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 March 31, 2018

 

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 May 4, 2018: 23,066,564

 

 

 

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION		3
Item 1.	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	3
	Consolidated Statements of Operations for the Three Months ended March 31, 2018 and 2017	4
	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2018 and 2017	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 4.	Controls and Procedures	17
PART II. OTHER INFORMATION		18
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)

  

		March 31,				December 31,
		2018				2017
		(Unaudited)				(Audited)
ASSETS
Current Assets
Cash		$	59			$	86
Restricted cash			304				303
Trade accounts receivable, net			1,622				1,673
Other receivables			359				345
Receivable from affiliates			10				6
Inventories, net			3,518				3,562
Prepaid expenses			209				267
Total current assets			6,081				6,242
Long term receivable			448				448
Property and equipment, net			1,046				1,045
Intangible assets, net			2,724				2,892
Deferred tax asset			2,000				2,000
Total assets		$	12,299			$	12,627
LIABILITIES
Current Liabilities
Accounts payable		$	3,017			$	3,123
Accrued liabilities			583				429
Notes payable, current portion			708				813
Revolving credit facility			3,975				3,831
Total current liabilities			8,283				8,196
Notes payable, long-term portion			2,661				2,801
Total liabilities			10,944				10,997
STOCKHOLDERS' EQUITY
Stockholders' equity:
Preferred stock, $0.0001 par value; 7,500,000 shares authorized: none issued and outstanding
Common stock, $0.0001 par value; 50,000,000 shares authorized; 24,117,164 shares issued and 23,087,164 shares outstanding at March 31, 2018; 24,003,310 shares issued and 22,973,310 shares outstanding at December 31, 2017			2				2
Additional paid-in capital			60,212				60,221
Accumulated deficit			(58,462	)			(58,196	)
Treasury stock, at cost, 1,030,000 shares			(397	)			(397	)
Total stockholders' equity			1,355				1,630
Total liabilities and stockholders' equity		$	12,299			$	12,627

 

 

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 March 31,
		2018				2017
Revenue		$	9,455			$	10,055
Cost of sales (exclusive of depreciation and amortization shown separately below)			6,887				7,268
Gross profit			2,568				2,787
Operating expenses
Selling, general and administrative expenses			2,518				2,564
Non-cash stock compensation			(9	)			12
Depreciation and amortization			242				266
Total operating expenses			2,751				2,842
Operating loss			(183	)			(55	)
Other income			37				–
Interest expense			(110	)			(102	)
Loss before provision for income tax			(256	)			(157	)
Income tax provision			(10	)			(11	)
Net loss		$	(266	)		$	(168	)
Basic and diluted net loss per share attributable to common stockholders		$	(0.01	)		$	(0.01	)
Weighted-average number of shares-basic and diluted			23,087,164				22,417,760

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

 

Dougherty’s Pharmacy, Inc.

Consolidated Statements of Cash Flows

(000’s omitted)

(Unaudited)

 

		Three Months Ended March 31,
		2018				2017
Operating Activities
Net loss		$	(266	)		$	(168	)
Items not requiring (providing) cash
Depreciation and amortization			242				266
Stock-based compensation			(9	)			12
Changes in operating assets and liabilities:
Accounts receivable			47				269
Inventories			44				(102	)
Prepaid expenses and other assets			44				(25	)
Accounts payable			(106	)			238
Accrued liabilities			154				64
Net cash provided by operating activities			150				554
Investing Activities
Purchases of property and equipment			(75	)			(41	)
Cash received upon disposition of CPOC			–				617
Net cash (used in) provided by investing activities			(75	)			576
Financing Activities
Payments on notes payable			(4,545	)			(5,083	)
Proceeds from notes payable			4,444				4,418
Net cash used in financing activities			(101	)			(665	)
Net (decrease) increase in cash			(26	)			465
Cash, beginning of period			389				361
Cash, end of period		$	363			$	826
Supplemental Cash Flow Information
Cash paid for income taxes		$	2			$	1
Cash paid for interest		$	111			$	100
Reconciliation of Cash to the Consolidated Balance Sheets
Cash		$	59			$	523
Restricted cash			304				303
Total cash		$	363			$	826

 

 

 

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 company focused on successfully acquiring, managing and growing community based pharmacies in the Southwest Region. Dougherty’s was incorporated in Delaware on August 8, 2000.

 

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

 

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

 

On February 7, 2017, CRESA Partners of Orange County, L.P., an affiliate of Cresa Partners-West, Inc. was acquired by Savills Studley, Inc. liquidating the partnership interest in its entirety held by ASDS. ASDS remains active as a holding company for the remaining payouts.

 

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

 

On February 6, 2018, the Company opened a new retail pharmacy location at The Campus at Legacy West in Plano, Texas (“Legacy”). This new location will offer pharmacy services and retail products to the approximately 3,000 JCPenney Home Office employees and is open to all other future tenants and visitors of The Campus at Legacy West. Dougherty’s is initially filling prescriptions via concierge service from its pharmacy on Campbell Road until the new location receives its pharmacy license, which is expected to occur within the standard 90-day waiting period or soon thereafter. Dougherty’s anticipates first year revenues from the new location of less than $1.0 million as the pharmacy establishes itself at the new location.

 

Our business requires us to rely on cash flow from operations and the revolving credit facility as our primary sources of funding to operate and meet our financial obligations in the foreseeable future. Historically, much of our debt has been renewed or refinanced in the ordinary course of business. We maintain a level of liquidity sufficient to allow us to cover our cash needs in the short-term. Over the long-term, we manage our cash and capital structure to maintain our financial position and maintain flexibility for future strategic initiatives. We continuously assess our working capital needs, debt and leverage levels, capital expenditure requirements, and future investments or acquisitions. As of March 31, 2018 we had cash and restricted cash of approximately $363,000, working capital of approximately negative $2.2 million and total outstanding debt of $7.3 million, including $4.0 million for the revolving credit facility. Negative working capital is due to the reclassification of the revolving credit facility to current liabilities to present the consolidated financial statements in conformity with GAAP. The reclassification does not affect the representation of the Company’s overall performance. Cash provided from operating activities for the three months ended March 31, 2018 was $150,000. Management believes it will have adequate cash to operate the Company and renew, extend, or refinance the revolving credit facility in the next twelve months.

 

Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Dougherty’s and all subsidiaries for which the Company has a controlling financial interest. Dougherty’s uses the cost method of accounting to recognize investments in and income from entities where Dougherty’s does not have a significant influence. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared by the Company, in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X, and have not been audited. Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Registration Statement on Form 10. 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 months ended March 31, 2018, are not necessarily indicative of the results to be expected for any future interim period for the year ending December 31, 2018.

 

 

 

 

 

Use of Estimates

 

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

 

Concentration of Credit Risk

 

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

 

Accounts Receivable

 

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

 

At March 31, 2018 and 2017, all of the trade accounts receivable were from retail pharmacy operations.

 

Inventories

 

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

  

Long-Lived Assets

 

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

  

Revenue Recognition

 

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

 

 

 

 

 

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

 

Substantially all revenues earned during the three months ended March 31, 2018 and 2017, were earned from the retail pharmacy operations.

 

Cost of Sales

 

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

 

Income Taxes

 

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.

 

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

 

On December 22, 2017, the President signed into law the “Tax Cuts and Jobs Act” (the “TCJA”). Among numerous changes to existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The effects on deferred tax balances of changes in tax rates are required to be taken into consideration in the period in which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax assets and recorded a provisional noncash income tax loss of approximately $1.0 million for year ended December 31, 2017. The Company has not completed all of its processes to determine the TCJA’s final impact. The final impact may differ from this provisional amount due to, among other things, changes in interpretations and assumptions the Company has made thus far and the issuance of additional regulatory or other guidance. The accounting is expected to be completed by the time the 2017 federal income tax return is filed in 2018.

  

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 March 31, 2018 and 2017 is $22,000 and $27,000, respectively; the unvested restricted stock units is 170,150 and 135,300, respectively. Due to the net losses for both years, restricted stock units for 2018 and 2017 were anti-dilutive.

 

New Accounting Pronouncements

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, the lease requires a finance lease to recognize both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and becomes effective on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial position, results of operations and cash flows. Our current minimum lease commitments are disclosed in Note 4.

 

 

 

 

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

 

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), or Accounting Standards Codification 606 (“ASC 606”). This guidance outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. Under the new revenue recognition standard, entities apply a five-step model that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, companies identify the performance obligations within their contracts with customers, allocate the transaction price received from customers to each performance obligation identified within their contracts, and recognize revenue as the performance obligations are satisfied. During 2015, 2016, and 2017, the FASB issued various amendments which provide additional clarification and implementation guidance on ASC 606. Specifically, these amendments clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, clarify how an entity should identify performance obligations and licensing implementation guidance, as well as account for shipping and handling fees and freight service, assess collectability, present sales tax, treat non-cash consideration, and account for completed and modified contracts at the time of transition. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition.

 

The Company adopted the new revenue recognition standard as of January 1, 2018. The adoption of this standard did not result in a change in its recognition of pharmacy retail sales of prescriptions and products as no performance obligations exist within contracts with customers as discussed below. Had a change occurred, the change would have been applied using the modified retrospective approach.

 

The retail pharmacy operations recognize revenue for pharmaceutical products sold under prescriptions and non-pharmaceutical products at the time the customer takes possession of the merchandise through the point of sale system as transactions occur. Each prescription claim is its own arrangement with the customer and is a performance obligation that is reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional health care providers and others.

 

The Company provides retail pharmacy prescriptions and products to residents at long-term care facilities. Revenue is recognized through the billing system at the time of delivery as transactions occur. Each prescription claim is its own arrangement with the customer and is a performance obligation that is reported at the estimated net realizable amounts expected to be received from individuals, third-party payors, institutional health care providers and others. Prescription co-payments are typically not collected at the time products are delivered but are billed to the individuals as part of normal billing procedures and subject to normal accounts receivable collections procedures. The Company has contracts with certain of the long-term care facilities for the delivery of those prescriptions, certain computer and medication dispensing equipment and software and support services all of which are specifically outlined in the contract. The contracts provide for reimbursement of certain costs for certain of these services. As it relates to the long-term care contracts and any other support services provided to its customers, the Company has determined that no revenue is recognized from separate and distinct performance obligations other than the retail sale of the pharmacy prescriptions and products.

 

 

 

 

 

 

2.       Notes Payable

 

Notes payable consist of the following:

 

		March 31, 2018				December 31, 2017
		(Unaudited)				(Audited)
First National Bank of Omaha Credit Facility and Promissory Note secured by certain retail pharmacy assets
Revolving line of credit in the principal amount of $4,450,000, interest at LIBOR plus 3.25% (4.92% at Mar 31, 2018)		$	3,975,000			$	3,831,000
Term note in the principal amount of $432,859 at fixed interest rate of 8.11% per annum payable in 36 monthly installments of $13,641. Final payment plus accrued and unpaid interest due in full on April 10, 2020.			300,000				335,000
Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (7.35% at Mar 31, 2018) per annum payable in monthly installments of $15,232 plus interest, a final payment of $929,157 plus all accrued and unpaid interest due in full on July 10, 2020.			1,326,000				1,371,000
Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (7.35% at Mar 31, 2018 ) per annum payable in monthly installments of $10,344 plus interest, a final payment of $638,850 plus all accrued and unpaid interest due in full on January 10, 2020.			838,000				869,000
Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (7.13% at Mar 31, 2018 ) per annum payable in monthly installments of $6,200 plus interest, a final payment of $378,251 plus all accrued and unpaid interest due in full on August 10, 2020.			552,000				570,000
Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (7.15% at Mar 31, 2018 ) per annum payable in monthly installments of $2,545 plus interest, a final payment of $155,220 plus all accrued and unpaid interest due in full on August 10, 2019.			193,000				202,000
Acquisition Notes Payable , unsecured
Notes payable to sellers of acquired pharmacies with varying monthly payments with interest at 5.5% due through September 2018.			52,000				97,000
Insurance notes payable, secured by the respective insurance policies
Notes payable for the Company’s insurance policy premiums with varying monthly payments due through September 2018. Interest rates vary up to 4.076%			108,000				170,000
			7,344,000				7,445,000
Less current portion			(4,683,000	)			(4,644,000	)
		$	2,661,000			$	2,801,000

 

Future maturities of notes payable at March 31, 2018, are as follows:

 

2018		$	4,683,000
2019			1,299,000
2020			1,362,000
		$	7,344,000

 

 

 

 

 

 

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% (4.92% at March 31, 2018); accrued and unpaid interest on the Revolver is due monthly. All outstanding principal under the Revolver plus all accrued and unpaid interest thereon is due and payable in full on August 1, 2018. As of the date of this report, the Lender has indicated it does not intend to renew the Revolver on the maturity date. The Company is actively engaged negotiating the re-financing of this indebtedness, and believes that it will be able to do so prior to the maturity date; provided, however, the Company can provide no such assurances. 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. 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. As of March 31, 2018 the Borrowers were not in compliance with this financial covenant.

  

3.       Stock and Share-Based Compensation

 

Restricted Share Unit Incentive Plan

 

On November 13, 2013, the Board of Directors approved and adopted the Restricted Share Unit (“RSU”) Incentive Plan. Under the plan the Company can award RSUs to employees and non-employee directors and consultants pursuant to restricted stock agreements contingent upon continuous service. Under the restricted stock agreements, the restricted shares will vest annually over a four-year period and will be payable in stock, valued at the fair market value on the grant date.

 

As of March 31, 2018, the following shares had been issued under the 2013 RSU Plan:

 

Year of Issuance:		Number of Shares				Fair Value at Date of Grant				Shares Vested				Non-Vested				Cancelled
2013			120,000			$	26,400				115,000				–				5,000
2014			122,100			$	30,946				86,700				15,150				20,250
2015			150,000			$	39,000				70,000				30,000				50,000
2016			–				–				–				–				–
2017			563,000			$	114,030				111,600				45,000				406,400
2018			80,000			$	11,192				–				80,000				–
			1,035,100			$	221,568				383,300				170,150				481,650

 

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 thee months ended March 31, 2018, are as follows:

 

2018		$	779,000
2019			795,000
2020			713,000
2021			669,000
2022			680,000
Thereafter			3,680,000
		$	7,316,000

 

 

 

 

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 months ended March 31, 2018 and 2017, the Company paid fees to its directors of $12,000 and $13,000 for their roles as members of the Board of Directors and its related committees; fees paid to the Company’s Chairman totaled $30,000 for management and other services provided.  

 

6.       Subsequent Events

 

On April 3, 2018, total principal amount due and owing under the promissory note issued by a bank in favor of an individual who was previously, through August of 2008, a related party of the Company, for which the Company was a co-guarantor as of March 31, 2018, was satisfied in full by the primary obligor. The restricted cash balance of $304,000, for which the Company was required to provide as escrow, was released as unrestricted and can be used for operations.

 

 

 

 

 

 

 

 

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 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 Annual Form 10-K filed on March 29, 2018. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date the statement.

 

OVERVIEW

 

Key measures used by the Company’s management to evaluate business performance include revenue, gross profit, selling, general and administrative expense (“SG&A”) and EBITDA. EBITDA is calculated as net income before deducting interest, taxes, depreciation and amortization. EBITDA is a non-GAAP measure that the Company’s management considers to best present the results of ongoing operations and is useful when comparing the performance between different reporting periods. In those instances, we have identified when the Company is presenting adjusted EBITDA. Although EBITDA is not a measure of actual cash flow because it does not consider changes in assets and liabilities that may impact cash balances, the Company believes it is a useful metric to evaluate operating performance and has therefore included such measures in the discussion of operating results below.

 

The Company also tracks prescriptions sold to assess operational performance.

 

 

 

 

  

Overview of Our Business

 

Dougherty’s Pharmacy, Inc. (“Dougherty’s,” which is also referred to in this Quarterly Report on Form 10-Q as “we,” “us,” or “the Company”) is a value 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 months ended March 31, 2018 and 2017, and the significant developments affecting our financial condition since the Form 10-K filed March 29, 2018. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2017 and 2016 filed in that report, along with this report.

 

Comparison of the Three months ended March 31, 2018, to the Three months ended March 31, 2017 (000’s Omitted)

 

		Three Months Ended March 31,
		2018				2017				$ Change
Revenue		$	9,455			$	10,055			$	(600	)
Cost of sales (exclusive of depreciation and amortization shown separately below)			6,887				7,268				(381	)
Gross profit			2,568				2,787				(219	)
Operating expenses
Selling, General and Administrative			2,509				2,576				(67	)
Depreciation and amortization			242				266				(24	)
Other income			37				–				37
Interest expense			110				102				8
Income tax provision			10				11				(1	)
Net loss		$	(266	)		$	(168	)		$	(98	)
plus:
Interest expense		$	110			$	102			$	8
Depreciation and amortization			242				266				-24
Income tax provision			10				11				(1	)
EBITDA		$	96			$	211			$	(115	)
Prescription count			103,098				111,145				(8,047	)

 

Revenues

 

Net revenues decreased approximately $600,000 or 6.0% in the three months ended March 31, 2018 as compared to prior year. Retail pharmacy prescriptions sold decreased 8,047 or 7.2% for the same period. Net revenues and prescriptions for the three months ended March 31, 2017 includes $124,000 and 1,664, respectively, from the Humble, Texas pharmacy, sold on May 6, 2017. Net revenues for the three months ended March 31, 2018 includes $11,000 of front-end sales at the Legacy store, opened February 6, 2018 and also $19,000 of net retail pharmacy revenues and 460 prescriptions filled for the Legacy store via concierge service from its pharmacy on Campbell Road. Net revenues and retail pharmacy prescriptions declined $506,000 and 6,843, respectively, after adjusting for the Humble, Texas and Legacy stores, primarily attributable to the transition of prescriptions filled for certain long-term care facilities and under certain third party payor benefit plans that changed effective January, 2018, to other pharmacy providers. The initial focus of the Managing Director of Business Development appointed during the first quarter of 2018 is to recoup these prescriptions.

 

 

 

 

Gross profit

 

Gross profit dollars decreased $219,000, or 7.9% as a result of the factors discussed in Revenues above. Gross profit as a percent of revenues declined slightly to 27.2% for the three months ended March 31, 2018, as compared to 27.7% during the same period prior year due to an increase in third party payor fees that began increasing at the beginning of 2017. Total third party fees for the three months March 31, 2018, ended increased $35,000 as compared to the same quarter prior year. Net Direct and Indirect Remuneration fees during the three months ended March 31, 2018 were comparable to the same quarter prior year.

 

SG&A expenses

 

SG&A expenses decreased $67,000, or 2.6% for the three months ended March 31, 2018, as compared to prior year. SG&A expenses as a percentage of revenues for the three months ended March 31, 2018, increased to 26.5% as compared to 25.6% for the same period prior year. The decrease in SG&A expenses during the three months ended March 31, 2018, is due to salary and payroll related cost savings from the resignations of the President of Pharmacy Operations and President and Chief Financial Officer during the fourth quarter of 2017 and first quarter of 2018, respectively, offset by the addition of the Managing Director of Business Development during the first quarter of 2018. The increase in operating expenses as a percentage of revenues is due to lower revenue as compared to prior year. Management plans to continue cost reduction initiatives during 2018 to decrease SG&A expenses as a percentage of revenues.

 

Earnings Before Interest, Taxes, Depreciation and Amortization

 

EBITDA decreased $115,000, or 54.5% for the three months ended March 31, 2018, as compared to the same prior year during the prior year. EBITDA as a percentage of revenues was 1.0% and 2.1% during the three months ended in March 31, 2018. The decrease in EBITDA for the three months ended March 31, 2018, compared to the same period during prior year, is primarily due to lower gross profit dollars offset by SG&A savings and an increase in other income of $37,000 derived from a non-pharmacy related transaction.

 

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 March 31, 2018, we had working capital of approximately negative $2.2 million as compared to working capital of approximately negative $2.0 million at December 31, 2017. Negative working capital is due to the reclassification of the Revolver balance of $4.0 million and $3.8 million as of March 31, 2018 and December 31, 2017, respectively, to current liabilities to present the consolidated financial statements in conformity with GAAP (See Note 2). The reclassification does not affect the representation of the Company’s overall performance. The net increase in negative working capital of $0.2 million is discussed below. The Company is actively engaged negotiating the re-financing of this indebtedness, and believes that it will be able to do so prior to the maturity date; provided, however, the Company can provide no such assurances.

 

As of March 31, 2018, we had cash and restricted cash of approximately $363,000, of which $304,000 was restricted, as compared to approximately $389,000, of which $303,000 was restricted, at December 31, 2017. The net decrease in cash for the three months ended March 31, 2018, of $26,000 was due to the use of cash provided by operating activities for capital expenditures discussed below.

 

As of March 31, 2018, the Company had total current assets of $6,081,000 and total current liabilities of $8,283,000 creating negative working capital of approximately $2,202,000 as compared to total current assets of $6,242,000 and total current liabilities of $8,196,000 creating negative working capital of approximately $1,954,000 at December 31, 2017. The overall increase in negative working capital of $248,000 is primarily due to decreases in trade accounts receivable, inventory and prepaid expenses and increases in accrued liabilities and the Revolver.

 

The change in cash and cash equivalents is as follows: 

 

		Three Months Ended March 31,
		2018				2017
Net cash provided by operating activities		$	150			$	554
Net (used in) provided by investing activities			(75	)			576
Net cash used in financing activities			(101	)			(665	)
Net (decrease) increase in cash		$	(26	)		$	465

 

 

 

 

 

Net cash provided by operating activities was approximately $150,000 in the three months ended March 31, 2018, compared to $554,000 in the three months ended March 31, 2017. The decrease of $404,000 was primarily related to the decline in revenues discussed in “Revenues” above resulting in an increase in net loss of $98,000, a decrease in cash provided by accounts receivable of $222,000, an decrease in cash used by inventory of $146,000 and an increase in cash used by accounts payable of $344,000, and net increases in cash provided by other changes of $114,000.

 

Net cash (used in) provided by investing activities was approximately $75,000 for the three months ended March 31, 2018, compared to $576,000 in the three months ended March 31, 2017. Cash used to purchase property and equipment was $75,000 for the three months ended March 31, 2018, compared to $41,000 for the prior year due to capital expenditures to open the new retail pharmacy location at The Campus at Legacy West in Plano, Texas and capital expenditures to expand long-term care facilities. For the three months ended March 31, 2017, cash provided by the proceeds of the disposition of CPOC was $618,000.

 

Net cash used in financing activities was $101,000 in the three months ended March 31, 2018, compared to $665,000 for the same period in 2017. For the three months ended March 31, 2018, borrowings of $4,444,000 and payments of $4,301,000 were made on the revolving credit facility; payments of $244,000 were made on notes payable. For the three months ended March 31, 2017, borrowings of $4,418,000 and payments of $4,739,000 were made on the revolving credit facility; payments of $344,000 were made on notes payable. Certain proceeds from the disposition of CPOC were used to make certain payments on notes payable for the three months ended March 31, 2017.

 

Our principal indebtedness at March 31, 2018, consists of the following:

 

	·	A number of term notes in favor of Cardinal Health in the aggregate amount of $3,209,000, secured by certain retail pharmacy assets, and maturing between August 2019 and August 2020;
	·	A revolving credit facility in the principal amount of $4,000,000, of which the Company has currently borrowed $3,975,000 on the revolving credit facility, leaving $25,000 available for future borrowings;

 

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, as of March 31, 2018, the Company was a co-guarantor on a promissory note issued by a bank in favor of an individual who was previously, through August of 2008, a related party of the Company. On April 3, 2018, total principal amount due and owing under the promissory note (the “Guarantee Payment”), was satisfied in full by the primary obligor. The restricted cash balance of $304,000, for which the Company was required to provide as escrow, was released as unrestricted and used for operations.

 

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, 2017, we had approximately $48 million of federal net operating loss carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 2020 to 2037. We believe that the issuance of shares of our common stock pursuant to our initial public offering on November 15, 1999 caused an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. Consequently, we believe that the portion of our federal NOL carryforwards attributable to the period prior to November 16, 1999 is subject to an annual limitation pursuant to Section 382. Our total deferred tax assets have been fully reserved as a result of the uncertainty of future taxable income, except for $2 million that is estimated to offset future taxable income from pharmacy operations and or the sale of pharmacy businesses. The estimated deferred tax asset as of March 31, 2018 is consistent with December 31, 2018; 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 March 31, 2018.  Based upon that evaluation, our chief executive officer and chief financial officer concluded that as of March 31, 2018, 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 March 31, 2018, 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 May 11, 2018.

 

	DOUGHERTY’S PHARMACY, INC.
	By:	/s/ James C. Leslie
		James C. Leslie
		Interim 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.