Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                        

 

Commission file number: 000-27945

 

DOUGHERTY’S PHARMACY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		75-2900905
(State or other jurisdiction		(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. Yes x No o

 

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). Yes x No o

 

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 o		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x
		Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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 November 3, 2017: 22,476,821

 

 

 

 

TABLE OF CONTENTS

 

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	3
	Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2017 and 2016	4
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4.	Controls and Procedures	17
PART II.	OTHER INFORMATION	17
Item 1.	Legal Proceedings	18
Item 6.	Exhibits	18
SIGNATURES		19

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Dougherty’s Pharmacy, Inc.

Consolidated Balance Sheets

(000’s omitted, except par value and share amounts)

 

		September 30,				December 31,
		2017				2016
		(Unaudited)				(Audited)
ASSETS
Current Assets
Cash		$	147			$	58
Restricted cash			303				303
Trade accounts receivable, net			1,740				1,901
Other receivables			226				113
Receivable from affiliates			7				12
Inventories, net			3,497				3,340
Prepaid expenses			158				286
Total current assets			6,078				6,013
Long term receivable			608				–
Property and equipment, net			1,098				1,386
Intangible assets, net			3,059				3,681
Investments carried at cost			–				1,295
Deferred tax asset			3,000				3,000
Total assets		$	13,843			$	15,375
LIABILITIES
Current Liabilities
Accounts payable		$	3,050			$	2,643
Accrued liabilities			627				293
Notes payable, current portion			702				1,129
Revolving credit facility			3,712				–
Total current liabilities			8,091				4,065
Revolving credit facility			–				4,179
Notes payable, long-term portion			2,932				3,428
Total liabilities			11,023				11,672
STOCKHOLDERS' EQUITY
Stockholders' equity:
Preferred stock, $0.0001 par value; 7,500,000 shares authorized: none issued and outstanding
Common stock, $0.0001 par value; 50,000,000 shares authorized; 23,506,821 shares issued and 22,476,821 shares outstanding at September 30, 2017; 23,447,679 shares issued and 22,417,679 shares outstanding at December 31, 2016			2				2
Additional paid-in capital			60,170				60,144
Accumulated deficit			(56,955	)			(56,046	)
Treasury stock, at cost, 1,030,000 shares			(397	)			(397	)
Total stockholders' equity			2,820				3,703
Total liabilities and stockholders' equity		$	13,843			$	15,375

  

See Notes to Consolidated Financial Statements

 

 

 

 

Dougherty’s Pharmacy, Inc.

Consolidated Statements of Operations

(000’s omitted, except share and per share amounts)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Revenue		$	9,947			$	10,494			$	30,213			$	32,308
Cost of sales (exclusive of depreciation and amortization shown separately down below)			7,367				7,900				22,083				23,957
Gross profit			2,580				2,594				8,130				8,351
Operating expenses
Selling, general and administrative expenses			2,632				2,471				7,820				7,918
Non-cash stock compensation			11				5				26				15
Depreciation and amortization			249				261				769				789
Total operating expenses			2,892				2,737				8,615				8,722
Operating loss			(312	)			(143	)			(485	)			(371	)
Other income			–				44				–				84
Interest expense			(115	)			(112	)			(317	)			(329	)
Loss on disposal of assets			–				–				(75	)			(114	)
Loss before provision for income tax			(427	)			(211	)			(877	)			(730	)
Income tax provision			(9	)			(10	)			(32	)			(30	)
Net loss		$	(436	)		$	(221	)		$	(909	)		$	(760	)
Basic and diluted net loss per share attributable to common stockholders		$	(0.02	)		$	(0.01	)		$	(0.04	)		$	(0.03	)
Weighted-average number of shares-Basic and diluted			22,476,821				22,165,131				22,450,017				22,129,389

 

See Notes to Consolidated Financial Statements

 

 

 

 

Dougherty’s Pharmacy, Inc.

Consolidated Statements of Cash Flows

(000’s omitted)

(Unaudited)

 

 

		Nine Months Ended September 30,
		2017				2016
Operating Activities
Net loss		$	(909	)		$	(760	)
Items not requiring (providing) cash
Loss from disposal of assets			75				114
Provision for doubtful accounts			6				43
Depreciation and amortization			769				789
Stock-based compensation			26				15
Changes in operating assets and liabilities:
Accounts receivable			94				(55	)
Inventories			(193	)			113
Prepaid expenses and other assets			12				171
Accounts payable			388				447
Accrued liabilities			334				207
Net cash provided by operating activities			602				1,084
Investing Activities
Purchases of property and equipment			(85	)			(398	)
Cash proceeds from disposition of pharmacy			274				–
Cash received upon disposition of investment			688				–
Net provided by (used in) investing activities			877				(398	)
Financing Activities
Payments on notes payable			(15,735	)			(19,188	)
Proceeds from notes payable			14,345				18,486
Net cash used in financing activities			(1,390	)			(702	)
Net increase (decrease) increase in cash			89				(16	)
Cash, beginning of period			361				371
Cash, end of period		$	450			$	355
Supplemental Cash Flow Information
Cash paid for income taxes		$	42			$	42
Cash paid for interest		$	315			$	328
Reconciliation of Cash to the Consolidated Balance Sheets
Cash		$	147			$	53
Restricted cash			303				302
Total cash		$	450			$	355

 

See Notes to Consolidated Financial Statements

 

 

 

 

Dougherty’s Pharmacy, Inc.

Notes to Consolidated Financial Statements

 

 

1.       Organization and Significant Accounting Policies

 

Description of Business

 

Dougherty’s Pharmacy, Inc. (“Dougherty’s” or the “Company”) is a value oriented investment firm focused on successfully acquiring, managing and growing community based pharmacies in the Southwest Region.

 

A summary of the Company’s investments at September 30, 2017, is shown in the table below:

 

Date	Entity		Transaction Description	% Ownership
March 2004	Dougherty’s Holdings, Inc. and subsidiaries (“DHI” or the “Borrowers”)		Acquisition of retail pharmacy	100%
September 2010	ASDS of Orange County, Inc. (“ASDS”)		Holding company for Investment in CRESA Partners of Orange County, L.P. (“CPOC”)	100%

 

On February 7, 2017, CRESA Partners of Orange County, L.P., an affiliate of Cresa Partners-West, Inc. was acquired by Savills Studley, Inc. liquidating the partnership interest in its entirety held by ASDS of Orange County, Inc. As of December 31, 2016, the estimated value of this investment was recorded at $1,295,000, which represents the estimated future cash payments for this transaction. The Company has received payments of $688,000 with the remainder as a long term receivable due in three increments over 49 months, contingent on certain milestones expected to be achieved.

 

On May 6, 2017, the Company sold its pharmacy in Humble, Texas, acquired in September 2014, and received total cash proceeds of $274,000 related to this transaction. The revenues and earnings of the divested pharmacy are not significant to the consolidated financial statements taken as a whole.

 

Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Dougherty’s and all subsidiaries for which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared by the Company, in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X, and have not been audited. Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 included in the Company’s Registration Statement on Form 10. In the opinion of management, the interim unaudited consolidated financial statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented. Due to seasonality, the results of operations for the three and nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for any future interim period for the year ending December 31, 2017.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

 

 

Reclassification

 

The revolving credit facility (See Note 2) was reclassified as a current liability. The purpose of the reclassification is to present the consolidated financial statements in conformity with GAAP. The reclassification does not affect the representation of the Company’s overall performance.

 

Concentration of Credit Risk

 

The Company’s credit risk relates primarily to its trade accounts receivables and its receivables from affiliates, along with cash deposits maintained at financial institutions in excess of federally insured limits on interest bearing accounts. Management performs continuing evaluations of debtors’ financial condition and maintains an allowance for uncollectible accounts as determined necessary.

 

Accounts Receivable

 

Receivables recorded in the financial statements represent valid claims against debtors for services rendered or other charges arising on or before the balance sheet date. Management makes estimates of the collectability of accounts receivable. Specifically, management analyzes accounts receivable and historical bad debts, customer credit-worthiness, current economic trends, and changes in customer payment terms and collections trends when evaluating the adequacy of the allowance for doubtful accounts. Any change in the assumptions used in analyzing accounts receivable may result in additional allowances for doubtful accounts being recognized in the periods in which the change in assumptions occurs.

 

At September 30, 2017 and 2016, 100% of the trade accounts receivable is from retail pharmacy operations.

 

Inventories

 

Inventories consist of health care product finished goods held for resale, valued at the lower of cost using the first-in, first-out method or market. The Company maintains an estimated reserve against inventory for excess, slow-moving, and obsolete inventory as well as inventory for which carrying value is in excess of its net realizable value.

 

Long-Lived Assets

 

The Company evaluates the recoverability of the carrying value of its long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

 

Revenue Recognition

 

Revenues generated by the retail pharmacy operations are reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional health care providers and others. The Company recognizes revenue from the sale of pharmaceutical products and retail merchandise as transactions occur and product is delivered to the customer. Revenue from product sales is recognized at the point of sale and service revenue is recognized at the time services are provided.

 

Sales and similar taxes collected from clients are excluded from revenues. The obligation is included in accounts payable until the taxes are remitted to the appropriate taxing authorities.

 

All revenues earned during the three and nine months ended September 30, 2017 and 2016, were earned from the retail pharmacy business.

 

Cost of Sales

 

Cost of sales includes the purchase price of goods sold, prescription packaging, compounded prescription direct labor, inventory obsolescence, freight costs, cash discounts and vendor rebates. Rebates or refunds received by the Company from its suppliers are considered as an adjustment of the prices of the supplier’s products purchased by the Company.

 

 

 

 

Income Taxes

 

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.

 

Tax positions are recognized if it is more-likely-than-not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold consider the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

 

Earnings per Share

 

Basic earnings per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net loss and unrecognized stock-based compensation by the weighted-average number of common shares outstanding during the period and the unvested restricted stock units. The unrecognized stock based compensation as of September 30, 2017 and 2016 is $116,000 and $41,000, respectively; the unvested restricted stock units are 658,500 and 233,000, respectively. Due to the net losses for both years, restricted stock units for 2017 and 2016 were anti-dilutive.

 

Accounting Pronouncements Not Yet Adopted

 

ASU No. 2016-02, Leases (Topic 842)

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and becomes effective on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial position, results of operations and cash flows.

 

Accounting Standards Update ("ASU") No. 2014-09 "Revenue from Contracts with Customers (Topic 606)”

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), an update to ASU 2014-09. This ASU amends ASU 2014-09 to defer the effective date by one year for annual reporting periods beginning after December 15, 2017. Subsequently, the FASB has also issued accounting standards updates which clarify the guidance. This ASU removes inconsistencies, complexities and allows transparency and comparability of revenue transactions across entities, industries, jurisdictions and capital markets by providing a single comprehensive principles-based model with additional disclosures regarding uncertainties. The principles-based revenue recognition model has a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. In transition, the ASU may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance including the transition method, but we do not currently believe this change will materially impact our financial statements.

  

 

 

 

2.       Notes Payable

 

Notes payable consist of the following:

 

		September 30, 2017				December 31, 2016
		(Unaudited)				(Audited)
First National Bank of Omaha Credit Facility and Promissory Note secured by certain retail pharmacy assets
Revolving line of credit in the principal amount of $4,450,000, interest at LIBOR plus 3.25% (4.49% at Sept 30, 2017)		$	3,712,000			$	4,179,000
Term note in the principal amount of $150,000 with interest payable at LIBOR plus 3.25% (4.04% at March 31, 2017) per annum payable in monthly installments of $10,000 plus all accrued and unpaid interest due. Paid in full February 8, 2017.			–				100,000
Cardinal Health Term Notes, secured by certain retail pharmacy assets
Term note in the principal amount of $1,500,000 with interest payable at prime plus 2.75 (7.0% at Sept 30, 2017) per annum payable in monthly installments of $17,861 plus interest, a final payment of $446,533 plus all accrued and unpaid interest due in full on February 20, 2017. Refinanced March 31, 2017.			–				447,000
							–
Term note in the principal amount of $432,859 at fixed interest rate of 8.11% per annum payable in 36 monthly installments of $13,641. Final payment plus accrued and unpaid interest due in full on April 10, 2020.			368,000				–
Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (6.85% at Sept 30, 2017) per annum payable in monthly installments of $15,232 plus interest, a final payment of $929,157 plus all accrued and unpaid interest due in full on July 10, 2020.			1,417,000				1,553,000
Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (6.85% at Sept 30, 2017) per annum payable in monthly installments of $10,344 plus interest, a final payment of $638,850 plus all accrued and unpaid interest due in full on January 10, 2020.			900,000				993,000
Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (6.63% at Sept 30, 2017) per annum payable in monthly installments of $6,200 plus interest, a final payment of $378,251 plus all accrued and unpaid interest due in full on August 10, 2020.			589,000				645,000
Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (6.65% at Sept 30, 2017) per annum payable in monthly installments of $2,545 plus interest, a final payment of $155,220 plus all accrued and unpaid interest due in full on August 10, 2019.			208,000				231,000
Term note in the principal amount of $168,350 with interest payable at prime plus 2.6% (6.85% at Sept 30, 2017) per annum payable in monthly installments of $2,004 plus interest, a final payment of $50,356 plus all accrued and unpaid interest due in full on September 10, 2019.			–				112,000
Acquisition Notes Payable , unsecured
Notes payable to sellers of acquired pharmacies with varying monthly payments with interest at 5.5% due through September 2018.			149,000				309,000
Insurance notes payable, secured by the respective insurance policies
Notes payable for the Company’s insurance policy premiums with varying monthly payments due through September 2017. Interest rates vary up to 3.68%			3,000				167,000
			7,346,000				8,736,000
Less current portion			(4,414,000	)			(1,129,000	)
		$	2,932,000			$	7,607,000

 

 

 

 

Future maturities of notes payable at September 30, 2017, are as follows:

 

2017		$	4,414,000
2018			702,000
2019			2,230,000
		$	7,346,000

 

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 under the Revolver will bear interest at LIBOR plus 3.25% (4.49% at September 30, 2017). Accrued and unpaid interest on the Revolver is due monthly beginning on September 1, 2017. All outstanding principal under the Revolver plus all accrued and unpaid interest thereon is due and payable in full on August 1, 2018. The Revolver is secured by certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company. The Revolver is subject to certain financial restrictions, subject to the Lender’s prior written approval, including, but not limited to, capital expenditures not to exceed $200,000, additional indebtedness, acquisitions of entities and payment of dividends and distributions. Furthermore, the loan agreement does not provide for financial covenants until, effective December 31, 2017, the Borrowers will maintain a minimum debt service coverage ratio of not less than 1.00 to 1.00, as defined.

  

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 September 30, 2017, the following shares had been issued under the 2013 RSU Plan:

 

Year of Issuance:				Number of Shares				Fair Value at Date of Grant				Shares Vested				Non-Vested				Cancelled
	2013				120,000			$	26,400				90,000				25,000				5,000
	2014				122,100			$	30,946				86,300				25,650				10,150
	2015				150,000			$	39,000				70,000				65,000				15,000
	2016				–				–				–				–				–
	2017				563,000			$	118,230				–				543,000				20,000
					955,100			$	214,576				246,300				658,650				50,150

 

 

 

 

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 twelve months ended September 30, 2017, are as follows:

 

2017		$	774,000
2018			787,000
2019			782,000
2020			663,000
2021			674,000
Thereafter			4,022,000
		$	7,702,000

 

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 September 30, 2017 and 2016, the Company paid fees to its directors of $14,000 and $9,000 and $37,000 and 42,000, respectively for their roles as members of the Board of Directors and its related committees; fees paid to the Company’s Chairman totaled $30,000 and $90,000 for management and other services provided.

  

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.  We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.

The forward-looking statements contained in this Form 10-Q and other documents that we file or furnish with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company’s website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications.

 

Statements that are not historical facts are forward-looking statements, including, without limitation, those regarding estimates of and goals for future financial and operating performance as well as forward-looking statements concerning the expected execution and effect of our business strategies. Words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “can,” “will,” “project,” “intend,” “plan,” “goal,” “guidance,” “continue,” “sustain,” “synergy,” “believe,” “seek,” “estimate,” “anticipate,” “may,” “possible,” “assume,” and variations of such words and similar expressions are intended to identify such forward-looking statements.

 

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results to vary materially from those indicated or anticipated, including, but not limited to the following:

 

	·	We have limited funds and may require additional financing;
	·	We may not be able to effectively integrate and manage our current and anticipated growth strategies;
	·	We could be subject to unforeseen costs associated with our Pharmacy Acquisitions which could reduce our profitability;
	·	We may enter into additional leveraged transactions in connection with future Pharmacy Acquisitions;
	·	We may be negatively affected by restrictive terms and covenants in our existing credit facility;
	·	We may be required to perform as a co-guarantor on certain indebtedness obligations, and if such event were to occur, we do not anticipate that we would have sufficient cash resources to meet such obligations;
	·	We are substantially dependent on a single supplier of pharmaceutical products;
	·	We must maintain sufficient sales to qualify for favorable pricing under our long term supply contract;
	·	We may be affected by the introduction of new brand name and generic prescription drugs, the conversion rate and mix of prescriptions filled, the reimbursement rate by third party payors of prescriptions and increases in the cost to procure those drugs;
	·	We are subject to considerable uncertainty as to how current Health Reform Laws will affect our business and operations;
	·	We could be negatively affected by future legislative or regulator policies designed to manage healthcare costs or alter healthcare financing practices; and
	·	We handle confidential healthcare information for our customers and are subject to the risk in securing such confidential information and protecting it from cyber-attacks.

 

These and other risks, assumptions and uncertainties include, but are not limited to, those factors described in the “Risk Factors” sections of our Registration Statement on Form 10 filed on June 2, 2017, and as amended on July 21 and August 18, 2017. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date the statement.

 

 

 

 

OVERVIEW

 

Key measures used by the Company’s management to evaluate business performance include revenue, gross profit, selling, general and administrative expense (“SG&A”) and EBITDA. EBITDA is calculated as net income before deducting interest, taxes, depreciation and amortization. EBITDA is a non-GAAP measure that 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 certain instances, we have presented EBITDA (Adjusted) which also excludes certain one-time, non-recurring, non-operating losses or impairments, as the Company considers excluding these adjustments necessary to derive the results of ongoing operations. In those instances, we have identified when the Company is presenting adjusted EBITDA. Although EBITDA or EBITDA (Adjusted) is not a measure of actual cash flow because it does not consider changes in assets and liabilities that may impact cash balances, the Company believes it is a useful metric to evaluate operating performance and has therefore included such measures in the discussion of operating results below.

 

The Company also tracks prescriptions sold to assess operational performance.

  

Overview of Our Business

 

Dougherty’s Pharmacy, Inc. (“Dougherty’s,” which is also referred to in this Quarterly Report on Form 10-Q as “we,” “us,” or “the Company”) is a value oriented company focused on successfully acquiring, managing and growing community based pharmacies in the Southwest Region. Our wholly owned subsidiary, Dougherty’s Holdings, Inc., owns and operates multiple Dougherty’s Pharmacies, which we operate as a single segment in our financial reporting. The flagship store, Dougherty’s Pharmacy, is a turn-key multi-service pharmacy located in a highly prestigious area of Dallas, Texas. Centrally located, we believe that Dougherty’s Pharmacy continues to provide a level of service not typically provided by national pharmacy chain stores. We fulfill virtually any prescription need, from the simplest to the most complex compounding prescriptions. Most national pharmacy chains do not provide complex pharmacy prescription services. We specialize in providing solutions for our retail customers’ pharmacy needs and also for our customers residing in assisted living facilities. Dougherty’s long history began in 1929 and continues today as one of Dallas’s oldest, largest and best-known full-service pharmacies, which also includes durable medical equipment, home healthcare products services, and health and wellness supplements. We have a customer service oriented philosophy and typically do not attempt to compete solely based on price, as is the case with most of the national pharmacy chains.

 

Additional community pharmacies are located in Dallas, El Paso, and Springtown, Texas and in McAlester, Oklahoma.

  

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

RESULTS OF OPERATIONS 

 

The following discussion explains the material changes in our results of operations for the three and nine months ended September 30, 2017 and 2016, and the significant developments affecting our financial condition since the Form 10-12G and Form 10-12G/A filed June 2, 2017 and July 21, 2017, respectively. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2016 and 2015 and the three months ended March 31, 2017 and 2016, filed in those reports, along with this report.

 

Comparison of the Three and Nine months ended September 30, 2017, to the Three and Nine months ended September 30, 2016 (000’s Omitted)

 

		Three Months ended Sept 30,								Nine Months Ended Sept 30,
		2017				2016				2017				2016
Revenue		$	9,947			$	10,494			$	30,213			$	32,308
Cost of sales (exclusive of depreciation and amortization shown separately down below)			7,367				7,900				22,083				23,957
Gross profit			2,580				2,594				8,130				8,351
Operating expenses
Selling, General and Administrative			2,643				2,476				7,846				7,933
Depreciation and amortization			249				261				769				789
Other income			–				44				–				84
Interest expense			115				112				317				329
Loss of disposal of assets			–				–				75				114
Income tax provision			9				10				32				30
Net loss		$	(436	)		$	(221	)		$	(909	)		$	(760	)
plus:
Interest expense		$	115			$	112			$	317			$	329
Depreciation and amortization			249				261				769				789
Loss on disposal of assets			–				–				75				114
Income tax provision			9				10				32				30
EBITDA (Adjusted)		$	(63	)		$	162			$	284			$	502
Prescription count			107,178				109,249				328,399				330,774

 

Revenues

 

Net revenues decreased approximately $547,000 or 5.2%, and $2.1 million, or 6.5% in the three and nine months ended September 30, 2017. The decrease includes a less than 2% decrease in the number of retail pharmacy prescriptions sold. The decline in revenues per prescription sold during the three and nine months ended September 30, 2017, as compared to the same periods for 2016 are due to lower revenues per prescription filled due to the brand to generic conversion and lower generic selling prices as experienced during the first six months of 2017. Management expects this trend will continue for the remainder of 2017, resulting in lower revenues filled due to brand-to-generic conversion and lower generic selling prices in 2017. Prescriptions sold are expected to continue to remain consistent, with prior years.

  

 

 

 

Gross profit

 

Gross profit dollars decreased $14,000, or 0.5%, and $221,000, or 2.6% in the three and nine months ended September 30, 2017, as compared to prior year. Gross profit as a percent of revenues increased approximately 120 basis points for the three months ended September 30, 2017, to 25.9%, as compared to prior year. Gross profit as a percentage of net revenues increased approximately 110 basis points in the nine months ended September 30, 2017, to 26.9%, as compared to prior year. as a result of the improved pricing secured in the November 2016 pricing agreement with Cardinal Health, offset by an increase in third party payor fees, as experienced during the first six months of 2017 and expected to continue to occur during the remainder of 2017. The increase in third party payor fees are due to Direct and Indirect Remuneration (“DIR”) fees charged to pharmacies that relate to Medicare Part D plans and commenced during the first quarter of 2017. DIR fees were $37,000, $53,000 and $54,000 for the first, second and third quarters, respectively, of 2017. Total adjudicated fees were $284,000 for the nine months ended September 30, 2017, an increase of 217.7% as compared to prior year due to the DIR fees. As Management expected, DIR fees stabilized at 1.34% of total third party payor revenues for the nine months ended September 30, 2017, as compared to 1.39% for the six months ended June 30, 2017.

 

SG&A expenses

 

SG&A expenses increased $167,000, or 6.7% for the three months ended September 30, 2017, as compared to prior year. SG&A expenses decreased $87,000, or 1.1% for the nine months ended September 30, 2017, as compared to prior year. SG&A expenses as a percentage of revenues for the three months ended September 30, 2017, increased to 26.6%, up 300 basis points from 23.6% for the same period prior year. The increase in SG&A expenses for the three months ended is due to accrued severance related the resignation of the President of Pharmacy Operations and continued professional fees for services and subscriptions incurred for the Form 10 filing, corporate name change and upgrade to OTCQB Venture Markets from the Pink Sheets. SG&A expenses as a percentage of revenues for the nine months ended September 30, 2017, increased to 26.0%, up 140 basis points from 24.6% for the same period prior year. The decrease in SG&A expenses for the nine months ended is due primarily to cost reduction initiatives that were implemented during 2016 offset by the accrued severance in September of 2017 related to the resignation of the President of Pharmacy Operations and professional fees for services and subscriptions incurred since April of 2017 for the Form 10 filing, corporate name change and upgrade to OTCQB Venture Markets from the Pink Sheets. The increase in operating expenses as a percentage of revenues is due to lower revenue as compared to prior year. Management continues to implement cost reduction initiatives during 2017 to decrease SG&A expenses as a percentage of revenues.

 

Earnings Before Interest, Taxes, Depreciation and Amortization (Adjusted for the nine months)

 

EBITDA (Adjusted for the nine months) decreased $225,000, or 138.9%, and $218,000, or 43.4% in the three and nine months ended September 30, 2017, as compared to prior year. EBITDA (Adjusted for the nine months) as a percentage of revenues decreased approximately 210 basis points to negative 0.6% and decreased 70 basis points to 0.9% for the three and nine months ended September 30, 2017, respectively, as compared to 1.5% and 1.6% for the three and nine months ended in September 30, 2016. The decrease in EBITDA (Adjusted for the nine months) for the three months ended September 30, 2017, compared to prior year is primarily due to the accrued severance in September of 2017 and additional SG&A expense incurred by the company related to the decision to file its Form 10, both discussed in “SG&A” above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We maintain a level of liquidity sufficient to allow us to cover our cash needs in the short-term. Over the long-term, we manage our cash and capital structure to maintain our financial position and maintain flexibility for future strategic initiatives. We continuously assess our working capital needs, debt and leverage levels, capital expenditure requirements, and future investments or acquisitions. We believe our operating cash flows, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives.

 

As of September 30, 2017, we had working capital of approximately negative $2.0 million as compared to working capital of approximately negative $2.2 million at December 31, 2016. Negative working capital is due to the reclassification of the Revolver balance of $3.7 million and $4.2 million as of September 30, 2017 and December 31, 2016, 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.

 

As of September 30, 2017, we had cash and restricted cash of approximately $450,000, of which $303,000 was restricted, as compared to approximately $361,000, of which $303,000 was restricted, at December 31, 2016. The increase in cash for the nine months ended September 30, 2017, of $89,000 was the overall net increase from activities as presented below.

 

 

 

 

As of September 30, 2017, the Company had total current assets of $6,078,000 and total current liabilities of $8,091,000 creating negative working capital of approximately $2,013,000 as compared to total current assets of $6,013,000 and total current liabilities of $8,244,000 creating negative working capital of approximately $2,231,000 at December 31, 2016. The overall decrease in negative working capital of $218,000 is primarily due to payments of current notes payable and the Revolver, net of increases in accruals for severance and professional fees incurred for the Form 10 filing, discussed in “SG&A” above.

 

The change in cash and cash equivalents is as follows:

 

		Nine Months Ended Sept 30,
		2017				2016
Net cash provided by operating activities		$	602			$	1,084
Net provided by (used in) investing activities			877				(398	)
Net cash used in financing activities			(1,390	)			(702	)
Net increase (decrease) increase in cash		$	89			$	(16	)

 

Net cash provided by operating activities was approximately $602,000 in the nine months ended September 30, 2017, compared to $1,084,000 in the nine months ended September 30, 2016. The decrease of $482,000 was primarily due to an increase in net loss of $149,000 due to lower gross margin as discussed in “Gross Margin” above, an increase in inventory of $306,000 for expected increases in sales for the fourth quarter, decrease in accounts receivable of $149,000 due to a reduction in accounts receivable related to the decline in revenues discussed in “Gross Margin” above, and a decrease of $176,000 due to other net changes.

 

Net cash provided by (used in) investing activities was approximately $877,000 in the nine months ended September 30, 2017, compared to a negative $398,000 in the nine months ended September 30, 2016. Cash used to purchase property and equipment was $85,000 for the nine months ended September 30, 2017, compared to $398,000 for the prior year. The decrease of $313,000 was primarily due to capital expenditures incurred during the nine months ended September 30, 2016, related to the relocation of a pharmacy. For the nine months ended September 30, 2017, cash proceeds from the disposition of the Humble pharmacy were $274,000, and cash provided by the proceeds of the disposition of CPOC was $688,000. Proceeds from these dispositions totaling $962,000 were primarily used to make note payments.

 

Net cash used in financing activities was $1,390,000 in the nine months ended September 30, 2017, compared to net cash used in financing activities of $702,000 in the nine months ended September 30, 2016. For the nine months ended September 30, 2017, borrowings of $14,345,000 and payments of $14,808,000 were made on the revolving credit facility; payments of $927,000 were made on notes payable. For the nine months ended September 30, 2016, borrowings of $18,486,000 and payments of $18,305,000 were made on the revolving credit facility; payments of $883,000 were made on notes payable.

 

Our principal indebtedness at September 30, 2017, consists of the following:

 

	·	A number of term notes in favor of Cardinal Health in the aggregate amount of $3,485,000, secured by certain retail pharmacy assets, and maturing between August 2019 and August 2020;
	·	A revolving credit facility in the principal amount of $4,450,000, of which the Company has currently borrowed $3,712,000 on the revolving credit facility, leaving $738,000 available for future borrowings;
	·	A number of notes payable to sellers of acquired pharmacies in the aggregate amount of $149,000, unsecured, and maturing on or before September 18, 2018.

 

The material terms under these agreements include, without limitation, notice requirements for certain material events, the provision of periodic financial statements, the maintenance of certain financial ratios, maintaining certain minimum insurance requirements, as well as restrictions on our ability to incur additional indebtedness, incur future capital expenditures, as well as restrictions on our ability purchase, create or acquire any interest in any other pharmacy store or distributing company, or loan, invest in or advance money or assets to any other person, enterprise or entity for the acquisition of a pharmacy store or distributing company without the prior written consent of the First National Bank of Omaha.

 

 

 

 

In addition, the Company may be required to make payment as a co-guarantor on a promissory note issued by a bank in favor of an individual who was previously, through August of 2008, a related party of the Company. The total principal amount due and owing under the promissory note as of July 15, 2017, of $1,887,884 (the “Guarantee Payment”), and as the co-guarantor, of which $136,000 payments have been made during 2017. The Company has received written assurance that the primary obligors are current in their payment obligations under the promissory note as of August 1, 2017. The promissory note is collateralized by a property that is currently held for sale, is expected to sell before the end of the calendar year and for which the proceeds will be sufficient and are expected to be used to pay off the balance of the promissory note. Upon payment of the promissory note in full, the restricted cash balance of $303,000, for which the Company was required to provide as escrow, and for which there are no additional escrow provisions, will be released and unrestricted for use in operations, financing or investing as determined Management. As the co-guarantor, the Company could be liable for the entire amount of the Guarantee Payment in the event of default, which management deems to be highly unlikely.

 

Our future capital needs are uncertain. Management anticipates funding our capital needs through a combination of projected positive cash flow after debt service and available borrowings under our revolving line of credit; however, cash flow projections are based on anticipated operations of our business, for which we can provide no assurance. Additionally, if we were to make additional acquisitions, we would likely need additional capital to fund all, or a portion, of those acquisitions. If the Company does not generate the necessary cash flow, the Company will need additional financing in excess of our current revolving line of credit to fund operations in the future. We do not know whether additional financing will be available when needed, or that, if available, we will be able to obtain financing on terms favorable, or even acceptable, to the Company. 

  

Tax Loss Carryforwards

 

At December 31, 2016, we had approximately $48 million of federal net operating loss carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 2020 to 2035. We believe that the issuance of shares of our common stock pursuant to our initial public offering on November 15, 1999 caused an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. Consequently, we believe that the portion of our federal NOL carryforwards attributable to the period prior to November 16, 1999 is subject to an annual limitation pursuant to Section 382. Our total deferred tax assets have been fully reserved as a result of the uncertainty of future taxable income, except for $3 million that is estimated to offset future taxable income from pharmacy operations and or the sale of pharmacy businesses. The estimated deferred tax asset is consistent with the prior year, accordingly, no tax benefit has been recognized in the periods presented.

 

Off Balance Sheet Arrangements

 

We do not have any unconsolidated special purpose entities and, except as described herein, we do not have significant exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in conformity with GAAP, which requires management to make certain estimates and apply judgment. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the condensed consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed consolidated financial statements.

 

While we believe that the historical experience, current trends and other factors considered support the preparation of our condensed consolidated financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.

 

For a full description of our significant accounting policies, please refer to the Notes to Consolidated Financial Statements in Item 1.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our chief executive officer and 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 September 30, 2017.  Based upon that evaluation, our chief executive officer and chief financial officer concluded that as of September 30, 2017, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

 

Item 6. Exhibits

 

Exhibit Number		Description
31.1		Certification of the President - Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act (1)
31.2		Certification of  the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act (1)
32		Certification of the President - Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

 

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.

  

 

 

 

 

 

SIGNATURES

 

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 November 10, 2017.

 

 

	DOUGHERTY’S PHARMACY, INC.
	By:	/s/ Mark S. Heil
		Mark S. Heil
		President and Chief Financial Officer (Duly Authorized Principal Executive Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT INDEX

 

Exhibit Number		Description
31.1		Certification of the President - Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act (1)
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act (1)
32		Certification of the President - Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

 

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.