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8-K/A - 8-K/A - Diplomat Pharmacy, Inc.a15-18892_18ka.htm
EX-23.1 - EX-23.1 - Diplomat Pharmacy, Inc.a15-18892_1ex23d1.htm
EX-99.3 - EX-99.3 - Diplomat Pharmacy, Inc.a15-18892_1ex99d3.htm
EX-99.4 - EX-99.4 - Diplomat Pharmacy, Inc.a15-18892_1ex99d4.htm

Exhibit 99.2

 

Burman’s Apothecary, L.L.C.,

Subsidiaries, and Affiliate

 


 

Consolidated Financial Report

December 31, 2014

 



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Contents

 

Report Letter

1-2

 

 

Consolidated Financial Statements (Restated)

 

 

 

Balance Sheets

3

 

 

Statements of Operations

4

 

 

Statements of Members’ Equity

5

 

 

Statements of Cash Flows

6

 

 

Notes to Consolidated Financial Statements

7-20

 



 

Plante & Moran, PLLC

Suite 360

4444 W. Bristol Road

Flint, Ml 48507-3153

Tel: 810.767.5350

Fax: 810.767.8150

plantemoran.com

 

Independent Auditor’s Report

 

To the Board of Directors

Burman’s Apothecary, L.L.C.,

Subsidiaries, and Affiliate

 

We have audited the accompanying consolidated financial statements of Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate (the “Company”), which comprise the consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of operations, members’ equity, and cash flows for the years ended December 31, 2014, 2013, and 2012, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Consolidated Financial Statements

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

 

1



 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate as of December 31, 2014 and 2013 and the results of their operations and their cash flows for the years ended December 31, 2014, 2013, and 2012 in accordance with accounting principles generally accepted in the United States of America.

 

Emphasis of Matters

 

As disclosed in Note 12 to the consolidated financial statements, on June 15, 2015, all of the members’ interests in Burman’s Apothecary, L.L.C. and subsidiaries were contributed to a related entity.

 

As disclosed in Note 12 to the consolidated financial statements, on June 19, 2015, all of the members’ interests in Burman’s Apothecary, L.L.C. and subsidiaries were acquired by an unrelated party.

 

As disclosed in Note 10 to the consolidated financial statements, the 2014, 2013, and 2012 financial statements have been restated to correct various accounting errors contained in the consolidated financial statements previously issued by the Company.

 

 

/s/ Plante & Moran, PLLC

 

September 3, 2015

Flint, Michigan

 

2



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Consolidated Balance Sheets

(Restated)

 

 

 

December 31,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

16,855,254

 

$

4,727,193

 

Investments (Note 9)

 

1,051,312

 

 

Accounts receivable:

 

 

 

 

 

Trade - Net of allowances (Note 1)

 

14,919,763

 

3,444,095

 

Affiliates (Note 7)

 

 

43,645

 

Other

 

2,148,353

 

 

Inventory (Note 1)

 

2,044,333

 

4,786,268

 

Other current assets:

 

 

 

 

 

Vendor deposits (Note 3)

 

5,549,271

 

 

Prepaid expenses and other

 

20,765

 

79,312

 

 

 

 

 

 

 

Total current assets

 

42,589,051

 

13,080,513

 

 

 

 

 

 

 

Equipment and Software - Net (Note 2)

 

790,062

 

429,781

 

 

 

 

 

 

 

Total assets

 

$

43,379,113

 

$

13,510,294

 

 

 

 

 

 

 

Liabilities and Members’ Equity

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Trade accounts payable

 

$

15,335,276

 

$

4,640,984

 

Trade payables to related parties (Note 7)

 

185,683

 

58

 

Line of credit (Note 4)

 

2,000,000

 

 

Current portion of notes payable (Note 5)

 

114,545

 

119,162

 

Accrued and other current liabilities:

 

 

 

 

 

Taxes payable (Note 1)

 

566,620

 

 

Accrued compensation

 

182,722

 

87,015

 

Other accrued liabilities

 

51,500

 

28,778

 

 

 

 

 

 

 

Total current liabilities

 

18,436,346

 

4,875,997

 

 

 

 

 

 

 

Notes Payable - Net of current portion (Note 5)

 

 

225,767

 

 

 

 

 

 

 

Members’ Equity (Note 6)

 

24,942,767

 

8,408,530

 

 

 

 

 

 

 

Total liabilities and members’ equity

 

$

43,379,113

 

$

13,510,294

 

 

See Notes to Consolidated Financial Statements.

 

3



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Consolidated Statements of Operations

(Restated)

 

 

 

Year Ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net Revenue

 

$

325,485,490

 

$

68,779,389

 

$

94,456,694

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

292,085,820

 

58,946,331

 

81,277,881

 

 

 

 

 

 

 

 

 

Gross Profit

 

33,399,670

 

9,833,058

 

13,178,813

 

 

 

 

 

 

 

 

 

Operating Expenses

 

8,597,348

 

4,797,919

 

6,881,040

 

 

 

 

 

 

 

 

 

Operating Income

 

24,802,322

 

5,035,139

 

6,297,773

 

 

 

 

 

 

 

 

 

Nonoperating Income

 

12,597

 

6,160

 

10,707

 

 

 

 

 

 

 

 

 

Income - Before income taxes

 

24,814,919

 

5,041,299

 

6,308,480

 

 

 

 

 

 

 

 

 

Income Tax Expense (Note 1)

 

195,176

 

33,322

 

49,866

 

 

 

 

 

 

 

 

 

Consolidated Net Income

 

24,619,743

 

5,007,977

 

6,258,614

 

 

 

 

 

 

 

 

 

Less Consolidated Net Income Attributable to Noncontrolling Interest in Affiliate

 

106,612

 

 

 

 

 

 

 

 

 

 

 

Consolidated Net Income Attributable to Controlling Interest

 

$

24,513,131

 

$

5,007,977

 

$

6,258,614

 

 

See Notes to Consolidated Financial Statements.

 

4



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Consolidated Statements of Members’ Equity

(Restated)

 

 

 

 

 

 

 

Total

 

 

 

Controlling

 

Noncontrolling

 

Members’

 

 

 

Interest

 

Interest

 

Equity

 

 

 

 

 

 

 

 

 

Balance - January 1, 2012 (Note 10)

 

$

4,573,870

 

$

 

$

4,573,870

 

 

 

 

 

 

 

 

 

Consolidated net income - 2012

 

6,258,614

 

 

6,258,614

 

 

 

 

 

 

 

 

 

Member distributions

 

(4,544,665

)

 

(4,544,665

)

 

 

 

 

 

 

 

 

Balance - December 31, 2012

 

6,287,819

 

 

6,287,819

 

 

 

 

 

 

 

 

 

Consolidated net income - 2013

 

5,007,977

 

 

5,007,977

 

 

 

 

 

 

 

 

 

Redemption of member’s interest (Note 6)

 

(1,250,000

)

 

(1,250,000

)

 

 

 

 

 

 

 

 

Member distributions

 

(1,735,750

)

 

(1,735,750

)

 

 

 

 

 

 

 

 

Member contributions

 

98,484

 

 

98,484

 

 

 

 

 

 

 

 

 

Balance - December 31, 2013

 

8,408,530

 

 

8,408,530

 

 

 

 

 

 

 

 

 

Consolidated net income - 2014

 

24,513,131

 

106,612

 

24,619,743

 

 

 

 

 

 

 

 

 

Member distributions

 

(19,615,506

)

 

(19,615,506

)

 

 

 

 

 

 

 

 

Member contributions

 

 

10,000,000

 

10,000,000

 

 

 

 

 

 

 

 

 

Equity based compensation (Note 6)

 

1,530,000

 

 

1,530,000

 

 

 

 

 

 

 

 

 

Balance - December 31, 2014

 

$

14,836,155

 

$

10,106,612

 

$

24,942,767

 

 

See Notes to Consolidated Financial Statements.

 

5



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Consolidated Statements of Cash Flows

(Restated)

 

 

 

Year Ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

 

 

2014

 

2013

 

2012

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Consolidated net income

 

$

24,619,743

 

$

5,007,977

 

$

6,258,614

 

Adjustments to reconcile consolidated net income to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

207,254

 

101,722

 

96,997

 

Bad debt recoveries

 

 

 

(20,059

)

Investment income

 

(105,612

)

 

 

Equity based compensation

 

1,530,000

 

 

 

Changes in operating assets and liabilities which (used) provided cash:

 

 

 

 

 

 

 

Accounts receivable

 

(13,580,376

)

2,047,470

 

(357,009

)

Inventory

 

2,741,935

 

(1,599,061

)

(1,661,820

)

Other current assets

 

(5,490,724

)

(16,137

)

(63,175

)

Accounts payable

 

10,879,917

 

(1,306,757

)

(1,286,435

)

Accrued and other current liabilities

 

685,049

 

(122,353

)

60,735

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

21,487,186

 

4,112,861

 

3,027,848

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Purchases of equipment and software

 

(567,535

)

(90,000

)

(253,341

)

Purchases of investments

 

(945,700

)

 

 

Payments on notes receivable

 

 

84,853

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(1,513,235

)

(5,147

)

(253,341

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Payments on debt

 

(230,384

)

(117,013

)

(5,009

)

Proceeds from line of credit

 

2,000,000

 

 

 

Redemption of member interest

 

 

(800,000

)

 

Member distributions

 

(19,615,506

)

(1,735,750

)

(4,544,665

)

Member contributions

 

10,000,000

 

98,484

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(7,845,890

)

(2,554,279

)

(4,549,674

)

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

12,128,061

 

1,553,435

 

(1,775,167

)

 

 

 

 

 

 

 

 

Cash and Cash Equivalents - Beginning of year

 

4,727,193

 

3,173,758

 

4,948,925

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents - End of year

 

$

16,855,254

 

$

4,727,193

 

$

3,173,758

 

 

See Notes to Consolidated Financial Statements.

 

6



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 1 - Nature of Business and Significant Accounting Policies

 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate (the “Company”) is a specialty pharmacy sales business headquartered in metropolitan Philadelphia, Pennsylvania. The Company stocks, dispenses, and distributes prescriptions for various specialty pharmaceuticals, principally for the treatment of Hepatitis C. The Company grants credit to its customers, who are located throughout the Delaware Valley.

 

Principles of Consolidation - The consolidated financial statements include the accounts of Burman’s Apothecary, L.L.C. (“Apothecary”), its wholly owned subsidiaries, Burman’s Media Pharmacy, L.L.C. (“Media”) and PharmTrack, L.L.C. (“PharmTrack”), and Burman’s Investment Company, L.L.C. (“BIC”), a variable interest entity (“VIE”) for which Apothecary is the primary beneficiary. The equity attributable to the VIE is reported as a noncontrolling interest in the accompanying consolidated financial statements. All material intercompany accounts and balances have been eliminated in consolidation. For purposes of consolidation, the effects of eliminations of revenue and expenses due to intercompany transactions between Apothecary and its subsidiaries and VIE are attributed to Apothecary.

 

Information About Variable Interest Entities - Apothecary distributed funds in 2014 to its members to form BIC, an entity with common ownership. The entity was formed for the purpose of holding investments and providing a line of credit to Apothecary.

 

BIC is considered to be a variable interest entity because its primary funding and resources were provided by Apothecary.

 

Apothecary determined that it is the primary beneficiary of BIC because the funding and resources provided to BIC provide it with (1) the power to direct the activities of BIC that most significantly impact their economic performance and (2) the obligation to absorb losses that could potentially be significant to BIC. As a result, BIC has been included in the consolidated financial statements as a consolidated variable interest entity.

 

As of December 31, 2014, BIC had current assets of $10,106,612 and no liabilities. As the entity was formed in 2014, there are no assets or liabilities in previous years.

 

Concentrations of Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with banks or other financial institutions and trade accounts receivable.

 

As of and for the years ended December 31, 2014, 2013, and 2012, approximately 76, 71, and 69 percent, respectively, of sales and 51, 41, and 65 percent, respectively, of accounts receivable related to five insurance carriers. Concentrations of credit risk with respect to trade receivables are limited by the large number of patients comprising the Company’s customer base and their dispersion across multiple payors and geographic areas.

 

7



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

 

The Company purchases prescription drugs from pharmaceutical companies. One supplier comprises 95, 71, and 92 percent of the cost of sales and 97, 82, and 92 percent of accounts payable as of and for the years ended December 31, 2014, 2013, and 2012, respectively.

 

Cash Equivalents - The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.

 

Investments - Investments in debt and equity securities are recorded at fair value based on quoted market market prices and other inputs as described in Note 9.

 

Trade Accounts Receivable - Accounts receivable primarily include amounts from third-party benefit managers and insurance providers and are based on contracted prices. Trade receivables require no collateral and are on an unsecured basis. Accounts receivable terms vary by payor, but generally are due within 30 days after the sale of the product or the performance of the service.

 

The Company maintains an allowance for doubtful accounts that reduces receivables to amounts that are expected to be collected.

 

In estimating the allowance, management considers factors such as current overall economic conditions, historical and anticipated customer performance, historical experience with write-offs, and the level of past-due accounts. Changes in these conditions may result in additional allowances. All accounts or portions thereof deemed to be uncollectible or to require excessive collection costs are written off in the period that determination is made. The allowance for doubtful accounts on accounts receivable balances was $27,791 and $79,810 as of December 31, 2014 and 2013, respectively.

 

Inventory - Inventory consists primarily of prescription medications. Inventory is stated at the lower of cost or market, with cost determined on the first-in, first-out (“FIFO”) method, and is adjusted to actual cost monthly based on a physical count.

 

Equipment - Equipment is recorded at cost. The Company uses the straight-line method for computing depreciation. Assets are depreciated over their estimated useful lives. Costs of maintenance and repairs are charged to expense when incurred.

 

8



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

 

Internal-use Software - The Company capitalizes certain development costs primarily related to a custom-developed scalable patient care system. The Company expenses the costs incurred during the preliminary project stage and capitalizes the direct development costs, including the associated payroll and related costs for employees working on development and outside contractors during the application development stage. The Company monitors development on an ongoing basis and capitalizes the costs of any major improvements or that result in significant additional functionality.

 

Capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful lives of the assets, generally three years. Management evaluates the useful lives of these assets on an annual basis.

 

Revenue Recognition - The Company recognizes revenue from prescription drug sales for home delivery at the time the drugs are shipped. Shipping and handling costs are not billed to patients; therefore, there are no shipping and handling revenues. Conversely, shipping and handling costs incurred by the Company are included in operating expenses and were approximately $192,000, $148,000, and $183,000 in 2014, 2013, and 2012, respectively.

 

Cost of Sales - Cost of sales includes expenses related to pharmaceutical purchases. The Company purchases substantially all of its pharmaceuticals from two vendors.

 

The Company is entitled to rebates from its buying alliances based on the amount of purchases made during the year. Supplier rebates are accrued ratably under contract terms and reduce cost of sales. Earned rebates totaled approximately $7,328,000, $273,000, and $104,000 for 2014, 2013, and 2012, respectively.

 

Income Taxes - Pursuant to provisions of the Internal Revenue Code, Burman’s Apothecary, L.L.C. and subsidiaries have elected to be taxed as an S Corporation, with the wholly owned subsidiaries considered disregarded entities for tax purposes. Generally, the income of an S Corporation is not subject to federal income tax at the corporate level, but rather the stockholders are required to include a pro-rata share of the corporation’s taxable income or loss in their personal income tax returns, irrespective of whether dividends have been paid. Accordingly, no provision for federal income taxes has been made in the accompanying consolidated financial statements.

 

BIC is treated as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable or provided for by BIC. Members are taxed individually on their pro-rata ownership share of BIC’s earnings. BIC’s net income or loss is allocated among the members in accordance with the operating agreement.

 

9



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 1 - Nature of Business and Significant Accounting Policies (Continued)

 

The Company’s application of accounting principles generally accepted in the United States of America regarding uncertain tax positions had no effect on its financial position, as management believes the Company has no material unrecognized income tax benefits.

 

The Company classifies interest and penalties associated with tax liabilities as interest expense and operating expenses, respectively, in the accompanying consolidated financial statements.

 

The Company is subject to tax in various states. The total amount of state income taxes reported in income tax expense for 2014, 2013, and 2012 was $195,176, $33,322, and $49,866, respectively. The Company is no longer subject to tax examinations for federal, state or local returns for years prior to 2011.

 

Fair Value of Financial Instruments - Financial instruments consist of cash equivalents, investments, accounts receivable, accounts payable, and debt. The carrying amount of all significant financial instruments approximates fair value due to either the short maturity or the existence of variable interest rates that approximate prevailing market rates.

 

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Subsequent Events - The consolidated financial statements and related disclosures include evaluation of events up through and including September 3, 2015, which is the date the consolidated financial statements were available to be issued.

 

10



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 2 - Equipment and Software

 

Equipment and software are summarized as follows:

 

 

 

 

 

 

 

Depreciable

 

 

 

2014

 

2013

 

Life - Years

 

Transportation equipment

 

$

69,721

 

$

19,219

 

5

 

Furniture, fixtures, and equipment

 

204,099

 

152,250

 

5-7

 

Internal-use software

 

1,021,619

 

246,435

 

3-5

 

Software development in progress

 

 

310,000

 

 

 

 

 

 

 

 

 

 

Total cost

 

1,295,439

 

727,904

 

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation/amortization

 

505,377

 

298,123

 

 

 

 

 

 

 

 

 

 

 

Net property and equipment

 

$

790,062

 

$

429,781

 

 

 

 

Depreciation and amortization expense for 2014, 2013, and 2012 were $207,254, $101,722, and $96,997, respectively.

 

Note 3 - Vendor Deposits

 

During 2014, the Company began placing funds on deposit with its largest supplier in an amount approximately equal to one week’s purchases in order to secure more favorable pricing for future purchases. As of December 31, 2014, the amounts on deposit totaled $5,549,271.

 

Note 4 - Lines of Credit

 

Apothecary had a $4,000,000 committed line of credit with PNC Bank, which has increased to $7,000,000 during 2014. The line continues to bear interest at 1.75 percent over the daily libor rate as published by the Wall Street Journal (an effective rate of 1.91 percent at December 31, 2014). The line of credit is secured by the Company’s existing and future assets, with the exception of the assets of PharmTrack. In addition, the line of credit is secured by the personal guarantees of two of the Company’s members. The line expires on August 31, 2015. At December 31, 2014, total outstanding borrowings were $2,000,000. At December 31, 2013, there was no outstanding balance.

 

During 2014, Apothecary entered into a revolving line of credit agreement with BIC. The line of credit has available borrowings of up to $10,000,000 and is due on demand. Interest is payable at 2.0 percent above prime rate (an effective rate of 5.25 percent at December 31, 2014). This line of credit is subordinated to the bank line of credit disclosed above. The outstanding balance was $8,000,000 at December 31, 2014 and was eliminated in consolidation in the accompanying consolidated financial statements.

 

11



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 4 - Lines of Credit (Continued)

 

The line of credit agreement with PNC Bank contains a financial covenant that requires the maintenance of a minimum tangible net worth. As of December 31, 2014, the Company was in compliance with the loan covenant. The Company was in violation of certain loan covenants during 2014 and earlier periods; these violations have subsequently been waived by the bank.

 

Note 5 - Long-term Debt

 

Long-term debt at December 31 is as follows:

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Note payable to a former member, due in monthly installments of $58,000 including interest at 3.25 percent per annum, maturing in June 2015

 

$

114,545

 

$

338,267

 

Note payable with a financial institution due in monthly installments of $491 including interest at 5.99 percent per annum, collateralized by an automobile and paid in full during 2014

 

 

6,662

 

Total

 

114,545

 

344,929

 

Less current portion

 

114,545

 

119,162

 

Long-term portion

 

$

 

$

225,767

 

 

Interest expense for 2014, 2013, and 2012 was $160,790, $4,876, and $1,315, respectively.

 

Note 6 - Members’ Equity Interests

 

Under the terms of the operating agreement, members’ equity interests are divided into two classes, Class A and Class B. Each Class A and Class B membership interest is divided into uniform units of interest and each member has been assigned a specific number of units based upon their initial capital contribution. Class A interests have the sole right to vote and shall not have any restrictions on transfer of their Class A interests. Holders of Class B interests that do not also own Class A interests have the right to transfer all or part of that interest only with prior consent of the Company and all holders of Class A interests, and have limitations on their ability to transfer their interest. Upon the death of a holder of a Class B interest, the interest shall be first offered to the Class A member at a price determined to be the fair market value. If the Class A member does not accept the offer, the Company would be required to purchase all of the Class B interest then owned at the same offer price. Payment for the interest may be made over a period of five years.

 

12



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 6 - Members’ Equity Interests (Continued)

 

Equity Based Compensation - Under the terms of a letter agreement between Apothecary and an officer hired in September 2014, if the officer remains a full-time employee of the Company for one continuous year from his date of employment, the Company is required to issue Class B membership interests to the officer representing 11 percent equity interests in Apothecary and PharmTrack. The fair value of the equity based compensation award was estimated on the date of grant at $6,120,000 using an income approach based on a discounted cash flow method. The compensation cost is being charged against income ratably over the one-year vesting period. The total compensation cost charged against income in 2014 under this agreement totaled $1,530,000, which amount has also been recorded as a Class B member’s equity interest as of December 31, 2014.

 

During April 2015, the letter agreement was amended and restated to provide an alternative payment formula in the event of a sale of the Company prior to the officer’s completion of one year of continuous employment. Provided that the officer is a fulltime employee of the Company at the time of the closing date of sale transaction, the Company shall pay to the officer a sale bonus equal to 3.5 percent of the net purchase consideration, in lieu of the equity based compensation described above. As discussed in Note 12, the Company sold all of its equity interests to an unrelated party in June 2015, at which time the Company paid a sale bonus to the officer of $3,000,000.

 

Member Redemption - In September 2013, the Company redeemed a member’s entire 17.5 percent Class B member interest for $1,250,000, including an initial payment of $800,000 and a note payable of $450,000 (see Note 5).

 

Note 7 - Related Party Transactions

 

Following is a description of transactions between the Company and related parties:

 

Administrative Fees - The Company is charged administrative fees from Burman’s Medical Supplies, Inc., a related company with common ownership, for a percentage of payroll taxes, benefits, and commissions as well as for various overhead expenses. Administrative fee expense for 2014, 2013, and 2012 was $1,239,249, $552,837, and $1,076,887, respectively.

 

13



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 7 - Related Party Transactions (Continued)

 

Sales are made and services are purchased from entities affiliated through common ownership. The following is a summary of transactions and balances with affiliates for 2014, 2013, and 2012:

 

 

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Sales to Burman’s Pharmacy, Inc.

 

$

31,365

 

$

20,509

 

$

330,804

 

Sales to Burman’s Medical Supplies, Inc.

 

83,823

 

51,474

 

55,338

 

Purchases from Burman’s Pharmacy, Inc.

 

303,131

 

5,009,531

 

215,088

 

Purchases from Burman’s Medical Supplies, Inc.

 

125,349

 

136,069

 

175,094

 

Accounts Receivable from Burman’s Pharmacy, Inc.

 

 

9,365

 

55,900

 

Accounts Receivable from Burman’s Medical Supplies, Inc.

 

 

26,122

 

280,223

 

Accounts Payable to Burman’s Medical Supplies, Inc.

 

185,608

 

 

 

Accounts Payable to Burman’s Pharmacy, Inc.

 

75

 

 

 

 

Note 8 - Retirement Plans

 

The Company participates in a 401(k) plan sponsored by a related entity with common ownership, which covers substantially all employees. The plan provides for the Company to make matching contributions. The Company’s contributions to the plan totaled $59,848, $68,273, and $62,098 for 2014, 2013, and 2012, respectively.

 

During December 2014, the Company began participating in a new profit-sharing plan sponsored by a related entity with common ownership. Contributions to the plan are made at the discretion of management. Participants vest in company contributions ratably over a number of years. Company contributions to the profit-sharing plan during 2014 were $11,703.

 

During December 2014, the Company began participating in a new defined benefit pension plan sponsored by a related entity with common ownership. Contributions to the plan are based on the actuarially determined present value of accumulated plan benefits. The benefits are based on an eligible employee’s years of service and compensation as defined by the plan. Company contributions to the plan during 2014 were $81,369.

 

14



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 8 - Retirement Plans (Continued)

 

In connection with the sale of all members’ interests in the Company to an unrelated party in June 2015 (see Note 12), the Company has agreed that each of the three qualified retirement plans described above will be terminated before the end of 2015. The Company’s transactions with the retirement plans are not material to the consolidated financial statements.

 

Note 9 - Fair Value Measurements

 

Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

 

Fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.

 

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

The Company measures its investments at fair value on a recurring basis. The fair value of its investments in fixed-income mutual funds is based primarily on Level 1 inputs as described above, and had a carrying value of $1,051,312 at December 31, 2014. There were no investments measured at fair value at December 31, 2013.

 

15



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 10 - Restatements

 

The accompanying consolidated financial statements for 2014, 2013, and 2012 have been restated to correct the following errors included in the Company’s previously issued consolidated financial statements:

 

Consolidation of Variable Interest Entity - The 2014 consolidated financial statements have been restated to include the accounts of BIC, a VIE formed in 2014 for which Apothecary is the primary beneficiary. See Note 1 for additional information about BIC. BIC’s primary assets and liabilities include cash and cash equivalents, investments and a line of credit extended to Apothecary that has been eliminated in consolidation as discussed in Note 4.

 

Equity Based Compensation - The 2014 consolidated financial statements have been restated to record compensation expense and members’ equity contributions in connection with an equity based compensation award granted to an officer in 2014. See Note 6 for additional information about this agreement.

 

Vendor Rebates Receivable - The 2014 consolidated financial statements have been restated to record accounts receivable and reductions to cost of revenue related to vendor rebates that have been earned under the terms of agreements effective beginning in 2014.

 

Accrued Vacation Pay - The 2014 consolidated financial statements have been restated to record additional liabilities and expenses for accrued vacation pay earned by employees as of December 31, 2014 that had been omitted from the previously issued 2014 consolidated financial statements.

 

Internal Use Software - The 2014, 2013, and 2012 consolidated financial statements have been restated to properly capitalize the costs of developing internal use software. The Company has capitalized approximately $246,000 in development costs for software placed in service prior to 2012, and approximately $775,000 in development costs for software placed in service during 2014. Amortization has been recorded as discussed in Notes 1 and 2.

 

Inventory - The 2014, 2013, and 2012 consolidated financial statements have been restated to record the proper carrying amount of inventory on hand at the end of each fiscal year.

 

Other Adjustments and Reclassifications - The 2014, 2013, and 2012 consolidated financial statements have been restated to record the effects of other less significant adjustments and reclassifications that do not have a material effect on the consolidated financial statements.

 

16



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 10 - Restatements (Continued)

 

Impact of Restatements - The following table sets forth the collective impacts of the restatements described above:

 

 

 

As previously

 

 

 

 

 

 

 

reported

 

Adjustment

 

As adjusted

 

As of and for the year ended December 31, 2014:

 

 

 

 

 

 

 

Consolidated Balance Sheet:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,800,954

 

$

1,054,300

 

$

16,855,254

 

Investments

 

 

1,051,312

 

1,051,312

 

Accounts receivable

 

14,919,763

 

2,148,353

 

17,068,116

 

Inventory

 

2,087,396

 

(43,063

)

2,044,333

 

Prepaid expenses and other

 

19,770

 

995

 

20,765

 

Equipment and software - Net

 

144,076

 

645,986

 

790,062

 

Total assets

 

38,521,230

 

4,857,883

 

43,379,113

 

Lines of credit

 

10,000,000

 

(8,000,000

)

2,000,000

 

Accrued and other current liabilities

 

742,026

 

58,816

 

800,842

 

Total liabilities

 

26,377,530

 

(7,941,184

)

18,436,346

 

Members’ equity

 

12,143,700

 

12,799,067

 

24,942,767

 

Consolidated Statement of Operations:

 

 

 

 

 

 

 

Sales

 

325,472,138

 

13,352

 

325,485,490

 

Cost of sales

 

293,858,612

 

(1,772,792

)

292,085,820

 

Gross profit

 

31,613,526

 

1,786,144

 

33,399,670

 

Operating expenses

 

7,409,236

 

1,188,112

 

8,597,348

 

Operating income

 

24,204,290

 

598,032

 

24,802,322

 

Other income

 

25,048

 

(12,451

)

12,597

 

Income tax expense

 

195,847

 

(671

)

195,176

 

Consolidated net income

 

24,033,491

 

586,252

 

24,619,743

 

Consolidated Statement of Members’ Equity:

 

 

 

 

 

 

 

Total member’s equity - Beginning of year

 

7,725,714

 

682,816

 

8,408,530

 

Consolidated net income

 

24,033,491

 

586,252

 

24,619,743

 

Member contributions

 

 

10,000,000

 

10,000,000

 

Equity based compensation

 

 

1,530,000

 

1,530,000

 

Total members’ equity - End of year

 

12,143,700

 

12,799,067

 

24,942,767

 

 

17



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 10 — Restatements (Continued)

 

 

 

As previously

 

 

 

 

 

 

 

reported

 

Adjustment

 

As adjusted

 

As of and for the year ended December 31, 2014 (Continued):

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows:

 

 

 

 

 

 

 

Consolidated net income

 

$

24,033,491

 

$

586,252

 

$

24,619,743

 

Depreciation and amortization

 

36,625

 

170,629

 

207,254

 

Investment income

 

 

(105,612

)

(105,612

)

Equity based compensation

 

 

1,530,000

 

1,530,000

 

Changes in accounts receivable

 

(11,440,180

)

(2,140,196

)

(13,580,376

)

Changes in inventory

 

2,367,489

 

374,446

 

2,741,935

 

Changes in other current assets

 

(5,489,729

)

(995

)

(5,490,724

)

Changes in accounts payable

 

10,888,192

 

(8,275

)

10,879,917

 

Changes in accrued and other current liabilities

 

626,113

 

58,936

 

685,049

 

Net cash provided by operating activities

 

21,022,002

 

465,184

 

21,487,186

 

Purchases of equipment and software

 

(102,351

)

(465,184

)

(567,535

)

Purchases of investments

 

 

(945,700

)

(945,700

)

Net cash used in investing activities

 

(102,351

)

(1,410,884

)

(1,513,235

)

Proceeds from line of credit

 

10,000,000

 

(8,000,000

)

2,000,000

 

Member contributions

 

 

10,000,000

 

10,000,000

 

Net cash used in financing activities

 

(9,845,890

)

2,000,000

 

(7,845,890

)

Net increase in cash and cash equivalents

 

11,073,761

 

1,054,300

 

12,128,061

 

Cash and cash equivalents - End of year

 

15,800,954

 

1,054,300

 

16,855,254

 

 

 

 

 

 

 

 

 

As of and for the year ended December 31, 2013:

 

 

 

 

 

 

 

Consolidated Balance Sheet:

 

 

 

 

 

 

 

Accounts receivable

 

3,479,583

 

8,157

 

3,487,740

 

Inventory

 

4,454,885

 

331,383

 

4,786,268

 

Equipment and software - Net

 

78,350

 

351,431

 

429,781

 

Total assets

 

12,819,323

 

690,971

 

13,510,294

 

Accounts payable

 

4,632,767

 

8,275

 

4,641,042

 

Accrued and other current liabilities

 

115,913

 

(120

)

115,793

 

Total liabilities

 

5,093,609

 

8,155

 

5,101,764

 

Members’ equity

 

7,725,714

 

682,816

 

8,408,530

 

Consolidated Statement of Operations:

 

 

 

 

 

 

 

Sales

 

68,839,139

 

(59,750

)

68,779,389

 

Cost of sales

 

59,574,844

 

(628,513

)

58,946,331

 

Gross profit

 

9,264,295

 

568,763

 

9,833,058

 

Operating expenses

 

4,867,402

 

(69,483

)

4,797,919

 

Operating income

 

4,396,893

 

638,246

 

5,035,139

 

Other income

 

5,498

 

662

 

6,160

 

Consolidated net income

 

4,369,069

 

638,908

 

5,007,977

 

Consolidated Statement of Members’ Equity:

 

 

 

 

 

 

 

Total members’ equity - Beginning of year

 

6,243,913

 

43,906

 

6,287,819

 

Consolidated net income

 

4,369,069

 

638,908

 

5,007,977

 

Total members’ equity - End of year

 

7,725,714

 

682,816

 

8,408,530

 

 

18



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 10 - Restatements (Continued)

 

 

 

As previously

 

 

 

 

 

 

 

reported

 

Adjustment

 

As adjusted

 

As of and for the year ended December 31, 2013 (Continued):

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows:

 

 

 

 

 

 

 

Consolidated net income

 

$

4,369,069

 

$

638,908

 

$

5,007,977

 

Depreciation and amortization

 

19,937

 

81,785

 

101,722

 

Bad debts

 

59,751

 

(59,751

)

 

Changes in accounts receivable

 

1,995,876

 

51,594

 

2,047,470

 

Changes in inventory

 

(968,366

)

(630,695

)

(1,599,061

)

Changes in accounts payable

 

(1,315,032

)

8,275

 

(1,306,757

)

Changes in accrued and other current liabilities

 

(122,233

)

(120

)

(122,353

)

Net cash provided by operating activities

 

4,022,863

 

89,998

 

4,112,861

 

Purchases of equipment and software

 

 

(90,000

)

(90,000

)

Net cash provided by (used in) investing activities

 

84,853

 

(90,000

)

(5,147

)

 

 

 

 

 

 

 

 

For the year ended December 31, 2012:

 

 

 

 

 

 

 

Consolidated Statement of Operations:

 

 

 

 

 

 

 

Sales

 

94,496,812

 

(40,118

)

94,456,694

 

Cost of sales

 

80,972,064

 

305,817

 

81,277,881

 

Gross profit

 

13,524,748

 

(345,935

)

13,178,813

 

Operating expenses

 

7,065,512

 

(184,472

)

6,881,040

 

Operating income

 

6,459,236

 

(161,463

)

6,297,773

 

Consolidated net income

 

6,420,072

 

(161,458

)

6,258,614

 

Consolidated Statement of Members’ Equity:

 

 

 

 

 

 

 

Total members’ equity - Beginning of year

 

4,368,508

 

205,362

 

4,573,870

 

Consolidated net income

 

6,420,072

 

(161,458

)

6,258,614

 

Total members’ equity - End of year

 

6,243,913

 

43,906

 

6,287,819

 

Consolidated Statement of Cash Flows:

 

 

 

 

 

 

 

Consolidated net income

 

6,420,072

 

(161,458

)

6,258,614

 

Depreciation and amortization

 

14,852

 

82,145

 

96,997

 

Bad debts

 

20,059

 

(40,118

)

(20,059

)

Changes in accounts receivable

 

(344,985

)

(12,024

)

(357,009

)

Changes in inventory

 

(1,961,132

)

299,312

 

(1,661,820

)

Net cash provided by operating activities

 

2,859,992

 

167,856

 

3,027,848

 

Purchases of equipment and software

 

(33,341

)

(220,000

)

(253,341

)

Advances to related companies

 

(52,142

)

52,142

 

 

Net cash used in investing activities

 

(85,483

)

(167,858

)

(253,341

)

 

19



 

Burman’s Apothecary, L.L.C., Subsidiaries, and Affiliate

 

Notes to Consolidated Financial Statements

December 31, 2014

 

Note 11 - Supplemental Disclosures of Cash Flow Information

 

Cash paid for interest and income taxes for the years ended December 31, 2014, 2013, and 2012 was as follows:

 

 

 

2014

 

2013

 

2012

 

Interest

 

$

55,077

 

$

4,876

 

$

1,315

 

Income taxes

 

50,769

 

83,563

 

27,198

 

 

There were no significant noncash investing transactions in for the years ended December 31, 2014, 2013, or 2012.

 

Significant noncash financing activities for the years ended December 31, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

2013

 

2012

 

Note payable issued for redemption of member’s interest

 

$

 

$

450,000

 

$

 

Equity-based compensation award

 

1,530,000

 

 

 

 

Note 12 - Subsequent Events

 

On February 27, 2015, the Company formed Bridgewater Pharmacy, LLC, a wholly owned subsidiary that will be considered a disregarded entity for tax purposes.

 

On June 15, 2015, all of the members’ interests in Burman’s Apothecary, L.L.C. and subsidiaries were contributed to SLB Holdings, Inc., a newly-formed entity, in exchange for all of the equity interests of SLB Holdings. Apothecary then became a wholly-owned subsidiary of SLB Holdings and elected to become a single-member L.L.C. for tax purposes.

 

On June 19, 2015, all of the outstanding members’ interests in Burman’s Apothecary, L.L.C. and subsidiaries were acquired by Diplomat Pharmacy, Inc. for a total acquisition price of approximately $93.9 million.

 

20