UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2018
OR
| 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 | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
5924 ROYAL LANE SUITE 250
DALLAS, TEXAS 75230
(Address of principal executive offices) (Zip code)
972-250-0945
(Registrant’s telephone number, including area code)
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 preceding 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. Yesx☐ Noo☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☐Noo☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer | Accelerated filer | |
| Non-accelerated filer | Smaller reporting company | |
| Emerging growth company |
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☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
Number of shares of common stock, $0.0001 par value, of registrant outstanding at May 4, 2018: 23,066,564April 22, 2019: 24,127,914.
PART I – FINANCIAL INFORMATION
Dougherty’s Pharmacy, Inc.
(000’s omitted, except par value and share amounts)
| March 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 59 | $ | 86 | ||||
| Restricted cash | 304 | 303 | ||||||
| Trade accounts receivable, net | 1,622 | 1,673 | ||||||
| Other receivables | 359 | 345 | ||||||
| Receivable from affiliates | 10 | 6 | ||||||
| Inventories, net | 3,518 | 3,562 | ||||||
| Prepaid expenses | 209 | 267 | ||||||
| Total current assets | 6,081 | 6,242 | ||||||
| Long term receivable | 448 | 448 | ||||||
| Property and equipment, net | 1,046 | 1,045 | ||||||
| Intangible assets, net | 2,724 | 2,892 | ||||||
| Deferred tax asset | 2,000 | 2,000 | ||||||
| Total assets | $ | 12,299 | $ | 12,627 | ||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 3,017 | $ | 3,123 | ||||
| Accrued liabilities | 583 | 429 | ||||||
| Notes payable, current portion | 708 | 813 | ||||||
| Revolving credit facility | 3,975 | 3,831 | ||||||
| Total current liabilities | 8,283 | 8,196 | ||||||
| Notes payable, long-term portion | 2,661 | 2,801 | ||||||
| Total liabilities | 10,944 | 10,997 | ||||||
| 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; 24,117,164 shares issued and 23,087,164 shares outstanding at March 31, 2018; 24,003,310 shares issued and 22,973,310 shares outstanding at December 31, 2017 | 2 | 2 | ||||||
| Additional paid-in capital | 60,212 | 60,221 | ||||||
| Accumulated deficit | (58,462 | ) | (58,196 | ) | ||||
| Treasury stock, at cost, 1,030,000 shares | (397 | ) | (397 | ) | ||||
| Total stockholders' equity | 1,355 | 1,630 | ||||||
| Total liabilities and stockholders' equity | $ | 12,299 | $ | 12,627 | ||||
| September 30, | December 31, | |||||||
| 2018 | 2017 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 206 | $ | 86 | ||||
| Restricted cash | – | 303 | ||||||
| Trade accounts receivable, net | 1,585 | 1,673 | ||||||
| Other receivables | 218 | 345 | ||||||
| Receivable from affiliates | – | 6 | ||||||
| Inventories, net | 2,854 | 3,562 | ||||||
| Prepaid expenses | 77 | 267 | ||||||
| Total current assets | 4,940 | 6,242 | ||||||
| Long term receivable | 472 | 448 | ||||||
| Property and equipment, net | 956 | 1,045 | ||||||
| Intangible assets, net | 2,389 | 2,892 | ||||||
| Deferred tax asset | – | 2,000 | ||||||
| Total assets | $ | 8,757 | $ | 12,627 | ||||
| LIABILITIES | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 2,896 | $ | 3,123 | ||||
| Accrued liabilities | 483 | 429 | ||||||
| Notes payable, current portion | 1,326 | 813 | ||||||
| Revolving credit facility | 3,956 | 3,831 | ||||||
| Total current liabilities | 8,661 | 8,196 | ||||||
| Notes payable, long-term portion | 1,653 | 2,801 | ||||||
| Total liabilities | 10,314 | 10,997 | ||||||
| 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; 24,112,164 shares issued and 23,082,164 shares outstanding at September 30, 2018; 24,003,310 shares issued and 22,973,310 shares outstanding at December 31, 2017 | 2 | 2 | ||||||
| Additional paid-in capital | 60,214 | 60,221 | ||||||
| Accumulated deficit | (61,376 | ) | (58,196 | ) | ||||
| Treasury stock, at cost, 1,030,000 shares | (397 | ) | (397 | ) | ||||
| Total stockholders' equity | (1,557 | ) | 1,630 | |||||
| Total liabilities and stockholders' equity | $ | 8,757 | $ | 12,627 | ||||
See Notes to Consolidated Financial Statements
| 3 |
Dougherty’s Pharmacy, Inc.
Consolidated Statements of Operations
(000’s omitted, except share and per share amounts)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenue | $ | 9,455 | $ | 10,055 | ||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 6,887 | 7,268 | ||||||
| Gross profit | 2,568 | 2,787 | ||||||
| Operating expenses | ||||||||
| Selling, general and administrative expenses | 2,518 | 2,564 | ||||||
| Non-cash stock compensation | (9 | ) | 12 | |||||
| Depreciation and amortization | 242 | 266 | ||||||
| Total operating expenses | 2,751 | 2,842 | ||||||
| Operating loss | (183 | ) | (55 | ) | ||||
| Other income | 37 | – | ||||||
| Interest expense | (110 | ) | (102 | ) | ||||
| Loss before provision for income tax | (256 | ) | (157 | ) | ||||
| Income tax provision | (10 | ) | (11 | ) | ||||
| Net loss | $ | (266 | ) | $ | (168 | ) | ||
| Basic and diluted net loss per share attributable to common stockholders | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted-average number of shares-basic and diluted | 23,087,164 | 22,417,760 | ||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenue | $ | 8,761 | $ | 9,947 | $ | 27,384 | $ | 30,213 | ||||||||
| Cost of sales (exclusive of depreciation and amortization shown separately down below) | 6,650 | 7,367 | 20,431 | 22,083 | ||||||||||||
| Gross profit | 2,111 | 2,580 | 6,953 | 8,130 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | 2,285 | 2,632 | 7,233 | 7,820 | ||||||||||||
| Non-cash stock compensation | 1 | 11 | (6 | ) | 26 | |||||||||||
| Depreciation and amortization | 231 | 249 | 713 | 769 | ||||||||||||
| Total operating expenses | 2,517 | 2,892 | 7,940 | 8,615 | ||||||||||||
| Operating loss | (406 | ) | (312 | ) | (987 | ) | (485 | ) | ||||||||
| Other income | 47 | – | 135 | – | ||||||||||||
| Interest income | – | – | 33 | – | ||||||||||||
| Interest expense | (118 | ) | (115 | ) | (339 | ) | (317 | ) | ||||||||
| Loss on disposal of assets and investment impairment | – | – | – | (75 | ) | |||||||||||
| Loss before provision for income tax | (477 | ) | (427 | ) | (1,158 | ) | (877 | ) | ||||||||
| Income tax provision | (2,006 | ) | (9 | ) | (2,022 | ) | (32 | ) | ||||||||
| Net loss | $ | (2,483 | ) | $ | (436 | ) | $ | (3,180 | ) | $ | (909 | ) | ||||
| Basic and diluted net loss per share attributable to common stockholders | $ | (0.11 | ) | $ | (0.02 | ) | $ | (0.14 | ) | $ | (0.04 | ) | ||||
| Weighted-average number of shares-basic and diluted | 23,097,914 | 22,476,821 | 23,087,347 | 22,450,017 | ||||||||||||
See Notes to Consolidated Financial Statements
| 4 |
Dougherty’s Pharmacy, Inc.
Consolidated Statements of Cash Flows
(000’s omitted)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Operating Activities | ||||||||
| Net loss | $ | (266 | ) | $ | (168 | ) | ||
| Items not requiring (providing) cash | ||||||||
| Depreciation and amortization | 242 | 266 | ||||||
| Stock-based compensation | (9 | ) | 12 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 47 | 269 | ||||||
| Inventories | 44 | (102 | ) | |||||
| Prepaid expenses and other assets | 44 | (25 | ) | |||||
| Accounts payable | (106 | ) | 238 | |||||
| Accrued liabilities | 154 | 64 | ||||||
| Net cash provided by operating activities | 150 | 554 | ||||||
| Investing Activities | ||||||||
| Purchases of property and equipment | (75 | ) | (41 | ) | ||||
| Cash received upon disposition of CPOC | – | 617 | ||||||
| Net cash (used in) provided by investing activities | (75 | ) | 576 | |||||
| Financing Activities | ||||||||
| Payments on notes payable | (4,545 | ) | (5,083 | ) | ||||
| Proceeds from notes payable | 4,444 | 4,418 | ||||||
| Net cash used in financing activities | (101 | ) | (665 | ) | ||||
| Net (decrease) increase in cash | (26 | ) | 465 | |||||
| Cash, beginning of period | 389 | 361 | ||||||
| Cash, end of period | $ | 363 | $ | 826 | ||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for income taxes | $ | 2 | $ | 1 | ||||
| Cash paid for interest | $ | 111 | $ | 100 | ||||
| Reconciliation of Cash to the Consolidated Balance Sheets | ||||||||
| Cash | $ | 59 | $ | 523 | ||||
| Restricted cash | 304 | 303 | ||||||
| Total cash | $ | 363 | $ | 826 | ||||
| Nine Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Operating Activities | ||||||||
| Net loss | $ | (3,180 | ) | $ | (909 | ) | ||
| Items not requiring (providing) cash | ||||||||
| Loss from disposal of assets | – | 75 | ||||||
| Provision for doubtful accounts | – | 6 | ||||||
| Depreciation and amortization | 713 | 769 | ||||||
| Change in deferred tax asset | 2,000 | – | ||||||
| Stock-based compensation | (7 | ) | 26 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 197 | 94 | ||||||
| Inventories | 708 | (193 | ) | |||||
| Prepaid expenses and other assets | 190 | 12 | ||||||
| Accounts payable | (227 | ) | 388 | |||||
| Accrued liabilities | 54 | 334 | ||||||
| Net cash provided by operating activities | 448 | 602 | ||||||
| Investing Activities | ||||||||
| Purchases of property and equipment | (121 | ) | (85 | ) | ||||
| Cash received upon disposition of pharmacy | – | 274 | ||||||
| Cash received upon disposition of CPOC | – | 688 | ||||||
| Net (used in) provided by investing activities | (121 | ) | 877 | |||||
| Financing Activities | ||||||||
| Payments on notes payable | (8,561 | ) | (15,735 | ) | ||||
| Proceeds from notes payable | 8,051 | 14,345 | ||||||
| Net cash used in financing activities | (510 | ) | (1,390 | ) | ||||
| Net (decrease) increase in cash | (183 | ) | 89 | |||||
| Cash, beginning of period | 389 | 361 | ||||||
| Cash, end of period | $ | 206 | $ | 450 | ||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for income taxes | $ | 24 | $ | 42 | ||||
| Cash paid for interest | $ | 336 | $ | 315 | ||||
| Reconciliation of Cash to the Consolidated Balance Sheets | ||||||||
| Cash | $ | 206 | $ | 147 | ||||
| Restricted cash | – | 303 | ||||||
| Total cash | $ | 206 | $ | 450 | ||||
See Notes to Consolidated Financial Statements
| 5 |
Dougherty’s Pharmacy, Inc.
Notes to Consolidated Financial Statements
1. Organization and Significant Accounting Policies
Description of Business
Dougherty’s Pharmacy, Inc. (“Dougherty’s” or the “Company”) is a value orientedvalue-oriented company focused on successfully acquiring, managing and growing community basedcommunity-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,September 30, 2018, 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. ASDS remains active as a holding company for the remaining payouts.
On May 6, 2017, the Company sold its pharmacy in Humble, Texas, acquired in September 2014, and received total cash proceeds of $274,000 related to this transaction. The revenues and earnings of the pharmacy are not significant to the consolidated financial statements taken as a whole.
On February 6, 2018, the Company opened a new retail pharmacy location at The Campus at Legacy West in Plano, Texas (“Legacy”). This new location will offer pharmacy services and retail products to the approximately 3,000 JCPenney Home Office employees and iswill be open to all other future tenants and visitors of The Campus at Legacy West. Dougherty’s is initially filling prescriptions via concierge service from its pharmacy on Campbell Road until the new location receivesLegacy completes its pharmacy license, which is expected to occur within the standard 90-day waiting period or soon thereafter. Dougherty’s anticipatesthird-party contract enrollment process. The first year revenues from the newfor this location ofwere less than $1.0 million as the pharmacy establishes itself at the new$150,000. The location. was closed on February 7, 2019.
Our business requireshas historically required us to rely on cash flow from operations and theupon borrowing under a $4,000,000 revolving credit facility (“the Revolver”) with the First National Bank of Omaha (the “Lender”) as our primary sources of funding to operate and meet our financial obligations in the foreseeable future.obligations. Historically, much of our debt, including the Revolver, has been renewed or refinanced in the ordinary course of business. However, on August 1, 2018, the Company was obligated to make payment of the outstanding principal of $3,956,000 plus $18,000 in accrued and unpaid interest under the Revolver. Failure to make this payment on the August 1, 2018, maturity date was an event of default under the Revolver. The accrued interest of $18,000 was paid on August 2, 2018. An event of default under the Revolver permits the Lender, among other things, to foreclose on the assets securing the Revolver, which includes certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company (the “Secured Assets”). In addition to the failure to make the payment on the maturity date, as of August 1, 2018, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio of not less than 1.00 to 1.00, as defined under the Revolver. Failure to maintain this financial covenant also constitutes an event of default under the Revolver. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term.
| 6 |
On August 10, 2018, the Lender notified the Company that the Revolver had been sold to OSK VII, LLC (the “Current Lender”) effective on August 10, 2018. This assignment of the Revolver from the Lender to the Current Lender does not affect any terms and condition of the Revolver and the associated loan documents. The Company does not currently have the ability to cure either events of default under the Revolver. Should the Current Lender elect to foreclose against the Secured Assets, it would significantly impair the Company's ability to continue as a going concern or to even be able to continue its operations. The Company is evaluating all of its options in light of these circumstances, including, without limitation, refinancing the indebtedness with another lender, negotiating a settlement arrangement with the Current Lender, or obtaining a temporary waiver or forbearance from the Current Lender; provided, however, the Company can provide no assurances that any of these arrangements can be entered into or if entered into would be upon terms and conditions beneficial to and acceptable by the Company. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term.
We maintainhave historically maintained a level of liquidity sufficient to allow us to cover our cash needs in the short-term. Over the long-term, we managehave managed 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 March 31,September 30, 2018, we had cash and restricted cash of approximately $363,000,$206,000, working capital deficit of approximately negative $2.2 million$3,720,000 and total outstanding debt of $7.3 million, including $4.0 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.$6,935,000. Cash provided from operating activities for the threenine months ended March 31,September 30, 2018 was $150,000. Management believes it will have adequate cash to operate$448,000.
On March 22, 2019, the Company and renew, extend, or refinance the revolvingsecured a letter of credit facility in the next twelve months.amount of $825,000 issued by Legacy Texas Bank for the benefit of Associated Food Stores, Inc. that renews annually with a reduction of $100,000 on each anniversary date.
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. The accompanying unaudited consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared by the Company, in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X and have not been audited. Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Registration Statement on Form 10.10-K. In the opinion of management, the interim unaudited consolidated financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented. Due to seasonality, the results of operations for the threenine months ended March 31,September 30, 2018, are not necessarily indicative of the results to be expected for any future interim period for the year ending December 31, 2018.
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.
| 7 |
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 collectibilitycollectability of accounts receivable. Specifically, management analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends, and changes in customer payment terms and collections trends when evaluating the adequacy of the allowance for doubtful accounts. Any change in the assumptions used in analyzing accounts receivable may result in additional allowances for doubtful accounts being recognized in the periods in which the change in assumptions occurs.
At March 31,September 30, 2018 and 2017, all of the trade accounts receivable were 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.
Long-Lived Assets
The Company evaluates the recoverability of the carrying value of its long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Revenue Recognition
Revenues generated by the retail pharmacy operations are reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional health care providers and others. The Company recognizes revenue from the sale of pharmaceutical products and retail merchandise as transactions occur and product is delivered to the customer. Revenue from product sales is recognized at the point of sale and service revenue is recognized at the time services are provided.
Sales and similar taxes collected from clients are excluded from revenues. The obligation is included in accounts payable until the taxes are remitted to the appropriate taxing authorities.
Substantially all revenues earned during the threenine months ended March 31,September 30, 2018 and 2017, were earned from the retail pharmacy operations.
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Cost of Sales
Cost of sales includes the purchase price of goods sold, prescription packaging, compounded prescription direct labor, inventory obsolescence, freight costs, cash discounts and vendor rebates. Rebates or refunds received by the Company from its suppliers are considered as an adjustment of the prices of the supplier’s products purchased by the Company.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.
Tax positions are recognized if it is more-likely-than-not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.
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 tax loss of approximately $1.0 million for year ended December 31, 2017. TheAs of September 30, 2018, the Company has not completed all offully reserved its processesdeferred tax asset resulting in a $2 million charge to determine the TCJA’s final impact. The final impact may differ from this provisional amountincome statement due to among other things, changes in interpretations and assumptions the Company has made thus far and the issuanceuncertainty of additional regulatory or other guidance. The accounting is expectedfuture income to be completed by the time the 2017 federal income tax return is filed in 2018.utilize such assets.
Earnings per Share
Basic earnings per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net loss and unrecognized stock basedstock-based compensation by the weighted-average number of common shares outstanding during the period and the unvested restricted stock units. The unrecognized stock basedstock-based compensation as of March 31,September 30, 2018 and 2017 is $22,000$12,000 and $27,000,$116,000, respectively; the unvested restricted stock units is 170,150are 140,000 and 135,300,658,500, respectively. Due to the net losses for both years, restricted stock units for 2018 and 2017 were anti-dilutive.
| 9 |
New Accounting Pronouncements
ASU No. 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight linestraight-line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and becomes effective on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial position, results of operations and cash flows. Our current minimum lease commitments are disclosed in Note 4.
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 Company adopted the new revenue recognition standard as of January 1, 2018. The adoption of this standard did not result in a change in its recognition of pharmacy retail sales of prescriptions and products as no performance obligations exist within contracts with customers as discussed below. Had a change occurred, the change would have been applied using the modified retrospective approach.
The retail pharmacy operations recognize revenue for pharmaceutical products sold under prescriptions and non-pharmaceutical products at the time the customer takes possession of the merchandise through the point of sale system as transactions occur. Each prescription claim is its own arrangement with the customer and is a performance obligation that is reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional health care providers and others.
The Company provides retail pharmacy prescriptions and products to residents at long-term care facilities. Revenue is recognized through the billing system at the time of delivery as transactions occur. Each prescription claim is its own arrangement with the customer and is a performance obligation that is reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional health care providers and others. Prescription co-payments are typically not collected at the time products are delivered but are billed to the individuals as part of normal billing procedures and subject to normal accounts receivable collections procedures. The Company has contracts with certain of the long-term care facilities for 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 reimbursement of certain costs for certain of these services. As it relates to the long-term care contracts and any other support services provided to its customers, the Company has determined that no revenue is recognized from separate and distinct performance obligations other than the retail sale of the pharmacy prescriptions and products.
2. Notes Payable
Notes payable consist of the following:
| September 30, 2018 | December 31, 2017 | |||||||
| (Unaudited) | (Audited) | |||||||
| First National Bank of Omaha Credit Facility and Promissory Note secured by certain retail pharmacy assets | ||||||||
| Revolving line of credit in the principal amount of $4,000,000 and $4,450,000, interest at LIBOR plus 3.25% (5.24% at September 30, 2018) | $ | – | $ | 3,831,000 | ||||
| Term note OSK VII, LLC principal amount of $3,956,000, interest at LIBOR plus 3.25% (5.36% at September 30, 2018) | 3,956,000 | |||||||
| 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. | 242,000 | 335,000 | ||||||
| Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.60% (7.85% at September 30, 2018) 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. | 1,249,000 | 1,371,000 | ||||||
| Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.60% (7.85% at September 30, 2018) 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. | 786,000 | 869,000 | ||||||
| Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (7.63% at September 30, 2018) 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. | 521,000 | 570,000 | ||||||
| Term note in the principal amount of $305,350 with interest payable at prime plus 2.40% (7.65% at September 30, 2018) 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. | 181,000 | 202,000 | ||||||
| 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 | ||||||
| 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 | ||||||
| 6,935,000 | 7,445,000 | |||||||
| Less current portion | (5,282,000 | ) | (4,644,000 | ) | ||||
| $ | 1,653,000 | $ | 2,801,000 | |||||
| March 31, 2018 | December 31, 2017 | |||||||
| (Unaudited) | (Audited) | |||||||
| First National Bank of Omaha Credit Facility and Promissory Note secured by certain retail pharmacy assets | ||||||||
| Revolving line of credit in the principal amount of $4,450,000, interest at LIBOR plus 3.25% (4.92% at Mar 31, 2018) | $ | 3,975,000 | $ | 3,831,000 | ||||
| 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. | 300,000 | 335,000 | ||||||
| Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (7.35% at Mar 31, 2018) 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. | 1,326,000 | 1,371,000 | ||||||
| Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (7.35% at Mar 31, 2018 ) 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. | 838,000 | 869,000 | ||||||
| Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (7.13% at Mar 31, 2018 ) 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. | 552,000 | 570,000 | ||||||
| Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (7.15% at Mar 31, 2018 ) 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. | 193,000 | 202,000 | ||||||
| Acquisition Notes Payable , unsecured | ||||||||
| Notes payable to sellers of acquired pharmacies with varying monthly payments with interest at 5.5% due through September 2018. | 52,000 | 97,000 | ||||||
| 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% | 108,000 | 170,000 | ||||||
| 7,344,000 | 7,445,000 | |||||||
| Less current portion | (4,683,000 | ) | (4,644,000 | ) | ||||
| $ | 2,661,000 | $ | 2,801,000 | |||||
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Future maturities of notes payable at March 31,September 30, 2018, are as follows:
| 2018 | $ | 4,683,000 | $ | 4,130,000 | ||||
| 2019 | 1,299,000 | 1,324,000 | ||||||
| 2020 | 1,362,000 | 1,481,000 | ||||||
| $ | 7,344,000 | $ | 6,935,000 |
The revolving credit facility (“the Revolver”) with the First National Bank of Omaha (“the Lender”) is secured by, but not limited to, the accounts receivable, inventory, and the fixed assets of the Borrowers. On July 1, 2017, the Company obtained an extension of the Revolver, through September 1, 2017. On August 9, 2017, the Company obtained an additional term for the Revolver in the amount of $4,450,000 effective September 1, 2017, and then effective February 1, 2018, in the amount of $4,000,000. Outstanding advances underunder the Revolver will bearbore interest at LIBOR plus 3.25% (4.92%(5.36% at March 31,September 30, 2018); accrued and unpaid interest on the Revolver iswas due monthly. All outstanding principal under the Revolver plus all accrued and unpaid interest thereon iswas due and payable in full on August 1, 2018 (See Note 6). On August 10, 2018, the Lender notified the Company that the Revolver had been sold to the Current Lender effective on August 10, 2018. AsThis assignment of the date of this report,Revolver from the Lender has indicated itto the Current Lender does not intend to renewaffect any terms and condition of the Revolver onand the maturity date. The Company is actively engaged negotiating the re-financing of this indebtedness, and believes that it will be able to do so prior to the maturity date; provided, however, the Company can provide no such assurances.associated loan documents. The Revolver is secured by certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company. The Revolver is subject to certain financial restrictions, now subject to the Current Lender’s prior written approval, including, but not limited to, capital expenditures not to exceed $200,000, additional indebtedness, acquisitions of entities and payment of dividends and distributions. Effective December 31, 2017, the Borrowers willagreed to maintain a minimum debt service coverage ratio of not less than 1.00 to 1.00, as defined. As of March 31,September 30, 2018, the Borrowers were not in compliance with this financial covenant.
3. Stock and Share-Based Compensation
Restricted Share Unit Incentive Plan
On November 13, 2013, the Board of Directors approved and adopted the Restricted Share Unit (“RSU”) Incentive Plan. Under the plan the Company can award RSUs to employees and non-employee directors and consultants pursuant to restricted stock agreements contingent upon continuous service. Under the restricted stock agreements, the restricted shares will vest annually over a four-year period and will be payable in stock, valued at the fair market value on the grant date.
As of March 31,September 30, 2018, the following shares had been issued under the 2013 RSU Plan:
| Year of Issuance: | Number of Shares | Fair Value at Date of Grant | Shares Vested | Non-Vested | Cancelled | Number of Shares | Fair Value at Date of Grant | Shares Vested | Non-Vested | Cancelled | ||||||||||||||||||||||||||||||
| 2013 | 120,000 | $ | 26,400 | 115,000 | – | 5,000 | 120,000 | $ | 26,000 | 115,000 | – | 5,000 | ||||||||||||||||||||||||||||
| 2014 | 122,100 | $ | 30,946 | 86,700 | 15,150 | 20,250 | 122,100 | $ | 31,000 | 101,850 | – | 20,250 | ||||||||||||||||||||||||||||
| 2015 | 150,000 | $ | 39,000 | 70,000 | 30,000 | 50,000 | 150,000 | $ | 39,000 | 85,000 | 15,000 | 50,000 | ||||||||||||||||||||||||||||
| 2016 | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||
| 2017 | 563,000 | $ | 114,030 | 111,600 | 45,000 | 406,400 | 563,000 | $ | 114,000 | 111,600 | 45,000 | 406,400 | ||||||||||||||||||||||||||||
| 2018 | 80,000 | $ | 11,192 | – | 80,000 | – | 80,000 | $ | 11,000 | – | 80,000 | – | ||||||||||||||||||||||||||||
| 1,035,100 | $ | 221,568 | 383,300 | 170,150 | 481,650 | 1,035,100 | $ | 221,000 | 413,450 | 140,000 | 481,650 | |||||||||||||||||||||||||||||
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4. Commitments and Contingencies
Operating Leases
The Company leases their pharmacy, corporate offices and certain pharmacy equipment under non-cancelable operating lease agreements. Certain leases contain renewal options and provide that the Company pay taxes, insurance, maintenance and other operating expenses.
Minimum lease payments under all non-cancelable operating lease agreements for the theenine months ended March 31,September 30, 2018, are as follows:
| 2018 | $ | 779,000 | $ | 788,000 | ||||
| 2019 | 795,000 | 806,000 | ||||||
| 2020 | 713,000 | 670,000 | ||||||
| 2021 | 669,000 | 674,000 | ||||||
| 2022 | 680,000 | 685,000 | ||||||
| Thereafter | 3,680,000 | 3,372,000 | ||||||
| $ | 7,316,000 | $ | 6,995,000 |
Legal Proceedings
The Company is occasionally involved in other claims and proceedings, which are incidental to its business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.
5. Related Party Transactions
During the three and nine months ended March 31,September 30, 2018, and 2017, the Company paid fees to its directors of $12,000$5,000 and $13,000$33,000 for their roles as members of the Board of Directors and its related committees; fees paid to the Company’s Chairman totaled $30,000 and $90,000 for management and other services provided.
6. Subsequent Events
On April 3, 2018, total principalMarch 22, 2019, the Company secured a letter of credit in the amount due and owing under the promissory noteof $825,000 issued by Legacy Texas Bank for the benefit of Associated Food Stores, Inc. that renews annually with a bankreduction of $100,000 on each anniversary date.
The Legacy West Campus in favor of an individual whoPlano, Texas was previously, through August of 2008, a related party of the Company, for which the Company was a co-guarantor as of March 31, 2018, was satisfied in full by the primary obligor. The restricted cash balance of $304,000, for which the Company was required to provide as escrow, was released as unrestricted and can be used for operations.closed on February 4, 2019.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.
The forward-looking statements contained in this Form 10-Q and other documents that we file or furnish with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company’s website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications.
Statements that are not historical facts are forward-looking statements, including, without limitation, those regarding estimates of and goals for future financial and operating performance as well as forward-looking statements concerning the expected execution and effect of our business strategies. Words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “can,” “will,” “project,” “intend,” “plan,” “goal,” “guidance,” “continue,” “sustain,” “synergy,” “believe,” “seek,” “estimate,” “anticipate,” “may,” “possible,” “assume,” and variations of such words and similar expressions are intended to identify such forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results to vary materially from those indicated or anticipated, including, but not limited to the following:
| · | Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long-term. | |
| · | We are in default under our revolving credit facility, which jeopardizes our ability to continue current operations in the event that the lender elects to foreclose against the Company’s material assets securing this indebtedness; | |
| · | We have limited funds and | |
| · | We have material weaknesses in our internal controls over financial reporting; | |
| · | Our disclosure controls are not effective; | |
| · | 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 | |
| · | We must maintain sufficient sales to qualify for favorable pricing under our | |
| · | 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. |
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These and other risks, assumptions and uncertainties include, but are not limited to, those factors described in the “Risk Factors” sections of our Registration Statement on Annual Report on Form 10-K filed on March 29, 2018. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date the statement.
OVERVIEW
Key measures used by the Company’s management to evaluate business performance include revenue, gross profit, selling, general and administrative expense (“SG&A”) and EBITDA. EBITDA is calculated as net income before deducting interest, taxes, depreciation and amortization. EBITDA is a non-GAAP measure that the Company’s management considers to best present the results of ongoing operations and is useful when comparing the performance between different reporting periods. In those instances, we have identified when the Company is presenting adjusted EBITDA. 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 and has therefore included such measures in the discussion of operating results below.
The Company also tracks prescriptions sold to assess operational performance.
Overview of Our Business
Dougherty’s Pharmacy, Inc. (“Dougherty’s,” which is also referred to in this Quarterly Report on Form 10-Q as “we,” “us,” or “the Company”) is a value orientedvalue-oriented company focused on successfully acquiring, managing and growing community basedcommunity-based pharmacies in the Southwest Region. Our wholly owned subsidiary, Dougherty’s Holdings, Inc., owns and operates multiple Dougherty’s Pharmacies, which we operate as a single segment in our financial reporting. The flagship store, Dougherty’s Pharmacy, is a turn-key multi-service pharmacy located in a highly prestigious area of Dallas, Texas. Centrally located, we believe that Dougherty’s Pharmacy continues to provide a level of service not typically provided by national pharmacy chain stores. We fulfill virtually any prescription need, from the simplest to the most complex compounding prescriptions. Most national pharmacy chains do not provide complex pharmacy prescription services. We specialize in providing solutions for our retail customers’ pharmacy needs and also for our customers residing in assisted living facilities. Dougherty’s long history began in 1929 and continues today as one of Dallas’s oldest, largest and best-known full-service pharmacies, which also includes durable medical equipment, home healthcare products services, and health and wellness supplements. We have a customer service orientedservice-oriented philosophy and typically do not attempt to compete solely based on price, as is the case with most of the national pharmacy chains.
Additional community pharmacies are located in Dallas, El Paso, and Springtown, Texas and in McAlester, Oklahoma.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion explains the material changes in our results of operations for the threenine months ended March 31,September 30, 2018 and 2017, and the significant developments affecting our financial condition since the Form 10-K filed March 29, 2018. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2017 and 2016 filed in that report, along with this report.
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Comparison of the Three monthsand Nine Months ended March 31,September 30, 2018, to the Three monthsand Nine Months ended March 31,September 30, 2017 (000’s Omitted)
| Three Months Ended March 31, | Three Months ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2018 | 2017 | $ Change | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||
| Revenue | $ | 9,455 | $ | 10,055 | $ | (600 | ) | $ | 8,761 | $ | 9,947 | $ | 27,384 | $ | 30,213 | |||||||||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 6,887 | 7,268 | (381 | ) | ||||||||||||||||||||||||
| Cost of sales | 6,650 | 7,367 | 20,431 | 22,083 | ||||||||||||||||||||||||
| Gross profit | 2,568 | 2,787 | (219 | ) | 2,111 | 2,580 | 6,953 | 8,130 | ||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||
| Selling, General and Administrative | 2,509 | 2,576 | (67 | ) | 2,286 | 2,643 | 7,227 | 7,846 | ||||||||||||||||||||
| Depreciation and amortization | 242 | 266 | (24 | ) | 231 | 249 | 713 | 769 | ||||||||||||||||||||
| Other income | 37 | – | 37 | 47 | – | 135 | – | |||||||||||||||||||||
| Interest income | – | – | 33 | – | ||||||||||||||||||||||||
| Interest expense | 110 | 102 | 8 | (118 | ) | (115 | ) | (339 | ) | (317 | ) | |||||||||||||||||
| Loss of disposal of assets | – | – | – | (75 | ) | |||||||||||||||||||||||
| Income tax provision | 10 | 11 | (1 | ) | (2,006 | ) | (9 | ) | (2,022 | ) | (32 | ) | ||||||||||||||||
| Net loss | $ | (266 | ) | $ | (168 | ) | $ | (98 | ) | $ | (2,483 | ) | $ | (436 | ) | $ | (3,180 | ) | $ | (909 | ) | |||||||
| plus: | ||||||||||||||||||||||||||||
| Interest expense | $ | 110 | $ | 102 | $ | 8 | $ | 118 | $ | 115 | $ | 339 | $ | 317 | ||||||||||||||
| Depreciation and amortization | 242 | 266 | -24 | 231 | 249 | 713 | 769 | |||||||||||||||||||||
| Loss on disposal of assets | – | – | – | 75 | ||||||||||||||||||||||||
| Income tax provision | 10 | 11 | (1 | ) | 2,006 | 9 | 2,022 | 32 | ||||||||||||||||||||
| EBITDA | $ | 96 | $ | 211 | $ | (115 | ) | |||||||||||||||||||||
| EBITDA (Adjusted) | $ | (128 | ) | $ | (63 | ) | $ | (106 | ) | $ | 284 | |||||||||||||||||
| Prescription count | 103,098 | 111,145 | (8,047 | ) | 98,115 | 107,178 | 303,923 | 328,399 | ||||||||||||||||||||
Revenues
Net revenues decreased approximately $600,000$1,186,000 or 6.0%11.9%, and $2,829,000, or 9.4% in the three and nine months ended March 31, 2018 as compared to prior year.September 30, 2018. Retail pharmacy prescriptions sold decreased 8,0479,000 or 7.2%8.5% and 24,000 or 7.5% for the same period.three and nine months ended September 30, 2018. Net revenues and prescriptions for the threenine months ended March 31,September 30, 2017 includes $124,000$177,000, and 1,664,2,313, respectively, from the Humble, Texas pharmacy, sold on May 6, 2017. Net revenues for the three and nine months ended March 31,September 30, 2018 includes $11,000$24,000,and $57,000, respectively, of front-end sales at the Legacy store, opened February 6, 2018 and also $19,000$27,000, and $75,000, respectively, of net retail pharmacy revenues and 460 prescriptions filled for the Legacy store via concierge service from its pharmacy on Campbell Road. Net revenues949 and 2,212, retail pharmacy prescriptions, respectively. For the three and nine months ended September 30, 2018, pharmacy net revenues and prescriptions declined $506,000$923,000, and 6,843,10,000, respectively, and $2,559,000, and 24,000, respectively, after adjusting for the Humble, Texas and Legacy stores, primarily attributable to the transition of prescriptions filled for certain long-term care facilities and under certain third partythird-party payor benefit plans that changed effective January 1, 2018, to other pharmacy providers. The initial focus of the Managing Director of Business Development appointed during the first quarter of 2018 ishas been to recoup these prescriptions.
Gross profit
Gross profit dollars decreased $219,000,$469,000, or 7.9%18.2% and $1,177,000, or 14.5% in the three and nine months ended September 30, 2018, as a result of the factors discussed in Revenues above.compared to prior year. Gross profit as a percent of revenues declined slightly to 27.2%decreased 180 basis points for the three months ended March 31,September 30, 2018, to 24.1% as compared to 27.7% duringprior year. Gross profit as a percentage of net revenues decreased approximately 150 basis points in the same periodnine months ended September 30, 2018 to 25.4%, as compared to prior year due to an increaseas a result of reduced reimbursement from certain third-party payor benefit plans that changed effective January 1, 2018, and continued increases in third party payor fees that began increasing at the beginning of 2017.fees. Total third partythird-party fees for the three and nine months March 31,September 30, 2018, ended increased $35,000$53,000, and $140,000, as compared to the same quarter prior year. Net Direct and Indirect Remuneration fees during the three and nine months ended March 31,September 30, 2018, were comparable to the same quarter prior year.
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SG&A expenses
SG&A expenses decreased $67,000,$357,000, or 2.6%13.5% and $619,000, or 7.9% for the three and nine months ended March 31,September 30, 2018, as compared to prior year. SG&A expenses as a percentage of revenues for both the three months ended March 31,September 30, 2018, increaseddecreased to 26.5%26.1% as compared to 25.6%26.6% prior year. SG&A expenses as a percentage of revenues for both the three ended September 30, 2018, decreased to 26.4% as compared to 26.6% prior year, for the same period prior year.nine months ended September SG&A percentage of revenue increased to 26.3% from 26.0%. The decrease in SG&A expenses during the threenine months ended March 31,September 30, 2018, is due to salary and payroll related cost savings from the resignations of the President of Pharmacy Operations and President and Chief Financial Officer during the fourth quarter of 2017 and first quarter of 2018, respectively, offset by the addition of the Managing Director of Business Development during the first quarter of 2018. The increase in operating expenses as a percentage of revenues is due to lower revenue as compared to prior year. Management plans to continue cost reduction initiatives during 2018 to decrease SG&A expenses as a percentage of revenues.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA decreased $115,000, or 54.5%$65,000 and $390,000, respectively, for the three and nine months ended March 31,September 30, 2018, as compared to the same prior year during theperiods prior year. EBITDA as a percentage of revenues was 1.0% and 2.1% duringdecreased 133 basis points for the threenine months ended September 30, 2018, to -0.4% as compared to prior year. EBITDA as a percentage of net revenues decreased 133 basis points in March 31, 2018.the nine months ended September 30, 2018 to -0.4% as compared to prior year. The decrease in EBITDA basis points for the three and nine months ended March 31,September 30, 2018, compared to the same period during prior year, is primarily due to lowera result of corresponding decreases in gross profit dollars offset by SG&A savings and an increase in other income of $37,000 derived from a non-pharmacy related transaction.discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We maintainhave historically maintained a level of liquidity sufficient to allow us to cover our cash needs in the short-term. Over the long-term, we managehave managed 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 March 31,September 30, 2018, we had working capital deficit of approximately negative $2.2 million$3,720,000 as compared to working capital deficit of approximately negative $2.0$1,954,000 million at December 31, 2017. NegativeThe change in working capital is due to decreases in inventory and accounts payable. Note 6 in Item 1of the reclassificationFinancial Statements included in Part 1 of the Revolver balance of $4.0 million and $3.8 million as of March 31, 2018 and December 31, 2017, respectively, to current liabilities to present the consolidated financial statements in conformity with GAAP (See Note 2). The reclassification does not affect the representation of the Company’s overall performance. The net increase in negative working capital of $0.2 million is discussed below. The Company is actively engaged negotiating the re-financing of this indebtedness, and believes that it will be able to do so prior to the maturity date; provided, however, the Company can provide no such assurances.Financial Information above.
As of March 31,September 30, 2018, we had cash and restricted cash of approximately $363,000, of which $304,000 was restricted,$206,000 as compared to approximately $389,000, of which $303,000 was restricted, at December 31, 2017. The net decrease in cash for the threenine months ended March 31,September 30, 2018, of $26,000$183,000 was due to the use of cash provided by operating activities for capital expenditures and financing activities discussed below.
As of March 31,September 30, 2018, the Company had total current assets of $6,081,000$4,940,000 and total current liabilities of $8,283,000$8,661,000 creating negativea working capital deficit of approximately $2,202,000$3,720,000 as compared to total current assets of $6,242,000 and total current liabilities of $8,196,000 creating negativea working capital deficit of approximately $1,954,000 at December 31, 2017. The overall increasedecrease in negative working capital of $248,000$1,766,000 is primarily due to increased current portion of notes payable and decreases in cash, trade accounts receivable and inventory and prepaid expenses and increasesas a result of the decline in accrued liabilities and the Revolver.revenues discussed above.
The change in cash and cash equivalents is as follows:
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net cash provided by operating activities | $ | 150 | $ | 554 | ||||
| Net (used in) provided by investing activities | (75 | ) | 576 | |||||
| Net cash used in financing activities | (101 | ) | (665 | ) | ||||
| Net (decrease) increase in cash | $ | (26 | ) | $ | 465 | |||
| Nine Months Ended September 30, | ||||||||
| 2018 | 2017 | |||||||
| Net cash provided by operating activities | $ | 448 | $ | 602 | ||||
| Net provided by (used in) investing activities | (121 | ) | 877 | |||||
| Net cash used in financing activities | (510 | ) | (1,390 | ) | ||||
| Net increase (decrease) increase in cash | $ | (183 | ) | $ | 89 | |||
Net cash provided by operating activities was approximately $150,000$448,000 in the threenine months ended March 31,September 30, 2018, compared to $554,000$602,000 in the threenine months ended March 31,September 30, 2017. The decrease of $404,000$154,000 was primarily related to the decline in revenues discussed in “Revenues” above resulting in an increase in net loss of $98,000, a decrease in$252,000, increases cash provided byfrom accounts receivable of $222,000, an decrease in cash used by$94,000, inventory of $146,000$708,000, prepaid expenses, other assets of $160,000 and an increaseaccrued liabilities of $54,000 and increases in cash used by accounts payable of $344,000,$227,000, accrued liabilities of $281 and net increasesdecreases in cash provided by other changes of $114,000.$188,000.
Net cash (used in) provided by investing activities was approximately $75,000$(121,000) for the threenine months ended March 31,September 30, 2018, compared to $576,000$877,000 provided by in the threenine months ended March 31,September 30, 2017. Cash used to purchase property and equipment was $75,000$121,000 for the threenine months ended March 31,September 30, 2018, compared to $41,000$85,000 for the prior year due to capital expenditures to open the new retail pharmacy location at The Campus at Legacy West in Plano, Texas, and capital expenditures to expand long-term care facilities.facilities and for upgrades to the Preston Royal, Dallas, Texas location. For the threenine months ended March 31,September 30, 2017, cash provided by the proceeds of the disposition of the Humble, Texas location was $274,000 and CPOC was $618,000.$688,000.
Net cash used in financing activities was $101,000$510,000 in the threenine months ended March 31,September 30, 2018, compared to $665,000cash used of $1,390,000 for the same period in 2017. For the threenine months ended March 31,September 30, 2018, borrowings of $4,444,000$8,051,000 and payments of $4,301,000$7,926,000 were made on the revolving credit facility; payments of $244,000$634,000 were made on notes payable. For the threenine months ended March 31,September 30, 2017, borrowings of $4,418,000 and$14,345,000 payments of $4,739,000$14,808,000 were made on the revolving credit facility; payments of $344,000$927,000 were made on notes payable. Certain proceeds from the disposition of CPOC were used to make certain payments on notes payable for the threenine months ended March 31,September 30, 2017.
Our principal indebtedness at March 31,September 30, 2018, consists of the following:
| · | A number of term notes in favor of Cardinal Health in the aggregate amount of | |
| · | A revolving credit facility (the “Revolver”), which as of August 10, 2018, is in favor of OSK VII, LLC (the “Current Lender”) in the |
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 to 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, as of March 31, 2018, the Company was 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. On April 3, 2018, total principal amount due and owing under the promissory note (the “Guarantee Payment”), was satisfied in full by the primary obligor. The restricted cash balance of $304,000,$303,000, for which the Company was required to provide as escrow, was released as unrestricted and used for operations. In conjunction with the satisfaction of the of the obligation and release of restricted funds, the primary obligor paid the Company $33,000 interest for the 11 months ended September 30, 2018 during April of 2018 and $12,000 for the nine months ended September 31, 2017 during May of 2017.
Our future capital needs are uncertain. Management anticipates funding our capital needs throughOn August 1, 2018, the Company was obligated to make payment of the outstanding principal of $3,956,000 plus $18,000 in accrued and unpaid interest under the Revolver with the First National Bank of Omaha (the “Lender”. Failure to make this payment on the August 1, 2018, maturity date was an event of default under the Revolver. The accrued interest of $18,000 was paid on August 2, 2018. An event of default under the Revolver permits the Lender, among other things, to foreclose on the assets securing the Revolver, which includes certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company (the “Secured Assets”). In addition to the failure to make the payment on the maturity date, as of August 1, 2018, the Company was not in compliance with its covenant to maintain a combination of projected positive cash flow afterminimum debt service and available borrowingscoverage ratio of not less than 1.00 to 1.00, as defined under our revolving linethe Revolver. Failure to maintain this financial covenant also constitutes an event of credit; however, cash flow projections are based on anticipated operations of our business, for which we can provide no assurance. Additionally, if we were to make additional acquisitions, we would likely need additional capital to fund all, or a portion, of those acquisitions. Ifdefault under the Company does not generate the necessary cash flow, the Company will need additional financing in excess of our current revolving line of credit to fund operations in the future. We do not know whether additional financing will be available when needed, or that, if available, we will be able to obtain financing on terms favorable, or even acceptable, to the Company. Revolver.
On August 10, 2018, the Lender notified the Company that the Revolver had been sold to the Current Lender effective on August 10, 2018. This assignment of the Revolver from the Lender to the Current Lender does not affect any terms and condition of the Revolver and the associated loan documents. The Company does not currently have the ability to cure either events of default under the Revolver. Should the Current Lender elect to foreclose against the Secured Assets, it would significantly impair the Company's ability to continue as a going concern or to even be able to continue its operations. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term. The Company is evaluating all of its options in light of these circumstances, including, without limitation, refinancing the indebtedness with another lender, negotiating a settlement arrangement with the Current Lender, or obtaining a temporary waiver or forbearance from the Current Lender; provided, however, the Company can provide no assurances that any of these arrangements can be entered into or if entered into would be upon terms and conditions beneficial to and acceptable by the Company. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term.
On March 22, 2019, the Company secured a letter of credit in the amount of $825,000 issued by Legacy Texas Bank for the benefit of Associated Food Stores, Inc. that renews annually with a reduction of $100,000 on each anniversary date.
Tax Loss Carryforwards
At December 31, 2017, we had approximately $48 million of federal net operating loss carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 2020 to 2037. We believe that the issuance of shares of our common stock pursuant to our initial public offering on November 15, 1999 caused an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. Consequently, we believe that the portion of our federal NOL carryforwards attributable to the period prior to November 16, 1999 is subject to an annual limitation pursuant to Section 382. Our total deferred tax assets have been fully reserved as a result of the uncertainty of future taxable income, except for $2 million that is estimated to offset future taxable income from pharmacy operations and or the sale of pharmacy businesses.income. The estimated deferred tax asset as of March 31,September 30, 2018 is consistent with December 31, 2018; accordingly, no tax benefit has been recognized in the periods presented.fully reserved due to uncertainty of future income to utilize such asset.
Off Balance Sheet Arrangements
We do not have any unconsolidated special purpose entities and, except as described herein, we do not have significant exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with GAAP, which requires management to make certain estimates and apply judgment. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the condensed consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed consolidated financial statements.
While we believe that the historical experience, current trends and other factors considered support the preparation of our condensed consolidated financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.
For a full description of our significant accounting policies, please refer to the Notes to Consolidated Financial Statements in Item 1.
| 18 |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our interim chief executive officer and interim chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a–15(e) under the Exchange Act) as of March 31,September 30, 2018. Based upon that evaluation, and in light of the Company’s delinquency in filing this quarterly report on Form 10-Q, our interim chief executive officer and interim chief financial officer concluded that as of March 31,September 30, 2018, our disclosure controls and procedures were not effective. We have taken the initial steps to remediate this failure in our disclosure controls by engaging an SEC compliance resource to assist in the preparation of our filing obligations. In addition to this, we are exploring the possibility of engaging a full-time Chief Financial Officer who would have responsibility for, among other things, overseeing the collection, dissemination, and processing of the information (financial and otherwise) required for us to meet our future disclosure obligations.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31,September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
Item 3. Defaults on Senior Securities.
On August 1, 2018, the Company was obligated to make payment of the outstanding principal of $3,956,000 plus $18,000 in accrued and unpaid interest under the Revolver with the First National Bank of Omaha (the “Lender”. Failure to make this payment on the August 1, 2018, maturity date was an event of default under the Revolver. The accrued interest of $18,000 was paid on August 2, 2018. An event of default under the Revolver permits the Lender, among other things, to foreclose on the assets securing the Revolver, which includes certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company (the “Secured Assets”). In addition to the failure to make the payment on the maturity date, as of August 1, 2018, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio of not less than 1.00 to 1.00, as defined under the Revolver. Failure to maintain this financial covenant also constitutes an event of default under the Revolver.
On August 10, 2018, the Lender notified the Company that the Revolver had been sold to the Current Lender effective on August 10, 2018. This assignment of the Revolver from the Lender to the Current Lender does not affect any terms and condition of the Revolver and the associated loan documents. The Company does not currently have the ability to cure either events of default under the Revolver. Should the Current Lender elect to foreclose against the Secured Assets, it would significantly impair the Company's ability to continue as a going concern or to even be able to continue its operations. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term. The Company is evaluating all of its options in light of these circumstances, including, without limitation, refinancing the indebtedness with another lender, negotiating a settlement arrangement with the Current Lender, or obtaining a temporary waiver or forbearance from the Current Lender; provided, however, the Company can provide no assurances that any of these arrangements can be entered into or if entered into would be upon terms and conditions beneficial to and acceptable by the Company. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term.
| 101.INS | XBRL Instances Document (1) | |
| 101.SCH | XBRL Taxonomy Extension Schema Document (1) | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (1) | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
| (1) | Filed herewith. |
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized on May 11, 2018.April 29, 2019.
| DOUGHERTY’S PHARMACY, INC. | ||
| By: | /s/ | |
EXHIBIT INDEX
| 101.INS | XBRL Instances Document (1) | |
| 101.SCH | XBRL Taxonomy Extension Schema Document (1) | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (1) | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
| (1) | Filed herewith. |