UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 19, 2015
Diplomat Pharmacy, Inc.
(Exact Name of Registrant as Specified in its Charter)
Michigan |
|
001-36677 |
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38-2063100 |
(State or Other Jurisdiction of |
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(Commission File Number) |
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(IRS Employer |
4100 S. Saginaw St.
Flint, Michigan 48507
(Address of Principal Executive Offices) (Zip Code)
(888) 720-4450
(Registrants Telephone Number, Including Area Code)
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 (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Explanatory Note
Diplomat Pharmacy, Inc. (the Company) is filing this Current Report on Form 8-K/A (Amendment No. 1) to amend its Current Report on Form 8-K filed on June 22, 2015 (the Initial Report), which disclosed the completion of the Companys acquisition of all of the outstanding equity interests of Burmans Apothecary, L.L.C., a Pennsylvania limited liability company (d/b/a/ Burmans Specialty Pharmacy, Burmans), pursuant to the terms of that certain Membership Interest Purchase Agreement, dated as of June 19, 2015, by and among the Company, Burmans, certain direct and indirect equityholders of Burmans and certain of Burmans wholly owned subsidiaries. As previously disclosed, the acquisition was completed on June 19, 2015.
The information previously reported in the Initial Report is hereby incorporated by reference into this Amendment No. 1. This Amendment No. 1 is being filed solely to provide the information required by Item 9.01 of Form 8-K, and does not amend the Initial Report in any manner other than such Item 9.01.
Item 9.01 |
Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired
Attached hereto as Exhibits 99.2 and 99.3 and incorporated herein by reference are the financial statements of Burmans as follows:
· Audited financial statements of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of December 31, 2014 and 2013, and for the years ended December 31, 2014, 2013 and 2012, including the Independent Auditors Report thereon
· Notes to audited financial statements
· Unaudited financial statements of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of March 31, 2015, and for the three months ended March 31, 2015 and 2014
· Notes to unaudited financial statements
(b) Pro Forma Financial Information
Attached hereto as Exhibit 99.4 and incorporated herein by reference are the unaudited pro forma combined consolidated financial statements of the Company, as follows:
· Unaudited pro forma combined consolidated statements of operations for the six months ended June 30, 2015 and year ended December 31, 2014
· Notes to unaudited pro forma combined consolidated statements of operations
(d) Exhibits
No. |
|
Description |
23.1 |
|
Consent of Plante & Moran, PLLC |
99.2 |
|
Audited financial statements of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of December 31, 2014 and 2013, and for the years ended December 31, 2014, 2013 and 2012 |
99.3 |
|
Unaudited financial statements of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of March 31, 2015, and for the three months ended March 31, 2015 and 2014 |
99.4 |
|
Unaudited pro forma combined consolidated statements of operations for the six months ended June 30, 2015 and year ended December 31, 2014 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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Diplomat Pharmacy, Inc. | |
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| |
|
| |
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By: |
/s/ Sean M. Whelan |
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Sean M. Whelan |
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Chief Financial Officer |
Date: September 3, 2015
EXHIBIT INDEX
No. |
|
Description |
23.1 |
|
Consent of Plante & Moran, PLLC |
99.2 |
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Audited financial statements of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of December 31, 2014 and 2013, and for the years ended December 31, 2014, 2013 and 2012 |
99.3 |
|
Unaudited financial statements of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of March 31, 2015, and for the three months ended March 31, 2015 and 2014 |
99.4 |
|
Unaudited pro forma combined consolidated statements of operations for the six months ended June 30, 2015 and year ended December 31, 2014 |
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation be reference in the Registration Statement (No. 333-199244) on Form S-8 of Diplomat Pharmacy, Inc. of our report dated September 3, 2015, relating to our audits of the financial position of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of December 31, 2014 and 2013, and the results of its operations, members equity and cash flows for each of the three years in the period ended December 31, 2014, included in this Current Report on Form 8-K/A.
/s/ Plante & Moran, PLLC
Flint, Michigan
September 3, 2015
Exhibit 99.2
Burmans Apothecary, L.L.C.,
Subsidiaries, and Affiliate
Consolidated Financial Report
December 31, 2014
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Contents
Report Letter |
1-2 |
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Consolidated Financial Statements (Restated) |
|
|
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Balance Sheets |
3 |
|
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Statements of Operations |
4 |
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Statements of Members Equity |
5 |
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Statements of Cash Flows |
6 |
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Notes to Consolidated Financial Statements |
7-20 |
Plante & Moran, PLLC Suite 360 4444 W. Bristol Road Flint, Ml 48507-3153 Tel: 810.767.5350 Fax: 810.767.8150 plantemoran.com |
Independent Auditors Report
To the Board of Directors
Burmans Apothecary, L.L.C.,
Subsidiaries, and Affiliate
We have audited the accompanying consolidated financial statements of Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate (the Company), which comprise the consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of operations, members equity, and cash flows for the years ended December 31, 2014, 2013, and 2012, and the related notes to the consolidated financial statements.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the 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 consolidated 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 Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate as of December 31, 2014 and 2013 and the results of their operations and their cash flows for the years ended December 31, 2014, 2013, and 2012 in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matters
As disclosed in Note 12 to the consolidated financial statements, on June 15, 2015, all of the members interests in Burmans Apothecary, L.L.C. and subsidiaries were contributed to a related entity.
As disclosed in Note 12 to the consolidated financial statements, on June 19, 2015, all of the members interests in Burmans Apothecary, L.L.C. and subsidiaries were acquired by an unrelated party.
As disclosed in Note 10 to the consolidated financial statements, the 2014, 2013, and 2012 financial statements have been restated to correct various accounting errors contained in the consolidated financial statements previously issued by the Company.
|
/s/ Plante & Moran, PLLC |
September 3, 2015
Flint, Michigan
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Balance Sheets
(Restated)
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December 31, |
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December 31, |
| ||
|
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2014 |
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2013 |
| ||
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Assets |
| ||||||
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Current Assets |
|
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|
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| ||
Cash and cash equivalents |
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$ |
16,855,254 |
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$ |
4,727,193 |
|
Investments (Note 9) |
|
1,051,312 |
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|
| ||
Accounts receivable: |
|
|
|
|
| ||
Trade - Net of allowances (Note 1) |
|
14,919,763 |
|
3,444,095 |
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Affiliates (Note 7) |
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|
|
43,645 |
| ||
Other |
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2,148,353 |
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Inventory (Note 1) |
|
2,044,333 |
|
4,786,268 |
| ||
Other current assets: |
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|
|
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| ||
Vendor deposits (Note 3) |
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5,549,271 |
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Prepaid expenses and other |
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20,765 |
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79,312 |
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|
|
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Total current assets |
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42,589,051 |
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13,080,513 |
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Equipment and Software - Net (Note 2) |
|
790,062 |
|
429,781 |
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|
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|
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Total assets |
|
$ |
43,379,113 |
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$ |
13,510,294 |
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|
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Liabilities and Members Equity |
| ||||||
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Current Liabilities |
|
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| ||
Trade accounts payable |
|
$ |
15,335,276 |
|
$ |
4,640,984 |
|
Trade payables to related parties (Note 7) |
|
185,683 |
|
58 |
| ||
Line of credit (Note 4) |
|
2,000,000 |
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|
| ||
Current portion of notes payable (Note 5) |
|
114,545 |
|
119,162 |
| ||
Accrued and other current liabilities: |
|
|
|
|
| ||
Taxes payable (Note 1) |
|
566,620 |
|
|
| ||
Accrued compensation |
|
182,722 |
|
87,015 |
| ||
Other accrued liabilities |
|
51,500 |
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28,778 |
| ||
|
|
|
|
|
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Total current liabilities |
|
18,436,346 |
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4,875,997 |
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|
|
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Notes Payable - Net of current portion (Note 5) |
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225,767 |
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|
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Members Equity (Note 6) |
|
24,942,767 |
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8,408,530 |
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|
|
|
|
|
| ||
Total liabilities and members equity |
|
$ |
43,379,113 |
|
$ |
13,510,294 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Statements of Operations
(Restated)
|
|
Year Ended |
| |||||||
|
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December 31, |
|
December 31, |
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December 31, |
| |||
|
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2014 |
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2013 |
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2012 |
| |||
|
|
|
|
|
|
|
| |||
Net Revenue |
|
$ |
325,485,490 |
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$ |
68,779,389 |
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$ |
94,456,694 |
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|
|
|
|
|
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|
| |||
Cost of Revenue |
|
292,085,820 |
|
58,946,331 |
|
81,277,881 |
| |||
|
|
|
|
|
|
|
| |||
Gross Profit |
|
33,399,670 |
|
9,833,058 |
|
13,178,813 |
| |||
|
|
|
|
|
|
|
| |||
Operating Expenses |
|
8,597,348 |
|
4,797,919 |
|
6,881,040 |
| |||
|
|
|
|
|
|
|
| |||
Operating Income |
|
24,802,322 |
|
5,035,139 |
|
6,297,773 |
| |||
|
|
|
|
|
|
|
| |||
Nonoperating Income |
|
12,597 |
|
6,160 |
|
10,707 |
| |||
|
|
|
|
|
|
|
| |||
Income - Before income taxes |
|
24,814,919 |
|
5,041,299 |
|
6,308,480 |
| |||
|
|
|
|
|
|
|
| |||
Income Tax Expense (Note 1) |
|
195,176 |
|
33,322 |
|
49,866 |
| |||
|
|
|
|
|
|
|
| |||
Consolidated Net Income |
|
24,619,743 |
|
5,007,977 |
|
6,258,614 |
| |||
|
|
|
|
|
|
|
| |||
Less Consolidated Net Income Attributable to Noncontrolling Interest in Affiliate |
|
106,612 |
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
Consolidated Net Income Attributable to Controlling Interest |
|
$ |
24,513,131 |
|
$ |
5,007,977 |
|
$ |
6,258,614 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Statements of Members Equity
(Restated)
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Total |
| |||
|
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Controlling |
|
Noncontrolling |
|
Members |
| |||
|
|
Interest |
|
Interest |
|
Equity |
| |||
|
|
|
|
|
|
|
| |||
Balance - January 1, 2012 (Note 10) |
|
$ |
4,573,870 |
|
$ |
|
|
$ |
4,573,870 |
|
|
|
|
|
|
|
|
| |||
Consolidated net income - 2012 |
|
6,258,614 |
|
|
|
6,258,614 |
| |||
|
|
|
|
|
|
|
| |||
Member distributions |
|
(4,544,665 |
) |
|
|
(4,544,665 |
) | |||
|
|
|
|
|
|
|
| |||
Balance - December 31, 2012 |
|
6,287,819 |
|
|
|
6,287,819 |
| |||
|
|
|
|
|
|
|
| |||
Consolidated net income - 2013 |
|
5,007,977 |
|
|
|
5,007,977 |
| |||
|
|
|
|
|
|
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| |||
Redemption of members interest (Note 6) |
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(1,250,000 |
) |
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|
(1,250,000 |
) | |||
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|
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|
|
|
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| |||
Member distributions |
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(1,735,750 |
) |
|
|
(1,735,750 |
) | |||
|
|
|
|
|
|
|
| |||
Member contributions |
|
98,484 |
|
|
|
98,484 |
| |||
|
|
|
|
|
|
|
| |||
Balance - December 31, 2013 |
|
8,408,530 |
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|
|
8,408,530 |
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|
|
|
|
|
|
|
| |||
Consolidated net income - 2014 |
|
24,513,131 |
|
106,612 |
|
24,619,743 |
| |||
|
|
|
|
|
|
|
| |||
Member distributions |
|
(19,615,506 |
) |
|
|
(19,615,506 |
) | |||
|
|
|
|
|
|
|
| |||
Member contributions |
|
|
|
10,000,000 |
|
10,000,000 |
| |||
|
|
|
|
|
|
|
| |||
Equity based compensation (Note 6) |
|
1,530,000 |
|
|
|
1,530,000 |
| |||
|
|
|
|
|
|
|
| |||
Balance - December 31, 2014 |
|
$ |
14,836,155 |
|
$ |
10,106,612 |
|
$ |
24,942,767 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Statements of Cash Flows
(Restated)
|
|
| ||||||||
|
|
December 31, |
|
December 31, |
|
December 31, |
| |||
|
|
2014 |
|
2013 |
|
2012 |
| |||
Cash Flows from Operating Activities |
|
|
|
|
|
|
| |||
Consolidated net income |
|
$ |
24,619,743 |
|
$ |
5,007,977 |
|
$ |
6,258,614 |
|
Adjustments to reconcile consolidated net income to net cash from operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
207,254 |
|
101,722 |
|
96,997 |
| |||
Bad debt recoveries |
|
|
|
|
|
(20,059 |
) | |||
Investment income |
|
(105,612 |
) |
|
|
|
| |||
Equity based compensation |
|
1,530,000 |
|
|
|
|
| |||
Changes in operating assets and liabilities which (used) provided cash: |
|
|
|
|
|
|
| |||
Accounts receivable |
|
(13,580,376 |
) |
2,047,470 |
|
(357,009 |
) | |||
Inventory |
|
2,741,935 |
|
(1,599,061 |
) |
(1,661,820 |
) | |||
Other current assets |
|
(5,490,724 |
) |
(16,137 |
) |
(63,175 |
) | |||
Accounts payable |
|
10,879,917 |
|
(1,306,757 |
) |
(1,286,435 |
) | |||
Accrued and other current liabilities |
|
685,049 |
|
(122,353 |
) |
60,735 |
| |||
|
|
|
|
|
|
|
| |||
Net cash provided by operating activities |
|
21,487,186 |
|
4,112,861 |
|
3,027,848 |
| |||
|
|
|
|
|
|
|
| |||
Cash Flows from Investing Activities |
|
|
|
|
|
|
| |||
Purchases of equipment and software |
|
(567,535 |
) |
(90,000 |
) |
(253,341 |
) | |||
Purchases of investments |
|
(945,700 |
) |
|
|
|
| |||
Payments on notes receivable |
|
|
|
84,853 |
|
|
| |||
|
|
|
|
|
|
|
| |||
Net cash used in investing activities |
|
(1,513,235 |
) |
(5,147 |
) |
(253,341 |
) | |||
|
|
|
|
|
|
|
| |||
Cash Flows from Financing Activities |
|
|
|
|
|
|
| |||
Payments on debt |
|
(230,384 |
) |
(117,013 |
) |
(5,009 |
) | |||
Proceeds from line of credit |
|
2,000,000 |
|
|
|
|
| |||
Redemption of member interest |
|
|
|
(800,000 |
) |
|
| |||
Member distributions |
|
(19,615,506 |
) |
(1,735,750 |
) |
(4,544,665 |
) | |||
Member contributions |
|
10,000,000 |
|
98,484 |
|
|
| |||
|
|
|
|
|
|
|
| |||
Net cash used in financing activities |
|
(7,845,890 |
) |
(2,554,279 |
) |
(4,549,674 |
) | |||
|
|
|
|
|
|
|
| |||
Net Increase (Decrease) in Cash and Cash Equivalents |
|
12,128,061 |
|
1,553,435 |
|
(1,775,167 |
) | |||
|
|
|
|
|
|
|
| |||
Cash and Cash Equivalents - Beginning of year |
|
4,727,193 |
|
3,173,758 |
|
4,948,925 |
| |||
|
|
|
|
|
|
|
| |||
Cash and Cash Equivalents - End of year |
|
$ |
16,855,254 |
|
$ |
4,727,193 |
|
$ |
3,173,758 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 1 - Nature of Business and Significant Accounting Policies
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate (the Company) is a specialty pharmacy sales business headquartered in metropolitan Philadelphia, Pennsylvania. The Company stocks, dispenses, and distributes prescriptions for various specialty pharmaceuticals, principally for the treatment of Hepatitis C. The Company grants credit to its customers, who are located throughout the Delaware Valley.
Principles of Consolidation - The consolidated financial statements include the accounts of Burmans Apothecary, L.L.C. (Apothecary), its wholly owned subsidiaries, Burmans Media Pharmacy, L.L.C. (Media) and PharmTrack, L.L.C. (PharmTrack), and Burmans Investment Company, L.L.C. (BIC), a variable interest entity (VIE) for which Apothecary is the primary beneficiary. The equity attributable to the VIE is reported as a noncontrolling interest in the accompanying consolidated financial statements. All material intercompany accounts and balances have been eliminated in consolidation. For purposes of consolidation, the effects of eliminations of revenue and expenses due to intercompany transactions between Apothecary and its subsidiaries and VIE are attributed to Apothecary.
Information About Variable Interest Entities - Apothecary distributed funds in 2014 to its members to form BIC, an entity with common ownership. The entity was formed for the purpose of holding investments and providing a line of credit to Apothecary.
BIC is considered to be a variable interest entity because its primary funding and resources were provided by Apothecary.
Apothecary determined that it is the primary beneficiary of BIC because the funding and resources provided to BIC provide it with (1) the power to direct the activities of BIC that most significantly impact their economic performance and (2) the obligation to absorb losses that could potentially be significant to BIC. As a result, BIC has been included in the consolidated financial statements as a consolidated variable interest entity.
As of December 31, 2014, BIC had current assets of $10,106,612 and no liabilities. As the entity was formed in 2014, there are no assets or liabilities in previous years.
Concentrations of Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with banks or other financial institutions and trade accounts receivable.
As of and for the years ended December 31, 2014, 2013, and 2012, approximately 76, 71, and 69 percent, respectively, of sales and 51, 41, and 65 percent, respectively, of accounts receivable related to five insurance carriers. Concentrations of credit risk with respect to trade receivables are limited by the large number of patients comprising the Companys customer base and their dispersion across multiple payors and geographic areas.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 1 - Nature of Business and Significant Accounting Policies (Continued)
The Company purchases prescription drugs from pharmaceutical companies. One supplier comprises 95, 71, and 92 percent of the cost of sales and 97, 82, and 92 percent of accounts payable as of and for the years ended December 31, 2014, 2013, and 2012, respectively.
Cash Equivalents - The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Investments - Investments in debt and equity securities are recorded at fair value based on quoted market market prices and other inputs as described in Note 9.
Trade Accounts Receivable - Accounts receivable primarily include amounts from third-party benefit managers and insurance providers and are based on contracted prices. Trade receivables require no collateral and are on an unsecured basis. Accounts receivable terms vary by payor, but generally are due within 30 days after the sale of the product or the performance of the service.
The Company maintains an allowance for doubtful accounts that reduces receivables to amounts that are expected to be collected.
In estimating the allowance, management considers factors such as current overall economic conditions, historical and anticipated customer performance, historical experience with write-offs, and the level of past-due accounts. Changes in these conditions may result in additional allowances. All accounts or portions thereof deemed to be uncollectible or to require excessive collection costs are written off in the period that determination is made. The allowance for doubtful accounts on accounts receivable balances was $27,791 and $79,810 as of December 31, 2014 and 2013, respectively.
Inventory - Inventory consists primarily of prescription medications. Inventory is stated at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) method, and is adjusted to actual cost monthly based on a physical count.
Equipment - Equipment is recorded at cost. The Company uses the straight-line method for computing depreciation. Assets are depreciated over their estimated useful lives. Costs of maintenance and repairs are charged to expense when incurred.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 1 - Nature of Business and Significant Accounting Policies (Continued)
Internal-use Software - The Company capitalizes certain development costs primarily related to a custom-developed scalable patient care system. The Company expenses the costs incurred during the preliminary project stage and capitalizes the direct development costs, including the associated payroll and related costs for employees working on development and outside contractors during the application development stage. The Company monitors development on an ongoing basis and capitalizes the costs of any major improvements or that result in significant additional functionality.
Capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful lives of the assets, generally three years. Management evaluates the useful lives of these assets on an annual basis.
Revenue Recognition - The Company recognizes revenue from prescription drug sales for home delivery at the time the drugs are shipped. Shipping and handling costs are not billed to patients; therefore, there are no shipping and handling revenues. Conversely, shipping and handling costs incurred by the Company are included in operating expenses and were approximately $192,000, $148,000, and $183,000 in 2014, 2013, and 2012, respectively.
Cost of Sales - Cost of sales includes expenses related to pharmaceutical purchases. The Company purchases substantially all of its pharmaceuticals from two vendors.
The Company is entitled to rebates from its buying alliances based on the amount of purchases made during the year. Supplier rebates are accrued ratably under contract terms and reduce cost of sales. Earned rebates totaled approximately $7,328,000, $273,000, and $104,000 for 2014, 2013, and 2012, respectively.
Income Taxes - Pursuant to provisions of the Internal Revenue Code, Burmans Apothecary, L.L.C. and subsidiaries have elected to be taxed as an S Corporation, with the wholly owned subsidiaries considered disregarded entities for tax purposes. Generally, the income of an S Corporation is not subject to federal income tax at the corporate level, but rather the stockholders are required to include a pro-rata share of the corporations taxable income or loss in their personal income tax returns, irrespective of whether dividends have been paid. Accordingly, no provision for federal income taxes has been made in the accompanying consolidated financial statements.
BIC is treated as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable or provided for by BIC. Members are taxed individually on their pro-rata ownership share of BICs earnings. BICs net income or loss is allocated among the members in accordance with the operating agreement.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 1 - Nature of Business and Significant Accounting Policies (Continued)
The Companys application of accounting principles generally accepted in the United States of America regarding uncertain tax positions had no effect on its financial position, as management believes the Company has no material unrecognized income tax benefits.
The Company classifies interest and penalties associated with tax liabilities as interest expense and operating expenses, respectively, in the accompanying consolidated financial statements.
The Company is subject to tax in various states. The total amount of state income taxes reported in income tax expense for 2014, 2013, and 2012 was $195,176, $33,322, and $49,866, respectively. The Company is no longer subject to tax examinations for federal, state or local returns for years prior to 2011.
Fair Value of Financial Instruments - Financial instruments consist of cash equivalents, investments, accounts receivable, accounts payable, and debt. The carrying amount of all significant financial instruments approximates fair value due to either the short maturity or the existence of variable interest rates that approximate prevailing market rates.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Subsequent Events - The consolidated financial statements and related disclosures include evaluation of events up through and including September 3, 2015, which is the date the consolidated financial statements were available to be issued.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 2 - Equipment and Software
Equipment and software are summarized as follows:
|
|
|
|
|
|
Depreciable |
| ||
|
|
2014 |
|
2013 |
|
Life - Years |
| ||
Transportation equipment |
|
$ |
69,721 |
|
$ |
19,219 |
|
5 |
|
Furniture, fixtures, and equipment |
|
204,099 |
|
152,250 |
|
5-7 |
| ||
Internal-use software |
|
1,021,619 |
|
246,435 |
|
3-5 |
| ||
Software development in progress |
|
|
|
310,000 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Total cost |
|
1,295,439 |
|
727,904 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Accumulated depreciation/amortization |
|
505,377 |
|
298,123 |
|
|
| ||
|
|
|
|
|
|
|
| ||
Net property and equipment |
|
$ |
790,062 |
|
$ |
429,781 |
|
|
|
Depreciation and amortization expense for 2014, 2013, and 2012 were $207,254, $101,722, and $96,997, respectively.
Note 3 - Vendor Deposits
During 2014, the Company began placing funds on deposit with its largest supplier in an amount approximately equal to one weeks purchases in order to secure more favorable pricing for future purchases. As of December 31, 2014, the amounts on deposit totaled $5,549,271.
Note 4 - Lines of Credit
Apothecary had a $4,000,000 committed line of credit with PNC Bank, which has increased to $7,000,000 during 2014. The line continues to bear interest at 1.75 percent over the daily libor rate as published by the Wall Street Journal (an effective rate of 1.91 percent at December 31, 2014). The line of credit is secured by the Companys existing and future assets, with the exception of the assets of PharmTrack. In addition, the line of credit is secured by the personal guarantees of two of the Companys members. The line expires on August 31, 2015. At December 31, 2014, total outstanding borrowings were $2,000,000. At December 31, 2013, there was no outstanding balance.
During 2014, Apothecary entered into a revolving line of credit agreement with BIC. The line of credit has available borrowings of up to $10,000,000 and is due on demand. Interest is payable at 2.0 percent above prime rate (an effective rate of 5.25 percent at December 31, 2014). This line of credit is subordinated to the bank line of credit disclosed above. The outstanding balance was $8,000,000 at December 31, 2014 and was eliminated in consolidation in the accompanying consolidated financial statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 4 - Lines of Credit (Continued)
The line of credit agreement with PNC Bank contains a financial covenant that requires the maintenance of a minimum tangible net worth. As of December 31, 2014, the Company was in compliance with the loan covenant. The Company was in violation of certain loan covenants during 2014 and earlier periods; these violations have subsequently been waived by the bank.
Note 5 - Long-term Debt
Long-term debt at December 31 is as follows:
|
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Note payable to a former member, due in monthly installments of $58,000 including interest at 3.25 percent per annum, maturing in June 2015 |
|
$ |
114,545 |
|
$ |
338,267 |
|
Note payable with a financial institution due in monthly installments of $491 including interest at 5.99 percent per annum, collateralized by an automobile and paid in full during 2014 |
|
|
|
6,662 |
| ||
Total |
|
114,545 |
|
344,929 |
| ||
Less current portion |
|
114,545 |
|
119,162 |
| ||
Long-term portion |
|
$ |
|
|
$ |
225,767 |
|
Interest expense for 2014, 2013, and 2012 was $160,790, $4,876, and $1,315, respectively.
Note 6 - Members Equity Interests
Under the terms of the operating agreement, members equity interests are divided into two classes, Class A and Class B. Each Class A and Class B membership interest is divided into uniform units of interest and each member has been assigned a specific number of units based upon their initial capital contribution. Class A interests have the sole right to vote and shall not have any restrictions on transfer of their Class A interests. Holders of Class B interests that do not also own Class A interests have the right to transfer all or part of that interest only with prior consent of the Company and all holders of Class A interests, and have limitations on their ability to transfer their interest. Upon the death of a holder of a Class B interest, the interest shall be first offered to the Class A member at a price determined to be the fair market value. If the Class A member does not accept the offer, the Company would be required to purchase all of the Class B interest then owned at the same offer price. Payment for the interest may be made over a period of five years.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 6 - Members Equity Interests (Continued)
Equity Based Compensation - Under the terms of a letter agreement between Apothecary and an officer hired in September 2014, if the officer remains a full-time employee of the Company for one continuous year from his date of employment, the Company is required to issue Class B membership interests to the officer representing 11 percent equity interests in Apothecary and PharmTrack. The fair value of the equity based compensation award was estimated on the date of grant at $6,120,000 using an income approach based on a discounted cash flow method. The compensation cost is being charged against income ratably over the one-year vesting period. The total compensation cost charged against income in 2014 under this agreement totaled $1,530,000, which amount has also been recorded as a Class B members equity interest as of December 31, 2014.
During April 2015, the letter agreement was amended and restated to provide an alternative payment formula in the event of a sale of the Company prior to the officers completion of one year of continuous employment. Provided that the officer is a fulltime employee of the Company at the time of the closing date of sale transaction, the Company shall pay to the officer a sale bonus equal to 3.5 percent of the net purchase consideration, in lieu of the equity based compensation described above. As discussed in Note 12, the Company sold all of its equity interests to an unrelated party in June 2015, at which time the Company paid a sale bonus to the officer of $3,000,000.
Member Redemption - In September 2013, the Company redeemed a members entire 17.5 percent Class B member interest for $1,250,000, including an initial payment of $800,000 and a note payable of $450,000 (see Note 5).
Note 7 - Related Party Transactions
Following is a description of transactions between the Company and related parties:
Administrative Fees - The Company is charged administrative fees from Burmans Medical Supplies, Inc., a related company with common ownership, for a percentage of payroll taxes, benefits, and commissions as well as for various overhead expenses. Administrative fee expense for 2014, 2013, and 2012 was $1,239,249, $552,837, and $1,076,887, respectively.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 7 - Related Party Transactions (Continued)
Sales are made and services are purchased from entities affiliated through common ownership. The following is a summary of transactions and balances with affiliates for 2014, 2013, and 2012:
|
|
2014 |
|
2013 |
|
2012 |
| |||
|
|
|
|
|
|
|
| |||
Sales to Burmans Pharmacy, Inc. |
|
$ |
31,365 |
|
$ |
20,509 |
|
$ |
330,804 |
|
Sales to Burmans Medical Supplies, Inc. |
|
83,823 |
|
51,474 |
|
55,338 |
| |||
Purchases from Burmans Pharmacy, Inc. |
|
303,131 |
|
5,009,531 |
|
215,088 |
| |||
Purchases from Burmans Medical Supplies, Inc. |
|
125,349 |
|
136,069 |
|
175,094 |
| |||
Accounts Receivable from Burmans Pharmacy, Inc. |
|
|
|
9,365 |
|
55,900 |
| |||
Accounts Receivable from Burmans Medical Supplies, Inc. |
|
|
|
26,122 |
|
280,223 |
| |||
Accounts Payable to Burmans Medical Supplies, Inc. |
|
185,608 |
|
|
|
|
| |||
Accounts Payable to Burmans Pharmacy, Inc. |
|
75 |
|
|
|
|
| |||
Note 8 - Retirement Plans
The Company participates in a 401(k) plan sponsored by a related entity with common ownership, which covers substantially all employees. The plan provides for the Company to make matching contributions. The Companys contributions to the plan totaled $59,848, $68,273, and $62,098 for 2014, 2013, and 2012, respectively.
During December 2014, the Company began participating in a new profit-sharing plan sponsored by a related entity with common ownership. Contributions to the plan are made at the discretion of management. Participants vest in company contributions ratably over a number of years. Company contributions to the profit-sharing plan during 2014 were $11,703.
During December 2014, the Company began participating in a new defined benefit pension plan sponsored by a related entity with common ownership. Contributions to the plan are based on the actuarially determined present value of accumulated plan benefits. The benefits are based on an eligible employees years of service and compensation as defined by the plan. Company contributions to the plan during 2014 were $81,369.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 8 - Retirement Plans (Continued)
In connection with the sale of all members interests in the Company to an unrelated party in June 2015 (see Note 12), the Company has agreed that each of the three qualified retirement plans described above will be terminated before the end of 2015. The Companys transactions with the retirement plans are not material to the consolidated financial statements.
Note 9 - Fair Value Measurements
Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.
Fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on managements own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.
In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Companys assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
The Company measures its investments at fair value on a recurring basis. The fair value of its investments in fixed-income mutual funds is based primarily on Level 1 inputs as described above, and had a carrying value of $1,051,312 at December 31, 2014. There were no investments measured at fair value at December 31, 2013.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 10 - Restatements
The accompanying consolidated financial statements for 2014, 2013, and 2012 have been restated to correct the following errors included in the Companys previously issued consolidated financial statements:
Consolidation of Variable Interest Entity - The 2014 consolidated financial statements have been restated to include the accounts of BIC, a VIE formed in 2014 for which Apothecary is the primary beneficiary. See Note 1 for additional information about BIC. BICs primary assets and liabilities include cash and cash equivalents, investments and a line of credit extended to Apothecary that has been eliminated in consolidation as discussed in Note 4.
Equity Based Compensation - The 2014 consolidated financial statements have been restated to record compensation expense and members equity contributions in connection with an equity based compensation award granted to an officer in 2014. See Note 6 for additional information about this agreement.
Vendor Rebates Receivable - The 2014 consolidated financial statements have been restated to record accounts receivable and reductions to cost of revenue related to vendor rebates that have been earned under the terms of agreements effective beginning in 2014.
Accrued Vacation Pay - The 2014 consolidated financial statements have been restated to record additional liabilities and expenses for accrued vacation pay earned by employees as of December 31, 2014 that had been omitted from the previously issued 2014 consolidated financial statements.
Internal Use Software - The 2014, 2013, and 2012 consolidated financial statements have been restated to properly capitalize the costs of developing internal use software. The Company has capitalized approximately $246,000 in development costs for software placed in service prior to 2012, and approximately $775,000 in development costs for software placed in service during 2014. Amortization has been recorded as discussed in Notes 1 and 2.
Inventory - The 2014, 2013, and 2012 consolidated financial statements have been restated to record the proper carrying amount of inventory on hand at the end of each fiscal year.
Other Adjustments and Reclassifications - The 2014, 2013, and 2012 consolidated financial statements have been restated to record the effects of other less significant adjustments and reclassifications that do not have a material effect on the consolidated financial statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 10 - Restatements (Continued)
Impact of Restatements - The following table sets forth the collective impacts of the restatements described above:
|
|
As previously |
|
|
|
|
| |||
|
|
reported |
|
Adjustment |
|
As adjusted |
| |||
As of and for the year ended December 31, 2014: |
|
|
|
|
|
|
| |||
Consolidated Balance Sheet: |
|
|
|
|
|
|
| |||
Cash and cash equivalents |
|
$ |
15,800,954 |
|
$ |
1,054,300 |
|
$ |
16,855,254 |
|
Investments |
|
|
|
1,051,312 |
|
1,051,312 |
| |||
Accounts receivable |
|
14,919,763 |
|
2,148,353 |
|
17,068,116 |
| |||
Inventory |
|
2,087,396 |
|
(43,063 |
) |
2,044,333 |
| |||
Prepaid expenses and other |
|
19,770 |
|
995 |
|
20,765 |
| |||
Equipment and software - Net |
|
144,076 |
|
645,986 |
|
790,062 |
| |||
Total assets |
|
38,521,230 |
|
4,857,883 |
|
43,379,113 |
| |||
Lines of credit |
|
10,000,000 |
|
(8,000,000 |
) |
2,000,000 |
| |||
Accrued and other current liabilities |
|
742,026 |
|
58,816 |
|
800,842 |
| |||
Total liabilities |
|
26,377,530 |
|
(7,941,184 |
) |
18,436,346 |
| |||
Members equity |
|
12,143,700 |
|
12,799,067 |
|
24,942,767 |
| |||
Consolidated Statement of Operations: |
|
|
|
|
|
|
| |||
Sales |
|
325,472,138 |
|
13,352 |
|
325,485,490 |
| |||
Cost of sales |
|
293,858,612 |
|
(1,772,792 |
) |
292,085,820 |
| |||
Gross profit |
|
31,613,526 |
|
1,786,144 |
|
33,399,670 |
| |||
Operating expenses |
|
7,409,236 |
|
1,188,112 |
|
8,597,348 |
| |||
Operating income |
|
24,204,290 |
|
598,032 |
|
24,802,322 |
| |||
Other income |
|
25,048 |
|
(12,451 |
) |
12,597 |
| |||
Income tax expense |
|
195,847 |
|
(671 |
) |
195,176 |
| |||
Consolidated net income |
|
24,033,491 |
|
586,252 |
|
24,619,743 |
| |||
Consolidated Statement of Members Equity: |
|
|
|
|
|
|
| |||
Total members equity - Beginning of year |
|
7,725,714 |
|
682,816 |
|
8,408,530 |
| |||
Consolidated net income |
|
24,033,491 |
|
586,252 |
|
24,619,743 |
| |||
Member contributions |
|
|
|
10,000,000 |
|
10,000,000 |
| |||
Equity based compensation |
|
|
|
1,530,000 |
|
1,530,000 |
| |||
Total members equity - End of year |
|
12,143,700 |
|
12,799,067 |
|
24,942,767 |
| |||
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 10 Restatements (Continued)
|
|
As previously |
|
|
|
|
| |||
|
|
reported |
|
Adjustment |
|
As adjusted |
| |||
As of and for the year ended December 31, 2014 (Continued): |
|
|
|
|
|
|
| |||
Consolidated Statement of Cash Flows: |
|
|
|
|
|
|
| |||
Consolidated net income |
|
$ |
24,033,491 |
|
$ |
586,252 |
|
$ |
24,619,743 |
|
Depreciation and amortization |
|
36,625 |
|
170,629 |
|
207,254 |
| |||
Investment income |
|
|
|
(105,612 |
) |
(105,612 |
) | |||
Equity based compensation |
|
|
|
1,530,000 |
|
1,530,000 |
| |||
Changes in accounts receivable |
|
(11,440,180 |
) |
(2,140,196 |
) |
(13,580,376 |
) | |||
Changes in inventory |
|
2,367,489 |
|
374,446 |
|
2,741,935 |
| |||
Changes in other current assets |
|
(5,489,729 |
) |
(995 |
) |
(5,490,724 |
) | |||
Changes in accounts payable |
|
10,888,192 |
|
(8,275 |
) |
10,879,917 |
| |||
Changes in accrued and other current liabilities |
|
626,113 |
|
58,936 |
|
685,049 |
| |||
Net cash provided by operating activities |
|
21,022,002 |
|
465,184 |
|
21,487,186 |
| |||
Purchases of equipment and software |
|
(102,351 |
) |
(465,184 |
) |
(567,535 |
) | |||
Purchases of investments |
|
|
|
(945,700 |
) |
(945,700 |
) | |||
Net cash used in investing activities |
|
(102,351 |
) |
(1,410,884 |
) |
(1,513,235 |
) | |||
Proceeds from line of credit |
|
10,000,000 |
|
(8,000,000 |
) |
2,000,000 |
| |||
Member contributions |
|
|
|
10,000,000 |
|
10,000,000 |
| |||
Net cash used in financing activities |
|
(9,845,890 |
) |
2,000,000 |
|
(7,845,890 |
) | |||
Net increase in cash and cash equivalents |
|
11,073,761 |
|
1,054,300 |
|
12,128,061 |
| |||
Cash and cash equivalents - End of year |
|
15,800,954 |
|
1,054,300 |
|
16,855,254 |
| |||
|
|
|
|
|
|
|
| |||
As of and for the year ended December 31, 2013: |
|
|
|
|
|
|
| |||
Consolidated Balance Sheet: |
|
|
|
|
|
|
| |||
Accounts receivable |
|
3,479,583 |
|
8,157 |
|
3,487,740 |
| |||
Inventory |
|
4,454,885 |
|
331,383 |
|
4,786,268 |
| |||
Equipment and software - Net |
|
78,350 |
|
351,431 |
|
429,781 |
| |||
Total assets |
|
12,819,323 |
|
690,971 |
|
13,510,294 |
| |||
Accounts payable |
|
4,632,767 |
|
8,275 |
|
4,641,042 |
| |||
Accrued and other current liabilities |
|
115,913 |
|
(120 |
) |
115,793 |
| |||
Total liabilities |
|
5,093,609 |
|
8,155 |
|
5,101,764 |
| |||
Members equity |
|
7,725,714 |
|
682,816 |
|
8,408,530 |
| |||
Consolidated Statement of Operations: |
|
|
|
|
|
|
| |||
Sales |
|
68,839,139 |
|
(59,750 |
) |
68,779,389 |
| |||
Cost of sales |
|
59,574,844 |
|
(628,513 |
) |
58,946,331 |
| |||
Gross profit |
|
9,264,295 |
|
568,763 |
|
9,833,058 |
| |||
Operating expenses |
|
4,867,402 |
|
(69,483 |
) |
4,797,919 |
| |||
Operating income |
|
4,396,893 |
|
638,246 |
|
5,035,139 |
| |||
Other income |
|
5,498 |
|
662 |
|
6,160 |
| |||
Consolidated net income |
|
4,369,069 |
|
638,908 |
|
5,007,977 |
| |||
Consolidated Statement of Members Equity: |
|
|
|
|
|
|
| |||
Total members equity - Beginning of year |
|
6,243,913 |
|
43,906 |
|
6,287,819 |
| |||
Consolidated net income |
|
4,369,069 |
|
638,908 |
|
5,007,977 |
| |||
Total members equity - End of year |
|
7,725,714 |
|
682,816 |
|
8,408,530 |
| |||
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 10 - Restatements (Continued)
|
|
As previously |
|
|
|
|
| |||
|
|
reported |
|
Adjustment |
|
As adjusted |
| |||
As of and for the year ended December 31, 2013 (Continued): |
|
|
|
|
|
|
| |||
Consolidated Statement of Cash Flows: |
|
|
|
|
|
|
| |||
Consolidated net income |
|
$ |
4,369,069 |
|
$ |
638,908 |
|
$ |
5,007,977 |
|
Depreciation and amortization |
|
19,937 |
|
81,785 |
|
101,722 |
| |||
Bad debts |
|
59,751 |
|
(59,751 |
) |
|
| |||
Changes in accounts receivable |
|
1,995,876 |
|
51,594 |
|
2,047,470 |
| |||
Changes in inventory |
|
(968,366 |
) |
(630,695 |
) |
(1,599,061 |
) | |||
Changes in accounts payable |
|
(1,315,032 |
) |
8,275 |
|
(1,306,757 |
) | |||
Changes in accrued and other current liabilities |
|
(122,233 |
) |
(120 |
) |
(122,353 |
) | |||
Net cash provided by operating activities |
|
4,022,863 |
|
89,998 |
|
4,112,861 |
| |||
Purchases of equipment and software |
|
|
|
(90,000 |
) |
(90,000 |
) | |||
Net cash provided by (used in) investing activities |
|
84,853 |
|
(90,000 |
) |
(5,147 |
) | |||
|
|
|
|
|
|
|
| |||
For the year ended December 31, 2012: |
|
|
|
|
|
|
| |||
Consolidated Statement of Operations: |
|
|
|
|
|
|
| |||
Sales |
|
94,496,812 |
|
(40,118 |
) |
94,456,694 |
| |||
Cost of sales |
|
80,972,064 |
|
305,817 |
|
81,277,881 |
| |||
Gross profit |
|
13,524,748 |
|
(345,935 |
) |
13,178,813 |
| |||
Operating expenses |
|
7,065,512 |
|
(184,472 |
) |
6,881,040 |
| |||
Operating income |
|
6,459,236 |
|
(161,463 |
) |
6,297,773 |
| |||
Consolidated net income |
|
6,420,072 |
|
(161,458 |
) |
6,258,614 |
| |||
Consolidated Statement of Members Equity: |
|
|
|
|
|
|
| |||
Total members equity - Beginning of year |
|
4,368,508 |
|
205,362 |
|
4,573,870 |
| |||
Consolidated net income |
|
6,420,072 |
|
(161,458 |
) |
6,258,614 |
| |||
Total members equity - End of year |
|
6,243,913 |
|
43,906 |
|
6,287,819 |
| |||
Consolidated Statement of Cash Flows: |
|
|
|
|
|
|
| |||
Consolidated net income |
|
6,420,072 |
|
(161,458 |
) |
6,258,614 |
| |||
Depreciation and amortization |
|
14,852 |
|
82,145 |
|
96,997 |
| |||
Bad debts |
|
20,059 |
|
(40,118 |
) |
(20,059 |
) | |||
Changes in accounts receivable |
|
(344,985 |
) |
(12,024 |
) |
(357,009 |
) | |||
Changes in inventory |
|
(1,961,132 |
) |
299,312 |
|
(1,661,820 |
) | |||
Net cash provided by operating activities |
|
2,859,992 |
|
167,856 |
|
3,027,848 |
| |||
Purchases of equipment and software |
|
(33,341 |
) |
(220,000 |
) |
(253,341 |
) | |||
Advances to related companies |
|
(52,142 |
) |
52,142 |
|
|
| |||
Net cash used in investing activities |
|
(85,483 |
) |
(167,858 |
) |
(253,341 |
) | |||
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements
December 31, 2014
Note 11 - Supplemental Disclosures of Cash Flow Information
Cash paid for interest and income taxes for the years ended December 31, 2014, 2013, and 2012 was as follows:
|
|
2014 |
|
2013 |
|
2012 |
| |||
Interest |
|
$ |
55,077 |
|
$ |
4,876 |
|
$ |
1,315 |
|
Income taxes |
|
50,769 |
|
83,563 |
|
27,198 |
| |||
There were no significant noncash investing transactions in for the years ended December 31, 2014, 2013, or 2012.
Significant noncash financing activities for the years ended December 31, 2014, 2013 and 2012 were as follows:
|
|
2014 |
|
2013 |
|
2012 |
| |||
Note payable issued for redemption of members interest |
|
$ |
|
|
$ |
450,000 |
|
$ |
|
|
Equity-based compensation award |
|
1,530,000 |
|
|
|
|
| |||
Note 12 - Subsequent Events
On February 27, 2015, the Company formed Bridgewater Pharmacy, LLC, a wholly owned subsidiary that will be considered a disregarded entity for tax purposes.
On June 15, 2015, all of the members interests in Burmans Apothecary, L.L.C. and subsidiaries were contributed to SLB Holdings, Inc., a newly-formed entity, in exchange for all of the equity interests of SLB Holdings. Apothecary then became a wholly-owned subsidiary of SLB Holdings and elected to become a single-member L.L.C. for tax purposes.
On June 19, 2015, all of the outstanding members interests in Burmans Apothecary, L.L.C. and subsidiaries were acquired by Diplomat Pharmacy, Inc. for a total acquisition price of approximately $93.9 million.
Exhibit 99.3
Burmans Apothecary, L.L.C.,
Subsidiaries, and Affiliate
Consolidated Financial Report
March 31, 2015
(Unaudited)
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Contents
Consolidated Financial Statements |
|
|
|
Balance Sheets (Unaudited) |
1 |
|
|
Statements of Operations (Unauditied) |
2 |
|
|
Statement of Members Equity (Unaudited) |
3 |
|
|
Statements of Cash Flows (Unaudited) |
4 |
|
|
Notes to Consolidated Financial Statements (Unaudited) |
5-14 |
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Balance Sheets (Unaudited)
|
|
|
|
December 31, |
| ||
|
|
March 31, 2015 |
|
2014 |
| ||
|
|
|
|
|
| ||
Assets |
|
|
|
|
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
21,268,834 |
|
$ |
16,855,254 |
|
Investments (Note 9) |
|
1,000,000 |
|
1,051,312 |
| ||
Accounts receivable: |
|
|
|
|
| ||
Trade - Net of allowances (Note 1) |
|
17,781,186 |
|
14,919,763 |
| ||
Other |
|
5,231,881 |
|
2,148,353 |
| ||
Inventory (Note 1) |
|
2,728,364 |
|
2,044,333 |
| ||
Othe current assets: |
|
|
|
|
| ||
Vendor deposits (Note 3) |
|
7,327,131 |
|
5,549,271 |
| ||
Prepaid expenses and other |
|
116,547 |
|
20,765 |
| ||
Total current assets |
|
55,453,943 |
|
42,589,051 |
| ||
Equipment and Software - Net (Note 2) |
|
720,840 |
|
790,062 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
56,174,783 |
|
$ |
43,379,113 |
|
|
|
|
|
|
| ||
Liabilities and Members Equity |
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
| ||
Trade accounts payable |
|
$ |
22,568,047 |
|
$ |
15,335,276 |
|
Trade payables to related parties (Note 7) |
|
272,741 |
|
185,683 |
| ||
Lines of credit (Note 4) |
|
2,000,000 |
|
2,000,000 |
| ||
Current portion of notes payable (Note 5) |
|
57,462 |
|
114,545 |
| ||
Accrued and other current liabilities: |
|
|
|
|
| ||
Taxes payable (Note 1) |
|
31,526 |
|
566,620 |
| ||
Accrued compensation |
|
288,628 |
|
182,722 |
| ||
Other accrued liabilities |
|
109,162 |
|
51,500 |
| ||
Total current liabilities |
|
25,327,566 |
|
18,436,346 |
| ||
Members Equity (Note 6) |
|
30,847,217 |
|
24,942,767 |
| ||
|
|
|
|
|
| ||
Total liabilities and members equity |
|
$ |
56,174,783 |
|
$ |
43,379,113 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Statements of Operations (Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 31, 2015 |
|
March 31, 2014 |
| ||
Net Revenue |
|
$ |
106,386,367 |
|
$ |
56,225,964 |
|
Cost of Revenue |
|
96,867,394 |
|
50,231,630 |
| ||
Gross Profit |
|
9,518,973 |
|
5,994,334 |
| ||
Operating Expenses |
|
4,263,081 |
|
1,466,857 |
| ||
Operating Income |
|
5,255,892 |
|
4,527,477 |
| ||
Nonoperating Income |
|
7,151 |
|
1,849 |
| ||
Income - Before income taxes |
|
5,263,043 |
|
4,529,326 |
| ||
Income Tax Expense (Note 1) |
|
48,962 |
|
9,456 |
| ||
Consolidated Net Income |
|
5,214,081 |
|
4,519,870 |
| ||
Less Consolidated Net Income Attributable to Noncontrolling Interest in Affiliate |
|
105,580 |
|
|
| ||
Consolidated Net Income Attributable to Controlling Interest |
|
$ |
5,108,501 |
|
$ |
4,519,870 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Statement of Members Equity (Unaudited)
|
|
Controlling |
|
Noncontrolling |
|
|
| |||
|
|
Interest |
|
Interest |
|
Total |
| |||
Balance - January 1, 2015 |
|
$ |
14,836,155 |
|
$ |
10,106,612 |
|
$ |
24,942,767 |
|
Consolidated net income |
|
5,108,501 |
|
105,580 |
|
5,214,081 |
| |||
Member distributions |
|
(839,631 |
) |
|
|
(839,631 |
) | |||
Equity-based compensation (Note 6) |
|
1,530,000 |
|
|
|
1,530,000 |
| |||
Balance - March 31, 2015 |
|
$ |
20,635,025 |
|
$ |
10,212,192 |
|
$ |
30,847,217 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Consolidated Statements of Cash Flows (Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 31, |
|
March 31, |
| ||
|
|
2015 |
|
2014 |
| ||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Consolidated net income |
|
$ |
5,214,081 |
|
$ |
4,519,870 |
|
Adjustments to reconcile consolidated net income to net cash from operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
69,222 |
|
29,193 |
| ||
Investment income |
|
(7,126 |
) |
|
| ||
Equity-based compensation |
|
1,530,000 |
|
|
| ||
Changes in operating assets and liabilities which (used) provided cash: |
|
|
|
|
| ||
Accounts receivable |
|
(5,944,951 |
) |
(9,962,067 |
) | ||
Inventory |
|
(684,031 |
) |
2,549,259 |
| ||
Other current assets |
|
(1,873,642 |
) |
(4,250,067 |
) | ||
Accounts payable |
|
7,319,829 |
|
9,750,549 |
| ||
Accrued and other current liabilities |
|
(371,526 |
) |
(12,078 |
) | ||
Net cash provided by operating activities |
|
5,251,856 |
|
2,624,659 |
| ||
Cash Flows from Investing Activities - Proceeds from sales and maturities of investments |
|
58,438 |
|
|
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
Payments on debt |
|
(57,083 |
) |
(56,681 |
) | ||
Proceeds from line of credit |
|
|
|
2,000,000 |
| ||
Member distributions |
|
(839,631 |
) |
|
| ||
Net cash (used in) provided by financing activities |
|
(896,714 |
) |
1,943,319 |
| ||
Net Increase in Cash and Cash Equivalents |
|
4,413,580 |
|
4,567,978 |
| ||
Cash and Cash Equivalents - Beginning of period |
|
16,855,254 |
|
4,727,193 |
| ||
Cash and Cash Equivalents - End of period |
|
$ |
21,268,834 |
|
$ |
9,295,171 |
|
See Notes to Consolidated Financial Statements.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 1 - Nature of Business and Significant Accounting Policies
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate (the Company) is a specialty pharmacy sales business headquartered in metropolitan Philadelphia, Pennsylvania. The Company stocks, dispenses, and distributes prescriptions for various specialty pharmaceuticals, principally for the treatment of Hepatitis C. The Company grants credit to its customers, which are located throughout the Delaware Valley.
Unaudited Interim Financial Information - The accompanying consolidated balance sheets as of March 31, 2015, the consolidated statements of operations for the three months ended March 31, 2015 and 2014, the consolidated statements of cash flows for the three months ended March 31, 2015 and 2014, and the consolidated statement of members equity for the three months ended March 31, 2015 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In the opinion of the Companys management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Companys statement of financial position at March 31, 2015, its results of operations and its cash flows for the three months ended March 31, 2015 and 2014, and its changes in members equity for the three months ended March 31, 2015. The results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015. These consolidated financial statements should be read in conjunction with our audited financial statements and notes as of and for the year ended December 31, 2014.
Principles of Consolidation - The consolidated financial statements include the accounts of Burmans Apothecary, L.L.C. (Apothecary), its wholly owned subsidiaries, Burmans Media Pharmacy, L.L.C. (Media), PharmTrack, L.L.C. (PharmTrack), and Bridgewater Pharmacy, L.L.C. (Bridgewater), and Burmans Investment Company, L.L.C. (BIC), a variable interest entity (VIE) for which Apothecary is the primary beneficiary. The equity attributable to the VIE is reported as a noncontrolling interest in the accompanying consolidated financial statements. All material intercompany accounts and balances have been eliminated in consolidation. For the purpose of consolidation, the effects of eliminations of revenue and expenses due to intercompany transactions between Apothecary and its subsidiaries and the VIE are attributed to Apothecary.
Information About Variable Interest Entities - Apothecary distributed funds in 2014 to its members to form BIC, an entity with common ownership. The entity was formed for the purpose of holding investments and providing a line of credit to Apothecary.
BIC is considered to be a variable interest entity because its primary funding and resources were provided by Apothecary.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 1 - Nature of Business and Significant Accounting Policies (Continued)
Apothecary determined that it is the primary beneficiary of BIC because the funding and resources provided to BIC provide it with (1) the power to direct the activities of BIC that most significantly impact its economic performance and (2) the obligation to absorb losses that could potentially be significant to BIC. As a result, BIC has been included in the consolidated financial statements as a consolidated variable interest entity.
As of March 31, 2015, BIC had current assets of $10,212,192 and no liabilities. As of December 31, 2014, BIC had current assets of $10,106,612 and no liabilities.
Concentrations of Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with banks or other financial institutions and trade accounts receivable.
Approximately 87 and 66 percent of sales for the three months ended March 31, 2015 and March 31, 2014, respectively, and 35 and 51 percent of accounts receivable at March 31, 2015 and December 31, 2014, respectively, related to five insurance carriers. Concentrations of credit risk with respect to trade receivables are limited by the large number of patients comprising the Companys customer base and their dispersion across multiple payors and multiple geographic areas.
The Company purchases prescription drugs from pharmaceutical companies. One supplier comprises 91 and 78 percent of the cost of sales for the three months ended March 31, 2015 and 2014, respectively, and 93 and 97 percent of accounts payable at March 31, 2015 and December 31, 2014, respectively.
Cash Equivalents - The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Investments - Investments in debt and equity securities are recorded at fair value based on quoted market market prices and other inputs as described in Note 9.
Trade Accounts Receivable - Accounts receivable primarily include amounts from third-party benefit managers and insurance providers and are based on contracted prices. Trade receivables require no collateral and are on an unsecured basis. Accounts receivable terms vary by payor, but generally are due within 30 days after the sale of the product or the performance of the service.
The Company maintains an allowance for doubtful accounts that reduces receivables to amounts that are expected to be collected.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 1 - Nature of Business and Significant Accounting Policies (Continued)
In estimating the allowance, management considers factors such as current overall economic conditions, historical and anticipated customer performance, historical experience with write-offs, and the level of past-due accounts. Changes in these conditions may result in additional allowances. All accounts or portions thereof deemed to be uncollectible or to require excessive collection costs are written off in the period that determination is made. The allowance for doubtful accounts on accounts receivable balances was $32,806 and $27,791 as of March 31, 2015 and December 31, 2014, respectively.
Inventory - Inventory consists primarily of prescription medications. Inventory is stated at the lower of cost or market, with cost determined on the first in, first out (FIFO) method, and is adjusted to actual cost monthly based on a physical count.
Equipment - Equipment is recorded at cost. The Company uses the straight-line method for computing depreciation. Assets are depreciated over their estimated useful lives. Costs of maintenance and repairs are charged to expense when incurred.
Internal Use Software - The Company capitalizes certain development costs primarily related to a custom-developed scalable patient care system. The Company expenses the costs incurred during the preliminary project stage, and capitalizes the direct development costs, including the associated payroll and related costs for employees working on development and outside contractors during the application development stage. The Company monitors development on an ongoing basis and capitalizes the costs of any major improvements or that result in significant additional functionality.
Capitalized internal use software costs are amortized on a straight-line basis over the estimated useful lives of the assets (generally three years). Management evaluates the useful lives of these assets on an annual basis.
Revenue Recognition - The Company recognizes revenue from prescription drug sales for home delivery at the time the drugs are shipped. Shipping and handling costs are not billed to patients; therefore, there is no shipping and handling revenue. Conversely, shipping and handling costs incurred by the Company are included in operating expenses and were approximately $53,000 and $44,000 for the three months ended March 31, 2015 and March 31, 2014, respectively.
Cost of Sales - Cost of sales includes expenses related to pharmaceutical purchases. The Company purchases substantially all of its pharmaceuticals from two vendors.
The Company is entitled to rebates from its buying alliances based on the amount of purchases made during the year. Supplier rebates are accrued ratably under contract terms and reduce cost of sales. Earned rebates totaled approximately $5,800,000 and $739,000 for the three months ended March 31, 2015 and March 31, 2014, respectively.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 1 - Nature of Business and Significant Accounting Policies (Continued)
Income Taxes - Pursuant to provisions of the Internal Revenue Code, Burmans Apothecary, L.L.C. and subsidiaries have elected to be taxed as an S corporation, with the wholly owned subsidiaries considered disregarded entities for tax purposes. Generally, the income of an S corporation is not subject to federal income tax at the corporate level but rather, the stockholders are required to include a pro-rata share of the corporations taxable income or loss in their personal income tax returns, irrespective of whether dividends have been paid. Accordingly, no provision for federal income taxes has been made in the accompanying consolidated financial statements.
BIC is treated as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable or provided for by BIC. Members are taxed individually on their pro-rata ownership share of BICs earnings. BICs net income or loss is allocated among the members in accordance with the operating agreement.
The Companys application of accounting principles generally accepted in the United States of America regarding uncertain tax positions had no effect on its financial position, as management believes the Company has no material unrecognized income tax benefits.
The Company classifies interest and penalties associated with tax liabilities as interest expense and operating expenses, respectively, in the accompanying consolidated financial statements.
The Company is subject to tax in various states. The total amount of state income taxes reported in income tax expense for the three months ended March 31, 2015 and March 31, 2014 was $48,962, and $9,456, respectively. The Company is no longer subject to tax examinations for federal, state or local returns for years prior to 2011.
Fair Value of Financial Instruments - Financial instruments consist of cash equivalents, investments, accounts receivable, accounts payable, and debt. The carrying amount of all significant financial instruments approximates fair value due to either the short maturity or the existence of variable interest rates that approximate prevailing market rates.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 1 - Nature of Business and Significant Accounting Policies (Continued)
Subsequent Events - The financial statements and related disclosures include evaluation of events up through and including September 3, 2015, which is the date the financial statements were available to be issued.
Note 2 - Equipment and Software
Equipment and software are summarized as follows:
|
|
March 31, |
|
December 31, |
|
Depreciable |
| ||
|
|
2015 |
|
2014 |
|
Life - Years |
| ||
Transportation equipment |
|
$ |
69,721 |
|
$ |
69,721 |
|
5 |
|
Furniture, fixtures, and equipment |
|
204,099 |
|
204,099 |
|
5-7 |
| ||
Internal use software |
|
1,021,619 |
|
1,021,619 |
|
3-5 |
| ||
Total cost |
|
1,295,439 |
|
1,295,439 |
|
|
| ||
Accumulated amortization/depreciation |
|
574,599 |
|
505,377 |
|
|
| ||
Net property and equipment |
|
$ |
720,840 |
|
$ |
790,062 |
|
|
|
Depreciation and amortization expense for the three months ended March 31, 2015 and March 31, 2014 were $69,222 and $29,193, respectively.
Note 3 - Vendor Deposits
During 2014, the Company began placing funds on deposit with its largest supplier in an amount approximately equal to one weeks purchases in order to secure more favorable pricing for future purchases. As of March 31, 2015 and December 31, 2014, the amounts on deposit totaled $7,327,131 and $5,549,271, respectively.
Note 4 - Lines of Credit
Apothecary had a $4,000,000 committed line of credit with PNC Bank, which has increased to $7,000,000 during 2014. The line continues to bear interest at 1.75 percent over the daily LIBOR rate as published by The Wall Street Journal (an effective rate of 1.92 percent at March 31, 2015). The line of credit is secured by the Companys existing and future assets, with the exception of the assets of PharmTrack. In addition, the line of credit is secured by the personal guarantees of two of the Companys members. The line expires on August 31, 2015. At both March 31, 2015 and December 31, 2014, total outstanding borrowings were $2,000,000.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 4 - Lines of Credit (Continued)
During 2014, Apothecary entered into a revolving line of credit agreement with BIC. The line of credit has available borrowings of up to $10,000,000 and is due on demand. Interest is payable at 2.0 percent above prime rate (an effective rate of 5.25 percent at March 31, 2015). This line of credit is subordinated to the bank line of credit disclosed above. The outstanding balance was $8,000,000 at both March 31, 2015 and December 31, 2014, and was eliminated in consolidation in the accompanying consolidated financial statements.
The line of credit agreement with PNC Bank contains a financial covenant that requires the maintenance of a minimum tangible net worth. As of March 31, 2015, the Company was in compliance with the loan covenant. The Company was in violation of certain loan covenants during 2014 and earlier periods; these violations have subsequently been waived by the bank.
Note 5 - Long-term Debt
Long-term debt at March 31, 2015 and December 31, 2014 is as follows:
|
|
March 31, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
Note payable to a former member, due in monthly installments of $58,000 including interest at 3.25 percent per annum, maturing in June 2015 |
|
$ |
57,462 |
|
$ |
114,545 |
|
Total |
|
57,462 |
|
114,545 |
| ||
Less current portion |
|
57,462 |
|
114,545 |
| ||
Long-term portion |
|
$ |
|
|
$ |
|
|
Interest expense for the three months ended March 31, 2015 and March 31, 2014 was $113,984 and $11,794, respectively.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 6 - Members Equity Interests
Under the terms of the operating agreement, members equity interests are divided into two classes, Class A and Class B. Each Class A and Class B membership interest is divided into uniform units of interest and each member has been assigned a specific number of units based upon their initial capital contribution. Class A interests have the sole right to vote and shall not have any restrictions on transfer of their Class A interests. Holders of Class B interests that do not also own Class A interests have the right to transfer all or part of that interest only with prior consent of the Company and all holders of Class A interests, and have limitations on their ability to transfer their interest. Upon the death of a holder of a Class B interest, the interest shall be first offered to the Class A member at a price determined to be the fair market value. If the Class A member does not accept the offer, the Company would be required to purchase all of the Class B interest then owned at the same offer price. Payment for the interest may be made over a period of five years.
Equity Based Compensation - Under the terms of a letter agreement between Apothecary and an officer hired in September 2014, if the officer remains a full-time employee of the Company for one continuous year from his date of employment, the Company is required to issue Class B membership interests to the officer representing 11 percent equity interests in Apothecary and PharmTrack. The fair value of the equity-based compensation award was estimated on the date of grant at $6,120,000 using an income approach based on a discounted cash flow method. The compensation cost is being charged against income ratably over the one-year vesting period. The total compensation cost charged against income in the three months ended March 31, 2015 under this agreement totaled $1,530,000, which has also been recorded as a Class B members equity interest as of March 31, 2015.
During April 2015, the letter agreement was amended and restated to provide an alternative payment formula in the event of a sale of the Company prior to the officers completion of one year of continuous employment. Provided that the officer is a full-time employee of the Company at the time of the closing date of sale transaction, the Company shall pay to the officer a sale bonus equal to 3.5 percent of the net purchase consideration, in lieu of the equity-based compensation described above. As discussed in Note 11, the Company sold all of its equity interests to an unrelated party in June, 2015, at which time the Company paid a sale bonus to the officer of $3,000,000.
Note 7 - Related Party Transactions
Following is a description of transactions between the Company and related parties:
Accounts Payable - At March 31, 2015 and December 31, 2014, the Company had accounts payable to Burmans Medical Supplies, LLC, totaling $260,388 and $185,608, and to Burmans Pharmacy, LLC, totaling $12,353 and $75, respectively.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 7 - Related Party Transactions (Continued)
Administrative Fees - The Company is charged administrative fees from Burmans Medical Supplies, Inc., a related company with common ownership, for a percentage of payroll taxes, benefits, and commissions as well as for various overhead expenses. Administrative fee expense for the three months ended March 31, 2015 and March 31, 2014 was $267,584 and $228,135, respectively.
Sales are made and services are purchased from entities affiliated through common ownership. Following is a summary of transactions and balances with affiliates for the three months ended March 31, 2015 and March 31, 2014:
|
|
Three Months Ended |
| ||||
|
|
March 31, 2015 |
|
March 31, 2014 |
| ||
|
|
|
|
|
| ||
Sales to Burmans Pharmacy, Inc. |
|
$ |
|
|
$ |
22,091 |
|
Sales to Burmans Medical Supplies, Inc. |
|
|
|
17,389 |
| ||
Purchases from Burmans Pharmacy, Inc. |
|
100,681 |
|
164,520 |
| ||
Purchases from Burmans Medical Supplies, Inc. |
|
89,494 |
|
|
| ||
Note 8 - Retirement Plans
The Company participates in a 401(k) plan sponsored by a related entity with common ownership, which covers substantially all employees. The plan provides for the Company to make matching contributions. The Companys contributions to the plan totaled $32,855 and $17,108 for the three months ended March 31, 2015 and March 31, 2014, respectively.
During December 2014, the Company began participating in a new profit-sharing plan sponsored by a related entity with common ownership. Contributions to the plan are made at the discretion of management. Participants vest in company contributions ratably over a number of years. Company contributions to the profit-sharing plan for the three months ended March 31, 2015 were $15,756.
During December 2014, the Company began participating in a new defined benefit pension plan sponsored by a related entity with common ownership. Contributions to the plan are based on the actuarially determined present value of accumulated plan benefits. The benefits are based on an eligible employees years of service and compensation as defined by the plan. Company contributions to the plan for the three months ended March 31, 2015 were $61,820.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 8 - Retirement Plan (Continued)
In connection with the sale of all members interests in the Company to an unrelated party in June 2015 (see Note 11), the Company has agreed that each of the three qualified retirement plans described above will be terminated before the end of 2015. The Companys transactions with the retirement plans are not material to the consolidated financial statements.
Note 9 - Fair Value Measurements
Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.
Fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. These Level 3 fair value measurements are based primarily on managements own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset or liabliity.
In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Companys assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
The Company measures its investments at fair value on a recurring basis. The fair value of its investments in fixed-income mutual funds is based primarily on Level 1 inputs as described above, and had a carrying value of $1,000,000 and $1,051,312 at March 31, 2015 and December 31, 2014, respectively.
Burmans Apothecary, L.L.C., Subsidiaries, and Affiliate
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
Note 10 - Supplemental Disclosures of Cash Flow Information
Cash paid for interest and income taxes was as follows:
|
|
Three Month Ended |
| ||||
|
|
March 31, 2015 |
|
March 31, 2014 |
| ||
Interest |
|
$ |
113,984 |
|
$ |
11,794 |
|
Income taxes |
|
48,962 |
|
9,456 |
| ||
There were no significant noncash investing transactions for the three months ended March 31, 2015 or March 31, 2014.
Significant noncash financing activities for the three months ended March 31, 2015 and 2014 are as follows:
|
|
2015 |
|
2014 |
| ||
Equity based compensation award |
|
$ |
1,530,000 |
|
$ |
|
|
Note 11 - Subsequent Events
On June 15, 2015, all of the members interests in Burmans Apothecary, L.L.C. and subsidiaries were contributed to SLB Holdings, Inc., a newly formed entity, in exchange for all of the equity interests of SLB Holdings, Inc. Apothecary then became a wholly owned subsidiary of SLB Holdings, Inc. and elected to become a single-member LLC. for tax purposes.
On June 19, 2015, all of the outstanding members interests in Burmans Apothecary, L.L.C. and subsidiaries were acquired by Diplomat Pharmacy, Inc. for a total acquisition price of approximately $93.9 million.
Exhibit 99.4
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined consolidated statement of operations for the six months ended June 30, 2015 presents our operating results after giving pro forma effect to the following as if such transactions had occurred on January 1, 2014:
· our acquisition of Burmans Apothecary, LLC (Burmans) on June 19, 2015;
· our acquisition of BioRx, LLC (BioRx) on April 1, 2015;
· our borrowings under our new credit facility; and
· the follow-on public offering of our common stock, which closed on March 31, 2015, and the use of a portion of related proceeds to repurchase common stock options (the Follow-On Offering).
The following unaudited pro forma combined consolidated statement of operations for the year ended December 31, 2014 presents our operating results after giving pro forma effect to the following as if such transactions had occurred on January 1, 2014:
· our acquisition of Burmans on June 19, 2015;
· our acquisition of BioRx on April 1, 2015;
· our acquisition of MedPro Rx, Inc. (MedPro) on June 27, 2014;
· our borrowings under our new credit facility;
· our election to be taxed as a C corporation effective on January 23, 2014;
· our issuance of capital stock to certain funds of T. Rowe Price on January 23, 2014, our issuance of capital stock to certain funds of Janus Capital Group (Janus) on April 1, 2014, and the use of a portion of related proceeds to repurchase common stock and common stock options (the Preferred Stock Transactions);
· the initial public offering of our common stock on October 9, 2014 (the IPO) and the conversion of all outstanding shares of our capital stock into shares of our common stock upon the completion of the IPO and immediately thereafter a stock split effected as a stock dividend of 8,500 shares for each share of our common stock (the IPO Transactions); and
· the Follow-On Offering (collectively with the Preferred Stock Transactions and the IPO Transactions, the Capital Stock Transactions).
These transactions are all more fully described in Note 2 hereto. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the noted events on our historical consolidated financial information.
Included in the pro forma combined consolidated financial information is an allocation of the purchase price paid for BioRx and Burmans based on preliminary estimates and assumptions. Those estimates and assumptions could change materially as we finalize our assessment of the allocation and the fair values of the net tangible and intangible assets we acquired, some of which are dependent on the completion of valuations being performed by independent valuation specialists. The unaudited pro forma combined consolidated financial information does not reflect any future operating efficiencies, associated costs savings or any possible integration costs that may occur related to the BioRx and Burmans acquisitions or may yet occur related to the MedPro acquisition.
The unaudited pro forma combined consolidated financial information is included for informational purposes only and should not be relied upon as being indicative of our financial condition or results of operations had the noted events occurred on the dates assumed nor as a projection of our results of operations or financial position for any future period or date. The preparation of the unaudited pro forma combined consolidated information requires the use of certain assumptions which may be materially different from our actual experience.
The unaudited pro forma combined consolidated statements of operations should be read in conjunction with our consolidated financial statements included in our Form 10-Q for the quarterly period ended June 30, 2015, our Annual Report on Form 10-K for the year ended December 31, 2014 and the consolidated financial statements of Burmans included herein as Exhibits 99.2 and 99.3.
DIPLOMAT PHARMACY, INC.
Unaudited Pro Forma Combined Consolidated Statement of Operations
For the Six Months Ended June 30, 2015
|
|
|
|
|
|
Burmans |
|
|
|
|
|
Other |
|
|
|
|
| ||||||||
|
|
Diplomat |
|
Burmans |
|
Acquisition |
|
|
|
BioRx |
|
Acquisitions |
|
Follow-On |
|
Pro Forma |
| ||||||||
|
|
Actual |
|
Actual |
|
Adjustments |
|
Subtotal |
|
Actual |
|
Adjustments |
|
Offering |
|
Total |
| ||||||||
|
|
(Dollars in Thousands, Except Per Share Amounts) |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net sales |
|
$ |
1,432,894 |
|
$ |
215,219 |
|
$ |
|
|
$ |
1,648,113 |
|
$ |
59,955 |
|
$ |
|
|
$ |
|
|
$ |
1,708,068 |
|
Cost of goods sold |
|
(1,322,083 |
) |
(193,319 |
) |
|
|
(1,515,402 |
) |
(42,809 |
) |
632 |
(G) |
|
|
(1,557,579 |
) | ||||||||
Gross profit |
|
110,811 |
|
21,900 |
|
|
|
132,711 |
|
17,146 |
|
632 |
|
|
|
150,489 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Selling, general and administrative expenses |
|
(98,777 |
) |
(15,563 |
) |
(3,877 |
)(A) |
(106,533 |
) |
(11,921 |
) |
(6,027 |
)(H) |
|
|
(119,474 |
) | ||||||||
|
|
|
|
|
|
11,684 |
(B) |
|
|
|
|
1,354 |
(I) |
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
4,285 |
(J) |
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(632 |
)(G) |
|
|
|
| ||||||||
Income from operations |
|
12,034 |
|
6,337 |
|
7,807 |
|
26,178 |
|
5,225 |
|
(388 |
) |
|
|
31,015 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Interest expense |
|
(2,224 |
) |
(215 |
) |
(1,151 |
)(C) |
(3,590 |
) |
(49 |
) |
(1,824 |
)(K) |
1,234 |
(P) |
(4,229 |
) | ||||||||
Other |
|
179 |
|
208 |
|
(201 |
)(D) |
186 |
|
14 |
|
|
|
|
|
200 |
| ||||||||
Total other income (expense) |
|
(2,045 |
) |
(7 |
) |
(1,352 |
) |
(3,404 |
) |
(35 |
) |
(1,824 |
) |
1,234 |
|
(4,029 |
) | ||||||||
Income before income taxes |
|
9,989 |
|
6,330 |
|
6,455 |
|
22,774 |
|
5,190 |
|
(2,212 |
) |
1,234 |
|
26,986 |
| ||||||||
Income tax expense |
|
(4,204 |
) |
(39 |
) |
(5,075 |
)(E) |
(9,318 |
) |
(134 |
) |
(1,057 |
)(L) |
(493 |
)(Q) |
(11,003 |
) | ||||||||
Net income |
|
5,785 |
|
6,291 |
|
1,380 |
|
13,456 |
|
5,056 |
|
(3,269 |
) |
740 |
|
15,983 |
| ||||||||
Less: net (loss) income attributable to noncontrolling interest |
|
(464 |
) |
201 |
|
(201 |
)(D) |
(464 |
) |
|
|
|
|
|
|
(464 |
) | ||||||||
Net income attributable to Diplomat Pharmacy, Inc. |
|
$ |
6,249 |
|
$ |
6,090 |
|
$ |
1,581 |
|
$ |
13,920 |
|
$ |
5,056 |
|
$ |
(3,269 |
) |
$ |
740 |
|
$ |
16,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
|
$ |
0.11 |
|
|
|
|
|
$ |
0.24 |
|
|
|
|
|
|
|
$ |
0.26 |
| |||||
Diluted |
|
$ |
0.10 |
|
|
|
|
|
$ |
0.23 |
|
|
|
|
|
|
|
$ |
0.25 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
|
57,279,670 |
|
|
|
236,260 |
(F) |
57,515,930 |
|
|
|
3,358,578 |
(M) |
3,172,682 |
(R) |
64,047,191 |
| ||||||||
Diluted |
|
59,845,620 |
|
|
|
236,260 |
(F) |
60,081,880 |
|
|
|
3,358,578 |
(M) |
2,756,575 |
(R) |
66,197,033 |
|
See accompanying notes to unaudited pro forma combined consolidated financial information.
DIPLOMAT PHARMACY, INC.
Unaudited Pro Forma Combined Consolidated Statement of Operations
For the Year Ended December 31, 2014
|
|
|
|
|
|
Burmans |
|
|
|
|
|
|
|
Other |
|
C |
|
Capital |
|
|
| ||||||||||
|
|
Diplomat |
|
Burmans |
|
Acquisition |
|
|
|
BioRx |
|
MedPro |
|
Acquisitions |
|
Corporation |
|
Stock |
|
Pro Forma |
| ||||||||||
|
|
Actual |
|
Actual |
|
Adjustments |
|
Subtotal |
|
Actual |
|
Actual |
|
Adjustments |
|
Adjustments |
|
Transactions |
|
Total |
| ||||||||||
|
|
(Dollars in Thousands, Except Per Share Amounts) |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net sales |
|
$ |
2,214,956 |
|
$ |
325,485 |
|
$ |
|
|
$ |
2,540,441 |
|
$ |
227,162 |
|
$ |
43,780 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
2,811,383 |
|
Cost of goods sold |
|
(2,074,817 |
) |
(292,086 |
) |
|
|
(2,366,903 |
) |
(161,705 |
) |
(35,733 |
) |
2,340 |
(G) |
|
|
|
|
(2,562,001 |
) | ||||||||||
Gross profit |
|
140,139 |
|
33,399 |
|
|
|
173,538 |
|
65,457 |
|
8,047 |
|
2,340 |
|
|
|
|
|
249,382 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Selling, general and administrative expenses |
|
(127,556 |
) |
(8,543 |
) |
(8,569 |
)(A) |
(144,668 |
) |
(42,889 |
) |
(6,169 |
) |
(22,042 |
)(H) |
|
|
1,173 |
(T) |
(212,913 |
) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
825 |
(I) |
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,207 |
(J) |
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,340 |
)(G) |
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
)(N) |
|
|
|
|
|
| ||||||||||
Income from operations |
|
12,583 |
|
24,856 |
|
(8,569 |
) |
28,870 |
|
22,568 |
|
1,878 |
|
(18,020 |
) |
|
|
1,173 |
|
36,469 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Interest expense |
|
(2,528 |
) |
(161 |
) |
(2,789 |
)(C) |
(5,478 |
) |
(249 |
) |
|
|
(8,229 |
)(K) |
|
|
6,895 |
(U) |
(7,061 |
) | ||||||||||
Change in fair value of redeemable common stock |
|
9,073 |
|
|
|
|
|
9,073 |
|
|
|
|
|
|
|
|
|
(9,073 |
)(V) |
|
| ||||||||||
Equity loss and impairment of non-consolidated entity |
|
(6,208 |
) |
|
|
|
|
(6,208 |
) |
|
|
|
|
|
|
|
|
|
|
(6,208 |
) | ||||||||||
Termination of existing stock redemption agreement |
|
(4,842 |
) |
|
|
|
|
(4,842 |
) |
|
|
|
|
|
|
|
|
|
|
(4,842 |
) | ||||||||||
Other |
|
1,128 |
|
120 |
|
(107 |
)(D) |
1,141 |
|
24 |
|
90 |
|
|
|
|
|
|
|
1,255 |
| ||||||||||
Total other income (expense) |
|
(3,377 |
) |
(41 |
) |
(2,896 |
) |
(6,314 |
) |
(225 |
) |
90 |
|
(8,229 |
) |
|
|
(2,178 |
) |
(16,856 |
) | ||||||||||
Income before income taxes |
|
9,206 |
|
24,815 |
|
(11,465 |
) |
22,556 |
|
22,343 |
|
1,968 |
|
(26,249 |
) |
|
|
(1,005 |
) |
19,613 |
| ||||||||||
Income tax expense |
|
(4,655 |
) |
(195 |
) |
(5,145 |
)(E) |
(9,995 |
) |
(595 |
) |
|
|
1,370 |
(L) |
(787 |
)(S) |
402 |
(W) |
(9,605 |
) | ||||||||||
Net income |
|
4,551 |
|
24,620 |
|
(16,610 |
) |
12,561 |
|
21,748 |
|
1,968 |
|
(24,879 |
) |
(787 |
) |
(603 |
) |
10,008 |
| ||||||||||
Less: net (loss) income attributable to noncontrolling interest |
|
(225 |
) |
107 |
|
(107 |
)(D) |
(225 |
) |
|
|
|
|
|
|
|
|
|
|
(225 |
) | ||||||||||
Net income attributable to Diplomat Pharmacy, Inc. |
|
4,776 |
|
24,513 |
|
(16,503 |
) |
12,786 |
|
21,748 |
|
1,968 |
|
(24,879 |
) |
(787 |
) |
(603 |
) |
10,233 |
| ||||||||||
Net income allocable to preferred shareholders |
|
458 |
|
|
|
|
|
458 |
|
|
|
|
|
|
|
|
|
(458 |
)(V) |
|
| ||||||||||
Net income allocable to common shareholders |
|
$ |
4,318 |
|
$ |
24,513 |
|
$ |
(16,503 |
) |
$ |
12,328 |
|
$ |
21,748 |
|
$ |
1,968 |
|
$ |
(24,879 |
) |
$ |
(787 |
) |
$ |
(145 |
) |
$ |
10,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
$ |
0.12 |
|
|
|
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0.16 |
| |||||||
Diluted |
|
$ |
0.11 |
|
|
|
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
$ |
0.16 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Basic |
|
35,990,122 |
|
|
|
253,036 |
(F) |
36,243,158 |
|
|
|
|
|
4,397,201 |
(O) |
|
|
21,654,490 |
(X) |
62,294,849 |
| ||||||||||
Diluted |
|
38,535,325 |
|
|
|
253,036 |
(F) |
38,788,361 |
|
|
|
|
|
4,734,778 |
(O) |
|
|
20,669,866 |
(X) |
64,193,004 |
|
See accompanying notes to unaudited pro forma combined consolidated financial information.
DIPLOMAT PHARMACY, INC.
Notes to Unaudited Pro Forma Combined Consolidated Financial Information
(Dollars in Thousands)
1. Basis of Presentation
The unaudited pro forma combined consolidated financial information presents our results of operations as if the transactions described in Note 2 occurred on January 1, 2014 for purposes of the pro forma statements of operations. For the six months ended June 30, 2015, our actual unaudited operating results for that six month period, BioRxs actual unaudited operating results from January 1, 2015 to its April 1, 2015 acquisition date, and Burmans actual unaudited operating results from January 1, 2015 to its June 19, 2015 acquisition date were used as the basis for the pro forma statement of operations. For the year ended December 31, 2014, our, BioRxs and Burmans actual operating results for that year and MedPros actual unaudited operating results from January 1, 2014 to its June 27, 2014 acquisition date were used as the basis for the pro forma statement of operations. The pro forma combined consolidated financial information also reflects the assumptions and adjustments described in Note 3.
2. Description of Transactions
We account for our business acquisitions using the acquisition method as required by Financial Accounting Standards Boards Accounting Standards Codification Topic 805, Business Combinations. We ascribe significant value to the synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value of these components is included within goodwill. Our business acquisitions described below were treated as stock purchases for accounting purposes, and except for one subsidiary of BioRx the acquisitions were treated as asset purchases for income tax purposes and the related goodwill resulting from these business acquisitions is deductible for tax purposes.
Burmans Acquisition
On June 19, 2015, we acquired all of the outstanding equity interests of Burmans. Burmans, located in the greater Philadelphia, Pennsylvania area, is a provider of individualized patient care with a primary focus on hepatitis C. We acquired Burmans to further expand our existing hepatitis business and to increase our national presence. The following table summarizes the consideration transferred to acquire Burmans:
Cash |
|
$ |
84,296 |
|
253,036 restricted common shares |
|
9,578 |
| |
|
|
$ |
93,874 |
|
The above cash consideration is subject to a post-closing adjustment for net working capital, indebtedness, cash and sellers expenses. This amount is not known at this time and is therefore not reflected above.
The above share consideration is based on 253,036 shares, as computed in accordance with the purchase agreement, multiplied by the per share closing market price as of June 18, 2015 ($42.06) and multiplied by 90% to account for the restricted nature of the shares.
We incurred acquisition-related costs of approximately $204 which were charged to Selling, general and administrative expenses during the six months ended June 30, 2015.
The following table summarizes the preliminary amounts of identifiable assets acquired and liabilities assumed at the acquisition date:
Accounts receivable |
|
$ |
17,274 |
|
Inventories |
|
8,668 |
| |
Prepaid expenses and other current assets |
|
7,514 |
| |
Property and equipment |
|
49 |
| |
Capitalized software for internal use |
|
17,000 |
| |
Definite-lived intangible assets |
|
23,400 |
| |
Current liabilities |
|
(25,797 |
) | |
Total identifiable net assets |
|
48,108 |
| |
Goodwill |
|
45,766 |
| |
|
|
$ |
93,874 |
|
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
|
|
Useful |
|
Amount |
| |
Physician relationships |
|
10 years |
|
$ |
15,000 |
|
Non-compete employment agreements |
|
5 years |
|
5,700 |
| |
Favorable supply agreement |
|
1 year |
|
2,700 |
| |
|
|
|
|
$ |
23,400 |
|
We have not finalized the purchase price allocation. Accordingly, the purchase price allocation described above could change materially as we finalize our assessment of the allocation and the fair values of the net tangible and intangible assets acquired, some of which are dependent on the finalization of valuations being performed by independent valuation specialists.
BioRx Acquisition
On February 26, 2015, we signed a definitive agreement to acquire BioRx. On April 1, 2015, we acquired BioRx, a highly specialized pharmacy and infusion services company based in Cincinnati, Ohio that provides treatments for patients with ultra-orphan and rare, chronic diseases. We acquired BioRx to further expand our existing specialty infusion business and to increase our national presence. The following table summarizes the consideration transferred to acquire BioRx:
Cash |
|
$ |
217,023 |
|
4,038,853 restricted common shares |
|
125,697 |
| |
Contingent consideration at fair value |
|
37,000 |
| |
|
|
$ |
379,720 |
|
The above share consideration at closing is based on 4,038,853 shares, as computed in accordance with the purchase agreement, multiplied by the per share closing market price as of March 31, 2015 ($34.58) and multiplied by 90% to account for the restricted nature of the shares.
The purchase price includes a contingent consideration arrangement that requires us to issue up to 1,350,309 shares of our restricted common stock, as computed in accordance with the purchase agreement, to the former holders of BioRxs equity interests based upon the achievement of a certain earnings before interest, taxes, depreciation and amortization target in the twelve month period ending March 31, 2016. Payment of the contingent consideration is subject to acceleration at the maximum contingent amount in the event of (i) a change in control of Diplomat or (ii) the termination without cause of either of two principals of BioRx that have continued employment with us following the closing, in each case during the twelve month period ending March 31, 2016. Diplomats actual results for
the six months ended June 30, 2015 include a $4,000 charge to increase this initial liability due to BioRxs operating results and an increase in Diplomats stock price since BioRxs acquisition.
We incurred acquisition-related costs of $1,354 which were charged to Selling, general and administrative expenses during the six months ended June 30, 2015.
The following table summarizes the preliminary amounts of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash and cash equivalents |
|
$ |
1,786 |
|
Accounts receivable |
|
42,131 |
| |
Inventories |
|
5,546 |
| |
Prepaid expenses and other current assets |
|
669 |
| |
Property and equipment |
|
494 |
| |
Other noncurrent assets |
|
162 |
| |
Definite-lived intangible assets |
|
182,000 |
| |
Liabilities |
|
(36,702 |
) | |
Total identifiable net assets |
|
196,086 |
| |
Goodwill |
|
183,634 |
| |
|
|
$ |
379,720 |
|
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
|
|
Useful |
|
Amount |
| |
Patient relationships |
|
10 years |
|
$ |
130,000 |
|
Non-compete employment agreements |
|
5 years |
|
39,700 |
| |
Trade names and trademarks |
|
8 years |
|
12,300 |
| |
|
|
|
|
$ |
182,000 |
|
We determined the estimated fair values of the identifiable long-lived assets with assistance from an independent valuation firm. The valuation firm also assisted with our determination of the fair value of the contingent consideration utilizing a Monte Carlo simulation.
MedPro Acquisition
On June 27, 2014, we acquired all of the authorized, issued and outstanding shares of capital stock of MedPro. MedPro, based in Raleigh, North Carolina, is a specialty pharmacy focused on specialty infusion therapies including hemophilia and immune globulin. We acquired MedPro to expand our existing specialty infusion business and to increase our presence in the mid-Atlantic and Southern regions of the U.S.
We did not acquire MedPros affiliate from which MedPro leased certain operating and other facilities. Instead, we, commensurate with the acquisition, entered into a five-year external lease agreement for the facilities on similar terms. As we do not direct the significant activities of the lessor, it is not consolidated into our financial statements.
The following table summarizes the consideration transferred to acquire MedPro:
Cash |
|
$ |
52,267 |
|
716,695 restricted common shares |
|
12,000 |
| |
Contingent consideration at fair value |
|
4,270 |
| |
|
|
$ |
68,537 |
|
The purchase price includes a contingent consideration arrangement that requires us to pay the former owners an additional payout based upon the achievement of certain revenue and gross profit targets in each of the twelve month periods ending June 30, 2015 and 2016. The maximum payout of contingent consideration is $11,500.
Approximately $3,503 of the purchase consideration was deposited into an escrow account to be held for two years after the closing date to satisfy any of our indemnification claims.
The following table summarizes the amounts of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash and cash equivalents |
|
$ |
668 |
|
Accounts receivable |
|
9,050 |
| |
Inventories |
|
3,819 |
| |
Prepaid expenses and other current assets |
|
204 |
| |
Property and equipment |
|
697 |
| |
Capitalized software for internal use |
|
25 |
| |
Definite-lived intangible assets |
|
37,099 |
| |
Current liabilities |
|
(4,660 |
) | |
Total identifiable net assets |
|
46,902 |
| |
Goodwill |
|
21,635 |
| |
|
|
$ |
68,537 |
|
Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
|
|
Useful |
|
Amount |
| |
Patient relationships |
|
7 years |
|
$ |
24,000 |
|
Trade names and trademarks |
|
10 years |
|
8,700 |
| |
Non-compete employment agreements |
|
5 years |
|
4,399 |
| |
|
|
|
|
$ |
37,099 |
|
We determined the fair values of the identifiable long-lived assets with assistance from an independent valuation firm. The valuation firm also assisted with our determination of the fair value of the contingent consideration utilizing historical results, forecasted operating results of MedPro for each of the twelve month periods ending June 30, 2015 and 2016, and the corresponding contractual contingent payouts based on those results discounted at rates commensurate with the uncertainty involved. Diplomats actual results for the six months ended June 30, 2015 and the year ended December 31, 2014 include a $1,038 charge and a $5,621 charge, respectively, to increase this liability due to MedPros operating results and accretion of the liability since MedPros acquisition.
New Credit Facility
In conjunction with the BioRx acquisition, on April 1, 2015, we also entered into a credit facility with GE Capital Bank to increase our line of credit to $175,000, enter into a Term Loan A for $120,000, a deferred draw term loan for an additional $25,000 and extend the maturity date to April 1, 2020 (the new credit facility). The new credit facility provides for the issuance of letters of credit up to $10,000 and swingline loans up to $15,000, the issuance and incurrence of which will reduce the availability of the revolving credit facility. The new credit facility provides two interest rate options, (i) LIBOR (as defined) plus 2.75% or (ii) Base Rate (as defined) plus 1.75%, provided, however, that the interest rate may adjust downward only, by as much as 0.25%, beginning September 2015 based on changes in our leverage ratio. We incurred deferred financing costs of $5,131 associated with the new credit facility. These costs, along with previously unamortized deferred debt issuance costs, are being amortized over the term of the new credit facility.
Change in Income Tax Status
We elected to be taxed as a C corporation effective on January 23, 2014.
Preferred Stock Transactions
In January 2014, we entered into a Series A Preferred Stock Purchase Agreement with certain funds of T. Rowe Price under which we issued to certain funds of T. Rowe Price 2,986,228 shares of Series A Preferred Stock at a purchase price of $16.74 per share. We used $20,000 of this $50,000 investment for general corporate purposes inclusive of fees associated with this transaction, and the remaining $30,000 was used to repurchase common stock ($26,900) and common stock options ($3,100).
In April 2014, we entered into a Series A Preferred Stock Purchase Agreement with certain funds of Janus under which we issued to certain funds of Janus 3,225,127 shares of Series A Preferred Stock at a purchase price of $16.74 per share. We used $25,200 of the $54,000 investment for general corporate purposes inclusive of fees associated with this transaction, and the remaining $28,800 was used to repurchase common stock ($26,500) and common stock options ($2,300).
IPO Transactions
In October 2014, we completed our IPO in which 15,333,333 shares of common stock were sold at a public offering price of $13.00 per share. We sold 11,000,000 shares of common stock and certain existing shareholders sold 4,333,333 shares of common stock. We did not receive any proceeds from the sale of common stock by the existing shareholders. We received net proceeds of $130,440 after deducting underwriting discounts and commissions of $9,652, and other offering expenses of $2,908. Proceeds of $80,458 were used to repay existing indebtedness to certain current or former shareholders and employees ($19,824) and borrowings under our revolving line of credit ($60,634). The remaining net proceeds of $49,982 continue to be used for working capital and other general purposes. Immediately prior to the completion of the IPO, all outstanding shares of our capital stock converted, on a one-to-one basis, into shares of the single class of common stock that were authorized in conjunction with the IPO, and immediately thereafter a stock split was effected as a stock dividend of 8,500 shares for each share of our common stock.
Follow-On Offering
On March 31, 2015, we completed a follow-on public offering in which 9,821,125 shares of common stock were sold at a public offering price of $29.00 per share. We sold 6,821,125 shares of common stock and certain existing shareholders sold 3,000,000 shares of common stock. We did not receive any proceeds from the sale of common stock by the existing shareholders. We received net proceeds of $187,271 after deducting underwriting discounts and commissions of $9,891, and other offering expenses of $652. We used $36,298 of the net proceeds to repurchase options to purchase common stock held by a number of current and former employees, including certain executive officers, with the remainder of the proceeds used to pay a portion of the cash consideration for the BioRx acquisition. The purchase price for each stock option repurchased was based on the public offering price per share, net of the underwriting discount and exercise price.
3. Unaudited Pro Forma Combined Consolidated Statement of Operations Adjustments
Burmans Acquisition Adjustments:
A |
|
Reflects amortization of identifiable definite-lived intangible assets, including capitalized software for internal use, acquired in the Burmans acquisition (net of amortization already reflected in actual results). See Note 2 for further details. |
B |
|
Reflects the elimination from actual results of Burmans acquisition-related transaction costs ($204 from Diplomats actual results and $11,480 from Burmans actual results). Transaction costs are eliminated from the pro forma results as they do not represent recurring expenses. |
C |
|
Reflects interest expense on incremental borrowings at a 3.5% annual rate under our new credit facility to fund the cash portion of the Burmans acquisition ($1,366 for the six months ended June 30, 2015 and $2,950 for the year ended December 31, 2014), less actual interest expense related to Burmans debt that was not assumed in the transaction ($215 for the six months ended June 30, 2015 and $161 for the year ended December 31, 2014). |
D |
|
Reflects elimination of investment income earned by Burmans Investment Company, L.L.C., a consolidated variable interest entity of Burmans, which was not acquired by Diplomat. |
E |
|
Reflects income taxes associated with Burmans operating results ($6,330 for the six months ended June 30, 2015 and $24,815 for the year ended December 31, 2014) and Burmans pro forma adjustments ($6,455 for the six months ended June 30, 2015 and $(11,465) for the year ended December 31, 2014) at our statutory income tax rate of 40.0%. |
F |
|
Reflects the 253,036 restricted shares of common stock issued to the sellers of Burmans as partial payment of the aggregate purchase price. The weighted average shares outstanding for the six months ended June 30, 2015 is reduced for the period of time in which these restricted shares were actually outstanding. |
Other Acquisitions Adjustments:
G |
|
Reflects reclassification of BioRxs shipping and handling expenses to conform to our presentation of such costs. |
H |
|
Reflects amortization of identifiable definite-lived intangible assets acquired in the BioRx acquisition ($(5,970) for the six months ended June 30, 2015 and $(19,524) for the year ended December 31, 2014). Also reflects amortization of identifiable definite-lived intangible assets acquired in the MedPro acquisition ($(57) for the six months ended June 30, 2015 and $(2,518) for the year ended December 31, 2014). These amounts are net of amortization already reflected in the actual results. See Note 2 for further details. |
I |
|
Reflects the elimination from actual results of BioRx acquisition-related transaction costs for the six months ended June 30, 2015. Also reflects the elimination from actual results of MedPro acquisition-related transaction costs for the year ended December 31, 2014. Transaction costs are eliminated from the pro forma results as they do not represent recurring expenses. |
J |
|
Reflects the elimination of $4,000 of BioRx contingent consideration expense for the six months ended June 30, 2015 under the presumption that such consideration was fully earned and the associated shares were issued on December 31, 2014. This presumption also led to the realization of $3,738 in income for the year ended December 31, 2014 utilizing the ending market price for our stock as of December 31, 2014 (1,350,309 restricted shares * $27.37 * 90% = $33,262) to adjust the original fair value established on the assumed acquisition date of January 1, 2014. Also reflects the change in fair value of the MedPro contingent liability, net of such changes already reflected in the actual results ($285 for the six months ended June 30, 2015 and $(531) for the year ended December 31, 2014). Changes in fair value of the contingent consideration liability for MedPro includes accretion of the liability at a 10.5% rate. |
K |
|
Reflects interest expense on incremental borrowings at a 3.5% annual rate under our new credit facility to fund the cash portion of the BioRx acquisition for the six months ended June 30, 2015 ($1,873), less actual interest expense related to BioRxs debt that was not assumed in the transaction ($49), and to fund the cash portions of the BioRx and MedPro acquisitions for the year ended December 31, 2014 ($7,596 and 882, respectively), less actual interest expense related to BioRxs debt that was not assumed in the transaction ($249). |
L |
|
Reflects income taxes associated with BioRxs operating results ($5,190 for the six months ended June 30, 2015 and $22,343 for the year ended December 31, 2014), MedPros operating results ($1,968 for the year ended December 31, 2014), BioRxs pro forma adjustments ($(2,489) for the six months ended June 30, 2015 and $(23,382) for the year ended December 31, 2014), and MedPros pro forma adjustments ($228 for the six months ended June 30, 2015 and $(3,116) for the year ended December 31, 2014) at our statutory income tax rate of 40.0%. |
M |
|
Reflects the 4,038,853 restricted shares of common stock issued to the sellers of BioRx as partial payment of the aggregate purchase price as well as 1,350,309 restricted shares of common stock associated with the contingent consideration under the presumption of it being fully earned and issued on December 31, 2014. The weighted average shares outstanding are reduced for the period of time in which the 4,038,853 restricted shares were actually outstanding. |
N |
|
Reflects, for the 2014 period prior to our acquisition of MedPro, the net impact of the elimination of affiliate rental income ($69) and affiliate depreciation expense ($(59)) associated with a certain property owned by the consolidated affiliates of MedPro that we did not acquire in the related acquisition from whom MedPro leased such properties. We have entered into an external lease agreement with comparable terms on an ongoing basis. |
O |
|
Reflects the 4,038,853 restricted shares of common stock issued to the sellers of BioRx as partial payment of the aggregate purchase price. Also reflects the 716,695 restricted shares of common stock issued to the sellers of MedPro as partial payment of the aggregate purchase price. The weighted average shares outstanding are reduced for the period of time in which the 716,695 restricted shares were actually outstanding. The increase in diluted versus basic is due to the presumption that the 1,350,309 restricted shares of common stock associated with the BioRx contingent consideration were fully earned during the fourth quarter of 2014. |
Follow-On Offering:
P |
|
Reflects the elimination of interest expense ($1,505) associated with debt repaid under our new credit facility with a portion of the net proceeds from our March 2015 follow-on public offering, partially offset by an increase in debt issuance cost amortization expense ($(271)). |
Q |
|
Reflects income taxes associated with the net interest expense reduction at our statutory income tax rate of 40.0%. |
R |
|
Reflects the 6,821,125 shares of common stock issued in the follow-on public offering, reduced for the period of time in which the 6,821,125 shares were actually outstanding. The decrease in diluted versus basic is due to the removal of the dilutive impact associated with the stock options that were repurchased on March 31, 2015. |
C Corporation Adjustments:
S |
|
Reflects our income tax expense as if Diplomat had been a C corporation for the entire period at our statutory income tax rate of 40.0%, adjusted for permanent items. |
Capital Stock Transactions:
T |
|
Reflects the elimination of share-based compensation expense related to stock options repurchased in the Follow-On Offering. |
U |
|
Reflects the elimination of interest expense ($7,765) associated with acquisition-related debt repaid with a portion of the net proceeds from our Capital Stock Transactions, partially offset by an increase in debt issuance cost amortization expense ($(870)). |
V |
|
Reflects the elimination of the change in fair value of redeemable common shares and the elimination of any net income attributable to preferred shareholders due to the assumed conversion of all outstanding shares of redeemable common shares and preferred shares into common stock. |
W |
|
Reflects income tax benefit at our statutory income tax rate of 40.0%. |
X |
|
Reflects the impact of additional shares of common stock resulting from the assumed conversion of all shares of redeemable common stock and preferred stock (6,752,540), from the IPO (8,515,068) and from the follow-on public offering (6,821,125), partially offset by the impact of the reduction of common shares caused by their redemption with certain proceeds in the Preferred Stock Transactions (434,243). The decrease in diluted versus basic is due to the removal of the dilutive impact associated with the stock options that were repurchased in the Preferred Stock Transactions and the Follow-On Offering. |
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