| DEBT
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1.DESCRIPTION OF BUSINESS
Diplomat Pharmacy, Inc. and its consolidated subsidiaries (the “Company”) operate a specialty pharmacy business which stocks, dispenses and distributes prescriptions for various biotechnology and specialty pharmaceutical manufacturers. Its primary focus is on medication management programs for individuals with complex chronic diseases. Disease states covered include oncology, immunology, specialty infusion therapy, hepatitis, multiple sclerosis, and many other serious or long-term conditions. The Company has its corporate headquarters and main distribution facility in Flint, Michigan, and operates 24 other pharmacy locations in Alabama, Arizona, California, Connecticut, Florida, Illinois, Iowa, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New York, North Carolina, Ohio, Pennsylvania, Texas, and Wisconsin. The Company also has centralized call centers to effectively deliver services to customers located in all 50 states in the United States of America (“U.S.”) and U.S. territories. The Company operates as one reportable segment.
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2.BASIS OF PRESENTATION
Interim Unaudited Condensed Consolidated Financial Statements
The accompanying 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 interim 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. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on March 8, 2017.
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3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Diplomat Pharmacy, Inc., its wholly-owned subsidiaries, and a 51 percent owned subsidiary, formed in August 2014, which the Company controls. An investment in an entity in which the Company owns less than 20 percent and does not have the ability to exercise significant influence is accounted for under the cost method.
Noncontrolling interest in a consolidated subsidiary in the condensed consolidated balance sheets represents the minority shareholders’ proportionate share of the equity in such subsidiary. Consolidated net income (loss) is allocated to the Company and noncontrolling interests (i.e., minority shareholders) in proportion to their percentage ownership.
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.
Inventories
Inventories consist of prescription and over-the-counter medications and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Prescription medications are returnable to the Company’s vendors and fully refundable before six months of expiration, and any remaining expired medication is relieved from inventory on a quarterly basis.
Revenue Recognition
The Company recognizes revenue from prescription drug sales for home delivery at the time the drugs are shipped. At the time of shipment, the Company has performed substantially all of its obligations under its payor contracts and does not experience a significant level of returns or reshipments. Revenues from dispensing specialty prescriptions that are picked up by patients at an open door or retail pharmacy location are recorded at prescription adjudication, which approximates the fill date. Sales taxes are presented on a net basis (excluded from revenues and costs). Revenues generated from prescription drug sales were $1,073,865 and $990,011 for the three months ended March 31, 2017 and 2016, respectively.
The Company recognizes revenue from service, data, and consulting services when the services have been performed and the earnings process is therefore complete. Revenues generated from service, data, and consulting services were $4,875 and $5,859 for the three months ended March 31, 2017 and 2016, respectively.
Accounting Standards Update (“ASU”) Adoption — Balance Sheet Classification of Deferred Taxes
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), eliminating the current requirement for companies to present deferred tax assets and liabilities as current and noncurrent. Instead, companies will be required to classify all deferred tax assets and liabilities as noncurrent. This ASU is effective for annual periods beginning on or after December 15, 2016, including interim periods within those annual periods, and can be adopted either prospectively or retrospectively.
Effective January 1, 2017, the Company retrospectively adopted the accounting guidance contained within ASU 2015-17. The following December 31, 2016 condensed consolidated balance sheet line items were adjusted due to this adoption:
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As |
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Previously |
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Reported |
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Adjustment |
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As Adjusted |
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Deferred income taxes (current asset) |
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$ |
14,703 |
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$ |
(14,703 |
) |
$ |
— |
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Total current assets |
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519,810 |
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(14,703 |
) |
505,107 |
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Deferred income taxes (noncurrent asset) |
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— |
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6,010 |
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6,010 |
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Total assets |
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1,107,947 |
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(8,693 |
) |
1,099,254 |
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Deferred income taxes (noncurrent liability) |
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8,693 |
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(8,693 |
) |
— |
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Total liabilities |
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494,223 |
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(8,693 |
) |
485,530 |
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Total liabilities and shareholders’ equity |
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1,107,947 |
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(8,693 |
) |
1,099,254 |
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ASU Adoption — Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 from the quantitative goodwill impairment test. Instead, an entity should perform its annual, or interim, quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount (Step 1). An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for an entity’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted.
Effective January 1, 2017, the Company adopted the accounting guidance contained within ASU 2017-04. There was no current impact to the Company as a result of this adoption.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which will supersede the existing revenue recognition guidance under U.S. GAAP. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017 for public entities, though early adoption is permitted. ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (cumulative catch-up transition method). The Company currently anticipates adopting ASU 2014-09 using the cumulative catch-up transition method. The Company continues to assess the impact that the adoption of ASU 2014-09 will have on its condensed consolidated financial statements and/or notes thereto, although the Company does not expect the impact to be significant.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), requiring lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) at lease commencement date. This ASU is effective for annual periods beginning on or after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating whether to early adopt and the impact that the adoption of this guidance will have on its condensed consolidated financial statements and/or notes thereto.
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4.BUSINESS ACQUISITIONS
The Company accounts for its business acquisitions using the acquisition method as required by FASB Accounting Standards Codification Topic 805, Business Combinations. The Company ascribes significant value to the synergies and other benefits that do not meet the recognition criteria of acquired identifiable intangible assets. Accordingly, the value of these components is included within goodwill. The Company’s business acquisitions described below were treated as asset purchases for income tax purposes and the related goodwill resulting from these business acquisitions is deductible for income tax purposes. The results of operations for acquired businesses are included in the Company’s consolidated financial statements from their respective acquisition dates.
The assets acquired and liabilities assumed in the business combinations described below, including identifiable intangible assets, were based on their estimated fair values as of the acquisition date. The excess of 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 required management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to identifiable intangible assets. These estimated fair values were based on information obtained from management of the acquired companies and historical experience and, with respect to the long-lived tangible and intangible assets, were made with the assistance of an independent valuation firm. These estimates included, but were not limited to, the cash flows that an asset is expected to generate in the future, and the cost savings expected to be derived from acquiring an asset, discounted at rates commensurate with the risks and uncertainties involved. For acquisitions that involved contingent consideration, the Company recognized a liability equal to the fair value of the contingent consideration obligation as of the acquisition date. The estimate of fair value of a contingent consideration obligation required subjective assumptions regarding future business results, discount rates, and probabilities assigned to various potential business result scenarios.
Comfort Infusion, Inc.
On March 22, 2017, the Company acquired Comfort Infusion, Inc. (“Comfort Infusion”), a specialty pharmacy and infusion services company based in Birmingham, AL that specializes in intravenous immune globulin therapy to support patients’ immune systems. The following table summarizes the consideration transferred to acquire Comfort Infusion:
Cash |
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$ |
10,600 |
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Contingent consideration at fair value |
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3,700 |
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$ |
14,300 |
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The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners additional cash payouts of up to $2,000 per performance period based upon the achievement of a certain gross profit targets in each of the 12-month periods ending March 31, 2018, 2019, and 2020. The maximum payout of contingent consideration is $6,000.
Approximately $1,050 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $133 which were charged to “Selling, general and administrative expenses” during the three months ended March 31, 2017.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash |
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$ |
122 |
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Accounts receivable |
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546 |
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Inventories |
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86 |
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Prepaid expenses and other current assets |
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24 |
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Definite-lived intangible assets |
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2,360 |
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Accounts payable |
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(273 |
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Accrued expenses — other |
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(207 |
) |
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Total identifiable net assets |
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2,658 |
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Goodwill |
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11,642 |
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$ |
14,300 |
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Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
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Useful |
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Amount |
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Patient relationships |
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9 years |
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$ |
1,400 |
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Non-compete employment agreements |
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5 years |
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960 |
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$ |
2,360 |
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Affinity Biotech, Inc.
On February 1, 2017, the Company acquired Affinity Biotech, Inc. (“Affinity”), a specialty pharmacy and infusion services company based in Houston, TX that provides treatments and nursing services for patients with hemophilia. The following table summarizes the consideration transferred to acquire Affinity:
Cash |
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$ |
17,097 |
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Contingent consideration at fair value |
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35 |
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$ |
17,132 |
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The purchase price includes a contingent consideration arrangement that requires the Company to pay the former owners an additional cash payout based upon the achievement of a certain earnings before interest, taxes, depreciation, and amortization target in the 12-month period ending January 31, 2018. The maximum payout of contingent consideration is $4,000.
Approximately $2,000 of the purchase consideration was deposited into an escrow account to be held for 18 months after the closing date to satisfy any of the Company’s indemnification claims.
The Company incurred acquisition-related costs of $224 which were charged to “Selling, general and administrative expenses” during the three months ended March 31, 2017.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash |
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$ |
1,043 |
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Accounts receivable |
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3,537 |
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Inventories |
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79 |
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Prepaid expenses and other current assets |
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72 |
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Definite-lived intangible assets |
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5,100 |
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Other noncurrent assets |
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5 |
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Accounts payable |
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(1,075 |
) |
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Accrued expenses — compensation and benefits |
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(144 |
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Accrued expenses — other |
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(2 |
) |
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Total identifiable net assets |
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8,615 |
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Goodwill |
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8,517 |
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$ |
17,132 |
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Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
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Useful |
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Amount |
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Patient relationships |
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7 years |
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$ |
4,000 |
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Non-compete employment agreements |
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5 years |
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1,100 |
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$ |
5,100 |
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Valley Campus Pharmacy, Inc.
On June 1, 2016, the Company acquired Valley Campus Pharmacy, Inc., doing business as TNH Advanced Specialty Pharmacy (“TNH”). TNH, a specialty pharmacy based in Van Nuys, California, provides medication management programs for individuals with complex chronic diseases, including oncology, hepatitis, and immunology. The Company acquired TNH to expand its existing business, enhance its proprietary technology, and increase its geographic presence, particularly in California and Texas. The following table summarizes the consideration transferred to acquire TNH:
Cash |
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$ |
68,915 |
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324,244 restricted common shares |
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9,507 |
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$ |
78,422 |
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The above share consideration at closing is based on 324,244 shares, in accordance with the purchase agreement, multiplied by the per share closing market price of the Company’s common stock as of May 31, 2016 ($32.58), and multiplied by 90 percent to account for the restricted nature of the shares.
Approximately $3,800 of the purchase consideration was deposited into an escrow account to be held for one year after the closing date to satisfy any indemnification claims that may be made by the Company.
The following table summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash |
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$ |
2,114 |
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Accounts receivable |
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16,271 |
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Inventories |
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4,740 |
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Prepaid expenses and other current assets |
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46 |
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Property and equipment |
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200 |
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Capitalized software for internal use |
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14,000 |
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Definite-lived intangible assets |
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13,890 |
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Other noncurrent assets |
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21 |
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Accounts payable |
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(29,773 |
) |
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Accrued expenses — compensation and benefits |
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(400 |
) |
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Accrued expenses — other |
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(1,962 |
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Total identifiable net assets |
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19,147 |
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Goodwill |
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59,275 |
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$ |
78,422 |
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Definite-lived intangible assets that were acquired and their respective useful lives are as follows:
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Useful |
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Amount |
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Physician relationships |
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10 years |
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$ |
7,700 |
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Noncompete employment agreements |
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5 years |
|
4,490 |
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Trade names and trademarks |
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1 year |
|
1,700 |
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$ |
13,890 |
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Pro Forma Operating Results
The following 2017 unaudited pro forma summary presents condensed consolidated financial information as if the Affinity and Comfort Infusion acquisitions had occurred on January 1, 2016. The following 2016 unaudited pro forma summary presents condensed consolidated financial information as if the Affinity and Comfort Infusion acquisitions had occurred on January 1, 2016 and the TNH acquisition had occurred on January 1, 2015. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as amortization expense resulting from intangible assets acquired and adjustments to reflect the Company’s borrowings and tax rates. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of the as if dates or of results that may occur in the future.
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Three Months Ended |
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2017 |
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2016 |
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Net sales |
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$ |
1,082,592 |
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$ |
1,124,300 |
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Net income attributable to Diplomat Pharmacy, Inc. |
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$ |
3,807 |
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$ |
15,985 |
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Net income per common share — basic |
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$ |
0.06 |
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$ |
0.25 |
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Net income per common share — diluted |
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$ |
0.06 |
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$ |
0.23 |
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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 need to 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 assets and liabilities that are measured and disclosed at fair value on a recurring basis at March 31, 2017:
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Asset / |
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Valuation |
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(Liability) |
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Level 3 |
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Technique |
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Contingent consideration |
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$ |
(3,735 |
) |
$ |
(3,735 |
) |
C |
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The following table sets forth a roll forward of the Level 3 measurements:
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Contingent |
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Balance at January 1, 2017 |
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$ |
— |
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Affinity acquisition |
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(35 |
) |
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Comfort Infusion acquisition |
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(3,700 |
) |
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Balance at March 31, 2017 |
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$ |
(3,735 |
) |
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The carrying amounts of the Company’s financial instruments — consisting primarily of cash and cash equivalents, accounts receivable, accounts payable, and other liabilities — approximate their estimated fair values due to the relative short-term nature of the amounts. The carrying amount of debt approximates fair value due to variable interest rates at customary terms and rates the Company could obtain in current financing.
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6.GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS
The following table sets forth a roll forward of goodwill for the three months ended March 31, 2017:
Balance at January 1, 2017 |
|
$ |
316,616 |
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Affinity acquisition |
|
8,517 |
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Comfort Infusion acquisition |
|
11,642 |
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Balance at March 31, 2017 |
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$ |
336,775 |
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Definite-lived intangible assets consisted of the following:
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March 31, 2017 |
|
December 31, 2016 |
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Gross |
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Accumulated |
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Net |
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Gross |
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Accumulated |
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Net |
|
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Patient relationships |
|
$ |
164,500 |
|
$ |
(35,710 |
) |
$ |
128,790 |
|
$ |
159,100 |
|
$ |
(31,445 |
) |
$ |
127,655 |
|
Non-compete employment agreements |
|
56,749 |
|
(21,445 |
) |
35,304 |
|
54,689 |
|
(18,674 |
) |
36,015 |
|
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Physician relationships |
|
21,700 |
|
(3,630 |
) |
18,070 |
|
21,700 |
|
(2,831 |
) |
18,869 |
|
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Trade names and trademarks |
|
23,800 |
|
(8,326 |
) |
15,474 |
|
23,800 |
|
(6,477 |
) |
17,323 |
|
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|
||||||
|
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$ |
266,749 |
|
$ |
(69,111 |
) |
$ |
197,638 |
|
$ |
259,289 |
|
$ |
(59,427 |
) |
$ |
199,862 |
|
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7.INVESTMENT IN NON-CONSOLIDATED ENTITY
From October 2011 through January 2017, the Company maintained a 25.0 percent minority interest in Worksmart MD, LLC, also known as Ageology, though it fully impaired its investment during the fourth quarter of 2014. In transactions unrelated to the Company, SkyPoint Ventures LLC (“SkyPoint”), an affiliated entity of the Company’s chief executive officer, loaned $16,000 to Ageology through January 2017. In February 2017, SkyPoint elected to convert its $16,000 in outstanding loans into equity in Ageology, which equated to an approximate ownership of 51.8 percent. Concurrently, the Company converted its $2,500 in outstanding loans (which the Company had written off during the fourth quarter of 2014) into equity in Ageology, thereby increasing the Company’s minority interest to approximately 26.5 percent. Because the Company does not direct the activities that most significantly impact the economic performance of Ageology, management has determined that the Company is not nor ever has been Ageology’s primary beneficiary.
Subsequent to the February 2017 concurrent conversion transactions, SkyPoint loaned Ageology $860 during the three months ended March 31, 2017.
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8.DEBT
The Company had $109,500 and $111,000 outstanding on Term Loan A as of March 31, 2017 and December 31, 2016, respectively. Unamortized debt issuance costs of $3,061 and $3,316 as of March 31, 2017 and December 31, 2016, respectively, are presented in the condensed consolidated balance sheets as direct deductions from the outstanding debt balances. During the first quarter of 2017, the Company fully drew down its $25,000 deferred draw term loan (“DDTL”), which was outstanding as of March 31, 2017. The Company also had $5,718 and $39,255 outstanding on its line of credit as of March 31, 2017 and December 31, 2016, respectively. The Company had $149,845 and $129,908 available to borrow on its line of credit at March 31, 2017 and December 31, 2016, respectively.
The interest rate on the Company’s Term Loan A and DDTL was 3.31 percent and 3.13 percent at March 31, 2017 and December 31, 2016, respectively. The Company’s line of credit interest rate was 4.50 percent at both March 31, 2017 and December 31, 2016. In addition, the Company is charged a monthly unused commitment fee ranging from 0.25 percent to 0.50 percent on its average unused daily balance on its $175,000 line of credit.
The Company’s credit facility, consisting of the Term Loan A, DDTL, and line of credit, contains certain financial and non-financial covenants. The Company was in compliance with all such covenants as of March 31, 2017 and December 31, 2016.
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9.SHARE-BASED COMPENSATION
A summary of the Company’s stock option activity as of and for the three months ended March 31, 2017 is as follows:
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Weighted |
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Weighted |
|
Average |
|
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|
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Average |
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Remaining |
|
Aggregate |
|
||
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
||
|
|
of Options |
|
Price |
|
Life |
|
Value |
|
||
|
|
|
|
|
|
(Years) |
|
|
|
||
Outstanding at January 1, 2017 |
|
4,413,341 |
|
$ |
19.02 |
|
7.0 |
|
$ |
11,558 |
|
Granted |
|
300,000 |
|
14.86 |
|
|
|
|
|
||
Exercised |
|
(391,965 |
) |
7.14 |
|
|
|
|
|
||
Expired/cancelled |
|
(532,916 |
) |
27.55 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Outstanding at March 31, 2017 |
|
3,788,460 |
|
$ |
18.73 |
|
6.9 |
|
$ |
10,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Exercisable at March 31, 2017 |
|
1,736,876 |
|
$ |
12.25 |
|
4.3 |
|
$ |
10,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded share-based compensation expense associated with stock options of $896 and $1,432 for the three months ended March 31, 2017 and 2016, respectively.
The Company granted service-based awards of 300,000 options to purchase common stock to key employees under its 2014 Omnibus Incentive Plan during the three months ended March 31, 2017. The options become exercisable in installments of 25 percent per year, beginning on the first anniversary of the grant date and each of the three anniversaries thereafter, and have a maximum term of ten years.
The 300,000 options to purchase common stock that were granted during the three months ended March 31, 2017 have a weighted average grant date fair value of $5.58 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 |
|
$ |
14.66 - $15.71 |
|
Expected volatility |
|
33.82% - 33.93 |
% |
|
Expected dividend yield |
|
0 |
% |
|
Risk-free rate over the estimated expected life |
|
2.11% - 2.32 |
% |
|
Expected life (in years) |
|
6.25 |
|
Estimating grant date fair values for employee stock options requires management to make assumptions regarding expected volatility of 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 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).
Restricted Stock Awards
The Company issues restricted stock awards to non-employee directors. A summary of the Company’s restricted stock award activity as of and for the three months ended March 31, 2017 is as follows:
|
|
Number |
|
Weighted |
|
|
|
|
of Shares |
|
Average |
|
|
|
|
Subject to |
|
Grant Date |
|
|
|
|
Restriction |
|
Fair Value |
|
|
Nonvested at January 1, 2017 |
|
5,765 |
|
$ |
32.97 |
|
Granted |
|
7,642 |
|
14.01 |
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2017 |
|
13,407 |
|
$ |
22.16 |
|
|
|
|
|
|
|
|
The Company recorded share-based compensation expense associated with restricted stock awards of $76 and $71 for the three months ended March 31, 2017 and 2016, respectively.
|
10.CONTINGENCIES
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. In addition, 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 officers of the Company. Following appointment of lead plaintiffs and lead counsel, an amended complaint was filed on April 11, 2017. The amended complaint alleges 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 2, 2016 (the “potential class period”). The plaintiff seeks 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 believes the complaint and allegations to be without merit and intends to vigorously defend itself against these actions. 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. In the opinion of management, the disposition or ultimate resolution of all other currently known claims and lawsuits will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
|
11.INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income per common share:
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
Numerator: |
|
|
|
|
|
||
Net income attributable to Diplomat Pharmacy, Inc. |
|
$ |
4,367 |
|
$ |
15,429 |
|
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
||
Weighted average common shares outstanding, basic |
|
66,886,866 |
|
64,539,161 |
|
||
Weighted average dilutive effect of stock options and restricted stock awards |
|
893,568 |
|
1,959,494 |
|
||
Weighted average dilutive effect of contingent consideration |
|
— |
|
1,346,282 |
|
||
|
|
|
|
|
|
||
Weighted average common shares outstanding, diluted |
|
67,780,434 |
|
67,844,937 |
|
||
|
|
|
|
|
|
||
Net income per common share: |
|
|
|
|
|
||
Basic |
|
$ |
0.07 |
|
$ |
0.24 |
|
Diluted |
|
$ |
0.06 |
|
$ |
0.23 |
|
Stock options to purchase a weighted average of 2,433,510 and 1,369,375 common shares were excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2017 and 2016, respectively, as inclusion of such options would be anti-dilutive. Performance-based stock options to purchase up to a weighted average of 46,119 common shares were excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2016 as all performance conditions were not satisfied as of March 31, 2016. Weighted average restricted stock awards of 2,560 common shares were excluded from the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2017 as inclusion of such shares would be anti-dilutive.
|
12.SUBSEQUENT EVENT
On May 8, 2017, the Company acquired WRB Communications, Inc., a communications and contact center company based in Chantilly, VA that specializes in relationship management programs for leading pharmaceutical manufacturers and service organizations. Under the terms of the agreement, Diplomat transferred cash and stock consideration of approximately $24,500 and $4,500, respectively, with additional cash payouts of up to $500 per performance period based upon the achievement of certain earnings before interest, taxes, depreciation, and amortization targets in the 12-month periods ending April 30, 2018 and 2019. The maximum additional cash payout is $1,000.
|
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Diplomat Pharmacy, Inc., its wholly-owned subsidiaries, and a 51 percent owned subsidiary, formed in August 2014, which the Company controls. An investment in an entity in which the Company owns less than 20 percent and does not have the ability to exercise significant influence is accounted for under the cost method.
Noncontrolling interest in a consolidated subsidiary in the condensed consolidated balance sheets represents the minority shareholders’ proportionate share of the equity in such subsidiary. Consolidated net income (loss) is allocated to the Company and noncontrolling interests (i.e., minority shareholders) in proportion to their percentage ownership.
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.
Inventories
Inventories consist of prescription and over-the-counter medications and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Prescription medications are returnable to the Company’s vendors and fully refundable before six months of expiration, and any remaining expired medication is relieved from inventory on a quarterly basis.
Revenue Recognition
The Company recognizes revenue from prescription drug sales for home delivery at the time the drugs are shipped. At the time of shipment, the Company has performed substantially all of its obligations under its payor contracts and does not experience a significant level of returns or reshipments. Revenues from dispensing specialty prescriptions that are picked up by patients at an open door or retail pharmacy location are recorded at prescription adjudication, which approximates the fill date. Sales taxes are presented on a net basis (excluded from revenues and costs). Revenues generated from prescription drug sales were $1,073,865 and $990,011 for the three months ended March 31, 2017 and 2016, respectively.
The Company recognizes revenue from service, data, and consulting services when the services have been performed and the earnings process is therefore complete. Revenues generated from service, data, and consulting services were $4,875 and $5,859 for the three months ended March 31, 2017 and 2016, respectively.
Accounting Standards Update (“ASU”) Adoption — Balance Sheet Classification of Deferred Taxes
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), eliminating the current requirement for companies to present deferred tax assets and liabilities as current and noncurrent. Instead, companies will be required to classify all deferred tax assets and liabilities as noncurrent. This ASU is effective for annual periods beginning on or after December 15, 2016, including interim periods within those annual periods, and can be adopted either prospectively or retrospectively.
Effective January 1, 2017, the Company retrospectively adopted the accounting guidance contained within ASU 2015-17. The following December 31, 2016 condensed consolidated balance sheet line items were adjusted due to this adoption:
|
|
As |
|
|
|
|
|
|||
|
|
Previously |
|
|
|
|
|
|||
|
|
Reported |
|
Adjustment |
|
As Adjusted |
|
|||
Deferred income taxes (current asset) |
|
$ |
14,703 |
|
$ |
(14,703 |
) |
$ |
— |
|
Total current assets |
|
519,810 |
|
(14,703 |
) |
505,107 |
|
|||
Deferred income taxes (noncurrent asset) |
|
— |
|
6,010 |
|
6,010 |
|
|||
Total assets |
|
1,107,947 |
|
(8,693 |
) |
1,099,254 |
|
|||
Deferred income taxes (noncurrent liability) |
|
8,693 |
|
(8,693 |
) |
— |
|
|||
Total liabilities |
|
494,223 |
|
(8,693 |
) |
485,530 |
|
|||
Total liabilities and shareholders’ equity |
|
1,107,947 |
|
(8,693 |
) |
1,099,254 |
|
ASU Adoption — Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 from the quantitative goodwill impairment test. Instead, an entity should perform its annual, or interim, quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount (Step 1). An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for an entity’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted.
Effective January 1, 2017, the Company adopted the accounting guidance contained within ASU 2017-04. There was no current impact to the Company as a result of this adoption.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which will supersede the existing revenue recognition guidance under U.S. GAAP. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017 for public entities, though early adoption is permitted. ASU 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (cumulative catch-up transition method). The Company currently anticipates adopting ASU 2014-09 using the cumulative catch-up transition method. The Company continues to assess the impact that the adoption of ASU 2014-09 will have on its condensed consolidated financial statements and/or notes thereto, although the Company does not expect the impact to be significant.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), requiring lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) at lease commencement date. This ASU is effective for annual periods beginning on or after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating whether to early adopt and the impact that the adoption of this guidance will have on its condensed consolidated financial statements and/or notes thereto.
|
The following December 31, 2016 condensed consolidated balance sheet line items were adjusted due to this adoption:
|
|
As |
|
|
|
|
|
|||
|
|
Previously |
|
|
|
|
|
|||
|
|
Reported |
|
Adjustment |
|
As Adjusted |
|
|||
Deferred income taxes (current asset) |
|
$ |
14,703 |
|
$ |
(14,703 |
) |
$ |
— |
|
Total current assets |
|
519,810 |
|
(14,703 |
) |
505,107 |
|
|||
Deferred income taxes (noncurrent asset) |
|
— |
|
6,010 |
|
6,010 |
|
|||
Total assets |
|
1,107,947 |
|
(8,693 |
) |
1,099,254 |
|
|||
Deferred income taxes (noncurrent liability) |
|
8,693 |
|
(8,693 |
) |
— |
|
|||
Total liabilities |
|
494,223 |
|
(8,693 |
) |
485,530 |
|
|||
Total liabilities and shareholders’ equity |
|
1,107,947 |
|
(8,693 |
) |
1,099,254 |
|
|
|
|
Three Months Ended |
|
||||
|
|
2017 |
|
2016 |
|
||
Net sales |
|
$ |
1,082,592 |
|
$ |
1,124,300 |
|
|
|
|
|
|
|
|
|
Net income attributable to Diplomat Pharmacy, Inc. |
|
$ |
3,807 |
|
$ |
15,985 |
|
|
|
|
|
|
|
|
|
Net income per common share — basic |
|
$ |
0.06 |
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
Net income per common share — diluted |
|
$ |
0.06 |
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
10,600 |
|
Contingent consideration at fair value |
|
3,700 |
|
|
|
|
|
|
|
|
|
$ |
14,300 |
|
|
|
|
|
|
Cash |
|
$ |
122 |
|
Accounts receivable |
|
546 |
|
|
Inventories |
|
86 |
|
|
Prepaid expenses and other current assets |
|
24 |
|
|
Definite-lived intangible assets |
|
2,360 |
|
|
Accounts payable |
|
(273 |
) |
|
Accrued expenses — other |
|
(207 |
) |
|
|
|
|
|
|
Total identifiable net assets |
|
2,658 |
|
|
Goodwill |
|
11,642 |
|
|
|
|
|
|
|
|
|
$ |
14,300 |
|
|
|
|
|
|
|
|
Useful |
|
Amount |
|
|
Patient relationships |
|
9 years |
|
$ |
1,400 |
|
Non-compete employment agreements |
|
5 years |
|
960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,360 |
|
|
|
|
|
|
|
|
Cash |
|
$ |
17,097 |
|
Contingent consideration at fair value |
|
35 |
|
|
|
|
|
|
|
|
|
$ |
17,132 |
|
|
|
|
|
|
Cash |
|
$ |
1,043 |
|
Accounts receivable |
|
3,537 |
|
|
Inventories |
|
79 |
|
|
Prepaid expenses and other current assets |
|
72 |
|
|
Definite-lived intangible assets |
|
5,100 |
|
|
Other noncurrent assets |
|
5 |
|
|
Accounts payable |
|
(1,075 |
) |
|
Accrued expenses — compensation and benefits |
|
(144 |
) |
|
Accrued expenses — other |
|
(2 |
) |
|
|
|
|
|
|
Total identifiable net assets |
|
8,615 |
|
|
Goodwill |
|
8,517 |
|
|
|
|
|
|
|
|
|
$ |
17,132 |
|
|
|
|
|
|
|
|
Useful |
|
Amount |
|
|
Patient relationships |
|
7 years |
|
$ |
4,000 |
|
Non-compete employment agreements |
|
5 years |
|
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,100 |
|
|
|
|
|
|
|
|
Cash |
|
$ |
68,915 |
|
324,244 restricted common shares |
|
9,507 |
|
|
|
|
|
|
|
|
|
$ |
78,422 |
|
|
|
|
|
|
Cash |
|
$ |
2,114 |
|
Accounts receivable |
|
16,271 |
|
|
Inventories |
|
4,740 |
|
|
Prepaid expenses and other current assets |
|
46 |
|
|
Property and equipment |
|
200 |
|
|
Capitalized software for internal use |
|
14,000 |
|
|
Definite-lived intangible assets |
|
13,890 |
|
|
Other noncurrent assets |
|
21 |
|
|
Accounts payable |
|
(29,773 |
) |
|
Accrued expenses — compensation and benefits |
|
(400 |
) |
|
Accrued expenses — other |
|
(1,962 |
) |
|
|
|
|
|
|
Total identifiable net assets |
|
19,147 |
|
|
Goodwill |
|
59,275 |
|
|
|
|
|
|
|
|
|
$ |
78,422 |
|
|
|
|
|
|
|
|
Useful |
|
Amount |
|
|
Physician relationships |
|
10 years |
|
$ |
7,700 |
|
Noncompete employment agreements |
|
5 years |
|
4,490 |
|
|
Trade names and trademarks |
|
1 year |
|
1,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,890 |
|
|
|
|
|
|
|
|
|
The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured and disclosed at fair value on a recurring basis at March 31, 2017:
|
|
Asset / |
|
|
|
Valuation |
|
||
|
|
(Liability) |
|
Level 3 |
|
Technique |
|
||
Contingent consideration |
|
$ |
(3,735 |
) |
$ |
(3,735 |
) |
C |
|
|
|
Contingent |
|
|
Balance at January 1, 2017 |
|
$ |
— |
|
Affinity acquisition |
|
(35 |
) |
|
Comfort Infusion acquisition |
|
(3,700 |
) |
|
|
|
|
|
|
Balance at March 31, 2017 |
|
$ |
(3,735 |
) |
|
|
|
|
|
|
Balance at January 1, 2017 |
|
$ |
316,616 |
|
Affinity acquisition |
|
8,517 |
|
|
Comfort Infusion acquisition |
|
11,642 |
|
|
|
|
|
|
|
Balance at March 31, 2017 |
|
$ |
336,775 |
|
|
|
|
|
|
|
|
March 31, 2017 |
|
December 31, 2016 |
|
||||||||||||||
|
|
Gross |
|
Accumulated |
|
Net |
|
Gross |
|
Accumulated |
|
Net |
|
||||||
Patient relationships |
|
$ |
164,500 |
|
$ |
(35,710 |
) |
$ |
128,790 |
|
$ |
159,100 |
|
$ |
(31,445 |
) |
$ |
127,655 |
|
Non-compete employment agreements |
|
56,749 |
|
(21,445 |
) |
35,304 |
|
54,689 |
|
(18,674 |
) |
36,015 |
|
||||||
Physician relationships |
|
21,700 |
|
(3,630 |
) |
18,070 |
|
21,700 |
|
(2,831 |
) |
18,869 |
|
||||||
Trade names and trademarks |
|
23,800 |
|
(8,326 |
) |
15,474 |
|
23,800 |
|
(6,477 |
) |
17,323 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
$ |
266,749 |
|
$ |
(69,111 |
) |
$ |
197,638 |
|
$ |
259,289 |
|
$ |
(59,427 |
) |
$ |
199,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
Weighted |
|
Average |
|
|
|
||
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
||
|
|
Number |
|
Exercise |
|
Contractual |
|
Intrinsic |
|
||
|
|
of Options |
|
Price |
|
Life |
|
Value |
|
||
|
|
|
|
|
|
(Years) |
|
|
|
||
Outstanding at January 1, 2017 |
|
4,413,341 |
|
$ |
19.02 |
|
7.0 |
|
$ |
11,558 |
|
Granted |
|
300,000 |
|
14.86 |
|
|
|
|
|
||
Exercised |
|
(391,965 |
) |
7.14 |
|
|
|
|
|
||
Expired/cancelled |
|
(532,916 |
) |
27.55 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
Outstanding at March 31, 2017 |
|
3,788,460 |
|
$ |
18.73 |
|
6.9 |
|
$ |
10,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Exercisable at March 31, 2017 |
|
1,736,876 |
|
$ |
12.25 |
|
4.3 |
|
$ |
10,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price |
|
$ |
14.66 - $15.71 |
|
Expected volatility |
|
33.82% - 33.93 |
% |
|
Expected dividend yield |
|
0 |
% |
|
Risk-free rate over the estimated expected life |
|
2.11% - 2.32 |
% |
|
Expected life (in years) |
|
6.25 |
|
|
|
Number |
|
Weighted |
|
|
|
|
of Shares |
|
Average |
|
|
|
|
Subject to |
|
Grant Date |
|
|
|
|
Restriction |
|
Fair Value |
|
|
Nonvested at January 1, 2017 |
|
5,765 |
|
$ |
32.97 |
|
Granted |
|
7,642 |
|
14.01 |
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2017 |
|
13,407 |
|
$ |
22.16 |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2017 |
|
2016 |
|
||
Numerator: |
|
|
|
|
|
||
Net income attributable to Diplomat Pharmacy, Inc. |
|
$ |
4,367 |
|
$ |
15,429 |
|
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
||
Weighted average common shares outstanding, basic |
|
66,886,866 |
|
64,539,161 |
|
||
Weighted average dilutive effect of stock options and restricted stock awards |
|
893,568 |
|
1,959,494 |
|
||
Weighted average dilutive effect of contingent consideration |
|
— |
|
1,346,282 |
|
||
|
|
|
|
|
|
||
Weighted average common shares outstanding, diluted |
|
67,780,434 |
|
67,844,937 |
|
||
|
|
|
|
|
|
||
Net income per common share: |
|
|
|
|
|
||
Basic |
|
$ |
0.07 |
|
$ |
0.24 |
|
Diluted |
|
$ |
0.06 |
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|