Company Quick10K Filing
Diplomat Pharmacy
Price5.05 EPS-9
Shares76 P/E-1
MCap384 P/FCF4
Net Debt447 EBIT-618
TEV831 TEV/EBIT-1
TTM 2019-09-30, in MM, except price, ratios
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-18
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-07
10-Q 2018-03-31 Filed 2018-05-08
10-K 2017-12-31 Filed 2018-03-01
10-Q 2017-09-30 Filed 2017-11-06
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-09
10-K 2016-12-31 Filed 2017-03-08
10-Q 2016-09-30 Filed 2016-11-02
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-09
10-K 2015-12-31 Filed 2016-02-29
10-Q 2015-09-30 Filed 2015-11-04
10-Q 2015-06-30 Filed 2015-08-04
10-Q 2015-03-31 Filed 2015-05-12
10-K 2014-12-31 Filed 2015-03-03
10-Q 2014-09-30 Filed 2014-11-10
8-K 2020-02-10
8-K 2019-12-27
8-K 2019-12-09
8-K 2019-11-12
8-K 2019-08-06
8-K 2019-07-22
8-K 2019-06-19
8-K 2019-06-03
8-K 2019-05-07
8-K 2019-05-02
8-K 2019-04-08
8-K 2019-03-14
8-K 2019-03-07
8-K 2019-02-22
8-K 2019-02-22
8-K 2019-01-04
8-K 2018-11-06
8-K 2018-08-06
8-K 2018-07-24
8-K 2018-06-12
8-K 2018-05-09
8-K 2018-05-07
8-K 2018-04-06
8-K 2018-03-27
8-K 2018-02-26
8-K 2018-01-04

DPLO 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.Exhibits
EX-10.1 ex-10d1.htm
EX-10.2 ex-10d2.htm
EX-31.1 ex-31d1.htm
EX-31.2 ex-31d2.htm
EX-32.1 ex-32d1.htm
EX-32.2 ex-32d2.htm

Diplomat Pharmacy Earnings 2019-09-30

Balance SheetIncome StatementCash Flow
2.01.61.20.80.40.02013201520172020
Assets, Equity
1.51.10.80.40.1-0.32013201520172020
Rev, G Profit, Net Income
0.60.40.1-0.1-0.4-0.62013201520172020
Ops, Inv, Fin

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

or

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

For the transition period from                     to                  

Commission File Number:  001-36677

DIPLOMAT PHARMACY, INC.

(Exact name of Registrant as specified in its charter)

Michigan

38-2063100

(State or other jurisdiction of
incorporation or organization)

(IRS employer
identification number)

4100 S. Saginaw Street, Flint, Michigan

48507

(Address of principal executive offices)

(Zip Code)

(888) 720-4450

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, no par value per share

DPLO

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No 

As of November 8, 2019, there were 75,973,963 outstanding shares of the registrant’s no par value common stock.

Table of Contents

DIPLOMAT PHARMACY, INC.

Form 10-Q

INDEX

    

Page No.

Part I — Financial Information

3

Item 1 — Financial Statements

3

Condensed Consolidated Balance Sheets (Unaudited)

3

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

4

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3 — Qualitative and Quantitative Disclosures about Market Risk

38

Item 4 — Controls and Procedures

38

Part II — Other Information

40

Item 1 — Legal Proceedings

40

Item 1A — Risk Factors

40

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 6 — Exhibits

43

Signatures

44

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIPLOMAT PHARMACY, INC.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

September 30, 

December 31, 

    

2019

    

2018

ASSETS

Current assets:

Cash and equivalents

$

8,420

$

9,485

Receivables, net

 

338,321

 

326,602

Inventories

 

181,401

 

210,573

Prepaid expenses and other current assets

 

14,035

 

9,596

Total current assets

542,177

556,256

Property and equipment

54,462

55,929

Accumulated depreciation

(26,258)

(21,404)

Property and equipment, net

 

28,204

 

34,525

Capitalized software for internal use, net

28,899

30,506

Operating lease right-of-use assets

 

26,863

 

Goodwill

 

371,569

 

609,592

Definite-lived intangible assets, net

 

155,798

 

240,810

Assets held for sale

3,642

Other noncurrent assets

 

5,451

 

4,670

Total assets

$

1,162,603

$

1,476,359

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

368,410

$

308,084

Rebates payable to PBM customers

23,459

23,264

Borrowings on revolving line of credit

105,000

176,300

Current portion of long-term debt

 

443,324

 

11,500

Current portion of operating lease liabilities

4,566

Accrued expenses:

Compensation and benefits

13,481

13,348

Contingent consideration

 

5,523

 

5,075

Other

 

27,779

 

21,014

Total current liabilities

 

991,542

 

558,585

Long-term debt, less current portion

 

 

438,369

Noncurrent operating lease liabilities

23,538

Deferred income taxes

1,459

2,781

Contingent consideration

4,948

1,820

Derivative liability

10,084

4,292

Deferred gain

5,175

Other

 

 

253

Total liabilities

1,031,571

1,011,275

Shareholders’ equity:

Preferred stock (10,000,000 shares authorized; none issued and outstanding)

Common stock (no par value; 590,000,000 shares authorized; 75,973,963 and 74,474,677 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)

641,557

629,411

Additional paid-in capital

 

55,529

 

50,544

Accumulated deficit

 

(555,970)

 

(210,579)

Accumulated other comprehensive loss

(10,084)

(4,292)

Total shareholders' equity

 

131,032

 

465,084

Total liabilities and shareholders' equity

$

1,162,603

$

1,476,359

See Accompanying Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

DIPLOMAT PHARMACY, INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(Dollars in thousands, except per share amounts)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Net sales

$

1,301,197

$

1,373,334

$

3,845,629

$

4,131,896

Cost of sales

 

(1,237,812)

 

(1,279,976)

 

(3,630,297)

 

(3,849,743)

Gross profit

 

63,385

93,358

 

215,332

 

282,153

Selling, general and administrative expenses

 

(74,993)

 

(83,419)

 

(238,677)

 

(255,705)

Goodwill impairments

(122,076)

(244,967)

Impairments of definite-lived intangible assets

(34,173)

(52,152)

(Loss) income from operations

 

(167,857)

 

9,939

 

(320,464)

 

26,448

Other (expense) income:

Interest expense

 

(11,659)

 

(10,179)

 

(32,044)

 

(30,998)

Impairment of non-consolidated entities

 

 

(286)

 

 

(329)

Other

 

149

 

574

 

431

 

1,385

Total other expense

(11,510)

(9,891)

(31,613)

(29,942)

(Loss) income before income taxes

(179,367)

48

(352,077)

(3,494)

Income tax benefit (expense)

2,087

121

1,034

(750)

Net (loss) income

$

(177,280)

$

169

$

(351,043)

$

(4,244)

Other comprehensive (loss) income, net of tax

(307)

918

(5,792)

(44)

Total comprehensive (loss) income

$

(177,587)

$

1,087

$

(356,835)

$

(4,288)

(Loss) income per common share, basic and diluted

$

(2.35)

$

0.00

$

(4.69)

$

(0.06)

Weighted average common shares outstanding

Basic

 

75,509,088

74,386,386

 

74,904,776

74,181,869

Diluted

 

75,509,088

74,741,511

 

74,904,776

74,181,869

See Accompanying Notes to Condensed Consolidated Financial Statements.

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DIPLOMAT PHARMACY, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

(Dollars in thousands) ollars in thousands)

Nine Months Ended

September 30, 

    

2019

    

2018

Cash flows from operating activities:

Net loss

$

(351,043)

$

(4,244)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

 

58,518

 

72,547

Goodwill impairments

244,967

Impairments of definite-lived intangible assets

52,152

Insurance proceeds received on settlement of claim

(14,100)

Payment on settlement of claim

14,100

Share-based compensation expense

12,632

15,771

Net provision for doubtful accounts

9,090

5,862

Write-off of debt issuance costs

731

Amortization of debt issuance costs

3,101

3,703

Write-down on assets held for sale to net realizable value

1,654

Changes in fair value of contingent consideration

 

49

 

2,419

Contingent consideration payments

 

(1,298)

 

(3,181)

Deferred income tax benefit

(1,322)

(2,034)

Impairment of non-consolidated entities

329

Other

(7)

(43)

Changes in operating assets and liabilities, net of business acquisition

Accounts receivable

 

(13,871)

 

(31,090)

Inventories

 

29,668

 

36,717

Accounts payable

 

57,759

 

(73,227)

Rebates payable

195

1,209

Other assets and liabilities

 

5,070

 

8,469

Net cash provided by operating activities

 

108,045

 

33,207

Cash flows from investing activities:

Expenditures for property and equipment

 

(3,961)

 

(7,880)

Expenditures for capitalized software for internal use

 

(14,050)

 

(8,736)

Payments to acquire businesses, net of cash acquired

(7,048)

(1,139)

Other

22

46

Net cash used in investing activities

 

(25,037)

 

(17,709)

Cash flows from financing activities:

Net payments on revolving line of credit

 

(71,300)

 

(10,000)

Payments on long term debt

 

(8,625)

 

(82,625)

Payments of debt issuance costs

(2,471)

(821)

Proceeds from issuance of stock upon stock option exercises

600

3,999

Contingent consideration payments

(2,277)

(2,088)

Net cash used in financing activities

 

(84,073)

 

(91,535)

Net decrease in cash and equivalents

 

(1,065)

 

(76,037)

Cash and equivalents at beginning of period

 

9,485

 

84,251

Cash and equivalents at end of period

$

8,420

$

8,214

Supplemental disclosures of cash flow information:

Cash paid for interest

$

28,212

$

27,707

Cash paid for income taxes

$

2,354

$

2,142

Noncash investing and financing activities:

Right-of-use assets obtained in exchange for new operating lease liabilities

$

2,101

$

See Accompanying Notes to Condensed Consolidated Financial Statements.

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DIPLOMAT PHARMACY, INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands)

Retained

Accumulated

Additional

Earnings

Other

Total

Common Stock

Paid-In

(Accumulated

Comprehensive

Shareholders'

    

Shares

    

Amount

    

Capital

    

Deficit)

    

Loss

    

Equity

Balance at January 1, 2018

73,871,424

$

619,235

$

38,450

$

91,816

$

$

749,501

Cumulative effect adjustment, revenue recognition standard

(126)

(126)

Net loss

(450)

(450)

Stock issued upon stock option exercises

200,677

2,461

(552)

1,909

Share-based compensation

3,161

3,161

Stock issued upon vesting of restricted stock units

10,705

157

(157)

Balance at March 31, 2018

74,082,806

621,853

40,902

91,240

753,995

Net loss

(3,964)

(3,964)

Stock issued upon stock option exercises

129,722

1,831

(389)

1,442

Share-based compensation

6,961

6,961

Stock issued upon vesting of restricted stock units

47,683

1,109

(1,109)

Restricted stock award activity

21,924

561

(561)

Other comprehensive loss, net of tax

(962)

(962)

Balance at June 30, 2018

74,282,135

625,354

45,804

87,276

(962)

757,472

Net income

169

169

Stock issued upon stock option exercises

41,420

896

(248)

648

Share-based compensation

5,649

5,649

Stock issued upon vesting of restricted stock units

124,875

3,033

(3,033)

Other comprehensive income, net of tax

918

918

Balance at September 30, 2018

74,448,430

$

629,283

$

48,172

$

87,445

$

(44)

$

764,856

Balance at January 1, 2019

74,474,677

$

629,411

$

50,544

$

(210,579)

$

(4,292)

$

465,084

Cumulative effect adjustment, leasing standard (Notes 2 and 14)

5,652

5,652

Net loss

(14,301)

(14,301)

Share-based compensation

3,572

3,572

Stock issued upon vesting of restricted stock units

244,948

4,766

(4,766)

Restricted stock award activity

(5,929)

37

(37)

Other comprehensive loss, net of tax

(2,127)

(2,127)

Balance at March 31, 2019

74,713,696

634,214

49,313

(219,228)

(6,419)

457,880

Net loss

(159,462)

(159,462)

Stock issued upon stock option exercises

27,313

148

(30)

118

Share-based compensation

4,283

4,283

Stock issued upon vesting of restricted stock units

65,988

1,544

(1,544)

Restricted stock award activity

186,969

425

(425)

Other comprehensive loss, net of tax

(3,358)

(3,358)

Balance at June 30, 2019

74,993,966

636,331

51,597

(378,690)

(9,777)

299,461

Net loss

(177,280)

(177,280)

Issuance of shares of common stock as consideration for InTouch Pharmacy LLC acquisition (Note 4)

836,431

3,899

3,899

Stock issued upon stock option exercises

104,653

582

(100)

482

Share-based compensation

4,777

4,777

Stock issued upon vesting of restricted stock units

38,913

745

(745)

Other comprehensive loss, net of tax

(307)

(307)

Balance at September 30, 2019

75,973,963

$

641,557

$

55,529

$

(555,970)

$

(10,084)

$

131,032

See Accompanying Notes to Condensed Consolidated Financial Statements.

6

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands, except per share amounts)

1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Diplomat Pharmacy, Inc. and its consolidated subsidiaries (the “Company”) is the largest independent provider of specialty pharmacy and infusion services in the United States of America (“U.S.”). The Company is focused on improving the lives of patients with complex chronic diseases while also delivering unique solutions for manufacturers, hospitals, payors and providers. The Company’s patient-centric approach positions it at the center of the healthcare continuum for the treatment of complex chronic disease states, including oncology, specialty infusion therapies, immunology, hepatitis, multiple sclerosis and many other serious or long-term conditions. The Company operates in two reportable segments - Specialty and Pharmacy Benefit Management (“PBM”). The Specialty segment offers a broad range of innovative solutions to address the dispensing, delivery, dosing and reimbursement of clinically intensive, high-cost specialty drugs and a wide range of applications. The PBM segment provides services designed to help customers reduce the cost and manage the complexity of their prescription drug programs. The Company dispenses to patients in all U.S. states and territories through its advanced distribution centers and manages centralized clinical call centers to deliver localized services on a national scale.

Basis of Presentation

Liquidity and Going Concern

Beginning in latter half of 2018, the Company began experiencing operating results below expectations and deteriorating forecasts for future revenue growth.  Competitive challenges in its core specialty pharmacy business, impact of continued customer contract losses in the PBM business, and uncertainties and challenges facing the health care industry continue to create increasing headwinds for the Company’s operating results.

The continued availability of funding under our credit agreement is contingent on compliance with, among other things, certain financial debt covenants consisting of a total net leverage ratio and interest coverage ratio.  Effective August 2019, the Company amended the terms of its credit facility, in particular these specific ratios, which made these debt covenants less restrictive for the period September 30, 2019 through December 31, 2020, but thereafter returns to the originally agreed upon ratios.  The Company has been monitoring and evaluating the impact of these changes and originally expected to be in compliance with the amended covenants but it has determined, given recent operating results and deteriorated forecasts, that it is probable that the Company will be in violation of these covenants at December 31, 2019. If we were to violate our covenants, our lenders would have the right to terminate funding of our credit facility, accelerate our indebtedness (under the revolving credit facility and term loans), or foreclose on our assets.  While we believe that we would be able to obtain waivers for any such breach of covenants to prevent an acceleration of the outstanding indebtedness, the Company cannot conclude with certainty that it will have the ability to restructure its credit agreement, obtain necessary waivers or negotiate less restrictive debt covenants with its lenders. If the covenant violations are not waived and our access to the credit facility is terminated or the indebtedness thereunder is accelerated,  the Company may be unable to repay the obligations due under the credit agreement which would have a material adverse impact on the Company’s liquidity and business.  Accordingly, management’s assessment indicates, due to these conditions, there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements were filed.

The Company’s operations are funded primarily through cash generated from operations, cash and equivalents on hand, and available borrowings under its revolving credit facility. As of September 30, 2019, the Company had $8.4 million in cash and equivalents, $105 million in borrowings under its revolving credit facility and $456 million outstanding under its

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DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands, except per share amounts) (continued)

term loans. At September 30, 2019, the Company had $95 million of available borrowing capacity under its revolving line of credit.  For the nine months ended September 30, 2019, the Company generated $108 million of cash from operations.

The Company is reviewing strategic alternatives related to its future business operations which include, but are not limited to, a sale or merger of the Company, pursuing value enhancing initiatives or undertaking structural changes as a standalone company, or the sale or disposition of certain of the Company’s business or assets.  Additionally, the Company plans to work with its lenders to amend the credit agreement and continue to pursue cost-cutting initiatives.  However, given many of the mitigating plans are reliant on third parties and therefore outside the Company’s control, it is not considered probable that any of these alternatives will be effectively implemented in the near term.  Therefore, these plans do not mitigate the substantial doubt raised surrounding the Company’s ability to continue as a going concern.

Unaudited Condensed Consolidated Financial Statements

The condensed consolidated balance sheet as of September 30, 2019, and the condensed consolidated statements of comprehensive loss, changes in shareholders’ equity and cash flows for the three and nine months ended September 30, 2019 and 2018 are unaudited.  These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations, cash flows and changes in shareholders’ equity for the periods presented. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any future annual or interim period. The consolidated balance sheet at December 31, 2018 included herein was derived from the audited financial statements as of that date.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

2.  NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standard

Leases

The Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) and all subsequent amendments as of January 1, 2019.  Topic 842 requires a lessee to recognize the following for all leases, except short-term leases, at the commencement date: (1) a lease liability which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Topic 842 also requires expanded disclosures.

The Company adopted Topic 842 as of January 1, 2019 using the optional transition method, which allowed entities to apply the new guidance at the adoption date and record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, and not to restate the comparative periods presented. Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.  The adoption of the standard resulted in the recognition of net operating lease right-of-use assets of approximately $28,400 and operating lease liabilities of approximately $29,300 on the condensed consolidated balance sheet as of January 1, 2019 primarily related to its real estate operating leases. The operating lease right-of-use assets includes the impact of deferred rent. The Company does not have any finance leases.

Also, upon adoption, the Company recorded a cumulative-effect adjustment, after tax, of $5,652 (a valuation allowance was established against the full amount of the net deferred taxes of $1,387) to increase retained earnings for the amount of a previously deferred gain on a sale-leaseback transaction that closed in 2018. Such gain recorded on the sale-leaseback transaction would have been fully recognized under Topic 842.

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DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands, except per share amounts) (continued)

The Company elected to apply the package of practical expedients upon transition, which includes no reassessment of whether existing contracts are or contain leases and allowed for the lease classification for existing leases to be retained. The Company did not elect the practical expedient to use hindsight, and accordingly the initial lease term did not differ under the new standard versus prior accounting practice.  After transition, in certain instances, the cost of renewal options will be recognized earlier in the term of the lease than under the previous lease accounting rules.  The operating lease agreements include lease and non-lease components for which the Company elected the practical expedient to not separate non-lease components from the lease components but instead to combine them and account for them as a single lease component and will continue to do so for its real estate operating leases. The Company has selected as its accounting policy to keep leases with a term of twelve months or less off the balance sheet and recognize these lease payments on a straight-line basis over the lease term.

The Company has recorded operating lease right-of-use assets and operating lease liabilities in its condensed consolidated balance sheet at September 30, 2019. The lessors’ rate implicit in the operating leases was not available to the Company and was not determinable from the terms of the lease.  Therefore, the Company used its incremental borrowing rate to determine the present value of the future lease payments. The incremental borrowing rates were not observable and therefore, the rates were estimated primarily using a methodology dependent on the Company’s financial condition, creditworthiness, and availability of certain observable data.  In particular, the Company considered its actual cost of borrowing for collateralized loans and its credit rating, along with the corporate bond yield curve in estimating its incremental borrowing rates. These estimated incremental borrowing rates were applied to future lease payments to determine the present value of the operating lease liability for each lease.    

The new standard did not have a significant impact on the timing or measurement of lease expense in the condensed consolidated statements of comprehensive (loss) income and had no impact on the condensed consolidated statements of cash flows for the nine months ended September 30, 2019. As noted above, the comparative prior period information for the nine months ended September 30, 2018 has not been adjusted and continues to be reported under the Company’s historical lease recognition policies under ASC Topic 840, Leases.

The disclosure requirements of Topic 842 are included within Note 14, Leases.

Accounting Standards Issued But Not Yet Adopted

Credit Losses

In September 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring the recording of credit losses on financial assets, including receivables, on a more timely basis. The guidance will replace the current incurred loss accounting model with an expected loss approach. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. The effect of adoption of the standard is required as an adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU No. 2016-13 is effective.   The Company is currently evaluating the impact of the adoption of this accounting standard and has not yet determined the magnitude of any such one-time adjustment or the overall impact of ASU No. 2016-13 on its consolidated financial statements.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Diplomat Pharmacy, Inc., and its wholly owned subsidiaries.

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Table of Contents

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands, except per share amounts) (continued)

All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

Receivables, net

Receivables, net consisted of the following:

September 30, 

December 31, 

    

2019

    

2018

Trade receivables, net of allowances of $(31,344) and $(25,342), respectively

$

329,141

$

299,407

Rebate receivables

 

6,450

 

22,375

Other receivables

 

2,730

 

4,820

$

338,321

$

326,602

Trade receivables are stated at the invoiced amount. Trade receivables primarily include amounts due from clients, third-party pharmacy benefit managers and insurance providers and are based on contracted prices. Trade receivables are unsecured and require no collateral. Trade receivable terms vary by payor, but generally are due within 30 days after the sale of the product or performance of the service.

Rebate receivables are amounts due from pharmaceutical manufacturers related to drug purchases by participants of the various pharmacy benefit plans that the Company manages, a portion of which, depending on contract terms, are paid back to the Company’s customers. The Company estimates these rebates at period-end based on its contractual arrangements with its manufacturers and such rebates are recorded as a reduction of cost of sales.

Inventories

Inventories consist of prescription and over-the-counter medications and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Prescription medications are returnable to the Company’s vendors and fully refundable before nine months of expiration, and any remaining expired medication is relieved from inventory on a quarterly basis.

4. ACQUISITION OF INTOUCH PHARMACY LLC

On July 22, 2019, the Company acquired all of the outstanding equity interests of InTouch Pharmacy LLC (“InTouch”), a national specialty home infusion pharmacy based in Atlanta, Georgia with two additional locations in Tennessee and South Carolina. The Company accounted for the acquisition using the acquisition method.  The results of operations of InTouch are included in the condensed consolidated financial statements from the acquisition date.

The assets acquired and liabilities assumed in the InTouch acquisition, including identifiable intangible assets, were based on their estimated fair values as of the acquisition date.  The excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill.  The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, specifically related to identifiable intangible assets. These estimates are preliminary and subject to change primarily due to the fair values of the acquired identifiable intangibles assets of $6,660 and the contingent consideration arrangement of $7,102 are provisional pending receipt of the final valuations for those assets and information to finalize the opening

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Table of Contents

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands, except per share amounts) (continued)

working capital adjustments is not yet available. The following table summarizes the consideration transferred to acquire InTouch:

Cash

$

7,491

Restricted common stock (836,431 shares)

3,899

Contingent consideration at fair value

7,102

$

18,492

The fair value of the 836,431 restricted common shares issued as part of the consideration paid at closing, in accordance with the purchase agreement, was determined using a per share closing price of the Company’s common stock on the acquisition date ($5.18) and multiplied by 90 percent to account for the restricted nature of the shares.

The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $8,000 if certain gross profit targets, as defined in the arrangement, are met in each of the next three years. The Company recorded an estimated liability equal to the fair value of the contingent consideration obligation of $7,102 as of the acquisition date.  The estimated fair value of the contingent consideration obligation was determined using a probability weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurements.

The Company incurred acquisition related costs of $174 which were charged to Selling, general and administrative expenses during the three months ended September 30, 2019.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

Cash

$

443

Receivables

6,939

Inventories

496

Other current assets

40

Definite-lived intangibles assets

6,660

Other noncurrent assets

24

Accounts payable

(2,567)

Accrued expenses - compensation and benefits

(625)

Total identifiable net assets

11,410

Goodwill

7,082

$

18,492

The estimated fair value of the definite-lived intangible assets that were acquired and their respective useful lives are as follows:

Useful

    

Life

    

Amount

Patient relationships

 

8 years

$

4,400

Non-compete employment agreements