UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment # 1 to
Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 3, 2018
GENEREX BIOTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 000-29169 | 98-0178636 |
(State or other jurisdiction of Incorporation) |
(Commission File Number) |
(I.R.S Employer Identification No.) |
10102 USA Today Way Miramar, Florida |
33025 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (416) 364-2551
4145 North Service Rd, Suite 200, Burlington, Ontario Canada L7L 6A3
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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Generex Biotechnology Corporation
Form 8-K/A
Amendment to Current Report on Form 8-K dated January 17, 2107
EXPLANATORY NOTE
Explanatory Note
As reported in our Current Reports on Form 8-K dated October 3, 2018, filed October 9, 2018 and dated November 1, 2018, filed November 5, 2018, we acquired certain operating assets of Veneto Holdings, LLC and its affiliates (the “Acquisition”).
Our original Current Reports omitted the Financial Statements of Business Acquired required by Item 9.01(a) and the Pro Forma Financial Information required by Item 9.01(b). The financial statements and pro forma financial information is being filed by this Amendment.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired in accordance with Item 9.01(a) is included in this Amendment following the signature page.
(i) | Audited Consolidated Financial Statements of Veneto Holdings, LLC as of and for the years ended December 31, 2016 and 2017 are attached as Exhibit 99.2 to this Current Report on Form 8-K/A. |
(ii) | Unaudited Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017 and the related unaudited Consolidated Statements of Operations, Changes in Equity and Consolidated Statements of Cash Flows for the six month periods ended June 30, 2018 and 2017 of Veneto Holdings, LLC are attached as Exhibit 99.3 to this Current Report on Form 8-K/A. |
(b) Pro forma financial information
Pro forma financial information required by Item 9.01(c) of Form 8-K related to the Acquisition is attached as Exhibit 99.4 to this Current Report on Form 8-K/A.is included in this Amendment following the signature page.
(i) | Unaudited Pro Forma Condensed Combined Balance Sheet as of July 31, 2018. |
(ii) | Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended July 31, 2018. |
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(d) Exhibits.
Exhibit Number | Description of Exhibit |
10.1 | Asset Purchase Agreement by and between Veneto Holdings, L.L.C. and NuGenerex Distribution Solutions, LLC effective October 3, 2018.* |
10.2 | Amendment to Asset Purchase Agreement by and between Veneto Holdings, L.L.C. and NuGenerex Distribution Solutions 2, LLC effective November 1, 2018.* |
10.3 | Promissory Note in the amount of $15,000,000 from NuGenerex Distribution Solutions, LLC to Veneto Holdings, LLC.* |
10.4 | Promissory Note in the amount of $35,000,000 from NuGenerex Distribution Solutions 2, LLC to Veneto Holdings, LLC.* |
99.1 | Audited consolidated financial statements of Generex Biotechnology Corporation for the fiscal years ended July 31, 2018 and 2017 including the report of MNP, LLC on such audited financial statements, filed with the Securities and Exchange Commission on October 26, 2018.* |
99.2 | Audited consolidated financial statements of Veneto Holdings, LLC for the years ended December 31, 2017 and 2016 including the report of Whitley Penn LLP on the 2017 audited financial statements. |
99.3 | Unaudited pro forma condensed combined financial information as of and for the twelve-month period ended July 31, 2018. |
99.4 | Press release dated October 9, 2018 issued by Generex Biotechnology Corporation* |
99.5 | Press release dated November 2, 2018 issued by Generex Biotechnology Corporation* |
99.6 | Unaudited consolidated financial statements for Veneto Holdings, LLC as of June 30, 2018 and December 31, 2017 and for the six months ended June 30, 2018 and 2017 |
* Previously filed with the Original Reports.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENEREX BIOTECHNOLOGY CORPORATION. | |
Date: December 19, 2018 | /s/ Joseph Moscato |
Joseph Moscato | |
President and Chief Executive Officer |
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Exhibit 99.3
Unaudited pro forma condensed combined financial information
The following unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the acquisition of substantially all the assets primarily used in ancillary health care service providers, primarily pharmacies, laboratories and investments in and management of managed service organization businesses of Veneto Holdings, LLC ("Veneto”) by Generex Biotechnology Corporation (“Generex” or the “Company”), except for certain excluded assets and liabilities identified in the asset acquisition agreements (the “Acquisition”). The purchase price for the Acquisition was $35 million which includes an adjustment for working capital of $3 million. The total purchase consideration consisted of the issuance of a promissory note in the amount of $35 million. The unaudited pro forma condensed combined financial information gives effect to the Acquisition and the incurrence of additional debt used to fund the Acquisition.
The Company accounted for the Acquisition of Veneto as a business combination as prescribed in Accounting Standards Codification 805, Business Combinations (“ASC 805”). In accordance with ASC 805, we use our best estimates and assumptions to accurately assign fair value to the tangible assets acquired, identifiable intangible assets and liabilities assumed and the related income tax impacts as of the acquisition dates. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed.
The fair values assigned to Veneto’s tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The estimated fair values of these assets acquired, and liabilities assumed are considered preliminary and are based on the information that was available as of the date of the acquisition. The preliminary estimated fair values of assets acquired, liabilities assumed, and identifiable intangible assets may be subject to change as additional information is received. Thus, the provisional measurements of fair value are subject to change. We expect to finalize the valuation as soon as practicable, but not later than one year from the second closing date.
The unaudited pro forma condensed combined financial information is based upon, and should be read in conjunction with:
• | The accompanying notes to the unaudited condensed combined pro forma financial statements; |
• | The Company’s audited consolidated financial statements and accompanying notes as of and for the fiscal years ended July 31, 2018 and 2017 filed with the Securities and Exchange Commission ("SEC") on October 26, 2018; |
• | Veneto’s audited consolidated financial statements for the years ended December 31, 2017 and 2016; and |
• | Veneto’s unaudited consolidated financial statements for the six-month period ended June 30, 2018 and 2017; and |
The pro forma combined financial statements for the year ended July 31, 2018 are presented as if the Acquisition of Veneto had occurred on August 1, 2017.
Veneto’s historical fiscal year ends on December 31 and, for purposes of the unaudited pro forma condensed combined financial information, its historical results have been aligned to conform to the Company’s July 31 fiscal year end:
• | The unaudited pro forma condensed combined balance sheet as of July 31, 2018, combines the Company’s historical results as of July 31, 2018, and Veneto's historical results as of June 30, 2018; |
• | The unaudited pro forma condensed combined statement of operations for the fiscal year ended July 31, 2018, combines the Company’s historical results for year ended July 31, 2018, and Veneto's historical results for the twelve months ended June 30, 2018; and |
The unaudited pro forma combined financial information is presented for informational purposes only and is not intended to represent the consolidated financial position or consolidated results of operations of Generex that would have been reported had the Acquisition been completed as of the dates described above, and should not be taken as indicative of any future consolidated financial position or consolidated results of operations. The preliminary Unaudited Pro Forma Combined Income Statements do not reflect any sales or cost savings from synergies that may be achieved with respect to the combined companies, or the impact of non-recurring items, including restructuring liabilities, directly related to the Acquisition.
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PROFORMA STATEMENTS
GENEREX BIOTECHNOLOGY CORPORATION | ||||||||||||||||||||
UNAUDITED PROFORMA COMBINED BALANCE SHEET | ||||||||||||||||||||
FOR THE YEAR ENDED JULY 31, 2018 | ||||||||||||||||||||
Historical | ||||||||||||||||||||
Generex Biotechnology Corporation | Veneto Holdings LLC | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||||||
July 31, 2018 | June 30, 2018 | 12 Months | ||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,046,365 | $ | 7,790,000 | $ | 5,226,825 | (A) | $ | 14,063,190 | |||||||||||
Restricted cash | 350,000 | (350,000 | ) | (B) | — | |||||||||||||||
Accounts receivable, net | 33,555 | 3,933,000 | (614,216 | ) | (B) | 3,352,339 | ||||||||||||||
Inventory, net | 12,075 | 1,638,000 | — | 1,650,075 | ||||||||||||||||
Prepaid expenses and other | — | 3,890,000 | (1,480,030 | ) | (B) | 2,409,970 | ||||||||||||||
Other current assets | 96,251 | — | — | 96,251 | ||||||||||||||||
Total Current Assets | 1,188,246 | 17,601,000 | 2,782,579 | 21,571,825 | ||||||||||||||||
Property and equipment, net | 31,536 | 2,775,000 | (2,106,491 | ) | (C) | 700,045 | ||||||||||||||
Call option | 2,168,211 | — | — | 2,168,211 | ||||||||||||||||
Goodwill, net | 3,082,000 | 22,095,930 | (D) | 25,177,930 | ||||||||||||||||
Intangible asset, net | 3,187,757 | — | 5,889,333 | (E) | 9,077,090 | |||||||||||||||
Patents, net | 23,280 | — | — | 23,280 | ||||||||||||||||
Notes receivable from related parties | 2,015,000 | (499,000 | ) | (B) | 1,516,000 | |||||||||||||||
Other assets, net | 7,824 | 485,000 | — | 492,824 | ||||||||||||||||
TOTAL ASSETS | $ | 6,606,854 | $ | 25,958,000 | $ | 28,162,351 | $ | 60,727,205 | ||||||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||
Accounts payable and accrued expenses | $ | 11,044,774 | $ | 4,513,000 | $ | (1,366,608 | ) | (B) | $ | 14,191,166 | ||||||||||
Notes payable | 320,000 | 5,624,000 | — | 5,944,000 | ||||||||||||||||
Loans from related parties | 13,864,241 | 462,000 | — | 14,326,241 | ||||||||||||||||
Other current liabilities | 32,000 | (318,689 | ) | (B) | (286,689 | ) | ||||||||||||||
Total Current Liabilities | 25,229,015 | 10,631,000 | (1,685,297 | ) | 34,174,718 | |||||||||||||||
Warrants to be issued | 24,962,507 | — | — | 24,962,507 | ||||||||||||||||
Notes payable - long term | — | 1,554,000 | 31,233,866 | (B) | 32,787,866 | |||||||||||||||
Equipment lease financing | 10,000 | (10,000 | ) | (B) | — | |||||||||||||||
Contingent consideration | 181,000 | (652,000 | ) | (B) | (471,000 | ) | ||||||||||||||
Deferred rent | 959,000 | (958,669 | ) | (B) | 331 | |||||||||||||||
Total Liabilities | 50,191,522 | 13,335,000 | 27,927,900 | 91,454,422 | ||||||||||||||||
Stockholders’ Deficiency | ||||||||||||||||||||
Series H Convertible Preferred Stock, $.001 par value; authorized 109,000 shares, 3,000 and 3,000 issued shares at July 31, 2018 and July 31, 2017, respectively | 3 | — | — | 3 | ||||||||||||||||
Series I Convertible Preferred Stock, $.001 par value; authorized 6,000 shares, 790 and 790 issued shares at July 31, 2018 and July 31, 2017, respectively | 1 | — | — | 1 | ||||||||||||||||
Common stock, $.001 par value; authorized 750,000,000 and 2,450,000 shares at July 31, 2018 and July 31, 2017, respectively; 1,068,101 and 1,068,101 issued and outstanding at July 31, 2018 and July 31, 2017, respectively | 1,068 | — | — | 1,068 | ||||||||||||||||
Common stock payable | 2,168,951 | — | — | 2,168,951 | ||||||||||||||||
Additional paid-in capital | 368,409,627 | — | — | 368,409,627 | ||||||||||||||||
Accumulated deficit | (409,386,468 | ) | — | 12,033,451 | (F) | (397,353,017 | ) | |||||||||||||
Accumulated other comprehensive income | 798,422 | — | — | 798,422 | ||||||||||||||||
Members' Equity | — | 11,799,000 | (11,799,000 | ) | (F) | — | ||||||||||||||
Non-controlling interest | (5,576,272 | ) | 824,000 | — | (4,752,272 | ) | ||||||||||||||
Total Stockholders’ Deficiency | (43,584,668 | ) | 12,623,000 | 234,415 | (30,727,217 | ) | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | $ | 6,606,854 | $ | 25,958,000 | $ | 28,162,351 | $ | 60,727,205 |
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PROFORMA STATEMENTS
GENEREX BIOTECHNOLOGY CORPORATION | ||||||||||||||||||||
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS | ||||||||||||||||||||
FOR THE YEAR ENDED JULY 31, 2018 | ||||||||||||||||||||
Historical | ||||||||||||||||||||
Generex Biotechnology Corporation | Veneto Holdings LLC | Pro Forma Adjustments | Notes | Pro Forma Combined | ||||||||||||||||
12 Months Ended July 31, 2018 | 12 Months Ended June 30, 2018 | 12 Months Ended July 31, 2018 | ||||||||||||||||||
Revenue | ||||||||||||||||||||
Revenue, net | $ | — | $ | 73,673,000 | $ | — | $ | 73,673,000 | ||||||||||||
Sales | 3,244 | — | — | 3,244 | ||||||||||||||||
Licensing income | 700,000 | — | — | 700,000 | ||||||||||||||||
Total Revenue | 703,244 | 73,673,000 | — | 74,376,244 | ||||||||||||||||
Cost of Goods Sold | — | 42,212,000 | — | 42,212,000 | ||||||||||||||||
Gross Profit | 703,244 | 31,461,000 | — | 32,164,244 | ||||||||||||||||
Operating expenses | ||||||||||||||||||||
Selling, general, and administrative expenses | 2,359,706 | 35,501,000 | (4,434,451 | ) | (G) | 33,426,255 | ||||||||||||||
Research and development | 839,147 | — | — | 839,147 | ||||||||||||||||
Total Operating Expenses | 3,198,853 | 35,501,000 | (4,434,451 | ) | 34,265,402 | |||||||||||||||
Operating Loss | (2,495,609 | ) | (4,040,000 | ) | 4,434,451 | (2,101,158 | ) | |||||||||||||
Other Income (Expense): | ||||||||||||||||||||
Interest Expense, net | (583,594 | ) | — | (4,200,000 | ) | (H) | (4,783,594 | ) | ||||||||||||
Changes in fair value of contingent purchase consideration | 39,027,901 | — | — | 39,027,901 | ||||||||||||||||
Other Loss (Gain) | — | (142,000 | ) | — | (142,000 | ) | ||||||||||||||
Other Expense (Income), net | — | 2,217,000 | — | 2,217,000 | ||||||||||||||||
Net Income (loss) | 35,948,698 | (1,965,000 | ) | 234,451 | 34,218,149 | |||||||||||||||
Net loss attributable to noncontrolling interests | (385,400 | ) | — | — | (385,400 | ) | ||||||||||||||
Net Income (loss) Available to Common Stockholders | $ | 36,334,098 | $ | (1,965,000 | ) | $ | 234,451 | 34,603,549 | ||||||||||||
— | ||||||||||||||||||||
Net Income (loss) per Common Share | ||||||||||||||||||||
Basic | $ | 34.02 | 0.22 | $ | 32.40 | |||||||||||||||
Diluted | $ | 14.02 | 0.09 | 13.35 | ||||||||||||||||
Shares Used to Compute Income (loss) per Share | ||||||||||||||||||||
Basic | 1,068,101 | 1,068,101 | 1,068,101 | |||||||||||||||||
Diluted | 2,591,129 | 2,591,129 | 2,591,129 | |||||||||||||||||
Comprehensive Income: | ||||||||||||||||||||
Net Income | 36,334,098 | 234,451 | 34,603,549 | |||||||||||||||||
Change in foreign currency translation adjustments | 15,272 | — | 15,272 | |||||||||||||||||
Comprehensive Income Available to Common Stockholders | 36,349,370 | 234,451 | 34,618,821 |
3 |
Generex Biotechnology Corporation and
Veneto Holdings, LLC
Notes to the unaudited pro forma combined financial information
1. Basis of pro forma presentation
The accompanying unaudited pro forma combined financial information is derived from the historical financial statements of Generex and Veneto. The unaudited pro forma combined financial information is prepared using the purchase method of accounting, as defined by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, with Generex treated as the acquirer.
Generex with a fiscal year ended July 31, 2018, acquired Veneto with a fiscal year that ends on December 31st. The pro forma financial statements include (1) Generex’s year ended July 31, 2018 and (2) Veneto’s twelve months year ended June 30, 2018. Unaudited pro forma adjustments, and the assumptions on which they are based, are described in the accompanying Notes to the Unaudited Pro Forma Combined financial information.
The Unaudited Pro Forma Combined Income Statements for the year ended July 31, 2018 are presented as if the Acquisition occurred on August 1, 2017.
The unaudited pro forma combined financial information has been compiled in a manner consistent with the accounting policies adopted by Generex. These accounting policies are similar in most material respects to those of Veneto, except for the amortization of goodwill which as a private company, Veneto adopted to amortize its goodwill. Generex, as a public company, permitted accounting policy does not amortize goodwill. Pursuant to the Acquisition, Generex did not acquire any goodwill from Veneto and such goodwill and corresponding amortization of goodwill has been identified and eliminated in the pro forma adjustments. Generex is currently performing a more detailed review of Veneto’s accounting policies. As a result of that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the combined financial statements.
The unaudited pro forma combined financial information is presented for informational purposes only and is not intended to represent the consolidated financial position or consolidated results of operations of Generex that would have been reported had the Acquisition been completed as of the dates described above, and should not be taken as indicative of any future consolidated financial position or consolidated results of operations. The Unaudited Pro Forma Combined do not reflect any sales or cost savings from synergies that may be achieved with respect to the combined companies, or the impact of non-recurring items, including restructuring liabilities, directly related to the Acquisition.
The unaudited pro forma combined financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes of Generex and Veneto.
2. Purchase price
The purchase price for the Acquisition was $35.0 million which includes an adjustment for working capital in excess of $3.0 million.
On October 3, 2018, the first closing, pursuant to asset purchase agreement, was completed by and between Veneto Holdings, LLC (“Veneto”) and NuGenerex Distribution Solutions, LLC (“NuGenerex” – an indirect wholly owned subsidiary of the Company) effective October 3, 2018 (the “Asset Purchase Agreement”). NuGenerex purchased the operating assets of (a) seven dispensing pharmacies, (b) a wholesale pharmaceutical purchasing company, and (c) an in-network laboratory (the “First Closing”) in exchange for a secured promissory note in the principal amount of $15,000,000 executed by NuGenerex, delivered to Veneto, and guaranteed by Generex and Company’s Chief Executive Officer, Joseph Moscato, which shall bear an annual rate of five percent (5.0%), simple interest that shall accrue daily on the basis of a 365-day year (the “First Promissory Note”). This note was cancelled on November 1, 2018 upon the issuance of Second Promissory Note.
On November 1, 2018, pursuant to an amended asset purchase agreement by and between Veneto Holdings, LLC (“Veneto”) and NuGenerex Distribution Solutions 2 , LLC (“NuGenerex 2” – an indirect wholly owned subsidiary of the Company) effective November 1, 2018 (the “Amended Asset Purchase Agreement”), the acquisition of the balance of the Assets contemplated by the asset purchase agreements was completed, consisting primarily of Veneto’s ownership in its management services organization (MSO) business and two additional ancillary service companies (the “Second Closing”) in exchange for the cancellation of the First Promissory Note and the simultaneous issuance of a secured promissory note in the principal amount of $35,000,000 executed by NuGenerex 2, delivered to Veneto, and guaranteed by Generex and the Company’s Chief Executive Officer, Joseph Moscato, due on January 15, 2019 which shall bear an annual rate of twelve percent (12.0%), simple interest that shall accrue daily on the basis of a 365-day year (the “Second Promissory Note”).
In addition, NuGenerex 2 has assumed approximately $3.4 million in outstanding institutional debt of Veneto subsidiaries; NuGenerex will have use of the Veneto cash which would otherwise have been applied to paying down the debt. Additionally, Generex entered into one or more employment agreements with certain continuing employees of Veneto.
The unaudited pro forma condensed combined financial information gives effect to the Acquisition and the incurrence of additional debt used to fund the Acquisition.
3. Preliminary Pro Forma Allocation of Purchase Price
Generex has performed a preliminary valuation analysis of the fair market value of Veneto Business assets to be acquired and liabilities to be assumed. Using the total consideration for the Acquisition, the Company has estimated the allocations to such assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:
Cash and cash equivalents | $ | 2,542,421 | ||
Accounts receivable, net | 1,935,078 | |||
Property and equipment, net | 652,590 | |||
Inventory, net | 1,068,856 | |||
Prepaid expenses and other | 2,402,080 | |||
Other assets, net | 61,348 | |||
Intangible assets, net | 7,110,000 | |||
Total assets acquired | 15,868,176 | |||
Total current liabilities | 2,642,158 | |||
Notes payable | 3,403,948 | |||
Total liabilities assumed | 6,046,106 | |||
Net identifiable assets acquired | 9,822,070 | |||
Goodwill | 25,177,930 | |||
Total consideration transferred | $ | 35,000,000 |
4. Intangibles, net
The significant intangible assets identified in the purchase price allocation discussed above include developed software and technology, referral base (recurring revenue from the MSO investments and their use of Company owned pharmacies) and non-compete agreements with continued employment of key employees. Tradenames and trademarks were not valued as tradenames and trademarks will not be maintained going forward. To value the developed software and technology, the Company utilized the relief from royalty method, a form of the income approach to value the developed software and technology which assumes a limited technology life and market share adjusted by assumed obsolescence with a terminal value. The referral base was valued using a multi-period excess earnings method, a form of the income approach. The Company utilized the with and withhold method, a form of the income approach to value non-compete agreements with Generex.
4 |
The preliminary amounts assigned to the identifiable intangible assets, the estimated useful lives, and the estimated amortization expense related to these identifiable intangible assets are as follows:
Preliminary
Fair Value | Average
Estimated Life | Amortization
for Year Ended July 31, 2018 | ||||||||||
Developed Software/Technology | $ | 780,000 | 5 | $ | 156,000 | |||||||
Referral Base | 3,920,000 | 15 | 261,333 | |||||||||
Non-compete agreements | 2,410,000 | 3 | 803,333 | |||||||||
$ | 7,110,000 | $ | 1,220,667 |
5. Pro Forma Adjustments
The following describes the pro forma adjustments related to the acquisition that have been made in the accompanying unaudited pro forma condensed combined statements of operations for the year ended July 31, 2018, giving effect to the acquisition as if it had been consummated at the beginning of the period presented, all of which are based on preliminary estimates that could change significantly as additional information is obtained:
(A) | To reflect the net effect working capital adjustments. |
(B) | To record the exclusion of assets not acquired or liabilities assumed in the Acquisition. |
(C) | To record the exclusion of fixed assets not acquired less any accumulated depreciation and/or accumulated amortization. |
(D) | To record the exclusion of $3,082,000 of goodwill not acquired form Veneto in the transaction, and the excess of the purchase consideration over the fair value of assets acquired in the amount of $25,177,930 as if the acquisition was completed on August 1, 2017. |
(E) | To record the fair value of the intangible assets acquired in the amount of $7,110,000 less the amortization of the intangibles in the amount of $1,220,667 as if the acquisition was completed on August 1, 2015. |
(F) | To reflect the exclusion of the Member’s Equity, the net assets acquired and record the losses due to the amortization of the intangible assets, the accrual of interest of the notes payable issued in the acquisition and to exclude any depreciation expense on the excluded assets as reported on the combined pro forma statement of operations |
(G) | To reflect the amortization of the intangible assets in the amount of $1,220,667 acquired, less the depreciation and amortization expense in the amount of $425,491 on the excluded assets as if the acquisition was completed on August 1, 2017, and exclude $5,229,626 of identified non-recurring professional fees incurred by Veneto. |
(H) | To reflect the accrual of interest of the notes payable issued in the acquisition in the amount of $4,200,000 as if the acquisition was completed on August 1, 2017. |
To supplement the consolidated financial results prepared under generally accepted accounting principles (“GAAP”), the Company uses a pro forma measure of net income or loss that consists of GAAP net income or loss adjusted to exclude the impact of amortization of acquisition-related charges and other non-recurring charges and gains.
Pro forma net income gives an indication of the Company’s baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results. In addition, pro forma net income is among the primary indicators management uses as a basis for planning and forecasting future periods. These measures are not in accordance with or an alternative for GAAP and may be materially different from pro forma non-GAAP measures used by other companies.
5 |
Veneto Holdings, LLC
Consolidated Financial Statements as of June 30, 2018
and December 31, 2017 and for the Six Months Ended
June 30, 2018 and 2017
1 |
Veneto Holdings, LLC
TABLE OF CONTENTS
Page | |
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2018 AND DECEMBER 31, 2017 AND FOR THE SIX MONTHS ENDED JUNE 30, 2018 and 2017: | |
Balance Sheets | 3 |
Statements of Operations | 4 |
Statements of Changes in Equity | 5 |
Statements of Cash Flows | 6 |
Notes to Consolidated Financial Statements | 7-19 |
2 |
VENETO HOLDINGS, LLC | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
AS OF JUNE 30, 2018 AND DECEMBER 31, 2017 | ||||||||
Dollars in thousands | ||||||||
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 7,790 | $ | 14,748 | ||||
Restricted cash | 350 | 350 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $189 and $806 | 3,933 | 7,996 | ||||||
Inventories, net of allowance for obsolescence of $41 and $0 | 1,638 | 1,561 | ||||||
Prepaid expenses and other | 3,890 | 5,001 | ||||||
Total current assets | 17,601 | 29,656 | ||||||
LONG-TERM ASSETS: | ||||||||
Property and equipment, net | 2,775 | 3,007 | ||||||
Goodwill, net | 3,082 | 6,079 | ||||||
Notes receivable from related parties | 2,015 | 499 | ||||||
Other assets, net | 485 | 788 | ||||||
Total long-term assets | 8,357 | 10,373 | ||||||
TOTAL ASSETS | $ | 25,958 | $ | 40,029 | ||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 3,089 | $ | 4,636 | ||||
Accrued expenses | 1,424 | 3,476 | ||||||
Current portion of notes payable | 5,624 | — | ||||||
Other current liabilities | 32 | 18 | ||||||
Total current liabilities | 10,169 | 8,130 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Notes payable | 1,554 | 8,512 | ||||||
Due to related parties | 462 | 462 | ||||||
Equipment lease financing | 10 | 43 | ||||||
Contingent consideration | 181 | 728 | ||||||
Deferred rent | 959 | 1,049 | ||||||
Total long-term liabilities | 3,166 | 10,794 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
NONCONTROLLING INTERESTS | 824 | 709 | ||||||
MEMBERS’ EQUITY | 11,799 | 20,396 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 25,958 | $ | 40,029 | ||||
The accompanying notes are an integral part of these consolidated financial statements. |
3 |
VENETO HOLDINGS, LLC | ||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017 | ||||||||
Dollars in thousands | ||||||||
2018 | 2017 | |||||||
REVENUE, NET | $ | 25,773 | $ | 58,993 | ||||
COST OF GOODS SOLD | 14,427 | 31,575 | ||||||
GROSS PROFIT | 11,346 | 27,418 | ||||||
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES | 17,853 | 19,182 | ||||||
OPERATING INCOME (LOSS) | (6,507 | ) | 8,236 | |||||
INTEREST EXPENSE, NET | 235 | 140 | ||||||
OTHER EXPENSE (INCOME), NET | (546 | ) | 159 | |||||
NET INCOME (LOSS) | (6,196 | ) | 7,937 | |||||
LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 2,401 | 4,544 | ||||||
NET INCOME (LOSS) ATTRIBUTABLE TO VENETO HOLDINGS, LLC | $ | (8,597 | ) | $ | 3,393 | |||
The accompanying notes are an integral part of these consolidated financial statements. |
4 |
VENETO HOLDINGS, LLC | ||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | ||||||||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2018 | ||||||||||||
Dollars in thousands | ||||||||||||
Members’ Equity | Noncontrolling Interests | Total Equity | ||||||||||
BALANCE—January 1, 2018 | $ | 20,396 | $ | 709 | $ | 21,105 | ||||||
Net loss | (8,597 | ) | 2,401 | (6,196 | ) | |||||||
Contributions from noncontrolling interests | — | 111 | 111 | |||||||||
Distributions to noncontrolling interests | — | (2,397 | ) | (2,397 | ) | |||||||
BALANCE—June 30, 2018 | $ | 11,799 | $ | 824 | $ | 12,623 | ||||||
The accompanying notes are an integral part of these consolidated financial statements. |
5 |
VENETO HOLDINGS, LLC | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017 | ||||||||
Dollars in thousands | ||||||||
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | (6,196 | ) | $ | 7,937 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 3,412 | 3,249 | ||||||
Loss on disposal of assets | — | 126 | ||||||
Bad debt expense (recoveries) | (220 | ) | 1,110 | |||||
Noncash interest expense | 19 | 10 | ||||||
Inventory obsolescence reserve | 55 | — | ||||||
Increase (decrease) in deferred rent | (90 | ) | 276 | |||||
Contingent consideration valuation adjustment | (471 | ) | — | |||||
Decrease (increase) in accounts receivable | 4,283 | (886 | ) | |||||
Decrease (increase) in inventories | (133 | ) | 782 | |||||
Decrease (increase) in prepaid expenses and other | 1,112 | (1,415 | ) | |||||
Increase (decrease) in accounts payable | (1,546 | ) | 3,640 | |||||
Increase (decrease) in accrued expenses | (1,649 | ) | 1,328 | |||||
Increase in other current liabilities | 14 | 19 | ||||||
Other | (41 | ) | (23 | ) | ||||
Net cash provided by (used in) operating activities | (1,451 | ) | 16,153 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Business acquisition—net of cash acquired | — | (1,529 | ) | |||||
Capital expenditures | (114 | ) | (1,158 | ) | ||||
Loan to third party - Ayass | — | (1,695 | ) | |||||
Loan to related party | (1,500 | ) | — | |||||
Payments received on note receivable from third party - Ayass | 240 | — | ||||||
Net cash used in investing activities | (1,374 | ) | (4,382 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from notes payable | — | 7,560 | ||||||
Payment of loan origination fees | — | (76 | ) | |||||
Payments on notes payable | (1,383 | ) | (46 | ) | ||||
Payments of contingent consideration | (65 | ) | (554 | ) | ||||
Distributions to members | — | (16,109 | ) | |||||
Distributions to noncontrolling interests | (2,796 | ) | (4,959 | ) | ||||
Contributions from noncontrolling interests | 111 | 9 | ||||||
Net cash used in financing activities | (4,133 | ) | (14,175 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (6,958 | ) | (2,404 | ) | ||||
CASH AND CASH EQUIVALENTS—Beginning of period | 14,748 | 15,996 | ||||||
CASH AND CASH EQUIVALENTS—End of period | $ | 7,790 | $ | 13,592 | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Interest paid | $ | 206 | $ | 104 | ||||
Franchise taxes paid | 455 | 277 | ||||||
Non cash business acquisition | — | 336 | ||||||
Non cash satisfaction of contingent consideration | 11 | — | ||||||
Non cash contribution in exchange for extinguishment of due to related parties | — | 2,100 | ||||||
Non cash satisfaction of notes receivable from related parties | — | 1,097 | ||||||
Accrued but unpaid distributions | 395 | 940 | ||||||
The accompanying notes are an integral part of these consolidated financial statements. |
6 |
Veneto Holdings, LLC
Notes to Consolidated Financial Statements
AS OF June 30, 2018 and December 31, 2017 AND FOR THE SIX MONTHS ENDED JUNE 30, 2018 and 2017
(Dollars in thousands)
1. Organization
From inception through March 16, 2017, Medoc Health Services & Affiliates (“Medoc”) represented the combination of Medoc Health Services, LLC (MHS) formed on October 24, 2014, Messorio Healthcare Services, LLC (Messorio) formed on April 27, 2015, Buccella Biomedical, LP (Buccella) formed on March 10, 2016, MD 20/20 Health Services, LP (MD 20/20) formed on September 3, 2015, and Molise Health Sciences, LLC (Molise) formed on January 23, 2017. MHS and Buccella hold investments in and manage managed services organizations (each an “MSO”). Messorio owns and operates ancillary health care service providers, primarily pharmacies and laboratories in Texas, Oklahoma and Arizona. MD 20/20 provides management, administrative, and marketing services with respect to physicians that are not affiliated with a MHS MSO. Molise owns and operates a diagnostic laboratory in Arizona.
On March 16, 2017 the membership interests of MHS, Messorio, Buccella, MD 20/20, and Molise were contributed by their members to Veneto Holdings, LLC (“Veneto” or the “Company”), which was formed on December 10, 2015. As of March 16, 2017, Veneto Holdings, LLC represents the consolidation of each of the aforementioned entities.
2. Summary of Significant Accounting Policies
The consolidated financial statements and accompanying notes have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”).
Business—Veneto is a Master managed services organization engaged in the business of providing, directly or through affiliates, certain management, administrative, and marketing services to a network of ancillary health care service providers including specialty pharmacies, diagnostic laboratories, diagnostic imaging centers, and biologic companies. Through this network, Veneto is able to provide physicians with a portfolio of services designed to improve patient care, practice productivity, and clinical efficiency. The Company began operations in 2015 when the first Veneto-managed MSO was formed. Veneto, through its wholly owned subsidiary MHS, entered into contractual relationships with ancillary service providers, where Medoc performed certain management, administrative and marketing services on behalf of the ancillary service provider (each a “VSA”) in exchange for service fees. From inception to March 2016, Medoc had VSAs with specialty pharmacies, laboratories, diagnostic imaging providers, and biologic companies, with the vast majority of revenue coming from the VSAs with specialty pharmacies. In November 2015, the Company transitioned from contractual relationships with non-owned or “contracted” pharmacies and laboratories to owned pharmacies and laboratories. Each MSO contracts directly with Medoc to provide a portion of the services that Medoc has agreed to provide to each ancillary service vendor under a VSA. Each MSO is then entitled to a portion of the revenues collected by Medoc for the portion of services that the MSO performs. Assuming that the MSO has available cash (as defined), each MSO makes a monthly distribution of profits to each MSO member based on the member’s ownership percentage.
7 |
Principles of Consolidation—The consolidated financial statements include the accounts of Veneto, MHS, Messorio, Buccella, MD 20/20, Molise, and each of their subsidiaries. All material balances and transactions between these entities have been eliminated in consolidation. The Company continually evaluates its investments to determine if they represent variable interests in a Variable Interest Entity (VIE). If the Company determines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE based on whether the Company has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb benefits from or losses of the VIE that could potentially be significant to the VIE. The Company consolidates a VIE if it is considered to be the primary beneficiary. While the individual MSOs have more diverse ownership, the outside (non-common) ownership does not have the ability to direct the activities of the entity. The outside ownership does not have the ability to determine the timing or amount of distributions. As a result, these VIEs are consolidated and the non-controlling interest presented represents the physician ownership. The Company consolidates entities in which it or its wholly owned subsidiary is the general partner or managing member and the limited partners or members, respectively, do not have substantive participating rights to overcome the Company’s control. These entities’ intercompany transactions and balances have been eliminated through consolidation.
Revenue Recognition—Revenue is recognized when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.
Revenue from the provision of pharmacy services is recognized when the prescription is dispensed (picked up by the patient or shipped to the patient using common carrier). At the time of dispensing each pharmacy has a contract with the insurance payor (item (i)); the insurance payor has accepted the claim for reimbursement from the pharmacy and informed the pharmacy how much will be paid for the prescription (item (iii)); the insurance payor is now legally obligated to make payment on the accepted claim within a given period proscribed by statute (item (iv)); and, the prescription has been taken from the pharmacy inventory, placed into an individually labeled container specific to the patient, and the patient is able to take possession of the prescription (item (ii)). Shipment to or pick up by the patient is the first time that all criteria for revenue recognition have been met.
Revenue from the provision of laboratory services is recognized upon the completion of accessions (the requested laboratory test has been performed and the report has been issued to the requesting physician). After the test has been performed and reported, the insurance company and/or patient has an obligation to pay for medically necessary laboratory tests (items (i) and (ii)). Unlike the pharmacy services model, laboratory services are provided prior to insurance company approval; as a result, the seller’s price to buyer is not known until payment is provided (items (iii) and (iv). Based on historical collections, the Company estimates the expected revenues associated with similar tests and recognizes the revenue when testing results have been provided.
Provisions for estimated sales returns and uncollectible accounts are recorded in the period in which the related sales are recognized based on historical and anticipated rates.
8 |
The Company determines whether it is the principal or agent for its retail pharmacy contract services on a contract by contract basis. In the majority of its contracts, the Company has determined it is the principal due to it: (i) being the primary obligor in the arrangement, (ii) having latitude in changing the product or performing part of the service, (iii) having discretion in supplier selection, (iv) having involvement in the determination of product or service specifications, and (v) having credit risk. The Company’s obligations under its client contracts for which revenues are reported using the gross method are separate and distinct from its obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these contracts, the Company is contractually required to pay the third party pharmacies in its retail pharmacy network for products sold, regardless of whether the Company is paid by its clients. The Company’s responsibilities under its client contracts typically include validating eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible adverse drug interactions for the pharmacist to address with the prescriber prior to dispensing, suggesting generic alternatives where clinically appropriate and approving the prescription for dispensing. Although the Company does not have credit risk with respect to Retail Co-Payments or inventory risk related to retail network claims, management believes that all of the other applicable indicators of gross revenue reporting are present. For contracts under which the Company acts as an agent, revenue is recognized using the net method.
Cost of Goods Sold—Costs and directly related expenses to sell the Company’s products and services are recorded as cost of goods sold when the related revenue is recognized. The Company records shipping and handling costs related to delivery of products to customers within cost of goods sold.
Income Taxes—The Company is not generally a taxable entity for income tax purposes, with the exception of Texas franchise tax. Other income taxes are generally borne by individual members. Net income for financial statement purposes may differ significantly from taxable income of members as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the various membership agreements. The aggregated difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each member’s tax attributes in us is not available to us. The years 2015 through 2017 remain subject to examination by the Internal Revenue Service or other taxing authorities.
Cash and Cash Equivalents—The Company maintains bank accounts in the United States of America, which, at times, may exceed federally insured limits. All of the amounts reported as cash on the Company’s consolidated balance sheets represent cash on deposit, which is available on demand to the Company.
Restricted Cash—Restricted cash is stated at cost. The Company had cash held in a specified cash collateral account which was required upon entrance into the lease of its corporate offices.
Accounts Receivable—Accounts receivable are stated net of allowances for doubtful accounts and estimated returns. Allowances for doubtful accounts are recognized for estimated losses resulting from customers’ inability to meet payment obligations. Management specifically analyzes account receivables and historical bad debt; customer concentrations; customer creditworthiness; past due balances; current economic trends; and changes in customer payment terms when determining allowances for doubtful accounts. Allowances for estimated returns are recognized for sales that have occurred but which are expected to result in returned products from patients based upon their determination that they no longer need the medication. Additional allowances may be required in future periods if financial positions of customers deteriorate, reducing their ability to meet payment obligations.
9 |
Inventories—Inventories, which consist of finished goods, are stated at the lower of cost, determined principally under the first-in, first-out method, or net realizable value. Inventories include the cost of pharmaceuticals, reagents, and consumables. Obsolete or excess inventories are reflected at their estimated realizable values. Net realizable value is the estimated sales revenue for a normal period of activity less expected selling costs.
Allowances for excess and obsolete inventory are recognized for excess amounts, obsolescence and declines in net realizable value below cost. Estimation and judgment are required in determining the value of the allowance for excess and obsolete inventory at each statement of financial position date. Management specifically analyzes estimates of future demand for products when determining allowances for excess and obsolete inventory. Changes in these estimates could result in revisions to the valuation of inventory in future periods.
Property and Equipment—Property, equipment and improvements to leased premises are depreciated using the straight-line method over the estimated useful lives of the assets, or when applicable, the term of the lease, whichever is shorter. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which are generally as follows:
Leasehold improvements | The shorter of the expected useful life of the |
improvement or the lease term | |
Computers and technological assets | 3–5 years |
Machinery and equipment | 5 years |
Furniture and fixtures | 7 years |
Assets acquired through finance lease arrangements or long-term rental arrangements that transfer substantially all the risks and rewards associated with ownership of the asset to the Company (as lessee) are capitalized.
Depreciation is accounted for in the Consolidated Statement of Operations under Cost of Goods Sold and Selling, General and Administrative Expense, depending on the use of the underlying assets. Depreciation expense recorded for the six-month periods ended June 30, 2018 and 2017, was approximately $346 and $282, respectively.
In addition, gains (losses) from disposals of property and equipment are accounted for in the corresponding cost line items in the Consolidated Statement of Income depending on where in the Consolidated Statement of Income the underlying asset would normally be expensed (i.e., Cost of Goods Sold or Selling, General and Administrative Expenses). There were no losses from disposals of assets recorded for the six month periods ended June 30, 2018 and 2017.
10 |
Goodwill and Intangible Assets—Intangible assets consist of goodwill and licenses associated with business acquisitions as well as purchased software used in the business. The Company has elected to use the Private Company Council guidance as issued in Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other and amortizes goodwill associated with business acquisitions, as well as licenses, straight-line over a three-year period. Software used in the business is amortized on a straight-line basis over three years. Additions to intangible assets are recorded at cost.
Goodwill is tested for impairment if an event occurs or circumstances change that indicate that the fair value of the entity may be below its carrying amount. The Company evaluates goodwill at the entity level. Messorio and Molise are the only entities with goodwill. Upon the occurrence of a triggering event, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of the entity is less than its carrying amount, including goodwill. A goodwill impairment loss is recognized if the carrying amount of the entity exceeds its fair value. A goodwill impairment loss, if any, is measured as the amount by which the carrying amount of an entity including goodwill exceeds its fair value. No impairment losses associated with goodwill have been recorded.
Amortization expense for the six-month periods ended June 30, 2018 and 2017, was approximately $3,066 and $2,967, respectively. Amortization of intangible assets has been reflected in amortization within Selling, General and Administrative Expense in the consolidated statements of income. Expected future amortization of goodwill and intangible assets is $2,269, $883 and $103 for the six month period ending December 31, 2018, and the years ended 2019 and 2020, respectively.
Impairment of Long-Lived Assets—The carrying value of property and equipment is assessed for recoverability by management whenever events or change in circumstances indicate an impairment may exist based on analysis of future undiscounted expected cash flows from the asset or asset group. Impairment losses are accounted for in the Consolidated Statement of Income under Impairment of Long-lived Assets. No significant impairment losses associated with property and equipment were recorded for the six-month periods ended June 30, 2018 and 2017.
Notes Receivable from Related Parties—Notes receivable from related parties are stated at historical cost, net of any related amortization and/or impairment, and consist of amounts which are of continuing benefit to the Company.
Use of Estimates—The preparation of 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. Estimates also affect the reported amount of revenues and expenses in the reporting period. Actual amounts could differ from those estimates.
Fair Value Hierarchy—The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:
11 |
• | Level 1—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
• | Level 2—Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. |
• | Level 3—Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk. |
Fair Value of Financial Instruments—As of June 30, 2018 and 2017, the Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, due to related parties, notes receivable from related parties, accounts payable, notes payable, equipment lease financing liability, and contingent consideration liability. Due to the nature of these instruments, the Company’s carrying value approximates fair value. There were no outstanding derivative financial instruments as of June 30, 2018 or 2017.
Contingent Consideration—The Company from time to time includes in its acquisition purchase agreements, a provision that the seller is entitled to a portion of future net profits from the entity over a specified period of time. The Company considers the net profit agreement to be contingent consideration at the purchase date and records a liability for the fair value of the amount expected to be paid under the net profits agreement. Contingent consideration is considered a Level 3 financial instrument.
3. Business Combinations
2017 Acquisitions— On February 1, 2017, the Company acquired the limited liability company interests of Pure Pharmacy, LLC (“Pure”) for a total of $133 which represented a net profit interest equal to eight percent of Pure’s net profits for a period of three years. The purchase of Pure expanded the footprint of the Company in Austin, Texas.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration—contingent consideration | $ | 133 | ||
Allocated fair value of acquired asset—licenses | 37 | |||
Goodwill | 96 | |||
Total net assets acquired | $ | 133 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Company’s systems and MSO network.
On February 21, 2017, the Company acquired 100% of the capital stock of High Desert Diagnostic Laboratory, Inc. (HDDL) for a total purchase price of $1,300 representing $1,300 in cash. The purchase of HDDL expanded the ancillary service offerings able to be provided directly by the Company.
12 |
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration—cash, net of cash acquired | $ | 1,270 | ||
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $ | 197 | ||
Prepaids and other current assets | 14 | |||
Property and equipment | 22 | |||
Licenses | 29 | |||
Accounts payable | (91 | ) | ||
Total identifiable net assets | 171 | |||
Goodwill | 1,099 | |||
Total net assets acquired | $ | 1,270 |
The goodwill recognized represents the value of synergies expected to be realized when the laboratory is integrated into the Company’s systems and MSO network.
On June 1, 2017, the Company acquired the outstanding seventy-one percent of the limited liability company interests of Baywood for a total of $10 in cash. As the purchase of the original twenty-nine percent resulted in the consolidation of the entity, the additional purchase price of $10 resulted in an increase in goodwill and equity of the entity.
On June 23, 2017, the Company acquired the limited liability company interests of Serene Pharmacy, LLC (“Serene”) for a total of $203 which represented a net profit interest equal to eight percent of Serene’s net profits for a period of three years. The purchase of Serene expanded the footprint of the Company in Austin, Texas.
13 |
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration—contingent consideration | $ | 203 | ||
Allocated fair value of acquired asset—licenses | 37 | |||
Goodwill | 166 | |||
Total net assets acquired | $ | 203 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Company’s systems and MSO network.
On June 30, 2017, the Company acquired 100% of the capital stock of Pro Pharmacy Health, Inc. (“Pro”) for a total of $265 of cash. The purchase of Pro expanded the footprint of the Company into Sugar Land, Texas.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration—cash, net of cash acquired | $ | 258 | ||
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $ | 137 | ||
Inventory | 19 | |||
Licenses | 41 | |||
Total identifiable net assets | 197 | |||
Goodwill | 61 | |||
Total net assets acquired | $ | 258 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Company’s systems and MSO network.
14 |
4. Property and Equipment
The Company maintained the following property and equipment balances at June 30, 2018 and December 31, 2017:
2018 | 2017 | |||||||
Leasehold improvements | $ | 2,350 | $ | 2,248 | ||||
Computers and technological assets | 558 | 550 | ||||||
Machinery and equipment | 866 | 863 | ||||||
Furniture and fixtures | 166 | 166 | ||||||
Property and equipment—gross | 3,940 | 3,827 | ||||||
Less accumulated depreciation | (1,165 | ) | (820 | ) | ||||
Property and equipment—net | $ | 2,775 | $ | 3,007 |
5. GOODWILL
The following table provides information on changes in the carrying amount of goodwill, which is included in the accompanying consolidated balance sheets as of June 30, 2018 and December 31, 2017:
2018 | 2017 | |||||||
As of January 1, | $ | 17,988 | $ | 16,556 | ||||
Goodwill added during the period | 0 | 1,432 | ||||||
As of June 30 and December 31, respectively | 17,988 | 17,988 | ||||||
Accumulated amortization | (14,906 | ) | (11,909 | ) | ||||
Goodwill, net | $ | 3,082 | $ | 6,079 |
6. Notes Payable
Revolving Credit Note
On April 21, 2017 the Company obtained a revolving credit note with a bank with a borrowing base of up to $7,000. During 2017 the Company borrowed $7,000 against the line. As of June 30, 2018, $5,650 was outstanding. The Company incurred $63 in loan origination costs, of which $26 remains unamortized and has been included in Current portion of notes payable on the Consolidated Balance Sheets. The borrowings against the line bear interest at a rate per annum equal LIBOR plus 3.25% which is paid monthly. Interest expense recorded during the six-month periods ended June 30, 2018 and 2017, was $171 and $46, respectively. The borrowing base is reviewed monthly and the outstanding balance is adjusted, if necessary, to ensure that the outstanding borrowings do not exceed the borrowing base. Under the terms of the revolving credit note, the Company is required to maintain a specified fixed charge coverage ratio, as that term is defined. This note is collateralized by all the assets of the Company. The outstanding balance of the revolving credit note is due upon the note’s maturity date of April 21, 2019.
15 |
Term Note
On April 21, 2017 the Company obtained a term note with a bank for a principle amount up to $3,000. During 2017 the Company borrowed $1,560 against the term note, this balance was outstanding as of June 30, 2018. The Company incurred $14 in loan origination costs, of which $6 remains unamortized and has been included in notes payable on the Consolidated Balance Sheets. The borrowings against the term note bear interest at a rate per annum equal LIBOR plus 3.25% which is paid monthly. Interest expense recorded during the six-month periods ended June 30, 2018 and 2017, was $38 and $3, respectively. Under the terms of the term note, the Company is required to maintain a specified fixed charge coverage ratio, as that term is defined. This note is collateralized by all the assets of the Company. The outstanding balance of the term note is due upon the note’s maturity date of April 21, 2022.
7. Contingent consideration
The following table provides information on changes in the carrying amount of contingent consideration, which is included in the accompanying consolidated balance sheet as of June 30, 2018:
Level 3 | ||||
Contingent Consideration | ||||
2018 | ||||
As of January 1, | $ | 728 | ||
Contingent consideration added during the year | — | |||
Payments of contingent consideration | (65 | ) | ||
Settlement of Baywood remaining consideration | (11 | ) | ||
Valuation adjustment - included in earnings | (471 | ) | ||
As of June 30, | $ | 181 |
16 |
The following table provides information on changes in the carrying amount of contingent consideration, which is included in the accompanying consolidated balance sheet as of December 31, 2017:
Level 3 | ||||
Contingent Consideration | ||||
2017 | ||||
As of January 1, | $ | 1,888 | ||
Contingent consideration added during the year | 336 | |||
Payments of contingent consideration | (624 | ) | ||
Settlement of Baywood remaining consideration | — | |||
Valuation adjustment - included in earnings | (872 | ) | ||
As of December 31, | $ | 728 |
The fair value of contingent consideration was determined by Level 3 inputs, which are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In the valuation of contingent consideration as of the reporting date, the Level 3 inputs used are expected sales volumes, forecasted selling prices and associated direct costs for goods and services, and expectations of future operating costs.
8. Related Parties
During the year ended December 31, 2015, the Company entered into a consulting agreement with entities that had common ownership with Messorio. Specifically, the entities agreed to serve as insurance consultants to handle the tornado-related losses associated with Total RX. The entities received compensation for these consulting services, included in Other Expense in the accompanying consolidated statements of operations, amounting to $0 and $15,373 for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2016, $3,299 was payable to these related party entities, $3,255 in the form of a note payable bearing interest at .5% per annum and $44 in accrued interest, for these consulting services and is included in Due to Related Parties in the long term liabilities portion of the accompanying consolidated balance sheet. This balance was relieved during the six months ended June 30, 2017 as a result of the related party being merged into the Company.
During 2016, TotalRX loaned an entity that had common ownership with Messorio money for various expenses and entered into a note receivable arrangement. The amount outstanding under the note receivable as of December 31, 2016 was $1,324, bearing interest at the rate of 10% per annum, with accrued interest of $110 and is included in Note Receivable From Related Party in the accompanying consolidated balance sheet. This balance was relieved during the six months ended June 30, 2017 as a result of the related party being merged into the Company.
During 2017, a related party paid a vendor of the Company $462 on the Company’s behalf. This related party owed a total of $499 to the Company as a result of the Company’s merger with a separate related party during the six months ended June 30, 2017. As of June 30, 2018 and December 31, 2017 both of these balances were outstanding.
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In January 2017 the Company received a loan in the amount of $4,108 from its partners. This balance, plus accrued interest of $77, was repaid in April 2017.
During the six months ended June 30, 2018 the Company provided $1,500 to a related party in the form of an unsecured convertible promissory note bearing interest at the lesser of five percent (5%) or the maximum rate permitted by applicable law. The balance of the convertible promissory note and accrued interest in the amount of $18 is outstanding at June 30, 2018. The principal and unpaid interest on the note are due on December 31, 2020.
9. Members’ equity and partners’ capital
Veneto—Veneto Holdings, LLC is a manager-managed limited liability company organized under the laws of the State of Texas. Veneto has 100 total authorized Units of Membership, all of the same class. All 100 Units are outstanding. Veneto distributed $0 and $6,108 to the Class A members of its subsidiaries in the six months ended June 30, 2018 and year ended December 31, 2017, respectively.
MHS—Medoc Health Services, LLC is a manager-managed limited liability company organized under the laws of the State of Texas. MHS has 100 total authorized Units of Membership, all of the same class. All 100 Units are outstanding. MHS subsidiaries distributed $2,269 and $7,695 to the Class A members of its subsidiaries in the six months ended June 30, 2018 and year ended December 31, 2017, respectively. MHS distributed $0 and $3,800 to its members during the six months ended June 30, 2018 and year ended December 31, 2017, respectively.
MHS Subsidiaries—MHS controls a number of subsidiaries that are all manager-managed limited liability companies organized under either the laws of the State of Texas or Delaware. Prior to April 1, 2016, each MSO entity was established with a maximum of 100 Units of Membership broken up into 40 Class A units and 60 Class B units. After April 1, 2016, each subsidiary has a total of 100 authorized units divided between 99 Class A Units and One Class B Units. The actual number of Class A Units issued by each subsidiary of MHS can vary as qualified investors successfully complete the investment subscription process. Any un-issued Class A units will be converted into Class B units until sold in the future. During that time, MHS will receive the profits from those units. MHS owns all Class B Units. The Class B Units have the authority to select the manager of the subsidiary.
Messorio—Messorio is a manager-managed limited liability company organized under the laws of the State of Texas. Messorio has 100 total authorized Units of Membership, all of the same class. All 100 Units are outstanding. All Messorio subsidiaries are wholly owned. Messorio distributed $0 and $6,200 to its members during the six months ended June 30, 2018 and year ended December 31, 2017, respectively.
MD 20/20—MD 20/20 is a limited partnership organized under the laws of the State of Texas. The limited partnership issues Interests to each partner, expressed as a percentage of the total interests issued. There is no limitation on the number of Interests that can be issued by the partnership. The limited partnership has two classes of partners, General Partners and Limited Partners. The General Partner owns 1% of the interests and the Limited Partners own 99% of the interests.
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Buccella—Buccella is a limited partnership organized under the laws of the State of Texas. The limited partnership issues Interests to each partner, expressed as a percentage of the total interests issued. There is no limitation on the number of Interests that can be issued by the partnership. The limited partnership has two classes of partners, General Partners and Limited Partners. The General Partner owns 1% of the interests and the Limited Partners own 99% of the interests. Buccella and its subsidiaries distributed $0 and $128 to its General Partner and Limited Partner, respectively during the six months ended June 30, 2018, respectively. Buccella and its subsidiaries distributed $0 and $1,036 to its General Partner and Limited Partner, respectively during the year ended December 31, 2017.
Buccella Subsidiaries—Buccella controls a number of subsidiaries that are all manager-managed limited liability companies organized under either the laws of the State of Texas or Delaware. Each subsidiary has a total of 100 authorized units divided between Class A and Class B Units. The Class B Units have the authority to select the manager of the subsidiary. Buccella owns all Class B Units.
10. commitments and Contingencies
On May 2, 2017, the Company learned that it is the subject of a federal grand jury investigation into allegations concerning (i) compounding pharmacy practices and payments made to physician investors with federal health care laws and regulations, and (ii) a business interruption insurance claim made following the destruction of a pharmacy in December of 2015. On May 9, 2018, the government executed a search warrant on the Company’s offices located at 3030 LBJ Freeway, Dallas, Texas, 75234. Subsequent to the execution of the search warrant, the government served grand jury subpoenas on several of the Company’s pharmacies. The Company has assured the government that it will cooperate with the government’s investigation, that it has been preserving, and will continue to preserve, a wide range of documents and electronic evidence, and that it looks forward to discussing the government’s concerns. As this matter is in its early stages, the Company does not have the ability to determine whether a loss associated with this matter is probable, nor would a loss be estimable. As such, no liability has been accrued as of June 30, 2018.
The Company is involved in various pending and threatened actions as well as regulatory investigations arising from its normal business operations. After consultations with legal counsel, since these actions are in the early stages, management cannot estimate the impact that these matters will have on the Company’s consolidated financial position or results of operations.
11. subsequent events
The Company has evaluated subsequent events through November 18, 2018, which is the date the consolidated financial statements were available for issuance, and concluded that there were no events or transactions that needed to be disclosed other than 1) during the third quarter, the Company determined that it had failed to achieve the Fixed Charge Coverage Ratio necessitated by its loan agreement with its lender and notified the lender of this breach. The Company is currently in discussion with the bank concerning potential cures as well as a potential forbearance agreement; 2) the Company closed three of its pharmacy locations in order to reduce selling, general and administrative costs associated with those pharmacies as a result of a decline in revenues; and, 3) on November 1, 2018 the Company restructured its MSO model by extinguishing the existing MSOs and allowing the physician investors to either transfer their existing investment to a new single MSO or sell back their existing investment to the Company for a contractually determined buyout figure.
Additionally, on October 4, 2018, the Company sold the bulk of its pharmacy and laboratory operations to Nugenerex Distribution Solutions 2, LLC (NDS), a third party. On November 2, 2018, the Company sold the remainder of its operational assets as well as the MSO to the same third party. Upon completion of the second acquisition the Company effectively no longer has operations. The combined purchase price for the acquisitions was $35 million and was paid for in the form of a note payable from NDS to the former owners of the Company.
******
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Veneto Holdings, LLC
Consolidated Financial Statements as of and for the Years Ended December 31, 2017 and 2016, and
Report of Independent Auditors
1 |
VENETO HOLDINGS, LLC
TABLE OF CONTENTS
Page | |
REPORT OF INDEPENDENT AUDITORS | 3 |
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016: | |
Balance Sheets | 4 |
Statements of Income | 5 |
Statements of Changes in Equity | 6 |
Statements of Cash Flows | 7 |
Notes to Consolidated Financial Statements | 823 |
SUPPLEMENTAL SCHEDULES - CONSOLIDATING STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2017: | |
Consolidating Balance Sheet | 24 |
Consolidating Statement of Income | 25 |
2 |
REPORT OF INDEPENDENT AUDITORS RE
To the Audit Committee of
Veneto Holdings, LLC
We have audited the accompanying consolidated financial statements of Veneto Holdings, LLC and subsidiaries which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of income, changes in equity, and cash flows for the year then ended, and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP); this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and A disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Veneto Holdings, LLC and subsidiaries as of December 31, 2017, and the results of their operations and their cash flows for the year then ended in conformity with GAAP.
Other Matter
The combined financial statements of Medoc Health Services and Affiliates (now the consolidated financial statements of Veneto Holdings, LLC) as of December 31, 2016, were audited by other auditors whose report dated December 18, 2017, expressed an unmodified opinion on those statements.
Other Financial Information
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The Consolidating Balance Sheet and Statement of Income, which is the responsibility of management, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the consolidated financial statements, and, accordingly, we do not express an opinion or provide any assurance on them.
/s/ Whitley Penn LLP
Dallas, Texas
June 28, 2018
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VENETO HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
Dollars in thousands
2017 | 2016 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 14,748 | $ | 15,996 | ||||
Restricted cash | 350 | 350 | ||||||
Accounts receivable, net | 7,996 | 8,060 | ||||||
Inventories, net | 1,561 | 3,210 | ||||||
Prepaid expenses and other | 5,001 | 374 | ||||||
Total current assets | 29,656 | 27,990 | ||||||
LONG-TERM ASSETS: | ||||||||
Property and equipment, net | 3,007 | 2,532 | ||||||
Goodwill, net | 6,079 | 10,552 | ||||||
Notes receivable from related parties | 499 | 1,707 | ||||||
Other assets, net | 788 | 309 | ||||||
Total long-term assets | 10,373 | 15,100 | ||||||
TOTAL ASSETS | $ | 40,029 | $ | 43,090 | ||||
LIABILITIES AND MEMBERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 4,636 | $ | 2,163 | ||||
Accrued expenses | 3,476 | 2,978 | ||||||
Other current liabilities | 18 | 8 | ||||||
Total current liabilities | 8,130 | 5,149 | ||||||
LONG-TERM LIABILITIES: | ||||||||
Notes payable | 8,512 | — | ||||||
Due to related parties | 462 | 3,299 | ||||||
Equipment lease financing | 43 | 136 | ||||||
Contingent consideration | 728 | 1,888 | ||||||
Deferred rent | 1,049 | 790 | ||||||
Total long-term liabilities | 10,794 | 6,113 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
NONCONTROLLING INTERESTS | 709 | 814 | ||||||
MEMBERS’ EQUITY | 20,396 | 31,014 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 40,029 | $ | 43,090 |
The accompanying notes are an integral part of these consolidated financial statements.
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VENETO HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Dollars in thousands
2017 | 2016 | |||||||
REVENUE, NET | $ | 106,893 | $ | 97,655 | ||||
COST OF GOODS SOLD | 59,360 | 37,440 | ||||||
GROSS PROFIT | 47,533 | 60,215 | ||||||
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES | 36,830 | 27,600 | ||||||
OPERATING INCOME | 10,703 | 3 2,615 | ||||||
INTEREST EXPENSE (INCOME), NET | 3 04 | (114 | ) | |||||
OTHER LOSS (GAIN) | 142 | (813 | ) | |||||
OTHER EXPENSE (INCOME), NET | (1,512 | ) | 1,873 | |||||
NET INCOME | 11,769 | 3 1,669 | ||||||
LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | 8,379 | 10,367 | ||||||
NET INCOME ATTRIBUTABLE TO VENETO HOLDINGS, LLC | $ | 3,390 | $ | 21,302 |
The accompanying notes are an integral part of these consolidated financial statements.
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VENETO HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Dollars in thousands
Members' Equity | Noncontrolling interests | Total Equity | ||||||||||
BALANCE—January 1, 2016 | $ | 23,806 | $ | 3,861 | $ | 27,667 | ||||||
Net income | 21,302 | 10,367 | 31,669 | |||||||||
Contributions from members | 250 | — | 250 | |||||||||
Distributions to members | (14,344 | ) | — | (14,344 | ) | |||||||
Contributions from noncontrolling interests | — | 1,677 | 1,677 | |||||||||
Distributions to noncontrolling interests | — | (15,091 | ) | (15,091 | ) | |||||||
BALANCE—December 31, 2016 | 31,014 | 814 | 31,828 | |||||||||
Net income | 3,390 | 8,379 | 11,769 | |||||||||
Contributions from members | 2,100 | — | 2,100 | |||||||||
Distributions to members | (16,108 | ) | — | -16,108 | ||||||||
Contributions from noncontrolling interests | — | 247 | 247 | |||||||||
Distributions to noncontrolling interests | — | (8,731 | ) | (8,731 | ) | |||||||
BALANCE—December 31, 2017 | $ | 20,396 | $ | 709 | $ | 21,105 |
The accompanying notes are an integral part of these consolidated financial statements.
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VENETO HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
Dollars in thousands
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 11,769 | $ | 31,669 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 6,605 | 5,580 | ||||||
Gain on acquisition | — | (870 | ) | |||||
Loss on disposition of assets | 126 | 22 | ||||||
Bad debt expense | 1,069 | 3,993 | ||||||
Noncash interest expense expense | 28 | — | ||||||
Inventory obsolescence reserve | 80 | 220 | ||||||
Deferred rent | 258 | 781 | ||||||
Contingent consideration valuation adjustment | (872 | ) | (580 | ) | ||||
Decrease (increase) in accounts receivable | 420 | (3,561 | ) | |||||
Decrease (increase) in inventories | 1,588 | (3,276 | ) | |||||
Decrease (increase) in prepaid expenses and other | (4,646 | ) | 1,623 | |||||
Increase in accounts payable | 2,383 | 1,118 | ||||||
Increase in accrued liabilities | 641 | 298 | ||||||
Increase in other current liabilities | 360 | 3,307 | ||||||
Other | 9 | (122 | ) | |||||
Net cash provided by operating activities | 19,818 | 40,202 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Business acquisition—net of cash acquired | (1,538 | ) | (236 | ) | ||||
Capital expenditures | (1,166 | ) | (2,819 | ) | ||||
Loan to contract pharmacy | — | (130 | ) | |||||
Loan to third party - Ayass | (1,695 | ) | — | |||||
Loan to related party | — | (1,324 | ) | |||||
Payments received on note receivable from third party - Ayass | 365 | — | ||||||
Proceeds from property damage insurance | — | 445 | ||||||
Net cash used in investing activities | (4,034 | ) | (4,064 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from notes payable | 8,560 | 149 | ||||||
Payment of loan origination fees | (76 | ) | — | |||||
Payments on notes payable | (91 | ) | (2,926 | ) | ||||
Payments of contingent consideration | (625 | ) | (272 | ) | ||||
Distributions to members | (16,108 | ) | (14,185 | ) | ||||
Distributions to noncontrolling interests | (8,939 | ) | (14,089 | ) | ||||
Contributions from members | — | 250 | ||||||
Contributions from noncontrolling interests | 247 | 1,677 | ||||||
Net cash used in financing activities | (17,032 | ) | (29,396 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,248 | ) | 6,742 | |||||
CASH AND CASH EQUIVALENTS—Beginning of year | 15,996 | 9,254 | ||||||
CASH AND CASH EQUIVALENTS—End of year | $ | 14,748 | $ | 15,996 | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Interest paid | $ | 277 | $ | 140 | ||||
Franchise taxes paid | 601 | 747 | ||||||
Non cash business acquisition | 336 | 2,740 | ||||||
Non cash contribution in exchange for extinguishment of due to related parties | 2,100 | — | ||||||
Non cash satisfaction of notes receivable from related parties | 1,097 | — | ||||||
Accrued but unpaid distributions | 794 | 1,002 |
The accompanying notes are an integral part of these consolidated financial statements.
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VENETO HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(Dollars in thousands)
1. ORGANIZATION
From inception through March 16, 2017, Medoc Health Services and Affiliates (Medoc) represented the combination of Medoc Health Services, LLC (MHS) formed on October 24, 2014, Messorio Healthcare Services, LLC (Messorio) formed on April 27, 2015, Buccella Biomedical, LP (Buccella) formed on March 10, 2016, MD 20/20 Health Services, LP (MD 20/20) formed on September 3, 2015, and Molise Health Sciences, LLC (Molise) formed on January 23, 2017. MHS and Buccella hold investments in and manage managed services organizations (each an MSO). Messorio owns and operates ancillary health care service providers, primarily pharmacies and laboratories in Texas, Oklahoma and Arizona. MD 20/20 provides management, administrative, and marketing services with respect to physicians that are not affiliated with a MHS MSO. Molise owns and operates a diagnostic laboratory in Arizona.
On March 16, 2017 the membership interests of MHS, Messorio, Buccella, MD 20/20, and Molise were contributed by their members to Veneto Holdings, LLC (Veneto or the Company), which was formed on December 10, 2015. As of March 16, 2017, Veneto Holdings, LLC represents the consolidation of each of the aforementioned entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements and accompanying notes have been prepared in conformity with generally accepted accounting principles in the United States of America (GAAP).
BusinessVeneto is a Master managed services organization engaged in the business of providing, directly or through affiliates, certain management, administrative, and marketing services to a network of ancillary health care service providers including specialty pharmacies, diagnostic laboratories, diagnostic imaging centers, and biologic companies. Through this network, Veneto is able to provide physicians with a portfolio of services designed to improve patient care, practice productivity, and clinical efficiency. The Company began operations in 2015 when the first Veneto-managed MSO was formed. Veneto, through its wholly owned subsidiary MHS, entered into contractual relationships with ancillary service providers, where Medoc performed certain management, administrative and marketing services on behalf of the ancillary service provider (each a VSA) in exchange for service fees. From inception to March 2016, Medoc had VSAs with specialty pharmacies, laboratories, diagnostic imaging providers, and biologic companies, with the vast majority of revenue coming from the VSAs with specialty pharmacies. In November 2015, the Company transitioned from contractual relationships with non-owned or contracted pharmacies and laboratories to owned pharmacies and laboratories. Each MSO contracts directly with Medoc to provide a portion of the services that Medoc has agreed to provide to each ancillary service vendor under a VSA. Each MSO is then entitled to a portion of the revenues collected by Medoc for the portion of services that the MSO performs. Assuming that the MSO has available cash (as defined), each MSO makes a monthly distribution of profits to each MSO member based on the members ownership percentage.
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Principles of ConsolidationThe consolidated financial statements include the accounts of Veneto, MHS, Messorio, Buccella, MD 20/20, Molise, and each of their subsidiaries. All material balances and transactions between these entities have been eliminated in consolidation. The Company continually evaluates its investments to determine if they represent variable interests in a Variable Interest Entity (VIE). If the Company determines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE based on whether the Company has both the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and the obligation to absorb benefits from or losses of the VIE that could potentially be significant to the VIE. The Company consolidates a VIE if it is considered to be the primary beneficiary. While the individual MSOs have more diverse ownership, the outside (non-common) ownership does not have the ability to direct the activities of the entity. The outside ownership does not have the ability to determine the timing or amount of distributions. As a result, these VIEs are consolidated and the non-controlling interest presented represents the physician ownership. The Company consolidates entities in which it or its wholly owned subsidiary is the general partner or managing member and the limited partners or members, respectively, do not have substantive participating rights to overcome the Companys control. These entities intercompany transactions and balances have been eliminated through consolidation.
Revenue RecognitionRevenue is recognized when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the sellers price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.
Revenue from the provision of pharmacy services is recognized when the prescription is dispensed (picked up by the patient or shipped to the patient using common carrier). At the time of dispensing each pharmacy has a contract with the insurance payor (item (i)); the insurance payor has accepted the claim for reimbursement from the pharmacy and informed the pharmacy how much will be paid for the prescription (item (iii)); the insurance payor is now legally obligated to make payment on the accepted claim within a given period proscribed by statute (item (iv)); and, the prescription has been taken from the pharmacy inventory, placed into an individually labeled container specific to the patient, and the patient is able to take possession of the prescription (item (ii)). Shipment to or pick up by the patient is the first time that all criteria for revenue recognition have been met.
Revenue from the provision of laboratory services is recognized upon the completion of accessions (the requested laboratory test has been performed and the report has been issued to the requesting physician). After the test has been performed and reported, the insurance company and/or patient has an obligation to pay for medically necessary laboratory tests (items (i) and (ii)). Unlike the pharmacy services model, laboratory services are provided prior to insurance company approval; as a result, the sellers price to buyer is not known until payment is provided (items (iii) and (iv). Based on historical collections, the Company estimates the expected revenues associated with similar tests and recognizes the revenue when testing results have been provided.
Provisions for estimated sales returns and uncollectible accounts are recorded in the period in which the related sales are recognized based on historical and anticipated rates.
9 |
The Company determines whether it is the principal or agent for its retail pharmacy contract services on a contract by contract basis. In the majority of its contracts, the Company has determined it is the principal due to it: (i) being the primary obligor in the arrangement, (ii) having latitude in changing the product or performing part of the service, (iii) having discretion in supplier selection, (iv) having involvement in the determination of product or service specifications, and (v) having credit risk. The Companys obligations under its client contracts for which revenues are reported using the gross method are separate and distinct from its obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these contracts, the Company is contractually required to pay the third party pharmacies in its retail pharmacy network for products sold, regardless of whether the Company is paid by its clients. The Companys responsibilities under its client contracts typically include validating eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible adverse drug interactions for the pharmacist to address with the prescriber prior to dispensing, suggesting generic alternatives where clinically appropriate, and approving the prescription for dispensing. Although the Company does not have credit risk with respect to Retail Co-Payments or inventory risk related to retail network claims, management believes that all of the other applicable indicators of gross revenue reporting are present. For contracts under which the Company acts as an agent, revenue is recognized using the net method.
Cost of Goods SoldCosts and directly related expenses to sell the Companys products and services are recorded as cost of goods sold when the related revenue is recognized. The Company records shipping and handling costs related to delivery of products to customers within cost of goods sold.
Income TaxesThe Company is not generally a taxable entity for income tax purposes, with the exception of Texas franchise tax. Other income taxes are generally borne by individual members. Net income for financial statement purposes may differ significantly from taxable income of members as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the various membership agreements. The aggregated difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each members tax attributes in us is not available to us. The years 2015 through 2017 remain subject to examination by the Internal Revenue Service or other taxing authorities.
Cash and Cash EquivalentsThe Company maintains bank accounts in the United States of America, which, at times, may exceed federally insured limits. All of the amounts reported as cash on the Companys consolidated balance sheets represent cash on deposit, which is available on demand to the Company.
Restricted CashRestricted cash is stated at cost. The Company had cash held in a specified cash collateral account which was required upon entrance into the lease of its corporate offices.
Accounts ReceivableAccounts receivable are stated net of allowances for doubtful accounts and estimated returns. Allowances for doubtful accounts are recognized for estimated losses resulting from customers inability to meet payment obligations. Management specifically analyzes account receivables and historical bad debt; customer concentrations; customer creditworthiness; past due balances; current economic trends; and changes in customer payment terms when determining allowances for doubtful accounts. Allowances for estimated returns are recognized for sales that have occurred but
10 |
which are expected to result in returned products from patients based upon their determination that they no longer need the medication. Additional allowances may be required in future periods if financial positions of customers deteriorate, reducing their ability to meet payment obligations. Based on these estimates and assumptions, allowances for doubtful accounts and estimated returns were $70 and $1,589 at December 31, 2017 and 2016, respectively.
InventoriesInventories, which consist of finished goods, are stated at the lower of cost, determined principally under the first-in, first-out method, or net realizable value. Inventories include the cost of pharmaceuticals, reagents, and consumables. Obsolete or excess inventories are reflected at their estimated realizable values. Net realizable value is the estimated sales revenue for a normal period of activity less expected selling costs. Allowances for excess and obsolete inventory are recognized for excess amounts, obsolescence and declines in net realizable value below cost. Estimation and judgment are required in determining the value of the allowance for excess and obsolete inventory at each statement of financial position date. Management specifically analyzes estimates of future demand for products when determining allowances for excess and obsolete inventory. Changes in these estimates could result in revisions to the valuation of inventory in future periods. Based on these estimates and assumptions, the Company had an allowance for excess and obsolete inventory of $95 and $220 at December 31, 2017 and 2016, respectively.
Property and EquipmentProperty, equipment and improvements to leased premises are depreciated using the straight-line method over the estimated useful lives of the assets, or when applicable, the term of the lease, whichever is shorter. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which are generally as follows:
Leasehold improvements | The shorter of the expected useful life of the improvement or the lease term | |
Computers and technological assets | 3-5 years | |
Machinery and equipment | 5 years | |
Furniture and fixtures | 7 years |
Assets acquired through finance lease arrangements or long-term rental arrangements that transfer substantially all the risks and rewards associated with ownership of the asset to the Company (as lessee) are capitalized.
Depreciation is accounted for in the Consolidated Statement of Income under Cost of Goods Sold and Selling, General and Administrative Expense, depending on the use of the underlying assets. Depreciation expense recorded for the years ended December 31, 2017 and 2016, was approximately $588 and $324, respectively.
In addition, gains (losses) from disposals of property and equipment are accounted for in the corresponding cost line items in the Consolidated Statement of Income depending on where in the Consolidated Statement of Income the underlying asset would normally be expensed (i.e., Cost of Goods Sold or Selling, General and Administrative Expenses). Losses from disposals of assets recorded for the years ended December 31, 2017 and 2016, were $126 and $37, respectively.
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Goodwill and Intangible AssetsIntangible assets consist of goodwill and licenses associated with business acquisitions as well as purchased software used in the business. The Company has elected to use the Private Company Council guidance as issued in Accounting Standards Update (ASU) No. 2014-02, IntangiblesGoodwill and Other and amortizes goodwill associated with business acquisitions, as well as licenses, straight-line over a three-year period. Software used in the business is amortized on a straight-line basis over three years. Additions to intangible assets are recorded at cost.
Goodwill is tested for impairment if an event occurs or circumstances change that indicate that the fair value of the entity may be below its carrying amount. The Company evaluates goodwill at the entity level. Messorio and Molise are the only entities with goodwill. Upon the occurrence of a triggering event, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of the entity is less than its carrying amount, including goodwill. A goodwill impairment loss is recognized if the carrying amount of the entity exceeds its fair value. A goodwill impairment loss, if any, is measured as the amount by which the carrying amount of an entity including goodwill exceeds its fair value. No impairment losses associated with goodwill have been recorded.
Amortization expense for the years ended December 31, 2017 and 2016, was approximately $6,017 and $5,256, respectively. Amortization of intangible assets has been reflected in amortization within Selling, General, and Administrative Expense in the consolidated statements of income. Expected future amortization of goodwill and intangible assets is $5,323, $883, and $103 for the years ending December 31, 2018, 2019, and 2020, respectively.
Impairment of Long-Lived AssetsThe carrying value of property and equipment is assessed for recoverability by management whenever events or change in circumstances indicate an impairment may exist based on analysis of future undiscounted expected cash flows from the asset or asset group. Impairment losses are accounted for in the Consolidated Statement of Income under Impairment of Long-lived Assets. No significant impairment losses associated with property and equipment were recorded for the years ended December 31, 2017 and 2016.
Notes Receivable from Related PartiesNotes receivable from related parties are stated at historical cost, net of any related amortization and/or impairment, and consist of amounts which are of continuing benefit to the Company.
Use of EstimatesThe preparation of 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. Estimates also affect the reported amount of revenues and expenses in the reporting period. Actual amounts could differ from those estimates. Fair Value HierarchyThe Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:
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| Level 1Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
| Level 2Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. |
| Level 3Inputs to the valuation methodology are unobservable inputs based upon managements best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk. |
Fair Value of Financial InstrumentsAs of December 31, 2017 and 2016, the Companys financial instruments include cash and cash equivalents, restricted cash, accounts receivable, due to related parties, notes receivable from related parties, accounts payable, notes payable, equipment lease financing liability, and contingent consideration liability. Due to the nature of these instruments, the Companys carrying value approximates fair value. There were no outstanding derivative financial instruments as of December 31, 2017 and 2016.
Contingent ConsiderationThe Company from time to time includes in its acquisition purchase agreements, a provision that the seller is entitled to a portion of future net profits from the entity over a specified period of time. The Company considers the net profit agreement to be contingent consideration at the purchase date and records a liability for the fair value of the amount expected to be paid under the net profits agreement. Contingent consideration is considered a Level 3 financial instrument.
3. BUSINESS COMBINATIONS
2016 AcquisitionsOn February 1, 2016, the Company acquired the limited liability company interests of Doctors Specialty Pharmacy, LLC (DSP) for a total purchase price of $115 in cash. As a result of the seller accepting consideration that was less than the fair value of the net assets acquired, primarily attributable to the value of the sellers recorded accounts receivable, this acquisition resulted in a bargain purchase gain of $870 which is included in Other Gain in the accompanying Consolidated Statement of Income for the year ended December 31, 2016. The purchase of DSP allowed for increased market share in the Dallas-Fort Worth area.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration - cash, net of cash acquired | $ | (407 | ) | |
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $7 68 | |||
Prepaids and other current assets | 4 | |||
Property and equipment | 90 | |||
Accounts payable and other current liabilities | (399 | ) | ||
Total indentifiable net assets | 463 | |||
Bargain purchase gain | (870 | ) | ||
Total net assets acquired | $ | (407 | ) |
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On March 18, 2016, the Company acquired the limited liability company interests of Eco Pharmacy of South Austin, LLC (Eco) for a total of $1,326 which represented $59 in cash and a net revenues interest equal to five percent of Ecos net revenues for a period of three years, valued at $1,267. The purchase of Eco expanded the footprint of the Company into Austin, Texas.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration: | ||||
Cash, net of cash acquired | $ | 59 | ||
Contingent consideration | 1,267 | |||
$ | 1,326 | |||
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $ | 141 | ||
Inventory | 36 | |||
Property and equipment | 17 1 | |||
Licenses | 50 | |||
Accounts payable and other current liabilities | (26 | ) | ||
Total identifiable net assets | 372 | |||
Goodwill | 954 | |||
Total net assets acquired | $ | 1,326 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Companys systems and MSO network.
On July 29, 2016, the Company acquired twenty-nine percent of the limited liability company interests of Canaan Capital Management, LLC d/b/a Baywood Pharmacy (Baywood) for a total of $734 representing $110 in cash and contingent consideration equal to the greater of $25 and seven percent of the management fee charged by the Company, annually, for a period of three years, valued at $624. While less than fifty percent of the LLC interests were purchased, the Company had control and received all of the net profits of the entity through a management agreement; therefore Baywood was consolidated. The purchase of Baywood expanded the footprint of the Company into Arizona.
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At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration: | ||||
Cash | $ | 110 | ||
Contingent consideration | 624 | |||
$ | 734 | |||
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $ | 8 | ||
Inventory | 13 | |||
Property and equipment | 37 | |||
Licenses | 25 | |||
Total identifiable net assets | 83 | |||
Goodwill | 651 | |||
Total net assets acquired | $ | 734 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Companys systems and MSO network.
Additionally, during the year ended December 31, 2016 the Company acquired several pharmacies that were individually immaterial. The purchase price and net assets acquired have been aggregated and presented below:
Consideration: | ||||
Cash | $ | 474 | ||
Contingent consideration | 849 | |||
$ | 1,323 | |||
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $ | 373 | ||
Inventory | 69 | |||
Prepaid and other current assets | 5 | |||
Property and equipment | 26 | |||
Licenses | 157 | |||
Accounts payable and other current liabilities | (6 | ) | ||
Total identifiable net assets | 624 | |||
Goodwill | 69 9 | |||
Total net assets acquired | $ | 1,323 |
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The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Companys systems and MSO network.
2017 Acquisitions On February 1, 2017, the Company acquired the limited liability company interests of Pure Pharmacy, LLC (Pure) for a total of $133 which represented a net profit interest equal to eight percent of Pures net profits for a period of three years. The purchase of Pure expanded the footprint of the Company in Austin, Texas.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration—contingent consideration | $ | 133 | ||
Allocated fair value of acquired asset—licenses | 37 | |||
Goodwill | 96 | |||
Total net assets acquired | $ | 133 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Companys systems and MSO network.
On February 21, 2017, the Company acquired 100% of the capital stock of High Desert Diagnostic Laboratory, Inc. (HDDL) for a total purchase price of $1,300 representing $1,300 in cash. The purchase of HDDL expanded the ancillary service offerings able to be provided directly by the Company.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Considerationcash, net of cash acquired$ 1,270
Allocated fair value of acquired assets and assumed liabilities:
Consideration - cash, net of cash acquired | $ | 1,270 | ||
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $ | 197 | ||
Prepaids and other current assets | 14 | |||
Property and equipment | 22 | |||
Licenses | 29 | |||
Accounts payable | (91 | ) | ||
Total identifiable net assets | 171 | |||
Goodwill | 1 ,099 | |||
Total net assets acquired | $ | 1,270 |
The goodwill recognized represents the value of synergies expected to be realized when the laboratory is integrated into the Companys systems and MSO network.
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On June 1, 2017, the Company acquired the outstanding seventy-one percent of the limited liability company interests of Baywood for a total of $10 in cash. As the purchase of the original twenty-nine percent resulted in the consolidation of the entity, the additional purchase price of $10 resulted in an increase in goodwill and equity of the entity.
On June 23, 2017, the Company acquired the limited liability company interests of Serene Pharmacy, LLC (Serene) for a total of $203 which represented a net profit interest equal to eight percent of Serenes net profits for a period of three years. The purchase of Serene expanded the footprint of the Company in Austin, Texas.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration—contingent consideration | $ | 203 | ||
Allocated fair value of acquired asset—licenses | 37 | |||
Goodwill | 166 | |||
Total net assets acquired | $ | 203 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Companys systems and MSO network.
On June 30, 2017, the Company acquired 100% of the capital stock of Pro Pharmacy Health, Inc. (Pro) for a total of $265 of cash. The purchase of Pro expanded the footprint of the Company into Sugar Land, Texas.
At the acquisition date, the purchase price assigned to the acquired assets and assumed liabilities was as follows:
Consideration — cash, net of cash acquired | $ | 258 | ||
Allocated fair value of acquired assets and assumed liabilities: | ||||
Accounts receivable | $ | 137 | ||
Inventory | 19 | |||
Licenses | 41 | |||
Total identifiable net assets | 197 | |||
Goodwill | 61 | |||
Total net assets acquired | $ | 258 |
The goodwill recognized represents the value of synergies expected to be realized when the pharmacy is integrated into the Companys systems and MSO network.
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4. PREPAID EXPENSES AND OTHER
2017 | 2016 | |||||||
Other receivables - 3rd parties | $ | 267 | $ | 4 | ||||
Liability and property insurance | 130 | 139 | ||||||
Legal retainer | 1,242 | — | ||||||
Employee benefits | 33 | 22 | ||||||
Software support service agreement | 19 | 15 | ||||||
Rent | 127 | 67 | ||||||
Inventory deposits | — | 19 | ||||||
Inventory rebate receivable | 3,055 | — | ||||||
Other | 128 | 108 | ||||||
Prepaid Expenses and Other | $ | 5,001 | $ | 374 |
5. PROPERTY AND EQUIPMENT
The Company maintained the following property and equipment balances at December 31, 2017 and 2016:
2017 | 2016 | |||||||
Leasehold improvements | $ | 2,248 | $ | 2,036 | ||||
Computers and technological assets | 550 | 359 | ||||||
Machinery and equipment | 863 | 291 | ||||||
Furniture and fixtures | 166 | 177 | ||||||
Property and equipment—gross | 3, 827 | 2,863 | ||||||
Less accumulated depreciation | (820 | ) | (331 | ) | ||||
Property and equipment—net | $ | 3,007 | $ | 2,532 |
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6. GOODWILL
The following table provides information on changes in the carrying amount of goodwill, which is included in the accompanying consolidated balance sheets as of December 31, 2017 and 2016:
2017 | 2016 | |||||||
As of January 1, | $ | 16,556 | $ | 14,252 | ||||
Goodwill added during the year | 1,432 | 2 ,304 | ||||||
As of December 31, | 17,988 | 16,556 | ||||||
Accumulated amortization | (11,909 | ) | (6,004 | ) | ||||
Goodwill, net | $ | 6,079 | $ | 10,552 |
7. ACCRUED EXPENSES
The Company maintained the following accrued expenses at December 31, 2017 and 2016:
2017 | 2016 | |||||||
Franchise taxes | $ | 373 | $ | 694 | ||||
Payroll and related liabilities | 592 | 545 | ||||||
Noncontrolling interests distributions | 794 | 1 ,003 | ||||||
MSO manager fees | 499 | 434 | ||||||
Pharmacy Benefit Manager (PBM) payables | 119 | 93 | ||||||
Professional fees | 411 | 172 | ||||||
Accrued inventory purchases | 385 | — | ||||||
Other accrued expenses | 303 | 37 | ||||||
Accrued expenses | $ | 3,476 | $ | 2,978 |
8. NOTES PAYABLE
Revolving Credit Note
On April 21, 2017 the Company obtained a revolving credit note with a bank with a borrowing base of up to $7,000. During 2017 the Company borrowed $7,000 against the line, this balance was outstanding as of December 31, 2017. The Company incurred $63 in loan origination costs which have been included in notes payable on the Consolidated Balance Sheets. The borrowings against the line bear interest at a rate per annum equal LIBOR plus 3.25% which is paid monthly. Interest expense recorded during the year ended December 31, 2017 was $184. The borrowing base is reviewed monthly and the outstanding balance is adjusted, if necessary, to ensure that the outstanding borrowings do not exceed the borrowing base. Under the terms of the revolving credit note, the Company is required to maintain a specified fixed charge coverage ratio, as that term is defined. This note is collateralized by all the assets of the Company. The outstanding balance of the revolving credit note is due upon the notes maturity date of April 21, 2019.
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Term Note
On April 21, 2017, the Company obtained a term note with a bank for a principle amount up to $3,000. During 2017 the Company borrowed $1,560 against the term note, this balance was outstanding as of December 31, 2017. The Company incurred $14 in loan origination costs which have been included in notes payable on the Consolidated Balance Sheets. The borrowings against the term note bear interest at a rate per annum equal LIBOR plus 3.25% which is paid monthly. Interest expense recorded during the year ended December 31, 2017 was $39. Under the terms of the term note, the Company is required to maintain a specified fixed charge coverage ratio, as that term is defined. This note is collateralized by all the assets of the Company. The outstanding balance of the revolving credit note is due upon the notes maturity date of April 21, 2019.
9. CONTINGENT CONSIDERATION
Level 3 | ||||||||
Contingent Consideration | ||||||||
2017 | 2016 | |||||||
As of January 1, | $ | 1,888 | $ | — | ||||
Contingent consideration added during the year | 336 | 2,740 | ||||||
Payments of contingent consideration | (624 | ) | (272 | ) | ||||
Valuation adjustment - included in earnings | (872 | ) | (580 | ) | ||||
As of December 31, | $ | 728 | $ | 1,888 |
The fair value of contingent consideration was determined by Level 3 inputs, which are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In the valuation of contingent consideration as of the reporting date, the Level 3 inputs used are expected sales volumes, forecasted selling prices and associated direct costs for goods and services, and expectations of future operating costs.
10. RELATED PARTIES
During the year ended December 31, 2015, the Company entered into a consulting agreement with entities that had common ownership with Messorio. Specifically, the entities agreed to serve as insurance consultants to handle the tornado-related losses associated with Total RX. The entities received compensation for these consulting services, included in Other Expense in the accompanying consolidated statements of income, amounting to $0 and $15,373 for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2016, $3,299 was payable to these related party entities, $3,255 in the form of a note payable bearing interest at .5% per annum and $44 in accrued interest, for these consulting services and is included in Due to Related Parties in the long term liabilities portion of the accompanying consolidated balance sheet. This balance was relieved during 2017 as a result of the related party being merged into the Company.
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During 2016, TotalRX loaned an entity that had common ownership with Messorio money for various expenses and entered into a note receivable arrangement. The amount outstanding under the note receivable as of December 31, 2016 was $1,324, bearing interest at the rate of 10% per annum, with accrued interest of $110 and is included in Note Receivable From Related Party in the accompanying consolidated balance sheet. This balance was relieved during 2017 as a result of the related party being merged into the Company.
During 2017, a related party paid a vendor of the Company $462 on the Companys behalf. This related party owed a total of $499 to the Company as a result of the Companys merger with a separate related party during 2017. As of December 31, 2017, both of these balances were outstanding.
In January 2017 the Company received a loan in the amount of $4,108 from its partners. This balance, plus accrued interest of $77, was repaid in April 2017.
11. LEASE COMMITMENTS
The Company leases certain of its facilities and equipment under noncancelable lease agreements. These lease agreements have been accounted for as operating leases.
Future minimum lease payments under all noncancelable operating leases in effect at December 31, 2017, are as follows:
2018 | $ | 1,158 | ||
2019 | 1,115 | |||
2020 | 9 43 | |||
2021 | 8 53 | |||
2022 | 3 37 | |||
Thereafter | 1 78 | |||
Total minimum lease payments | $ | 4,584 |
Rental expense under all operating leases for the years ended December 31, 2017 and 2016, was $1,129 and $584, respectively.
12. MEMBERS EQUITY AND PARTNERS CAPITAL
VenetoVeneto Holdings, LLC is a manager-managed limited liability company organized under the laws of the State of Texas. Veneto has 100 total authorized Units of
Membership, all of the same class. All 100 Units are outstanding. Veneto distributed $6,108 and $0 to the Class A members of its subsidiaries in the years ended December 31, 2017 and 2016, respectively.
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MHSMedoc Health Services, LLC is a manager-managed limited liability company organized under the laws of the State of Texas. MHS has 100 total authorized Units of Membership, all of the same class. All 100 Units are outstanding. MHS subsidiaries distributed $7,695 and $14,716 to the Class A members of its subsidiaries in the years ended December 31, 2017 and 2016, respectively. MHS distributed $3,800 and $9,688 to its members during the years ended December 31, 2017 and 2016, respectively.
MHS SubsidiariesMHS controls a number of subsidiaries that are all manager-managed limited liability companies organized under either the laws of the State of Texas or Delaware. Prior to April 1, 2016, each MSO entity was established with a maximum of 100 Units of Membership broken up into 40 Class A units and 60 Class B units. After April 1, 2016, each subsidiary has a total of 100 authorized units divided between 99 Class A Units and One Class B Units. The actual number of Class A Units issued by each subsidiary of MHS can vary as qualified investors successfully complete the investment subscription process. Any un-issued Class A units will be converted into Class B units until sold in the future. During that time, MHS will receive the profits from those units. MHS owns all Class B Units. The Class B Units have the authority to select the manager of the subsidiary.
MessorioMessorio is a manager-managed limited liability company organized under the laws of the State of Texas. Messorio has 100 total authorized Units of Membership, all of the same class. All 100 Units are outstanding. All Messorio subsidiaries are wholly owned. Messorio distributed $6,200 and $4,137 to its members during the years ended December 31, 2017 and 2016, respectively.
MD 20/20MD 20/20 is a limited partnership organized under the laws of the State of Texas. The limited partnership issues Interests to each partner, expressed as a percentage of the total interests issued. There is no limitation on the number of Interests that can be issued by the partnership. The limited partnership has two classes of partners, General Partners and Limited Partners. The General Partner owns 1% of the interests and the Limited Partners own 99% of the interests.
BuccellaBuccella is a limited partnership organized under the laws of the State of Texas. The limited partnership issues Interests to each partner, expressed as a percentage of the total interests issued. There is no limitation on the number of Interests that can be issued by the partnership. The limited partnership has two classes of partners, General Partners and Limited Partners. The General Partner owns 1% of the interests and the Limited Partners own 99% of the interests. Buccella and its subsidiaries distributed $0 and $1,036 to its General Partner and Limited Partner, respectively during the year ended
December 31, 2017. Buccella and its subsidiaries distributed $519 and $375 to its General Partner and Limited Partner, respectively during the year ended December 31, 2016, respectively.
Buccella SubsidiariesBuccella controls a number of subsidiaries that are all manager-managed limited liability companies organized under either the laws of the State of Texas or Delaware. Each subsidiary has a total of 100 authorized units divided between Class A and Class B Units. The Class B Units have the authority to select the manager of the subsidiary. Buccella owns all Class B Units.
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13. COMMITMENTS AND CONTINGENCIES
On May 2, 2017, the Company learned that it is the subject of a federal grand jury investigation into allegations concerning (i) compounding pharmacy practices and payments made to physician investors with federal health care laws and regulations, and (ii) a business interruption insurance claim made following the destruction of a pharmacy in December of 2015. On May 9, 2018, the government executed a search warrant on the Companys offices located at 3030 LBJ Freeway, Dallas, Texas, 75234. Subsequent to the execution of the search warrant, the government served grand jury subpoenas on several of the Companys pharmacies. The Company has assured the government that it will cooperate with the governments investigation, that it has been preserving, and will continue to preserve, a wide range of documents and electronic evidence, and that it looks forward to discussing the governments concerns. As this matter is in its early stages, the Company does not have the ability to determine whether a loss associated with this matter is probable, nor would a loss be estimable. As such, no liability has been accrued as of December 31, 2017.
The Company is involved in various pending and threatened actions as well as regulatory investigations arising from its normal business operations. After consultations with legal counsel, since these actions are in the early stages, management cannot estimate the impact that these matters will have on the Companys consolidated financial position or results of operations.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through June 28, 2018, which is the date the consolidated financial statements were available for issuance, and concluded that there were no events or transactions that needed to be disclosed other than 1) the execution of a search warrant on the Companys offices as described in Note 13 and 2) the Company provided $1,500 under the terms of a convertible promissory note to a related party entity.
******
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VENETO HOLDINGS, LLC
CONSOLIDATING BALANCE SHEET - UNAUDITED
AS OF DECEMBER 31, 2017
Dollars in thousands
Messorio | Molise | Medoc | MD 2020 | Buccella | Elim | Consolidated | ||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 11,021 | $ | 468 | $ | 2,140 | $ | 489 | $ | 630 | $ | — | $ | 14,748 | ||||||||||||||
Restricted cash | — | — | 350 | — | — | 350 | ||||||||||||||||||||||
Accounts receivable, net | 7,444 | 214 | — | — | 338 | — | 7,996 | |||||||||||||||||||||
Inventory, net | 1,493 | 68 | — | — | — | 1,561 | ||||||||||||||||||||||
Intercompany receivables | 35,096 | 1,134 | 9,428 | 1,371 | (47,029 | ) | — | |||||||||||||||||||||
Prepaid expenses and other | 4,339 | 47 | 615 | — | — | 5,001 | ||||||||||||||||||||||
Total current assets | 59,393 | 1,931 | 12,533 | 1,860 | 968 | (47,029 | ) | 29,656 | ||||||||||||||||||||
LONG-TERM ASSETS: | ||||||||||||||||||||||||||||
Property and equipment, net | 1,648 | 626 | 733 | — | — | — | 3,007 | |||||||||||||||||||||
Goodwill, net | 5,295 | 784 | — | — | — | — | 6,079 | |||||||||||||||||||||
Notes receivable from related parties | 369 | — | 130 | — | — | 499 | ||||||||||||||||||||||
Other assets, net | 354 | 312 | 122 | — | — | — | 788 | |||||||||||||||||||||
Total long-term assets | 7,666 | 1,722 | 855 | 130 | — | — | 10,373 | |||||||||||||||||||||
TOTAL ASSETS | 67,059 | 3,653 | 13,388 | 1,990 | 968 | (47,029 | ) | 40,029 | ||||||||||||||||||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||||||||||
Accounts payable | $ | 4,316 | $ | 133 | $ | 187 | $ | — | $ | — | $ | — | $ | 4,636 | ||||||||||||||
Accrued expenses | 1,804 | 192 | 945 | 425 | 110 | — | 3,476 | |||||||||||||||||||||
Intercompany payables | 41,440 | 2,651 | 4,499 | (664 | ) | (897 | ) | (47,029 | ) | — | ||||||||||||||||||
Other current liabilities | 8 | (1 | ) | 11 | — | — | — | 18 | ||||||||||||||||||||
Total current liabilities | 47,568 | 2,975 | 5,642 | (239 | ) | (787 | ) | (47,029 | ) | 8,130 | ||||||||||||||||||
LONG-TERM LIABILITIES: | ||||||||||||||||||||||||||||
Notes payable | 8,512 | — | — | — | — | — | 8,512 | |||||||||||||||||||||
Due to related parties | 462 | — | — | — | — | — | 462 | |||||||||||||||||||||
Equipment lease financing | 19 | — | 24 | — | — | — | 43 | |||||||||||||||||||||
Contingent consideration | 728 | — | — | — | — | — | 728 | |||||||||||||||||||||
Deferred rent | 395 | 11 | 643 | — | — | — | 1,049 | |||||||||||||||||||||
Total long-term liabilities | 10,116 | 11 | 667 | — | — | — | 10,794 | |||||||||||||||||||||
NONCONTROLLING INTERESTS | — | — | 501 | — | 208 | — | 709 | |||||||||||||||||||||
MEMBERS’ EQUITY | 9,375 | 667 | 6,578 | 2,229 | 1,547 | — | 20,396 | |||||||||||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 67,059 | $ | 3,653 | $ | 13,388 | $ | 1,990 | $ | 968 | $ | (47,029 | ) | $ | 40,029 |
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VENETO HOLDINGS, LLC
CONSOLIDATING STATEMENT OF INCOME - UNAUDITED
AS OF DECEMBER 31, 2017
Dollars in thousands
Messorio | Molise | Medoc | MD 2020 | Buccella | Elim | Consolidated | ||||||||||||||||||||||
REVENUE, NET | $ | 107,004 | $ | 1,630 | $ | 25,349 | $ | 7,474 | $ | 1,867 | $ | (36,431 | ) | $ | 106,893 | |||||||||||||
COST OF GOODS SOLD | 58,470 | 874 | 16 | — | — | — | 59,360 | |||||||||||||||||||||
GROSS PROFIT | 48,534 | 756 | 25,333 | 7,474 | 1,867 | (36,431 | ) | 47,533 | ||||||||||||||||||||
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES | 52,360 | 1,390 | 13,263 | 6,022 | 226 | (36,431 | ) | 36,830 | ||||||||||||||||||||
OPERATING INCOME | (3,826 | ) | (634 | ) | 12,070 | 1,452 | 1,641 | — | 10,703 | |||||||||||||||||||
INTEREST EXPENSE (INCOME), NET | 301 | — | 3 | — | — | — | 304 | |||||||||||||||||||||
OTHER (GAIN) LOSS | 126 | 16 | — | — | — | — | 142 | |||||||||||||||||||||
OTHER EXPENSE (INCOME), NET | (1,509 | ) | (1 | ) | (2 | ) | — | — | — | (1,512 | ) | |||||||||||||||||
NET INCOME | (2,744 | ) | (649 | ) | 12,069 | 1,452 | 1,641 | — | 11,769 | |||||||||||||||||||
LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | 7,623 | — | 756 | — | 8,379 | |||||||||||||||||||||
NET INCOME ATTRIBUTABLE TO VENETO HOLDINGS, LLC | $ | (2,744 | ) | $ | (649 | ) | $ | 4,446 | $ | 1,452 | $ | 885 | $ | — | $ | 3,390 |
25 |