DIPLOMAT PHARMACY, INC., 10-Q filed on 11/12/2019
Quarterly Report
v3.19.3
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2019
Nov. 08, 2019
Document and Entity Information    
Document Type 10-Q  
Document Quarterly Report true  
Document Transition Report false  
Document Period End Date Sep. 30, 2019  
Entity File Number 001-36677  
Entity Registrant Name DIPLOMAT PHARMACY, INC.  
Entity Incorporation, State or Country Code MI  
Entity Tax Identification Number 38-2063100  
Entity Address, Address Line One 4100 S. Saginaw Street  
Entity Address, City or Town Flint  
Entity Address, State or Province MI  
Entity Address, Postal Zip Code 48507  
City Area Code 888  
Local Phone Number 720-4450  
Title of 12(b) Security Common Stock  
Trading Symbol DPLO  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   75,973,963
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Entity Central Index Key 0001610092  
Amendment Flag false  
v3.19.3
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
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
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
v3.19.3
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares
Sep. 30, 2019
Dec. 31, 2018
Condensed Consolidated Balance Sheets    
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common shares, par value (in dollars per share) $ 0 $ 0
Common shares, authorized shares 590,000,000 590,000,000
Common shares, issued shares 75,973,963 74,474,677
Common shares, outstanding shares 75,973,963 74,474,677
v3.19.3
Condensed Consolidated Statements of Comprehensive (Loss) Income - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Condensed Consolidated Statements of Comprehensive (Loss) Income        
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)
Basic (in shares) 75,509,088 74,386,386 74,904,776 74,181,869
Diluted (in shares) 75,509,088 74,741,511 74,904,776 74,181,869
v3.19.3
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 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  
v3.19.3
Condensed Consolidated Statements of Changes in Shareholders' Equity - USD ($)
$ in Thousands
InTouch Pharmacy LLC
Common Stock
InTouch Pharmacy LLC
Common Stock
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive Loss
Total
Balance at Dec. 31, 2017     $ 619,235 $ 38,450 $ 91,816   $ 749,501
Balance (in shares) at Dec. 31, 2017     73,871,424        
Changes in Shareholders' Equity              
Net loss         (450)   (450)
Stock issued upon stock option exercises     $ 2,461 (552)     1,909
Stock issued upon stock option exercises (in shares)     200,677        
Share-based compensation       3,161     3,161
Stock issued upon vesting of restricted stock units     $ 157 (157)      
Stock issued upon vesting of restricted stock units (in shares)     10,705        
Balance at Mar. 31, 2018     $ 621,853 40,902 91,240   753,995
Balance (in shares) at Mar. 31, 2018     74,082,806        
Balance at Dec. 31, 2017     $ 619,235 38,450 91,816   749,501
Balance (in shares) at Dec. 31, 2017     73,871,424        
Changes in Shareholders' Equity              
Net loss             (4,244)
Other comprehensive (loss) income, net of tax             (44)
Balance at Sep. 30, 2018     $ 629,283 48,172 87,445 $ (44) 764,856
Balance (in shares) at Sep. 30, 2018     74,448,430        
Changes in Shareholders' Equity              
Cumulative effect adjustment | ASU 2014-09         (126)   (126)
Balance at Mar. 31, 2018     $ 621,853 40,902 91,240   753,995
Balance (in shares) at Mar. 31, 2018     74,082,806        
Changes in Shareholders' Equity              
Net loss         (3,964)   (3,964)
Stock issued upon stock option exercises     $ 1,831 (389)     1,442
Stock issued upon stock option exercises (in shares)     129,722        
Share-based compensation       6,961     6,961
Stock issued upon vesting of restricted stock units     $ 1,109 (1,109)      
Stock issued upon vesting of restricted stock units (in shares)     47,683        
Restricted stock award activity     $ 561 (561)      
Restricted stock award activity (in shares)     21,924        
Other comprehensive (loss) income, net of tax           (962) (962)
Balance at Jun. 30, 2018     $ 625,354 45,804 87,276 (962) 757,472
Balance (in shares) at Jun. 30, 2018     74,282,135        
Changes in Shareholders' Equity              
Net loss         169   169
Stock issued upon stock option exercises     $ 896 (248)     648
Stock issued upon stock option exercises (in shares)     41,420        
Share-based compensation       5,649     5,649
Stock issued upon vesting of restricted stock units     $ 3,033 (3,033)      
Stock issued upon vesting of restricted stock units (in shares)     124,875        
Other comprehensive (loss) income, net of tax           918 918
Balance at Sep. 30, 2018     $ 629,283 48,172 87,445 (44) 764,856
Balance (in shares) at Sep. 30, 2018     74,448,430        
Balance at Dec. 31, 2018     $ 629,411 50,544 (210,579) (4,292) $ 465,084
Balance (in shares) at Dec. 31, 2018     74,474,677       74,474,677
Changes in Shareholders' Equity              
Net loss         (14,301)   $ (14,301)
Share-based compensation       3,572     3,572
Stock issued upon vesting of restricted stock units     $ 4,766 (4,766)      
Stock issued upon vesting of restricted stock units (in shares)     244,948        
Restricted stock award activity     $ 37 (37)      
Restricted stock award activity (in shares)     (5,929)        
Other comprehensive (loss) income, net of tax           (2,127) (2,127)
Balance at Mar. 31, 2019     $ 634,214 49,313 (219,228) (6,419) 457,880
Balance (in shares) at Mar. 31, 2019     74,713,696        
Balance at Dec. 31, 2018     $ 629,411 50,544 (210,579) (4,292) $ 465,084
Balance (in shares) at Dec. 31, 2018     74,474,677       74,474,677
Changes in Shareholders' Equity              
Net loss             $ (351,043)
Other comprehensive (loss) income, net of tax             (5,792)
Balance at Sep. 30, 2019     $ 641,557 55,529 (555,970) (10,084) $ 131,032
Balance (in shares) at Sep. 30, 2019     75,973,963       75,973,963
Changes in Shareholders' Equity              
Cumulative effect adjustment | ASU 2016-02         5,652   $ 5,652
Balance at Mar. 31, 2019     $ 634,214 49,313 (219,228) (6,419) 457,880
Balance (in shares) at Mar. 31, 2019     74,713,696        
Changes in Shareholders' Equity              
Net loss         (159,462)   (159,462)
Stock issued upon stock option exercises     $ 148 (30)     118
Stock issued upon stock option exercises (in shares)     27,313        
Share-based compensation       4,283     4,283
Stock issued upon vesting of restricted stock units     $ 1,544 (1,544)      
Stock issued upon vesting of restricted stock units (in shares)     65,988        
Restricted stock award activity     $ 425 (425)      
Restricted stock award activity (in shares)     186,969        
Other comprehensive (loss) income, net of tax           (3,358) (3,358)
Balance at Jun. 30, 2019     $ 636,331 51,597 (378,690) (9,777) 299,461
Balance (in shares) at Jun. 30, 2019     74,993,966        
Changes in Shareholders' Equity              
Net loss         (177,280)   (177,280)
Stock issued upon stock option exercises     $ 582 (100)     482
Stock issued upon stock option exercises (in shares)     104,653        
Share-based compensation       4,777     4,777
Stock issued upon vesting of restricted stock units     $ 745 (745)      
Stock issued upon vesting of restricted stock units (in shares)     38,913        
Other comprehensive (loss) income, net of tax           (307) (307)
Balance at Sep. 30, 2019     $ 641,557 $ 55,529 $ (555,970) $ (10,084) $ 131,032
Balance (in shares) at Sep. 30, 2019     75,973,963       75,973,963
Changes in Shareholders' Equity              
Issuance of stock upon full contingent consideration payout $ 3,899 $ 3,899          
Issuance of stock upon full contingent consideration payout (in shares) 836,431            
v3.19.3
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
9 Months Ended
Sep. 30, 2019
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION  
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

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.

v3.19.3
NEW ACCOUNTING STANDARDS
9 Months Ended
Sep. 30, 2019
NEW ACCOUNTING STANDARDS  
NEW ACCOUNTING STANDARDS

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.

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.

v3.19.3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 2019
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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.

v3.19.3
ACQUISITION OF INTOUCH PHARMACY LLC
9 Months Ended
Sep. 30, 2019
ACQUISITION OF INTOUCH PHARMACY LLC  
ACQUISITION OF INTOUCH PHARMACY LLC

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

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

 

5 years

 

260

Trade names and trademarks

 

5 years

 

2,000

$

6,660

The estimated fair value of the accounts receivable acquired is $6,939, with the gross contractual amount being $7,695. The Company expects $756 to be uncollectible.

The unaudited pro forma operating results have not been presented since the effect of the InTouch acquisition was not significant to the condensed consolidated financial statements.

v3.19.3
FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2019
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

5. FAIR VALUE MEASUREMENTS

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy was established, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:

A.Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

B.Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).

C.Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

The following table presents the placement in the fair value hierarchy of liabilities that are measured and disclosed at fair value on a recurring basis:

Asset /

Valuation

Valuation

    

(Liability)

    

Level 2

    

Level 3

     

Technique

September 30, 2019:

Contingent consideration

 

$

(10,471)

 

$

$

(10,471)

 

C

Interest rate swaps (Note 8)

(10,084)

(10,084)

 

A

December 31, 2018:

Contingent consideration

 

$

(6,895)

 

$

$

(6,895)

 

C

Interest rate swaps (Note 8)

(4,292)

(4,292)

 

A

The following table sets forth the change in contingent consideration (Level 3 measurements) for the nine months ended September 30, 2019:

Contingent

    

Consideration

Balance at January 1, 2019

$

(6,895)

InTouch Acquisition

(7,102)

Change in fair value

(49)

Payments

 

3,575

Balance at September 30, 2019

$

(10,471)

The carrying amount of the Company’s debt approximates fair value due to variable interest rates at customary terms and rates the Company could obtain in current financing.

v3.19.3
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
9 Months Ended
Sep. 30, 2019
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS  
GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

6. GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

Goodwill

Goodwill is not amortized but it is reviewed for impairment annually in the fourth quarter of each year using data as of December 31 of that year, or more frequently if facts or circumstances indicate that the carrying value of a reporting unit’s goodwill may not be recoverable.  The Company has three reporting units – Diplomat Specialty Pharmacy (“DSP”) and Diplomat Specialty Infusion Group (“DSIG”), which are within the Specialty segment, and PBM. The following table sets forth the changes in the carrying amount of goodwill and accumulated impairment losses, by segment, for the nine months ended September 30, 2019:

    

Specialty

    

PBM(a)

    

Total

Balance at January 1, 2019

Goodwill

$

386,436

$

448,122

 

$

834,558

Accumulated impairment losses

(45,776)

(179,190)

(224,966)

 

 

340,660

268,932

 

609,592

Goodwill acquired with InTouch acquisition

7,082

7,082

Impairment losses (second quarter)

(68,218)

(54,673)

(122,891)

Impairment losses (third quarter)

 

 

(122,076)

 

(122,076)

Other

(138)

(138)

Balance at September 30, 2019

Goodwill

393,518

447,984

841,502

Accumulated impairment losses

(113,994)

(355,939)

(469,933)

$

279,524

$

92,045

 

$

371,569

(a)The goodwill in the PBM segment was recorded as a result of two separately acquired entities (i) Pharmaceutical Technologies, Inc. d/b/a National Pharmaceutical Services, acquired in November 27, 2017, and (ii) LDI Holding Company, LLC, acquired December 20, 2017.

The Company determined, due to lower than expected second quarter of 2019 results and the resulting negative impact on future forecasts, that there was an indication of impairment for the Specialty and PBM segments and, as a result, tested goodwill, at the reporting unit level, in the interim period at June 30, 2019. The impairment test consists of comparing the reporting unit’s fair value to its carrying value. Based on the interim impairment test as of June 30, 2019, the Company determined that the fair value of DSP reporting unit and PBM reporting unit were less than their respective carrying value. As a result, in the second quarter of 2019, the Company recorded total goodwill impairment charges of $122,891 and impairments to definite-lived intangible assets of $17,979.

For the DSP reporting unit, as of and for the second quarter of 2019, the Company experienced lower than expected results, which had impacted the outlook for the remainder of 2019 and into 2020. The lowered outlook for the DSP reporting unit included slower than anticipated brand to generic conversions and delays in the release of generic versions of certain drugs which tend to provide higher margin contribution. Additionally, anticipated cost savings were running behind forecast primarily due to delays in the implementation of ScriptMed, our new specialty operating platform, which we deliberately slowed to minimize any disruptive impact of the transition to providers and patients. While the previous outlook assumed additional investment in the Company’s payor sales team which would have resulted in new business opportunities that would offset anticipated negative impacts to volume, the Company saw limited impacts from this investment on 2019 results through June 30, 2019. Lastly, while it was believed the business environment would stabilize, the Company continued to see volumes in the DSP reporting unit business being negatively impacted by member channel management and increased competition from larger, vertically-integrated peers and a reimbursement environment in specialty pharmacy that was driving continued downward pressure on margins. As such, these conditions resulted in downward revisions of the forecasts on current and future projected earnings and cash flows from the DSP reporting unit. During the second quarter of 2019, the Company recorded a goodwill impairment in the Specialty segment of $68,218, which was allocated to the DSP reporting unit. The impairment charge is not deductible for income tax purposes.

Also, in the second quarter of 2019, the PBM business experienced lower than expected results driven by continued business losses and lower earned rebates due to drug mix and slightly lower rebate retention. These lower than expected results, and a reduced outlook in 2020 and beyond, resulted in downward revisions of the forecasts on current and future projected earnings and cash flows of the PBM reporting unit. During the second quarter of 2019, the Company recorded a goodwill impairment charge of $54,673 in the PBM segment which is not deductible for income tax purposes.

In the third quarter of 2019, the Company determined, due to downward revisions on future forecasts, there was an additional indication of impairment for the PBM segment and, as a result, tested goodwill, at the reporting unit level, in the interim period at September 30, 2019. During the third quarter of 2019, the Company recorded a goodwill impairment charge in the PBM segment of $122,076. The impairment charge resulted primarily from lower than anticipated success rate in converting potential sales opportunities into new customer contracts during the third quarter and into the fourth quarter for the upcoming 2020 calendar year contracts and continued customer contract losses impacting 2020 forecasts occurring in the third quarter beyond those anticipated at the time of our second quarter impairment assessment. An additional factor driving the impairment charge was our inability to meet certain contractual membership level requirements, which was communicated in August 2019 from one of our PBM aggregators, that resulted in a rebate penalty impacting the full year of 2019.

The estimated fair value for each of the reporting units was determined using the income approach. Fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. Internal forecasts are used to estimate future cash flows and include an estimate of long-term growth rates based on management’s most recent views of the long-term outlook for each reporting unit. Such projections contain management’s best estimates of growth rates in revenue and costs, and future expected changes in operating margins and cash expenditures, which are based on factors including the best estimates of economic and market conditions over the projected period. The projection of estimated operating results and cash flows are discounted using a weighted average cost of capital that reflects current market conditions appropriate to each reporting unit. The discount rate is sensitive to changes in interest rates and other market rates in place at the time the assessment is performed. The discount rates used in the valuations of the reporting units as of June 30, 2019 were 10.5% for the DSP reporting unit and 11.75% for the PBM reporting unit, and 13.5% for the PBM reporting unit as of September 30, 2019.  The discount rate was increased to 13.5% for the PBM reporting unit due to the increased risk in the Company’s ability to forecast future sales volumes.

Also, the Company in connection with the goodwill impairment analyses performed as of June 30, 2019 and September 30, 2019 assessed whether the carrying amounts of the reporting units long-lived assets may not be recoverable and therefore may be impaired. To assess the recoverability at the DSP reporting unit and PBM segment asset group level, the undiscounted cash flows of the DSP and PBM businesses were analyzed over a range of potential remaining useful lives. As a result, the Company determined that certain trade names and trademarks, certain customer and physician relationships in the DSP and PBM reporting units and certain non-compete employment agreements in its DSP reporting unit were not recoverable and were impaired. During the second quarter of 2019, the Company recorded an impairment charge of

$16,772 to fully impair the remaining intangible assets in the DSP reporting unit and an impairment charge of $1,207 to further impair those intangible assets at the PBM reporting unit. During the third quarter of 2019, the Company recorded an additional impairment charge of $34,173 to further impair certain trade names and trademarks, and customer relationship intangibles in the PBM reporting unit. Refer to the additional discussion below.

Definite-lived intangible assets

Definite-lived intangible assets consisted of the following:

 

September 30, 2019

Weighted

 

Average

 

Gross

 

Net

 

Amortization

 

Carrying

 

Accumulated

 

Carrying

    

Period Remaining

    

Amount

    

Amortization

    

Amount

Customer relationships

9.3

$

52,000

$

 

$

52,000

Patient relationships

5.3

174,500

(81,535)

92,965

Trade names and trademarks

 

2.7

 

 

29,620

(25,171)

 

4,449

Non-compete employment agreements

 

1.3

 

 

51,659

(45,275)

 

6,384

Total definite-lived intangible assets

$

307,779

$

(151,981)

 

$

155,798

December 31, 2018

Weighted

Average

 

Gross

 

Net

Amortization

 

Carrying

 

Accumulated

 

Carrying

    

Period Remaining

    

Amount

    

Amortization

    

Amount

Customer relationships

9.8

$

100,200

$

(1,238)

 

$

98,962

Patient relationships

5.9

170,100

(67,964)

102,136

Trade names and trademarks

1.8

 

30,650

(20,270)

 

10,380

Non-compete employment agreements

1.6

 

61,389

(44,100)

 

17,289

Physician relationships

4.8

21,700

(9,657)

12,043

Total definite-lived intangible assets

$

384,039

$

(143,229)

 

$

240,810

As disclosed above, certain intangible assets, consisting of certain trade names and trademarks, certain customer and physician relationships, and certain non-compete employment agreements, were impaired in the second and third quarter of 2019. The Company performed a valuation to determine the fair values of these intangible assets and as a result, the Company recorded non-cash impairment charges of $34,173 and $52,152 in the three and nine months ended September 30, 2019, respectively. In conjunction with the valuations performed, management also reviewed the useful lives of the trade names and trademarks, and customer relationships.  As a result of the review, no significant changes were necessary to the remaining estimated useful lives.

The Company recorded amortization expense on the definite-lived intangible assets of $11,962 and $17,190 for the three months ended September 30, 2019 and 2018, respectively, and $39,520 and $51,360 for the nine months ended September 30, 2019 and 2018, respectively.

v3.19.3
DEBT
9 Months Ended
Sep. 30, 2019
DEBT  
DEBT

7. DEBT

Total outstanding debt consisted of the following:

September 30, 

December 31, 

    

2019

    

2018

Short-term debt, borrowings on revolving line of credit

$

105,000

$

176,300

Term loan notes:

 

Term Loan A

$

136,875

$

142,500

Term Loan B

 

319,000

 

322,000

Total

 

455,875

 

464,500

Unamortized debt issuance costs

 

(12,551)

 

(14,631)

Total term loan notes

443,324

449,869

Less: current portion

443,324

11,500

Long-term debt, less current portion

$

$

438,369

The Company has a credit agreement with JP Morgan Chase Bank, N.A., and Capital One, N.A. that provides for a revolving line of credit and a $150,000 Term Loan A and $400,000 Term Loan B (“credit facility”). The credit agreement also provides for issuances of letters of credit of up to $10,000 and swingline loans up to $20,000.  On July 19, 2019, the Company agreed to a first amendment to the credit facility, effective August 6, 2019, which permanently reduced the commitment on its revolving line of credit from $250,000 to $200,000. In addition, the first amendment modified the financial debt covenants for the total net leverage ratio and the interest coverage ratio for the period September 30, 2019 through December 31, 2020. The first amendment makes these financial debt covenants less restrictive during the stated period and thereafter returns to the originally agreed upon ratios. The revolving line of credit and Term Loan A mature on December 20, 2022 and Term Loan B matures on December 20, 2024.

Interest on the revolving line of credit and Term Loan A is accrued at a rate equal to (i) the monthly LIBOR plus an applicable margin or (ii) a base rate that is the highest of the U.S. prime rate, federal funds rate (plus ½ of 1 percent) and LIBOR (plus 1 percent), at the Company’s option. The applicable margin is adjusted quarterly based on the Company’s leverage ratio. At September 30, 2019, the applicable margin was 2.50 percent for LIBOR loans and 1.50 percent for base rate loans. Interest on the Term Loan B is accrued similarly to Term Loan A, except the applicable margin is fixed at 4.50 percent for LIBOR loans and 3.50 percent for base rate loans.  The Company’s Term Loan A and Term Loan B interest rates were 4.55 percent and 6.55 percent, respectively, at September 30, 2019 and 4.78 percent and 7.03 percent, respectively, at December 31, 2018. The interest rate on the revolving line of credit was 4.55 percent and 5.19 percent at September 30, 2019 and December 31, 2018, respectively. The Company is charged a monthly unused commitment fee ranging from 0.3 percent to 0.4 percent on the average unused daily balance on its $200,000 revolving line of credit.

The Company had weighted average borrowings on its revolving line of credit of $137,521 and $163,380 and maximum borrowings on its revolving line of credit of $196,300 and $231,200 during the nine months ended September 30, 2019 and 2018, respectively. The Company had $95,000 and $73,700 available to borrow on its revolving line of credit at September 30, 2019 and December 31, 2018, respectively.  The revolving line of credit-related unamortized debt issuance costs were $4,964 and $4,246 as of September 30, 2019 and December 31, 2018, respectively.  In July 2019, the Company incurred $2,346 in debt issuance costs with the first amendment and wrote-off $731 in debt issuance costs, due to the permanent reduction in the borrowing commitment under the credit facility, to interest expense.  Such debt issuance costs, are classified within “Other noncurrent assets” in the condensed consolidated balance sheets.

The Term Loan A and Term Loan B requires quarterly principal payments of $1,875 and $1,000, plus accrued interest, respectively.  During the nine months ended September 30, 2018, the Company made a voluntary prepayment of $74,000 on the Term Loan B.

The credit facility is collateralized by substantially all of the Company’s assets.  The credit facility contains covenants that requires the Company, among other things, to provide financial and other information reporting, and to provide notice upon certain events. These covenants also place restrictions on the Company’s ability to incur additional indebtedness,

pay dividends or make other distributions, redeem or repurchase capital stock, make investments and loans, and enter into certain transactions, including selling assets, engaging in mergers or acquisitions, or engaging in transactions with affiliates. The Company was in compliance with all such covenants as of September 30, 2019. Although the Company was in compliance with its financial debt covenants at September 30, 2019, it was in compliance due to the modification of the financial debt covenants that became effective in August 2019.  As disclosed in Note 1, “Description of Business and Basis of Presentation, Liquidity and Going Concern,” management believes it is probable that the Company will be in violation of the less restrictive covenants at December 31, 2019.  Therefore, the Company has classified the outstanding balance under Term Loan A and Term Loan B as of September 30, 2019 as current in the condensed consolidated balance sheet.

v3.19.3
INTEREST RATE SWAPS
9 Months Ended
Sep. 30, 2019
INTEREST RATE SWAPS  
INTEREST RATE SWAPS

8.  INTEREST RATE SWAPS

The Company enters into interest rate swap contracts to hedge variable interest rate risk related to certain variable rate borrowings. These interest rate swap contracts are designated as cash flow hedges for the purposes of hedge accounting treatment and any unrealized gains or losses that result from changes in the fair value of the interest rate swap contracts are reported in “Accumulated other comprehensive loss” as a component of shareholders’ equity. The Company measures hedge effectiveness on a quarterly basis. The Company does not use derivative financial instruments for speculative purposes.

In 2018, the Company entered into two pay-fixed and receive-floating interest rate swaps, which were effective on March 29, 2019 and terminate on March 31, 2022. The combined notional amount of the interest rate swaps was $286.1 million and $290.6 million at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, the fair value of the interest rate swaps (derivative liability) was $10,084 and $4,292, respectively (a valuation allowance was established against the full amount of the net deferred tax benefit of $2,582 and $1,099, respectively). During the three months ended September 30, 2019 and 2018, the Company recognized other comprehensive (loss) income of $(307) and $918, respectively, and during the nine months ended September 30, 2019 and 2018, the Company recognized other comprehensive loss of $(5,792) and $(44), respectively.

v3.19.3
REVENUE
9 Months Ended
Sep. 30, 2019
REVENUE  
REVENUE

9.  REVENUE

The following table disaggregates net sales by therapeutic categories for the Specialty segment and by product and service distribution channels for the PBM segment:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Specialty Segment:

Oncology

$

718,859

$

701,206

$

2,123,574

$

2,094,394

Specialty infusion

 

209,767

 

178,890

 

580,254

 

525,857

Immunology

 

135,740

 

135,397

 

412,268

 

413,948

Other

 

179,082

 

196,805

 

511,486

 

564,824

Total Specialty segment

1,243,448

1,212,298

3,627,582

3,599,023

PBM Segment:

Retail networks

48,604

126,082

173,800

417,370

Specialty pharmacy

23,156

22,470

57,323

67,784

Mail order

7,976

16,019

30,758

50,029

Other

2,764

5,362

8,849

14,965

Total PBM segment

82,500

169,933

270,730

550,148

Inter-segment eliminations

(24,751)

(8,897)

(52,683)

(17,275)

Total net sales

$

1,301,197

$

1,373,334

$

3,845,629

$

4,131,896

Rebates retained, which represents the difference between the manufacturers’ rebates earned and rebates incurred to customers, approximated (5.5%) and 22.1% of total gross profit for the three months ended September 30, 2019 and 2018,

respectively and 5.9% and 17.2% of total gross profit for the nine months ended September 30, 2019 and 2018, respectively.

Rebates retained was negatively impacted for the three and nine months ended September 30, 2019.  In the third quarter of 2019, manufacturers’ rebates earned, recorded in Cost of sales, includes an approximate $9,000 adjustment due to the Company’s inability to meet certain contractual membership level requirements in 2019, as included in the PBM aggregator’s contract, necessary to maintain contractual rebate rates.  The Company had met the membership requirements for this standard contract for the years 2017 and 2018.  At the end of the second quarter of 2019, the Company was in negotiations with the aggregator, as required by the contract, regarding contract renewals (including the potential for adjustments to rebate pricing in the future and retroactively to January 1, 2019). In late August 2019, negotiations concluded with the aggregator assessing a rebate penalty of approximately $9,000 of which approximately $6,000 related to the six months ended June 30, 2019.  The aggregator began withholding from monthly rebate payments in September and October of 2019 to recover the penalty amount.  

Additionally, as of September 30, 2019, the Company recorded against Net sales, the recognition of an accrual for litigation of $3,900 relating to a rebate dispute with a terminated customer.

v3.19.3
SHARE-BASED COMPENSATION
9 Months Ended
Sep. 30, 2019
SHARE-BASED COMPENSATION  
SHARE-BASED COMPENSATION

10.  SHARE-BASED COMPENSATION

Stock Options

A summary of the Company’s stock option activity as of and for the nine months ended September 30, 2019 is as follows:

Weighted

Weighted

Average

Average

Remaining

Aggregate

Number

Exercise

Contractual

Intrinsic

    

of Options

    

Price

    

Life

    

Value

(Years)

Outstanding at January 1, 2019

5,186,025

$

18.42

8.0

$

2,910

Granted

 

453,808

 

5.19

Exercised

(131,966)

4.54

Expired/cancelled

 

(1,732,525)

 

17.40

Outstanding at September 30, 2019

 

3,775,342

$

17.57

7.6

$

26

Exercisable at September 30, 2019

 

1,670,724

$

21.25

7.1

$

0

The Company recorded share-based compensation expense associated with stock options of $946 and $2,073 for the three months ended September 30, 2019 and 2018, respectively and $3,588 and $6,225 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, the total compensation cost related to nonvested options not yet recognized was $7,985 which will be recognized over a weighted average period of 1.8 years, assuming all employees complete their respective service periods for vesting of the options.

The Company granted annual awards of 366,330 options under its 2014 Omnibus Incentive Plan (the “2014 Plan”) and an inducement award of 87,478 options to purchase common stock to key employees during the nine months ended September 30, 2019, which options become exercisable in installments of 33.3 percent, per year, beginning on the first anniversary of the grant date. These options have a maximum term of ten years.

Options to purchase 453,808 shares of common stock were granted during the nine months ended September 30, 2019 and have a weighted average grant date fair value of $2.53 per option. The grant date fair values of these stock option awards

were estimated using the Black Scholes-Merton option pricing model using the assumptions set forth in the following table:

Exercise price

$4.81 - $5.94

Expected volatility

 

49.12% - 49.47%

Expected dividend yield

 

0%

Risk-free rate for expected term

1.95% - 2.38%

Expected life (in years)

6.00

Estimating grant date fair values for employee stock options requires management to make assumptions regarding expected volatility of the value of those underlying shares, the risk-free rate over the expected life of the stock options and the date on which share-based payments will be settled. Expected volatility is based on a weighted average of the Company’s historic volatility and an implied volatility for a group of industry-relevant healthcare companies as of the measurement date. Risk-free rate is determined based upon U.S. Treasury rates over the estimated expected option lives. Expected dividend yield is zero as the Company does not anticipate that any dividends will be declared during the expected term of the options. The expected term of options granted is calculated using the simplified method (the midpoint between the end of the vesting period and the end of the maximum term). Forfeitures are accounted for when they occur.

Restricted Stock Units (“RSU” or “RSUs”)

A summary of the Company’s RSU activity as of and for the nine months ended September 30, 2019 is as follows:

Weighted

Average

Number

Grant Date

    

of RSUs

    

Fair Value

Nonvested at January 1,2019

 

1,869,029

$

21.67

Granted

 

5,908,924

 

5.30

Vested and issued

(349,849)

20.17

Cancelled /expired

 

(1,124,650)

 

19.13

Nonvested at September 30, 2019

 

6,303,454

$

6.78

Performance Based RSUs (shares reflected at maximum earn-out potential)

The Company granted an award of 1,498,500 performance-based RSUs as a sign-on inducement award to an executive during the second quarter of 2018. The award will be earned or forfeited based upon the Company’s performance relative to specified cumulative Adjusted EBITDA and revenue goals for the years ending December 31, 2018 and 2019 and the executive’s completion of the service condition. In January 2019, the performance goals were measurable and determinable, therefore, a grant date for accounting purposes was established. During the second quarter of 2019, these performance-based RSUs were modified by (1) adjusting the performance goals so that earning or forfeiture will be based upon the Company’s actual 2018 performance and projected 2019 performance, and (2) including a new performance goal that provides for full vesting at the maximum amount in the event the Company’s stock price increases by a specified percentage over a specified period of time during the 2019 fiscal year as a result of corporate actions taken during the 2019 performance year. The Company accounted for this modification pursuant to ASC Topic 718, “Compensation – Stock Compensation”, as a Type III (Improbable to Probable) modification and changed its estimate of the number of shares that will be earned from 0 percent to 30 percent.

During the second quarter of 2019, the Company granted annual awards of 1,835,000 performance-based RSUs under the 2014 Plan and 172,838 performance-based RSUs as an inducement award to key employees. These awards will be earned or forfeited based upon the Company’s performance relative to specified cumulative Adjusted EBITDA and revenue goals, as applicable, for the years ending December 31, 2019 and/or 2020, as applicable, and the completion of the service condition. The Company is currently accounting for these performance-based RSUs under the current estimate that 28.7 percent of the award shares will be earned. The Company recorded share-based compensation expense associated with

performance-based RSUs of $1,080 and $1,034 for the three months ended September 30, 2019 and 2018, respectively, and $2,154 and $1,886 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, the total compensation expense related to nonvested performance-based RSUs not yet recognized, assuming 29.8 percent of the shares will be earned, was $2,947, which will be recognized over a weighted average remaining term of 1.2 years, assuming all employees also complete their respective service periods for vesting of the RSUs.

Service Based RSUs

The Company granted 2,159,377 service-based RSUs under its 2014 Plan and 243,209 service-based RSUs as inducement awards to key employees during the nine months ended September 30, 2019. The value of an RSU is determined by the market value of the Company’s common stock at the date of grant. This value is recorded as compensation expense on a straight-line basis over the vesting period, which ranges from one year to three years from grant date.

The Company recorded share-based compensation expense associated with service-based RSUs of $2,460 and $2,404 for the three months ended September 30, 2019 and 2018, respectively, and $6,258 and $7,245 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, the total compensation cost related to nonvested RSUs not yet recognized was $20,762, which will be recognized over a weighted average remaining term of 2.1 years, assuming all employees complete their respective service periods for vesting of the service-based RSUs.

Restricted Stock Awards (“RSA” or RSAs”)

A summary of the Company’s RSA activity as of and for the nine months ended September 30, 2019 is as follows:

Number

Weighted

of Shares

Average

Subject to

Grant Date

    

Restriction

    

Fair Value

Nonvested at January 1, 2019

 

43,355

$

20.91

Granted

186,969

4.51

Vested

 

(20,829)

 

22.20

Forfeited

 

(5,929)

 

21.63

Nonvested at September 30, 2019

203,566

5.69

Under the 2014 Plan, the Company issued 186,969 RSAs to non-employee directors. The value of a RSA is determined by the market value of the Company’s common stock at the date of grant. The value of a RSA is recorded as share-based compensation expense on a straight-line basis over the vesting period, which is typically one year.

The Company recorded share-based compensation expense associated with RSAs of $291 and $138 for the three months ended September 30, 2019 and 2018, respectively, and $632 and $415 for the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, the total compensation cost related to nonvested RSAs not yet recognized was $568 which will be recognized over a weighted average remaining term of 0.7 years, assuming the non-employee directors complete their service period for vesting of the RSAs.

v3.19.3
LOSS PER COMMON SHARE
9 Months Ended
Sep. 30, 2019
LOSS PER COMMON SHARE  
LOSS PER COMMON SHARE

11.  LOSS PER COMMON SHARE

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted income per common share further includes any common shares available to be issued upon exercise of outstanding service-based stock options; exercise of outstanding performance-based stock options for which all performance conditions were satisfied; and satisfaction of all contingent consideration performance conditions; and RSAs and RSUs, if such inclusions would be dilutive. The potentially dilutive common shares are determined for inclusion in diluted income per common share using the treasury stock method. For periods of net loss, basic and diluted per common share information are the same.

The following table sets forth the computation of basic and diluted loss per common share:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Numerator:

Net (loss) income

$

(177,280)

$

169

$

(351,043)

$

(4,244)

Denominator:

 

 

 

 

Weighted average common shares outstanding, basic

75,509,088

74,386,386

74,904,776

74,181,869

Weighted average dilutive effect of stock options, RSAs and RSUs

355,125

Weighted average common shares outstanding, diluted

75,509,088

74,741,511

74,904,776

74,181,869

(Loss) income per common share, basic and diluted

$

(2.35)

$

0.00

$

(4.69)

$

(0.06)

The Company had a net loss for the three months ended September 30, 2019 and nine months ended September 30, 2019 and 2018.  As a result, basic and diluted loss per common share were the same as any potentially dilutive securities would be anti-dilutive.  In the absence of a net loss, the weighted average dilutive effect of stock options, RSUs and RSAs would have been 235,830 for the three months ended September 30, 2019 and 399,746 and 383,742 for the nine months ended September 30, 2019 and 2018, respectively.

The weighted average effect of certain common stock equivalents including stock options, RSUs and RSAs were excluded from the computation of weighted average diluted shares outstanding as inclusion of such items would be anti-dilutive, are summarized as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Service-based and earned performance-based stock options

 

3,634,546

 

3,907,277

 

3,556,237

 

3,983,767

Unearned performance-based stock options

 

574,138

 

574,138

 

574,138

574,138

Weighted average service-based RSUs

 

663,653

 

285,386

 

804,761

367,970

Weighted average performance based RSUs

 

 

2,267,384

 

1,015,331

Weighted average RSAs

 

 

21,924

 

17,726

 

9,717

Total

 

4,872,337

 

7,056,109

 

4,952,862

 

5,950,923

v3.19.3
INCOME TAXES
9 Months Ended
Sep. 30, 2019
INCOME TAXES  
INCOME TAXES

12. INCOME TAXES

The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense is as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2019

    

2018

2019

    

2018

Income tax benefit (expense) at U.S. statutory rate

 

$

37,656

$

(10)

$

73,925

$

734

Tax effect from:

Valuation allowance

 

(29,438)

 

 

(61,861)

 

Share-based compensation

(906)

(86)

(2,298)

456

State income taxes, net of federal benefit

(206)

8

(754)

(755)

State income taxes, valuation allowance

1,575

1,637

Non-deductible employee compensation in excess of $1,000

(12)

183

(173)

(975)

Non-deductible goodwill impairment

(6,568)

(9,214)

Other

(14)

26

(228)

(210)

Income tax benefit (expense)

$

2,087

$

121

$

1,034

$

(750)

In determining the requirement for a valuation allowance against its deferred tax assets, the Company considers its historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset, along with other available positive and negative evidence. Due primarily to the parent company, along with several of its subsidiaries, being in a three-year cumulative loss from continuing operations position at September 30, 2019, the Company has determined it more likely than not its consolidated deferred tax asset and a substantial portion of separate entities’ deferred tax assets established for state loss carryforwards, will not be realized as a benefit in the future.  Accordingly, the Company has increased its valuation allowance against these net deferred tax assets by $60,224 at September 30, 2019.

v3.19.3
RELATED PARTY TRANSACTION
9 Months Ended
Sep. 30, 2019
RELATED PARTY TRANSACTION  
RELATED PARTY TRANSACTION

13.  RELATED PARTY TRANSACTION

In December 2018, the Company signed a definitive agreement with ReactiveCore, Inc. (“ReactiveCore”) pursuant to which ReactiveCore provides information technology services to the Company over a period of three years, which commenced on January 1, 2019. Kenneth Klepper, a director of the Company’s Board of Directors (the “Board”), is the co-founder, chairman and chief executive officer of ReactiveCore. Prior to the signing of this agreement, the Board reviewed and approved this transaction in accordance with the Company’s related persons transaction policy.

The Company will pay base fees to ReactiveCore of approximately $2,400 over the term of the agreement and will pay additional fees for the provision of additional services. In the first quarter of 2019, the Company incurred a three-year licensing fee of $1,946 for the term of the agreement. Implementation fees of $819 were incurred for the three and nine months ended September 30, 2019.  All amounts incurred in connection with this agreement have been recorded in capitalized software for internal use, net in the condensed consolidated balance sheet at September 30, 2019.

v3.19.3
LEASES
9 Months Ended
Sep. 30, 2019
LEASES  
LEASES

14.  LEASES

The Company leases many of its pharmacy locations, office facilities, distribution centers, and certain office equipment through noncancelable operating lease contracts. Such noncancelable operating lease contracts convey the right to control such property for a period of time in exchange for consideration.  The operating leases have initial terms ranging from three to twelve years and generally have options to extend for one or two five-year periods. Additionally, most frequently, the lease contracts include a provision for early termination after a specified time period along with payment of a termination fee. Beginning in 2019, the lease term, for accounting purposes, will include renewal option periods when it is reasonably certain that the option to extend the lease will be exercised based on the facts and circumstances at lease commencement. The lease agreements, most often, provide for rental payments that increase over the lease term based on a fixed percentage or specified amount.  Additionally, the Company, in most cases, is required to pay real estate taxes, insurance costs and other occupancy costs such as common area maintenance that vary over the lease term.  

Rent expense was $2,265 and $6,291 for the three and nine months ended September 30, 2018. The components of lease expense in the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2019, were as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2019

2019

Operating lease cost

    

$

1,775

    

$

5,082

Variable lease cost

218

 

1,409

Short-term lease cost

107

 

348

Total

 

$

2,100

$

6,839

Maturities of lease liabilities for each of the next five years and thereafter, including reconciliation to the lease liabilities, were as follows:

2019 (excluding the nine months ended September 30, 2019)

    

$

1,663

2020

6,218

2021

5,387

2022

 

4,612

2023

 

3,499

Thereafter

 

14,933

Total future lease payments

 

36,312

Less: imputed interest costs (a)

 

(8,208)

Lease liabilities

 

$

28,104

(a)Computed using the estimated incremental borrowing rate for each lease

Other information related to the Company's leases as of and for the nine months ended September 30, 2019 are as follows:

Cash paid for amounts included in the measurement of lease liabilities

    

 

Operating cash flows for operating leases

$

3,552

 

Weighted average remaining lease term (in years)

 

7.34

Weighted average discount rate

 

6.76

%

v3.19.3
CONTINGENCIES
9 Months Ended
Sep. 30, 2019
CONTINGENCIES  
CONTINGENCIES

15.  CONTINGENCIES

On November 10, 2016, a putative class action complaint was filed in the U.S. District Court for the Eastern District of Michigan against Diplomat Pharmacy, Inc. and certain former officers of the Company. Following the appointment of lead plaintiffs and lead counsel, an amended complaint was filed on April 11, 2017. The amended complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with public filings made between February 29, 2016 and November 3, 2016 (the “potential class period”). The plaintiffs sought to represent a class of shareholders who purchased stock in the potential class period. The complaint seeks unspecified monetary damages and other relief. The Company filed a motion to dismiss the amended complaint on May 26, 2017. The court issued orders denying the Company’s motion to dismiss on January 19, 2018 and the Company’s motion for reconsideration of its motion to dismiss on August 9, 2018. The parties reached an agreement-in-principle on April 22, 2019 to resolve the litigation for a payment of $14,100 which was fully covered by the Company’s insurance policies. The court approved the settlement on August 20, 2019. The settlement, as a result of coverage provided, did not have a material impact on the Company’s results of operations, financial condition or cash flows. The settlement was subsequently paid during the quarter ended September 30, 2019.

On February 24, 2019 and March 6, 2019, in the U.S. District Court for the Central District of California and on March 12, 2019 in the U.S. District Court for the Northern District of Illinois, putative class action complaints were filed against Diplomat Pharmacy, Inc. and certain current and former officers of the Company. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with public filings made between February 26, 2018 and February 21, 2019 (the “potential class period”). The plaintiffs each sought to represent a class of shareholders who purchased stock in the potential class period. The complaints sought unspecified monetary damages and other relief. The cases were subsequently transferred and consolidated into a single proceeding in the Northern District of Illinois. The court appointed a lead plaintiff and lead counsel on July 19, 2019, and the lead plaintiff has sought leave until December 6, 2019 to file an amended complaint. The Company believes the complaints and allegations to be without merit and intends to vigorously defend itself against the action. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.

The Company’s business of providing specialized pharmacy services and other related services may subject it to litigation and liability for damages in the ordinary course of business. Nevertheless, the Company believes there are no other legal

proceedings, the outcome of which, if determined adversely to the Company, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business, financial position, cash flows, or results of operations.

v3.19.3
SEGMENT REPORTING
9 Months Ended
Sep. 30, 2019
SEGMENT REPORTING  
SEGMENT REPORTING

16.  SEGMENT REPORTING

The Company reports in two reportable segments: Specialty and 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 and the PBM segment provides services designed to help the Company’s customers reduce the cost and manage the complexity of their prescription drug programs. The chief operating decision maker evaluates segment performance principally upon net sales and gross profit. Net sales, cost of sales and gross profit information by segment are as follows:

Three Months Ended September 30, 

Net Sales

Cost of Sales

Gross Profit

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

Specialty

$

1,243,448