
| Average common shares outstanding, diluted | | | 22,676 | | | 22,878 | | | 22,389 | | | 21,557 | | | 21,231 | |
| | | |
December 31, | | | 2006 | | | 2005 | | | 2004 | | | 2003 | | | 2002 | |
Balance Sheet Data | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2,686 | | $ | 3,221 | | $ | 1,868 | | $ | 2,006 | | $ | 2,950 | |
| Working capital | | | (86 | ) | | 4,508 | | | 6,196 | | | 2,120 | | | 3,063 | |
| Total assets | | | 21,039 | | | 21,998 | | | 20,753 | | | 2,841 | | | 3,673 | |
| Long-term debt (including current maturities) | | | 9,930 | | | 11,924 | | | 12,616 | | | - | | | - | |
| Stockholders' equity | | | 4,235 | | | 3,073 | | | 2,879 | | | 2,523 | | | 3,306 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto included elsewhere in this report. Except for thenot historical information contained herein, certain statements used in this Form 10-Kfacts are forward-looking statements, within the meaningincluding, without limitation, those regarding estimates of Section 27A of the Securities Act of 1933,and goals for future financial and operating performance as amended, and Section 21E of the Securities Exchange Act of 1934,well as amended. These forward-looking statements aboutconcerning the expected execution and effect of our financial condition, prospects, operations and business are generally accompanied by wordsstrategies. Words such as “anticipates,“expect,” “expects,“likely,” “estimates,“outlook,” “believes,“forecast,” “intends,“preliminary,” “plans” or“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. expressions are intended to identify such forward-looking statements.These forward-looking statements are not guarantees of future performance and are subject to numerous risks, uncertainties and other factors, some of which are beyond our controlassumptions, known or unknown, that could cause actual results to differvary materially from those forecastedindicated or anticipated, in such forward-looking statements.
Factors that could cause or contribute to such differences include,including, but are not limited to those discussed below under “Risk Factors -- Risks Related to Our Business,” “Risk Factors -- Risks Specific to Operating Subsidiaries,”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 “Risk Factors -- Other Risks.” Theseother risks, assumptions and uncertainties include, but are not limited to, (a) the following general risks: our limited funds anddescribed in Item 1A. “Risk Factors”. Should one or more of these risks of not obtaining additional funds, certain of our subsidiaries are highly leveraged, potential difficulties in integrating and managing our subsidiaries, our dependence upon management, our dependence upon a small staff, certain subsidiaries accounting for a significant percentage of revenue, unforeseen acquisition costs, the potential for future leveraged acquisitions, restrictions on the use of net operating loss carryforwards, and the difficulty in predicting operations; (b) the following risks to Dougherty’s Holdings, Inc.: potential problems thator uncertainties materialize, or should underlying assumptions prove incorrect, actual results may arise in operating the Park InfusionCare business, extensive regulation of the pharmacy business, the competitive nature of the retail pharmacy industry, third party payor attempts to reduce reimbursement rates, difficulty in collecting accounts receivable, dependence upon a single pharmaceutical products supplier, price increases as a result of our potential failure to maintain sufficient pharmaceutical sales, shortages in qualified employees, and liability risks inherent in the pharmaceutical industry; (c) the following risks to CRESA Partners of Orange County, L.P.: the size of our competitors, our concentration on the southern California real estate market, the variance of financial results among quarters, the inability to retain senior management and/vary materially from those indicated or attract and retain qualified employees, the regulatory and compliance requirements of the real estate brokerage industry and the risks of failing to comply with such requirements, and the potential liabilities that arise from our real estate brokerage activities; (d) the following risks to our investments in real estate: our dependence on tenants for lease revenues, the risks inherent in real estate development activities, the ability of the Frisco Square Partnerships to obtain financing on acceptable terms, the general economic conditions of areas in which we focus our real estate development activities, the risks of natural disasters, and the illiquidity of real estate investment; and (e) the following other risks: a majority of our common stock is beneficially ownedanticipated by our principal stockholders, officers and directors, relationships and transactions with related parties, our stock is not traded on NASDAQ or a national securities exchange, effect of penny stock regulations, and litigation.
Because such forward-looking statements are subject to risks, uncertainties and assumptions,statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s viewspeak only as of the date they are made. Except to the forward-looking statement is made. Our forward-looking statements are based on the current expectations of management,extent required by law, we do not undertake, and we undertake noexpressly disclaim, any duty or obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur inafter the future. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements, wherever they appear in this report.
OVERVIEW
Our company has undergone a series of fundamental changes indate the past four years, and as a result, our management believes that year-to-year comparisons of our past results are not meaningful as a basis for evaluating our future prospects.
Between 2002 and 2005, we made investments and/or acquisitions, which are more fully described herein in Item 1, Business of Part 1 and in the Notes to the Ascendant Consolidated Financial Statements also included herein.
There is no assurance that we will be able to successfully operate these acquired businesses or that we will be able to successfully acquire or develop additional business enterprises in the future.
We expect our future operating results to fluctuate. Factors that are likely to cause these fluctuations include:
· | the matters discussed under the section titled “Risks Related to our Business” and “Risks Specific to Operating Subsidiaries” below; |
· | our ability to profitably operate the businesses we acquired and to pay the principal and interest on the debt incurred to make these acquisitions; |
· | our ability to successfully operate the Park InfusionCare business; |
· | our success with the investments in, and operations of, Ampco, Capital Markets, Fairways Frisco and our participation in other Fairways transactions, if any; |
· | fluctuations in general interest rates; |
· | the availability and cost of capital to us; |
· | the existence and amount of unforeseen acquisition costs; and |
· | our ability to locate and successfully acquire or develop one or more additional business enterprises. |
statement.OVERVIEW
Key measures used by the Company’s management to evaluate business segment performance include revenue, cost of sales, gross profit, investment incomeselling, 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.
Discontinued Operations
As disclosed in a Current Report on Form 8-K filed on May 24, 2006, the board of directors decided to retain the operations of Park InfusionCare, which had previously been reported as a discontinued operation while the Company was pursuing a potential disposition or strategic transaction for its infusion therapy business. In connection with the decision to retain the operations of Park InfusionCare, DHI entered into an employment agreement on May 18, 2006 with Scott R. Holtmyer to be the Vice President of its Park InfusionCare infusion therapy business. As a result of the board of director’s decision to retain the operations of Park InfusionCare, the Company has reported the operating results of Park InfusionCare as part of continuing operations. The Company had previously recorded an estimated charge of $230,000 for employee retention costs directly relatedalso tracks prescriptions sold to any potential disposition or strategic transaction for Park InfusionCare.
assess operational performance.RESULTS OF CONTINUING OPERATIONS
Comparison of the Year Ended December 31, 20062017 to the Year Ended December 31, 20052016 (000’s omitted).
| | | Twelve Months Ended December 31, 2006 | |
| | | Healthcare | | Real Estate Advisory Services | |
| | | 2006 | | 2005 | | $ Change | | 2006 | | 2005 | | $ Change | |
| Revenue | | $ | 41,062 | | $ | 39,136 | | $ | 1,926 | | $ | 14,355 | | $ | 13,831 | | $ | 524 | |
| Cost of Sales | | | 28,048 | | | 26,517 | | | 1,531 | | | 8,404 | | | 8,205 | | | 199 | |
| Gross Profit | | | 13,014 | | | 12,619 | | | 395 | | | 5,951 | | | 5,626 | | | 325 | |
| Operating expenses | | | 12,292 | | | 13,143 | | | (851 | ) | | 3,448 | | | 3,343 | | | 105 | |
| Equity in income (losses) of equity method investees | | | - | | | - | | | - | | | - | | | - | | | - | |
| Other income | | | 8 | | | 9 | | | (1 | ) | | 100 | | | - | | | 100 | |
| Interest income (expense), net | | | (330 | ) | | (330 | ) | | - | | | (400 | ) | | (444 | ) | | 44 | |
| Gain (loss) on sale of equipment | | | - | | | - | | | - | | | - | | | (1 | ) | | 1 | |
| Minority interests | | | - | | | - | | | - | | | (48 | ) | | (37 | ) | | (11 | ) |
| Income tax provision | | | - | | | - | | | - | | | (199 | ) | | (209 | ) | | 10 | |
| Discontinued operations | | | 230 | | | (230 | ) | | 460 | | | - | | | - | | | - | |
Net income | | $ | 630 | | $ | (1,075 | ) | $ | 1,705 | | $ | 1,956 | | $ | 1,592 | | $ | 364 | |
Plus: | | | | | | | | | | | | | | | | | | | |
| Interest (income) expense, net | | $ | 330 | | $ | 330 | | $ | - | | $ | 400 | | $ | 444 | | $ | (44 | ) |
| Income tax provision | | | - | | | - | | | - | | | 199 | | | 209 | | | (10 | ) |
| Depreciation & Amortization | | | 391 | | | 332 | | | 59 | | | 297 | | | 304 | | | (7 | ) |
| Discontinued operations | | | (230 | ) | | 230 | | | (460 | ) | | - | | | - | | | - | |
EBITDA from continuing operations | | $ | 1,121 | | $ | (183 | ) | $ | 1,304 | | $ | 2,852 | | $ | 2,549 | | $ | 303 | |
| | | Twelve Months Ended December 31, 2006 | |
| | | Corporate & Other | | Consolidated | |
| | | 2006 | | 2005 | | $ Change | | 2006 | | 2005 | | $ Change | |
| | | | | | | | | | | | | | |
| Revenue | | $ | - | | $ | - | | $ | - | | $ | 55,417 | | $ | 52,967 | | $ | 2,450 | |
| Cost of Sales | | | - | | | - | | | - | | | 36,452 | | | 34,722 | | | 1,730 | |
| Gross Profit | | | - | | | - | | | - | | | 18,965 | | | 18,245 | | | 720 | |
| Operating expenses | | | 1,203 | | | 1,157 | | | 46 | | | 16,943 | | | 17,643 | | | (700 | ) |
| Equity in income (losses) of equity method investees | | | (356 | ) | | 675 | | | (1,031 | ) | | (356 | ) | | 675 | | | (1,031 | ) |
| Other income | | | 47 | | | 64 | | | (17 | ) | | 155 | | | 73 | | | 82 | |
| Interest income (expense), net | | | (28 | ) | | 11 | | | (39 | ) | | (758 | ) | | (763 | ) | | 5 | |
| Gain (loss) on sale of equipment | | | - | | | - | | | - | | | - | | | (1 | ) | | 1 | |
| Minority interests | | | (17 | ) | | (13 | ) | | (4 | ) | | (65 | ) | | (50 | ) | | (15 | ) |
| Income tax provision | | | (6 | ) | | (32 | ) | | 26 | | | (205 | ) | | (241 | ) | | 36 | |
| Discontinued operations | | | - | | | - | | | - | | | 230 | | | (230 | ) | | 460 | |
Net income | | $ | (1,563 | ) | $ | (452 | ) | $ | (1,111 | ) | $ | 1,023 | | $ | 65 | | $ | 958 | |
Plus: | | | | | | | | | | | | | | | | | | | |
| Interest (income) expense, net | | $ | 28 | | $ | (11 | ) | $ | 39 | | $ | 758 | | $ | 763 | | $ | (5 | ) |
| Income tax provision | | | 6 | | | 32 | | | (26 | ) | | 205 | | | 241 | | | (36 | ) |
| Depreciation & Amortization | | | 25 | | | 16 | | | 9 | | | 713 | | | 652 | | | 61 | |
| Discontinued operations | | | - | | | - | | | - | | | (230 | ) | | 230 | | | (460 | ) |
EBITDA from continuing operations | | $ | (1,504 | ) | $ | (415 | ) | $ | (1,089 | ) | $ | 2,469 | | $ | 1,951 | | $ | 518 | |
Healthcare
| | | 2017 | | | 2016 | | | $ Change | |
| | | | | | | | | | |
| Revenue | | $ | 40,213 | | | $ | 42,786 | | | $ | (2,573 | ) |
| Cost of sales (exclusive of depreciation and amortization shown separately below) | | | 29,390 | | | | 31,736 | | | | (2,346 | ) |
| Gross profit | | | 10,823 | | | | 11,050 | | | | (227 | ) |
| Operating expenses | | | | | | | | | | | | |
| Selling, General and Administrative | | | 10,395 | | | | 10,449 | | | | (54 | ) |
| Depreciation and amortization | | | 1,008 | | | | 1,052 | | | | (44 | ) |
| Other income | | | 3 | | | | 85 | | | | (82 | ) |
| Interest expense | | | 427 | | | | 443 | | | | (16 | ) |
| Loss of disposal of assets | | | 75 | | | | 4,008 | | | | (3,933 | ) |
| Income tax provision | | | 1,029 | | | | 42 | | | | 987 | |
| Net loss | | $ | (2,108 | ) | | $ | (4,859 | ) | | $ | 2,751 | |
| plus: | | | | | | | | | | | | |
| Interest expense | | $ | 427 | | | $ | 443 | | | $ | (16 | ) |
| Depreciation and amortization | | | 1,008 | | | | 1,052 | | | | -44 | |
| Loss on disposal of assets | | | 75 | | | | 4,008 | | | | -3933 | |
| Income tax provision | | | 1,029 | | | | 42 | | | | 987 | |
| EBITDA (Adjusted) | | $ | 431 | | | $ | 686 | | | $ | (255 | ) |
| | | | | | | | | | | | | |
| Prescription count | | | 436,945 | | | | 443,467 | | | | (6,522 | ) |
Total revenues increased $1,926,000decreased $2,573 during the year ended December 31, 20062017 to $41,062,000.$40,213. This represents a 4.9% increase over6% decrease from revenue of $39,136,000$42,786 in 2005.2016. The increasedecrease includes a 4.2% increase6,522 or 1.5% decrease in the number of retail pharmacy prescriptions filled and increased salessold, of front end merchandise. The increase in revenuewhich the majority, or 5,354 is attributable to the disposition of $3,804,000, or 12.7% at Dougherty’s Pharmacy and Medicine Man pharmacies (the “Retail Pharmacies”), is offset by athe Humble, Texas pharmacy with the remainder decrease of $1,878,000, or 20.5%, at Park InfusionCare.1,168 due to competition. The decrease in infusion revenue isrelated to the Humble, Texas pharmacy was not significant at $353,000. The decline in revenues for the twelve months ended December 31, 2017, as compared to the same periods for 2016 are due to a decreaselower revenues per prescription filled due to the increase in brand to generic conversion rate to 84.1% from 82.7% and lower industry generic pricing selling prices in 2017 as compared to 2016 due to network reimbursement pressures, competitive pressure and customer demand for lower prices. This trend is consistent with that reported by other retail pharmacy companies in the number of patient therapies and the lingering impact on ongoingindustry. This industry trend is expected to continue into 2018. Management expects this trend to continue impacting our business from the Company’s prior announcement in November 2005 of the plans to seek a strategic transaction2018.
Gross Profit
Gross profit decreased $227 or potential disposition.
Cost of Sales
Cost of sales increased $1,531,0002.1% for the year ended December 31, 20062017 to $28,048,000,$10,823, or 68.3%26.9% of revenue. Cost of salesGross profit was $26,517,000$11,050 or 67.8%25.8% of sales in 2005.2016. $194 of the decrease in gross margin is attributable to the disposition of the Humble, Texas pharmacy. The overall increase in costgross profit as a percent of sales is primarily duerevenue in 2017 to higher retail pharmacy sales at lower gross margins, caused principally by lower reimbursement rates by third party insurance companies. The increased cost of sales of 13.1% at the retail pharmacies was offset,26.9% from 25.8% in part, by the 29.4% decrease in cost of sales at Park InfusionCare which2016 is due to a changethe generic conversion rate discussed above as well as the improved pricing secured in revenue mixthe November 2016 pricing agreement with Cardinal Health. The increase in gross profit dollars was offset by the decrease in gross margin dollars due to higher margin therapies. Coststhe net loss of sales1,168 prescriptions due to competition as compared to prior year. and the increase in third party payor fees. The increase in third party payor fees are due to Direct and Indirect Remuneration (“DIR”) fees charged to pharmacies that relate to Medicare Part D plans and commenced during the first quarter of 2017. DIR fees were $37,000, $53,000, $55,000 and $76,000 for the first, second, third and fourth quarters, respectively, of 2017, totaling $221,000. Total adjudicated fees were $418,000 for the twelve months ended December 31, 2017, an increase of 219.4% as compared to prior year due to the DIR fees. Management expects the DIR fees to continue to impact Gross profit in 2018. Gross profit includes all direct costs related to the sale of products.
prescriptions.Operating Expenses
Operating expensesExpenseSG&A expense decreased $851,000$54 for the year ended December 31, 20062017, to $12,292,000$10,395 from $13,143,000$10,449 in 2005. Operating expenses2016. SG&A expense represented 29.9%25.8% of revenue in 20062016 as compared to 33.6%24.4% of revenue in 2005. The decrease in healthcare operating expenses is due primarily to a reduced headcount and other operating expenses at
Park InfusionCare of $515,000 which is a reduction of 10.4% as compared to 2005. In addition, overhead expenses at the DHI corporate office were reduced by $636,000, or 39.5%, as a result of reduced headcount and other cost reduction initiatives initiated in 2006. The overall decrease in operating expenses as a percentage of revenue is due primarily to a reduction of headcount net of increases attributable to increased pharmacy revenues.
Interest Income (Expense), Net
Interest expense, net is comprised of interest expense related to the debt assumed as part of the acquisition of the Park Assets by DHI. Interest expense, net was $330,000 for the year ended December 31, 2006, which was unchanged from the year ended December 31, 2005. Interest expense on DHI’s revolving bank debt is fixed at six percent per annum.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA increased by $1,304,000 to EBITDA of $1,121,000 in for the year ended December 31, 2006 from an EBITDA loss of ($183,000) in 2005. This overall increase is due primarily to an overall decrease in operating expense of $851,000 due to reduced headcount and other operating expenses. EBITDA at the Retail Pharmacies increased 43% in 2006 to $2,144,000 from $1,499,000 in the year ended 2005. During 2006, the EBITDA loss at Park InfusionCare was decreased by $25,000 to an EBITDA loss of ($253,000) in 2006 from an EBITDA loss of ($278,000) in 2005, a decrease of 9%.
Real estate advisory services
Revenue
Revenue increased $524,000 from $13,831,000 in 2005 to $14,355,000 during the year ended December 31, 2006. The following are included in real estate advisory services revenue for the year ended December 31, 2006 (i) fee revenue earned by CPOC of $13,510,000 and (ii) fee revenue earned by Capital Markets of $815,000. The overall increase is due primarily to an increase of $365,000 in revenue earned by CPOC which is due to an increase in commissions received for tenant representation services during 2006.
Cost of Revenue
Cost of revenue was $8,404,000 for the year ended December 31, 2006, representing 58.5% of revenue. By comparison, cost of revenue was $8,205,000 or 59.3% of revenue in 2005. The overall increase in cost of revenue is due to increased commission and referral fee costs. The decrease in the cost of revenue percentage is due to a decrease in broker commissions paid as a percentage of total revenue. Cost of revenue includes all direct costs, including license fees and broker commissions, incurred in connection with a real estate advisory transaction. Brokerage commissions can vary depending on the transaction terms and whether brokers have reached certain commission targets.
Operating Expenses
Operating Expenses increased $105,000 from $3,343,000 in 2005 to $3,448,000 for the year ended December 31, 2006. This overall increase includes an increase of $116,000 in selling, general and administrative expenses at Capital Markets due to increase professional bonuses due to greater transaction revenues. Under the management agreement which was implemented in 2005, Capital Markets only incurs expenses when revenues are earned from a real estate advisory transaction closing.
Interest Income (Expense), Net
Interest expense, net is comprised of interest expense related to the debt related to the CPOC acquisition. Interest expense, net was $400,000 in 2006 as compared to $444,000 for the year ended December 31, 2005. The overall decrease of $44,000 is primarily due to the reduction of the principal balance of $1,782,000 during 2006. The overall decrease is reduced by an increase in the prime rate from 7.25% at December 31, 2005 to 8.25% at December 31, 2006. The CPOC acquisition note payable bears interest at the Bank of America prime rate minus 0.25%.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA increased 11.9% to $2,852,000 in 2006 from $2,549,000 in 2005. This overall increase includes an increase in revenue of $524,000 and a corresponding increase in gross profit of $325,000. The increase also includes a $100,000 gain as a result of a discount on the restructuring of the Acquisition Debt.
Corporate and other
Operating Expenses
Operating expenses for the year ended December 31, 2006 were $1,203,000, or an increase of $46,000 over operating expenses of $1,157,000 for the year ended December 31, 2005. The increase is primarily a result of increased payroll and professional fees in the normal course of business. Operating expenses of $1,203,000 includes payroll and benefits of $418,000; legal expense of $78,000; insurance expense of $120,000; audit and accounting expense of $165,000; SEC, transfer agent and other professional fees of $128,000; director fees and stock compensation expense of $110,000 and other selling, general and administrative expenses of $184,000.
Equity in Income (Losses) of Equity Method Investees
Equity in income (losses) of equity method investees decreased $1,031,000 from $675,000 during the year ended December 31, 2005 to ($356,000) for the year ended December 31, 2006. Equity in income (losses) of equity method investees represents our pro-rata portion, based on our limited partnership interests, of the income (losses) of Ampco Partners, Ltd., Fairways 03 New Jersey, L.P. and Fairways Frisco, LP as follows:
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Ampco Partners, Ltd. | | $ | 96,000 | | $ | 100,000 | |
| Fairways 03 New Jersey, LP | | | 6,000 | | | 1,112,000 | |
| Fairways Frisco, L.P. | | | (458,000 | ) | | (537,000 | ) |
| | | $ | (356,000 | ) | $ | 675,000 | |
The equity in earnings of Fairways NJ of $1,112,000 is comprised of earnings from its interest in the leasing of a single tenant commercial building and a gain on the sale of that building in 2005. Of this total, $951,000 was received is cash distributions in 2005. The Company received a distribution of approximately $680,000 on December 30, 2005 from Fairways NJ, which represented the Company’s share in the profit from the sale of a single tenant commercial real estate property interest, the sole asset held by Fairways NJ. In addition to the distribution, cash of $162,000, representing the Company’s share of the total escrow, was held in escrow to fund any amounts owed by Fairways NJ to the purchaser, including any amounts owed for standard representations and warranties under the sale agreement. The balance of the escrow account and interest income of $168,000 was received in December 2006.
The equity in losses of Fairways Frisco of $458,000 and $537,000 represents our share of the net loss of Fairways Frisco for the years ended December 31, 2006 and 2005, respectively. These amounts are non-cash adjustments to our operating results and we have no obligation to fund the operating losses or debts of Fairways Frisco.
Other Income
Other income was $47,000 in 2006 as compared to $64,000 in 2005. This represents receipts from Fairways Equities under an agreement whereby the Company receives 25% of certain fees earned by Fairways Equities. During 2006 Fairways Equities earned fewer fees than in 2005.
Income tax provision
Income tax provision decreased $26,000 from $32,000 in 2005 to $6,000 in 2006 as a result of lower taxable income in 2006. The income tax provision represents federal alternative minimum taxes owed by the Company. The Company’s net operating loss carryforwards are limited to usage of 90% of alternative minimum taxable income, and therefore it will be required to pay alternative minimum tax on 10% of its alternative minimum taxable income at a statutory tax rate of 20%.
Comparison of the Year Ended December 31, 2005 to the Year Ended December 31, 2004 (000’s omitted).
| | | Years Ended December 31, | |
| | | Healthcare | | Real Estate Advisory Services | |
| | | 2005 | | 2004 | | $ Change | | 2005 | | 2004 | | $ Change | |
| Revenue | | $ | 39,136 | | $ | 29,532 | | $ | 9,604 | | $ | 13,831 | | $ | 9,759 | | $ | 4,072 | |
| Cost of Sales | | | 26,517 | | | 19,668 | | | 6,849 | | | 8,205 | | | 5,387 | | | 2,818 | |
| Gross Profit | | | 12,619 | | | 9,864 | | | 2,755 | | | 5,626 | | | 4,372 | | | 1,254 | |
| Operating expenses | | | 13,143 | | | 9,868 | | | 3,275 | | | 3,343 | | | 2,479 | | | 864 | |
| Equity in income (losses) of equity method investees | | | - | | | - | | | - | | | - | | | | | | - | |
| Other income | | | 9 | | | 19 | | | (10 | ) | | - | | | | | | - | |
| Interest income (expense), net | | | (330 | ) | | (297 | ) | | (33 | ) | | (444 | ) | | (247 | ) | | (197 | ) |
| Gain (loss) on sale of equipment | | | - | | | (17 | ) | | 17 | | | (1 | ) | | (15 | ) | | 14 | |
| Minority interests | | | - | | | - | | | - | | | (37 | ) | | (29 | ) | | (8 | ) |
| Income tax provision | | | - | | | - | | | - | | | (209 | ) | | (166 | ) | | (43 | ) |
| Discontinued operations | | | (230 | ) | | - | | | (230 | ) | | - | | | - | | | - | |
Net income | | $ | (1,075 | ) | $ | (299 | ) | $ | (776 | ) | $ | 1,592 | | $ | 1,436 | | $ | 156 | |
Plus: | | | | | | | | | | | | | | | | | | | |
| Interest (income) expense, net | | $ | 330 | | $ | 297 | | $ | 33 | | $ | 444 | | $ | 247 | | $ | 197 | |
| Income tax provision | | | - | | | - | | | - | | | 209 | | | 166 | | | 43 | |
| Depreciation & Amortization | | | 332 | | | 271 | | | 61 | | | 304 | | | 216 | | | 88 | |
| Discontinued operations | | | 230 | | | - | | | 230 | | | - | | | - | | | - | |
EBITDA from continuing operations | | $ | (183 | ) | $ | 269 | | $ | (452 | ) | $ | 2,549 | | $ | 2,065 | | $ | 484 | |
| | | Years Ended December 31, | |
| | | Corporate & Other | | Consolidated | |
| | | 2005 | | 2004 | | $ Change | | 2005 | | 2004 | | $ Change | |
| Revenue | | $ | - | | $ | - | | $ | - | | $ | 52,967 | | $ | 39,291 | | $ | 13,676 | |
| Cost of Sales | | | - | | | - | | | - | | | 34,722 | | | 25,055 | | | 9,667 | |
| Gross Profit | | | - | | | - | | | - | | | 18,245 | | | 14,236 | | | 4,009 | |
| Operating expenses | | | 1,157 | | | 1,259 | | | (102 | ) | | 17,643 | | | 13,606 | | | 4,037 | |
| Equity in income (losses) of equity method investees | | | 675 | | | 374 | | | 301 | | | 675 | | | 374 | | | 301 | |
| Other income | | | 64 | | | - | | | 64 | | | 73 | | | 19 | | | 54 | |
| Interest income (expense), net | | | 11 | | | 24 | | | (13 | ) | | (763 | ) | | (520 | ) | | (243 | ) |
| Gain (loss) on sale of equipment | | | - | | | - | | | - | | | (1 | ) | | (32 | ) | | 31 | |
| Minority interests | | | (13 | ) | | (27 | ) | | 14 | | | (50 | ) | | (56 | ) | | 6 | |
| Income tax provision | | | (32 | ) | | - | | | (32 | ) | | (241 | ) | | (166 | ) | | (75 | ) |
| Discontinued operations | | | - | | | - | | | - | | | (230 | ) | | - | | | (230 | ) |
Net income | | $ | (452 | ) | $ | (888 | ) | $ | 436 | | $ | 65 | | $ | 249 | | $ | (184 | ) |
Plus: | | | | | | | | | | | | | | | | | | | |
| Interest (income) expense, net | | $ | (11 | ) | $ | (24 | ) | $ | 13 | | $ | 763 | | $ | 520 | | $ | 243 | |
| Income tax provision | | | 32 | | | - | | | 32 | | | 241 | | | 166 | | | 75 | |
| Depreciation & Amortization | | | 16 | | | 7 | | | 9 | | | 652 | | | 494 | | | 158 | |
| Discontinued operations | | | - | | | - | | | - | | | 230 | | | - | | | 230 | |
EBITDA from continuing operations | | $ | (415 | ) | $ | (905 | ) | $ | 490 | | $ | 1,951 | | $ | 1,429 | | $ | 522 | |
Healthcare
Revenue
Revenue increased $9,604,000 during the year ended December 31, 2005 to $39,136,000 from $29,532,000 in 2004. The increase is due to increased pharmacy sales at Dougherty’s Pharmacy in 2005 as a result of increased pricing for prescription drug sales as well as increased front end merchandise sales subsequent to the remodeling of Dougherty’s Pharmacy. The increase is also due to the fact that 2004 results are reflected for the period from the date of acquisition on March 24, 2004 to December 31, 2004, as compared to a full twelve months in 2005.
Cost of Sales
Cost of sales was $26,517,000 for the year ended December 31, 2005, representing 68% of revenue. Cost of sales was $19,668,000 or 66.6% of sales in 2004. The overall increase is also due primarily to the inclusion of DHI’s cost of sales for the period from the date of acquisition on March 24, 2004 to December 31, 2004 as compared to a full twelve months in 2005. The increase is cost of sales as a percentage of revenue is primarily due to an increase in infusion care wholesale drug prices and a change in the mix of revenue to lower margin therapies. This increase in infusion care cost of sales is somewhat offset by the decline in retail pharmacy cost of sales as a percentage of revenue in 2006 is due to an increased mix of generic prescriptions as compared to brand name drugs, along with improved merchandising and purchasing in the front end of the pharmacies. Dougherty’s Pharmacy was remodeled in 2005, which contributed to increased sales of front end merchandise, which carry a higher gross margin than prescription drug sales. Cost of sales includes all direct costs related to the sale of products in pharmacies.
Operating Expenses
Operating expenses increased $3,275,000 for the year ended December 31, 2005 to $13,143,000 as compared to operating expenses of $9,868,000 in 2004. Operating expenses represented 33.6% of revenue in 2005 as compared to 33.4% of revenue in 2004.2016. The increase in operating expenses as a percentage of revenue is due primarily to increased pharmacy revenues combined with smaller increases in fixed operating expenses. The overall dollar increase in operating expenses is due primarily to the inclusion of DHI’s operating expenses, including amortization of Patient Prescriptions, for the period from the date of acquisition on March 24, 2004 to December 31, 2004 as compared to a full twelve months in 2005.
Interest Income (Expense), Net
Interest expense, net is comprised of interest expense related to the debt assumed as part of the acquisition of the Park Assets by DHI. Interest expense, net was $297,000 for the year ended December 31, 2004, as compared to $330,000 for the year ended December 31, 2005. Interest expense on DHI’s revolving bank debt is fixed at six percent per annum. For the year ended December 31, 2005, interest expense, net increased due to inclusion of the DHI results for the period from the date of acquisition on March 24, 2004 to December 31, 2004 as compared to a full twelve months in 2005.
Earnings Before Interest, Taxes, Depreciation and Amortization
DHI experienced an EBITDA loss of $(183,000) during 2005 as compared to EBITDA of $269,000 during 2004. EBITDA at the Retail Pharmacies increased 36.9% in 2005 to $1,499,000 from $946,000 in the year ended 2004. This EBITDA loss was primarily a result of an EBITDA loss of ($278,000) at Park InfusionCare as a result of the decline in revenue and a change in the mix of revenue to lower margin therapies. The decrease in infusion revenue is due to a decrease in the number of patient therapies and the lingering impact on ongoing business from the Company’s prior announcement in November 2005 of the plans to seek a strategic transaction or potential disposition.
Real estate advisory services
Revenue
Revenue increased $4,072,000 from $ 9,759,000 in 2004 to $13,831,000 during the year ended December 31, 2005. The following are included in real estate advisory services revenue for the year ended December 31, 2005 (i) fee revenue earned by CPOC of $13,176,000 and (ii) fee revenue earned by CRESA Capital Markets of $655,000. The increase over 2004 revenue is due primarily to the inclusion of CPOC’s revenue for the period from the date of acquisition on May 1, 2004 to December 31, 2004 as compared to a full twelve months in 2005.
Cost of Revenue
Cost of revenue was $8,205,000 for the year ended December 31, 2005, representing 59.3% of revenue. Cost of revenue was $5,387,000 or 55.2% of revenue in 2004. The overall increase in cost of revenueSG&A as a percentage of revenue is due to
increased commissionadditional expenses related to accrued severance related the resignation of the President of Pharmacy Operations and
referral fee costs. Cost of revenue includes all direct costs, including broker commissions,professional fees for services and subscriptions incurred
in connection with a real estate advisory transaction. The increase of $2,818,000 infor the Form 10 filing, corporate name change and upgrade to OTCQB Venture Markets from the Pink Sheets offset by cost
of revenuesavings implemented to counter the expected lower gross profit. Depreciation and amortization decreased $44 for the year ended December 31,
2005 is due primarily2017, to
the inclusion of CPOC’s cost of revenue for the period$1,008 from
the date of acquisition on May 1, 2004 to December 31, 2004 as compared to a full twelve months$1,052 in
2005.2016.
Operating Expenses
Operating expenses increased $864,000 from $2,479,000 in 2004 to $3,343,000Interest Expense
Interest expense decreased $16 for the year ended December 31, 2005. This increase includes a2017, to $427 from $443 in 2016. The decrease of $151,000 in selling, general and administrative expenses at Capital Marketsinterest expense is due to decreased professional bonuses due to lower transaction revenues. decrease in total debt of $1.3 million offset by increases in interest rates.
Earnings Before Interest, Taxes, Depreciation and Amortization
The increase also includes an increaseone time non-operating investments impairment of $926,000 for CPOC due to the inclusion$4,008, of CPOC’s operating expenses for the period from the date of acquisition on May 1, 2004 to December 31, 2004 as compared to a full twelve monthswhich $3,812 is described in 2005.
Interest Income (Expense), Net
Interest expense, net is comprised of interest expense related to the debt assumed as partNote 8 of the CPOC acquisition. Interest expense, net was $444,000 in 2005 as comparedDougherty’s Consolidated Financial Statements contained herein, is added back to $247,000income to calculate EBITDA (Adjusted) for the year ended December 31, 2004.2016. The increase$3,812 charge is partially due to an increase in the prime rate from 5.25% at December 31, 2004 to 7.25% at December 31, 2005. The CPOC acquisition note payable at the Northern Trust Bank was at prime rate plus 0.50%. The remainder of the increase in interest expense is duerelated to the inclusionliquidation of CPOC’sa partnership interest expense forlocated in California that performs real estate advisory services to corporate clients around the period from the dateUnited States. The investments impairments are not a result of acquisition on May 1, 2004ongoing operations and added back by management to December 31, 2004 as comparedderive comparative results year over year. EBITDA (Adjusted) decreased by $255 to a full twelve monthsEBITDA (Adjusted) of $431 in 2005.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA increased 23.4% to $2,549,000 in 2005 from $2,065,000 in 2004. This increase is due principally to an increase in gross profit of $1,254,000 which is partially offset by an increase in operating expenses of $864,000.
Corporate and other
Operating Expenses
Operating expenses for the year ended December 31, 2005 were $1,157,000, or a decrease2017, from EBITDA (Adjusted) of $102,000 from operating expenses$686 in 2016. EBITDA (Adjusted) represented 1.1% of $1,259,000 for the year ended December 31, 2004. Therevenue in 2017 as compared to 1.6% of revenue in 2016. This overall decrease is due primarily a result of decreased costs for legal and accounting due to the additional activity generated by our acquisitions of the Park Assets and CPOCincrease in 2004. Operating expenses of $1,157,000 includes payroll and benefits of $515,000; legal expense of $111,000; insurance expense of $178,000; audit and accounting expense of $83,000; SEC, transfer agent and other professional fees of $89,000; and other selling, general and administrative expenses of $181,000.
Equity in Income (Losses) of Equity Method Investees
Equity in income (losses) of equity method investees increased $301,000 from $374,000 during the year ended December 31, 2004 to $675,000 for the year ended December 31, 2005. Equity in income (losses) of equity method investees represents our pro-rata portion, based on our limited partnership interests, of the income (losses) of Ampco Partners, Ltd., Fairways 03 New Jersey, L.P., Fairways 36864, L.P. and Fairways Frisco, LP as follows:
| | | December 31, | | December 31, | |
| | | 2005 | | 2004 | |
| | | | | | |
| Ampco Partners, Ltd. | | $ | 100,000 | | $ | 82,000 | |
| Fairways 03 New Jersey, LP | | | 1,112,000 | | | 208,000 | |
| Fairways 36864, L.P. | | | - | | | 84,000 | |
| Fairways Frisco, L.P. | | | (537,000 | ) | | - | |
| | | $ | 675,000 | | $ | 374,000 | |
The equity in earnings of Fairways NJ of $1,112,000 is comprised of earnings from its interest in the leasing of a single tenant commercial building and a gain on the sale of that building in 2005. Of this total, $951,000 was received is cash distributions in 2005. The remaining amount is expected to be received in cash as described below. The Company received a distribution of approximately $680,000 on December 30, 2005 from Fairways NJ, which represented the Company’s share in the profit from the sale of a single tenant commercial real estate property interest, the sole asset held by Fairways NJ. In addition to the distribution, cash of $162,000, representing the Company’s share of the total escrow, is being held in escrow to fund any amounts owed by Fairways NJ to the purchaser, including any amounts owed for standard representations & warranties under the sale agreement. The balance of the escrow account was received in December 2006.
The equity in losses of Fairways Frisco of $537,000 represents our share of the net loss of Fairways Frisco for the year ended December 31, 2005. We made our initial investment in Fairways Frisco on December 31, 2004, and accordingly no equity in income (losses) of Fairways Frisco was recorded in 2004. This amount is a non-cash adjustment to our operating results and we have no obligation to fund the operating losses or debts of Fairways Frisco.
The equity in income of Fairways 36864, L.P. of $84,000 for the year ended December 31, 2005 was due to a gain on the sale of two single tenant commercial properties in which we had an investment through ASE Investments. This investment is no longer outstanding. See Item I, “Business” of Part I for more information.
Other Income
Other income in 2005 represents the receipt of $64,000 from Fairways Equities, LLC under an agreement whereby the Company receives 25% of certain fees earned by Fairway Equities.
Income tax provision
Income tax provision of $32,000 in 2005 represents federal alternative minimum taxes owed by the Company. Based on the Company’s differences in income in various legal entities and its temporary differences between taxable income and book income, there was no income tax provision recorded for 2004. The Company’s net operating loss carryforwards are limited to usage of 90% of alternative minimum taxable income, and therefore it will be required to pay alternative minimum tax on 10% of its alternative minimum taxable income at a statutory tax rate of 20%.
SG&A noted above.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 December 31, 2006,2017, we had working capital deficit of approximately $0.1negative $2.0 million as compared to working capital of approximately $4.5negative $2.2 million at December 31, 2005. The $4.6 million decrease in2016. Negative working capital is due to an increase in the current portionreclassification of notes payablethe balance of approximately $3.8 million dueand $4.2 million under the Company’s revolving credit facility (the “Revolver”) with the First National Bank of Omaha as of December 31, 2017 and December 31, 2016, respectively, to current liabilities to present the changeconsolidated financial statements in classificationconformity with GAAP. The reclassification does not affect the representation of the Bank of Texas notes payable, in our Healthcare segment, from a long-term liability to a current liability. In addition, the First Republic Bank note payable, in our Real Estate segment, increased the current portion of notes payable by $1.2 million.
On February 20, 2007, Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP, each a wholly-owned subsidiary of DHI, entered into a loan agreement with Amegy Bank for a $2,000,000 revolving line of credit and a $2,200,000 term loan. Substantially all of the proceeds from the revolving line of credit and the term loan were used to retire the outstanding balance owed to Bank of Texas, N.A. under an existing credit facility. As a result, under the payments terms of the Amegy Bank revolving line of credit and term loan, we improved the working capital position by approximately $3.7 million.
Company’s overall performance.As of December 31, 2006,2017, we had cash and restricted cash equivalents of approximately $2.7 million$389,000, of which $303,000 was restricted, as compared to approximately $3.2 million$361,000, of which $303,000 was restricted, at December 31, 2016. The increase in cash for the twelve months ended December 31, 2017, of $28,000 was the overall net increase from activities as presented below.
As of December 31, 2017, the Company had total current assets of $6,242,000 and total current liabilities of $8,196,000 creating negative working capital of approximately $1,954,000 as compared to total current assets of $6,013,000 and total current liabilities of $8,244,000 creating negative working capital of approximately $2,231,000 at December 31, 2016. The overall decrease in negative working capital of $277,000 is primarily due to payments of current notes payable and the Revolver, net of increases in accruals for severance and professional fees incurred for the Form 10 filing, discussed in “SG&A” above.
The change in cash and cash equivalents is as follows:
| | | 2017 | | | 2016 | |
| | | | | | | |
| Net cash provided by operating activities | | $ | 630 | | | $ | 1,374 | |
| Net provided by (used in) investing activities | | | 859 | | | | (447 | ) |
| Net cash used in financing activities | | | (1,461 | ) | | | (937 | ) |
| Net increase (decrease) increase in cash | | $ | 28 | | | $ | (10 | ) |
Net cash provided by operating activities was approximately $630,000 in the twelve months ended December 31, 2017, compared to $1,374,000 in the twelve months ended December 31, 2016. The decrease of $744,000 was primarily due to an increase in net loss of $143,000 due to lower gross margin as discussed in “Gross Margin” above, a decrease in accounts receivable of $162,000 due to a reduction in accounts receivable related to the decline in revenues discussed in “Gross Margin” above, an increase in inventory of $465,000 for expected increases in sales for the fourth quarter, an increase in accounts payable of $244,000 due to the increase in inventory, and a decrease of $74,000 due to other net changes.
Net cash provided by (used in) investing activities was approximately $859,000 in the twelve months ended December 31, 2017, compared to a negative $447,000 in the twelve months ended December 31, 2016. Cash used to purchase property and equipment was $128,000 for the twelve months ended December 31, 2017, compared to $447,000 for the prior year. The decrease of $319,000 was primarily due to capital expenditures incurred during the twelve months ended December 31, 2016, related to the relocation of a pharmacy. For the twelve months ended December 31, 2017, cash proceeds from the disposition of the Humble, Texas pharmacy were $274,000, and cash provided by the proceeds of the disposition of CPOC was $687,000. Proceeds from these dispositions totaling $961,000 were primarily used to make payments on notes payable.
Net cash used in financing activities was $1,461,000 in the twelve months ended December 31, 2017, compared to net cash used in financing activities of $937,000 in the twelve months ended December 31, 2016. For the twelve months ended December 31, 2017, borrowings of $19,310,000 and payments of $19,657,000 were made on the revolving credit facility; payments of $1,114,000 were made on notes payable. For the twelve months ended December 31, 2016, borrowings of $22,779,000 and payments of $22,726,000 were made on the revolving credit facility; payments of $990,000 were made on notes payable.
Our principal indebtedness at December 31, 2017, consists of the following:
| · | A number of term notes in favor of Cardinal Health in the aggregate amount of $3,347,000, secured by certain retail pharmacy assets, and maturing between August 2019 and August 2020; |
| | |
| · | A revolving credit facility in the principal amount of $4,450,000 as of December 31, 2017 of which the Company has currently borrowed $3,831,000 on the revolving credit facility, leaving $619,000 available for future borrowings; |
| | |
| · | Notes payable to sellers of acquired pharmacies in the aggregate amount of $97,000, 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 including interest due and owing under the promissory note as of February 21, 2018, of $1,917,440 (the “Guarantee Payment”), and as the co-guarantor, of which $420,000 in payments were made during 2017. The Company’s guarantee is in effect through the December 2018 maturity date of the note. The Company has received written assurance that the primary obligors are current in their payment obligations under the promissory note as of February 21, 2018. The promissory note is fully collateralized by a property that is currently held for sale, is expected to sell before the maturity date 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. 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, 2005.
2017 or 2016 related to this guarantee.Our future capital needs are uncertain. Although management projectsManagement 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 acquired businesses, therebusiness, for which we can beprovide no assurances that this will occur. If the Company does not generate the necessary cash flow, the Company will need additional financing in the future to fund operations. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on terms favorable to stockholders.
Cash from Financing Activities
Dougherty’s Holdings, Inc.
During the years ended December 31, 2006 and 2005, DHI made principal payments on its notes payable of $1,170,000 and $718,000, respectively. DHI also made $755,000 of new borrowings under its bank credit facility and the insurance premium finance notes payable during the year ended December 31, 2006 whereas no new borrowings were made during the year ended December 31, 2005.
ASDS of Orange County, Inc.
During the first six months of 2006, ASDS made principal payments of $882,000 on its Acquisition Note Payable to Kevin Hayes. In June 2006, ASDS entered into a credit agreement with First Republic Bank for a $5.3 million term note. The proceeds from the term note were used to retire the outstanding balance owed to Kevin Hayes under the Acquisition Note. The Acquisition Note was retired at a discount of approximately $100,000 to its outstanding principal balance of $5,400,000. During the last six months of the year, ASDS paid $900,000 on the First Republic Bank term note. Please see Note 10 of the Ascendant Consolidated Financial Statements contained herein.
During the year ended December 31, 2005, ASDS made principal payments of $718,000 on its Acquisition Note Payable to Kevin Hayes. There were no new borrowings during the year ended December 31, 2005 by either ASDS or CPOC.
In connection with the acquisition of CPOC, the Company was entitled to receive a structuring fee of $690,000, plus interest thereon, of which $230,000 was paid at closing and $230,000 was paid on May 1, 2005. The remainder of $230,000, plus interest thereon was paid on May 1, 2006. The structuring fee has been eliminated in the consolidation of the Company with CPOC and the Operating LP in the consolidated financial statements of the Company.
Cash Flow
During the year ended December 31, 2006 we had a decline in cash flow of approximately $535,000. Cash flow provided from operating activities for the year ended December 31, 2006 was $1,091,000 while cash used in investing activities was $70,000 and cash used in financing activities was $1,556,000. The cash used in investing activities was primarily for purchases of property and equipment of $177,000 less net distributions from limited partners of $107,000 which includes the Fairways NJ distribution. The cash used in financing activities was primarily related to payments on the acquisition debt for DHI and CPOC.
Through December 31, 2006, we have invested approximately $1.22 million in Fairways Frisco. In September 2005, the Company borrowed $225,000 from a bank and used the proceeds to increase its investment in Fairways Frisco. This unsecured bank note payable was repaid in full in January 2006. The Frisco Square Partnerships and Fairways Frisco will require additional funding in order to complete development of the planned project. We are not obligated to invest any additional funds if Fairways Frisco makes a capital call for additional cash, although we may choose to do so depending on our available funds. However, if we do not participate in additional capital calls, our limited partnership interest will be diluted.
In December 2005, the Company received a cash distribution of approximately $680,000 from Fairways NJ, which represented the Company’s share in the profit from the sale of a single tenant commercial real estate property interest, the sole asset held by Fairways NJ. In addition to the distribution, cash of $162,000, representing the Company’s share of the total escrow, was held in escrow to fund any amounts owed by Fairways NJ to the purchaser, including any amounts owed for standard representations & warranties under the sale agreement. The balance of the escrow account, including interest income, totaling approximately $168,000 was received in December 2006.
Our future capital needs are uncertain. Although management projects positive cash flow after debt service based on anticipated operations of our acquired businesses, there can be no assurances that this will occur. If the Company does not generate the necessary cash flow, the Company will need additional financing in the future to fund operations.
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
stockholders.the Company.
At December 31, 2006,2016, we had approximately $51$48 million of federal net operating lossNOL carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 20182020 to 2024. In addition, we had approximately $2.9 million of state net operating loss carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 2007 to 2009.2035. 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 net operating lossNOL 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. Accordingly,income, except for $2 million that is estimated to offset future taxable income from pharmacy operations and or the sale of pharmacy businesses. On December 22, 2017, the President signed into law the “Tax Cuts and Jobs Act” (the “TCJA”). Among numerous changes to existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The effects on deferred tax balances of changes in tax rates are required to be taken into consideration in the period in which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax assets from $3 million to $2 million and recorded a provisional noncash income tax loss of approximately $1.0 million for year ended December 31, 2017. The Company has not completed all of its processes to determine the TCJA’s final impact. The final impact may differ from this provisional amount due to, among other things, changes in interpretations and assumptions the Company has made thus far and the issuance of additional regulatory or other guidance. The accounting is expected to be completed by the time the 2017 federal income tax return is filed in 2018.
The estimated deferred tax asset is consistent with the prior year, accordingly, no tax benefit has been recognized in the periods presented.
State Income Taxes
In May 2006,presented other than the State of Texas replaced the current franchise tax system with a new Texas Margin Tax (“TMT”). The TMT is a 1% gross receipts tax based on the Company’s taxable margin, as defined by the new law. However, for taxable entities primarily engaged in retail and wholesale trade, the rate is 0.5% of taxable margin. The Company has evaluated the impact of the TMT on our consolidated financial position, results of operations or cash flows and has concluded that the TMT does not appear it will have a material impact on its results of operations.
$1.0 million discussed above.Off Balance Sheet Arrangements
As discussedWe 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 Part I of this Form 10-K, the Company guaranteed the Acquisition Note in the amount of $6.9 million. The Acquisition Note was payable from the excess cash flows of ASDS over a three year period. During the period from May 1, 2004 until June 2006, principal payments we made paid on the Acquisition Note. In June 2006, ASDS entered into aassets transferred to such entity or similar arrangement that serves as credit, agreement with First Republic Bankliquidity or market risk support for a $5.3 million term note. The proceeds from the term note were used to retire the outstanding balance owed to Kevin Hayes under the Acquisition Note. There were no payments required under the termssuch assets.
Please see Notes 10 and 14 of the Company’s guarantee.
In January 2005, the Company agreed to provide a limited indemnification to its partners in the Fairways NJ investment for any losses those partners may incur under their personal guaranties of the partnership’s bank indebtedness. The Company’s partners in this investment are the Fairways Members. The Company’s indemnification to these four partners is limited to $520,000 in the aggregate, which is its 20% pro rata partnership interest of the $2.6 million in bank debt that was guaranteed by the individuals. In December 2005, this bank debt was paid in full by Fairways NJ and the personal guarantees, as well as the Company’s indemnification, were cancelled.
Disclosures About Contractual Obligations and Commercial Commitments
In connection with the acquisition of the Park Assets in 2004, DHI entered into a three year supply agreement with AmerisourceBergen Drug Corporation pursuant to which DHI and its subsidiaries agreed to purchase prescription and over-the-counter pharmaceuticals from AmerisourceBergen through March 2007. This supply agreement provided us with pricing and payment terms that are improved from those previously provided by AmerisourceBergen to Park Pharmacy. In exchange for these improved terms, DHI agreed to acquire 85% of its prescription pharmaceuticals and substantially all of its generic pharmaceutical products from AmerisourceBergen and agreed to minimum monthly purchases of $900,000 of all products in order to obtain new favorable pricing terms. For the years ended December 31, 2006 and 2005 and the period from the date of acquisition through December 31, 2004, DHI purchased over $23,858,000, $23,159,000 and $17,250,000, respectively, of its pharmaceutical products from AmerisourceBergen.
In December 2006, DHI entered into Amendment No. 1 (“Amendment”) to the supply agreement. The Amendment extends the supply agreement from March 24, 2007 to March 24, 2009. In addition, the Amendment (1) improves the pricing for goods purchased, (2) changes the minimum order volume from $30,000,000 to $50,000,000 over the life of the agreement and (3) the percentage of generic drug purchases was changed from 2.50% to 6.0%. The Amendment also allows for the return of goods, in a saleable condition, within 180 days of the invoice date without a restocking fee and provides for a termination fee if DHI terminates the supply agreement before the expiration of the term of the agreement. The termination fee is a maximum of $50,000 but is reduced for each full month from December 1, 2006 until the date of termination. However, there is no termination fee if the minimum order volume has been satisfied. At December 31, 2006, DHI believes it has satisfied the minimum order volume.
The Amendment also provides for a rebate in the amount of $150,000 representing a 15.0% volume discount off the price of goods for the first $1,000,000 of net purchases purchased in the period after November 1, 2006 providing that DHI makes net purchases in excess of $1 million after November 1, 2006. In December 2006, DHI satisfied the net purchase requirement and received the $150,000 rebate.
A summary of our contractual commitments under debt and lease agreements and other contractual obligations at December 31, 2006 and the effect such obligations are expected to have on liquidity and cash flow in future periods appears below. This is all forward-looking information and is subject to the risks and qualifications set forth at the beginning of Item 7.
Contractual Obligations | | | |
As of December 31, 2006 | | Payments due by Period ($-000's omitted) | |
| | | Less than | | 1-3 | | 3-5 | | More than | | | |
| | | 1 year | | Years | | Years | | 5 years | | Total | |
| | | | | | | | | | | | |
| Lease Obligations | | $ | 1,260,000 | | $ | 2,147,000 | | $ | 1,127,000 | | $ | 2,007,000 | | $ | 6,541,000 | |
| Notes Payable | | | 6,106,000 | | | 3,824,000 | | | - | | | - | | | 9,930,000 | |
| Total | | $ | 7,366,000 | | $ | 5,971,000 | | $ | 1,127,000 | | $ | 2,007,000 | | $ | 16,471,000 | |
On February 20, 2007, Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP, each a wholly-owned subsidiary of DHI, entered into a loan agreement with Amegy Bank for a $2,000,000 revolving line of credit and a $2,200,000 term loan. Substantially all of the proceeds from the revolving line of credit and the term loan were used to retire the outstanding balance owed to Bank of Texas, N.A. under an existing credit facility. As a result of this new loan agreement, on February 20, 2007 the note payable payments due in less than one year decreased by approximately $3,757,000 since the new debt payments terms extend the maturity of the revolving line of credit and term loan payments into future years. Please see Note 10 of the Ascendant Consolidated Financial Statements contained herein.
| | | Contractual Obligations As of December 31, 2017 | |
| | | Payments due by Period ($-000's omitted) | |
| | | Less than | | | 1-3 | | | 4-5 | | | More than | | | | |
| | | 1 year | | | Years | | | Years | | | 5 years | | | Total | |
| Lease Obligations | | | 776 | | | | 1,538 | | | | 1,343 | | | | 3,853 | | | | 7,510 | |
| Notes Payable | | | 4,644 | | | | 2,801 | | | | – | | | | – | | | | 7,445 | |
| Total | | $ | 5,420 | | | $ | 4,339 | | | $ | 1,343 | | | $ | 3,853 | | | $ | 14,955 | |
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have beenare prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimatesAmerica and assumptions that affect the reportedinclude amounts of assets, liabilities, revenuesbased on management’s prudent judgments and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to long-term investments. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.estimates. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies and the relatedestimates. Management believes that any reasonable deviation from those judgments and estimates affect the preparation of our consolidated financial statements.
Revenue Recognition
Healthcare revenues are reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional healthcare providers and others. We recognize 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.
CPOC’s primary revenue is from brokerage commissions earned from project leasing and tenant representation transactions. Brokerage commission revenue is generally recorded upon execution of a lease contract, unless additional activities are required to earn the commission pursuant to a specific brokerage commission agreement. Participation interests in rental income are recognized over the life of the lease. Other revenue is recognized as the following consulting services are provided: facility and site acquisition and disposition, lease management, design, construction and development consulting, move coordination and strategic real estate advisory services.
Long-Term Investments
Our long-term investments are accounted for using the equity method of accounting for investments and none represent investments in publicly traded companies. The equity method is used as we do not have a majority interest and do not have significant influence over the operations of the respective companies. We also use the equity method for investments in real estate limited partnerships where we own more than 3% to 5% of the limited partnership interests. Accordingly, we record our proportionate share of the income or losses generated by our equity method investees in the income statement. If we receive distributions in excess of our equity in earnings, they are recorded as a reduction of our investment.
The fair value of our long-term investments is dependent upon the performance of the companies in which we have invested, as well as volatility inherent in the external markets for these investments. The fair value of our ownership interests in, and advances to, privately held companies is generally determined based on overall market conditions, availability of capital as well as the value at which independent third parties have invested in similar private equity transactions. We evaluate, on an on-going basis, the carrying value of our ownership interests in and advances to the companies in which we have invested for possible impairment based on achievement of business plan objectives, the financial condition and prospects of the company and other relevant factors, including overall market conditions. Such factors may be financial or non-financial in nature.
If as a result of the review of this information, we believe our investment should be reduced to a fair value below its cost, the reduction would be charged to “loss on investments” on the statements of income. Although we believe our estimates reasonably reflect the fair value of our investments, our key assumptions regarding future results of operations and other factors may not reflect those of an active market, in which case the carrying values may have been materially different than the amounts reported.
Recent Accounting Pronouncements.
In December 2004, the Financial Accounting Standards Board issued FASB Statement No. 123R (Revised 2004), Share-Based Payment. (“Statement 123R”), which required that the compensation cost relating to share-based payment transactions such as options, restricted share plans, performance based awards, share appreciation rights and employee share purchase plans be recognized in financial statements.
Statement 123R replaces FASB Statement No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used.
The Company currently expenses the cost of restricted shares issued to employees and directors over the service vesting period associated with the restricted shares.
The Company currently has no options outstanding which are not vested. The unrecognized compensation cost related to these options is not material and as a result, the implementation of Statement 123R did not have a material impact on the Company’s Stock Based Compensation.
The Company accounts for its employee stock options and stock based awards under the fair value provisions of Statement 123R, which was adopted effective January 1, 2006, whereby stock-based compensation is measured at the grant date based on the value of the awards and is recognized as expense over the requisite service period
(usually the vesting period). See Note 12 for additional information about the Company’s Stock Based Compensation.
In May 2006, the State of Texas replaced the current franchise tax system with a new Texas Margin Tax (“TMT”). The TMT is a 1% gross receipts tax based on the Company’s taxable margin, as defined by the new law. However, for taxable entities primarily engaged in retail and wholesale trade, the rate is 0.5% of taxable margin. The Company has evaluated the impact of the TMT on our consolidated financial position results of operations or cash flows and has concluded that the TMT does not appear it will have a material impact on our results of operations.
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006, with early adoption permitted. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes, by providing a recognition threshold and measurement guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We have evaluated the impact of the adoption of this interpretation on our consolidated financial position, results of operations or cash flows and have concluded that it does not appear it will have a material impact on our results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after December 15, 2007. We are currently evaluating the impact, if any; the adoption of SFAS 157 will have on our consolidated financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently do not engage in commodity futures trading or hedging activities and do not enter into derivative financial instrument transactions for trading or other speculative purposes. We also do not currently engage in transactions in foreign currencies or in interest rate swap transactions that could expose us to market risk.
We are exposed to market risk from changes in interest rates with respect to the credit agreements entered into by our subsidiaries to To the extent that the pricingestimates used differ from actual results, however, adjustments to the statement of these agreements is floating.
At December 31, 2006, we were exposed to interest rate risk under the First Republic Bank note payable which bears interest payable monthly at the prime rate of Bank of America minus 0.25% per annumearnings and the $440,000 demand note payable to Ampco Partners, Ltd., which bears interest at the Bank of Texas prime rate plus 4.00%.
If the effective interest rate under the First Republic Bank note and the Ampco Partners, Ltd demand note were to increase by 100 basis points (1.00%), our annual financing expensecorresponding balance sheet accounts would increase by approximately $44,000, based on the average balances outstanding during the year ended December 31, 2006. A 100 basis point (1.00%) increasebe necessary. These adjustments would be made in market interest rates would decrease the fair value of our fixed rate debt by approximately $23,000. We did not experience a material impact from interest rate risk during the year ended December 31, 2006.
On February 20, 2007, Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP, each a wholly-owned subsidiary of DHI, entered into a loan agreement with Amegy Bank for a $2,000,000 revolving line of credit and a $2,200,000 term loan. Please see Note 10future periods. Some of the
Ascendant Consolidated Financial Statements contained herein. Outstanding advances undermore significant estimates include intangible asset impairment, cost method investments and income taxes. We use the
revolving linefollowing 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 credit will bear interest at the Amegy Bank prime ratecollectability of accounts receivable. Specifically, management analyzes accounts receivable and the term loan bears interest at the Amegy Bank’s prime rate plus 0.25%. As a result, we are now exposed to interest rate risk under the Amegy Bank credit facility.
In addition, our ability to finance future acquisitions through debt transactions may be impacted if we are unable to obtain appropriate debt financing at acceptable rates. We are exposed to market risk fromhistorical bad debts, customer credit-worthiness, current economic trends, and changes in interest rates through our investing activities, if any. Our investment portfolio consists primarily of investments in high-grade commercial bank money market accounts. At December 31, 2006, we had no investing activities.
The following table summarizescustomer payment terms and collections trends when evaluating the financial instruments held by us at December 31, 2006, which are sensitive to changes in interest rates. At December 31, 2006, approximately 49% of our debt was subject to changes in market interest rates and was sensitive to those changes. Scheduled principal cash flows for debt outstanding at December 31, 2006 for the years ending December 31 are as follows:
| | | Fixed Rate | | Variable | | Total | |
| | | | | | | | |
| 2007 | | $ | 4,466,000 | | $ | 1,640,000 | | $ | 6,106,000 | |
| 2008 | | | 43,000 | | | 1,200,000 | | | 1,243,000 | |
| 2009 | | | 581,000 | | | 2,000,000 | | | 2,581,000 | |
| Thereafter | | | - | | | - | | | - | |
| | | $ | 5,090,000 | | $ | 4,840,000 | | $ | 9,930,000 | |
On February 20, 2007, Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP, each a wholly-owned subsidiary of DHI, entered into a loan agreement with Amegy Bank for a $2,000,000 revolving line of credit and a $2,200,000 term loan. Substantially alladequacy of the proceeds fromallowance for doubtful accounts. Any change in the revolving line of credit andassumptions used in analyzing accounts receivable may result in additional allowances for doubtful accounts being recognized in the term loan were used to retireperiods in which the outstanding balance owed to Bank of Texas, N.A. under an existing credit facility. As a result of this new loan agreement, on February 20, 2007 payments on fixed rate debt duechange in 2007 decreased by approximately $3,757,000 since the new debt payments terms extend the maturity of the revolving line of credit and term loan payments into future years. Also, due to this new loan agreement, $4,215,000 of the fixed rate debt in 2007 became variable rate debt. Consequently, as of February 20, 2007, approximately 91% of our debt is now subject to changes in market interest rates and is sensitive to those changes. Please see Note 10 of the Ascendant Consolidated Financial Statements contained herein.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA| | Page
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ASCENDANT SOLUTIONS, INC.
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| 18 | |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Ascendant Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Ascendant Solutions, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three the years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ascendant Solutions, Inc. and subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2006, in conformity with United States generally accepted accounting principles.
| /s/ HEIN & ASSOCIATES LLP
|
Dallas, Texas
April 11, 2007
ASCENDANT SOLUTIONS, INC. | |
CONSOLIDATED BALANCE SHEETS | |
(000's omitted, except par value and share amounts) | |
| | | | | | |
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
ASSETS | |
| | | | | | |
| Cash and cash equivalents | | $ | 2,686 | | $ | 3,221 | |
| Trade accounts receivable, net | | | 5,339 | | | 5,108 | |
| Other receivables | | | 387 | | | 171 | |
| Receivable from affiliates | | | 66 | | | 85 | |
| Inventories, net | | | 2,832 | | | 2,827 | |
| Prepaid expenses | | | 637 | | | 452 | |
| Total current assets | | | 11,947 | | | 11,864 | |
| Property and equipment, net | | | 1,019 | | | 1,222 | |
| Goodwill | | | 7,299 | | | 7,299 | |
| Other intangible assets | | | 95 | | | 426 | |
| Equity method investments | | | 419 | | | 1,086 | |
| Other assets | | | 260 | | | 101 | |
Total assets | | $ | 21,039 | | $ | 21,998 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
| | | | | | | | |
| Accounts payable | | $ | 2,293 | | $ | 3,455 | |
| Accrued liabilities | | | 3,634 | | | 2,852 | |
| Notes payable, current | | | 6,106 | | | 1,049 | |
| Total current liabilities | | | 12,033 | | | 7,356 | |
| Notes payable, long-term | | | 3,824 | | | 10,875 | |
| Minority interests | | | 947 | | | 694 | |
Total liabilities | | | 16,804 | | | 18,925 | |
| Commitments and contingencies (Notes 10 and 15) | | | | | | | |
| | | | | | | | |
| Stockholders' equity: | | | | | | | |
| Common stock, $0.0001 par value; 50,000,000 shares authorized; 22,508,170 and 22,180,900 shares issued and outstanding at December 31, 2006 and 2005, respectively | | | 2 | | | 2 | |
| Additional paid-in capital | | | 60,176 | | | 60,078 | |
| Deferred compensation | | | (25 | ) | | (66 | ) |
| Accumulated deficit | | | (55,918 | ) | | (56,941 | ) |
Total stockholders' equity | | | 4,235 | | | 3,073 | |
Total liabilities and stockholders' equity | | $ | 21,039 | | $ | 21,998 | |
| | | | | | | | |
| See accompanying notes to the Consolidated Financial Statements |
ASCENDANT SOLUTIONS, INC. | |
CONSOLIDATED STATEMENTS OF INCOME | |
(000's omitted, except share and per share amounts) | |
| | | | | | | | |
| | | Years Ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
| Revenue: | | | | | | | | | | |
| Healthcare | | $ | 41,062 | | $ | 39,136 | | $ | 29,532 | |
| Real estate advisory services | | | 14,355 | | | 13,831 | | | 9,759 | |
| | | | 55,417 | | | 52,967 | | | 39,291 | |
| Cost of sales: | | | | | | | | | | |
| Healthcare | | | 28,048 | | | 26,517 | | | 19,668 | |
| Real estate advisory services | | | 8,404 | | | 8,205 | | | 5,387 | |
| | | | 36,452 | | | 34,722 | | | 25,055 | |
| Gross profit | | | 18,965 | | | 18,245 | | | 14,236 | |
| | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | |
| Selling, general and administrative expenses | | | 16,190 | | | 16,910 | | | 13,054 | |
| Non-cash stock compensation | | | 40 | | | 81 | | | 58 | |
| Depreciation and amortization | | | 713 | | | 652 | | | 494 | |
| Total operating expenses | | | 16,943 | | | 17,643 | | | 13,606 | |
| Operating income | | | 2,022 | | | 602 | | | 630 | |
| Equity in income of equity method investees | | | (356 | ) | | 675 | | | 374 | |
| Other income | | | 155 | | | 73 | | | 19 | |
| Interest income (expense), net | | | (758 | ) | | (763 | ) | | (520 | ) |
| Loss on sale of property and equipment | | | - | | | (1 | ) | | (32 | ) |
| Income before minority interest and income tax provision | | | 1,063 | | | 586 | | | 471 | |
| Minority interest | | | 65 | | | 50 | | | 56 | |
| Income tax provision | | | 205 | | | 241 | | | 166 | |
| Income from continuing operations | | | 793 | | | 295 | | | 249 | |
| Income (loss) from discontinued operations | | | 230 | | | (230 | ) | | - | |
| | | | | | | | | | | |
| Net income | | $ | 1,023 | | $ | 65 | | $ | 249 | |
| | | | | | | | | | | |
| Basic net income (loss) per share | | | | | | | | | | |
| Continuing operations | | $ | 0.04 | | $ | 0.01 | | $ | 0.01 | |
| Discontinued operations | | $ | 0.01 | | $ | (0.01 | ) | $ | - | |
| | | $ | 0.05 | | | * | | $ | 0.01 | |
| Diluted net income (loss) per share | | | | | | | | | | |
| Continuing operations | | $ | 0.04 | | $ | 0.01 | | $ | 0.01 | |
| Discontinued operations | | $ | 0.01 | | $ | (0.01 | ) | $ | - | |
| | | $ | 0.05 | | | * | | $ | 0.01 | |
| * Less than $0.01 per share | | | | | | | | | | |
| | | | | | | | | | | |
| Average common shares outstanding, basic | | | 22,409,814 | | | 22,006,733 | | | 21,803,817 | |
| Average common shares outstanding, diluted | | | 22,675,722 | | | 22,877,704 | | | 22,389,267 | |
| See accompanying notes to the Consolidated Financial Statements. |
ASCENDANT SOLUTIONS, INC. | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |
(000's omitted, except share amounts) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | Common Stock | | Additional | | | | | | Total | |
| | | Class A | | Paid-in | | Deferred | | Accumulated | | Stockholders' | |
| | | Shares | | Amount | | Capital | | Compensation | | Deficit | | Equity | |
| | | | | | | | | | | | | | |
Balance at December 31, 2003 | | | 21,665,900 | | $ | 2 | | $ | 59,822 | | $ | (46 | ) | $ | (57,255 | ) | $ | 2,523 | |
| Exercise of stock options | | | 200,000 | | | - | | | 49 | | | - | | | - | | | 49 | |
| Non-cash stock option compensation | | | - | | | - | | | 18 | | | - | | | - | | | 18 | |
| Issuance of restricted stock to officers & directors | | | 67,500 | | | - | | | 72 | | | (72 | ) | | - | | | - | |
| Amortization of deferred compensation | | | - | | | - | | | - | | | 40 | | | - | | | 40 | |
| Net income | | | - | | | - | | | - | | | - | | | 249 | | | 249 | |
Balance at December 31, 2004 | | | 21,933,400 | | $ | 2 | | $ | 59,961 | | $ | (78 | ) | $ | (57,006 | ) | $ | 2,879 | |
| Exercise of stock options | | | 200,000 | | | - | | | 48 | | | - | | | - | | | 48 | |
| Issuance of restricted stock to directors | | | 47,500 | | | - | | | 69 | | | (69 | ) | | - | | | - | |
| Amortization of deferred compensation | | | - | | | - | | | - | | | 81 | | | - | | | 81 | |
| Net income | | | - | | | - | | | - | | | - | | | 65 | | | 65 | |
Balance at December 31, 2005 | | | 22,180,900 | | $ | 2 | | $ | 60,078 | | $ | (66 | ) | $ | (56,941 | ) | $ | 3,073 | |
| Exercise of stock options | | | 200,000 | | | - | | | 48 | | | - | | | - | | | 48 | |
| Issuance of restricted stock to directors | | | 127,270 | | | - | | | 50 | | | (15 | ) | | - | | | 35 | |
| Amortization of deferred compensation | | | - | | | - | | | - | | | 56 | | | - | | | 56 | |
| Net income | | | - | | | - | | | - | | | - | | | 1,023 | | | 1,023 | |
Balance at December 31, 2006 | | | 22,508,170 | | $ | 2 | | $ | 60,176 | | $ | (25 | ) | $ | (55,918 | ) | $ | 4,235 | |
| | | | | | | | | | | | | | | | | | | | |
| See accompanying notes to the Consolidated Financial Statements. |
ASCENDANT SOLUTIONS, INC. | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(000's omitted) | |
| | |
| | | Years Ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
Operating Activities | | | | | | | |
| | | | | | | | |
| Net income | | $ | 1,023 | | $ | 65 | | $ | 249 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | |
| Provision for doubtful accounts | | | 451 | | | 374 | | | 260 | |
| Depreciation and amortization | | | 713 | | | 652 | | | 494 | |
| Deferred compensation amortization | | | 56 | | | 81 | | | 40 | |
| Issuance of stock in lieu of directors fees | | | 35 | | | - | | | 18 | |
| Non-cash equity in losses (income) of equity method investees | | | | | | | | | | |
| Fairways Frisco, LP | | | 458 | | | 537 | | | - | |
| Fairways 03 New Jersey, LP | | | - | | | (162 | ) | | - | |
| Income from early extinguishment of debt | | | (100 | ) | | - | | | - | |
| Loss on sale of property and equipment | | | - | | | 1 | | | 32 | |
| Minority interest | | | 65 | | | 50 | | | 56 | |
| Discontinued operations | | | - | | | - | | | - | |
| Changes in operating assets and liabilities, net of effects from acquisitions: | | | | | | | | | | |
| Accounts receivable | | | (682 | ) | | 868 | | | 922 | |
| Inventories | | | (5 | ) | | (329 | ) | | (165 | ) |
| Prepaid expenses and other assets | | | (543 | ) | | 46 | | | (103 | ) |
| Accounts payable | | | (1,162 | ) | | 1,822 | | | 16 | |
| Accrued liabilities | | | 782 | | | (309 | ) | | 140 | |
| Net cash provided by operating activities | | | 1,091 | | | 3,696 | | | 1,959 | |
| | | | | | | | | | | |
Investing Activities | | | | | | | | | | |
| | | | | | | | | | | |
| Distributions from limited partnerships | | | 149 | | | 13 | | | 29 | |
| Proceeds from sale of property and equipment | | | - | | | - | | | 42 | |
| Deferred acquisition costs | | | - | | | - | | | 310 | |
| Net cash acquired in acquisitions | | | - | | | - | | | 1,537 | |
| Purchases of property and equipment | | | (177 | ) | | (569 | ) | | (172 | ) |
| Distributions to limited partners | | | (42 | ) | | (50 | ) | | (31 | ) |
| Investment in limited partnerships | | | - | | | (1,065 | ) | | (155 | ) |
| Payment of acquisition liabilities | | | - | | | - | | | (1,350 | ) |
| Purchase cost of acquisitions, net of cash acquired | | | - | | | - | | | (857 | ) |
| Net cash used in investing activities | | | (70 | ) | | (1,671 | ) | | (647 | ) |
ASCENDANT SOLUTIONS, INC. | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(000's omitted) | |
| | |
| | | Years Ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
Financing Activities | | | | | | | |
| | | | | | | | |
| Proceeds from exercise of common stock options | | | 48 | | | 48 | | | 49 | |
| Proceeds from sale of limited partnership interests | | | 230 | | | 230 | | | 230 | |
| Payments on notes payable | | | (8,472 | ) | | (1,291 | ) | | (1,729 | ) |
| Proceeds from notes payable | | | 6,638 | | | 341 | | | - | |
| Net cash used in financing activities | | | (1,556 | ) | | (672 | ) | | (1,450 | ) |
| | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (535 | ) | | 1,353 | | | (138 | ) |
| Cash and cash equivalents at beginning of year | | | 3,221 | | | 1,868 | | | 2,006 | |
| | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 2,686 | | $ | 3,221 | | $ | 1,868 | |
| | | | | | | | | | | |
Supplemental Cash Flow Information | | | | | | | | | | |
| Cash paid for income taxes | | $ | 205 | | $ | 502 | | $ | - | |
| Cash paid for interest on notes payable | | $ | 740 | | $ | 728 | | $ | 497 | |
Noncash financing activities: | | | | | | | | | | |
| Partnership distributions applied to note payable | | $ | 60 | | $ | - | | $ | - | |
| Property and equipment acquired under capital leases | | $ | - | | $ | 258 | | $ | - | |
| | | | | | | | | | | |
| See accompanying notes to the 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 diversified financial services company which is seeking to or has invested in or acquired healthcare, manufacturing, distribution or service companies. The Company also conducts various real estate activities, performing real estate advisory services for corporate clients, and, through an affiliate, purchase real estate assets, as a principal investor.
The following is a summary of the Company’s identifiable business segments, consolidated subsidiaries and their related business activities:
Business Segment
| Subsidiaries
| Principal Business Activity
|
Healthcare | Dougherty’s Holdings, Inc. and Subsidiaries | Healthcare products and services provided through retail pharmacies , including specialty compounding pharmacy services and home infusion therapy centers |
| | |
Real estate advisory services | CRESA Partners of Orange County, L.P., ASDS of Orange County, Inc.,
CRESA Capital Markets Group, L.P.
| Tenant representation, lease management services, capital markets advisory services and strategic real estate advisory services |
| | |
Corporate & other | Ascendant Solutions, Inc. and
ASE Investments Corporation
| Corporate administration, investments in Ampco Partners, Ltd., Fairways Frisco, L.P. and Fairways 03 New Jersey, L.P. |
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
During 2002, the Company made its first investments, and it has continued to make additional investments and acquisitions throughout 2003, 2004 and 2005. A summary of the Company’s investment and acquisition activity is shown in the table below:
Date
| Entity
| Business Segment
| Transaction Description
| % Ownership
|
April 2002 | Ampco Partners, Ltd | Corporate & other | Investment in a non-sparking, non-magnetic safety tool manufacturing company | 10% |
| | | | |
August 2002 | VTE, L.P. | Corporate & other | Investment to acquire early stage online electronic ticket exchange company | 23% |
| | | | |
October 2002 | CRESA Capital Markets Group, L.P.,
ASE Investments Corporation
| Real estate advisory services | Investment to form real estate capital markets and strategic advisory services companies | 80% |
| | | | |
November 2003 | Fairways 03 New Jersey, L.P. | Corporate & other | Investment in a single tenant office building | 20% |
| | | | |
March 2004 | Dougherty’s Holdings, Inc. and Subsidiaries | Healthcare | Acquisition of specialty pharmacies and therapy infusion centers | 100% |
| | | | |
April 2004 | Fairways 36864, L.P. | Corporate & other | Investment in commercial real estate properties | 24.75% |
| | | | |
May 2004 | CRESA Partners of Orange County, L.P.,
ASDS of Orange County, Inc.
| Real estate advisory services | Acquisition of tenant representation and other real estate advisory services company | 99% |
| | | | |
December 2004 | Fairways Frisco, L.P. | Corporate & other | Investment in a mixed-use real estate development | 8.87%1
|
1 The Company was the initial limited partner in Fairways Frisco, L.P. (“Fairways Frisco”), which obtained a 50% ownership interest in the Frisco Square Partnerships on December 31, 2004. Fairways Frisco L.P. subsequently sold additional limited partnership interests and the Company as of September 2006 now owns approximately 8.87% of Fairways Frisco, L.P.
Certain of these transactions involved related parties or affiliates as more fully described in Notes 2 and 16 of these consolidated financial statements.
The Company will continue to look for acquisition opportunities, however, its current cash resources are limited and it will be required to expend significant executive time to assist the management of its acquired businesses. The Company will continue seeking to (1) most effectively deploy its remaining cash and debt capacity (if any) (2) capitalize on the experience and contacts of its officers and directors and (3) explore other acquisition and investing opportunities.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Ascendant and all subsidiaries for which the Company owns greater than 50% of the voting equity interests or has significant influence over operations. All intercompany balances and transactions have been eliminated. The limited partnership interests for the consolidated subsidiaries and related minority interests are included on the balance sheet as Minority Interests.
The results of operations of CRESA Partners of Orange County, LP (“CPOC”) have been consolidated with ASDS of Orange County, Inc. (“ASDS”) and ultimately the Company, in accordance with FIN 46R “Consolidation of Variable Interest Entities”, until such time that ASDS has received cumulative distributions equal to $6.9 million (the Purchase Price) plus a preferential return of approximately $1.7 million (total distributions of $8.6 million). As of December 31, 2006, the Company has received distributions totaling approximately $3,515,000. When and if the total distributions equal to $8.6 million are fully paid, the Company’s residual interest will become 10% (through ASDS) and the principles of consolidation for financial reporting purposes will no longer be satisfied under FIN 46R or APB 18, “Equity Method for Investments in Common Stock”. Accordingly, the Company would no longer consolidate the results of operations of CPOC and would instead record its share of income from CPOC as “Equity in income of equity method investees” in the consolidated statements of income.
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 consolidated financial statements and accompanying notes, including allowance for doubtful accounts, inventory reserves and recoverability and valuation of equity method investments. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with original maturities of three months or less as cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
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. Management performs continuing evaluations of debtors’ financial condition and provides an allowance for uncollectible accounts as determined necessary. See Note 3 for additional information regarding the Company’s trade accounts receivable, allowance for doubtful accounts and significant customer relationships.
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 the respective lease term or estimated useful life of the asset. See Note 6 for additional information regarding property and equipment.
Inventories
Inventories consists of healthcarehealth care product finished goods held for resale, valued at the lower of cost using the first-in, first-out method or market.net realizable value. The Company providesmaintains an estimated reserve against inventory for excess, slow movingslow-moving, and obsolete inventory as well as inventory whosefor which carrying value is in excess of its net realizable value. See Note 4 for additional information regarding inventories.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Long-LivedIntangible Assets
The Company evaluates the carrying value of its long-lived assets by comparing the undiscounted cash flows over the remaining useful life of the long-livedIntangible assets with finite lives are being amortized on the assets’straight-line basis over seven years. Such assets are periodically evaluated as to the recoverability of their carrying value. If this comparison indicates that the carrying value will not be recoverable, the carrying value of the long-lived assets will be reduced accordingly based on a discounted cash flow analysis. No impairment provision was recorded in 2006 or 2005.
Equityvalues.Cost Method Investments
EquityCost method investments represent investments in limited partnerships accounted for using the equitycost method of accounting foraccounting. None of these investments and none representare investments in publicly traded companies. The equitycost method is used asbecause the Company does not have a majoritycontrolling interest and does not have significant influence over the operations of the respective companies. The Company also uses the equity method for investments in real estate limited partnerships where it owns more than 3% to 5% of the limited partnership interests. Accordingly, the Company recordsdoes not record its proportionate share of the income or losses generated by equity method investeesthe limited partnerships in the consolidated statementsstatement of income. Ifoperations. 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 receives distributions in excess of its equity in earnings, they are recorded as a reduction of its investment.
owns these interests, and management does not believe these to be impaired.Revenue Recognition
Healthcare revenuesRevenues generated by the retail pharmacy operations are reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional healthcarehealth 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.
Real estate advisory services revenue isCost 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 brokerage commissions earned from project leasing and tenant representation transactions. Brokerage commission revenue is generally recorded upon execution of a lease contract, unless additional activitiesits suppliers are required to earn the commission pursuant to a specific brokerage commission agreement. Participation interests in rental income are recognized over the lifeconsidered as an adjustment of the lease. Other revenue is recognized as the following consulting services are provided: facility and site acquisition and disposition, lease management, design, construction and development consulting, move coordination and strategic real estate advisory services. Participation interests in rental income are recognized over the lifeprices of the lease.
supplier’s products purchased by the Company.
Income Taxes
The Company’sCompany accounts for income taxes are presented utilizing anin 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 andor liability approach, and deferred taxes are determinedis based on the estimated future tax effects of the differences between the financial statementbook and tax bases of assets and liabilities, givenand 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.
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements of the Company are included beginning on page F-1 immediately following the signature page to this report.
| Item 9A. | Controls and Procedures |
Evaluation of Effectiveness of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on criteria established in2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s evaluation included an assessment of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Company’s overall control environment. Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017 to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company reviewed the results of management’s assessment with the Audit Committee of the Board of Directors.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls or internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2017, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
Certain information required by Part III is omitted from this Form 10-K because we will file a definitive Proxy Statement for our 2018 annual meeting of stockholders pursuant to Regulation 14A (the “Proxy Statement”) no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information called for by this item is incorporated herein by reference to the Proxy Statement.
| Item 11. | Executive Compensation. |
The information called for by this item is incorporated herein by reference to the Proxy Statement.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information called for by this item is incorporated herein by reference to the Proxy Statement.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information called for by this item is incorporated herein by reference to the Proxy Statement.
PART IV
| Item 14. | Principal Accounting Fees and Services. |
The information called for by this item is incorporated herein by reference to the Proxy Statement.
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) 1. Consolidated Financial Statements.
The following consolidated financial statements of Dougherty’s, Inc. and subsidiaries, are submitted as a separate section of this report (See F-pages):
(b)Exhibits
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) |
| 4.8 | | 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) |
| 4.20 | | 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 | | Promissory Note, effective September 1, 2017, by and between 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 Omaha.(2) |
| 4.29 | | Business Loan Agreement, effective September 1, 2017, by and among Dougherty's Holdings, Inc.; the Registrant; 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 Omaha. (3) |
| 4.30 | | Commercial Guaranty, by and among Dougherty's Holdings, Inc.; the Registrant; 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 Omaha, in favor of Dougherty’s Pharmacy, Inc. (3) |
| 4.31 | | Commercial Security Agreement, effective September 1, 2017, by and among Dougherty's Holdings, Inc.; the Registrant; 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 Omaha. (3) |
| 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)(4) |
| 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)(4) |
| 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)(4) |
| 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)(4) |
| 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)(4) |
| 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)(4) |
| 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.(4) |
| 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) |
| 31.1 | | Certification of the Interim President - Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act (5) |
| 31.2 | | Certification of the Interim Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act (5) |
| 32 | | Certification of the President - Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (5) |
| 101.INS | | XBRL Instances Document (5) |
| 101.SCH | | XBRL Taxonomy Extension Schema Document (5) |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (5) |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (5) |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document (5) |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (5) |
| (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. |
| (2) | Filed as the corresponding Exhibit Number with the Company’s Quarterly Report Form 10-Q, File Number 000-27945 filed with the Commission on August 14, 2017. |
| (3) | Filed as the corresponding Exhibit Number with the Company’s Registration Statement on Form 10 Amendment No. 2, File Number 000-27945 filed with the Commission on August 18, 2017. |
| (4) | Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. |
| (5) | Filed herewith. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: March 29, 2018 | DOUGHERTY’S PHARMACY, INC. | |
| (Registrant) | |
| | | |
| By: | /s/ James C. Leslie | |
| | James C. Leslie | |
| | Chairman, Chief Executive Officer, Interim President and Interim Chief Financial Officer | |
| | (Principal Executive Officer and Principal Financial Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | |
| /s/ JAMES C. LESLIE | | Chairman, Chief Executive Officer, Interim President, | | March 29, 2018 |
| James C. Leslie | | Interim Chief Financial Officer, and Director | | |
| | (Principal Executive Officer and Principal Financial Officer) | | |
| | | | |
| | | | |
| /s/ TROY PHILLIPS | | Director | | March 29, 2018 |
| Troy Phillips | | | | |
| | | | |
| | | | |
| /s/ WILL CURETON | | Director | | |
| Will Cureton | | | | March 29, 2018 |
| | | | |
| | | | |
| /s/ ANTHONY J. LEVECCHIO | | Director | | March 29, 2018 |
| Anthony J. LeVecchio | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Dougherty’s Pharmacy, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofDougherty’s Pharmacy, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, 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.
Basis for Opinion
These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Whitley Penn LLP
We have served as the Company's auditor since 2015.
Dallas, Texas
March 29, 2018
Dougherty’s Pharmacy, Inc.
Consolidated Balance Sheets
December 31, 2017 and 2016
(000’s omitted, except par value and share amounts)
| | | 2017 | | | 2016 | |
| | | | | | | |
| ASSETS | | | | | | | | |
| | | | | | | | | |
| Current Assets | | | | | | | | |
| Cash | | $ | 86 | | | $ | 58 | |
| Restricted cash | | | 303 | | | | 303 | |
| Trade accounts receivable, net | | | 1,673 | | | | 1,901 | |
| Other receivables | | | 345 | | | | 113 | |
| Receivable from affiliates | | | 6 | | | | 12 | |
| Inventories, net | | | 3,562 | | | | 3,340 | |
| Prepaid expenses | | | 267 | | | | 286 | |
| Total current assets | | | 6,242 | | | | 6,013 | |
| Long term receivable | | | 448 | | | | – | |
| Property and equipment, net | | | 1,045 | | | | 1,386 | |
| Intangible assets, net | | | 2,892 | | | | 3,681 | |
| Investments carried at cost | | | – | | | | 1,295 | |
| Deferred tax asset | | | 2,000 | | | | 3,000 | |
| Total assets | | $ | 12,627 | | | $ | 15,375 | |
| | | | | | | | | |
| LIABILITIES | | | | | | | | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable | | $ | 3,123 | | | $ | 2,643 | |
| Accrued liabilities | | | 429 | | | | 293 | |
| Notes payable, current portion | | | 813 | | | | 1,129 | |
| Revolving credit facility | | | 3,831 | | | | – | |
| Total current liabilities | | | 8,196 | | | | 4,065 | |
| Revolving credit facility | | | – | | | | 4,179 | |
| Notes payable, long-term portion | | | 2,801 | | | | 3,428 | |
| Total liabilities | | | 10,997 | | | | 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; 24,003,310 shares issued and 22,973,310 shares outstanding at December 31, 2017; 23,447,679 shares issued and 22,417,679 shares outstanding at December 31, 2016 | | | 2 | | | | 2 | |
| Additional paid-in capital | | | 60,221 | | | | 60,144 | |
| Accumulated deficit | | | (58,196 | ) | | | (56,046 | ) |
| Treasury stock, at cost, 1,030,000 shares | | | (397 | ) | | | (397 | ) |
| Total stockholders' equity | | | 1,630 | | | | 3,703 | |
| Total liabilities and stockholders' equity | | $ | 12,627 | | | $ | 15,375 | |
See Notes to Consolidated Financial Statements
Dougherty’s Pharmacy, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2017 and 2016
(000’s omitted, except share and per share amounts)
| | | Twelve Months Ended | |
| | | December 31, | |
| | | 2017 | | | 2016 | |
| | | | | | | |
| Revenue | | $ | 40,213 | | | $ | 42,786 | |
| Cost of sales (exclusive of depreciation and amortization shown seperately down below) | | | 29,390 | | | | 31,736 | |
| Gross profit | | | 10,823 | | | | 11,050 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Selling, general and administrative expenses | | | 10,360 | | | | 10,428 | |
| Non-cash stock compensation | | | 35 | | | | 21 | |
| Depreciation and amortization | | | 1,008 | | | | 1,052 | |
| Total operating expenses | | | 11,403 | | | | 11,501 | |
| Operating loss | | | (580 | ) | | | (451 | ) |
| | | | | | | | | |
| Other income | | | 3 | | | | 85 | |
| Interest expense | | | (427 | ) | | | (443 | ) |
| Loss on disposal of assets and investment impairment | | | (75 | ) | | | (4,008 | ) |
| Loss before provision for income tax | | | (1,079 | ) | | | (4,817 | ) |
| Income tax provision | | | (1,029 | ) | | | (42 | ) |
| Net loss | | $ | (2,108 | ) | | $ | (4,859 | ) |
| | | | | | | | | |
| Basic and diluted net loss per share attributable to common stockholders | | $ | (0.09 | ) | | $ | (0.22 | ) |
| Weighted-average number of shares - basic and diluted | | | 22,500,238 | | | | 22,161,920 | |
See Notes to Consolidated Financial Statements
Dougherty’s Pharmacy, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2017 and 2016
(000’s omitted, except share amounts)
| | | Class A Common Stock | | | | | | | | | Treasury | | | | |
| | | Shares | | | Amount | | | APIC | | | Accum Deficit | | | Shares | | | Amount | | | Total | |
| 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 | |
| Issue vested restricted stock units | | | 84,750 | | | | | | | | 35 | | | | | | | | | | | | | | | | 35 | |
| Issue stock dividend | | | 470,881 | | | | | | | | 42 | | | | (42 | ) | | | | | | | | | | | – | |
| Net loss | | | | | | | | | | | | | | | (2,108 | ) | | | | | | | | | | | (2,108 | ) |
| Balance at December 31, 2017 | | | 24,003,310 | | | $ | 2 | | | $ | 60,221 | | | $ | (58,196 | ) | | | (1,030,000 | ) | | $ | (397 | ) | | $ | 1,630 | |
See Notes to Consolidated Financial Statements
Dougherty’s Pharmacy, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2017 and 2016
(000’s omitted)
| | | 2017 | | | 2016 | |
| Operating Activities | | | | | | | | |
| Net loss | | $ | (2,108 | ) | | $ | (4,859 | ) |
| Items not requiring (providing) cash | | | | | | | | |
| Provision for doubtful accounts | | | 8 | | | | 91 | |
| Depreciation and amortization | | | 1,008 | | | | 1,052 | |
| Change in deferred tax asset | | | 1,000 | | | | – | |
| Stock-based compensation | | | 35 | | | | 21 | |
| Loss from disposal of assets | | | 75 | | | | 114 | |
| Investments impairment | | | – | | | | 3,894 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 160 | | | | (2 | ) |
| Inventories | | | (258 | ) | | | 207 | |
| Prepaid expenses and other assets | | | 114 | | | | 179 | |
| Accounts payable | | | 460 | | | | 684 | |
| Accrued liabilities | | | 136 | | | | (7 | ) |
| Net cash provided by operating activities | | | 630 | | | | 1,374 | |
| | | | | | | | | |
| Investing Activities | | | | | | | | |
| Purchases of property and equipment | | | (128 | ) | | | (447 | ) |
| Cash proceeds from disposition of equipment | | | 26 | | | | – | |
| Cash proceeds from disposition of pharmacy | | | 274 | | | | – | |
| Cash received upon disposition of investment | | | 687 | | | | – | |
| Net provided by (used in) investing activities | | | 859 | | | | (447 | ) |
| | | | | | | | | |
| Financing Activities | | | | | | | | |
| Payments on notes payable | | | (22,023 | ) | | | (25,123 | ) |
| Proceeds from notes payable | | | 20,562 | | | | 24,186 | |
| Net cash used in financing activities | | | (1,461 | ) | | | (937 | ) |
| | | | | | | | | |
| Net increase (decrease) increase in cash | | | 28 | | | | (10 | ) |
| | | | | | | | | |
| Cash, beginning of period | | | 361 | | | | 371 | |
| Cash, end of period | | $ | 389 | | | $ | 361 | |
| | | | | | | | | |
| Supplemental Cash Flow Information | | | | | | | | |
| Cash paid for income taxes | | $ | 21 | | | $ | 43 | |
| Cash paid for interest | | $ | 425 | | | $ | 441 | |
| | | | | | | | | |
| Reconciliation of Cash to the Consolidated Balance Sheets | | | | | | | | |
| Cash | | $ | 86 | | | $ | 58 | |
| Restricted cash | | | 303 | | | | 303 | |
| Total cash | | $ | 389 | | | $ | 361 | |
See Notes to Consolidated Financial Statements
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
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. Dougherty’s was incorporated in Delaware on August 8, 2000.
A summary of the Company’s investments at Dougherty’s, 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. (see Note 8)
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.
Our business requires us to rely on cash flow from operations and the revolving credit facility as our primary sources of funding to operate and meet our financial obligations in the foreseeable future. Historically, much of our debt has been renewed or refinanced in the ordinary course of business. 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. As of December 31, 2017 we had cash and restricted cash of approximately $389,000, working capital of approximately negative $2.0 million and total outstanding debt of $7.4 million, including $3.8 million for the revolving credit facility. Negative working capital is due to the reclassification of the revolving credit facility to current liabilities to present the consolidated financial statements in conformity with GAAP. The reclassification does not affect the representation of the Company’s overall performance. Cash provided from operating activities for the twelve months ended December 31, 2017 was $630,000. Management believes it will have adequate cash to operate the Company and renew, extend, or refinance the revolving credit facility in the next twelve months.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
1. Organization (Continued)
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. Dougherty’s uses the cost method of accounting to recognize investments in and income from entities where Dougherty’s does not have a significant influence. 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.
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 collectibility 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, 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 net realizable value. 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.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
1. Organization and Significant Accounting Policies (Continued)
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.
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. Transactions related to the cost method investments are more fully described in Note 8.
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.
Substantially all revenues earned during the years ended December 31, 2017 and 2016, were earned from the retail pharmacy business.
1. Organization and Significant Accounting Policies (Continued)
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 laws. Valuation allowanceslaw 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 established forrecognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets where management believesand 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 notmore-likely-than-not that thesome portion or all of a deferred tax asset will not be realized.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per shareTax positions are recognized if it is computedmore-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.
On December 22, 2017, the President signed into law the “Tax Cuts and Jobs Act” (the “TCJA”). Among numerous changes to existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The effects on deferred tax balances of changes in tax rates are required to be taken into consideration in the period in which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax assets and recorded a provisional noncash income (loss) applicable to common stockholders divided by the weighted average numbertax loss of shares of common stock outstanding during each period. The number of dilutive shares resulting from assumed conversion of stock options and warrants are determined by using the treasury stock method. See Note 14approximately $1.0 million for more information regarding the calculation of net income (loss) per share.
Impairment of goodwill and other intangible assets
year ended December 31, 2017. The Company has
adopted a policynot completed all of
recording an impairment loss on goodwillits processes to determine the TCJA’s final impact. The final impact may differ from this provisional amount due to, among other things, changes in interpretations and
other intangible assets when indicators of impairment are presentassumptions the Company has made thus far and the
undiscounted cash flows estimatedissuance of additional regulatory or other guidance. The accounting is expected to be
generatedcompleted by
those assetsthe time the 2017 federal income tax return is filed in 2018.Interest and penalties on income tax related items are less thanincluded within the assets’ carrying amount. Goodwillincome tax provision and other intangible assets are assessedrecorded in income tax expense. The Company did not incur any interest and penalties during the years ended December 31, 2017 and 2016.
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 impairment on at least an annual basis by management.years before 2013.
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
RecentDecember 31, 2017 and 2016
1. Organization and Significant Accounting Pronouncements
In December 2004,Policies (Continued)Advertising Expense
Advertising expense is comprised of media, agency, coupon, trade shows and other promotional expenses. Advertising expenses are charged to operations during the Financial Accounting Standards Board issued FASB Statement No. 123R (Revised 2004), Share-Based Payment. (“Statement 123R”), which requires that the compensation cost relating to share-based payment transactions such as options, restricted share plans, performance based awards, share appreciation rights and employee share purchase plans be recognized at fair value in financial statements.
Statement 123R replaces FASB Statement No. 123, Accountingperiod incurred, except for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotesexpenses related to the financial statements disclosed what net income would have been haddevelopment of a major commercial or media campaign that are charged to operations during the preferable fair-value-based method been used.
period in which the advertisement or campaign is first presented by the media. Advertising expenses totaled $101,000 in 2017 and $109,000 in 2016.Stock-Based Compensation
The Company currently expenses the cost of restricted shares issued to employees and directors over the service vesting period associated with the restricted shares. The Company currently has no options outstanding which are not vested. The unrecognizedrecognizes compensation cost related to these options is not material and as a result, the implementation of Statement 123R did not have a material impact on its results of operations.
The Company accountsexpense for its employee stock options and stock basedequity awards under the fair value provisions of Statement 123R, which was adopted effective January 1, 2006, whereby stock-based compensation is measured at the grant date based on the value of the awards and is recognized as expense over the requisite service period (usually the vesting period). based on their grant date fair value. See Note 1212 for additional information about the Company’s Stock Based Compensation.
In May 2006, the State of Texas replaced the current franchise tax system with a new Texas Margin Tax (“TMT”). The TMTon stock-based compensation.Earnings per Share
Basic earnings per share is a 1% gross receipts tax based on the Company’s taxable margin, as definedcomputed by dividing net loss by the new law. However,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 taxable entities primarily engaged in retail2017 and wholesale trade,2016 is $105,000 and $32,000, respectively; the rateunvested restricted stock units is 0.5% of taxable margin. The Company has evaluated633,250 and 203,400, respectively. Due to the impact of the TMT on our consolidated financial position, results of operations or cash flowsnet losses for both years, restricted stock units for 2017 and has concluded that the TMT does not appear it will have a material impact on its results of operations.
2016 were anti-dilutive.New Accounting Pronouncements
ASU No. 2016-02, Leases (Topic 842)
In June 2006,February 2016, the FASB issued Interpretation No. 48 (“FIN 48”ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), Accounting. ASU 2016-02 requires the lessee to recognize assets and liabilities for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006,leases with early adoption permitted. FIN 48 clarifieslease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes,policy election by providingclass of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a recognition thresholdfinance lease to recognize both an interest expense and measurement guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has evaluated the impactan amortization of the adoption of this interpretationassociated expense. Operating leases generally recognize the associated expense on its consolidated financial position, results of operations or cash flowsa straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and has concluded that it does not appear that FIN 48 will have a material impactbecomes effective on its results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after December 15, 2007.January 1, 2019. The Company is currently evaluating the impact if any; the adoption of SFAS 157that ASU 2016-02 will have on its consolidated financial position, results of operations orand cash flows. Our current minimum lease commitments are disclosed in Note 13.
In September 2006, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 108 ("SAB 108"), "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB 108 was issued to provide consistency in how registrants quantify financial statement misstatements. The Company is required to and will initially apply SAB 108 in connection with the preparation of its annual financial statements for the year ending December 31, 2006.
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
1. Organization and Significant Accounting Policies (Continued)
Accounting Standards Update ("ASU") No. 2014-09 "Revenue from Contracts with Customers (Topic 606)”
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or Accounting Standards Codification 606 (“ASC 606”). This guidance outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. Under the new revenue recognition standard, entities apply a five-step model that depicts 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. Specifically, companies identify the performance obligations within their contracts with customers, allocate the transaction price received from customers to each performance obligation identified within their contracts, and recognize revenue as the performance obligations are satisfied. During 2015, 2016, and 2017, the FASB issued various amendments which provide additional clarification and implementation guidance on ASC 606. Specifically, these amendments clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, clarify how an entity should identify performance obligations and licensing implementation guidance, as well as account for shipping and handling fees and freight service, assess collectability, present sales tax, treat non-cash consideration, and account for completed and modified contracts at the time of transition. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. The effective date and transition requirements for ASC 606 and amendments is for fiscal years, and for interim periods within those years, beginning after December 15, 2017, and the Company will adopt this guidance using the modified retrospective approach effective January 1, 2018.
The Company doeshas substantially completed its assessment of ASC 606, and the adoption of this guidance is not expect the application of SAB 108expected to have a material effectimpact on its financial positionrecognition ofpharmacy retail sales of prescriptions and results of operations.
Stock Based Compensation
products.The Company accountshas contracts with long-term care facilities to provide retail pharmacy prescriptions, the delivery of those prescriptions, certain computer and medication dispensing equipment and software and support services all of which are specifically outlined in the contract. The contracts provide for its employee stock options and stock based awardsreimbursement of certain costs for its Long-Term Incentive Plan (the “Plan”) under the fair value provisions of Statement 123R, which was adopted effective January 1, 2006, whereby stock based compensation is measured at the grant date based on the value of awards and is recognized as expense over the requisite service period (usually the vesting period). See Note 12 for additional information on stock based compensation.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, accounts receivable and accounts payable that are carried at cost, which approximates fair value because of the short maturitycertain of these instruments. The fair value of notes payable approximates carrying value as interest rates approximate market rates. The fair value of equity method investments is not readily determinable without undo cost.
Reclassifications
Certain prior year balances have been reclassified to conformservices. As it relates to the current year presentation.
As disclosed in a Current Report on Form 8-K filed on May 24, 2006, the board of directors decidedlong-term care contracts and any other support services provided to retain the operations of Park InfusionCare, which had previously been reported as a discontinued operation while the Company was pursuing a potential disposition or strategic transaction for its infusion therapy business. As a result of the board of director’s decision to retain the operations of Park InfusionCare,customers, the Company has reporteddetermined that no revenue is recognized from separate and distinct performance obligations other than the operating results of Park InfusionCare as part of continuing operations. The Company had previously recorded an estimated charge of $230,000 for employee retention costs directly related to any potential disposition or strategic transaction for Park InfusionCare. As no such transaction was consummated, none of these retention costs were paid and the Company has recorded a reversal of this accrual as part of results from discontinued operations in the accompanying consolidated statements of income for the year ended December 31, 2006. All other Park InfusionCare amounts in this Form 10-K for the years ended December 31, 2006 and 2005 have been reported as part of continuing operations.
2.Significant Equity Investments
Fairways 03 New Jersey, LP
During December 2003, the Company made a capital contribution of $145,000 to Fairways 03 New Jersey, LP (“Fairways NJ”) which, through a partnership with an institutional investor, acquired the stock of a company whose sole asset was a single tenant office building and entered into a long-term credit tenant lease with the former ownerretail sale of the
building. In December 2003, subsequent to the closing of this transaction, the Company’s capital contribution of $145,000 was distributed back. The Company received a distribution of approximately $680,000 on December 30, 2005 from Fairways NJ, which represented the Company’s share in the profit from the sale of a single tenant commercial real estate property interest, the sole asset held by Fairways NJ. In addition to the distribution, cash of $162,000, representing the Company’s share of the total escrow, was being held in escrow to fund any amounts owed by Fairways NJ to the purchaser, including any amounts owed for standard representationspharmacy prescriptions and
warranties under the sale agreement. The balance of the escrow account, including interest income, totaling approximately $168,000 was received in December 2006. Since the date of the property interest acquisition, the Company has received cumulative cash distributions of approximately $1,448,000 on its initial investment of $145,000 in Fairways NJ.products.
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
Fairways Frisco Partnerships
On December 31, 2004, Fairways Frisco, L.P. (“Fairways Frisco”) acquired certain indirect interests in various partnerships (the “Frisco Square Partnerships”) that own properties (the “Properties”) in the Frisco Square mixed-use real estate development in Frisco, Texas. Frisco Square is planned to include approximately 4 million developed square feet, including retail, offices, hotel, multi-family residences2017 and municipal space.
Under the terms of the amended Frisco Square Partnerships agreements, Fairways Equities is the sole general partner of the Frisco Square Partnerships and controls all operating activities, financing activities and development activities for the Frisco Square Partnerships.
As further described herein, the Company holds a limited partnership interest in Fairways Frisco. The Company is not involved in the development or management of Frisco Square; rather it is solely a limited partner. The Company has invested $1,219,000 of cash into Fairways Frisco as of December 31, 2006. The Company has made no additional capital contributions subsequent to December 31, 2005. Fairways Frisco made two capital calls in 2006, which were not funded by the Company and thus diluted the Company’s limited partnership interest from 14% at December 31, 2005 to approximately 8.87% as of December 31, 2006. As of April 7, 2007, the general partner of the Frisco Square Partnerships indicated that they would be making a capital call of the limited partners in the amount of $4 million, the exact terms of which are currently being negotiated. The Company will not participate in this capital call. If this capital call is fully funded, the Company‘s limited partnership interest will be reduced.
Fairways Frisco is expected to request additional capital contributions from the limited partners. At present, the Company does not intend to fund any additional capital requested from Fairways Frisco. The Company expects its limited partnership interest will be reduced further as additional limited partner contributions are received and the Company does not fund its limited partnership share of such capital contributions into Fairways Frisco.
As of December 31, 2006, Fairways Frisco owned, either directly or indirectly, 60% of the Frisco Square Partnerships and the remaining 40% is owned by CMP Family Limited Partnership (“CMP”), which is controlled by Cole McDowell. CMP’s partnership interest was subject to further reduction and dilution as discussed below. Under the terms of the amended Frisco Square Partnerships, Fairways Frisco also has a first priority distribution preference of $5.5 million, and it will receive its pro-rata partnership interest of the next $9.5 million of distributions from the Frisco Square Partnerships. After $15 million of distributions have been made, Fairways Frisco’s interest in the Cash Flow of the Frisco Square Partnerships, as defined in the partnership agreements, will become 80% and CMP’s interest will become 20%.
Furthermore, Fairways Frisco’s partnership interest in the Frisco Square Partnerships may be increased up to 85% if certain capital call and limited partner capital loan provisions are not met by CMP. If Fairways Frisco’s partnership interest in the Frisco Square Partnerships is increased in the future, the Company’s indirect interest in the Frisco Square Partnerships would also increase on a pro-rata basis with its investment in Fairways Frisco. No further capital loan provisions are provided in the partnership agreements, and CMP’s interest is dependent upon it ability to fund future capital calls. In the event CMP does not fund a capital call requested by the general partner, and provided the Partnership funds CMP’s unfunded amounts, CMP’s interest will be diluted according to the partnership agreements.
The Company has not guaranteed any of the debt of the Frisco Square Partnerships or Fairways Frisco, L.P. The Company is not involved with any management, financing or other operating activities of the Frisco Square Partnerships or Fairways Frisco. However, in May 2005, the Company entered into an agreement with Fairways Equities, pursuant to which the Company is entitled to receive 25% of the fees paid to Fairways Equities pursuant to the Fairways Frisco partnership agreement. These fees, including a monthly management fee, represent compensation to the Company for supplying resources to execute the initial transaction with the Frisco Square Partnerships in December 2004. During the years ended December 31, 2006 and 2005, the Company received fees allocated from Fairways Equities of $28,000 and $64,000, respectively under this agreement.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Fairways Frisco is currently negotiating with lenders to modify or extend certain bank loans which are reflected as current liabilities at December 31, 2006.
| 3.
| Trade Accounts Receivable
|
20162. Trade Accounts Receivable
Trade accounts receivable consist of the following:
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
Healthcare: | | | | | |
| Trade accounts receivable | | $ | 3,268,000 | | $ | 3,878,000 | |
| Less - allowance for doubtful accounts | | | (318,000 | ) | | (596,000 | ) |
| | | | 2,950,000 | | | 3,282,000 | |
Real Estate Advisory Services: | | | | | | | |
| Trade accounts receivable | | | 2,389,000 | | | 1,826,000 | |
| Less - allowance for doubtful accounts | | | - | | | - | |
| | | | 2,389,000 | | | 1,826,000 | |
| | | | | | | | |
| | | $ | 5,339,000 | | $ | 5,108,000 | |
Healthcare tradefollowing at December 31:| | | 2017 | | | 2016 | |
| Trade accounts receivable - retail pharmacy | | $ | 1,707,000 | | | $ | 1,930,000 | |
| Less: Allowance for doubtful accounts | | | (34,000 | ) | | | (29,000 | ) |
| | | $ | 1,673,000 | | | $ | 1,901,000 | |
3. Other Receivables
Other accounts receivable consists primarilyconsist of amounts receivable from third-party payors (insurance companies and governmental agencies) under various medical reimbursement programs, institutional healthcare providers, individuals and others and are not collateralized. Certain receivables are recorded at estimated net realizable amounts. Amounts that may be received under medical reimbursement programs are affected by changes in payment criteria and are subject to legislative actions. Healthcare reduces its accounts receivable by an allowance for the amounts deemed to be uncollectible. An allowance is established for all retail pharmacy accounts aged in excess of 60 days. In general, an allowance of 4% of all infusion therapy accounts is established when the receivable is recorded and it is increased to 80% for all accounts aged in excess of 180 days. Accounts that management has ultimately determined to be uncollectible are written off against the allowance.
Healthcare accounts receivable from Medicare and Medicaid combined were approximately 13.3% and 16.1% of total accounts receivablefollowing at December 31, 2006 and 2005, respectively. Additionally, at December 31, 2005, Healthcare had accounts receivable outstanding from one insurance company of approximately 13.1% of total Healthcare accounts receivable. No other single customer or third-party payer accounted for more than 10% of Healthcare’s accounts receivable at December 31, 2006 or 2005, respectively. In addition, during the years ended December 31, 2006 and 2005 and for the period from May 1, 2004 (date of acquisition) to December 31, 2004, the Healthcare operations did not derive revenue in excess of ten percent from any single customer.
The Company’s real estate advisory services operations grants credit to customers of various sizes and provides an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. For the year ended December 31, 2006 the Company’s real estate advisory services operations derived revenues in excess of ten percent from one customer totaling approximately $4,739,000 or 33% of revenues. For the year ended December 31, 2005 the Company’s real estate advisory services operations derived revenues in excess of ten percent from two customers totaling approximately $5,264,000 or 39.9% of revenues and $1,592,000 or 12.1% of revenues, respectively. For the period from May 1, 2004 (date of acquisition) to December 31, 2004, the Company’s real estate advisory services operations derived revenues in excess of ten percent from one customer totaling approximately $3,479,000 or 39% of its total revenue.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
31:| | | 2017 | | | 2016 | |
| Due from inventory return service | | $ | 185,000 | | | $ | 113,000 | |
| Current portion of proceeds due from disposition of investment | | | 160,000 | | | | – | |
| | | $ | 345,000 | | | $ | 113,000 | |
4. Inventories
Inventories consist of the following:
| | | December 31 | | December 31 | |
| | | 2006 | | 2005 | |
| | | | | | |
| Inventory-retail pharmacy | | $ | 1,650,000 | | $ | 1,849,000 | |
| Inventory-infusion/homecare | | | 537,000 | | | 448,000 | |
| Inventory-general retail | | | 665,000 | | | 568,000 | |
| Less: Inventory reserves | | | (20,000 | ) | | (38,000 | ) |
| | | $ | 2,832,000 | | $ | 2,827,000 | |
following at December 31:| | | 2017 | | | 2016 | |
| Inventories - retail pharmacy | | $ | 3,596,000 | | | $ | 3,372,000 | |
| Less: Inventory reserves | | | (34,000 | ) | | | (32,000 | ) |
| | | $ | 3,562,000 | | | $ | 3,340,000 | |
5. Prepaid Expenses
Prepaid expenses consist of the following:
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Prepaid insurance | | $ | 179,000 | | $ | 168,000 | |
| Deferred tenant representation costs | | | 364,000 | | | 94,000 | |
| Prepaid marketing costs | | | 13,000 | | | 13,000 | |
| Prepaid rent | | | - | | | 62,000 | |
| Other prepaid expenses | | | 81,000 | | | 115,000 | |
| | | $ | 637,000 | | $ | 452,000 | |
The Company’s real estate advisory services operations defer direct costs associated with its tenant representation services until such time a lease is signed between the tenant and landlord. Upon execution of a signed lease, the Company expenses 50% of these direct costs associated with the transactions, with the balance being paid by the individual broker through a reduction in the commission earned. The Company regularly reviews these direct costs and expenses such costs related to canceled or unlikely to be completed transactions.
following at December 31:| | | 2017 | | | 2016 | |
| Prepaid insurance | | $ | 199,000 | | | $ | 195,000 | |
| Other prepaid expenses | | | 68,000 | | | | 91,000 | |
| | | $ | 267,000 | | | $ | 286,000 | |
6. | Property and Equipment, Net
F-12 | |
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
6. Property and Equipment, Net
Property and equipment, net consist of the following:
| | | | | | | | |
| | | Estimated | | December 31, | | December 31, | |
| | | Useful Lives | | 2006 | | 2005 | |
| | | | | | | | |
| Computer equipment and software | | | 3 to 5 years | | $ | 657,000 | | $ | 539,000 | |
| Furniture, fixtures and equipment | | | 5 to 7 years | | | 684,000 | | | 652,000 | |
| Leasehold improvements | | | Life of Lease | | | 609,000 | | | 607,000 | |
| Automotive equipment | | | 5 years | | | 12,000 | | | - | |
| | | | | | | 1,962,000 | | | 1,798,000 | |
| Less accumulated depreciation and amortization | | | | | | (943,000 | ) | | (576,000 | ) |
| | | | | | $ | 1,019,000 | | $ | 1,222,000 | |
following at December 31:| | | Estimated Useful Lives | | 2017 | | | 2016 | |
| Computer equipment and software | | 3 to 5 years | | $ | 1,484,000 | | | $ | 1,483,000 | |
| Furniture, fixtures and equipment | | 5 to 7 years | | | 1,072,000 | | | | 1,106,000 | |
| Leasehold improvements | | Life of lease | | | | | | | | |
| | | (generally 15 years) | | | 1,284,000 | | | | 1,373,000 | |
| | | | | | 3,840,000 | | | | 3,962,000 | |
| Less accumulated depreciation | | | | | (2,795,000 | ) | | | (2,576,000 | ) |
| | | | | $ | 1,045,000 | | | $ | 1,386,000 | |
-57-
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Depreciation expense was $382,000, $320,000$329,000 and $257,000$356,000 for the years ended December 31, 2006, 20052017 and 2004,2016, respectively.
7. | Goodwill and Other 7. Intangible Assets, Net Intangible Assets |
Goodwill and other intangible assets,
net consist of the
following:following at December 31:| | | Estimated Useful Lives | | 2017 | | | 2016 | |
| Patient prescriptions | | 7 years | | $ | 4,691,000 | | | $ | 4,870,000 | |
| Less accumulated amortization | | | | | (1,799,000 | ) | | | (1,189,000 | ) |
| | | | | $ | 2,892,000 | | | $ | 3,681,000 | |
Amortization expense was $679,000 and $696,000 for the years ended December 31, 2017 and 2016, respectively.
Amortization expense for the years ended December 31, are as follows:
| 2018 | | $ | 670,000 | |
| 2019 | | | 670,000 | |
| 2020 | | | 670,000 | |
| 2021 | | | 648,000 | |
| 2022 | | | 234,000 | |
| | | $ | 2,892,000 | |
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Goodwill | | $ | 7,299,000 | | $ | 7,299,000 | |
| Other intangible assets: | | | | | | | |
| Patient Prescriptions | | | 544,000 | | | 544,000 | |
| Non-compete Agreements | | | 450,000 | | | 450,000 | |
| Less - accumulated amortization | | | (899,000 | ) | | (568,000 | ) |
| | | $ | 95,000 | | $ | 426,000 | |
The acquisitionsDougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
8. CRESA Partners of Orange County, L.P.
Effective May 1, 2004, the Company acquired through ASDS all of the Park Assetsissued 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 prices wereprice was allocated as to identifiable assets, including intangible assets, and liabilities at their fair market value at the date of acquisition. As a result
Pursuant to the partnership agreement, upon the payoff of the purchase price allocation,original acquisition debt by CPOC, which was paid in full on August 31, 2010, the acquisitionCompany’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 resultedand recognized the Company’s remaining investment in goodwill totaling $7,299,000.
CPOC at estimated fair value. The excesscontinuing investment is accounted for on the cost method of the purchase price over the net tangible assets acquired have been allocated to (i) patient prescriptions for the Park Assets acquisition which are being amortized over 3 years and (ii) to non-compete agreements and goodwill for the CPOC acquisition. In connection with the CPOC acquisition,accounting as the Company obtained non-compete agreements from ninedoes not have significant influence over CPOC. Distributions of CPOC’s managementzero and key employees, including Kevin Hayes, CPOC’s Chairman. The non-compete agreements are being amortized over their contractual life of 3 years, which amounted to $150,000 for the years ended December 31, 2006 and 2005. In addition, amortization expense on the non-compete agreements for the period from the acquisition date of May 1, 2004 through December 31, 2004 was $100,000. The Company made these acquisitions in 2004 for investment purposes.
The estimated scheduled amortization of other intangible assets for the twelve months ending December 31 is$84,000 were recognized as follows:
| | | Patient | | Non-compete | | | |
| | | Prescriptions | | Agreements | | Total | |
| | | | | | | | |
| 2007 | | $ | 45,000 | | $ | 50,000 | | $ | 95,000 | |
| Thereafter | | | - | | | - | | | - | |
| | | $ | 45,000 | | $ | 50,000 | | $ | 95,000 | |
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
8. | Equity Method Investments
|
Equity method investments consist of the following:
| | | Ownership | | Original | | December 31, | | December 31, | |
| | % | | Investment | | 2006 | | 2005 | |
| | | | | | | | | | |
| Ampco Partners, Ltd. | | | 10 | % | $ | 400,000 | | $ | 194,000 | | $ | 242,000 | |
| Fairways 03 New Jersey, LP | | | 20 | % | | 145,000 | | | - | | | 162,000 | |
| Fairways Frisco, LP | | | 8.87 | % | | 1,219,000 | | | 225,000 | | | 682,000 | |
| | | | | | $ | 1,764,000 | | $ | 419,000 | | $ | 1,086,000 | |
The Company’s investment in Fairways Frisco includes its cumulative cash investment of $1,219,000 and its equity in the losses of Fairways Frisco for the year ended December 31, 2006 and 2005 of ($458,000) and ($537,000) respectively. The Company received no distributions from Fairways Friscodividend income during the years ended December 31, 20062017 and 2005,2016, respectively.
TheOn 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 a result, as of December 31, 2016,the Company receivedrecorded a distribution of approximately $680,000$3,812,000 loss on December 30, 2005 from Fairways NJ, which representedimpairment to write down the Company’s share ininvestment to the profitestimated value to be received from the sale of a single tenant commercial real estate property interest,$1,295,000, which represented the sole asset held by Fairways NJ. In additionestimated future cash payments for this transaction. The Company has received payments of $687,000 with the remainder due in three increments contingent on certain milestones expected to the distribution, cashbe achieved. The first increment of approximately $162,000, representing the Company’s share of the total escrow,$160,000 due in September, 2018 is being held in escrow to fund any amounts owed by Fairways NJ to the purchaser, including any amounts owed for standard representations and warranties under the sale agreement. The balance of the escrow account, including interest income, of approximately $168,000 was received in December 2006.
Equity in earnings (losses) of equity method investees included in other receivables; the consolidated statements of income consists of the following:
| | | December 31, | | December 31, | | December 31, | |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Ampco Partners, Ltd. | | $ | 96,000 | | $ | 100,000 | | $ | 82,000 | |
| Fairways 03 New Jersey, LP | | | 6,000 | | | 1,112,000 | | | 208,000 | |
| Fairways 36864, L.P. | | | - | | | - | | | 84,000 | |
| Fairways Frisco, L.P. | | | (458,000 | ) | | (537,000 | ) | | - | |
| | | $ | (356,000 | ) | $ | 675,000 | | $ | 374,000 | |
remaining two increments totaling $448,000 is recorded as a long term receivable due in 2020 and 2021.9. Accrued Liabilities
Accrued liabilities consist of the following:following at December 31:
| | | 2017 | | | 2016 | |
| Accrued payroll and related costs | | $ | 237,000 | | | $ | 186,000 | |
| Accrued expenses - other | | | 107,000 | | | | 14,000 | |
| Accrued rent | | | 18,000 | | | | 32,000 | |
| Accrued property, federal, state and sales taxes | | | 67,000 | | | | 61,000 | |
| | | $ | 429,000 | | | $ | 293,000 | |
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Accrued real estate commissions and fees | | $ | 2,802,000 | | $ | 1,790,000 | |
| Accrued payroll and related costs | | | 395,000 | | | 651,000 | |
| Accrued expenses - other | | | 174,000 | | | 204,000 | |
| Accrued rent | | | 174,000 | | | 169,000 | |
| Accrued property, state and sales taxes | | | 89,000 | | | 38,000 | |
| | | $ | 3,634,000 | | $ | 2,852,000 | |
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
10. Notes Payable
Notes payable consist of the following:
| | | 2017 | | | 2016 | |
| | | | | | | |
| 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 $4,450,000, interest at LIBOR plus 3.25% (4.62% at Dec 31, 2017) | | $ | 3,831,000 | | | $ | 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 (7.25% at Dec 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. | | | 335,000 | | | | – | |
| | | | | | | | | |
| Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (7.1% at Dec 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. | | | 1,371,000 | | | | 1,553,000 | |
| Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (7.1% at Dec 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. | | | 869,000 | | | | 993,000 | |
| Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (6.88% at Dec 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. | | | 570,000 | | | | 645,000 | |
| Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (6.9% at Dec 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. | | | 202,000 | | | | 231,000 | |
| Term note in the principal amount of $168,350 with interest payable at prime plus 2.6% (7.1% at Dec 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. Paid in full May 6, 2017. | | | – | | | | 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. | | | 97,000 | | | | 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 2018. Interest rates vary up to 4.076% | | | 170,000 | | | | 167,000 | |
| | | | 7,445,000 | | | | 8,736,000 | |
| Less current portion | | | (4,644,000 | ) | | | (1,129,000 | ) |
| | | $ | 2,801,000 | | | $ | 7,607,000 | |
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
Bank of Texas Credit Facility, secured by substantially all healthcare assets | | | | | |
| Term note A in the principal amount of $1,000,000, interest at 6% per annum payable monthly, principal due in full in March 2007. Paid in full in February 2007. | | $ | 659,000 | | $ | 528,000 | |
| Term note B in the principal amount of $4,000,000, interest at 6% per annum, principal and interest payable in monthly installments of $44,408 over 35 months with a balloon payment of principal due in March 2007. Paid in full in February 2007. | | | 3,140,000 | | | 3,472,000 | |
| Term note C in the principal amount of $529,539, interest at 6% per annum, principal and interest payable in monthly installments of $5,579 over 35 months with a balloon payment of principal due in March 2007. Paid in full in February 2007. | | | 416,000 | | | 459,000 | |
AmerisourceBergen Drug Corporation, unsecured note payable | | | | | | | |
| Unsecured note in the principal amount of $750,000, interest at 6% per annum, principal and interest payable in monthly installments of $6,329 over 59 months with a balloon payment of principal of $576,000 due in March 2009. | | | 658,000 | | | 693,000 | |
CPOC Acquisition Note payable to Kevin Hayes | | | | | | | |
| Acquisition note in the principal amount of $6,900,000 due May 1, 2007, interest at Northern Trust Bank prime rate plus 0.5% payable monthly, principal payable quarterly from the Company's equity interest in the operating cash flow of CPOC and secured by the assets of CPOC. Paid in full in May 2006. | | | - | | | 6,182,000 | |
CPOC term note payable to First Republic Bank | | | | | | | |
| Term note in the principal amount of $5.3 million, due June 1, 2009, interest at Bank of America prime rate minus 0.25% (8.50% at December 31, 2006) payable monthly, principal of $300,000 payable quarterly with a balloon payment of $1,700,000 due on June 1, 2009 and secured by the assets of CPOC. | | | 4,400,000 | | | - | |
Capital lease obligations, secured by office equipment | | | 129,000 | | | 266,000 | |
Demand note payable to affiliate | | | | | | | |
| Demand note payable to Ampco Partners, Ltd., interest at Bank of Texas prime rate plus 4.00% (12.25% at December 31, 2006), secured by the Company's distributions from and partnership interest in Ampco Partners, Ltd., principal and accrued interest due on demand. | | | 440,000 | | | - | |
Comerica Bank term note payable | | | | | | | |
| Term note payable in the principal amount of $30,000, payable in 36 equal installments of $928 through April 2008, interest payable at the fixed rate of 7.00%, secured by all property and equipment of Ascendant Solutions, Inc. | | | 14,000 | | | 23,000 | |
| Unsecured term note payable in the principal amount of $225,000, interest only payable monthly at the Comerica Bank prime rate plus 1.00% (8.25% at December 31, 2005), principal due on February 1, 2006. Paid in full January 2006 | | | - | | | 225,000 | |
Insurance premium finance notes payable | | | | |
| Term note payable in the principal amount of $86,250, payable in 9 equal installments of $9,804 through August 2006, interest payable at the fixed rate of 5.50%, secured by the Company's directors and officers insurance policies. | | - | | 76,000 |
| Term note payable in the principal amount of $82,875, payable in 9 equal installments of $9,450 through August 2007, interest payable at the fixed rate of 6.25%, secured by the Company's directors and officers insurance policies. | | 74,000 | | - |
| | | 9,930,000 | | 11,924,000 |
| Less current portion | | (6,106,000) | | (1,049,000) |
| | | $3,824,000 | | $10,875,000 |
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
The aggregateDecember 31, 2017 and 2016
10. Notes Payable (Continued)
Future maturities of notes payable for the 12 months ended December 31at Dougherty’s are as follows:
| 2007 | | $ | 6,106,000 | |
| 2008 | | | 1,243,000 | |
| 2009 | | | 2,581,000 | |
| 2010 | | | - | |
| Thereafter | | | - | |
| | | $ | 9,930,000 | |
| 2018 | | $ | 4,644,000 | |
| 2019 | | | 1,334,000 | |
| 2020 | | | 1,467,000 | |
| | | $ | 7,445,000 | |
The revolving credit facility (“the Revolver”) with the First National Bank of Texas credit facility contained a borrowing base formula with which Omaha (“the Company must comply. If the outstanding borrowings under the facility exceeded the borrowing base, the Company was obligated to make additional principal payments to reduce the outstanding borrowings. As of December 31, 2006, the Company was in compliance with this borrowing base requirement. During 2005, DHI failed to notify Bank of Texas, as required under its credit agreement, that it was changing the names of certain legal entities. This failure to notify Bank of Texas of the legal entity name changes constituted a technical breach of the credit agreement. This breach of the terms of the credit agreement was waived by Bank of Texas.
In June 2006, ASDS entered into a credit agreement with First Republic Bank for a $5.3 million term note and CPOC entered into a $500,000 revolving line of credit. The proceeds from the term note were used to retire the outstanding balance owed to Kevin Hayes under the Acquisition Note pursuant to the acquisition of CPOC in 2004 by the Company (through ASDS). The Acquisition Note was retired at a discount of approximately $100,000 to its outstanding principal balance of $ 5,400,000.
Outstanding advances under the revolving line of credit will bear interest at the First Republic Bank prime rate minus 0.50% and is payable monthly. The revolving line of creditLender”) is secured by, substantially allbut not limited to, the accounts receivable, inventory, and the fixed assets of CPOC and is cross-collateralized with the term note. Both the term note and the revolving line of credit are subject to certain financial covenants including a minimum ratio of earnings before interest, taxes, depreciation and amortization to debt service and a limit on annual capital expenditures. As of December 31, 2006, CPOC was in compliance with these covenants. The term note is being guaranteed by CPOC. The term note and the revolving line of credit are also being personally guaranteed, subject to certain limits, by certain officers and minority limited partners of CPOC. The Company is not paying any compensation to the individuals providing these guaranties. At December 31, 2006, there were no borrowings under the revolving line of credit.
In June 2006,Borrowers. On July 1, 2017, the Company entered into a term loan agreement with Ampco for a $500,000 demand note. The proceeds from the demand note were used for general working capital purposes. The demand note bears interest at the prime rate plus 4.00% per annum. The Company’s quarterly partnership cash distributions from Ampco are being applied to the interest and principal balances owed on the demand note. The remaining outstanding balanceobtained an extension of the demand note is due onRevolver, through September 1, 2017. On August 9, 2017, the earlier of demand or June 13, 2009. The demand note is secured by the Company’s limited partnership interest in Ampco.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Subsequent Event
Subsequent to December 31, 2006, on February 20, 2007, Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP (collectively, the “Borrowers”), each a wholly-owned subsidiary of DHI, entered into a loan agreement with Amegy Bank National Association (the “Lender”)Company obtained an additional term for a $2,000,000 revolving line of credit (the “Revolver”) and a $2,200,000 term loan (the “Term Loan”). Substantially all of the proceeds from the Revolver in the amount of $4,450,000 effective September 1, 2017, and then effective February 1, 2018, in the Term Loan were used to retire the outstanding balance owed to Bankamount of Texas, N.A. under an existing credit facility. The Term Loan and the Revolver are being guaranteed by the Company, DHI, Medicine Man, LP, Dougherty’s LP Holdings, Inc., Medicine Man GP, LLC, Alvin Medicine Man GP, LLC, Angleton Medicine Man GP, LLC and Santa Fe Medicine Man GP, LLC.
$4,000,000. Outstanding advances under the Revolver will bear interest at the Lender’s prime rate. AccruedLIBOR plus 3.25% (4.62% at December 31, 2017); accrued and unpaid interest on the Revolver is due monthly beginning on March 20, 2007.monthly. All outstanding principal under the Revolver plus all accrued and unpaid interest thereon is due and payable in full on February 20, 2009. On a monthly basis beginning on AprilAugust 1, 2007,2018. As of the Borrowers will paydate of this report, the Lender has indicated they do not intend to Lender a one-half percent per annum commitment feerenew the Revolver on the average daily unused portionmaturity date. 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 Revolver.
Company. The Term Loan bears interest at the Lender’s prime rate plus 0.25%. Principal payments of $45,833.33 and accrued and unpaid interest on the Term LoanRevolver is due monthly beginning on March 20, 2007. All outstanding principal under the Term Loan plus all accrued and unpaid interest thereon is due and payable in full on February 20, 2011.
The Term Loan and the Revolver are secured by the accounts receivable, inventory and fixed assets of the Borrowers and the stock of Dougherty’s Pharmacy, Inc. The Term Loan and the Revolver are cross-collateralized and cross-defaulted.
Both the Term Loan and the Revolver are subject to certain financial covenantsrestrictions, subject to the Lender’s prior written approval, including, but not limited to, a cap on management fees, a limit oncapital expenditures not to exceed $200,000, additional indebtedness, acquisitions of entities and payment of dividends and distributions except for dividends and distributions between Borrowers or any of the Borrowers’ subsidiaries, a limit on payments of subordinated debt to the Company and a limit on additional debt of the Borrowers. Furthermore, the loan agreement provides thatdistributions. Effective December 31, 2017, the Borrowers will maintain a maximumminimum debt service coverage ratio of funded debtnot less than 1.00 to earnings before interest, taxes, depreciation and amortization plus certain non-recurring charges and fees (“Adjusted EBITDA”) and a minimum ratio1.00, as defined. As of Adjusted EBITDA to current maturities of long term bank debt and interest. The Company is currentlyDecember 31, 2017 the Borrowers were in compliance with thesethe financial covenants.
covenant via waiver by the Lender.In conjunction with pharmacy acquisitions, DHI secured term notes payable to Cardinal Health, its primary vendor (see Note 14), and promissory notes to the sellers, as described above. The Company refinanced the Cardinal Health Term Note due February 20, 2017 to a term of 36 months at 7.95% fixed rate interest due in full on April 10, 2020.
11. Income Taxes
The provision for income taxes is reconciled with the federal statutory rate for the years ended December 31 2006, 2005 and 2004is as follows:
| | | 2017 | | | 2016 | |
| | | | | | | |
| Provision computed at federal statutory rate | | $ | (367,000 | ) | | $ | (1,638,000 | ) |
| State income taxes, net of federal tax effect | | | 5,000 | | | | 30,000 | |
| Other permanent differences | | | 5,000 | | | | 6,000 | |
| Change in valuation allowance | | | (5,163,000 | ) | | | 1,645,000 | |
| TCJA income tax rate change | | | 6,528,000 | | | | – | |
| Change in current year estimate and other | | | 21,000 | | | | (1,000 | ) |
| Income tax provision | | $ | 1,029,000 | | | $ | 42,000 | |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Provision computed at federal statutory rate | | $ | 418,000 | | $ | 104,000 | | $ | 141,000 | |
| State income taxes, net of federal tax effect | | | 131,000 | | | 150,000 | | | 178,000 | |
| Other permanent differences | | | 55,000 | | | 32,000 | | | 104,000 | |
| Expiration of state net operating loss carryover | | | 552,000 | | | 557,000 | | | 267,000 | |
| Other changes in deferred tax assets valuation allowance | | | (940,000 | ) | | (606,000 | ) | | (524,000 | ) |
| Other | | | (11,000 | ) | | 4,000 | | | - | |
| Current provision | | $ | 205,000 | | $ | 241,000 | | $ | 166,000 | |
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
11. Income Taxes (Continued)
Significant components of the net deferred tax assetassets at December 31 2006 and 2005 are as follows:
| | | December 31, | | December 31, | |
| | | 2006 | | 2005 | |
Current deferred income tax assets: | | | | | |
| Allowance for doubtful accounts | | $ | 108,000 | | $ | 203,000 | |
| Inventory reserves | | | 7,000 | | | 13,000 | |
| | | | 115,000 | | | 216,000 | |
Current deferred income tax liabilities: | | | | | | | |
| Equity in earnings of equity method investee | | | - | | | (61,000 | ) |
| Net current deferred income tax assets | | | 115,000 | | | 155,000 | |
| Valuation allowance | | | (115,000 | ) | | (155,000 | ) |
| | | | - | | $ | - | |
| | | | | | | | |
Non-current deferred income tax assets: | | | | | | | |
| | | | | | | | |
| Net operating loss carryforward | | $ | 17,043,000 | | $ | 17,366,000 | |
| State temporary differences | | | 64,000 | | | 617,000 | |
| Property and equipment | | | 26,000 | | | 22,000 | |
| Deferred rent | | | 39,000 | | | 57,000 | |
| Equity in earnings of equity method investee | | | 35,000 | | | - | |
| Other | | | 28,000 | | | 32,000 | |
| | | | 17,235,000 | | | 18,094,000 | |
Non-current deferred income tax liabilities: | | | | | | | |
| | | | | | | | |
| Equity in earnings of equity method investee | | | (143,000 | ) | | - | |
| Intangible assets | | | (63,000 | ) | | (179,000 | ) |
| Property and equipment | | | (17,000 | ) | | - | |
| Other | | | - | | | (3,000 | ) |
| | | | (223,000 | ) | | (182,000 | ) |
| | | | | | | | |
| Net non-current deferred income tax assets | | | 17,012,000 | | | 17,912,000 | |
| Valuation allowance | | | (17,012,000 | ) | | (17,912,000 | ) |
| | | $ | - | | $ | - | |
| | | 2017 | | | 2016 | |
| Current deferred income tax assets: | | | | | | | | |
| Allowance for doubtful accounts | | $ | 7,000 | | | $ | 10,000 | |
| Inventory reserves | | | 7,000 | | | | 11,000 | |
| Income from Pass-through | | | 155,000 | | | | 32,000 | |
| UNICAP - Sec 263A | | | 18,000 | | | | 30,000 | |
| Accrued liabilities | | | 28,000 | | | | 25,000 | |
| Net current deferred income tax assets | | | 215,000 | | | | 108,000 | |
| Valuation allowance | | | (215,000 | ) | | | (108,000 | ) |
| | | $ | – | | | $ | – | |
| | | 2017 | | | 2016 | |
| Non-current deferred income tax assets: | | | | | | | | |
| Net operating loss carryforward | | $ | 10,135,000 | | | $ | 16,348,000 | |
| Alternative minimum tax credit | | | 223,000 | | | | 223,000 | |
| Other | | | 195,000 | | | | 252,000 | |
| Non-current deferred income tax assets | | | 10,553,000 | | | | 16,823,000 | |
| | | | | | | | | |
| Valuation allowance | | | (8,553,000 | ) | | | (13,823,000 | ) |
| | | $ | 2,000,000 | | | $ | 3,000,000 | |
As of Dougherty’s, the Company had approximately $223,000 of alternative minimum tax credits available to offset future federal income taxes. The Company’s totalcredits have no expiration date. The Company also has unused net operating loss carryforwards of $48,260,000, which expire between 2020 and 2035.
The realization of the deferred tax assets, have been fully reserved becauseincluding 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 uncertaintyforecast 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. Accordingly, noThe 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 benefit has been recognizedasset is a significant estimate that is subject to change in the accompanying financial statements.
At December 31, 2006,near term. Management’s estimate of the Company had approximately $51 millionuse of federal net operating loss carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 2018 to 2024. The Company anticipates utilization of approximately $940,000 of federal net operating losses duringincludes the year ended December 31, 2006. In addition,estimated gain or loss resulting from the Company had approximately $2.9 million of state net operating loss carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 2007 to 2009. The Company does not anticipate utilizing any significant portionultimate sale of the state net operating losses during the year ended December 31, 2006. 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 net operating loss carryforwards. Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) imposes an annual limitation on the portion of the Company’s federal net operating loss carryforwards that may be used to offset taxable income.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
The Companypharmacy 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.
12. | Stockholders’ Equity
F-17 | |
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
12. 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"Check” preferred stock, $.0001 par value | | | 2,077,778 | |
| Total | | | 7,500,000 | |
No preferred stock was outstanding at December 31, 20062017 or 2005.
2016.Stock Dividend
On December 27, 2017 and December 12, 2016, the Company issued a $.0002 and $.0001, respectively, per share dividend to stockholders of record on December 18, 2017 and December 5, 2016, respectively. Based Compensation
on the number of common shares outstanding on the record date, the Company issued 470,881 and 221,948 new shares at a fair market value of $42,000 and $44,000, 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 Company’s 2002 Equity Incentive Plan, itplan the Company can issue up to 2,000,000 shares of restricted stockaward RSUs to employees and non-employee directors and consultants pursuant to restricted stock agreements.agreements contingent upon continuous service. Under the restricted stock agreements, the restricted shares will vest annually over a three-yearfour-year period or such other restriction period asand will be payable in stock, valued at the Company’s Board of Directors may approve.
fair market value on the grant date.As of December 31, 2006,Dougherty’s, the following shares had been issued under the 2002 Equity Incentive2013 RSU Plan:
| | | Number of | | | | | |
Year of Issuance: | | Shares | | Shares Vested | | Non-Vested | |
| 2002 | | | 435,000 | | | 435,000 | | | - | |
| 2003 | | | - | | | - | | | - | |
| 2004 | | | 67,500 | | | 65,069 | | | 2,431 | |
| 2005 | | | 47,500 | | | 36,389 | | | 11,111 | |
| 2006 | | | 127,270 | | | 115,603 | | | 11,667 | |
| | | | 677,270 | | | 652,061 | | | 25,209 | |
Deferred compensation equivalent to the market value of these restricted common shares at the date of issuance is reflected in stockholders’ equity| Year of Issuance: | | Number of Shares | | | Fair Value at Date of Grant | | | Shares Vested | | | Non-Vested | | | Cancelled | |
| 2013 | | | 120,000 | | | $ | 26,400 | | | | 115,000 | | | | – | | | | 5,000 | |
| 2014 | | | 122,100 | | | $ | 30,946 | | | | 86,700 | | | | 25,250 | | | | 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 | | | | 271,700 | | | | 633,250 | | | | 50,150 | |
During 2017 and is being amortized to operating expense over three years or the vesting period if approved to be less than three years by the Company’s Board of Directors. Deferred2016, non-cash compensation expense includedof $35,000 and $21,000, respectively, was recognized for vested shares awarded in stock.
13. 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 accompanying consolidated statements of income amounted to $56,000, $81,000Company matches 100% on the first 2% and $40,0004% for the years ended December 31, 2006, 20052017 and 2004, respectively. The Company has not recognized any tax benefit related to this deferred2016, respectively, of eligible compensation expense due to the existence of its federal tax net operating loss carryforward.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
During the year ended December 31, 2006, the Company issued 99,770 shares of restricted common stock to non-employee directors in lieu of paying cash for directors’ fees. The fair value of these shares was approximately $51,000 based on the share price of the shares on the date of grant. This amount is also equal to the cash amount that would have been paid for the director’s fees,participant’s contribute and is included in selling, general and administrative expense for the year ended December 31, 2006. The Company has not deferred any of the compensation expense since the 3 month vesting period fully amortized these shares during 2006.
In September 2006, the Board of Directors of the Company elected to vest 43,334 of previously unvested shares of its former Chief Financial Officer in consideration for consulting services to be provided over the next year to advise on financial and accounting matters.
At December 31, 2005, the Company had warrants outstanding to purchase an aggregate of 800,000 shares of common stock at prices ranging from $1.00 to $3.00 per share related to the Company’s private placement offering in 1999. In September 2002, the Company’s Board of Directors authorized the extension of the maturity of the 800,000 warrants, which were held by Jonathan Bloch, one of its directors, from February 5, 2004 to February 5, 2006. These warrants expired unexercised on February 5, 2006.
The Company’s Long-Term Incentive Plan (the “Plan”), approved in May 1999 and last amended in October 2000, provides for the issuance to qualified participants options to purchase up to 2,500,000 shares of common stock. As of December 31, 2006 and 2005 respectively, options to purchase 460,000 and 915,000 shares of common stock were outstanding under the Plan.
The exercise price of the options is determined by the administrators of the Plan, but cannot be less than the fair market value of the Company’s common stock on the date of the grant. Options vest ratably over periods of one to six years from the date of the grant. The options have a maximum life of ten years.
Following is a summary of the activity of the Plan:
| | | | | Weighted | |
| | | Number of | | Average Exercise | |
| | | Options | | Price | |
| | | | | | |
| Outstanding, January 1, 2003 | | | 1,340,000 | | $ | 0.26 | |
| Granted in 2004 | | | - | | | - | |
| Exercised in 2004 | | | (200,000 | ) | | 0.24 | |
| Canceled in 2004 | | | - | | | - | |
| Outstanding, December 31, 2004 | | | 1,140,000 | | $ | 0.26 | |
| Granted in 2005 | | | - | | | - | |
| Exercised in 2005 | | | (200,000 | ) | | 0.24 | |
| Canceled in 2005 | | | (25,000 | ) | | 0.24 | |
| Outstanding, December 31, 2005 | | | 915,000 | | $ | 0.26 | |
| Granted in 2006 | | | - | | | - | |
| Exercised in 2006 | | | (200,000 | ) | | 0.24 | |
| Canceled in 2006 | | | (255,000 | ) | | 0.33 | |
| Outstanding, December 31, 2006 | | | 460,000 | | $ | 0.24 | |
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Additional information regarding options outstanding as of December 31, 2006 is as follows:
| | | Options Outstanding | | Options Exercisable | | | |
| | | | | Weighted | | | | | | | |
| | | | | Avg. | | | | | | | |
| | | | | Remaining | | | | Weighted | | | |
| | | | | Contractual | | | | Avg. Exercise | | Intrinsic | |
Exercise Price | | # Outstanding | | Life (Yrs) | | # Exercisable | | Price | | Value | |
| | | | | | | | | | | | |
| $0.24 | | | 460,000 | | | 5.20 | | | 460,000 | | $ | 0.24 | | $ | 59,800 | |
On March 14, 2002, in an attempt to further align the interests of management and members of its Board of Directors with its stockholders, the Company granted an aggregate of 375,000 options, having an exercise price of $0.24 per share, to certain of its directors. In addition, the Company granted an aggregate of 1,000,000 performance-based options, 400,000 to its Chairman and 600,000 to its President and Chief Executive Officer. These management options, having an exercise price of $0.24 per share, are intended to incentivize management. The management options have a vesting period of six years which can be accelerated100% upon achievement of certain performance goals. In May 2004, these performance goals were achieved and the Company’s Board of Directors accelerated the vesting of the remaining 666,667 unvested options out of the 1,000,000 performance-based options issued in 2002.
Had compensation cost been recognized consistent with Statement 123R, the Company’s net income attributable to common stockholders and net income per share would have been adjusted to the pro forma amounts indicated below forcontribution. For the years ended December 31, 20052017 and 2004:
| | | 2005 | | 2004 | |
| Net income attributable to common stockholders as reported | | $ | 65,000 | | $ | 249,000 | |
| Total stock-based employee compensation included in reported net income, net of related tax effects | | | - | | | 18,000 | |
| Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (10,000 | ) | | (88,000 | ) |
| | | | | | | | |
| Pro forma net income | | $ | 55,000 | | $ | 179,000 | |
| | | | | | | | |
| Net income per share: | | | | | | | |
| Basic - as reported | | | * | | $ | 0.01 | |
| Basic - pro forma | | | * | | $ | 0.01 | |
| Diluted - as reported | | | * | | $ | 0.01 | |
| Diluted - pro forma | | | * | | $ | 0.01 | |
| | | | | | | | |
| * Less than $0.01 per share | | | | | | | |
The Company used the Black-Scholes option-pricing model to determine the fair value of grants made during 2002. The following weighted average assumptions were applied in determining the pro forma compensation cost: risk free interest rate - 4.69%, expected option life in years - 6.00, expected stock price volatility - 1.837 and expected dividend yield - 0.00%.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
13. | Employee Benefit Plan
|
Effective January 1, 2005, the Company established a new 401(k) plan to cover all of its employees, and it terminated the old 401(k) plans related to the acquired entities. The terms of the new plan are substantially the same as the terms of the 401(k) plans of its acquired subsidiaries, DHI and CPOC. Under the terms of the new plan, the Company has the option to match employee’s contributions, in an amount and at the discretion of the Company. During the year ended December 31, 2006 and 2005,2016, the Company made matching contributions of $25,000totaling $69,000 and $19,000 to the new 401(k) plan.
The Company’s employees (including employees of its acquired subsidiaries DHI and CPOC) participated in three 401(k) plans during 2004. Under two of the plans, the Company made matching contributions based on the amount of employee contributions. Total contributions by the Company under all three plans were $29,000 in 2004.
$140,000, respectively.14. | Computations of Basic and Diluted Net Income Per Common Share
F-18 | |
Basic loss per common share is based on the net incomes divided by the weighted average number of common shares outstanding during the year. Diluted income per common share is based on the net income divided by the weighted average number of common shares including equivalent common shares of dilutive common stock options and warrants outstanding during the year. No effect has been given to outstanding options or warrants in the diluted computation for the years ended December 31, 2006 and 2005, respectively, as their effect would be anti-dilutive due to net income. The number of potentially dilutive stock options and warrants excluded from the computation for the years ended December 31, was approximately 265,909 in 2006 and 822,870 in 2005 and 296,989 in 2004, respectively.
A reconciliation of basic and diluted loss per common share follows:
| | | December 31, | | December 31, | | December 31, | |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Income from continuing operations, net of taxes | | $ | 793,000 | | $ | 295,000 | | $ | 249,000 | |
| Income (loss) from discontinued operations, net of taxes | | | 230,000 | | | (230,000 | ) | | - | |
| Net income | | $ | 1,023,000 | | $ | 65,000 | | $ | 249,000 | |
| | | | | | | | | | | |
| Weighted average common shares outstanding-Basic | | | 22,409,814 | | | 22,006,733 | | | 21,803,817 | |
| Effect of dilutive stock options and warrants | | | 265,908 | | | 870,971 | | | 585,450 | |
| Weighted average common shares outstanding-Diluted | | | 22,675,722 | | | 22,877,704 | | | 22,389,267 | |
| | | | | | | | | | | |
| Basic earnings per share from: | | | | | | | | | | |
| Continuing operations | | $ | 0.04 | | $ | 0.01 | | $ | 0.01 | |
| Discontinued operations | | $ | 0.01 | | $ | (0.01 | ) | $ | - | |
| Basic net income per share | | $ | 0.05 | | | * | | $ | 0.01 | |
| | | | | | | | | | | |
| Diluted earnings per share from: | | | | | | | | | | |
| Continuing operations | | $ | 0.04 | | $ | 0.01 | | $ | 0.01 | |
| Discontinued operations | | $ | 0.01 | | $ | (0.01 | ) | $ | - | |
| Diluted net income per share | | $ | 0.05 | | | * | | $ | 0.01 | |
| | | | | | | | | | | |
| * Less than $0.01 per share | | | | | | | | | | |
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
15. | Commitments and Contingencies
|
In connection with the acquisition of the Park Assets in 2004,December 31, 2017 and 2016
14. 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 supply agreement with AmerisourceBergen Drug Corporationthree-year period pursuant to which DHI and its newly acquired indirect subsidiaries agreed to purchase prescription and over-the-counter pharmaceuticals from AmerisourceBergen through March 2007. This supply agreement provided DHI with pricing and payment terms that are improved from those previously provided by AmerisourceBergen to Park Pharmacy. In exchange for these improved terms, DHI agreed to acquire 85% of its prescription pharmaceuticals and substantially all of itstheir prescription pharmaceutical drugs, generic and over-the-counter pharmaceutical products from AmerisourceBergenproducts. The Prime Vendor Agreement provides for minimum annual and agreedaggregate 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 minimum monthly purchases of $900,000 of all products in order to obtain new favorable pricing terms.increased volume; the amendment dated November 1 2016, extended the agreement through April 30, 2019. For the years ended December 31, 20062017 and 2005 and the period from the date of acquisition through December 31, 2004,2016, DHI purchased over $23,858,000, $23,159,000approximately $27,031,000 and $17,250,000, respectively,$28,457,000 of its pharmaceutical products from AmerisourceBergen.
As of November 30, 2006, DHI entered into Amendment No. 1 (“Amendment”)Cardinal Health. All minimum commitments were made pursuant to the supply agreement. The Amendment extends the supply agreement from March 24, 2007 to March 24, 2009. In addition, the Amendment (1) improves the pricing of goods purchased (2) changes the minimum order volume from $30,000,000 to $50,000,000 over the life of the agreementthese agreements during 2017 and (3) the percentage of generic drug purchases was changed from 2.50% to 6.0%. The Amendment also allows for the return of goods, in a saleable condition, within 180 days of the invoice date without a restocking fee and provides for a termination fee if DHI terminates the supply agreement before the expiration of the term of the agreement. The termination fee is a maximum of $50,000 but is reduced for each full month from December 1, 2006 until the date of termination. However, there is no termination fee if the minimum order volume has been satisfied. At December 31, 2006, DHI believes it has satisfied the minimum order volume.
The Amendment also provides for a rebate in the amount of $150,000 representing a 15.0% volume discount off the price of goods for the first $1,000,000 of net purchases purchased in the period after November 1, 2006 providing that DHI makes net purchases in excess of $1 million after November 1, 2006. In December 2006, DHI satisfied the net purchase requirement and received the $150,000 rebate.
In January 2005, the Company agreed to provide a limited indemnification to its partners in the Fairways 03 New Jersey LP investment for any losses those partners may incur under their personal guaranties of the partnership’s bank indebtedness. The Company’s partners in this investment are the Fairways Members. The Company’s indemnification to the Fairways Members is limited to its 20% pro rata partnership interest of the $2.6 million in bank debt that was guaranteed by the individuals. In December 2005, this bank debt was paid in full by Fairways 03 New Jersey LP and the Company’s limited indemnification agreement was cancelled.
The Company and its subsidiaries lease itsleases their pharmacy, real estate advisory service and 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 $1,431,000, $1,375,000$965,000 and $974,000$996,000 for the years ended December 31, 2006, 20052017 and 2004,2016, respectively.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Minimum lease payments under all non-cancelable operating lease agreements for the years ended December 31, are as follows:
Years ending December 31, | | | |
| 2007 | | $ | 1,260,000 | |
| 2008 | | | 1,108,000 | |
| 2009 | | | 1,039,000 | |
| 2010 | | | 836,000 | |
| 2011 | | | 291,000 | |
| Thereafter | | | 2,007,000 | |
| | | $ | 6,541,000 | |
| 2018 | | $ | 776,000 | |
| 2019 | | | 791,000 | |
| 2020 | | | 747,000 | |
| 2021 | | | 666,000 | |
| 2022 | | | 677,000 | |
| Thereafter | | | 3,853,000 | |
| | | $ | 7,510,000 | |
Legal Proceedings
On January 29, 2004, Bishopsgate Corp. and T.E. Millard filed a lawsuit in the 192nd District Court of Dallas County, Texas against the Company, its officers and directors, and Park Pharmacy’s officers and directors claiming that the Company breached obligations to fund Bishopsgate’s proposed purchase of the Park Assets. Mr. Millard filed a Chapter 13 bankruptcy case in Dallas, Texas on August 15, 2003. Millard’s Chapter 13 bankruptcy case was converted to a Chapter 7 liquidation bankruptcy case on December 20, 2004. Upon the conversion of the bankruptcy case, Daniel J. Sherman was appointed Chapter 7 Trustee. In August 2005, the Company, its officers and directors and Park Pharmacy’s officers and directors entered into a compromise and settlement agreement, which was approved by the bankruptcy court, whereby the defendants collectively paid $80,000 to the bankruptcy Trustee in settlement of all claims. The Company’s insurance carrier provided the funds for the Company’s portion of the settlement amount, which was $55,000. In exchange for the settlement, and in satisfaction of the counterclaims filed against Millard and Bishopsgate Corp, the Company received all of the stock of Bishopsgate Corp. The stock has not been assigned any value in the Company’s financial statements and it is held by a newly-formed entity, DM-ASD Holding, Co.
Between January 23, 2001 and February 21, 2001, five putative class action lawsuits were filed in the United States District Court for the Northern District of Texas against us, certain of our directors, and a limited partnership of which a director is a partner. The five lawsuits assert causes of action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, for an unspecified amount of damages on behalf of a putative class of individuals who purchased our common stock between various periods ranging from November 11, 1999 to January 24, 2000. The lawsuits claim that the Company and the individual defendants made misstatements and omissions concerning the Company’s products and customers.
In April 2001, the Court consolidated the lawsuits, and on July 26, 2002, plaintiffs filed a Consolidated Amended Complaint (“CAC”). The Company filed a motion to dismiss the CAC on or about September 9, 2002. On July 22, 2003, the Court granted in part and denied in part defendants’ motion to dismiss. On September 2, 2003, defendants filed an answer to the CAC. Plaintiffs then commenced discovery. On September 12, 2003, plaintiffs filed a motion for class certification, and on February 17, 2004, the Company filed its opposition. On July 1, 2004, the Court denied plaintiffs’ motion for certification. On September 8, 2004, the Fifth Circuit granted plaintiffs’ petition for permission to appeal the denial of class certification. On August 23, 2005, the Fifth Circuit affirmed the district court’s denial of class certification. The Company settled the lead plaintiffs’ remaining individual claims for a confidential amount, which was paid by the Company’s directors and officer’s insurance carrier. Accordingly, the district court entered a final judgment dismissing the claims with prejudice on February 24, 2006.
In April 2006, the Company was notified by the Internal Revenue Service (“IRS”) that its federal income tax return for the 2004 tax year had been selected for review. In addition, in September 2006 the Company was notified by the IRS that the federal partnership income tax return of CPOC for the 2004 tax year had been selected for review. The IRS is currently conducting its reviews. At this time, the Company can make no representations or give any guidance regarding the potential outcome of this review and the impact, if any, on its financial position. However, the Company is not aware of any potential issues that may cause adjustment to its filed tax returns.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
In September 2006, the Chapter 7 trustee for the bankruptcy estate of Quantum North America, Inc. sought to enforce two default judgments against the Company for alleged preferential and fraudulent transfers to the Company's predecessor, ASD Systems, Inc. in the aggregate amount of approximately $150,000, plus interest and attorneys fees. The transfers at issue occurred in 2000. The adversary proceedings filed in the bankruptcy case were styled: David Gottlieb Trustee v. ASD Systems, Inc.; Adv. Nos. 1:02-ap-02131-GM and 1:02-ap-01948. The Company took the position that the judgments were void based on defective service and neither Ascendant nor ASD were afforded the opportunity to defend the claims. The Company also disputed the underlying claims and was prepared to fully defend the Trustee's suit once the judgments were set aside. After presenting the Trustee with our defenses, the Company was able to settle the claims for a nominal payment of $5,000.00. The Company has a settlement in principle with the Trustee which is pending approval by the Bankruptcy Court.
The Company is
also 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 cannot determine what, if any, material affect these matters will haveis a co-guarantor on its future financial position and resultsa promissory note in the original amount of operations.
16.Related Party Transactions
During$2,024,800, as renegotiated by the
fourth quarterissuing bank during 2013, in favor of
2003, the Company entered intoan individual who was previously, through August of 2008, a
participation agreement (the “Participation Agreement”) with Fairways Equities LLC (“Fairways”), an entity controlled by Jim Leslie, the Company’s Chairman, and Brant Bryan, Cathy Sweeney and David Stringfield who are principals of Capital Markets and shareholdersrelated party of the
Company. The note became delinquent and was renegotiated in conjunction with the liquidation of the individual’s partnership interest in CPOC (see Note 8). As of February 21, 2018, the balance including interest was $1,917,440, of which $420,000 in principal payments have been made during 2017. The Company’s guarantee is in effect through the December 2018 maturity date of the note. The Company
(“Fairways Members”), pursuanthas received written assurance from the bank that the primary obligors are current in their payment obligations under the promissory note as of February 21, 2018. The promissory note is fully collateralized by a property that is currently held for sale, and is expected to
sell before the maturity date. 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
receive upbe released and unrestricted for use in operations, financing or investing as determined Management. Should the Company be obligated to
20%perform under the guarantee agreement, the Company may seek recourse from the related party in the form of the
profits realized by Fairways in connection with all real estate acquisitions made by Fairways. Additionally, the Company will have an opportunity, but not the obligation, to invest in the transactions undertaken by Fairways. The Company’s profit participation with Fairways is subject to modification or termination by Fairways at the end of 2005 in the event that the aggregate level of cash flow (as defined in the Participation Agreement) generated by the acquired operating entities has not reached $2 million for the twelve months ended December 31, 2005. For the twelve months ended December 31, 2005, the Company did not meet this cash flow requirement and thereloan collateral. No liability has been
no action taken by the Fairways Members to terminate the Participation Agreement. The Company is currently negotiating with the Fairways Members to modify the Participation Agreement, however, there can be no assurances that a mutually acceptable modification can be reached. The Company is unable to determine what real estate Fairways may acquire or the cost, type, location, or other specifics about such real estate. There can be no assurances that the Company will be able to generate the required cash flow to continue in the Fairways Participation Agreement after 2005, or that Fairways will be able to acquire additional real estate assets, that the Company will choose to invest in such real estate acquisitions or that there will be profits realized by such real estate investments. The Company does not have an investment in Fairways, but rather a profits interest through its Participation Agreement. Asrecorded as of December 31,
2005, the Company held a profits interest in one real estate development transaction pursuant2017 or 2016, related to
the Participation Agreement. The Company has no investment in the transaction, is not a partner in the investment partnership and it has received no distributions.this guarantee.
During the year ended December 31, 2005, CRESA Capital Markets Group, LP, a subsidiary of the Company received approximately $108,000 in cash advances from the 4 members of Fairways Equities, which were used to pay general operating expenses. The 4 members of Fairways Equities who each own 25% of its membership interests include James C. Leslie, the Chairman and principal shareholder of the Company, and Cathy Sweeney, Brant Bryan and David Stringfield, who are each shareholders of the Company as well as principals of CRESA Capital Markets Group, LP, a subsidiary of the Company (the “Fairways Members”). These non-interest bearing advances were repaid in full in December 2005 from the receipt of revenues from Capital Markets real estate advisory transactions.
Mr. James C. Leslie, the Company’s Chairman, controls, and Mr. Will Cureton, one of the Company’s directors, is indirectly a limited partner in the entity that owns the building in which the corporate office space is sub-leased by Ascendant and DHI.
Also, through August 2005, Capital Markets also paid rent for office space in the same building to an entity controlled by Mr. Leslie. The Company considers all of these leases to be at or below market terms for comparable space in the same building.
Beginning on March 16, 2005 and ending on October 13, 2006, Ascendant subleased space from an unrelated third party of approximately $7,000 per month. In October 2006, Ascendant began sharing office space with DHI. During the year ended December 31, 2006, DHI subleased space from an unrelated third party for $6,000 per month. In addition, Ascendant incurred certain shared office costs with an entity controlled by Mr. Leslie, which gives rise to reimbursements from the Company to that entity. These costs were approximately $9,000 in 2006.
ASCENDANT SOLUTIONS, INC.
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
During the year ended December 31, 20052017 and 2004, Ascendant2016
15. Related Party Transactions
ThroughJune 2017, Company co-leased separate office space with entities controlled by the Company’s Chairman in the same building. The Company pays certain operating expenses of the other entities and Capital Markets paid aggregate rentrecords receivables due from these entities. The Company pays shared office costs of approximately $26,000$2,000 through June 2017; $1,000 through December 31, 2017 and $67,200 directly$500 thereafter to anthe entity controlled by Mr. Leslie.the Chairman and records payable due to this entity. At December 31, 2017 and 2016, the Company had net receivables due from these affiliates totaling approximately $6,000 and $12,000, respectively. The remainingreceivables due from affiliates are classified in current assets based on the agreements with the affiliates for repayment.
During 2017, the Company received $18,000 and $1,000 as a portion of the sales commission proceeds, used to offset legal and rent expense, paid by Ascendant and DHI is paid under sublease agreements with an unrelated third party, and approximates $13,000 monthly. The Company also incurred certain shared office costs with an entity controlled by Mr. Leslie, which gives rise to reimbursements from the Company to that entity. These costs were approximately $24,000entity owned by the Company’s Chairman for the renegotiation of the lease for the Company’s flagship store and $23,000the corporate offices, respectively, both located in 2005 and 2004, respectively.
Dallas, Texas.During the years ended December 31, 2006, 20052017 and 2004,2016, the Company paid fees to its directors of $2,500, $8,750$49,000 and $11,000,$56,000, respectively in exchange for their roles as members of the boardBoard of directorsDirectors and its related committees. During 2006, the Company issued 99,770 shares of restricted stockFees paid to a director in lieu of cash fees for his role as members of the board of directors and its related committees for the year ended December 31, 2006. These restricted shares vested ratably over the three month period after the date of issuance. In July 2006, the Company issue 7,500 share of restricted stock to a director, for his annual restricted stock grant, which vests ratably over a three year period from the date of issuance. In July 2006, the Company issued 10,000 share of restricted stock to a newly elected director as his initial grant of restricted stock. This initial grant of restricted stock also vests ratably over a three year period from the date of issuance. Additionally, in May 2005, the Company issued 22,500 shares of restricted stock to directors in lieu of cash fees for their roles as members of the board of directors and its related committees for the year ended December 31, 2005. These restricted shares vested ratably at the end of each quarter ending June, September and December 2005, respectively.
The Company acquired CPOC on May 1, 2004 and in connection with that acquisition, it assumed a $500,000 note payable to Kevin Hayes, who is currently the Chairman of CPOC, and it entered into the Acquisition Note with Mr. Hayes. During the period from January 1, 2006 to June 2006, CPOC paid approximately $1,108,000 to Mr. Hayes for principal and interest under the assumed note and the Acquisition Note. In June 2006, ASDS entered into a credit agreement with First Republic Bank for a $5.3 million term note. The proceeds from the term note were used to retire the outstanding balance owed to Kevin Hayes under the Acquisition Note pursuant to the acquisition of CPOC in 2004 by the Company (through ASDS). The Acquisition Note was retired at a discount of approximately $100,000 to its outstanding principal balance of $ 5,400,000. During the year ended December 31, 2005 and for the period from the acquisition date through December 31, 2004, CPOC paid approximately $1,198,000 and $720,000, respectively to Mr. Hayes for principal and interest under the assumed note and the Acquisition Note.
Mr. Leslie, the Company’s Chairman
totaled $120,000 for management and other services provided.See also serves as an advisor to the Board of Directors of CRESA Partners, LLC,guarantee agreement with a national real estate services firm. Also, Kevin Hayes, the Chairmanpartner of CPOC serveddescribed in Note 14.
16. Subsequent Events
On February 12, 2018, DHI opened the Dougherty’s Pharmacy Legacy West retail pharmacy located within the JC Penney Corporate Headquarters at The Legacy West Campus in Plano, Texas. This location is initially filling prescriptions via its concierge service from its pharmacy on Campbell Road until the new location receives its pharmacy license, which is expected to be received within the standard 90 day waiting period. Dougherty’s anticipates first year revenues from the new location of less than $1,000,000 as the Chief Executive Officer of CRESA Partners, LLC from October 2005 to September 2006.
In March 2006, CPOC purchased a minority interest of approximately 2.7% in CRESA Partners, LLC. The amount paid for this investment was $160,000 and is accounted for under the cost method of accounting for investments. CPOC is a licensee of CRESA Partners, LLC.
In April 2004, the Company invested approximately $97,000 through ASE Investments for a 24.75% interest in Fairways 36864, LP, (whose other partners also included the Fairways Members) that participated in the development of and leaseback of single tenant commercial properties. In August and October 2004, respectively, these properties were sold and the Company recognized investment income of $84,000 in addition to the return of its original investment of $97,000.
The Company made an investment in Fairways 03 New Jersey, LP in December 2003, along with the Fairways Members and on substantially the same terms as the other limited partners in Fairways 03 New Jersey, LP. The Company agreed to indemnify the other partners of Fairways 03 New Jersey, LP (who are also the Fairways Members) for its 20% pro rata partnership interest of a guarantee of bank indebtedness which the partners provided to a bank. The limit of the Company’s indemnification under this agreement is $520,000. In December 2005, this bank debt was paid in full by Fairways 03 New Jersey LP and the Company’s limited indemnification agreement was cancelled.
Effective September 1, 2005, Capital Markets entered into an advisory services agreement with Fairways Equities whereby Fairways Equities will provide all of the professional and administrative services required by Capital Markets. In exchange, Capital Markets will pay Fairways Equities an administrative fee of 25% of gross revenues and a compensation fee of 40% of gross revenues, as compensation to the principals working on the transaction that generated the corresponding revenues.
Under the terms of the agreement, Fairways Equities assumed all of the administrative expenses, including payroll, of CRESA Capital Markets. Fairways Equities will only receive payments under the agreement if the Fairways Members close a real estate capital markets advisory transaction that generates revenue for Capital Markets. The impact of this agreement on Capital Markets is that it will have no administrative expenses or cash requirements unless it closes a revenue generating transaction. The principals in Capital Markets are also the four members of Fairways Equities. During the years ended December 31, 2006 and 2005, Capital Markets paid compensation fees to Fairways Equities under the advisory services agreement of approximately $262,000 and $233,000, respectively.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
17.Unaudited Quarterly Financial Data for 2006 and 2005:
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) | |
(In thousands except per share amounts) | |
| | | | | | | | | | | | |
| | | Quarters Ended 2006 | | 2006 | |
| | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | | YTD | |
| | | | | | | (Restated) | | | | | |
| Revenue | | $ | 13,604 | | $ | 12,889 | | $ | 12,284 | | $ | 16,640 | | $ | 55,417 | |
| Gross Profit | | | 4,549 | | | 3,870 | | | 4,225 | | | 6,321 | | | 18,965 | |
| Income (loss) from continuing operations | | | (142 | ) | | (410 | ) | | (8 | ) | | 1,353 | | | 793 | |
| Discontinued operations | | | - | | | 230 | | | - | | | - | | | 230 | |
| Net income (loss) | | | (142 | ) | | (180 | ) | | (8 | ) | | 1,353 | | | 1,023 | |
| | | | | | | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.01 | ) | $ | (0.02 | ) | | * | | $ | 0.06 | | $ | 0.04 | |
| Discontinued operations | | $ | - | | $ | 0.01 | | $ | - | | $ | - | | $ | 0.01 | |
| Net income (loss) per share, basic | | $ | (0.01 | ) | $ | (0.01 | ) | | * | | $ | 0.06 | | $ | 0.05 | |
Diluted income (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.01 | ) | $ | (0.02 | ) | | * | | $ | 0.06 | | $ | 0.04 | |
| Discontinued operations | | $ | - | | $ | 0.01 | | | - | | $ | - | | $ | 0.01 | |
| Net income (loss) per share, diluted | | $ | (0.01 | ) | $ | (0.01 | ) | | * | | $ | 0.06 | | $ | 0.05 | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares, basic | | | 22,258 | | | 22,418 | | | 22,455 | | | 22,508 | | | 22,410 | |
| Weighted average shares, diluted | | | 22,783 | | | 22,418 | | | 22,455 | | | 22,707 | | | 22,676 | |
| | | Quarters Ended 2005 | | 2005 | |
| | | March 31 | | June 30 | | Sept. 30 | | Dec. 31 | | YTD | |
| | | | | | | | | | | | |
| Revenue | | $ | 13,269 | | $ | 12,576 | | $ | 12,023 | | $ | 15,099 | | $ | 52,967 | |
| Gross Profit | | | 4,568 | | | 4,119 | | | 4,132 | | | 5,426 | | | 18,245 | |
| Income (loss) from continuing operations | | | 1 | | | (439 | ) | | (452 | ) | | 1,185 | | | 295 | |
| Discontinued operations | | | - | | | - | | | (230 | ) | | - | | | (230 | ) |
| Net income (loss) | | | 1 | | | (439 | ) | | (682 | ) | | 1,185 | | | 65 | |
| | | | | | | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | | * | | $ | (0.02 | ) | $ | (0.02 | ) | $ | 0.05 | | $ | 0.01 | |
| Discontinued operations | | $ | - | | | - | | | (0.01 | ) | | - | | $ | (0.01 | ) |
| Net income (loss) per share, basic | | | * | | $ | (0.02 | ) | $ | (0.03 | ) | $ | 0.05 | | | * | |
Diluted income (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | | * | | $ | (0.02 | ) | $ | (0.02 | ) | $ | 0.05 | | $ | 0.01 | |
| Discontinued operations | | $ | - | | $ | - | | $ | (0.01 | ) | $ | - | | $ | (0.01 | ) |
| Net income (loss) per share, diluted | | | * | | $ | (0.02 | ) | $ | (0.03 | ) | $ | 0.05 | | | * | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares, basic | | | 21,933 | | | 21,965 | | | 22,014 | | | 22,114 | | | 22,007 | |
| Weighted average shares, diluted | | | 22,512 | | | 21,965 | | | 22,014 | | | 22,719 | | | 22,878 | |
| * Less than $0.01 per share | | | | | | | | | | | | | | | | |
The quarterly earnings per share information will not tie across due to the different number of weighted average shares.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
As disclosed in a Current Report on Form 8-K filed on April 3, 2007, the Company identified an accounting errorestablishes itself at our Park InfusionCare subsidiary where certain payments received from insurance companies during the year ended December 31, 2006 were incorrectly recorded as a liability. As a result, the Company will amend the previously filed Form 10-Q for the 3rd Quarter Financials with an aggregate impact of an increase to its previously reported revenue by $301,000 and will decrease its previously reported net loss by $179,000. As a result, the quarterly financial data for the quarter ended September 30, 2006 has been restated to reflect these adjustments.
As disclosed in a Current Report on Form 8-K filed on May 24, 2006, the board of directors decided to retain the operations of Park InfusionCare, which had previously been reported as a discontinued operation while the Company was pursuing a potential disposition or strategic transaction for its infusion therapy business. As a result of the board of director’s decision to retain the operations of Park InfusionCare, the Company has reported the operating results of Park InfusionCare as part of continuing operations. Consequently, the quarterly financial data for each quarter in 2005 have been adjusted to reflect Park InfusionCare as a part of continuing operations.
For the quarter ended March 31, 2005, these adjustments increased revenue by $2,388,000 and gross profit by $1,195,000. In addition, for the quarter ended June 30, 2005 these adjustments increased revenue by $2,461,000 and gross profit by $1,288,000. For the quarter ended September 30, 2005, these adjustments increased revenue by $2,261,000 and gross profit by $1,075,000. In addition, for the quarter ended December 31, 2005 these adjustments increased revenue by $1,961,000 and gross profit by $955,000. The Company also reclassified $108,000 in the quarter ended December 31, 2005 from other income to revenue as a result of the accounting error at Park InfusionCare. This reclassification entry was recorded to conform to the 2006 presentation. None of these adjustments had any effect on net income (loss) for any of the quarters.
18.Subsequent Events
On February 20, 2007, Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP), each a wholly-owned subsidiary of DHI, entered into a loan agreement with Amegy Bank National Association for a $2,000,000 revolving line of credit and a $2,200,000 term loan. Substantially all of the proceeds from the Revolver and the Term Loan were used to retire the outstanding balance owed to Bank of Texas, N.A. under an existing credit facility. See Note 10 for further information regarding the new credit facility.
19.Segment Information
The Company is organized in three segments: (i) healthcare, (ii) real estate advisory services and (iii) corporate and other businesses. The healthcare segment consists of the operations of DHI, while the real estate advisory services segment consists of the operations of the CRESA Partners of Orange County LP and CRESA Capital Markets Group LP. Key measures used by the Company’s management to evaluate business segment performance include revenue, cost of sales, gross profit, investment income and EBITDA. EBITDA is calculated as net income before deducting interest, taxes, depreciation and amortization. Although EBITDA 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.
ASCENDANT SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Statements of income and balance sheet data for the Company’s principal business segments for the years ended December 31, 2006 and 2005 are as follows (000’s omitted):
| | | Years Ended December 31, | |
| | | Healthcare | | Real Estate Services | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | |
| Revenue | | $ | 41,062 | | $ | 39,136 | | $ | 14,355 | | $ | 13,831 | |
| Cost of sales | | | 28,048 | | | 26,517 | | | 8,404 | | | 8,205 | |
| Gross profit | | | 13,014 | | | 12,619 | | | 5,951 | | | 5,626 | |
| Other income | | | 8 | | | 9 | | | 100 | | | - | |
| Equity in income (losses) of equity method investees | | | - | | | - | | | - | | | - | |
| Discontinued operations | | | 230 | | | (230 | ) | | - | | | - | |
| Net income (loss) | | $ | 630 | | $ | (1,075 | ) | $ | 1,956 | | $ | 1,592 | |
| Plus: | | | | | | | | | | | | | |
| Interest Expense (Income) | | | 330 | | | 330 | | | 400 | | | 444 | |
| Income tax provision | | | - | | | - | | | 199 | | | 209 | |
| Depreciation & Amortization | | | 391 | | | 332 | | | 297 | | | 304 | |
| Discontinued operations | | | (230 | ) | | 230 | | | - | | | - | |
EBITDA from continuing operations | | $ | 1,121 | | $ | (183 | ) | $ | 2,852 | | $ | 2,549 | |
| | | | | | | | | | | | | | |
| Total Assets | | $ | 7,483 | | $ | 8,631 | | $ | 12,363 | | $ | 11,341 | |
| | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | Corporate & Other | | Consolidated | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | |
| Revenue | | $ | - | | $ | - | | $ | 55,417 | | $ | 52,967 | |
| Cost of sales | | | - | | | - | | | 36,452 | | | 34,722 | |
| Gross profit | | | - | | | - | | | 18,965 | | | 18,245 | |
| Other income | | | 47 | | | 64 | | | 155 | | | 73 | |
| Equity in income (losses) of equity method investees | | | (356 | ) | | 675 | | | (356 | ) | | 675 | |
| Discontinued operations | | | - | | | - | | | 230 | | | (230 | ) |
| Net income (loss) | | $ | (1,563 | ) | $ | (452 | ) | $ | 1,023 | | $ | 65 | |
| Plus: | | | | | | | | | | | | | |
| Interest Expense (Income) | | | 28 | | | (11 | ) | | 758 | | | 763 | |
| Income tax provision | | | 6 | | | 32 | | | 205 | | | 241 | |
| Depreciation & Amortization | | | 25 | | | 16 | | | 713 | | | 652 | |
| Discontinued operations | | | - | | | - | | | (230 | ) | | 230 | |
EBITDA from continuing operations | | $ | (1,504 | ) | $ | (415 | ) | $ | 2,469 | | $ | 1,951 | |
| | | | | | | | | | | | | | |
| Total Assets | | $ | 1,193 | | $ | 2,026 | | $ | 21,039 | | $ | 21,998 | |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified by the SEC and that such information is accumulated and communicated to our management, as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Due to the limited size of the Company’s staff, there is inherently a lack of segregation of duties related to the authorization, recording, processing, and reporting of transactions. In October 2004, the Company added a new Chief Financial Officer which allowed it to implement controls related, but not limited to segregation of duties. In September 2006, that Chief Financial Officer resigned and was replaced by an Interim Chief Financial Officer. The Company will continue to periodically assess the cost versus benefit of adding the resources that would improve segregation of duties. Currently, with the concurrence of the board of directors, the Company does not consider the benefits to outweigh the costs of adding additional staff in light of the limited number of transactions related to the Company’s operations.
Management, including our Chief Executive Office and Interim Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by the Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of December 31, 2006, our disclosure controls and procedures were ineffective, due to the identification of the material weakness in the revenue recognition process at its Park InfusionCare subsidiary as described below.
Notwithstanding the material weakness described below, management believes the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. The Company’s Chief Executive Officer and Interim Chief Financial Officer have certified that, to their knowledge, the Company’s consolidated financial statements included in this Annual Report on Form 10-K fairly present in all material respects the financial condition, results of operations and cash flows of the Company for the periods presented.
Material Weakness Related to Revenue Recognition
A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the consolidated annual or interim financial statements will not be prevented or detected. In connection with the preparation of the Company’s 2006 consolidated financial statements, the Company has identified the following control deficiencies, which represent a material weakness in the Company’s financial statement close and reporting process as of December 31, 2006.
The Company concluded that its revenue recognition process for 2006 at its Park InfusionCare subsidiary was ineffective as a result of an identified material weakness. During 2006, variances from expected payments received from insurance companies were not investigated in a timely manner, and thus were incorrectly accounted for as liabilities rather than revenue. In March 2007, the Company identified an accounting error at its Park InfusionCare subsidiary where certain payments received from insurance companies during the year ended December 31, 2006 were incorrectly recorded as a liability. The Company has evaluated these payments and, as a result of this evaluation, has increased the 2006 revenue of Park InfusionCare in the amount of approximately $482,000. As a result, an adjustment of approximately $482,000 was recorded in order to increase the revenue and reduce the net loss of the Park InfusionCare subsidiary for the year-ended December 31, 2006.
The efficacy of the measures the Company implements in this regard will be subject to ongoing management review supported by confirmation and testing by management as well as audit committee oversight. As a result, the Company expects that additional changes will be made to its processes as time progresses.
Plan for Remediation of Material Weakness
In order to remediate this material weakness, the Company will review and document the processes relating to the recording, processing, reconciliation, recognition and reporting of revenue at our Park InfusionCare subsidiary. In addition, the Company will provide additional training, review and supervision of personnel responsible for the billing, collection and accounting of the Park InfusionCare revenue.
ITEM 9B. OTHER INFORMATIONNone
PART III.
Certain information required by Part III is incorporated by reference in this Annual Report on Form 10-K from our definitive Proxy Statement to be filed within 120 days of December 31, 2006 and delivered to our stockholders in connection with our 2007 Annual Meeting of Stockholders, to be held on June 14, 2007, to be filed pursuant to Regulation 14A (the “Proxy Statement”).
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Information regarding our directors and executive officers may be found under the captions “Election of Directors,” “Corporate Governance” and “Executive Officers” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Audit Committee
The Company has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Additional information regarding the Audit Committee may be found under the captions “Committees of the Board of Directors; Meetings” and “Report of the Audit Committee” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Audit Committee Financial Expert
The Board of Directors has determined that it has at least one “Audit Committee Financial Expert” (as defined by Item 401(h)(2) of Regulation S-K of the Exchange Act) on the Audit Committee of the Board of Directors, Anthony J. LeVecchio. The Board of Directors has further determined that Mr. LeVecchio is “independent” from management within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Section 16(a) Beneficial Ownership Reporting Compliance
Information regarding Section 16(a) Beneficial Ownership Reporting Compliance may be found under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for our 2007 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
Code of Business Conduct and Ethics
The Company has adopted a code of business conduct and ethics, which applies to all of its officers, directors and employees, including its principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. The Company’s code of business conduct and ethics is set forth on the Company’s website at http://www.ascendantsolutions.com/ascendant_codeofconduct.pdf.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the sections of the Proxy Statement captioned “Election of Directors,” “Management,” “Compensation Discussion and Analysis,” and “Performance Graph.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities authorized for issuance under equity compensation plans at December 31, 2006 are as follows:
location.Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance |
Equity compensation plans approved by security holders | 460,000 (1)
| $.24
| 2,610,000 (2)
|
Equity compensation plans not approved by security holders | 0
| | 0
|
Total | 460,000
| | 2,610,000
|
(1) | As of December 31, 2006, options to purchase 915,000 shares of common stock were outstanding under the 1999 Long Term Incentive Plan. |
(2) | As of December 31, 2006, 550,000 shares of restricted stock were issued under the 2002 Equity Incentive Plan. These shares are not included in the number of securities remaining available for future issuance. |
Additional information required by this Item is incorporated by reference from the section of the Proxy Statement for our 2007 Annual Meeting of Stockholders captioned “Stock Ownership.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from the section of the Proxy Statement for our 2007 Annual Meeting of Stockholders captioned “Management.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference from the section of the Proxy Statement for our 2007 Annual Meeting of Stockholders captioned “Independent Public Accountants.”
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| 1. | Financial Statements: See “Index to Consolidated Financial Statements and Supplementary Data” under Part II, Item 8 of this Annual Report on Form 10-K.
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| | Unconsolidated subsidiaries
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| | The audited financial statements of Fairways Frisco, L.P. and Fairways 03 New Jersey, L.P. are filed hereto as Exhibits 99.8 and 99.9, respectively, pursuant to Rule 3-09 of Regulation S-X. The Company is not required to provide any other financial statements pursuant to Rule 3-09 of Regulation S-X. |
| 2. | All other schedules are omitted because they are not applicable or the required information is included in the Company’s Consolidated Financial Statements or Notes thereto included in this Annual Report on Form 10-K. |
| 3. | Exhibits: The exhibits listed on the accompanying Index to Exhibits immediately following the certifications are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 16, 2007.
| ASCENDANT SOLUTIONS, INC.
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| F-20 | |
| | |
| By: | /s/ David E. Bowe |
| | David E. Bowe |
| | President and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)
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| | |
| | |
| By: | /s/ Michal L. Gayler |
| | Michal L. Gayler |
| | Interim Vice President-Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on the 16th day of April 2007, below by the following persons on behalf of the registrant and in the capacities indicated.
Signature
| | Title
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/s/ James C. Leslie
James C. Leslie
| | Chairman of the Board
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/s/ David E. Bowe
David E. Bowe
| | Director, President and Chief Executive Officer,
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/s/ Anthony J. LeVecchio
Anthony J. LeVecchio
| | Director, Audit Committee Chairman
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/s/ Curt Nonomaque
Curt Nonomaque
| | Director
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/s/ Will Cureton
Will Cureton
| | Director
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INDEX TO EXHIBITS
Exhibit Number | | Description
|
2.1
| | Agreement and Plan of Merger by and between ASD Systems, Inc. d/b/a Ascendant Solutions, a Texas corporation, and Ascendant Solutions, Inc., a Delaware corporation (Exhibit 2.1) (1) |
2.2
| | Stock Purchase Agreement by and between ASDS of Orange County, Inc., a Delaware corporation f/k/a Orange County Acquisition Corp. and Kevin Hayes dated March 23, 2004 (Exhibit 2.1) (2) |
2.3
| | ASDS of Orange County, Inc. Promissory Note due May 1, 2007 (Exhibit 2.2) (2) |
3.1
| | Certificate of Incorporation of Ascendant Solutions, Inc. (Exhibit 3.1) (1) |
3.2
| | Bylaws of Ascendant Solutions, Inc. (Exhibit 3.2) (1) |
4.1
| | Specimen of Ascendant Solutions, Inc. Common Stock Certificate (Exhibit 4.1) (1) |
4.2
| | 1999 Long-Term Incentive Plan for ASD Systems, Inc. (Exhibit 4.2) (3) |
4.3
| | Form of Stock Option Agreement under 1999 Long-Term Incentive Plan (Exhibit 4.3) (3) |
10.1
| | Form of Indemnification Agreement with directors (Exhibit 10.10) (3) |
10.2
| | Form of Warrant granted to affiliates of CKM Capital LLC (Exhibit 10.15) (3) |
10.3
| | Stock Option Agreement dated as of March 14, 2002 between Ascendant Solutions, Inc. and David E. Bowe (Exhibit 10.6) (4) |
10.4
| | Stock Option Agreement dated as of March 14, 2002 between Ascendant Solutions, Inc. and James C. Leslie (Exhibit 10.7) (4) |
10.7
| | Asset Purchase Agreement between Dougherty’s Holdings, Inc. and Park Pharmacy Corporation dated December 9, 2003 (Exhibit 2.1) (5) |
10.8
| | First Amendment to the Asset Purchase Agreement between Dougherty’s Holdings, Inc. and Park Pharmacy Corporation dated February 27, 2004 (Exhibit 2.2) (6) |
10.9
| | Amended Warrant Agreement dated as of July 21, 2003 between Ascendant Solutions, Inc. and affiliates of CKM Capital LLC (Exhibit 10.10) (7) |
10.10
| | Parent Guaranty dated as of May 1, 2004, by and among Ascendant Solutions, Inc., ASDS Orange County, Inc., a Delaware corporation, and the successor corporation of the merger of Orange County Acquisition Corp. and CRESA Partners of Orange County, Inc. (Exhibit 10.1) (8) |
10.11
| | Parent Pledge Agreement dated May 1, 2004, by and between Ascendant Solutions, Inc. and Kevin J. Hayes (Exhibit 10.2) (8) |
10.12
| | Subsidiary Guaranty dated as of May 1, 2004 by and among CRESA Partners of Orange County, LP, a Delaware limited partnership, ASDS Orange County, Inc., a Delaware corporation, and the successor corporation of the merger of Orange County Acquisition Corp. and CRESA Partners of Orange County, Inc. (Exhibit 10.3) (8) |
10.13
| | Amended Promissory Note of CRESA Partners of Orange County, Inc. dated August 12, 2004, payable to the order of Kevin J. Hayes (Exhibit 10.1) (9) |
10.14
| | Restricted Stock Agreement dated October 18, 2004, between Ascendant Solutions, Inc. and Gary W. Boyd (Exhibit 1.01) (10) |
10.15
| | Master Agreement Regarding Frisco Square Partnerships dated December 31, 2004 (Exhibit 10.1) (11) |
10.16
| | Participation Agreement between Ascendant Solutions, Inc. and Fairways Partners, LLC dated August 2003 (Exhibit 10.16) (12) |
10.17
| | Restricted Stock Agreement dated June 25, 2004, between Ascendant Solutions, Inc. and Anthony J. LeVecchio (Exhibit 10.17) (12) |
10.18
| | Amended and Restated Agreement of Limited Partnership of Fairways Frisco, L.P. effective December 30, 2004 (Exhibit 10.18) (12) |
10.19
| | Promissory note payable from Ascendant Solutions, Inc. to Comerica Bank dated April 11, 2005 (Exhibit 10.1) (14) |
10.20
| | Fee allocation agreement dated May 31, 2005 between Fairways Equities, LLC and Ascendant Solutions, Inc. (Exhibit 10.2) (14) |
10.21 | | Advisory Services Agreement between CRESA Capital Markets Group, LP, Fairways Equities, LLC and Ascendant Solutions, Inc. dated September 1, 2005 (Exhibit 10.1)(15) |
10.22 | | Form of Restricted Stock Agreement between Ascendant Solutions, Inc. and non-employee directors (Exhibit 1.01) (17) |
10.23 | | Promissory note payable from Ascendant Solutions, Inc. to Comerica Bank dated September 13, 2005 (Exhibit 10.01) (18) |
10.24 | | Outline of Compensation Plan for Non-Employee Directors (21) |
10.25 | | Employment Agreement between Park InfusionCare, LP and Scott L. Holtmyer (Exhibit 10.1) (22). |
10.26 | | Loan Agreement (Term Loan) between ASDS of Orange County, Inc. and First Republic Bank dated June 8, 2006 (Exhibit 10.1) (23). |
10.27 | | Promissory Note (Term Loan) payable from Orange County, Inc. to First Republic Bank dated June 8, 2006 (Exhibit 10.2) (23). |
10.28 | | Security Agreement (Term Loan) between ASDS of Orange County, Inc. and First Republic Bank dated June 8, 2006 (Exhibit 10.3) (23). |
10.29 | | Continuing Guarantee of Payment and Performance by CRESA Partners of Orange County, LP for the benefit of First Republic Bank dated June 8, 2006 (Exhibit 10.4) (23). |
10.30 | | Form of Limited Guaranty of the Obligations of ASDS of Orange County, Inc. for the benefit of First Republic Bank dated June 8, 2006 (Exhibit 10.5) (23).
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10.31 | | Loan Agreement (Line of Credit) between CRESA Partners of Orange County, LP and First Republic Bank dated June 8, 2006 (Exhibit 10.6) (23). |
10.32 | | Promissory Note (Line of Credit) payable from CRESA Partners of Orange County, LP to First Republic Bank dated June 8, 2006 (Exhibit 10.7) (23). |
10.33 | | Security Agreement (Line of Credit) between CRESA Partners of Orange County, LP and First Republic Bank dated June 8, 2006 (Exhibit 10.8) (23). |
10.34 | | Form of Limited Guaranty of the Obligations of CRESA Partners of Orange County, LP for the benefit of First Republic Bank dated June 8, 2006 (Exhibit 10.9) (23).
|
10.35 | | Promissory Note payable from Ascendant Solutions, Inc. to Ampco Partners, Ltd. dated June 14, 2006 (Exhibit 10.1) (24). |
10.36 | | Security Agreement between Ascendant Solutions, Inc. and Ampco Partners, Ltd. dated June 14, 2006 (Exhibit 10.2) (24). |
10.37 | | Letter Agreement between Ascendant Solutions, Inc. and Gary W. Boyd dated September 6, 2006 (Exhibit 10.1) (25). |
10.38 | | Letter Agreement between Ascendant Solutions, Inc. and GaylerSmith Group, LLC dated May 16, 2005 (Exhibit 10.2) (25). |
10.39 | | Loan Agreement between Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, Santa Fe Medicine Man, LP and Amegy Bank National Association dated February 20, 2007 (Exhibit 10.1) (26). |
10.40 | | Promissory Note (Term) payable from Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP to Amegy Bank National Association dated February 20, 2007 (Exhibit 10.2) (26). |
10.41 | | Promissory Note (Revolving) payable from Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP, and Santa Fe Medicine Man, LP to Amegy Bank National Association dated February 20, 2007 (Exhibit 10.3) (26). |
10.42 | | Form of Security Agreement dated as of February 20, 2007 executed by Dougherty’s Pharmacy, Inc., Alvin Medicine Man, LP, Angleton Medicine Man, LP and Santa Fe Medicine Man, LP in favor of Amegy Bank National Association (Exhibit 10.4) (26).
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10.43 | | Form of Unlimited Guaranty Agreement dated as of February 20, 2007 executed by Ascendant Solutions, Inc., Dougherty’s Holdings, Inc. Medicine Man, LP, Dougherty’s LP Holdings, Inc., Medicine Man GP, LLC, Alvin Medicine Man GP, LLC, Angleton Medicine Man GP, LLC and Santa Fe Medicine Man GP, LLC for the benefit of Amegy Bank National Association (Exhibit 10.5) (26).
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10.44 | | Pledge Agreement between Dougherty’s Pharmacy, Inc. in favor of Amegy Bank National Association dated February 20, 2007 (Exhibit 10.6) (26). |
21.1 | | Subsidiaries of Ascendant Solutions, Inc.* |
23.1 | | Consent of Hein & Associates LLP * |
31.1 | | Written Statement of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
31.2 | | Written Statement of Vice President-Finance and Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
32.1 | | Certification of Ascendant Solutions, Inc. Annual Report on Form 10-K for the period ended December 31, 2006, by David E. Bowe as President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
32.2 | | Certification of Ascendant Solutions, Inc. Annual Report on Form 10-K for the period ended December 31, 2006, by Michal L. Gayler as Interim Vice President-Finance and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
99.1 | | Certificate of Incorporation for Orange County Acquisition Corp. (Exhibit 99.1) (8) |
99.2 | | Certificate of Ownership and Merger of Staubach Company - West, Inc. into Orange Co. (Exhibit 99.2) (8) |
99.3 | | Table reflecting certain ownership after giving effect to the transactions contemplated by the Master Agreement (Exhibit 99.1) (11) |
99.4 | | Table reflecting certain ownership after giving effect to the termination of the Master Agreement and other changes (Exhibit 99.1) (16) |
99.5 | | Office Building Sublease Agreement between Ascendant Solutions, Inc. and Holt Lunsford Commercial, Inc. dated March 16, 2005 (Exhibit 99.1) (14) |
99.6 | | Press release dated November 3, 2005 (Exhibit 99.1) (18) |
99.7 | | Press release dated January 3, 2006 (Exhibit 99.1) (19) |
99.8 | | Audited consolidated financial statements of Fairways Frisco, L.P. and Subsidiaries for the years ended December 31, 2006 and 2005 pursuant to Rule 3-09 of Regulation S-X* |
99.9 | | Audited financial statements of Fairways 03 New Jersey, L.P. for the year ended December 31, 2005 pursuant to Rule 3-09 of Regulation S-X* |
* | | * Filed herewith |
(1)
| Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed October 23, 2000. |
(2)
| Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K/A filed July 21, 2004. |
(3)
| Incorporated by reference to the exhibits shown in parenthesis filed in our Registration Statement on Form S-1, File No. 333-85983. |
(4)
| Incorporated by reference to the exhibits shown in parenthesis filed in our annual report on Form 10-K for the fiscal year ended December 31, 2002. |
(5)
| Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed December 11, 2003. |
(6)
| Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed March 29, 2004. |
(7)
| Incorporated by reference to the exhibits shown in parenthesis filed in our annual report on Form 10-K for the fiscal year ended December 31, 2003. |
(8)
| Incorporated by reference to the exhibits shown in parenthesis filed in our quarterly report on Form 10-Q for the period ended June 30, 2004. |
(9)
| Incorporated by reference to the exhibits shown in parenthesis filed in our quarterly report on Form 10-Q for the period ended September 30, 2004. |
(10)
| Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed October 19, 2004. |
(11)
| Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed January 7, 2005. |
(12)
| Incorporated by reference to the exhibits shown in parenthesis filed in our annual report on Form 10-K for the fiscal year ended December 31, 2004. |
(13)
| Incorporated herein by reference to the exhibits shown in parenthesis filed in our quarterly report on Form 10-Q for the quarterly period ended March 31, 2005 |
(14)
| Incorporated herein by reference to the exhibits shown in parenthesis filed in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2005. |
(15) | Incorporated herein by reference to the exhibits shown in parenthesis filed in our quarterly report on Form 10-Q for the quarterly period ended September 30, 2005. |
(16) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed April 29, 2005. |
(17) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed May 24, 2005. |
(18) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed September 15, 2005. |
(19) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed November 4, 2005. |
(20) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed January 3, 2006. |
(21) | Incorporated by reference to Item 1.01 in our current report on Form 8-K filed May 16, 2006. |
(22) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed May 24, 2006. |
(23) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed June 13, 2006. |
(24) | Incorporated by reference to the exhibits shown in parenthesis filed in our quarterly report on Form 10-Q for the quarterly period ended June 20, 2006. |
(25) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed September 8, 2006. |
(26) | Incorporated by reference to the exhibits shown in parenthesis filed in our current report on Form 8-K filed February 26, 2007. |
Executive Compensation Plans and Arrangements
The following is a list of all executive compensation plans and arrangements required to be filed as an exhibit to this Form 10-K:
| | |
1.
| | 1999 Long-Term Incentive Plan for ASD Systems, Inc. (filed as Exhibit 4.2 hereto and incorporated by reference to Exhibit 4.2 filed in our Registration Statement on Form S-1, File No. 333-85983)
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2.
| | Form of Stock Option Agreement under 1999 Long-Term Incentive Plan (filed as Exhibit 4.3 hereto and incorporated by reference to Exhibit 4.3 filed in our Registration Statement on Form S-1, File No. 333-85983)
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3.
| | Stock Option Agreement dated as of March 14, 2002 between Ascendant Solutions, Inc. and David E. Bowe (filed hereto as Exhibit 10.3 and incorporated by reference to Exhibit 10.6 filed in our annual report on Form 10-K for the fiscal year ended December 31, 2002)
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4.
| | Stock Option Agreement dated as of March 14, 2002 between Ascendant Solutions, Inc. and James C. Leslie (filed hereto as Exhibit 10.4 and incorporated by reference to Exhibit 10.7 filed in our annual report on Form 10-K for the fiscal year ended December 31, 2002)
|
5.
| | Restricted Stock Agreement dated October 18, 2004, between Ascendant Solutions, Inc. and Gary W. Boyd (filed hereto as Exhibit 10.14 and incorporated by reference to Exhibit 1.01 filed in our current report on Form 8-K filed October 19, 2004)
|
6.
| | Restricted Stock Agreement dated June 25, 2004, between Ascendant Solutions, Inc. and Anthony J. LeVecchio (filed as Exhibit 10.17 hereto and Incorporated by reference to Exhibit 10.17 filed in our annual report on Form 10-K for the fiscal year ended December 31, 2004)
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7.
| | Form of Restricted Stock Agreement between Ascendant Solutions, Inc. and non-employee directors (filed hereto as Exhibit 10.22 and incorporated by reference to Exhibit 1.01 filed in our current report on Form 8-K filed May 24, 2005)
|
8.
| | Outline of Compensation Plan for Non-Employee Directors (filed hereto as Exhibit 10.24 and incorporated by reference to Item 1.01 in our current report on Form 8-K filed May 16, 2006) |
9.
| | Employment Agreement between Park InfusionCare, LP and Scott L. Holtmyer (filed hereto as Exhibit 10.25 and incorporated by reference to Exhibit 10.1 filed in our current report on Form 8-K filed May 24, 2006) |
10.
| | Letter Agreement between Ascendant Solutions, Inc. and Gary W. Boyd dated September 6, 2006 (filed hereto as Exhibit 10.37 and incorporated by reference to Exhibit 10.1 filed in our current report on Form 8-K filed September 8, 2006) |
11.
| | Letter Agreement between Ascendant Solutions, Inc. and GaylerSmith Group, LLC dated May 16, 2005 (filed hereto as Exhibit 10.38 and incorporated by reference to Exhibit 10.2 filed in our current report on Form 8-K filed September 8, 2006) |