Company Quick10K Filing
Dougherty's Pharmacy
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 23 $2
10-Q 2019-05-20 Quarter: 2019-03-31
10-K 2019-05-06 Annual: 2018-12-31
10-Q 2019-04-29 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-11 Quarter: 2018-03-31
10-K 2018-03-29 Annual: 2017-12-31
10-Q 2017-11-13 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
8-K 2019-08-28 Enter Agreement, M&A, Bankruptcy, Other Events, Exhibits
8-K 2019-06-10 Enter Agreement, M&A, Shareholder Vote, Other Events
8-K 2019-02-07 Officers, Exhibits
8-K 2018-08-14 Earnings, Regulation FD, Exhibits
8-K 2018-08-01 Off-BS Arrangement
8-K 2018-06-12 Shareholder Vote
8-K 2018-05-22 Other Events, Exhibits
8-K 2018-05-14 Earnings, Regulation FD, Exhibits
8-K 2018-03-29 Earnings, Regulation FD, Exhibits
8-K 2018-02-28 Other Events, Exhibits
8-K 2018-02-20 Other Events, Exhibits
8-K 2018-01-17 Officers, Exhibits
MYDP 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 dougherty_ex3101.htm
EX-31.2 dougherty_ex3102.htm
EX-32 dougherty_ex3200.htm

Dougherty's Pharmacy Earnings 2019-03-31

MYDP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
PGEC 2 0 0 0 0 -0 -0 2 -92.8 -18,504%
EGLT 2 236 178 54 0 -101 -87 100 0% -1.1 -43%
EVTN 2 2 3 1 1 -0 -0 2 44% -5.5 -15%
MYHI 2 0 0 0 0 -5 -5 2 56% -0.4 -1,026%
MYDP 2 8 10 27 9 -3 -0 4 33% -95.8 -40%
NULF 2 0 2 0 0 -4 -4 2 51% -0.6 -4,308%
ALYE 2 35 10 17 0 1 4 6 0% 1.6 2%
PCYN 2 2 0 4 3 0 0 2 73% 16.5 1%
SGBI 2 0 1 0 0 -0 -0 2 100% -7.8 -478%
PTEO 2 0 1 0 0 -0 -0 2 0% -8.0 -85%

10-Q 1 dougherty_10q-033119.htm FORM 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

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

 

For the quarterly period ended March 31, 2019

 

OR

 

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

 

For the transition period from                        to                        

 

Commission file number: 000-27945

 

DOUGHERTY’S PHARMACY, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   75-2900905
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)

 

5924 ROYAL LANE SUITE 250

DALLAS, TEXAS 75230

(Address of principal executive offices) (Zip code)

 

972-250-0945

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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

 

Common Stock, $0.0001 par value

(Title of class)

 

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

 

Indicate by check mark whether the registrant has submitted electronically, 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 x No o

 

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

 

Large accelerated filer  o Accelerated filer  o
Non-accelerated filer  o  Smaller reporting company  x
   Emerging growth company  o

 

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

 

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

 

Number of shares of common stock, $0.0001 par value, of registrant outstanding at May 15, 2019: 23,097,914

 

 

 

   

 

 

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION 3
     
Item 1. FINANCIAL STATEMENTS 3
     
  Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 3
     
  Consolidated Statements of Operations for the Three Months ended March 31, 2019 and 2018 4
     
  Consolidated Statements of Stockholder’s Equity (Deficit) for the Three Months ended March 31, 2019 and 2018 5
     
  Consolidated Statements of Cash Flows for the Three Months ended March 31, 2019 and 2018 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
Item 4. Controls and Procedures 18
     
PART II. OTHER INFORMATION 23
     
Item 1. Legal Proceedings 25
     
Item 1A Risk Factors 25
     
Item 6. Exhibits 25
     
SIGNATURES 26

 

 

 

 

 ii 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Dougherty’s Pharmacy, Inc.

Consolidated Balance Sheets

(000’s omitted, except par value and share amounts)

  

   March 31,   December 31, 
   2019   2018 
    (Unaudited)    (Audited) 
ASSETS          
           
Current Assets          
Cash  $69   $248 
Trade accounts receivable, net   1,422    1,387 
Other receivables   307    301 
Inventories, net   2,727    2,689 
Prepaid expenses   212    277 
Total current assets   4,737    4,902 
Long term receivable   448    451 
Property and equipment, net   836    888 
Operating lease right-of-use asset   4,533     
Intangible assets, net   2,054    2,221 
Total assets  $12,608   $8,462 
           
LIABILITIES          
           
Current Liabilities          
Accounts payable  $3,105   $3,133 
Accrued liabilities   435    293 
Notes payable, current portion   820    886 
Operating lease liabilities, current portion   446     
Revolving credit facility   3,956    3,956 
Total current liabilities   8,762    8,268 
Operating lease liabilities, long-term portion   4,148     
Notes payable, long-term portion   2,096    2,096 
Total liabilities   15,006    10,364 
           
STOCKHOLDERS' EQUITY (DEFICIT)          
           
Stockholders' equity:          
Preferred stock, $0.0001 par value; 7,500,000 shares authorized: none issued and outstanding          
Common stock, $0.0001 par value; 50,000,000 shares authorized; 24,127,914 shares issued and 23,097,914 shares outstanding at March 31, 2019; 24,127,914 shares issued and 23,097,914 shares outstanding at December 31, 2018   2    2 
Additional paid-in capital   60,219    60,217 
Accumulated deficit   (62,222)   (61,724)
Treasury stock, at cost, 1,030,000 shares   (397)   (397)
Total stockholders' equity (deficit)   (2,398)   (1,902)
Total liabilities and stockholders' equity (deficit)  $12,608   $8,462 

 

See Notes to Consolidated Financial Statements

 

 

 

 3 

 

 

Dougherty’s Pharmacy, Inc.

Consolidated Statements of Operations

(000’s omitted, except share and per share amounts)

(Unaudited)

 

   Three Months Ended March 31, 
   2019   2018 
         
Revenue  $7,767   $9,455 
Cost of sales (exclusive of depreciation and amortization shown separately below)   5,754    6,887 
Gross profit   2,013    2,568 
           
Operating expenses          
Selling, general and administrative expenses   2,168    2,518 
Non-cash stock compensation   2    (9)
Depreciation and amortization   224    242 
Total operating expenses   2,394    2,751 
Operating loss   (381)   (183)
           
Other income       37 
Interest expense   (112)   (110)
Loss before provision for income tax   (493)   (256)
Income tax provision   (5)   (10)
Net loss  $(498)  $(266)
           
Basic and diluted net loss per share attributable to common stockholders  $(0.02)  $(0.01)
Weighted-average number of shares - basic and diluted   23,097,914    23,087,164 

 

See Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 4 

 

 

Dougherty’s Pharmacy, Inc.

Consolidated Statements of Stockholders’ Equity

Periods Ended March 31, 2019 and December 31, 2018

(000’s omitted, except share amounts)

 

   Class A Common Stock           Treasury     
   Shares   Amount   APIC   Accum Deficit   Shares   Amount   Total 
Balance at December 31, 2017   24,003,310   $2   $60,221   $(58,196)   (1,030,000)  $(397)  $1,630 
Issue vested restricted stock units   145,204        12                12 
Retired restricted stock units   (20,600)       (16)               (16)
Net loss               (3,528)           (3,528)
Balance at December 31, 2018   24,127,914   $2   $60,217   $(61,724)   (1,030,000)  $(397)  $(1,902)
Vested restricted stock units           2                2 
Net loss               (498)           (498)
Balance at March 31, 2019   24,127,914   $2   $60,219   $(62,222)   (1,030,000)  $(397)  $(2,398)

 

 

See Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 5 

 

 

Dougherty’s Pharmacy, Inc.

Consolidated Statements of Cash Flows

(000’s omitted)

(Unaudited)

 

   Three Months Ended March 31, 
   2019   2018 
Operating Activities          
Net loss  $(498)  $(266)
Items not requiring (providing) cash          
Depreciation and amortization   224    242 
Stock-based compensation   2    (9)
Changes in operating assets and liabilities:          
Accounts receivable   (38)   47 
Inventories   (38)   44 
Prepaid expenses and other assets   65    44 
Right of use asset   (4,533)    
Accounts payable   (28)   (106)
Accrued liabilities   142    154 
Operating lease   4,594     
           
Net cash provided by(used in)  operating activities   (108)   150 
           
Investing Activities          
Purchases of property and equipment   (5)   (75)
           
Net cash used in investing activities   (5)   (75)
           
Financing Activities          
Payments on notes payable   (66)   (4,545)
Proceeds from notes payable       4,444 
           
Net cash used in financing activities   (66)   (101)
           
Net decrease in cash   (179)   (26)
           
Cash, beginning of period   248    389 
Cash, end of period  $69   $363 
           
Supplemental Cash Flow Information          
Cash paid for income taxes  $   $2 
Cash paid for interest  $57   $111 

 

See Notes to Consolidated Financial Statements

 

 

 

 6 

 

 

Dougherty’s Pharmacy, Inc.

Notes to Consolidated Financial Statements

 

1.       Organization and Significant Accounting Policies

 

Description of Business

 

Dougherty’s Pharmacy, Inc. (“Dougherty’s” or the “Company”) is a value oriented investment firm focused on successfully acquiring, managing and growing community based pharmacies in the Southwest Region. Dougherty’s was incorporated in Delaware on August 8, 2000.

 

A summary of the Company’s investments at December 31, 2018, is shown in the table below:

 

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

 

On February 7, 2017, CRESA Partners of Orange County, L.P., an affiliate of Cresa Partners-West, Inc. was acquired by Savills Studley, Inc. liquidating the partnership interest in its entirety held by ASDS of Orange County, Inc.

 

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

 

On March 22, 2019, the Company secured a letter of credit in the amount of $825,000 issued by Legacy Texas Bank for the benefit of Associated Food Stores, Inc. that renews annually with a reduction of $100,000 on each anniversary date. On April 1, 2019, we entered into a Letter of Credit Collateralization Agreement, effective March 22, 2019, in favor of Legacy Texas Bank whereby 10 of our current stockholders, including six of our directors, pledged certain deposit accounts to collateralize the letter of credit. In consideration for entering into this agreement, we issued warrants to purchase a total of 330,000 shares of our common stock at an exercise price of $0.20 per share, exercisable until March 22, 2022, and each warrant holder will receive quarterly maintenance payments under the warrants equal to ten percent (10%) per year on the amount each warrant holder’s collateral commitment.

 

Historically, we have maintained a level of liquidity sufficient to allow us to cover our cash needs in the short-term. Over the long-term, we have managed our cash and capital structure to maintain our financial position and maintain flexibility for future strategic initiatives through borrowings under our Revolver. However, as of August 1, 2018, we have been in default in our Revolver and have no significant financing source to rely upon to meet our short or long term capital needs.

 

In addition, the audit opinion that accompanied our financial statements as of and for the year ended December 31, 2018 was qualified in that our auditors expressed substantial doubt about our ability to continue as a going concern.

 

 

 7 

 

 

We continuously assess our working capital needs, debt and leverage levels, capital expenditure requirements, and future investments or acquisitions. We do not believe our operating cash flows will be sufficient to fund these future payments and long-term initiatives unless we significantly increase our revenue. If the Company does not generate the necessary increase in cash flow, the Company will need additional financing in the future. We do not know whether additional financing will be available when needed, or that, if available, we will be able to obtain financing on terms favorable, or even acceptable, to the Company. Without a significant source of lender financing, we will find it difficult, if not impossible, to maintain our current operations, implement our plans for material growth in our business, or even continue operating as a going concern.

 

Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Dougherty’s and all subsidiaries for which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

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

 

Concentration of Credit Risk

 

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

 

Accounts Receivable

 

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

 

At March 31, 2019 and December 31, 2018, 100% of the trade accounts receivable is from retail pharmacy operations.

 

Inventories

 

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

 

 

 

 8 

 

 

Property and Equipment

 

Property and equipment is carried at cost. Depreciation and amortization are provided over the estimated useful lives of the assets (generally three to seven years) using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the lesser of either the lease term or the estimated useful life of the asset.

  

Long-Lived Assets

 

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

 

Intangible Assets

 

Intangible assets with finite lives are being amortized on the straight-line basis over seven years. Such assets are periodically evaluated as to the recoverability of their carrying values.

 

Treasury Stock

 

Common stock shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the first-in, first-out method.

 

Revenue Recognition

 

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

 

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

 

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

 

 

 

 9 

 

 

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

 

Substantially all revenues earned during the periods ended March 31, 2019 and 2018, were earned from the retail pharmacy business.

 

Cost of Sales

 

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

 

Income Taxes

 

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

 

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

 

On December 22, 2017, the President signed into law the “Tax Cuts and Jobs Act” (the “TCJA”). Among numerous changes to existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The effects on deferred tax balances of changes in tax rates are required to be taken into consideration in the period in which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax assets and recorded a provisional noncash income tax loss of approximately $1.0 million for year ended December 31, 2017. During 2018, the Company fully reserved its deferred tax asst resulting in a $2.0 million charge to the Statement of Operations due to uncertainty of future income to utilize such asset.

 

 

 

 10 

 

 

Interest and penalties on income tax related items are included within the income tax provision and are recorded in income tax expense. The Company did not incur any interest and penalties during the periods ended March 31, 2019 and 2018.

 

With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2015.

 

Stock-Based Compensation

 

The Company recognizes compensation expense for equity awards over the requisite service period (usually the vesting period) based on their grant date fair value and non-vested units adjusted quarterly to reflect current market price. See Note 12 for additional information on stock-based compensation.

 

Earnings per Share

 

Basic earnings per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net loss and unrecognized stock based compensation by the weighted-average number of common shares outstanding during the period and the unvested restricted stock units. The unrecognized stock based compensation as of March 31, 2019 2019 and 2018 is $18,600 and $22,000, respectively; the unvested restricted stock units is 105,000 and 170,150, respectively. Due to the net losses for both periods, restricted stock units for 2019 and 2018 were anti-dilutive.

 

New Accounting Pronouncements

 

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

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. We elected the available practical expedients and adopted ASC 842 effective January 1, 2019, prospectively. The adoption of this standard resulted in the recognition of right-to-use assets and lease liabilities of $4.5 million and $4.6 million, with no material impact on the results of operations and cash flows. See below Note 3 “Leases" for additional information regarding our leases. 

 

 

 

 11 

 

 

2.       Notes Payable

 

Notes payable consist of the following:

 

   March 31, 2019   December 31, 2018 
    (Unaudited)    (Audited) 
           
Term note OSK VII, LLC principal amount of $3,956,000, interest at LIBOR plus 3.25% (5.36% at March 31, 2019). Matured on August 31, 2018 (see below).  $3,956,000   $3,956,000 
           
Cardinal Health Term Notes, secured by retail pharmacy assets          
           
Term note in the principal amount of $432,859 at fixed interest rate of 8.11% per annum payable in 36 monthly installments of $13,641. Final payment plus accrued and unpaid interest due in full on April 10, 2020.   194,000    194,000 
           
Term note in the principal amount of $1,827,850 with interest payable at prime plus 2.6% (7.35% at Mar 31, 2018) per annum payable in monthly installments of $15,232 plus interest, a final payment of $929,157 plus all accrued and unpaid interest due in full on July 10, 2020.   1,188,000    1,188,000 
           
Term note in the principal amount of $1,241,350 with interest payable at prime plus 2.6% (7.35% at Mar 31, 2018 ) per annum payable in monthly installments of $10,344 plus interest, a final payment of $638,850 plus all accrued and unpaid interest due in full on January 10, 2020.   745,000    745,000 
           
Term note in the principal amount of $744,100 with interest payable at prime plus 2.38% (7.13% at Mar 31, 2018 ) per annum payable in monthly installments of $6,200 plus interest, a final payment of $378,251 plus all accrued and unpaid interest due in full on August 10, 2020.   496,000    496,000 
           
Term note in the principal amount of $305,350 with interest payable at prime plus 2.4% (7.15% at Mar 31, 2018 ) per annum payable in monthly installments of $2,545 plus interest, a final payment of $155,220 plus all accrued and unpaid interest due in full on August 10, 2019.   170,000    170,000 
           
Insurance notes payable, secured by the respective insurance policies          
           
Notes payable for the Company’s insurance policy premiums with varying monthly payments due through September 2019. Interest rates vary up to 4.76%   123,000    189,000 
    6,872,000    6,938,000 
Less current portion   (4,776,000)   (4,842,000)
   $2,096,000   $2,096,000 

 

 

 

 12 

 

 

Future maturities of notes payable at March 31, 2019, are as follows:

 

 2019   $4,776,000 
 2020    2,096,000 
     $6,872,000 

  

The revolving credit facility (“the Revolver”) with the First National Bank of Omaha (“the Lender”) was secured by, but not limited to, the accounts receivable, inventory, and the fixed assets of the Borrowers. On August 1, 2018, the Company was obligated to make payment of the outstanding principal of $3,956,000 plus $18,000 in accrued and unpaid interest under the Revolver with the Lender. Failure to make this payment on the August 1, 2018, maturity date was an event of default under the Revolver. The accrued interest of $18,000 was paid on August 2, 2018. An event of default under the Revolver permits the Lender, among other things, to foreclose on the assets securing the Revolver, which includes certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company (the “Secured Assets”). In addition to the failure to make the payment on the maturity date, as of August 1, 2018, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio of not less than 1.00 to 1.00, as defined under the Revolver. Failure to maintain this financial covenant also constitutes an event of default under the Revolver.

 

On August 10, 2018, the Lender notified the Company that the Revolver had been sold to OSK VII, LLC (the “Current Lender”) effective on August 10, 2018. This assignment of the Revolver from the Lender to the Current Lender does not affect any terms and condition of the Revolver and the associated loan documents. The Company does not currently have the ability to cure either events of default under the Revolver. Should the Current Lender elect to foreclose against the Secured Assets, it would significantly impair the Company's ability to continue as a going concern or to even be able to continue its operations. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term. The Company is evaluating all of its options in light of these circumstances, including, without limitation, refinancing the indebtedness with another lender, negotiating a settlement arrangement with the Current Lender,  or obtaining a temporary waiver or forbearance from the Current Lender; provided, however, the Company can provide no assurances that any of these arrangements can be entered into or if entered into would be upon terms and conditions beneficial to and  acceptable by the Company. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term.

 

In conjunction with pharmacy acquisitions, DHI secured term notes payable to Cardinal Health, its primary vendor (see Note 14), and promissory notes to the sellers, as described above. The Company refinanced the Cardinal Health Term Note due February 20, 2017 to a term of 36 months at 8.11% fixed rate interest due in full on April 10, 2020.

 

3.       Leases

 

Effective January 1, 2019, the Company adopted ASC 842, which requires recognition of a right-of-use asset and lease liability for all leases at the commencement date based on the present value of lease payments over the lease term. Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and nonlease components for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.

 

The Company determines if a contract is or contains a lease at inception. The Company has operating leases for their pharmacy locations, corporate offices, and certain pharmacy equipment. The Company has entered into lease contracts ranging from 1 to 14 years, many of which include options to extend in various increments. Variable lease costs consist primarily of variable common area maintenance, taxes, insurance, parking and utilities. The Company’s leases do not have any residual value guarantees or restrictive covenants.

 

 

 

 13 

 

 

As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These estimated discount rates for leases are calculated using the Company's interest rates on its term loans.

 

The components of lease costs are as follows:

 

  

Three Months ended

March 31, 2019

 
Operating lease costs  $210 
Variable lease costs   67 
Total lease costs  $277 

 

Supplemental cash flow information related to leases are as follows:

 

  

Three Months ended

March 31, 2019

 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flow from operating leases  $210 
Right-of-use assets obtained in exchange for lease obligations:     
Operating Leases  $ 

 

Weighted average remaining lease term and weighted average discount rate are as follows:

 

Weighted Average Remaining Lease Term (Years)    
Operating leases   9 
Weighted Average Discount Rate     
Operating Leases   8% 

 

Maturities of lease liabilities are as follows:

 

 2019 (1)   $605,000 
 2020    740,000 
 2021    674,000 
 2022    672,000 
 2023    684,000 
 Thereafter    3,131,000 
  Total lease payments    6,506,000 
 Less imputed interest    (1,912,000)
 Total lease liabilities   $4,594,000 

 

(1)2019 excluding the three months ended March 31, 2019

 

 

 

 14 

 

 

4.       Stock and Share-Based Compensation

 

Restricted Share Unit Incentive Plan

 

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

 

As of March 31, 2019, the following shares had been issued under the 2013 RSU Plan:

 

Year of Issuance:   Number of Shares   Fair Value at Date of Grant   Shares Vested   Non-Vested   Cancelled 
 2013    120,000   $26,400    115,000        5,000 
 2014    122,100   $30,946    101,850        20,250 
 2015    150,000   $39,000    85,000    15,000    50,000 
 2016                     
 2017    563,000   $114,030    126,600    30,000    406,400 
 2018    80,000   $11,192    20,000    60,000     
      1,035,100   $221,568    448,450    105,000    481,650 

 

5.       Commitments and Contingencies

 

Legal Proceedings

 

The Company is occasionally involved in other claims and proceedings, which are incidental to its business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

 

6.       Related Party Transactions

 

During the three months ended March 31, 2019 and 2018, the Company paid fees to its directors of $0 and $12,000 for their roles as members of the Board of Directors and its related committees; fees paid to the Company’s Chairman totaled $10,000 for management and other services provided.

 

 

 

 

 

 

 

 15 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Registration Statement and other documents that we file or furnish with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company’s website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications.

 

Statements that are not historical facts are forward-looking statements, including, without limitation, those regarding estimates of and goals for future financial and operating performance as well as forward-looking statements concerning the expected execution and effect of our business strategies. Words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “would,” “could,” “should,” “can,” “will,” “project,” “intend,” “plan,” “goal,” “guidance,” “continue,” “sustain,” “synergy,” “believe,” “seek,” “estimate,” “anticipate,” “may,” “possible,” “assume,” and variations of such words and similar expressions are intended to identify such forward-looking statements.

 

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results to vary materially from those indicated or anticipated, including, but not limited to the following:

 

  · We currently have no lender financing to maintain our operations;

 

  · Our auditors have expressed substantial doubt that we will be able to continue as a going concern.
     
  · We cannot provide any assurance that we can fund the Company’s capital needs in the near or long term;

 

  · We need significant amounts of cash to service our debt. If we are unable to generate sufficient cash to service our debt, our liquidity, financial condition and results of operation could be negatively affected;

 

  · We may not be able to renegotiate our current prime vendor agreement on terms favorable to us, if at all;

  

  ·

We are in default under our revolving credit facility;

 

  · Our line of credit with our prime vendor has been significantly reduced putting increased pressure on our cash flow and negatively affecting our ability to procure pharmaceuticals for resale to our customers;
     
  · Our failure to re-credential with Caremark has resulted in an inability to fill prescriptions for Caremark and ultimately in our termination with Caremark;
     
  · We have identified certain material weaknesses in our internal control over financial reporting;
     
  · We have determined that our disclosure controls are not effective;
     
  · We may be affected by the introduction of new brand name and generic prescription drugs, the conversion rate and mix of prescriptions filled, the reimbursement rate by third party payors of prescriptions and increases in the cost to procure those drugs;

  

  · We are subject to considerable uncertainty as to how current Health Reform Laws will affect our business and operations;

 

  · We could be negatively affected by future legislative or regulator policies designed to manage healthcare costs or alter healthcare financing practices; and

 

  · We handle confidential healthcare information for our customers and are subject to the risk in securing such confidential information and protecting it from cyber-attacks.

 

 

 

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These and other risks, assumptions and uncertainties include, but are not limited to, those factors described in the “Risk Factors” sections of our Registration Statement on Annual Form 10-K filed on May 6, 2019. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date the statement.

 

OVERVIEW

 

Overview of Our Business

 

Dougherty’s Pharmacy, Inc. (“Dougherty’s,” which is also referred to in this Quarterly Report on Form 10-Q as “we,” “us,” or “the Company”) is a value oriented company focused on successfully acquiring, managing and growing community based pharmacies in the Southwest Region. Our wholly owned subsidiary, Dougherty’s Holdings, Inc., owns and operates multiple Dougherty’s Pharmacies, which we operate as a single segment in our financial reporting. The flagship store, Dougherty’s Pharmacy, is a turn-key multi-service pharmacy located in a highly prestigious area of Dallas, Texas. Centrally located, we believe that Dougherty’s Pharmacy continues to provide a level of service not typically provided by national pharmacy chain stores. We fulfill virtually any prescription need, from the simplest to the most complex compounding prescriptions. Most national pharmacy chains do not provide complex pharmacy prescription services. We specialize in providing solutions for our retail customers’ pharmacy needs and also for our customers residing in assisted living facilities. Dougherty’s long history began in 1929 and continues today as one of Dallas’s oldest, largest and best-known full-service pharmacies, which also includes durable medical equipment, home healthcare products services, and health and wellness supplements. We have a customer service oriented philosophy and typically do not attempt to compete solely based on price, as is the case with most of the national pharmacy chains.

 

Additional community pharmacies are located in Dallas, El Paso, and Springtown, Texas and in McAlester, Oklahoma.

 

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

 

The Company also tracks prescriptions sold to assess operational performance.

 

Recent Developments

 

The revolving credit facility (“the Revolver”) with the First National Bank of Omaha (“the Lender”) was secured by, but not limited to, the accounts receivable, inventory, and the fixed assets of the Borrowers. On August 1, 2018, the Company was obligated to make payment of the outstanding principal of $3,956,000 plus $18,000 in accrued and unpaid interest under the Revolver with the Lender. Failure to make this payment on the August 1, 2018, maturity date was an event of default under the Revolver. The accrued interest of $18,000 was paid on August 2, 2018. An event of default under the Revolver permits the Lender, among other things, to foreclose on the assets securing the Revolver, which includes certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company (the “Secured Assets”). In addition to the failure to make the payment on the maturity date, as of August 1, 2018, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio of not less than 1.00 to 1.00, as defined under the Revolver. Failure to maintain this financial covenant also constitutes an event of default under the Revolver.

 

 

 

 17 

 

 

On August 10, 2018, the Lender notified the Company that the Revolver had been sold to OSK VII, LLC (the “Current Lender”) effective on August 10, 2018. This assignment of the Revolver from the Lender to the Current Lender does not affect any terms and condition of the Revolver and the associated loan documents. The Company does not currently have the ability to cure either events of default under the Revolver. Should the Current Lender elect to foreclose against the Secured Assets, it would significantly impair the Company's ability to continue as a going concern or to even be able to continue its operations. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term. The Company is evaluating all of its options in light of these circumstances, including, without limitation, refinancing the indebtedness with another lender, negotiating a settlement arrangement with the Current Lender,  or obtaining a temporary waiver or forbearance from the Current Lender; provided, however, the Company can provide no assurances that any of these arrangements can be entered into or if entered into would be upon terms and conditions beneficial to and  acceptable by the Company. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term.

 

In January 2018, in an attempt to maintain a higher tier rebate with Cardinal and avoid a margin shrink, management increased order volume resulting in higher inventory levels and less working capital and the maxing out of Dougherty’s line of credit by September 2018. This was in addition to the default on the revolver in August 2018 and the discontinuation of the corporate credit card program. The lower working capital resulted in a reduction in the ability to procure OTC stock (higher margin sales), an increase in out-of-stocks and poor customer service levels. This in turn had the opposite impact on our margin from what was intended – we lost sales on high margin OTC items and January’s high rebate was offset by lower rebates in February and March.

 

The loss of the line of credit and switch to COD ordering in turn exacerbated the poor level of service as it resulted in an increase in partial fills and out-of-stocks of essential prescription medications. Cardinal chose to decrease the line of credit by $64,000 / month beginning in February 2019 to offset Dougherty’s defaulted loan agreement putting further pressure on free cash flow and Dougherty’s ability to procure drugs. This issue was further compounded when Cardinal on several occasions did not release the orders even after receiving payments for them. In February 2019 all stores were allocated maximum weekly purchasing ability from Cardinal – focusing on medication owed to the customer and chronic medication. Our inability to renegotiate the loan agreement with Cardinal has affected Dougherty’s ability to ensure the safety and continual medication supply to their customers and forced management to seek alternative suppliers.

 

In September 2018, the company received notification from JC Penny that they would discontinue the subsidy for fiscal year 2019. No new agreement could be reached in January and the Legacy Pharmacy was closed in February and the contract with JC Penny terminated.

 

In December 2018, the Long Term Care pharmacy was wound down due to the inability of Dougherty’s to manage it profitably. All residual business was transferred to the Preston Royal store.

 

In January 2019, in an attempt to curtail spending, the decision was made to change phone carriers. The result was devastating; customers were unable to get through to the pharmacy, were being kept on hold for hours or the calls continually dropped. More labor was added in an attempt to improve the conditions with little impact.

 

In February 2019, Caremark, which represents a little over 30% of Dougherty’s business sent a letter out to all their members letting them know that Dougherty’s will no longer be able to fill prescriptions for them as a result of management failing to re-credential with Caremark by the cutoff date of 12/18. In spite of a $30,000 marketing campaign to reassure our customers, numerous customers transferred out. On 3/31 the Caremark contract was terminated and re-credentialing started as soon as all information on the State Secretary and Texas State Board of Pharmacy was updated.

 

In February 2019, TI money from Eden’s for the Preston Royal location was renegotiated and reinstated allowing management to start renovations with an emphasis on improving workflow and thus customer service, upgrading and expanding the sterile and non-sterile compounding departments to increase manufacturing capacity and reduce wait times. It also allowed Dougherty’s to ensure USP 800 standards, required by December 2019 to continue operations, were both met and exceeded. The LTC area was upgraded in anticipation of relaunching that business in the second quarter 2019. The central fill and mail order rooms were installed and application for licensing submitted to allow those businesses to launch in the 3rd quarter 2019.

 

On May 10, 2019, the Company signed an agreement to sell certain prescription files of three locations to a national Fortune 500 pharmaceutical and healthcare retail company, with the planned proceeds to reduce the Company’s debt and improve its balance sheet. However, as of May 20, 2019, the parties have terminated this agreement. The Company anticipates proceeding with a sale of these assets, but no other buyer has been identified, nor can we give any assurances that we could locate another interested buyer and close a deal on terms acceptable to the Company.

 

 

 

 18 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

RESULTS OF OPERATIONS

 

The following discussion explains the material changes in our results of operations for the three months ended March 31, 2019 and 2018, and the significant developments affecting our financial condition since the Form 10-K filed May 6, 2019. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2018 and 2017 filed in that report, along with this report.

 

Comparison of the Three months ended March 31, 2019, to the Three months ended March 31, 2018 (000’s Omitted)

 

   Three Months Ended March 31,     
   2019   2018   $ Change 
             
Revenue  $7,767   $9,455   $(1,688)
Cost of sales (exclusive of depreciation and amortization shown separately below)   5,754    6,887    1,133 
Gross profit   2,013    2,568    (555)
Operating expenses               
Selling, General and Administrative   2,170    2,509    (339)
Depreciation and amortization   224    242    (18)
Other income       37    (37)
Interest expense   (112)   (110)   2 
Income tax provision   (5)   (10)   (5)
Net loss  $(498)  $(266)  $272 
plus:               
Interest expense  $112   $110   $2 
Depreciation and amortization   224    242    (18)
Income tax provision   5    10    (5)
EBITDA  $(157)  $96   $(253)
                
Prescription count   87,057    103,098    (16,041)

 

Revenues

 

Net revenues decreased approximately $1,688,000 or 17.9% in the three months ended March 31, 2019 as compared to prior year. Retail pharmacy prescriptions sold decreased 16,041 or 15.6% for the same period. Third party fees netted against revenue increase $70,000 to 2.3% of total revenues compared to 1.1% for the same period in the prior year.

  

 

 

 19 

 

 

Gross profit

 

Gross profit dollars decreased $555,000, or 21.6% as a result of the factors discussed in Revenues above. Gross profit as a percent of revenues declined to 25.9% for the three months ended March 31, 2019, as compared to 27.2% during the same period prior year due to an increase in third party payor fees that began increasing at the beginning of 2017. Total third party fees for the three months March 31, 2019, ended increased $71,000 as compared to the same quarter prior year. Net Direct and Indirect Remuneration fees during the three months ended March 31, 2018 were comparable to the same quarter prior year.

 

SG&A expenses

 

SG&A expenses decreased $339,000, or 13.5% for the three months ended March 31, 2019, as compared to prior year. SG&A expenses as a percentage of revenues for the three months ended March 31, 2019, increased to 27.9% as compared to 26.5% for the same period prior year. The decrease in SG&A expenses during the three months ended March 31, 2019, is due to salary and payroll related cost savings from the corporate wide reorganization. The increase in operating expenses as a percentage of revenues is due to lower revenue as compared to prior year. Management plans to continue cost reduction initiatives during 2019 to decrease SG&A expenses as a percentage of revenues.

 

Earnings Before Interest, Taxes, Depreciation and Amortization

 

EBITDA decreased $253,000, or 263.5% for the three months ended March 31, 2019, as compared to the same prior year during the prior year. EBITDA as a percentage of revenues was -2.0% and 1.0% during the three months ended in March 31, 2019. The decrease in EBITDA for the three months ended March 31, 2019, compared to the same period during prior year, is primarily due to lower gross profit dollars offset by SG&A savings and a decrease in other income of $37,000 derived from a non-pharmacy related transaction.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2019, we had working capital deficit of approximately $4.0 million as compared to working capital deficit of approximately $3.4 million at December 31, 2018. Negative working capital is due to the reclassification of the Revolver balance of $4.0 million as of both March 31, 2019 and December 31, 2018, to current liabilities to present the consolidated financial statements in conformity with GAAP (See Note 2). The reclassification does not affect the representation of the Company’s overall performance. The net increase in negative working capital of $0.6 million is discussed below. The Company is actively engaged in negotiating the re-financing of this indebtedness.

 

As of March 31, 2019, we had cash of approximately $64,000, as compared to approximately $248,000, at December 31, 2018. The net decrease in cash for the three months ended March 31, 2019, of $179,000 was due to the an increase in accounts receivable and inventory and a reduction accounts payable and note payments.

 

As of March 31, 2019, the Company had total current assets of $4,737,000 and total current liabilities of $8,762,000 creating negative working capital of approximately $4,025,000 as compared to total current assets of $4,902,000 and total current liabilities of $8,268,000 creating negative working capital of approximately $3,366,000 at December 31, 2018. The overall increase in negative working capital of $659,000 is primarily due to increases in trade accounts receivable, inventory and prepaid expenses and decreases in accrued liabilities and the Revolver.

 

 

 

 20 

 

 

The change in cash and cash equivalents is as follows:

 

   Three Months Ended March 31, 
   2019   2018 
         
Net cash (used in) provided by operating activities  $(108)  $150 
Net (used in) provided by investing activities   (5)   (75)
Net cash used in financing activities   (66)   (101)
Net (decrease) increase in cash  $(179)  $(26)

  

Net cash used in operating activities was approximately $108,000 in the three months ended March 31, 2019, compared to $150,000 provided by operating activities in the three months ended March 31, 2018. The decrease of $258,000 was primarily related to the decline in revenues discussed in “Revenues” above resulting in an increase in net loss of $232,000, a decrease in cash provided by accounts receivable of $85,000, an decrease in cash used by inventory of $82,000 and a decrease in cash used by accounts payable of $78,000, and net increases in cash provided by other changes of $70,000.

 

Net cash used in investing activities was approximately $5,000 for the three months ended March 31, 2019, compared to $75,000 in the three months ended March 31, 2018. Cash used to purchase property and equipment was $5,000 for the three months ended March 31, 2019, compared to $75,000 for the prior year.

 

Net cash used in financing activities was $66,000 in the three months ended March 31, 2019, compared to $101,000 for the same period in 2018. The $66,000 was used to pay down insurance note payable.

 

Our principal indebtedness at March 31, 2019, consists of the following:

 

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

 

The material terms under these agreements include, without limitation, notice requirements for certain material events, the provision of periodic financial statements, the maintenance of certain financial ratios, maintaining certain minimum insurance requirements, as well as restrictions on our ability to incur additional indebtedness, incur future capital expenditures, as well as restrictions on our ability purchase, create or acquire any interest in any other pharmacy store or distributing company, or loan, invest in or advance money or assets to any other person, enterprise or entity for the acquisition of a pharmacy store or distributing company without the prior written consent of OSK VII, LLC.

 

On August 1, 2018, the Company was obligated to make payment of the outstanding principal of $3,956,000 plus $18,000 in accrued and unpaid interest under the Revolver with the Lender. Failure to make this payment on the August 1, 2018, maturity date was an event of default under the Revolver. The accrued interest of $18,000 was paid on August 2, 2018. An event of default under the Revolver permits the Lender, among other things, to foreclose on the assets securing the Revolver, which includes certain retail pharmacy assets, specifically but not limited to, inventory, equipment, software, accounts receivable, intangibles and deposit accounts of the Company (the “Secured Assets”). In addition to the failure to make the payment on the maturity date, as of August 1, 2018, the Company was not in compliance with its covenant to maintain a minimum debt service coverage ratio of not less than 1.00 to 1.00, as defined under the Revolver. Failure to maintain this financial covenant also constituted an event of default under the Revolver.

 

 

 

 21 

 

 

On August 10, 2018, the Lender notified the Company that the Revolver had been sold to OSK VII, LLC (the “Current Lender”) effective on August 10, 2018. This assignment of the Revolver from the Lender to the Current Lender does not affect any terms and condition of the Revolver and the associated loan documents. The Company does not currently have the ability to cure either events of default under the Revolver. Should the Current Lender elect to foreclose against the Secured Assets, it would significantly impair the Company's ability to continue as a going concern or to even be able to continue its operations.

 

Further, in February 2019 Cardinal chose to decrease the Company’s line of credit by $64,000/month to offset Dougherty’s defaulted loan agreement putting further pressure on free cash flow and Dougherty’s ability to procure drugs. This issue was further compounded when Cardinal on several occasions did not release the orders even after receiving payments for them. As a result, beginning in February 2019 all stores were allocated maximum weekly purchasing ability from Cardinal – focusing on medication owed to the customer and chronic medication.

 

On March 22, 2019, the Company secured a letter of credit in the amount of $825,000 issued by Legacy Texas Bank for the benefit of Associated Food Stores, Inc. that renews annually with a reduction of $100,000 on each anniversary date.

 

On May 10, 2019, the Company signed an agreement to sell certain prescription files of three locations to a national Fortune 500 pharmaceutical and healthcare retail company, with the planned proceeds to reduce the Company’s debt and improve its balance sheet. However, as of May 20, 2019, the parties have terminated this agreement. The Company anticipates proceeding with a sale of these assets, but no other buyer has been identified, nor can we give any assurances that we could locate another interested buyer and close a deal on terms acceptable to the Company.

 

In addition, the audit opinion that accompanies our audited financial statements for the year ended December 31, 2018, is qualified in that our auditors have expressed substantial doubt about our ability to continue as a going concern.

 

On April 1, 2019, we entered into a Letter of Credit Collateralization Agreement, effective March 22, 2019, in favor of Legacy Texas Bank whereby 10 of our current stockholders, including six of our directors, pledged certain deposit accounts to collateralize the letter of credit. In consideration for entering into this agreement, we issued warrants to purchase a total of 330,000 shares of our common stock at an exercise price of $0.20 per share, exercisable until March 22, 2022, and each warrant holder will receive quarterly maintenance payments under the warrants equal to ten percent (10%) per year on the amount each warrant holder’s collateral commitment.

 

Historically, we have maintained a level of liquidity sufficient to allow us to cover our cash needs in the short-term. Over the long-term, we have managed our cash and capital structure to maintain our financial position and maintain flexibility for future strategic initiatives through borrowings under our Revolver. However, since we have been in default in our Revolver, we have no significant financing source to rely upon to meet our short or long term capital needs.

 

We anticipate that our principal sources of liquidity will only be sufficient to fund our activities and debt service needs through January 1, 2020. In order to have sufficient cash to fund our operations, we will need to significantly increase our revenues or raise additional equity or debt capital by January 1, 2020 in order to continue as a going concern, and we cannot provide any assurance that we will be successful in doing so.

 

The Company is evaluating all of its options in light of these circumstances, including, without limitation, refinancing the indebtedness with another lender, negotiating a settlement arrangement with the Current Lender, or obtaining a temporary waiver or forbearance from the Current Lender; provided, however, the Company can provide no assurances that any of these arrangements can be entered into or if entered into would be upon terms and conditions beneficial to and acceptable by the Company. In light of these uncertainties, Management cannot provide any assurance that it can fund the Company’s capital needs in the near or long term.

 

 

 

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Tax Loss Carryforwards

 

At December 31, 2018, we had approximately $49 million of federal NOL carryforwards available to offset future taxable income, which, if not utilized, will fully expire from 2021 to 2036. We believe that the issuance of shares of our common stock pursuant to our initial public offering on November 15, 1999 caused an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. Consequently, we believe that the portion of our federal NOL carryforwards attributable to the period prior to November 16, 1999 is subject to an annual limitation pursuant to Section 382. Our total deferred tax assets have been fully reserved as a result of the uncertainty of future taxable income. On December 22, 2017, the President signed into law the “Tax Cuts and Jobs Act” (the “TCJA”). Among numerous changes to existing tax laws, the TCJA permanently reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The effects on deferred tax balances of changes in tax rates are required to be taken into consideration in the period in which the changes are enacted, regardless of when they are effective. As the result of the reduction of the corporate income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax assets from $3 million to $2 million and recorded a provisional noncash income tax loss of approximately $1.0 million for year ended December 31, 2017.

 

During 2018, the Company fully reserved its deferred tax asset resulting in a $2.0 million charge to the statement of operations due to the uncertainty of future income to utilize such assets.

 

Off Balance Sheet Arrangements

 

We do not have any unconsolidated special purpose entities and, except as described herein, we do not have significant exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in conformity with GAAP, which requires management to make certain estimates and apply judgment. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the condensed consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our condensed consolidated financial statements.

 

While we believe that the historical experience, current trends and other factors considered support the preparation of our condensed consolidated financial statements in conformity with GAAP, actual results could differ from our estimates and such differences could be material.

 

For a full description of our significant accounting policies, please refer to the Notes to Consolidated Financial Statements in Item 1.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

 

 

 

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Our interim chief executive officer and interim chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a–15(e) under the Exchange Act) as of December 31, 2018. Based upon that evaluation and in light of the Company’s delinquency in filing its quarterly report on Form 10-Q for the Company’s third quarter of 2018 and its delinquency in filing this annual report on Form 10-K, our interim chief executive officer and interim chief financial officer concluded that as of December 31, 2018, our disclosure controls and procedures were not effective.

 

We have taken the initial steps to remediate this failure in our disclosure controls by engaging an SEC compliance resource to assist in the preparation of our filing obligations. In addition to this, we are exploring the possibility of engaging a full-time Chief Financial Officer who would have responsibility for, among other things, overseeing the collection, dissemination, and processing of the information (financial and otherwise) required for us to meet our future disclosure obligations.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 

 

 

 

 

 

 24 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

 

Item 1A. Risk Factors

 

Our line of credit with our prime vendor has been significantly reduced putting increased pressure on our cash flow and negatively affecting our ability to procure pharmaceuticals for resale to our customers.

 

Cardinal chose to decrease the line of credit by $64,000 / month beginning in February 2019 to offset Dougherty’s defaulted loan agreement putting further pressure on free cash flow and Dougherty’s ability to procure drugs. This issue was further compounded when Cardinal on several occasions did not release the orders even after receiving payments for them. In February 2019 all stores were allocated maximum weekly purchasing ability from Cardinal – focusing on medication owed to the customer and chronic medication. Dougherty’s is unable to ensure the safety and continual medication supply to our customers and management has been forced to seek alternative suppliers. This will likely negatively impact our ability to operate our business and in turn could have a material adverse effect on our results of operations and our ability to continue as a going concern.

 

Our failure to re-credential with Caremark has resulted in an inability to fill prescriptions for Caremark and ultimately in our termination with Caremark.

 

In February 2019, Caremark, which represents a little over 30% of Dougherty’s insurance reimbursement business sent a letter out to all their members letting them know that Dougherty’s will no longer be able to fill prescriptions for them as a result of management failing to re-credential with Caremark by the cutoff date of 12/18. In spite of a $30,000 marketing campaign to reassure our customers, numerous customers transferred out. On 3/31 the Caremark contract was terminated and re-credentialing started as soon as all information on the State Secretary and Texas State Board of Pharmacy was updated.

 

Item 6. Exhibits

 

 

101.INS   XBRL Instances Document (*)
101.SCH   XBRL Taxonomy Extension Schema Document (*)
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document (*)
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document (*)
101.LAB   XBRL Taxonomy Extension Label Linkbase Document (*)
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document (*)

  

(1) Filed herewith.
* To be filed by amendment.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Company has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized on May 20, 2019.

 

  DOUGHERTY’S PHARMACY, INC.
     
     
  By: /s/ Stewart I. Edington
    Stewart I. Edington
    President and Chief Financial Officer (Duly Authorized Principal Executive Officer and Principal Financial Officer)
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 26 

 

 

EXHIBIT INDEX

 

 

 

101.INS   XBRL Instances Document (*)
101.SCH   XBRL Taxonomy Extension Schema Document (*)
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document (*)
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document (*)
101.LAB   XBRL Taxonomy Extension Label Linkbase Document (*)
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document (*)

  

 

 

(1) Filed herewith.
* To be filed by amendment.

 

 

 

 

 

 

 

 

 

 

 

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