QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered | ||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging growth company | ||||||
GUARDIAN PHARMACY SERVICES, INC.
FORM 10-Q
TABLE OF CONTENTS
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are all statements other than those of historical fact. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words such as “aims,” “anticipates,” “believes,” “contemplates,” “continues,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” “will,” “would,” and similar expressions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors, some of which are beyond our control. For more information regarding these risks and uncertainties, as well as certain additional risks that we face, refer to “Risk Factors” and the factors more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q. Among the factors that could cause actual results to differ materially from those suggested by forward-looking statements are:
| • | our ability to effectively execute our business strategies, implement new initiatives and improve efficiency; |
| • | our ability to effectively market and sell, customer acceptance of, and competition for, our pharmaceutical services in new and existing markets; |
| • | our relationships with pharmaceutical wholesalers and key manufacturers, long-term health care facilities (“LTCFs”) and health plan payors; |
| • | our ability to maintain and expand relationships with LTCF operators on favorable terms; |
| • | the impact of the outbreak of a national emergency, public health crisis or global pandemic, such as COVID-19, on our employees and business and on our supply chain and the LTCFs we serve; |
| • | continuing government and private efforts to lower pharmaceutical costs, including by limiting pharmacy reimbursements; |
| • | changes in, and our ability to comply with, healthcare laws, regulations or interpretations; |
| • | further consolidation of managed care organizations and other health plan payors and changes in the terms of our agreements with these parties; |
| • | our ability to retain members of our senior management team, our local pharmacy management teams and our pharmacy professionals; |
| • | our exposure to, and the results of, claims, legal proceedings and governmental inquiries; |
| • | our ability to maintain the security of our operating and information technology systems and infrastructure (e.g., against cyber-attacks); |
| • | product liability, product recall, personal injury or other health and safety issues related to the pharmaceuticals we dispense; |
| • | supply chain and other manufacturing disruptions related to the pharmaceuticals we dispense; |
| • | the sufficiency of our existing cash and cash equivalents to fund our future operating expenses and capital expenditure requirements, and our ability to raise additional capital, if needed; and |
| • | the misuse or off-label use, or errors in the dispensing or administration, of the pharmaceuticals we dispense. |
New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in, or implied by, the forward-looking statements. Therefore, we caution you not to place undue reliance on any forward-looking statements or information. Any forward-looking statements only speak as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as may be required by law.
2
(In thousands, except share amounts) |
December 31, 2023 |
September 30, 2024 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, net |
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Inventories |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Operating lease right-of-use |
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Deferred tax assets |
— | |||||||
Other assets |
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Total assets |
$ | $ | ||||||
Liabilities and equity |
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Current liabilities: |
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Accounts payable |
$ | $ | ||||||
Accrued compensation |
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Line of credit |
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Notes payable, current portion |
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Operating leases, current portion |
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Other current liabilities |
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Total current liabilities |
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Notes payable, net of current portion |
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Operating leases, net of current portion |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies (see Note 6) |
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Equity: |
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Members’ equity |
— | |||||||
Class A common stock- |
— | |||||||
Class B common stock- par value $ |
— | |||||||
Additional paid-in capital |
— | |||||||
Retained earnings |
— | |||||||
Non-controlling interests |
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Total equity |
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Total liabilities and equity |
$ | $ | ||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
(In thousands, except share and per share amounts) |
2023 |
2024 |
2023 |
2024 |
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| Revenues |
$ | $ | $ | $ | ||||||||||||
| Cost of goods sold |
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| Gross profit |
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| Selling, general, and administrative expenses |
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| Operating income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
| Other expenses: |
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| Interest expense |
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| Other expense (income), net |
( |
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| Total other expenses |
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| Income (loss) before income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
| Provision for income taxes |
— | — | ||||||||||||||
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| Net income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
| |
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| Less net income (loss) attributable to Guardian Pharmacy, LLC prior to the Corporate Reorganization |
( |
) | ||||||||||||||
| Less net income attributable to non-controlling interests |
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| |
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| Net income (loss) attributable to Guardian Pharmacy Services, Inc |
$ | — | $ | ( |
) | $ | — | $ | ( |
) | ||||||
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| Net income (loss) per share of Class A and Class B common stock 1 |
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| Basic |
N/A | $ | ( |
) | N/A | $ | ( |
) | ||||||||
| Diluted |
N/A | $ | ( |
) | N/A | $ | ( |
) | ||||||||
| Weighted-average Class A and Class B common shares outstanding |
||||||||||||||||
| Basic |
N/A | N/A | ||||||||||||||
| Diluted |
N/A | N/A | ||||||||||||||
1 |
Basic and diluted net income (loss) per share of Class A and Class B common stock is applicable only for the period from September 27, 2024 through September 30, 2024, which is the period following the initial public offering (“IPO”) and related Corporate Reorganization (as defined in Note 1 to the Unaudited Interim Consolidated Financial Statements). See Note 7 for the number of shares used in the computation of net income (loss) per share of Class A and Class B common stock and the basis for the computation of net income (loss) per share. |
Guardian Pharmacy, LLC (Prior to Corporate Reorganization) |
Guardian Pharmacy Services, Inc. Stockholders’ Equity |
|||||||||||||||||||||||||||||||||||
(In thousands, except share amounts) |
Members’ Equity |
Class A Shares |
Class B Shares |
Class A Amount |
Class B Amount |
Additional Paid-in capital |
Retained Earnings |
Non-Controlling Interests |
Total Equity |
|||||||||||||||||||||||||||
Balance, December 31, 2023 |
$ | — | — | $ | — | $ | — | $ | — | $ | — | $ | $ | |||||||||||||||||||||||
Contributions |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income |
— | — | — | — | — | — | ||||||||||||||||||||||||||||||
Distributions |
( |
) | — | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||
Balance, March 31, 2024 |
— | — | — | — | — | — | ||||||||||||||||||||||||||||||
Contributions |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Non-cash equity contribution |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income |
— | — | — | — | — | — | ||||||||||||||||||||||||||||||
Distributions |
( |
) | — | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||
Balance, June 30, 2024 |
— | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net income prior to Corporate Reorganization |
— | — | — | — | — | — | ||||||||||||||||||||||||||||||
Contributions prior to Corporate Reorganization |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Distributions prior to Corporate Reorganization |
( |
) | — | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||||
Impacts of Corporate Reorganization and IPO |
||||||||||||||||||||||||||||||||||||
Conversion of non-controlling interest into Guardian Pharmacy, LLC common units |
— | — | — | — | — | — | ( |
) | — | |||||||||||||||||||||||||||
Conversion of Restricted Interest Unit awards into Guardian Pharmacy, LLC common units |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Conversion of Guardian Pharmacy, LLC common units into Class B common stock of Guardian Pharmacy Services, Inc. |
( |
) | — | — | — | — | ||||||||||||||||||||||||||||||
Issuance of Class A common stock, net of costs |
— | — | — | — | — | |||||||||||||||||||||||||||||||
Payments to Class B common stock stockholders of $ |
— | — | — | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||||||||
Recognition of deferred tax asset, net from Corporate Reorganization |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income (loss) attributable to Guardian Pharmacy Services, Inc. |
— | — | — | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||||||||
Net income attributable to non-controlling interest subsequent to Corporate Reorganization |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Equity-based compensation subsequent Reorganization |
— | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Balance, September 30, 2024 |
$ | — | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
(In thousands, except share amounts) |
Members’ Equity |
Non-Controlling Interests |
Total Equity |
|||||||||
Balance, December 31, 2022 |
$ | $ | $ | |||||||||
Contributions |
— | |||||||||||
Non-cash equity contribution |
— | |||||||||||
Net income |
||||||||||||
Distributions |
( |
) | ( |
) | ( |
) | ||||||
Balance, March 31, 2023 |
||||||||||||
Contributions |
— | |||||||||||
Net income |
||||||||||||
Distributions |
( |
) | ( |
) | ( |
) | ||||||
Balance, June 30, 2023 |
||||||||||||
Contributions |
— | |||||||||||
Net income (loss) |
( |
) | ( |
) | ||||||||
Distributions |
( |
) | ( |
) | ( |
) | ||||||
Balance, September 30, 2023 |
$ | $ | $ | |||||||||
Nine Months Ended September 30, |
||||||||
(In thousands) |
2023 |
2024 |
||||||
| Operating activities |
||||||||
| Net income (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Share-based compensation expense |
||||||||
| Provision for losses on accounts receivable |
||||||||
| Other |
( |
) | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ||||||
| Other current assets |
( |
) | ||||||
| Accounts payable |
||||||||
| Accrued compensation |
( |
) | ( |
) | ||||
| Other operating liabilities |
( |
) | ||||||
| |
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| Net cash provided by operating activities |
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| |
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| Investing activities |
||||||||
| Purchases of property and equipment |
( |
) | ( |
) | ||||
| Payment for acquisitions |
( |
) | ( |
) | ||||
| Other |
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| |
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| Net cash used in investing activities |
( |
) | ( |
) | ||||
| |
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| Financing activities |
||||||||
| Proceeds from equity offering, net of underwriter fees |
— | |||||||
| Payments of equity offering costs |
— | ( |
) | |||||
| Payments to Class B common stock stockholders |
— | ( |
) | |||||
| Borrowings from notes payable |
— | |||||||
| Repayment of notes payable |
( |
) | ( |
) | ||||
| Borrowings from line of credit |
||||||||
| Repayments of line of credit |
( |
) | ( |
) | ||||
| Principal payments on finance lease obligations |
( |
) | ( |
) | ||||
| Contributions from non-controlling interests |
||||||||
| Distributions to non-controlling interests |
( |
) | ( |
) | ||||
| Member distributions |
( |
) | ( |
) | ||||
| Other |
( |
) | ( |
) | ||||
| |
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|
|||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| |
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| Net change in cash and cash equivalents |
||||||||
| Cash and cash equivalents, beginning of period |
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| Cash and cash equivalents, end of period |
$ | $ | ||||||
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| Supplemental disclosure of cash flow information |
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| Cash paid during the year for interest |
$ | $ | ||||||
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| Supplemental disclosure of non-cash investing and financing activities |
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| Purchases of property and equipment through finance leases |
$ | $ | ||||||
| |
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|
|||||
| Accrued and capitalized offering costs recorded to additional paid-in capital |
$ | — | $ | |||||
| |
|
|
|
|||||
| Non-cash equity contributions from non-controlling members |
$ | $ | ||||||
| |
|
|
|
|||||
1. |
Organization and Background |
| • | All Preferred Units in Guardian Pharmacy, LLC were converted into Common Units, resulting in Guardian Pharmacy, LLC having only Common Units outstanding; |
| • | The membership interests, including Restricted Interest Unit awards, held by members other than Guardian Pharmacy, LLC in our subsidiaries (other than certain subsidiaries that were not parties to the Corporate Reorganization, as discussed below) were converted into Common Units of Guardian Pharmacy, LLC. The subsidiaries that participated in the Corporate Reorganization are referred to as the Converted Subsidiaries, and the subsidiaries that were not parties to the Corporate Reorganization are referred to as the Non-Converted S ubsidiaries; and |
| • | Guardian Pharmacy, LLC became a wholly owned subsidiary of the Company by participating in a merger with a transitory subsidiary of the Company. Pursuant to the merger, each Common Unit of Guardian Pharmacy, LLC was converted into (i) one share of the Company’s Class B common stock, par value $and (ii) the right to receive $In the merger, were issued in exchange for Common Units of Guardian Pharmacy, LLC. In accordance with the terms of the Company’s Amended and Restated Certificate of Incorporation, such issued shares of Class B common stock will automatically convert on a Class A common stock, par value $the -year period following the IPO. The cash payment related to the Merger Consideration was $ |
2. |
Summary of Significant Accounting Policies |
New Accounting Standard Adopted | ||||||
ASU Number and Name |
Description |
Date of Adoption |
Effect on the unaudited interim Consolidated Financial Statements upon adoption | |||
2016-13, 2018-19, 2019-04, 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
ASU 2016-13 and its subsequent corresponding updates provide guidance for the impairment model for financial assets measured at amortized cost. For trade and other receivables, held-to-maturity available-for-sale |
January 1, 2023 |
The Company adopted the standard on January 1, 2023 with no material impact on its Consolidated Financial Statements. | |||
New Accounting Standards Not Yet Effective | ||||||
2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures |
ASU 2023-07 requires companies to disclose significant segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and are included within each reported measure of segment operating results. The standard also requires companies to disclose the total amount of any other items included in segment operating results which were not deemed to be significant expenses for separate disclosure, along with a qualitative description of the composition of these other items. In addition, the standard also requires disclosure of the CODM’s title and position, as well as detail on how the CODM uses the reported measure of segment operating results to evaluate segment performance and allocate resources. The standard also aligns interim segment reporting disclosure requirements with annual segment reporting disclosure requirements. The standard requires retrospective application to all prior periods presented. |
January 1, 2024 for annual disclosures. January 1, 2025 for interim disclosures. |
The Company is currently evaluating the impact of adopting the standard on its Consolidated Financial Statements. The adoption is not expected to have a material impact on the Consolidated Financial Statements. | |||
2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures |
ASU 2023-09 enhances the transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The standard requires the annual financial statements to include consistent categories and greater disaggregation of information in the rate reconciliation, and income taxes paid disaggregated by jurisdiction. |
January 1, 2025 for annual disclosures. | The Company is currently evaluating the impact of adopting the standard on its Consolidated Financial Statements. |
3. |
Acquisitions |
(in thousands) |
Fair Value |
|||
Total preliminary purchase consideration |
$ | |||
Net assets acquired: |
||||
Inventory |
||||
Other assets |
||||
Intangible Assets |
||||
Other liabilities |
( |
) | ||
Non-controlling interest equity |
( |
) | ||
Net assets acquired |
||||
Goodwill |
$ | |||
4. |
Debt Arrangements |
(in thousands) |
December 31, 2023 |
September 30, 2024 |
||||||
Term loan |
$ | $ | ||||||
Deferred financing costs, net |
( |
) | ( |
) | ||||
Total notes payable |
||||||||
Less current portion |
( |
) | ( |
) | ||||
Notes payable, net of current portion |
$ | $ | ||||||
(in thousands) |
||||
2024 |
$ | |||
2025 |
||||
2026 |
||||
2027 |
||||
Total |
$ | |||
5. |
Fair Value Measurements |
| • | Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
| • | Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. |
| • | Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs that market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk. |
Level 1 |
Level 2 |
Level 3 |
||||||||||
September 30, 2024 |
||||||||||||
Liabilities: |
||||||||||||
Contingent consideration payable |
$ | $ | $ | |||||||||
Fair value of financial instruments |
$ | $ | $ | |||||||||
Balance at December 31, 2023 |
$ | |||
Current year acquisitions |
||||
Fair value adjustments |
||||
Payments |
||||
Balance at September 30, 2024 |
$ | |||
6. |
Commitments and Contingencies |
7. |
Basic and Diluted Loss Per Share |
| (in thousands) | Three Months Ended September 30, 2024 |
Nine Months Ended September 30, 2024 |
||||||
| Numerator: |
||||||||
| Net income (loss) |
( |
) | ( |
) | ||||
| Less: Net income attributable to Guardian Pharmacy, LLC before Corporate Reorganization |
||||||||
| Less: Net income attributable to noncontrolling interests |
||||||||
| |
|
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|
|||||
| Net income (loss) attributable to Guardian Pharmacy Services, Inc. |
( |
) | ( |
) | ||||
| |
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|
|
|||||
Three Months Ended September 30, 2024 |
Nine Months Ended September 30, 2024 |
|||||||||||||||
Class A |
Class B |
Class A |
Class B |
|||||||||||||
| Basic net income (loss) per share attributable to common stockholders |
||||||||||||||||
| Numerator: |
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| ||||||||
| Allocation of net income (loss) attributable to Guardian Pharmacy Inc. |
$ | ( |
) | $ | ( |
) | |
$ |
( |
) |
|
$ |
( |
) | ||
| Denominator: |
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| ||||||||
| Weighted average number of shares of Class A and Class B common stock outstanding |
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| |
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| |||||||
| Basic net income (loss) per share attributable to common stockholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
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| |
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| Diluted net income (loss) per share attributable to common stockholders |
|
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| ||||||||
| Numerator: |
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| ||||||||
| Allocation of net income (loss) attributable to Guardian Pharmacy Inc. |
$ | ( |
) | $ | ( |
) | |
$ |
( |
) |
|
$ |
( |
) | ||
| Denominator: |
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| ||||||||
| Number of shares used in basic computation |
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| ||||||||
| Dilutive Restricted Stock Units and Class B Common Stock |
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| |
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| |||||||
| Weighted average shares of Class A and Class B common stock outstanding used to calculate diluted net income (loss) per share |
|
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|
| ||||||||
| |
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| |||||||
| Diluted net income (loss) per share attributable to common stockholders |
$ | ( |
) | $ | ( |
) | |
$ |
( |
) |
|
$ |
( |
) | ||
| |
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|
|
|
|
|
|
| |||||||
Three Months Ended September 30, 2024 |
Nine Months Ended September 30, 2024 |
|||||||||||||||
Class A |
Class B |
Class A |
Class B |
|||||||||||||
| Anti-dilutive unvested Restricted Stock Units and Class B Common Stock |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total anti-dilutive securities |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
8. |
Share-based Compensation |
Nine Months Ended September 30, 2024 |
||||
Volatility |
% | |||
Expected life (in months) |
||||
Risk-free rate |
% | |||
Fair value per unit |
$ | |||
Class B Common Stock |
Weighted Average Grant Date Fair Value |
|||||||
Unvested at September 27, 2024 |
$ | |||||||
Granted |
$ | |||||||
Vested |
( |
) | $ | |||||
Forfeited |
$ | |||||||
Unvested at September 30, 2024 |
$ | |||||||
Restricted Stock Units |
Weighted Average Grant Date Fair Value |
|||||||
Unvested at September 27, 2024 |
$ | |||||||
Granted |
$ | |||||||
Forfeited |
$ | |||||||
Unvested at September 30, 2024 |
$ | |||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2024 |
2023 |
2024 |
|||||||||||||
Total share-based compensation expense |
$ | $ | $ | $ | ||||||||||||
Amount |
Weighted Average Remaining Service Period (years) |
|||||||
Class B common stock |
$ | |||||||
Restricted stock units |
||||||||
Total unamortized share-based compensation cost |
$ | |||||||
9. |
Income Taxes |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes thereto and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our final prospectus, dated September 25, 2024, filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on September 26, 2024 (the “Prospectus”) in connection with our initial public offering (“IPO”).
This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions, that are based on the beliefs of our management. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors.” See “Special Note Regarding Forward-Looking Statements and Risk Factor Summary.”
Unless the context otherwise requires, the terms “Guardian,” the “Company,” “we,” “us” and “our” when used in this report mean Guardian Pharmacy Services, Inc. and all subsidiaries included in our consolidated financial statements.
Overview
We are a leading, highly differentiated pharmacy services company that provides an extensive suite of technology-enabled services designed to help residents of long-term health care facilities (“LTCFs”) adhere to their appropriate drug regimen, which in turn helps reduce the cost of care and improve clinical outcomes. We enter into contracts directly with LTCFs to serve as the principal pharmacy provider for their residents. In this capacity, we offer high-touch, individualized clinical, drug dispensing and administration capabilities that are tailored to serve the needs of residents in historically lower acuity LTCFs, such as assisted living facilities (“ALFs”) and behavioral health facilities (“BHFs”). Additionally, our robust capabilities enable us to serve residents in all types of LTCFs. Our services include prescription intake and adjudication management, packaging drugs into unit dose and/or multi-dose compliance packaging that are organized by date and time of administration, and electronically tracking each drug from delivery through administration to LTCF residents. We also offer training to caregivers and conduct mock audits to ensure compliance with pharmacy administration requirements, billing claims processing, government regulation and other matters. As of September 30, 2024, our 50 pharmacies served approximately 180,000 residents in approximately 6,800 LTCFs across 37 states.
While our national competitors have primarily focused on skilled nursing facilities (“SNFs”), we believe we enjoy a strong competitive position as a large and purpose-built provider of pharmacy services to ALFs and BHFs. More than two-thirds of our annual revenue for each of the past three years has been generated from residents of ALFs and BHFs, while the remainder has been generated primarily from residents of SNFs. LTCF industry trends, including aging demographics, increases in the number of assisted living residents, improving life expectancies and enhanced quality of care, have resulted in ALF and BHF resident populations that require assistance with their increasingly acute and complex healthcare needs. Through our value-added capabilities and local management model, we have been able to pass on to residents, LTCFs and health plan payors the benefits of our scale without compromising on the high-touch, localized customer service traditionally associated with an independent pharmacy. For this reason, we are well positioned to continue to serve ALFs and BHFs, which we believe to be the most attractive and highest growth sector of the LTCF market.
Our core growth strategy focuses on increasing the number of residents we serve through a combination of organic and acquired growth. Acquired growth represents growth in the number of residents served resulting from acquiring an operating pharmacy, which we measure using the number of residents served by the acquired pharmacy as of the acquisition date. Organic growth represents the increase in the number of residents served at existing pharmacies, our greenfield pharmacies, and acquired pharmacies subsequent to the acquisition date. We have generated organic growth through new and expanded LTCF relationships as well as increased resident adoption of our services in the facilities we already serve.
22
Recent Developments
Corporate Reorganization
Prior to the IPO, we conducted our business through Guardian Pharmacy, LLC, and its majority owned and wholly owned limited liability company subsidiaries, which were treated for income tax purposes as partnerships and disregarded entities, respectively. Immediately prior to the IPO, we completed a series of corporate reorganization transactions (the “Corporate Reorganization”), pursuant to which:
| • | All Preferred Units in Guardian Pharmacy, LLC were converted into Common Units, resulting in Guardian Pharmacy, LLC having only Common Units outstanding; |
| • | The membership interests, including Restricted Interest Unit awards, held by members other than Guardian Pharmacy, LLC in our subsidiaries (other than certain subsidiaries that were not parties to the Corporate Reorganization, as discussed below) were converted into Common Units of Guardian Pharmacy, LLC. The subsidiaries that participated in the Corporate Reorganization are referred to as the Converted Subsidiaries, and the subsidiaries that were not parties to the Corporate Reorganization are referred to as the Non-Converted Subsidiaries; and |
| • | Guardian Pharmacy, LLC became a wholly owned subsidiary of the Company by participating in a merger with a transitory subsidiary of the Company. Pursuant to the merger, each Common Unit of Guardian Pharmacy, LLC was converted into (i) one share of the Company’s Class B common stock, par value $0.001 per share (“Class B common stock”) and (ii) the right to receive $1.02 in cash per share, without interest (collectively, the “Merger Consideration”). In the merger 54,094,232 shares of Class B common stock were issued in exchange for Common Units of Guardian Pharmacy, LLC. In accordance with the terms of the Company’s Amended and Restated Certificate of Incorporation, such issued shares of Class B common stock will automatically convert on a one-for-one basis into shares of the Company’s Class A common stock, par value $0.001 per share (“Class A common stock”) over the two-year period following the IPO. The cash payment related to the Merger Consideration was $55.2 million and was paid using the proceeds from the IPO. |
As a result of the Corporate Reorganization, the Company became a holding company with no material assets other than its 100% interest in Guardian Pharmacy, LLC, and the Converted Subsidiaries became wholly owned subsidiaries of Guardian Pharmacy, LLC. In addition, Guardian Pharmacy, LLC remained the majority owner of each of the Non-Converted Subsidiaries.
The Non-Converted Subsidiaries collectively own nine pharmacies that are (i) greenfield start-up pharmacies in various stages of development and integration with Guardian and do not currently have material operations or (ii) pharmacies that we recently acquired. After a period of time that would typically be sufficient to allow such pharmacies to adopt our operating practices and experience meaningful growth in residents served and earnings, we expect to acquire the minority membership interests of such Non-Converted Subsidiaries.
Initial Public Offering
On September 27, 2024, the Company consummated its IPO of 8,000,000 shares of its Class A common stock, as described in the Prospectus. Also on September 27, 2024, the underwriters for the IPO exercised in full their option to purchase an additional 1,200,000 shares of Class A common stock. The 9,200,000 shares were issued at a public offering price of $14.00 per share, resulting in net proceeds to the Company of $119.8 million, after deducting underwriting discounts of $9.0 million. In addition to the underwriting discounts, the Company incurred $13.0 million of offering costs, which were recorded to additional paid-in capital.
23
Factors Affecting the Comparability of Our Results of Operations
Our results of operations for the three and nine months ended September 30, 2024 and the corresponding periods in 2023 have been affected by the following, among other factors, which must be understood to assess the comparability of our period-to-period financial performance and condition.
Acquisitions
The Company’s growth strategy involves periodically acquiring institutional pharmacies servicing LTCFs and their residents as well as residents in other care settings. The Company’s strategy includes the acquisition of freestanding institutional pharmacy businesses as well as other assets, generally less significant in size, which are combined with existing pharmacy operations to augment internal organic growth.
During the nine months ended September 30, 2024, the Company completed acquisitions of various pharmacy operations (the “Acquisitions”). The operating results of the Acquisitions were a contributing factor in certain changes in the results of operations for the three and nine months ended September 30, 2024 compared to the corresponding periods in 2023.
Share-Based Compensation (in connection with the Corporate Reorganization and IPO)
In connection with the Corporate Reorganization and IPO, Restricted Interest Unit awards associated with the Converted Subsidiaries and Guardian Pharmacy, LLC were converted into Common Units of Guardian Pharmacy, LLC, and the Common Units in Guardian Pharmacy, LLC were then converted into Class B common stock of the Company. This conversion of Restricted Interest Units was treated as a modification, requiring the units to be marked to fair value on the modification date, resulting in the Company recognizing $122.4 million of incremental share-based compensation expense during the three and nine months period ended September 30, 2024. In addition, certain Restricted Interest Unit awards which converted into Class B common stock are subject to a one-year service period ending one year subsequent to the IPO closing date. The unamortized share-based compensation expense associated with these awards is $13.5 million as of September 30, 2024. Refer to Note 8 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further detail surrounding the Restricted Interest Units conversion.
Components of Results of Operations
Revenues. We recognize revenue at the time of delivery of prescriptions and other pharmacy services to the LTCF, at which time control has been transferred. Revenue recognized reflects the consideration we expect to receive in exchange for these goods and services.
Cost of goods sold. Cost of goods sold consists primarily of expenses associated with the fulfillment and delivery of the prescription. Cost of goods sold also includes associated pharmacy personnel-related expenses, including salaries and benefits, delivery charges and other supporting overhead costs (such as rent and depreciation and amortization of assets used in the fulfillment and delivery of the prescription).
Selling, general, and administrative expenses. Selling, general, and administrative expenses consist primarily of personnel-related expenses, including share-based compensation, salaries and benefits, for our employees at the pharmacies and support services engaged in other pharmacy related activities including sales and marketing, finance, legal, human resources, purchasing and other administrative functions. Selling, general, and administrative expenses also include facilities-related expenses, software expenses, sales and marketing expenses, insurance premiums, professional services expenses, including for outside legal and accounting services, other overhead costs, changes in the fair value of contingent payments related to acquisitions, depreciation related to long lived assets, and amortization of intangible assets.
24
Prior to the Corporate Reorganization and IPO, share-based compensation expense primarily represented non-cash recognition of changes in the value of Restricted Interest Unit awards. These awards contained a cash settlement feature and were accounted for as a liability in accordance with GAAP. These units remained in place until they were (a) forfeited (which occurs when the employee leaves before the units are fully vested), (b) paid out (we purchase the units at a calculated value upon termination of employment) or (c) converted into shares as a result of a major capital event such as a sale or public offering. These units vest in their entirety on the third anniversary of their grant date. The value of the units is recognized ratably over the vesting period and is remeasured and reported at the end of each quarter based on the change in calculated value pursuant to our Restricted Interest Purchase Agreements. The primary inputs used to value the units include the accumulated vesting status of the issued units, the trailing four quarters of our adjusted earnings, inclusive of share-based compensation expense (income), and our outstanding capital and debt obligations as of the quarterly measurement date. The liability and corresponding expense are adjusted on a quarterly basis. Based on the number of participants and units outstanding, trailing earnings, forfeitures and other factors, we have experienced volatility in our share-based compensation liability. This calculation has in turn had a significant impact on our net income for the periods presented.
In connection with the Corporate Reorganization and IPO, all outstanding Restricted Interest Unit awards, other than those issued by Non-Converted Subsidiaries, were converted into shares of Class B common stock and are no longer considered a liability. As discussed above in the “—Factors Affecting the Comparability of Our Results of Operations—Share-Based Compensation (in connection with the Corporate Reorganization and IPO)”, this conversion resulted in significant incremental share-based compensation expense upon the IPO.
Interest expense. Interest expense consists of interest on our long-term debt and line of credit under our credit facility and finance leases.
Other expense, net. Other expense, net consists primarily of gain (loss) on asset disposals.
Provision for income taxes. Provision for income taxes consists primarily of income taxes in certain jurisdictions in which we conduct business.
Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2024
The following table sets forth our consolidated statements of operations data for the three and nine months ended September 30, 2023 and 2024, respectively. The year-over-year comparison of results of operations is not necessarily indicative of results for future periods.
25
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (in thousands) | 2023 | 2024 | 2023 | 2024 | ||||||||||||
| Revenues |
$ | 262,741 | $ | 314,393 | $ | 765,126 | $ | 889,840 | ||||||||
| Cost of goods sold |
210,549 | 253,515 | 611,394 | 712,573 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross profit |
52,192 | 60,878 | 153,732 | 177,267 | ||||||||||||
| Selling, general, and administrative expenses (1) |
58,522 | 165,491 | 128,310 | 256,942 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Operating income (loss) |
(6,330 | ) | (104,613 | ) | 25,422 | (79,675 | ) | |||||||||
| Other expenses: |
||||||||||||||||
| Interest expense |
716 | 1,026 | 2,120 | 2,857 | ||||||||||||
| Other expense (income), net |
(51 | ) | 2 | 141 | 166 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other expenses |
665 | 1,028 | 2,261 | 3,023 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income (loss) before income taxes |
(6,995 | ) | (105,641 | ) | 23,161 | (82,698 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Provision for income taxes |
— | 176 | — | 176 | ||||||||||||
| Net income (loss) |
(6,995 | ) | (105,817 | ) | 23,161 | (82,874 | ) | |||||||||
| Less net income (loss) attributable to Guardian Pharmacy, LLC prior to the Corporate Reorganization |
(11,290 | ) | 9,350 | 11,884 | 22,760 | |||||||||||
| Less net income (loss) attributable to non-controlling interests (2) |
4,295 | 6,823 | 11,277 | 16,356 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) attributable to Guardian Pharmacy Services, Inc |
$ | — | $ | (121,990 | ) | $ | — | $ | (121,990 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted EBITDA (3) |
$ | 19,144 | $ | 23,012 | $ | 56,299 | $ | 64,944 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Included in selling, general, and administrative expenses is share-based compensation expense of $20,700 and $122,355 during the three months ended September 30, 2023 and 2024, respectively, and $16,632 and $128,029 during the nine months ended September, 2023 and 2024, respectively. For the three and nine months ended September 30, 2023, this share-based compensation expense primarily represents non-cash recognition of changes in the value of Restricted Interest Unit awards, and has historically been recorded as a liability using a cash settlement methodology as calculated on a quarterly basis. For the three and nine months ended September 30, 2024, this share-based compensation expense primarily represents the incremental expense recognized for Restricted Interest Unit awards that were modified in connection with the Corporate Reorganization and IPO. |
| (2) | These figures, for both Converted Subsidiaries and Non-Converted Subsidiaries, reflect minority membership interests in our subsidiaries preceding the Corporate Reorganization and IPO. Such minority membership interests in the Converted Subsidiaries (but not in the Non-Converted Subsidiaries) were eliminated as part of the Corporate Reorganization. |
| (3) | See “—Adjusted EBITDA and Other Non-GAAP Financial Measures” below for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. |
Revenue
| Three Months Ended September 30, |
% Change | Nine Months Ended September 30, |
% Change | |||||||||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Revenue |
$ | 262,741 | $ | 314,393 | 19.7 | % | $ | 765,126 | $ | 889,840 | 16.3 | % | ||||||||||||
Revenue for the three months ended September 30, 2024 increased by $51.7 million or 19.7% compared to the three months ended September 30, 2023. $16.6 million of the increase was attributable to revenue from the Acquisitions, with the remaining $35.1 million of the increase attributable to the organic growth of our business. Further, the increase was attributable to increases in the number of residents served from 161,000 residents during September 2023 to 180,000 residents during September 2024 and prescriptions dispensed from 5.6 million during the three months ended September 30, 2023 to 6.4 million during the three months ended September 30, 2024, as well as annual drug price inflation.
Revenue for the nine months ended September 30, 2024 increased by $124.7 million or 16.3% compared to the nine months ended September 30, 2023. $32.4 million of the increase was attributable to revenue from the Acquisitions, with the remaining $92.3 million of the increase attributable to the organic growth of our business. Further, the increase was attributable to increases in the number of residents served from 161,000 residents during September 2023 to 180,000 residents during September 2024 and prescriptions dispensed from 16.4 million during the nine months ended September 30, 2023 to 18.4 million during the nine months ended September 30, 2024, as well as annual drug price inflation.
26
Cost of goods sold
| Three Months Ended September 30, |
% Change | Nine Months Ended September 30, |
% Change | |||||||||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Cost of goods sold |
$ | 210,549 | $ | 253,515 | 20.4 | % | $ | 611,394 | $ | 712,573 | 16.5 | % | ||||||||||||
| Percentage of revenue |
80.1 | % | 80.6 | % | 79.9 | % | 80.1 | % | ||||||||||||||||
Cost of goods sold for the three months ended September 30, 2024 increased by $43.0 million or 20.4% compared to the three months ended September 30, 2023. $14.4 million of the increase was attributable to the Acquisitions, with the remaining $28.6 million of the increase attributable to the organic growth of our business. Cost of goods sold as a percentage of revenue increased from 80.1% to 80.6% during the three months ended September 30, 2024.
Cost of goods sold for the nine months ended September 30, 2024 increased by $101.2 million or 16.5% compared to the nine months ended September 30, 2023. $28.2 million of the increase was attributable to the Acquisitions, with the remaining $73.0 million of the increase attributable to the organic growth of our business. Cost of goods sold as a percentage of revenue increased from 79.9% to 80.1% during the nine months ended September 30, 2024.
Selling, general, and administrative expenses
| Three Months Ended September 30, |
% Change | Nine Months Ended September 30, |
% Change | |||||||||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Selling, general, and administrative expenses |
$ | 58,522 | $ | 165,491 | 182.8 | % | $ | 128,310 | $ | 256,942 | 100.3 | % | ||||||||||||
| Percentage of revenue |
22.3 | % | 52.6 | % | 16.8 | % | 28.9 | % | ||||||||||||||||
Selling, general and administrative expenses increased $107.0 million or 182.8% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase was primarily due to share-based compensation expense that we recognized in connection with the Corporate Reorganization and IPO, which was $122.4 million for the three months ended September 30, 2024, compared to $20.7 million for the three months ended September 30, 2023. Additionally, $5.3 million of the increase in selling, general, and administrative expenses was driven by an increase in average employee headcount, with $3.4 million resulting from organic growth and $1.9 million resulting from the Acquisitions. Selling, general and administrative expenses as a percentage of revenue increased from 22.3% to 52.6% based primarily on increases to share-based compensation expense described above.
Selling, general and administrative expenses increased $128.6 million or 100.3% for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase was primarily due to share-based compensation expense that we recognized in connection with the Corporate Reorganization and IPO, which was $128.0 million for the nine months ended September 30, 2024, compared to $16.6 million for the nine months ended September 30, 2023. Additionally, $17.2 million of the increase in selling, general, and administrative expenses was driven by an increase in average employee headcount, with $13.6 million resulting from organic growth and $3.6 million resulting from the Acquisitions. Selling, general and administrative expenses as a percentage of revenue increased from 16.8% to 28.9% based primarily on increases to share-based compensation expense described above.
27
Interest expense
| Three Months Ended September 30, |
% Change | Nine Months Ended September 30, |
% Change | |||||||||||||||||||||
| 2023 | 2024 | 2023 | 2024 | |||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Interest expense |
$ | 716 | $ | 1,026 | 43.3 | % | $ | 2,120 | $ | 2,857 | 34.8 | % | ||||||||||||
Interest expense increased $0.3 million or 43.3% for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase was primarily due to increased utilization of the Credit Facility (see “—Liquidity and Capital Resources” below), coupled with higher interest rates on the Company’s outstanding indebtedness.
Interest expense increased $0.7 million or 34.8% for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase was primarily due to increased utilization of the Credit Facility (see “—Liquidity and Capital Resources” below), coupled with higher interest rates on the Company’s outstanding indebtedness.
Adjusted EBITDA and Other Non-GAAP Financial Measures
To supplement the results presented in our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”), we also present Adjusted EBITDA and Adjusted SG&A, which are financial measures not based on any standardized methodology prescribed by GAAP.
We define Adjusted EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization, as adjusted to exclude the impact of items and amounts that we view as not indicative of our core operating performance, including share-based compensation, acquisition accounting adjustments, and certain legal and regulatory items. We define Adjusted SG&A as GAAP selling, general, and administrative expenses adjusted to exclude the impact of share-based compensation and expenses relating to certain legal and regulatory items. Adjusted EBITDA and Adjusted SG&A do not have a definition under GAAP, and our definition of Adjusted EBITDA and Adjusted SG&A may not be the same as, or comparable to, similarly titled measures used by other companies.
We use Adjusted EBITDA and Adjusted SG&A to better understand and evaluate our core operating performance and trends. We believe that presenting Adjusted EBITDA and Adjusted SG&A provides useful information to investors in understanding and evaluating our operating results, as it permits investors to view our core business performance using the same metrics that management uses to evaluate our performance.
There are a number of limitations related to the use of Adjusted EBITDA and Adjusted SG&A rather than the most directly comparable GAAP financial measure, including:
| • | Adjusted EBITDA does not reflect interest and income tax payments that represent a reduction in cash available to us; |
| • | Depreciation and amortization are non-cash charges and the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| • | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
28
| • | Adjusted EBITDA and Adjusted SG&A do not consider the impact of share-based compensation; and |
| • | Adjusted EBITDA and Adjusted SG&A exclude the impact of certain legal and regulatory items, which can affect our current and future cash requirements. |
Because of these limitations, Adjusted EBITDA and Adjusted SG&A should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. You should consider Adjusted EBITDA and Adjusted SG&A alongside other financial measures, including net income, GAAP selling, general, and administrative expense and our other financial results presented in accordance with GAAP.
A reconciliation of Adjusted EBITDA to net income, and a reconciliation of Adjusted SG&A to GAAP selling, general, and administrative expense, the most directly comparable GAAP financial measures, are set forth below.
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (in thousands) | 2023 | 2024 | 2023 | 2024 | ||||||||||||
| Net income (loss) |
$ | (6,995 | ) | $ | (105,817 | ) | $ | 23,161 | $ | (82,874 | ) | |||||
| Add: |
||||||||||||||||
| Interest expense |
716 | 1,026 | 2,120 | 2,857 | ||||||||||||
| Depreciation and amortization |
4,638 | 4,994 | 13,520 | 14,619 | ||||||||||||
| Provision for income taxes |
— | 176 | — | 176 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| EBITDA |
$ | (1,641 | ) | $ | (99,621 | ) | $ | 38,801 | $ | (65,222 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Share-based compensation (1) |
20,700 | 122,355 | 16,632 | 128,029 | ||||||||||||
| Certain legal & other regulatory matters (2) |
85 | 278 | 866 | 3,807 | ||||||||||||
| Other (3) |
— | — | — | (1,670 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted EBITDA |
$ | 19,144 | $ | 23,012 | $ | 56,299 | $ | 64,944 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) as a percentage of revenue |
(2.7 | )% | (33.7 | )% | 3.0 | % | (9.3 | )% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted EBITDA as a percentage of revenue |
7.3 | % | 7.3 | % | 7.4 | % | 7.3 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| GAAP selling, general, and administrative expenses |
$ | 58,522 | $ | 165,491 | $ | 128,310 | $ | 256,942 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Subtract: |
||||||||||||||||
| Share-based compensation (1) |
20,700 | 122,355 | 16,632 | 128,029 | ||||||||||||
| Certain legal & other regulatory matters (2) |
85 | 278 | 866 | 3,807 | ||||||||||||
| Adjusted SG&A |
$ | 37,737 | $ | 42,858 | $ | 110,812 | $ | 125,106 | ||||||||
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| GAAP selling, general, and administrative expenses as a percentage of revenue |
22.3 | % | 52.6 | % | 16.8 | % | 28.9 | % | ||||||||
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| Adjusted SG&A as a percentage of revenue |
14.4 | % | 13.6 | % | 14.5 | % | 14.1 | % | ||||||||
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| (1) | Prior to the Corporate Reorganization and IPO, our share-based compensation expense primarily represented non-cash recognition of changes in the value of Restricted Interest Unit awards, which had historically been recorded as a liability using a cash settlement methodology as calculated on a quarterly basis. In connection with the Corporate Reorganization and IPO, certain Restricted Interest Unit awards were modified, resulting in share-based compensation expense of $122.4 million, based on the fair value of the modified awards. Subsequent to the Corporate Reorganization, these modified awards will be equity classified. |
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| (2) | Represents non-recurring attorney’s fees, settlement costs and other expenses associated with certain legal proceedings. The Company excludes such charges when evaluating operating performance because it does not incur such charges on a predictable basis and exclusion allows for consistent evaluation of operations. |
| (3) | Represents non-recurring proceeds from settlements related to payor reimbursement. |
Liquidity and Capital Resources
We have historically financed our business and acquisitions primarily through cash from operations and borrowings under our credit facility and, more recently, sales of our Class A common stock in our IPO. We use cash in the ordinary course of our operations primarily for prescription drug acquisition costs, capital expenditures, and personnel costs. As of September 30, 2024, we had $37.2 million in cash and cash equivalents. Our cash primarily consists of demand deposits held with a large regional financial institution.
On May 13, 2024, the Company entered into the Sixth Amendment to the Third Amended and Restated Loan and Security Agreement (the “2024 Amendment”) to the existing credit facility with Regions Bank (the “Credit Facility”). The Credit Facility provides for term loans (the “Term Loan”) and a line of credit. The 2024 Amendment extended the maturity date of the Credit Facility from April 23, 2025 to April 23, 2027. The line of credit under the Credit Facility bears an interest rate equal to the one-month Secured Overnight Financing Rate (“SOFR”) plus an additional rate of 1.80% to 2.80% based on certain financial ratios maintained by the Company. Additionally, the 2024 Amendment added a new term loan of $15.0 million to the Credit Facility. The interest rate of the Term Loan bears an interest rate equal to the one-month SOFR plus an additional rate of 1.80% to 2.80% based on certain financial ratios maintained by the Company. The Term Loan is payable in quarterly installments of $1.4 million through March 31, 2027, with the remaining balance of the Term Loan due in a final lump sum payment at maturity on April 23, 2027.
As of September 30, 2024, we had $34.3 million in principal outstanding under the Term Loan and $10.0 million in borrowings outstanding under the line of credit.
In connection with completing the Corporate Reorganization and the IPO, Guardian Pharmacy, LLC and the Converted Subsidiaries made certain final distributions to their respective members relating to time periods ending before or upon the closing of the Corporate Reorganization. The total amount of such final distributions by Guardian Pharmacy, LLC to its members subsequent to June 30, 2024 was $18.6 million. All of such distributions were made in ordinary course related to operating distributions from cash available prior to the offering.
We believe our existing cash and cash equivalents, expected cash from operations, and the amounts available under our Credit Facility will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months and for the foreseeable future, though we may require additional capital resources in the future.
Net Cash Flows
For the nine months ended September 30, 2023 and 2024, respectively, our net cash flows were as follows:
| (in thousands) | Nine Months Ended September 30, |
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| 2023 | 2024 | |||||||
| Operating activities |
$ | 56,265 | $ | 35,623 | ||||
| Investing activities |
(12,294 | ) | (23,783 | ) | ||||
| Financing activities |
(43,957 | ) | 24,629 | |||||
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Operating Activities
Cash flows provided by operating activities consist of our net income (loss) principally adjusted for certain non-cash items, such as depreciation and amortization, provision for losses on accounts receivable, and share-based compensation expense (income). Cash flows used in operating activities consist primarily of changes in our operating assets and liabilities.
Net cash provided by operating activities for the nine months ended September 30, 2024 decreased by $20.6 million compared to the corresponding period in 2023. The decrease was primarily due to increases in receivables and inventories, and decreases to operating liabilities, offset by increases in accounts payable when compared to the corresponding period in 2023.
Investing Activities
Cash flows provided by investing activities consist primarily of proceeds from disposition of property and equipment. Cash flows used in investing activities consist primarily of capital expenditures relating to our new and existing pharmacy locations and payments related to acquisitions.
Net cash used in investing activities for the nine months ended September 30, 2024 increased by $11.5 million compared to the corresponding period in 2023. The increase was primarily due to the increase in cash paid for the Acquisitions of $11.5 million compared to the corresponding period in 2023.
Financing Activities
Cash flows provided by financing activities consist primarily of borrowings from the term loan (recorded as borrowings from notes payable) and the line of credit, and proceeds from the issuance and sale of shares of Class A common stock in connection with the IPO. Cash flows used in financing activities consist primarily of repayment of borrowings from the term loan (recorded as repayment of notes payable) and the line of credit, and cash payments to Class B common stock stockholders related to the Merger Consideration. Prior to the Corporate Reorganization and IPO, cash flows used in financing activities included significant distributions to equity holders (inclusive of non-controlling interests) of Guardian Pharmacy, LLC, mostly consisting of distributions to fund tax liabilities and operational distributions, as well as return of capital.
Net cash provided by financing activities for the nine months ended September 30, 2024 increased by $68.6 million compared to the corresponding period in 2023. The increase is primarily due to the net proceeds received from the IPO of $119.8 million and the 2024 Amendment resulting in $15.0 million being added to the Credit Facility, offset by the Merger Consideration payment to holders of Class B common stock of $55.2 million in connection with the Corporate Reorganization and IPO, and a $10.2 million increase in distributions to equity holders (before the Corporate Reorganization and IPO) when compared to the corresponding period in 2023.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. Preparing our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as related disclosures. Because these estimates and judgments may change from period to period, actual results could differ materially, which may negatively affect our financial condition or results of operations. We base our estimates and judgments on historical experience and various other assumptions that we consider reasonable, and we evaluate these estimates and judgments on an ongoing basis.
See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Prospectus, including the fiscal year ended December 31, 2023, for further discussion of critical accounting estimates. There were no material changes to our critical accounting policies with which the estimates are developed since December 31, 2023.
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Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for accounting pronouncements adopted and recent accounting pronouncements not yet adopted as of the date of this Quarterly Report on Form 10-Q.
JOBS Act Accounting Election
The JOBS Act permits EGCs to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period for complying with certain new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common equity that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (c) the date on which we have issued more than $1.0 billion in non-convertible debt securities during any three-year period.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. Our operating results are subject to market risk from interest rate fluctuations on our Term Loan and line of credit, which both bear a variable interest rate based on SOFR. As of September 30, 2024, the total principal balance outstanding for the Term Loan and line of credit was $34.3 million and $10.0 million, respectively. Based on the outstanding balances and interest rates of our debt as of September 30, 2024, a hypothetical 10% relative increase or decrease in SOFR would result in an increase or decrease in interest expense of approximately $0.2 million over the next 12 months, which we do not consider to be a material impact on our future financial condition or results of operations.
Additionally, we held cash and cash equivalents of $37.2 million as of September 30, 2024, which primarily consist of demand deposits held with financial institutions. Changes in interest rates affect the interest income we earn on our cash and cash equivalents and the fair value of our cash equivalents. Historical fluctuations in interest rates have not had a significant impact on our financial condition or results of operations, and a hypothetical 10% relative increase or decrease in interest rates would not have a material impact on the value of our cash and cash equivalents or on our future financial condition or results of operations.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2024.
Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2024, our disclosure controls and procedures were designed, and were effective, to provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2024, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time, we and our pharmacies are involved and will continue to be involved in various claims relating to, and arising out of, our business and our operations. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
ITEM 1A. Risk Factors
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q and the other documents that we file with the SEC from time to time, including our consolidated financial statements and related notes, before deciding whether to invest in our Class A common stock. Any of the following risks could materially and adversely affect our business, financial condition, results of operations and prospects. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
Intense competition may erode our profit margins.
The business of providing pharmacy services to LTCF residents is highly competitive, and we face competition from multiple sources. There are national, regional and local institutional pharmacies, as well as numerous local retail pharmacies, that provide pharmaceutical dispensing services comparable to those that we offer. Many of these pharmacies have strong relationships with the LTCFs they serve and their residents. In addition, some of our competitors have greater financial resources than we do and may be more established in the markets they serve than we are, making our ability to compete more difficult. Some of our larger competitors have indicated that they plan to focus more on the ALF market, which could further increase the competition we face. Consolidation within the long-term care pharmacy industry may also lead to increased competition. We compete on the basis of the services we offer as well as price. To attract new and retain existing LTCFs and residents, we must continually meet service expectations of LTCFs and residents. There can be no assurance that we will continue to remain competitive, which would cause our business and operating results to suffer. Competitive pricing pressures may adversely affect our earnings and cash flow. If we cannot compete effectively, our business and operating results would be materially and adversely affected.
In addition, LTCF residents have the ability to choose among pharmacy providers. Certain states have a “freedom of choice” requirement as part of their state Medicaid programs or in separate legislation that enable a resident to select his/her provider. These laws may prevent LTCFs from requiring their residents to purchase pharmacy services or pharmaceuticals from particular providers that have a supplier relationship with the LTCF. Such “freedom of choice” requirements increase the competition we face in providing services to LTCF residents. The ability of a resident to select the pharmacy that supplies him or her with prescription drugs could adversely affect our business, financial condition and results of operations because there can be no assurance that such resident will select us as a provider.
Our prescription volumes may decline, and our operating results may be negatively impacted, if products are withdrawn from the market or if increased safety risk profiles of specific drugs result in utilization decreases.
If the volumes of dispensed pharmaceuticals from our pharmacies decline, our business and operating results would suffer. When increased safety risk profiles of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or reduce the numbers of prescriptions written for these drugs. Additionally, negative press regarding drugs with higher safety risk profiles may result in reduced resident demand for such drugs.
Unexpected safety or efficacy concerns with respect to pharmaceuticals can also lead to product recalls or withdrawals. In cases where there are no acceptable prescription drug equivalents or alternatives for these recalled or withdrawn pharmaceuticals, our volumes of dispensed pharmaceuticals and our operating results may decline.
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If we lose relationships with one or more pharmaceutical wholesalers or key manufacturers, or if such wholesalers or manufacturers refuse to extend our relationships on the same or similar terms, our business and financial results could be materially and adversely affected.
We maintain contractual relationships with pharmaceutical wholesalers and manufacturers that provide us with, among other things, discounts for drugs we purchase to be dispensed from our pharmacies. Our contracts with pharmaceutical wholesalers and manufacturers often provide us with, among other things, discounts on drugs we purchase and rebates and service fees. Our contracts with pharmaceutical wholesalers and manufacturers generally are terminable on relatively short notice by either party and we have limited contractual protections with them. If any of these contractual relationships are terminated, materially altered, or renewed on terms that are less favorable to us, our business and operating results could be materially adversely affected.
Our operating results may suffer if we fail to maintain certain relationships and contracts with LTCFs we serve.
We have a number of contracts with companies that own or operate numerous LTCFs. If we are not able to maintain these relationships and contracts or are only able to maintain them on less favorable terms than those currently in place, our ability to provide our services to residents of those LTCFs would be materially impacted and our operating results could suffer. Our agreements with SNFs generally range from one to three years in duration and typically renew automatically for subsequent renewal terms. The SNF contracts can be terminated by either party generally upon 60 days’ notice. Our relationships with ALFs and BHFs are generally memorialized in written agreements between Guardian and the owner of the respective community that designate Guardian as the “preferred provider” of that community owner. Unlike a SNF contract where virtually all of the residents in the skilled facility would be served by us, the ALF and BHF contract does not automatically grant us the right to serve those residents. Instead, our sales team must market our pharmacy services to the individual residents in that community, each of whom has the right to choose their pharmacy provider. These contracts generally range from one to three years in duration and typically renew automatically for subsequent renewal terms. These contracts can be terminated by either party generally upon 30 days’ notice. There can be no assurance that these parties will not terminate all or a portion of their contracts with us.
We also provide direct and indirect services to LTCFs, and our failure to provide services at optimal quality may impair our relationship with these LTCFs and could result in losing access to residents in these LTCFs.
The COVID-19 pandemic negatively impacted LTCFs and harmed our business. Another similar public health crisis or national emergency could also have a negative impact on our business.
The COVID-19 pandemic caused disruptions to our business and operational plans. Among other effects, the pandemic impacted our labor supply and marketing efforts. In addition, due to the older average age of LTCF residents and prevalence of chronic medical conditions affecting their demographics, LTCFs and their residents were disproportionately impacted by COVID-19, all of which resulted in a significant disruption in demand for senior living communities and a corresponding decrease in demand for our pharmacy services. We recognize that our business may continue to be susceptible to the impact of another public health crisis or national emergency including, without limitation, a global pandemic on the scale of COVID-19, which adversely affected economies and financial markets worldwide, and adversely affected our business and financial condition. We could experience disruptions to our operations as a result of any such public health crisis or national emergency. In the case of another pandemic or other public health crisis, our business and operations may be negatively impacted.
The impact of ongoing healthcare reform efforts on our business cannot accurately be predicted, and continuing government and private efforts to lower pharmaceutical costs, including by capping the prices for certain drugs and by limiting reimbursements, may adversely impact our profitability, results of operations and financial condition.
The healthcare industry in the United States is subject to fundamental changes due to ongoing federal and state healthcare reform efforts and related political, economic, and regulatory influences. Notably, the Affordable Care Act resulted in expanded healthcare coverage and has resulted in significant changes to the United States healthcare system. The Affordable Care Act outlines certain reductions for Medicare reimbursed services, which may affect skilled nursing, home health, hospice, and outpatient therapy services, as well as certain other changes to Medicare payment methodologies. In addition, there have been legislative initiatives with respect to pharmaceutical pricing practices, and we could be adversely affected by the impact of such legislation and the continuing efforts of government and private health plan payors to lower pharmaceutical costs. For example, the Inflation Reduction Act
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of 2022 contains several provisions that could have the effect of reducing the prices we can charge and the reimbursement we receive for the drugs we dispense, thereby reducing our profitability, and could adversely affect our financial condition and results of operations. These provisions include the establishment of a Medicare Drug Price Negotiation Program, which requires the government to negotiate and set a “maximum fair price” for select high-expenditure drugs covered under Medicare Part D (starting in 2026) and Part B (starting in 2028), and the implementation of changes to Medicare Part D benefits designed to limit patient out-of-pocket drug costs and shift program liabilities from patients to other stakeholders, including health plans, manufacturers and the government. These comprehensive healthcare reform efforts have resulted and will likely continue to result in extensive rulemaking and policy decisions by regulatory authorities, and applicable legislation and regulations may be altered, amended, repealed, or replaced. Moreover, there have been legal and political challenges to the Affordable Care Act and the Inflation Reduction Act since their passage and there may be future challenges. Therefore, it is difficult to predict the full impact of the Affordable Care Act, the Inflation Reduction Act, or other healthcare reform efforts due to the complexity of the law and implementing regulations, as well our inability to foresee how Centers for Medicare & Medicaid Services (“CMS”) and other participants in the healthcare industry will respond to the choices available to them under the law. The provisions of the legislation and other regulations implementing the Affordable Care Act, the Inflation Reduction Act, any amended or replacement legislation, or other healthcare reform efforts may increase our costs, materially and adversely affect our revenues and profitability, expose us to expanded liability, or require us to significantly alter the ways in which we conduct our business.
In addition, to reduce pharmaceutical costs, health plan payors may seek to lower reimbursement rates, limit the scope of covered services and negotiate reduced or capped pricing arrangements. Given the significant competition in the industry, we have limited bargaining power to counter health plan payor demands for reduced reimbursement rates. If we, or other entities acting on our behalf, are unable to negotiate for acceptable reimbursement rates, our profitability, results of operations and financial condition could be adversely affected.
In response to rising prescription drug prices, health plan payors may also demand that we satisfy certain quality metrics, enhanced service levels or cost efficiencies to help mitigate the increase in pharmaceutical costs. Our inability or failure to meet health plan payor imposed quality metrics, service requirements or cost efficiencies could adversely impact a health plan payor’s willingness to engage us or could result in payor-specific audits and recoupments.
We cannot assure you that reimbursement payments under governmental and private health plan payor programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to LTCF residents eligible for reimbursement under these programs. Any changes that lower reimbursement rates under Medicare, Medicaid or private payor programs could result in a substantial reduction in our revenues. Our operating results may be adversely affected due to deterioration in reimbursement, changes in payor mix and growth in operating expenses in excess of increases, if any, in payments by health plan payors. We also anticipate that federal and state governments will continue to review and assess alternate pharmaceutical delivery systems, payment methodologies and operational requirements for pharmaceutical providers, including LTCFs and pharmacies.
In addition, CMS and other governmental agencies have advocated for the creation of a national average acquisition cost benchmark, which states may use to set pharmacy payment rates. Formulary fee programs have been the subject of debate in federal and state legislatures and various other public and governmental forums. If these benchmarks and programs were adopted, our operating results could be materially adversely affected.
Over the long term, funding for federal and state healthcare programs may be impacted by the aging of the population, the growth in enrollees as eligibility is potentially expanded, the escalation in drug costs owing to higher drug utilization among seniors, the impact of the Medicare Part D benefit for seniors, the introduction of new, more efficacious but also more expensive medications and the long-term financing of the Medicare program. We are unable to predict the impact on our business of any changes in healthcare policy relating to the future funding of the Medicare and Medicaid programs. Further, Medicare, Medicaid and private health plan payor rates for pharmaceutical products and supplies may change from current methodologies and present levels. Any future healthcare legislation or regulation impacting these reimbursement rates may materially and adversely affect our business.
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If we fail to comply with Medicare and Medicaid regulations, we may be subjected to reduction in reimbursement, overpayment demands, or loss of eligibility to participate in these programs.
The Medicare and Medicaid programs are highly regulated. These programs are also subject to changes in regulations and guidance. If we fail to comply with applicable reimbursement laws and regulations, reimbursement under these programs and participation in these programs could be adversely affected. Federal or state governments may also impose other sanctions on us for failure to comply with the applicable reimbursement regulations, including but not limited to recovering an overpayment. Failure to comply with these or future laws and regulations could result in our inability to provide pharmacy services to LTCF residents or to participate in these payor programs.
CMS mandates 10 rules and service capabilities to qualify for participation as a Part D Network LTC Pharmacy provider. These required capabilities currently involve extended drug control and distribution systems that include items such as special packaging, 24/7 support and delivery, provision of certain reports, forms, and prescription ordering supplies, maintaining a comprehensive inventory of Part D drugs, and maintaining emergency kits and retrospective billing for patient copays and coverage gaps, known as the “donut hole.” CMS designates an institutional level of care as a “distinct pharmacy setting” and requires payors to compensate designated long-term care pharmacies for the specific services they are required to provide LTCF residents. In addition, CMS requires that payors maintain network adequacy to serve LTCF residents. If we were to lose our right to participate as a NLTCP, our business and operating results could be materially adversely affected.
Further modifications to the Medicare Part D program may reduce revenue and impose additional costs to the industry.
The Medicare Prescription Drug Improvement and Modernization Act of 2003, included a major expansion of the Medicare program with the addition of a prescription drug benefit under the Medicare Part D program. The continued impact of these regulations depends upon a variety of factors, including our ongoing relationships with the Part D Plans (as defined below) and the resident mix of the LTCFs we serve.
We cannot predict how future modifications to the Medicare Part D program, including through new legislation, may reduce revenue and impose additional costs to the industry, which could materially adversely affect our operating results. We cannot assure you that any changes to Medicare Part D and the regulations promulgated under Medicare Part D will not have a material adverse effect on our business.
Further consolidation of managed care organizations and other health plan payors, and changes in the terms of our agreements with these parties, may adversely affect our profits.
Managed care organizations and other health plan payors have continued to consolidate in order to enhance their ability to influence the delivery and cost structure of healthcare services. Consequently, the healthcare needs of a large percentage of the U.S. population are increasingly served by a smaller number of managed care organizations. If this consolidation continues, we could face additional pricing and service pressures from these organizations, which are increasingly demanding discounted fee structures. To the extent these organizations engage our competitors as a preferred or exclusive provider, demand discounted fee structures or limit the residents eligible for our services, our liquidity and results of operations could be materially and adversely affected.
In addition, a portion of our health plan payor reimbursements derive from our participation in the MHA Managed Care Network (“MHA”). In the event that we were to have a contractual dispute with MHA or fail to renew our agreement upon acceptable terms, our reimbursements may decrease. We also participate in the MHA group purchasing organization (“GPO”), for purposes of drug purchasing. In the event that our relationship were to suffer with MHA under either the network participation agreement or the MHA GPO agreement, our reimbursements could be further impacted and our business and operating results could be adversely affected.
We are highly dependent on our senior management team, our local pharmacy management teams and our pharmacy professionals and the loss of such persons could cause our business to suffer and materially adversely affect our operating results.
Our business is managed by a small number of senior management personnel, the loss of which could cause our business to suffer and materially adversely affect our operating results. There is a limited pool of senior management personnel with significant experience in our industry. Accordingly, if we are unable to retain members of our current management team, we could experience significant difficulty in replacing key management personnel and our business could be materially and adversely affected. Moreover, any newly-hired members of our senior management team would need time to fully assess and understand our business and operations. We can offer no assurance as to how long our senior management will choose to remain with us.
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In addition, our business model of empowering our local pharmacy management teams with significant autonomy makes us highly dependent on the local pharmacy’s ability to effectively manage and develop relationships with the LTCFs that they serve. If we experience substantial turnover in our local pharmacy management teams and these persons are not replaced by individuals with comparable skills, experience and industry knowledge, our business and operating results could be materially adversely impacted.
Further, our success depends on our ability to attract and retain pharmacists and other pharmacy professionals. Competition for qualified pharmacists and other pharmacy professionals is intense. The loss of pharmacy personnel or the inability to attract or retain sufficient numbers of qualified pharmacy professionals could materially adversely affect our business. Our inability to meet our staffing requirements for pharmacists and other pharmacy professionals in the future could have a material adverse effect on our business and operating results.
Continued inflation and increases in labor costs may reduce our profitability.
We are currently experiencing inflationary pressures on our operating costs. Among other things, competition for labor is becoming more acute and we expect our labor costs to increase as a result. We expect that as we rebound from labor shortages and our staffing levels increase, we will also experience a corresponding increase to our labor costs. Because labor costs are and will continue to be a major component of our operating expenses, higher labor costs, whether as a result of increased wages or increased staffing levels, could reduce our profitability and gross margins.
In addition, we have experienced increased costs for supplies, and rising fuel costs have resulted in increased costs for the transportation of drugs. We generally are not able to sufficiently raise our pricing to offset these increased costs. Continuing increased costs and prolonged inflation could materially and adversely affect our business, operating results and profitability.
Government efforts to combat inflation, along with other interest rate pressures arising from an inflationary economic environment, could lead to us to incur even higher interest rates and financing costs and may reduce our profitability.
Inflation has risen on a global basis, the United States has been experiencing historically high levels of inflation, and government entities have taken various actions to combat inflation, such as raising interest rate benchmarks. Government entities may continue their efforts, or implement additional efforts, to combat inflation, which could include among other things continuing to raise interest rate benchmarks and/or maintaining interest rate benchmarks at elevated levels. Such government efforts, along with other interest rate pressures arising from an inflationary economic environment, could lead to us to incur even higher interest rates and financing costs and have material adverse effect on our business, operating results and profitability.
Labor shortages could harm our ability to implement our growth strategy.
Our success and our ability to grow our business depends in large part on our ability to attract and retain employees. We have experienced labor shortages in the past, including as a result of the COVID-19 pandemic which negatively affected the labor market for employers. During the ongoing recovery from the COVID-19 pandemic, labor shortages have also impaired our ability to attract, hire and re-hire employees. To the extent we are unable to hire and retain a sufficient number of employees, our business and growth could be adversely affected. Additionally, labor shortages or labor disruptions experienced by our third-party contractors and subcontractors could disrupt our operations, increase our costs and adversely affect our profitability.
If we or the LTCFs we serve fail to comply with state licensure requirements, we could be prevented from providing pharmacy services or be required to make significant changes to our operations.
Our pharmacies must be licensed by the state boards of pharmacy in the states in which they operate. States also regulate out-of-state pharmacies that fill prescriptions for residents in their states. The failure to obtain or renew any required regulatory approvals or licenses could adversely impact the operation of our business. In addition, the LTCFs we service are also subject to extensive federal, state and local regulations, including a requirement to be licensed in the states in which they operate. A negative action on our licenses or the failure by the LTCFs we service to obtain or renew any required licenses could result in our inability to provide pharmacy services to these LTCFs and their residents and could have a material adverse effect on our financial condition, results of operations and liquidity.
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Complex and rapidly evolving laws and regulations could cause us to make significant changes to our operations or incur substantial costs or penalties.
As a participant in the healthcare industry in the United States, we are subject to numerous federal and state regulations. Further, there are various political, economic and regulatory influences that are placing our industry under intense scrutiny and which seek to implement fundamental changes. We cannot predict which reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us. Any changes to the current regulatory and legal paradigm could increase the overall regulatory burden and costs associated with our business and materially adversely affect our business and operating results. If we fail to comply with existing or future applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate our pharmacies and our ability to participate in federal and state healthcare programs. The U.S. Drug Enforcement Administration (the “DEA”), the U.S. Food and Drug Administration (the “FDA”) and various state regulatory authorities have broad enforcement powers, including the ability to seize or recall products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. As a consequence of the severe penalties we could face, we must devote significant operational and managerial resources to complying with these laws and regulations. Different legal interpretations and enforcement policies could subject our current practices to allegations of noncompliance or illegality, or could require us to make significant changes to our operations. In addition, we cannot predict the impact of future legislation and regulatory changes on our business or assure that we will be able to obtain or maintain the regulatory approvals required to operate our business. The costs associated with complying with federal and state laws and regulations could be significant and the failure to comply with any such legal requirements could have a material adverse effect on our financial condition, results of operations and liquidity.
If we fail to comply with fraud and abuse laws, false claims provisions or other applicable laws, we may need to curtail operations, and could be subject to significant penalties.
We are subject to federal and state fraud and abuse laws that prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of items or services. Violation of these laws can result in loss of licensure, civil and criminal penalties, damages and exclusion from the Medicaid, Medicare and other federal healthcare programs. The Office of Inspector General (“OIG”) and U.S. Department of Justice (“DOJ”) have, from time to time, established national enforcement initiatives, targeting all providers of a particular type, that focus on specific billing practices or other suspected areas of abuse. Under the qui tam or “whistleblower” provisions of the federal and various state false claims acts, private citizens may bring lawsuits alleging that a violation of the federal Anti-Kickback Statute (“AKS”) or similar laws has resulted in the submission of “false” claims to federal and/or state healthcare programs, including Medicare and Medicaid. Since the private plaintiff in this type of proceeding is generally entitled to share in any damages a court orders the defendant to pay to federal and state governments under these laws, financial incentives exist for individuals to allege that particular practices or activities constitute a violation of these statutes. A determination that we have violated these laws, or the initiation of lawsuits alleging violations of these laws, could adversely affect our business and financial condition.
As part of our ongoing operations, we are subject to various inspections, audits, inquiries, investigations and similar actions by third parties, as well as governmental/regulatory authorities responsible for enforcing the laws and regulations to which we are subject. From time to time we are subject to whistleblower complaints. Federal and state government agencies have increased their focus on and coordination of civil and criminal efforts in the healthcare area, and the ACA and other recent legislation has expanded federal healthcare fraud enforcement authority. There can be no assurance that the ultimate resolution of any such claims, inquiries or investigations, individually or in the aggregate, will not have a material adverse effect on our consolidated results of operations, financial position or cash flows. Moreover, we cannot predict our future costs associated with compliance with such laws.
Federal and state privacy and security regulations may increase our cost of operations and expose us to civil and criminal sanctions, damages, and penalties.
In the ordinary course of our business, we process, store and transmit data, which may include sensitive personal information of the residents we serve. We must comply with extensive federal and state requirements regarding the use, transmission and maintenance of protected health information (“PHI”) under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and the Health Information Technology for Economic and Clinical Health Act (“HITECH”), which expanded certain sections of HIPAA, including imposing certain liability on business associates, for example, with respect to impermissible uses and disclosures of PHI and Security Rule obligations, strengthening enforcement activities, and increasing penalties for violations. The requirements of federal and state privacy and security laws such as HIPAA and HITECH are complicated and are subject to interpretation and modification. In addition to HIPAA and HITECH, we must adhere to state privacy laws, including those that provide greater privacy protection for individuals than HIPAA. Failure to comply with HIPAA and HITECH or similar state equivalent laws could subject us to loss of customers, denial of the right to conduct business, civil damages, fines, criminal penalties, class action or other litigation, and other enforcement actions.
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In addition, there are numerous federal and state laws and regulations addressing patient and consumer privacy concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state and could impose additional penalties. Violations of these, or other applicable federal or state laws or regulations could subject us to significant criminal or civil penalties, including significant monetary penalties, and class action or other litigation. There are costs and administrative burdens associated with ongoing compliance with HIPAA’s Privacy and Security Rules, as well as HITECH and state equivalents, and other applicable federal and state regulations. Failure to comply carries with it the risk of significant penalties, damages, and sanctions. We cannot predict at this time the costs associated with compliance, or the impact of such laws and regulations on our results of operations, cash flows or financial condition. There can be no assurance that the cost of compliance with such laws and regulations will not increase significantly in the future, which could result in an adverse effect on our operations or profitability.
The increasing enforcement environment in the U.S. healthcare industry may negatively impact our business.
Federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare industry, and recent legislation has expanded federal healthcare enforcement authority. Both federal and state government agencies have appeared to increase their focus on and coordination of civil and enforcement efforts in the healthcare industry, including under the AKS, the False Claims Act (“FCA”), the Civil Monetary Penalty Law (“CMP Law”), and corollary state enforcement schemes. The OIG and the DOJ have, from time to time, established national enforcement initiatives, targeting all providers of a particular type, that focus on specific billing practices or other suspected areas of abuse.
Our pharmacies are registered with the appropriate state and federal authorities pursuant to statutes governing the regulation of pharmaceuticals and controlled substances. The DEA increased scrutiny and enforcement of long-term care pharmacy practices under the federal Controlled Substances Act. We believe that this increased scrutiny and, in some cases, stringent interpretation of existing regulations, effectively changed long-standing practices for dispensing controlled substances in the long-term care facility setting. Heightened enforcement of controlled substances regulations could increase the overall regulatory burden and costs associated with our pharmacy services, and there can be no assurance that this heightened level of enforcement and DEA or other investigations, or any fines or other penalties resulting therefrom, will not materially adversely affect our results of operations, financial condition or cash flows.
Courts across the United States have provided interpretations, sometimes conflicting, of these laws. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality, or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated these laws, or the public announcement that we are being investigated for possible violations of these laws, could have a material adverse effect on our business, operations and financial condition and our reputation could suffer significantly. If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more of our pharmacies), damages, and exclusion of one or more of our pharmacies from participation in the Medicare, Medicaid and other federal healthcare programs. In addition, we are unable to predict future legislation or regulations at the federal or state level and what impact they may have.
Furthermore, the OIG and the U.S. Department of Justice have established national enforcement initiatives that may focus on specific billing practices or other suspected areas of fraud, waste, and abuse. In addition, under the federal FCA and state equivalents, the government and private parties, by qui tam complaints, continue to pursue enforcement activities, resulting in potentially increasing awards of damages and penalties. If we are unable to adjust to an increasingly enforcement-focused environment, it could have a material adverse effect on our financial condition, results of operations and liquidity.
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Adverse results in material litigation matters or governmental inquiries could have a material adverse effect upon our business.
We may from time to time become subject in the ordinary course of business to material legal action related to, among other things, intellectual property disputes, professional liability and employee-related matters, as well as inquiries from governmental agencies and Medicare or Medicaid carriers requesting comment and information on allegations of billing irregularities and other matters that are brought to their attention through billing audits, third parties or other sources. The pharmaceutical industry is subject to substantial federal and state government regulation and audit. Legal actions could result in substantial monetary damages, including civil or criminal penalties, as well as damage to our reputation with customers, which could have a material adverse effect upon our financial condition and operating results.
Interruptions to our information systems may materially and adversely affect our operating results.
We rely on information systems to obtain, rapidly process, analyze, and manage data to facilitate the dispensing of prescription and non-prescription pharmaceuticals in accordance with physician orders and to deliver those medications to LTCF residents on a timely basis. We also use information systems to manage the accuracy of our billings and collections for thousands of LTCF residents and to process payments to suppliers.
In addition, we rely on computer and software systems owned and operated by third parties that we do not control. We depend on these third-party systems to be functioning and available to operate our business. It is possible that a third party that we rely on could experience interruptions, including as a result of a cybersecurity attack, data security breach or otherwise. These third-party providers also may decide to discontinue operating these systems.
Our business and operating results may be materially and adversely affected if any of these systems are interrupted for any reason (including cybersecurity threats or third-party provider failures), damaged or if they fail for an extended period of time. Significant disruptions to our infrastructure or any of our facilities due to failure of technology could adversely impact our business.
Our business success and results of operations depend in part on our ability to use technology effectively in our dispensing of prescriptions, and if we cannot keep pace with technological developments or continue to innovate and provide new programs, products and services, the use of our services and our revenue could decline.
To remain competitive, we must continually maintain and upgrade our technologies to meet the evolving preferences, needs and expectations of LTCFs and residents and to improve our productivity and reduce our operating expenses. We cannot predict the effect of technological changes on our business, and new services and technologies in the future could be superior to, or render obsolete, the technologies we currently use in our business. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and ultimately may not be successful. In addition, our ability to adopt and develop new technologies may be inhibited by industry-wide standards, new laws and regulations and other factors. Our success will depend on our ability to develop new technologies and adapt to technological changes and evolving industry standards. We rely in part on third parties for the development of and access to new technologies, which may adversely impact our ability to integrate new technologies into our business. If we fail to effectively maintain and upgrade our technology, our ability to sustain and grow our business and our results of operations may be materially adversely affected.
Cybersecurity attacks or other data security incidents could disrupt our operations and expose us to regulatory fines or penalties, liability or reputational harm.
In the ordinary course of our business, we process, store and transmit data, which may include sensitive personal information as well as proprietary or confidential information relating to our business or third parties. We have been subject to a ransomware attack, and may in the future be subject to various cyber or ransomware attacks or data breaches. Although the ransomware attack we experienced did not have a material impact to our business, such future incidents could disrupt and materially adversely affect our business. A cybersecurity attack or other data security incident could result in the misappropriation of confidential or personal information, create system interruptions or deploy malicious software that attacks our information technology security systems. Such an attack or incident could result in business interruptions from the disruption of our information technology systems or those of our third-party information systems providers, or negative publicity resulting in reputational harm with our customers, stockholders and other stakeholders. In addition, the unauthorized dissemination of sensitive personal information or proprietary or confidential information could expose us to regulatory fines or penalties, litigation and potential liability or otherwise harm our business.
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We could be adversely affected by product liability, product recall, personal injury or other health and safety issues, and our insurance coverage may not be adequate to protect us against all potential risks and claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals. We could be adversely impacted by the supply of defective or expired pharmaceuticals, including the infiltration of counterfeit products into the supply chain, errors in labeling of products, product tampering, product recall and contamination or product mishandling issues. Through our pharmacies and compliance packaging services, we are also exposed to potential risk of errors in the dispensing and packaging of pharmaceuticals, including related counseling, and in the provision of other healthcare services could lead to serious injury or death. Product liability or personal injury claims may be asserted against us with respect to any of the products or pharmaceuticals we dispense or services we provide.
Although we maintain various forms and levels of insurance to protect us against potential loss exposures, our available insurance coverage, and indemnification amounts available to us, may not be adequate to protect us against all potential risks, allegations and claims against us. We cannot assure you that the scope of our insurance coverage, or limitations or exclusions on availability thereunder that may exist now or in the future, will protect us against all potential future claims, or that we will be able to maintain our existing insurance on acceptable terms in the future.
We could suffer significant reputational harm and financial liability if we experience any of the foregoing health and safety issues or incidents or if our insurance coverage proves to be inadequate, any of which could have a material adverse effect on our business operations, financial condition and operating results.
Supply chain and other manufacturing disruptions related to the pharmaceuticals we dispense could adversely impact our business.
We may be exposed to risks related to disruptions in the pharmaceutical supply chain, such as shortages of medications, recall events, or disruptions caused by manufacturing issues or regulatory actions. These events may impact our ability to procure and deliver medications to our residents and in turn, adversely impact our business.
Acquisitions and strategic alliances that we have made or may make in the future could require significant resources, may be unsuccessful and could expose us to unforeseen liabilities.
We have made and anticipate that we may continue to make acquisitions of and strategic alliances with complementary businesses to expand our business. At any particular time, we may be in various stages of assessment, discussion and negotiation with regard to one or more potential acquisitions or strategic alliances, which may or may not be completed. Our growth plans rely, in part, on the successful completion of future acquisitions. If we are unsuccessful, our business would suffer.
Acquisitions may involve significant cash expenditures, debt incurrence, operating losses, amortization of certain intangible assets of acquired companies, and expenses that could have a material adverse effect on our financial condition, results of operations and liquidity. Acquisitions involve numerous risks and uncertainties, including, without limitation:
| • | difficulties integrating acquired operations, personnel and information systems, or in realizing projected efficiencies and cost savings; |
| • | failure to operate acquired facilities profitably or to achieve improvements in their financial performance; |
| • | diversion of management’s time from existing operations; |
| • | potential loss of key employees or customers of acquired companies; |
| • | inaccurate assessment of assets and liabilities and exposure to undisclosed or unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare laws; and |
| • | increases in our indebtedness. |
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Some of the pharmaceuticals we dispense are warehoused with a single logistics provider for warehouse and distribution services to our pharmacies, and our business could be harmed if our logistics provider performs poorly, fails to comply with its licensing requirements or is unavailable and we are unable to replace it.
Some of the pharmaceuticals we dispense are warehoused with one third-party logistics provider prior to receipt by the pharmacy. We depend on this provider’s warehousing services for efficient and cost effective delivery of a portion of our products to our pharmacies. Our logistics provider must hold appropriate licenses issued by state and federal regulators, especially due to its warehousing and distribution services of pharmaceuticals. If our logistics provider is not compliant with these licensing requirements, we could be subject to fines and penalties from governmental agencies, which could have a material adverse effect on our business and operating results. Additional risks associated with our relationship with our logistics provider include service interruptions or errors. In the event we lose these services or their services are ineffective and we are unable to transition efficiently and effectively to a new logistics provider, we could incur increased costs or experience a material disruption in our operations.
We may be exposed to potential liability and reputational harm if LTCF caregivers fail to properly administer the pharmaceuticals we dispense.
While we offer training sessions to inform LTCF caregivers about the proper administration of the pharmaceutical products we dispense, we cannot guarantee that the LTCFs and caregivers will utilize these training opportunities, or that the pharmaceuticals we dispense will be administered properly. The lack of required training for administration of the pharmaceutical products we dispense may result in product misuse, adverse treatment outcomes or errors in administration, which we might not anticipate and which could harm our reputation and expose us to potential liability and consequently harm our business and operating results.
The misuse or off-label use of the pharmaceuticals we dispense may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations and sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
The pharmaceuticals we dispense have been approved by the FDA for specific indications. We cannot however, prevent a physician from prescribing pharmaceuticals for uses outside of the FDA-approved indications for use, known as “off-label uses,” when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to LTCF residents if physicians attempt to use the pharmaceuticals off-label.
LTCF caregivers may also misuse pharmaceuticals that we dispense, ignore or disregard information provided in training or fail to obtain adequate training, potentially leading to injury and an increased risk of product liability. If pharmaceuticals that we dispense are misused, we may become subject to liability and costly litigation. It is also possible that federal or state enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations. Any of these events could significantly harm our business and operating results.
We may be exposed to potential liability and reputational harm if we make errors in the course of providing medication reconciliation, duplicate therapy resolution, clinical issue resolution and related services.
We provide full medication reconciliation, duplicate therapy resolution, clinical issue resolution and other services designed to help improve resident outcomes and reduce costs. In the course of these services, we review residents’ medication regimens, check for instances where multiple medications of the same therapeutic class have been prescribed to a single resident, which can result from a resident’s treatment by multiple physicians, and recommend corrective action where appropriate. These and other related services we offer are complex, and if and to the extent we make errors in the provision of these services, we may be subject to claims and potential liability, any of which could harm our reputation, operating results and financial condition.
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Our future success depends upon our ability to maintain and manage our growth. If we are unable to manage our growth effectively, we may incur unexpected expenses and be unable to meet the demands of our customers and other constituents.
We aim to continue to expand the scope of our operations, both organically and through strategic acquisitions. Growth in our operations will place significant demands on our management, financial and other resources. We cannot be certain that our current systems, procedures, controls, and space will adequately support expansion of our operations, and we may be unable to expand or upgrade our systems or infrastructure to accommodate future growth. Our future operating results will depend on the ability of our management and key employees to successfully maintain our independence and corporate culture, preserve the effectiveness of our high-touch resident care model, manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. Our inability to finance future growth, manage future expansion or hire and retain the personnel needed to manage our business successfully could have a material adverse effect on our business and prospects.
Our revenues and volume trends may be adversely affected by certain factors relevant to the markets in which we have pharmacies, including weather conditions and other natural disasters, some of which may not be covered by insurance.
Our revenues and volume trends will be predicated on many factors, including physicians’ pharmaceutical decisions on patients (residents), health plan payor programs, seasonal and severe weather conditions including the effects of extreme low temperatures, hurricanes and tornadoes, earthquakes, current local economic and demographic changes, some of which may not be covered by insurance. Any of these factors could have a material adverse effect on our revenues and volume trends, and many of these factors will not be within the control of our management. These factors may also have an effect on the LTCFs we serve and their ability to continue to operate.
Risks Related to Ownership of Our Class A Common Stock
The Guardian Founders are able to exercise significant control over us, including through the election of all of our directors.
The Guardian Founders beneficially own shares of our common stock representing a majority of our combined voting power. Pursuant to the terms of the Stockholders’ Agreement, the Guardian Founders have the ability to elect all of the members of our board of directors and thereby control our management and affairs. In addition, the Guardian Founders are able to determine the outcome of substantially all matters requiring action by our stockholders, including amendments to our certificate of incorporation and bylaws, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions even if such actions are not favored by our other stockholders. This concentration of ownership may also prevent a change in the composition of our board of directors or a change in control of our company that could deprive our stockholders of an opportunity to receive a premium for their Class A common stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.
We are a “controlled company” within the meaning of the corporate governance standards of NYSE. As a result, we qualify for exemptions from certain corporate governance standards and you do not have the same protections afforded to stockholders of companies that are subject to such requirements.
The Guardian Founders own more than 50% of the total voting power of our outstanding common stock and we are a “controlled company” under NYSE corporate governance standards. As a controlled company, we are not required by NYSE, for continued listing of our Class A common stock, to (i) have a majority of our board of directors consist of independent directors, (ii) maintain a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities or (iii) maintain a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. For so long as we qualify as a “controlled company,” we may rely on some or all of these exemptions from NYSE listing requirements. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced. As a result, our status as a “controlled company” could make our Class A common stock less attractive to some investors or could otherwise harm our Class A common stock price.
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Our future issuance of Class A common stock, Class B common stock, preferred stock or debt securities could dilute our common stockholders and adversely affect the market value of our Class A common stock.
The future issuance of shares of Class A common stock, Class B common stock, preferred stock or debt securities may dilute the economic and voting rights of our stockholders and reduce the market price of the Class A common stock. Preferred stock, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Class A common stock and adversely affect the market price of the Class A common stock.
From time to time in the future, we may also issue additional shares of our Class A common stock or securities convertible into Class A common stock pursuant to a variety of transactions, including acquisitions. We also anticipate that we may issue shares of our Class B common stock as consideration in the buyout of minority owners in our future greenfield start-up pharmacies and future acquired pharmacies. The issuance by us of additional shares of our Class A common stock, Class B common stock or securities convertible into our Class A common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our Class A common stock.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and NYSE rules, including those promulgated in response to the Sarbanes-Oxley Act. These requirements have increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and increased demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our organization and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We cannot assure you that management’s past experience will be sufficient to successfully develop and implement these systems, policies and procedures and to operate our company. Failure to do so could jeopardize our status as a public company, and the loss of such status could materially and adversely affect us and our stockholders.
We expect to incur significant additional annual expenses related to these steps associated with, among other things, director fees, reporting requirements, transfer agent fees, additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses. We also expect that the new rules and regulations that we will be subject to as a result of being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage for such directors and officers. Any of these factors could make it more difficult for us to attract and retain qualified members of our board of directors.
Future sales, or the perception of future sales of Class A common stock, by us or our existing stockholders in the public market could cause the market price for our common stock to decline.
The sale of substantial amounts of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Following the Corporate Reorganization, we have outstanding 54,094,232 shares of Class B common stock convertible into Class A common stock on a one-to-one basis. The shares of Class B common stock are subject to certain transfer restrictions and conversion terms, including with respect to sales. These transfer restrictions will cease to apply as shares of Class B common stock automatically convert into shares of Class A common stock. In addition, our board of directors may accelerate the conversion of Class B common stock into Class A common stock at their discretion.
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If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock may decline.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second Annual Report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could decline, and we could also become subject to investigations by the stock exchange on which our Class A common stock is listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
Our limited operating history as a publicly-traded company, and our inexperience could materially and adversely affect us and our stockholders.
We completed our initial public offering in September 2024 and became a publicly-traded company. Our senior management team lacks experience in operating a public company. As a publicly-traded company, we are required to develop and implement substantial control systems, policies and procedures in order to satisfy our periodic SEC reporting and NYSE obligations. We cannot guarantee that management’s past experience will be sufficient to successfully develop and implement these systems, policies and procedures and to operate our company. Failure to do so could jeopardize our status as a public company, and the loss of such status may materially and adversely affect us and our stockholders.
While we currently qualify as an “emerging growth company” under the JOBS Act, taking advantage of the reduced disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors. Once we lose emerging growth company status, the costs and demands placed upon our management are expected to increase.
The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies. As long as we qualify as an emerging growth company, we would be permitted, and we intend to, omit the auditor’s attestation on internal control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act, as described above. We intend to take advantage of the extended transition period to comply with new or revised accounting standards applicable to public companies. We also intend to take advantage of the exemption provided under the JOBS Act from the requirements to submit say-on-pay, say-on-frequency and say-on-golden parachute votes to our stockholders and we will avail ourselves of reduced executive compensation disclosure that is already available to smaller reporting companies.
We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common equity that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (c) the date on which we have issued more than $1.0 billion in non-convertible debt securities during any three-year period.
Until such time that we lose “emerging growth company” status, it is unclear if investors will find our Class A common stock less attractive because we may rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile and could cause our stock price to decline.
We may lose emerging growth status within a relatively short period of time on account of our public float exceeding $700 million or our annual gross revenues exceeding $1.235 billion. Once we lose emerging growth company status, we expect the costs and demands placed upon our management to increase, as we would have to comply with additional disclosure and accounting requirements.
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We do not intend to pay any cash dividends on our common stock in the foreseeable future.
We do not expect to pay any dividends on our common stock in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. As a result, capital appreciation in the price of our Class A common stock, if any, may be your only source of gain on an investment in our Class A common stock.
We are a holding company with no operations of its own and, accordingly, we depend on our subsidiaries for cash to fund our operations and expenses, including future dividend payments, if any.
We are a holding company and have no material assets other than our ownership of equity interests in our subsidiaries, including Guardian Pharmacy, LLC. As a holding company, we have no independent means of generating revenue, and our principal source of cash flow will be distributions from our direct and indirect subsidiaries. Therefore, our ability to fund and conduct our business, service our debt, and pay dividends, if any, in the future will depend on the ability of our subsidiaries to generate sufficient cash flow to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they are wholly owned or majority owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends, or otherwise. The ability of our subsidiaries to distribute cash to us will also be subject to, among other things, restrictions that may be contained in our subsidiary agreements (as entered into from time to time), availability of sufficient funds in such subsidiaries and applicable laws and regulatory restrictions. Claims of any creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, pay our expenses, service our debt, and pay dividends, if any, could be harmed.
Our certificate of incorporation and bylaws and provisions of Delaware law may discourage or prevent certain strategic transactions, including a takeover of our company, even if such a transaction would be beneficial to our stockholders.
Provisions contained in our certificate of incorporation and bylaws and provisions of the Delaware General Corporation Law (the “DGCL”), could delay or prevent a third party from entering into a strategic transaction with us, even if such a transaction would benefit our stockholders. For example, our certificate of incorporation and bylaws:
| • | provide that our board of directors is classified into three classes of directors with staggered three-year terms; |
| • | authorize the issuance of “blank check” preferred stock that could be issued by our board of directors without further action by our stockholders to increase the number of outstanding shares of capital stock, making a takeover more difficult and expensive; |
| • | do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; |
| • | do not permit stockholders to take action by written consent other than during the period in which we qualify as a “controlled company” within the meaning of NYSE rules; |
| • | provide that special meetings of the stockholders may be called only by or at the direction of the chair of our board or a majority of the directors; |
| • | vacancies on our board of directors will be able to be filled only by our board of directors (subject to the provisions set forth in the Stockholders’ Agreement) and not by stockholders; |
| • | restrict the forum for certain litigation against us to Delaware; and |
| • | provide for advance notice procedures, which apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. |
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In addition, we are subject to the provisions of Section 203 of the DGCL which limits, subject to certain exceptions, the right of a corporation to engage in a business combination with a holder of 15% or more of the corporation’s outstanding voting securities, or certain affiliated persons.
These restrictions and provisions could keep us from pursuing relationships with strategic partners and from raising additional capital, which could impede our ability to expand our business and strengthen our competitive position.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders and the federal district courts of the United States as the exclusive forum for litigation arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL or our certificate of incorporation or bylaws (as either may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine.
Furthermore, our certificate of incorporation also provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States will be, to the fullest extent permitted by law, the sole and exclusive forum for any action asserting a claim arising under the Securities Act. However, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder and accordingly, we cannot be certain that a court would enforce such provision. We believe this provision would not apply to any action or proceeding asserting a claim under the Exchange Act.
Our certificate of incorporation further provides that, to the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation described above. However, our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. The forum selection provisions in our certificate of incorporation may have the effect of discouraging lawsuits against us or our directors, officers or employees and may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees, and may increase the costs associated with bringing a claim, which may disadvantage a stockholder in any such lawsuit. If the enforceability of our forum selection provision were to be challenged, we may incur additional costs associated with resolving such a challenge. While we currently have no basis to expect any such challenge would be successful, if a court were to find our forum selection provision to be inapplicable or unenforceable, we may incur additional costs associated with having to litigate in other jurisdictions, which could have an adverse effect on our business, financial condition and results of operations and result in a diversion of the time, resources and attention of our management.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds
On September 27, 2024, we completed our IPO in which we issued and sold 8,000,000 shares of Class A common stock at a public offering price of $14.00 per share. Also on September 27, 2024, the underwriters for the IPO exercised in full their overallotment option to purchase 1,200,000 additional shares of Class A common stock. Following such sales, we received net proceeds of $119.8 million after deducting underwriter discounts of $9.0 million. All shares sold were registered pursuant to the Company’s registration statement on Form S-1, as amended (Registration No. 333 274847) (the “Initial Registration Statement”) and the related registration statement on Form S-1 (Registration No. 333-282344) filed pursuant to Rule 462(b) under the Securities Act (the “462(b) Registration Statement” and, together with the Initial Registration Statement, the “Registration Statement”). The Initial Registration Statement was declared effective by the SEC on September 25, 2024, and the 462(b) Registration Statement became effective on September 26, 2024 upon filing with the SEC pursuant to Rule 462(b) under the
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ITEM 6. Exhibits
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| 101.SCH | XBRL Taxonomy Schema Linkbase Document | |||||||||||||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | |||||||||||||||||
| 101.DEF | XBRL Taxonomy Definition Linkbase Document | |||||||||||||||||
| 101.LAB | XBRL Taxonomy Label Linkbase Document | |||||||||||||||||
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document | |||||||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | |||||||||||||||||
| + | Indicates management contract or compensatory plan. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Guardian Pharmacy Services, Inc. | ||||||
| Date: November 12, 2024 | By: | /s/ David Morris | ||||
| David Morris | ||||||
| Executive Vice President and Chief Financial Officer | ||||||
| (Principal Financial and Accounting Officer) | ||||||
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