10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2019

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                     to

Commission File Number:  001-36677

DIPLOMAT PHARMACY, INC.

(Exact name of Registrant as specified in its charter)

Michigan	38-2063100
(State or other jurisdiction of incorporation or organization)	(IRS employer identification number)

4100 S. Saginaw Street, Flint, Michigan	48507
(Address of principal executive offices)	(Zip Code)

(888) 720-4450

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value per share	DPLO	New York Stock Exchange

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

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

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

Large accelerated filer ⌧	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ☐
			Emerging growth company ☐

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

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

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

DIPLOMAT PHARMACY, INC.

Form 10-Q

INDEX

	Page No.
Part I — Financial Information	3
Item 1 — Financial Statements	3
Condensed Consolidated Balance Sheets (Unaudited)	3
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)	4
Condensed Consolidated Statements of Cash Flows (Unaudited)	5
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	6
Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3 — Qualitative and Quantitative Disclosures about Market Risk	38
Item 4 — Controls and Procedures	38
Part II — Other Information	40
Item 1 — Legal Proceedings	40
Item 1A — Risk Factors	40
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 6 — Exhibits	43
Signatures	44

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DIPLOMAT PHARMACY, INC.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

	September 30,		December 31,
	2019		2018
ASSETS
Current assets:
Cash and equivalents	$	8,420	$	9,485
Receivables, net		338,321		326,602
Inventories		181,401		210,573
Prepaid expenses and other current assets		14,035		9,596
Total current assets		542,177		556,256
Property and equipment		54,462		55,929
Accumulated depreciation		(26,258)		(21,404)
Property and equipment, net		28,204		34,525
Capitalized software for internal use, net		28,899		30,506
Operating lease right-of-use assets		26,863		—
Goodwill		371,569		609,592
Definite-lived intangible assets, net		155,798		240,810
Assets held for sale		3,642		—
Other noncurrent assets		5,451		4,670
Total assets	$	1,162,603	$	1,476,359
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	368,410	$	308,084
Rebates payable to PBM customers		23,459		23,264
Borrowings on revolving line of credit		105,000		176,300
Current portion of long-term debt		443,324		11,500
Current portion of operating lease liabilities		4,566		—
Accrued expenses:
Compensation and benefits		13,481		13,348
Contingent consideration		5,523		5,075
Other		27,779		21,014
Total current liabilities		991,542		558,585
Long-term debt, less current portion		—		438,369
Noncurrent operating lease liabilities		23,538		—
Deferred income taxes		1,459		2,781
Contingent consideration		4,948		1,820
Derivative liability		10,084		4,292
Deferred gain		—		5,175
Other		—		253
Total liabilities		1,031,571		1,011,275
Shareholders’ equity:
Preferred stock (10,000,000 shares authorized; none issued and outstanding)		—		—
Common stock (no par value; 590,000,000 shares authorized; 75,973,963 and 74,474,677 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)		641,557		629,411
Additional paid-in capital		55,529		50,544
Accumulated deficit		(555,970)		(210,579)
Accumulated other comprehensive loss		(10,084)		(4,292)
Total shareholders' equity		131,032		465,084
Total liabilities and shareholders' equity	$	1,162,603	$	1,476,359

See Accompanying Notes to Condensed Consolidated Financial Statements.

3

DIPLOMAT PHARMACY, INC.

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

(Dollars in thousands, except per share amounts)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net sales	$	1,301,197	$	1,373,334	$	3,845,629	$	4,131,896
Cost of sales		(1,237,812)		(1,279,976)		(3,630,297)		(3,849,743)
Gross profit		63,385		93,358		215,332		282,153
Selling, general and administrative expenses		(74,993)		(83,419)		(238,677)		(255,705)
Goodwill impairments		(122,076)		—		(244,967)		—
Impairments of definite-lived intangible assets		(34,173)		—		(52,152)		—
(Loss) income from operations		(167,857)		9,939		(320,464)		26,448
Other (expense) income:
Interest expense		(11,659)		(10,179)		(32,044)		(30,998)
Impairment of non-consolidated entities		—		(286)		—		(329)
Other		149		574		431		1,385
Total other expense		(11,510)		(9,891)		(31,613)		(29,942)
(Loss) income before income taxes		(179,367)		48		(352,077)		(3,494)
Income tax benefit (expense)		2,087		121		1,034		(750)
Net (loss) income	$	(177,280)	$	169	$	(351,043)	$	(4,244)
Other comprehensive (loss) income, net of tax		(307)		918		(5,792)		(44)
Total comprehensive (loss) income	$	(177,587)	$	1,087	$	(356,835)	$	(4,288)
(Loss) income per common share, basic and diluted	$	(2.35)	$	0.00	$	(4.69)	$	(0.06)
Weighted average common shares outstanding
Basic		75,509,088		74,386,386		74,904,776		74,181,869
Diluted		75,509,088		74,741,511		74,904,776		74,181,869

See Accompanying Notes to Condensed Consolidated Financial Statements.

4

DIPLOMAT PHARMACY, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

(Dollars in thousands) ollars in thousands)
	Nine Months Ended
	September 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(351,043)	$	(4,244)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		58,518		72,547
Goodwill impairments		244,967		—
Impairments of definite-lived intangible assets		52,152		—
Insurance proceeds received on settlement of claim		(14,100)		—
Payment on settlement of claim		14,100		—
Share-based compensation expense		12,632		15,771
Net provision for doubtful accounts		9,090		5,862
Write-off of debt issuance costs		731		—
Amortization of debt issuance costs		3,101		3,703
Write-down on assets held for sale to net realizable value		1,654		—
Changes in fair value of contingent consideration		49		2,419
Contingent consideration payments		(1,298)		(3,181)
Deferred income tax benefit		(1,322)		(2,034)
Impairment of non-consolidated entities		—		329
Other		(7)		(43)
Changes in operating assets and liabilities, net of business acquisition
Accounts receivable		(13,871)		(31,090)
Inventories		29,668		36,717
Accounts payable		57,759		(73,227)
Rebates payable		195		1,209
Other assets and liabilities		5,070		8,469
Net cash provided by operating activities		108,045		33,207
Cash flows from investing activities:
Expenditures for property and equipment		(3,961)		(7,880)
Expenditures for capitalized software for internal use		(14,050)		(8,736)
Payments to acquire businesses, net of cash acquired		(7,048)		(1,139)
Other		22		46
Net cash used in investing activities		(25,037)		(17,709)
Cash flows from financing activities:
Net payments on revolving line of credit		(71,300)		(10,000)
Payments on long term debt		(8,625)		(82,625)
Payments of debt issuance costs		(2,471)		(821)
Proceeds from issuance of stock upon stock option exercises		600		3,999
Contingent consideration payments		(2,277)		(2,088)
Net cash used in financing activities		(84,073)		(91,535)
Net decrease in cash and equivalents		(1,065)		(76,037)
Cash and equivalents at beginning of period		9,485		84,251
Cash and equivalents at end of period	$	8,420	$	8,214
Supplemental disclosures of cash flow information:
Cash paid for interest	$	28,212	$	27,707
Cash paid for income taxes	$	2,354	$	2,142
Noncash investing and financing activities:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	2,101	$	—

See Accompanying Notes to Condensed Consolidated Financial Statements.

5

DIPLOMAT PHARMACY, INC.

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

(Dollars in thousands)

						Retained		Accumulated
				Additional		Earnings		Other		Total
	Common Stock			Paid-In		(Accumulated		Comprehensive		Shareholders'
	Shares	Amount		Capital		Deficit)		Loss		Equity
Balance at January 1, 2018	73,871,424	$	619,235	$	38,450	$	91,816	$	—	$	749,501
Cumulative effect adjustment, revenue recognition standard	—		—		—		(126)		—		(126)
Net loss	—		—		—		(450)		—		(450)
Stock issued upon stock option exercises	200,677		2,461		(552)		—		—		1,909
Share-based compensation	—		—		3,161		—		—		3,161
Stock issued upon vesting of restricted stock units	10,705		157		(157)		—		—		—
Balance at March 31, 2018	74,082,806		621,853		40,902		91,240		—		753,995
Net loss	—		—		—		(3,964)		—		(3,964)
Stock issued upon stock option exercises	129,722		1,831		(389)		—		—		1,442
Share-based compensation	—		—		6,961		—		—		6,961
Stock issued upon vesting of restricted stock units	47,683		1,109		(1,109)		—		—		—
Restricted stock award activity	21,924		561		(561)		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(962)		(962)
Balance at June 30, 2018	74,282,135		625,354		45,804		87,276		(962)		757,472
Net income	—		—		—		169		—		169
Stock issued upon stock option exercises	41,420		896		(248)		—		—		648
Share-based compensation	—		—		5,649		—		—		5,649
Stock issued upon vesting of restricted stock units	124,875		3,033		(3,033)		—		—		—
Other comprehensive income, net of tax	—		—		—		—		918		918
Balance at September 30, 2018	74,448,430	$	629,283	$	48,172	$	87,445	$	(44)	$	764,856
Balance at January 1, 2019	74,474,677	$	629,411	$	50,544	$	(210,579)	$	(4,292)	$	465,084
Cumulative effect adjustment, leasing standard (Notes 2 and 14)	—		—		—		5,652		—		5,652
Net loss	—		—		—		(14,301)		—		(14,301)
Share-based compensation	—		—		3,572		—		—		3,572
Stock issued upon vesting of restricted stock units	244,948		4,766		(4,766)		—		—		—
Restricted stock award activity	(5,929)		37		(37)		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(2,127)		(2,127)
Balance at March 31, 2019	74,713,696		634,214		49,313		(219,228)		(6,419)		457,880
Net loss	—		—		—		(159,462)		—		(159,462)
Stock issued upon stock option exercises	27,313		148		(30)		—		—		118
Share-based compensation	—		—		4,283		—		—		4,283
Stock issued upon vesting of restricted stock units	65,988		1,544		(1,544)		—		—		—
Restricted stock award activity	186,969		425		(425)		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(3,358)		(3,358)
Balance at June 30, 2019	74,993,966		636,331		51,597		(378,690)		(9,777)		299,461
Net loss	—		—		—		(177,280)		—		(177,280)
Issuance of shares of common stock as consideration for InTouch Pharmacy LLC acquisition (Note 4)	836,431		3,899		—		—		—		3,899
Stock issued upon stock option exercises	104,653		582		(100)		—		—		482
Share-based compensation	—		—		4,777		—		—		4,777
Stock issued upon vesting of restricted stock units	38,913		745		(745)		—		—		—
Other comprehensive loss, net of tax	—		—		—		—		(307)		(307)
Balance at September 30, 2019	75,973,963	$	641,557	$	55,529	$	(555,970)	$	(10,084)	$	131,032

See Accompanying Notes to Condensed Consolidated Financial Statements.

6

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands, except per share amounts)

1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

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

Basis of Presentation

Liquidity and Going Concern

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

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

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

7

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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

Unaudited Condensed Consolidated Financial Statements

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

2.  NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standard

Leases

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

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

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

8

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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

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

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

Accounting Standards Issued But Not Yet Adopted

Credit Losses

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

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

9

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

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

Receivables, net

Receivables, net consisted of the following:

	September 30,		December 31,
	2019		2018
Trade receivables, net of allowances of $(31,344) and $(25,342), respectively	$	329,141	$	299,407
Rebate receivables		6,450		22,375
Other receivables		2,730		4,820
	$	338,321	$	326,602

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

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

Inventories

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

4. ACQUISITION OF INTOUCH PHARMACY LLC

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

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

10

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

Cash	$	7,491
Restricted common stock (836,431 shares)		3,899
Contingent consideration at fair value		7,102
	$	18,492

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

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

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

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

Cash	$	443
Receivables		6,939
Inventories		496
Other current assets		40
Definite-lived intangibles assets		6,660
Other noncurrent assets		24
Accounts payable		(2,567)
Accrued expenses - compensation and benefits		(625)
Total identifiable net assets		11,410
Goodwill		7,082
	$	18,492

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

	Useful
	Life	Amount
Patient relationships	8 years	$	4,400
Non-compete employment agreements	5 years		260
Trade names and trademarks	5 years		2,000
		$	6,660

11

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

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

12

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

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.

13

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

14

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

$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.

15

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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,

16

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

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.

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,

17

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

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

18

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

19

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

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.

20

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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

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)

21

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

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.

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

22

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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	%

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

23

DIPLOMAT PHARMACY, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

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.

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	$	1,212,298	$	(1,178,918)	$	(1,145,288)	$	64,530	$	67,010
PBM		82,500		169,933		(83,645)		(143,585)		(1,145)		26,348
Inter-segment eliminations		(24,751)		(8,897)		24,751		8,897		—		—
	$	1,301,197	$	1,373,334	$	(1,237,812)	$	(1,279,976)	$	63,385	$	93,358

	Nine Months Ended September 30,
	Net Sales				Cost of Sales				Gross Profit
	2019		2018		2019		2018		2019		2018
Specialty	$	3,627,582	$	3,599,023	$	(3,432,506)	$	(3,386,653)	$	195,076	$	212,370
PBM		270,730		550,148		(250,474)		(480,365)		20,256		69,783
Inter-segment eliminations		(52,683)		(17,275)		52,683		17,275		—		—
	$	3,845,629	$	4,131,896	$	(3,630,297)	$	(3,849,743)	$	215,332	$	282,153

Total assets by segment are as follows:

	September 30,		December 31,
	2019		2018
Specialty	$	968,956	$	1,045,174
PBM		193,647		431,185
	$	1,162,603	$	1,476,359

24

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share, per patient, and per prescription data)

The following Management’s Discussion and Analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed on March 18, 2019 with the Securities and Exchange Commission (“SEC”).

Forward-Looking Statements

Certain statements contained or incorporated in this Quarterly Report on Form 10-Q which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. Words such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” and similar terms and phrases, or the negative thereof, utilized in discussions of future operating or financial performance signify forward-looking statements.

The forward-looking statements contained in this report are based on management’s good-faith belief and reasonable judgment based on current information. The forward-looking statements are qualified by important factors, risks, and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in the forward-looking statements, including those described in “Part II, Other Information - Item 1A. Risk Factors” and elsewhere in this report, as well as in our Annual Report on Form 10-K for the year ended December 31, 2018 and subsequent reports filed with or furnished to the SEC. Any forward-looking statement made by us in this report speaks only as of the date hereof or as of the date specified in such forward-looking statement. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by any applicable laws or regulations.

Overview

Diplomat Pharmacy, Inc. (the “Company,” “Diplomat,” “our,” “us,” or “we”) is the largest independent provider of specialty pharmacy and infusion services in the United States of America (“U.S.”). We are focused on improving the lives of patients with complex chronic diseases while also delivering unique solutions for manufacturers, hospitals, payors and providers. Our patient-centric approach positions us at the center of the healthcare continuum for the treatment of complex chronic diseases. We offer a broad range of innovative solutions to address the dispensing, delivery, dosing and reimbursement of clinically intensive, high-cost specialty drugs (many of which can cost more than $100,000 per patient, per year) and a wide range of applications. We also provide PBM services, including administering pharmacy benefits, conducting quarterly and annual plan reviews and analyzing and modeling plan and formulary changes, designed to help our customers reduce the cost and manage the complexity of their prescription drug programs. We have expertise across a broad range of specialty therapeutic categories, including oncology, specialty infusion therapies, immunology, multiple sclerosis, hepatitis, and many other serious or long-term conditions. We dispense to patients in all U.S. states and territories through our advanced distribution centers and manage centralized clinical call centers to deliver localized services on a national scale. Diplomat opened its doors in 1975 as a neighborhood pharmacy with one essential tenet: “Take good care of patients and the rest falls into place.” Today, that tradition continues—always focused on improving patient care and clinical adherence.

Our revenues are derived from: (i) customized care management programs we deliver to our patients, surrounding the dispensing of their specialty medications and (ii) PBM services that we provide to our customers. Our specialty pharmacy services revenue growth has historically been primarily driven by manufacturer price inflation, new drugs coming to market, new indications for existing drugs, volume growth with current clients, and the addition of new clients. For the three and nine months ended September 30, 2019 and 2018, our revenues were primarily derived from the dispensing of drugs.

25

Strategic Alternatives Review

On August 9, 2019, the Company announced that, at the direction of its Board of Directors, it is reviewing strategic alternatives focused on maximizing shareholder value and this review remains ongoing. Financial and legal advisors are actively engaged to assist in this process. The strategic alternatives the Company is exploring include, but are not limited to, a sale or merger of the Company, continuing to pursue value-enhancing initiatives or undertaking structural changes as a standalone company, or the sale or other disposition of certain of the Company’s businesses or assets. There can be no assurance that this process will result in the approval or completion of any particular strategic alternative or transaction in the future or that any such strategic alternative or transaction, if approved or completed, will yield additional shareholder value.  Further, the process of exploring, reviewing and pursuing strategic alternatives, the public announcement of such process or any decision or transaction resulting from such process could adversely impact our business and our stock price.  

Specialty Segment Operating Results and Outlook

Our Specialty segment revenues were $1,243,448 and $3,627,582 for the three and nine months ended September 30, 2019, respectively, and $1,212,298 and $3,599,023 for the three and nine months ended September 30, 2018, respectively. Revenue generated in our Specialty segment has largely been driven by our position as a leader in the oncology, specialty infusion therapies and immunology therapeutic categories. We generated approximately 85 to 87 percent of our Specialty segment revenues in these categories for each of the three and nine months ended September 30, 2019 and 2018.

In the second quarter of 2019, our Specialty segment recorded a non-cash goodwill impairment charge of $68,218 and non-cash definite-lived intangible asset impairment charge of $16,772 to fully impair the remaining goodwill and intangible assets in our DSP reporting unit, primarily due to variances to our original 2019 forecast, which occurred during the second quarter of 2019. These variances were due to 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 and forecasted growth in volumes that were based on investments made in our payor sales team not yet coming to fruition. The variances also resulted from expected efficiencies not being achieved as quickly as originally expected due to delays in the implementation of ScriptMed, our new specialty operating system, which we deliberately slowed to minimize any disruptive impact of the transition to providers and patients. Additionally, the Company continues to experience pressure on reimbursement rates from certain payors and a less favorable medication drug mix than originally forecasted for 2019 which reduced profitability. As such, these conditions resulted in downward revisions of the forecasts on current and future projected earnings and cash flows in the DSP reporting unit of our Specialty segment.

In our Specialty segment, in the near-term we expect future revenue and profits will be negatively impacted by increased competitive pressures which are expected to drive reduced prescription volumes. We also believe we may continue to be negatively affected by a less favorable drug mix. Increased market consolidation has created opportunities for healthcare companies or PBMs to move patients to preferred pharmacies and narrow their networks on the commercial side. We expect this activity to continue to increase. As a result, we continue to observe and expect to continue to experience negative volume impacts connected to increasingly narrow or exclusive networks by large PBMs and health plans as well as less favorable drug mix due to payor formulary changes, brand versus generic mix and associated generic conversion rates. In addition, in both our commercial and Medicare businesses, we are observing that larger, vertically-integrated competitors, as well as health plans that own specialty pharmacies, are increasingly implementing aggressive member channel management techniques. Additionally, there continues to be pressure on reimbursement rates from payors which tend to reset annually, although these rates may also reset periodically throughout the year. As reimbursement rates have decreased, this decrease has compressed our profit margin. We have continued to see reimbursement rates decrease in our payor contracts. Subsequently, the Company was unable to reach an agreement on pricing to renew reimbursement rates with one of our largest specialty pharmacy network payors. As a result, effective November 28, 2019, the Company will no longer participate in the substantial majority of the retail and specialty pharmacy networks associated with this payor in which we currently participate.  We expect that for the full year of 2019, these networks will generate approximately $700,000 in revenue and be approximately breakeven at the operating income level, including the associated corporate costs.  Related prescription volume is approximately 100,000 scripts per year.  As such, we would expect to see a small reduction in volume and revenue during the remainder of 2019 and a significant reduction in volume and revenue in 2020. Although revenue and volume are expected to decline significantly in 2020, we expect exiting this contract and certain

26

associated networks to have an insignificant impact on profitability given severe pricing compression. In addition, as a result of lost volume, we expect to undertake further restructuring initiatives to reduce costs. Unless we successfully implement restructuring initiatives we would expect selling, general and administrative expense pertaining to personnel costs to significantly increase as a percentage of revenue. Furthermore, expected efficiencies which lagged due to second quarter delays in the implementation of ScriptMed, our new specialty operating system, are now expected to be significantly completed by the end of 2019 and fully implemented in the first quarter of 2020. However, because of the prior delay, expected cost savings will likely not be achieved in 2019 and may not be fully realized until the second half of 2020.  In addition, while cost saving efforts have resulted in efficiencies in certain areas, the expected margins have been offset through reinvestment in the sales team, an increase nursing labor costs for infusion therapies and increased facility costs from opening our new facility in Chandler, Arizona.

Longer-term, we believe that we can partially offset industry competitive pressures and market consolidation with an expanding breadth of services, our continued expectation of infusion therapy growth, and our access to limited-distribution drugs to help us achieve sustainable revenue in the future. However, we cannot predict the impact of any significant loss of volume on our access to limited-distribution prescription drugs.  The Company offers a range of specialty services, from simple limited-distribution drug clinical wrap-around services to a full specialty carve-out. We also provide a combined specialty pharmacy, infusion and PBM service offering designed to reduce specialty costs under both the pharmacy and medical benefit. We can also find value for patients and payors by offering comprehensive care management focused on optimized utilization and improved care outcomes. We also expect future revenue opportunities to be driven by favorable demographic trends (i.e., aging population and increasing prescription drug spend), advanced clinical developments, expanding drug pipelines, earlier detection of chronic diseases, improved access to medical care, long-term industry mix shift toward higher-cost specialty drugs and manufacturer price increases.

PBM Segment Results and Outlook

Our PBM segment revenues were $82,500 and $270,730 for the three and nine months ended September 30, 2019, respectively, and $169,933 and $550,148 for the three and nine months ended September 30, 2018, respectively. We continue to expect revenues for our PBM segment will decline significantly in 2019 and into 2020 due to substantial lost customer contracts, as currently reflected in the results for the three and nine months ended September 30, 2019 as compared to the same period of 2018, primarily as a result of service issues experienced while transitioning to a new claims processing platform in 2018, third-party acquisitions of clients, contract non-renewals, pricing compression, terminations prior to expiration as well as other factors. While we believe the service and execution issues are in the past and our PBM segment service performance remains consistent with industry standards, our PBM segment continues to be significantly challenged. Our ability to grow revenue in the PBM segment will depend on our ability to offset customer contract losses, and win new business, although, as we started to realize in the third quarter of 2019, we have not been as successful as anticipated in converting potential sales opportunities into new customer contracts, and we have continued to experience further contract non-renewals further depressing performance. We expect our revenue growth opportunities to be driven by rising drug prices and a growth in specialty drug spend, as well as a shift in the marketplace of drug coverage from a medical benefit to a pharmacy benefit, and the increasing complexity and required support for Medicare Part D programs.  In addition, we expect to implement a new rebate agreement with a new third-party beginning in 2020 with rates that we expect will favorably impact our anticipated rebate values going forward.

During the second quarter of 2019, our PBM segment recorded $54,673 of the non-cash goodwill impairment and non-cash definite-lived intangible asset impairment charges of $1,207. The impairment charges were taken as a result of lower than expected results driven by continued customer contract losses, and lower earned rebates due to drug mix and lower rebate retention all resulting in a reduced outlook in 2020 and beyond than was reflected in our previous guidance.

During the third quarter of 2019, our PBM segment recorded a non-cash goodwill impairment of $122,076 and a non-cash definite-lived intangible asset impairment charges of $34,173. The impairment charges were taken as a result of further downward revisions of the forecasts on current and future projected earnings and cash flows resulting partially from continued unanticipated client losses occurring in the third quarter of 2019, the lower than anticipated success in converting potential sales opportunities into new customer contracts to offset customer contract losses incurred, and continued margin erosion to retain existing customers. Additionally, driving the impairment charge was our inability to meet certain

27

contractual membership level requirements that resulted in a $12,000 reduction in anticipated rebate value for the full year 2019 which became known in the third quarter.

Key Performance Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Specialty
Prescriptions dispensed		237,000		230,000		697,000		689,000
Net sales per prescription dispensed	$	5,221	$	5,256	$	5,189	$	5,206
Gross profit per prescription dispensed	$	268	$	287	$	276	$	303
PBM
Prescriptions filled (adjusted to 30-day equivalent)(1)(2)		922,000		1,931,000		2,908,000		6,235,000
Gross profit per prescription filled	$	(1)	$	14	$	7	$	11

(1) A 90-day prescription is counted as three 30-day prescriptions filled.

(2) Prescriptions filled is defined as prescriptions dispensed in our mail order facility as well as prescriptions adjudicated in our retail network.

Prescription Data (rounded to the nearest thousand)

Specialty segment prescriptions dispensed represent prescriptions filled and dispensed to patients or, in rare cases, to physicians. Our Specialty segment volume for the three and nine months ended September 30, 2019 was 237,000 and 697,000 prescriptions dispensed, which was slightly up compared to the three and nine months ended September 30, 2018. Despite the slight increase in volume, we expect to see continued pressure on volume due to increasingly narrow or exclusive networks by large PBMs and health plans. In addition, in both our commercial and Medicare businesses, we are observing that larger, vertically-integrated competitors, as well as health plans that own specialty pharmacies, are increasingly implementing aggressive member channel management techniques. Also, the Company was unable to reach an agreement on pricing to renew reimbursement rates with one of our largest specialty pharmacy payers. As a result, effective November 28, 2019, the Company will no longer participate in a certain retail and specialty pharmacy network. While this is expected to have a significant impact on volume, with related prescription volume being approximately 100,000 scripts per year, we expect this contract and certain associated networks to have an insignificant impact on profitability given severe pricing compression.  In addition, as a result of lost volume, we expect to undertake further restructuring initiatives to reduce costs.  We believe that our focus on direct contracting with health plans for specialty carveout business will partially offset these continued volume pressures. Prescriptions dispensed adjusted to a 30-day equivalent by our PBM were approximately 922,000 and 1,931,000 for the three months ended September 30, 2019 and 2018, respectively, and 2,908,000 and 6,235,000 for the nine months ended September 30, 2019 and 2018, respectively. These volume decreases were primarily due to the impact of customer contract losses in late 2018 and the continued customer contract losses throughout 2019. Although the PBM segment has won some new business, but not as much as was originally forecasted for the year, the net impact of the contract terminations and new contract wins is unfavorable at this time.

Other Metrics

Other key metrics used in analyzing our business are net sales per prescription dispensed and gross profit per prescription dispensed. Net sales per prescription dispensed represent total prescription revenue from prescriptions dispensed divided by the number of prescriptions dispensed. Gross profit per prescription dispensed represents gross profit from prescriptions dispensed divided by the number of prescriptions dispensed. Total prescription revenue from prescriptions dispensed includes all revenue collected from patients, third-party payors and various patient assistance programs, as well as revenue collected from pharmaceutical manufacturers for data and other services directly tied to the actual dispensing of their

28

drug(s). Gross profit represents total prescription revenue from prescriptions dispensed less the cost of the drugs purchased, including performance-related rebates paid by manufacturers to us that are recorded as a reduction to cost of sales, shipping and handling costs incurred at our dispensing sites, and nursing support services.

Components of Results of Operations

Net Sales

Our Specialty segment recognizes revenue for a dispensed prescription drug at the time of delivery (when control transfers) and at prescription adjudication (which approximates the fill date) for patient pick up at open door or retail pharmacy locations. We can earn revenue from multiple sources for any one claim, including the primary insurance plan, the secondary insurance plan, the tertiary insurance plan, the patient co-pay and patient assistance programs. The net sales in our Specialty segment also include revenue from pharmaceutical manufacturers and other outside companies for data reporting or additional services rendered for dispensed prescriptions. Service revenue is primarily derived from fees earned by us from hospital pharmacies for patient support that is provided by us to those non-Diplomat pharmacies to dispense specialty drugs to patients. The hospital pharmacies dispense the drug and pay us a service fee for clinically and administratively servicing their patients. These services constituted less than 1 percent of our revenues in each of the three and nine months ended September 30, 2019 and 2018, respectively.

Our PBM segment recognizes revenue from the sale of prescription drugs by its mail order pharmacy service when the drugs are physically delivered (when control transfers) and by its retail pharmacy network when the claim is adjudicated. The Company records revenue, net of manufacturers’ rebates, which are earned by and paid to its clients based on their plan members’ utilization of brand-name formulary drugs. Our PBM segment recognizes revenue on a gross basis since they act as principal in the arrangement, exercise pricing latitude and independently have a contractual obligation to pay their network pharmacy providers for benefits provided to their clients’ members, and assuming primary responsibility for fulfilling the promise to provide prescription drugs to their client plan members while also performing the related pharmacy benefit management services. Our PBM segment includes the total prescription price (drug ingredient cost plus dispensing fee) they have contracted with their clients as revenue, including member co-payments to pharmacies.

Cost of Sales

Cost of sales in our Specialty segment primarily represents the purchase price of the drugs that we ultimately dispense. These drugs are purchased directly from the manufacturer or from an authorized wholesaler and the purchase price is negotiated with the selling entity. Cost of sales in our PBM segment primarily represents the purchase price of the drugs that we dispense from our mail order services and the amount that we reimburse to pharmacies for prescriptions adjudicated in our retail network. In general, there is a relationship between cost of sales and net sales for prescription dispensing transactions. This is due to the mathematical relationship between average wholesale price (“AWP”) and wholesale acquisition cost (“WAC”), where most commonly AWP equals WAC multiplied by 1.20, and our contractual relationships to purchase at a discount off WAC and receive reimbursement at a discount off AWP. The discounts off AWP and WAC that we receive vary significantly by drug and by contract. Rebates we receive from manufacturers are reflected as reductions to cost of sales when they are earned. In certain of our contracts with aggregators, these rebates could be returned if set membership levels are not met for a period of time. Other expenses contained in cost of sales consist of shipping and handling costs incurred at our dispensing pharmacies and nursing support services.

SG&A

Our operating expenses primarily consist of employee and employee-related costs inclusive of share-based compensation, amortization expense from definite-lived intangible assets associated with our acquired entities and amortization expense from capitalized software for internal use. Other operating expenses consist of occupancy and other indirect costs, insurance costs, professional fees and other general overhead expenses.

29

Other (Expense) Income

Other expense primarily consists of interest expense associated with our debt. Other income includes rental income from leased space in properties we own.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2019 versus Three Months Ended September 30, 2018

Consolidated Results

The following table provides our condensed consolidated statements of comprehensive (loss) income data for each of the periods presented:

	Three Months Ended
	September 30,
	2019		2018
Net sales	$	1,301,197	$	1,373,334
Cost of sales		(1,237,812)		(1,279,976)
Gross profit		63,385		93,358
SG&A		(74,993)		(83,419)
Goodwill impairments		(122,076)		—
Impairments of definite-lived intangible assets		(34,173)		—
(Loss) income from operations		(167,857)		9,939
Other (expense) income:
Interest expense		(11,659)		(10,179)
Impairment of non-consolidated entities		—		(286)
Other		149		574
Total other expense		(11,510)		(9,891)
(Loss) income before income taxes		(179,367)		48
Income tax benefit		2,087		121
Net (loss) income	$	(177,280)	$	169

Net Sales

Net sales for the three months ended September 30, 2019 were $1,301,197, a $72,137, or 5.3 percent, decrease compared to $1,373,334 for the three months ended September 30, 2018. This decrease was primarily due to the continued impact of the loss of customer contracts at our PBM segment, as well as payor reimbursement compression, and increased conversion of certain brand name drugs to their generic equivalents. The decreases were partially offset by the impact of manufacturer price inflation and growth in infusion therapies versus the comparable prior period.

Cost of Sales

Cost of sales for the three months ended September 30, 2019 was $1,237,812, a $42,164, or 3.3 percent, decrease compared to $1,279,976 for the three months ended September 30, 2018. This decrease was primarily the result of the loss of customer contracts at our PBM segment, and conversion of certain brand name drugs to their generic equivalent in our Specialty segment over the same period and a $9,000 impact due to the rebate penalty with a certain aggregator due to not meeting contractual membership level requirements. Cost of sales was 95.1 percent and 93.2 percent of net sales for the three months ended September 30, 2019 and 2018, respectively. The decrease in gross margin from 6.8 percent to 4.9 percent for the three months ended September 30, 2018 and 2019, respectively, was primarily due to the rebate penalty in our PBM segment, as well as payor reimbursement compression in our Specialty segment.

30

SG&A

SG&A expenses for the three months ended September 30, 2019 were $74,993, a $8,426 decrease compared to $83,419 for the three months ended September 30, 2018. The decrease is primarily the result of a $7,416 decrease in amortization expense primarily due to the amortization of intangible assets due to the impairment of these assets in the fourth quarter of 2018 and the second and third quarter of 2019, and a $872 decrease in share-based compensation expense.

Impairment Charges on Goodwill and Other Intangibles

As a result of an interim impairment test for goodwill for our PBM segment as of September 30, 2019, performed as a result of continued customer contract losses, but more importantly from our lower than anticipated success in converting potential sales opportunities into significant new customer contracts during our calendar 2020 selling season which typically occurs in the late third and fourth quarters of 2019, we recorded a non-cash impairment charge against goodwill of $122,076 and relatedly, an impairment charge of $34,173 of certain definite-lived intangible assets, primarily certain trade names and trademarks, certain customer relationships in our PBM segment. The impairment charges were taken as a result of lower than expected results and a reduced outlook in 2020 driven by continued unanticipated customer contract losses in the third quarter of 2019 and slower than anticipated success in converting potential sales opportunities into significant new customer contracts. See “Management Discussion and Analysis – Overview” above for additional information regarding these impairment charges.

Other Expense

Our other expense was $11,510 and $9,891 for the three months ended September 30, 2019 and 2018, respectively, and is primarily comprised of interest expense. The $1,619 increase in other expense was primarily due to the write-off of debt issuance costs of $731 and the impact of monthly settlement payments on unfavorable floating-to-fixed interest rate hedges entered into in 2018, which became effective in the second quarter of 2019, in the three months ended September 30, 2019 compared to the same period in 2018.

Income Tax Benefit

Our income tax benefit for the three months ended September 30, 2019 and 2018 was $2,087 and $121, respectively. Income tax benefit for the three months ended September 30, 2019 includes establishing an additional valuation allowance against deferred tax assets related to net operating losses due to our cumulative loss position and non-cash goodwill impairment charges that are not deductible for tax purposes.

Segment Results

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	$	1,212,298	$	(1,178,918)	$	(1,145,288)	$	64,530	$	67,010
PBM		82,500		169,933		(83,645)		(143,585)		(1,145)		26,348
Inter-segment eliminations		(24,751)		(8,897)		24,751		8,897		—		—
	$	1,301,197	$	1,373,334	$	(1,237,812)	$	(1,279,976)	$	63,385	$	93,358

Net Sales — Specialty

Net sales for the three months ended September 30, 2019 were $1,243,448, a $31,150 or 2.6 percent increase compared to $1,212,298 for the three months ended September 30, 2018. The increase was primarily the result of growth in our infusion therapies and manufacturer price inflation.  The increase was partially offset by payor reimbursement compression and the conversion of certain brand name drugs to their generic equivalent in the comparable prior period.

31

Cost of Sales — Specialty

Cost of sales for the three months ended September 30, 2019 was $1,178,918, a $33,630 or 2.9 percent increase, compared to $1,145,288 for the three months ended September 30, 2018. This increase was primarily the result of the same factors that drove the increase in Specialty’s Net sales over the same time. Cost of sales was 94.8 percent and 94.5 percent of Net sales for the three months ended September 30, 2019 and 2018, respectively.

Net Sales & Cost of Sales — PBM

Net sales for the three months ended September 30, 2019 were $82,500, a decrease of $87,433, compared to $169,933 for the three months ended September 30, 2018. Cost of sales for the three months ended September 30, 2019 were $83,645, a decrease of $59,940, compared to $143,585 for the three months ended September 30, 2018. The decrease in Net sales by our PBM segment was the result of the effect of customer contract losses that began in late 2018 and have continued through the third quarter of 2019 and the recognition of an accrual for litigation of $3,900 relating to a rebate dispute with a terminated customer. Cost of sales was 101 percent and 84 percent of Net sales for the three months ended September 30, 2019 and 2018, respectively. The change in Cost of sales as a percentage of net sales was driven by a rebate penalty with a certain aggregator due to not meeting contractual membership level requirements that resulted in a $9,000 negative impact to Cost of sales.

Nine Months Ended September 30, 2019 versus Nine Months Ended September 30, 2018

Consolidated Results

The following table provides our condensed consolidated statements of comprehensive loss data for each of the periods presented:

	Nine Months Ended
	September 30,
	2019		2018
Net sales	$	3,845,629	$	4,131,896
Cost of sales		(3,630,297)		(3,849,743)
Gross profit		215,332		282,153
SG&A		(238,677)		(255,705)
Goodwill impairments		(244,967)		—
Impairments of definite-lived intangible assets		(52,152)		—
(Loss) income from operations		(320,464)		26,448
Other (expense) income:
Interest expense		(32,044)		(30,998)
Impairment of non-consolidated entities		—		(329)
Other		431		1,385
Total other expense		(31,613)		(29,942)
Loss before income taxes		(352,077)		(3,494)
Income tax benefit (expense)		1,034		(750)
Net loss	$	(351,043)	$	(4,244)

Net Sales

Net sales for the nine months ended September 30, 2019 were $3,845,629, a $286,267, or 6.9 percent, decrease compared to $4,131,896 for the nine months ended September 30, 2018. This decrease was primarily due to loss of customer contracts and price compression to retain current business and win new business at our PBM segment, as well as payor reimbursement compression, brand to generic conversion, and volume declines in certain therapeutic areas in our Specialty segment. The decreases were partially offset by the impact of manufacturer price increases and growth in our infusion therapies versus the comparable prior period.

32

Cost of Sales

Cost of sales for the nine months ended September 30, 2019 was $3,630,297, a $219,446, or 5.7 percent, decrease compared to $3,849,743 for the nine months ended September 30, 2018. This decrease was primarily the result of the same factors that drove the decrease in our Net sales over the same period. Cost of sales was 94.4 percent and 93.2 percent of net sales for the nine months ended September 30, 2019 and 2018, respectively. The decrease in gross margin from 6.8 percent to 5.6 percent for the nine months ended September 30, 2018 and 2019, respectively, was primarily due to a price compression to retain current business and win new business at our PBM segment, a $9,000 impact to Cost of sales due to a rebate penalty to a certain aggregator at our PBM segment for not meeting certain contractual membership level requirements, a $3,900 accrual for litigation related to a rebate dispute with a terminated customer, a $2,500 rebate payment to a terminated customer in the second quarter of 2019 in our PBM segment, and payor reimbursement compression, as well as an additional liability for sales and use taxes, and gross receipt taxes of $2,985  in our specialty segment.

SG&A

SG&A expenses for the nine months ended September 30, 2019 were $238,677, a $17,028 decrease compared to $255,705 for the nine months ended September 30, 2018. The decrease is primarily the result of a $14,336 decrease in amortization expense primarily due to the amortization of intangible assets due to the impairment of these assets in the fourth quarter of 2018 and the second quarter of 2019, a $4,353 decrease in acquisition-related costs, and a $3,139 decrease in share-based compensation expense. The decrease in share-based compensation expense was primarily due to the impact in the second quarter of 2018 of the vesting of an award which vests based on the achievement of market performance criteria for an RSU grant awarded to an executive in the prior year. These decreases were partially offset by slight increases in employee costs, insurance, and facility expenses.

Impairment Charges on Goodwill and Other Intangibles

As a result of our interim impairment tests of goodwill as of September 30, 2019 and June 30, 2019, we recorded non-cash impairment charges against goodwill of $244,967 and relatedly, impairment charges of $52,152 of certain definite-lived intangible assets, primarily certain trade names and trademarks, certain customer and physician relationships in both segments, and certain non-compete employment agreements in our Specialty segment.

Our Specialty segment recorded $68,218 of the goodwill impairment and non-cash definite-lived intangible asset impairment charges of $16,772, primarily due to variances to our original forecast in the second quarter of 2019 caused by 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, our previously forecasted volume growth not yet coming to fruition and expected efficiencies not being recognized as early as originally forecasted. Our PBM segment recorded $176,749 of the goodwill impairment charge and non-cash definite-lived intangible asset impairment charges of $35,380 during the nine months ended September 30, 2019. The impairment charges were taken in both the second and third quarters of 2019 as a result of lower than expected results and the lowering of our outlook for 2020 in both quarters driven by continued business losses, slower than anticipated success in converting potential sales opportunities into significant new customer contracts, and lower earned rebates due to drug mix and slightly lower rebate retention. See “Management Discussion and Analysis – Overview” above for additional information regarding these impairment charges.

Other Expense

Our other expense was $31,613 and $29,942 for the nine months ended September 30, 2019 and 2018, respectively, and is primarily comprised of interest expense. The $1,671 increase in other expense was due to the write-off of debt issuance costs of $731 and the impact of monthly settlement payments on unfavorable floating-to-fixed interest rate hedges entered into 2018, which became effective in the second quarter of 2019, partially offset by lower interest charges due to decreased average borrowings.

33

Income Tax Benefit (Expense)

Our income tax benefit (expense) for the nine months ended September 30, 2019 and 2018 was $1,034 and ($750), respectively. Income tax benefit for the nine months ended September 30, 2019 includes establishing an additional valuation allowance against deferred tax assets related to net operating losses due to our cumulative loss position and non-cash goodwill impairment charges that are not tax deductible.

Segment Results

Net sales, cost of sales and gross profit information by segment are as follows:

	Nine Months Ended September 30,
	Net Sales				Cost of Sales				Gross Profit
	2019		2018		2019		2018		2019		2018
Specialty	$	3,627,582	$	3,599,023	$	(3,432,506)	$	(3,386,653)	$	195,076	$	212,370
PBM		270,730		550,148		(250,474)		(480,365)		20,256		69,783
Inter-segment eliminations		(52,683)		(17,275)		52,683		17,275		—		—
	$	3,845,629	$	4,131,896	$	(3,630,297)	$	(3,849,743)	$	215,332	$	282,153

Net Sales — Specialty

Net sales for the nine months ended September 30, 2019 were $3,627,582, a $28,559, or 0.8 percent, increase compared to $3,599,023 for the nine months ended September 30, 2018. The increase was primarily driven by growth in our infusion therapies and manufacturer price increases.  The increases were partially offset by reimbursement compression, the conversion of some brand drugs to their generic equivalent, and volume declines in certain therapeutic areas versus the comparable prior period.

Cost of Sales — Specialty

Cost of sales for the nine months ended September 30, 2019 was $3,432,506, a $45,853, or 1.4 percent, increase compared to $3,386,653 for the nine months ended September 30, 2018. This increase was primarily the result of manufacturer price increases and an additional liability for sales and use taxes, and gross receipt taxes of $2,985 which was recorded in 2019. Cost of sales was 94.6 percent and 94.1 percent of net sales for the nine months ended September 30, 2019 and 2018, respectively.

Net Sales & Cost of Sales — PBM

Net sales for the nine months ended September 30, 2019 were $270,730, a decrease of $279,418, compared to $550,148 for the nine months ended September 30, 2018. The decrease in our PBM segment was the result of continued customer contract losses that started in late 2018 and have continued into the third quarter of 2019, retail price compression to retain current business and win new business, a $3,900 accrual for litigation related to a rebate dispute with a terminated customer, and a $2,500 rebate payment to a terminated customer in the second quarter of 2019. Cost of sales for the nine months ended September 30, 2019 were $250,474, a decrease of $229,891, compared to $480,365 for the nine months ended September 30, 2018. The decrease in our PBM Cost of sales was the result of the continued customer contract losses partially offset by a $9,000 rebate penalty due to a certain aggregator for not meeting contractual membership level requirements for 2019. Cost of sales was 92.5 percent and 87.3 percent of Net sales for the nine months ended September 30, 2019 and 2018, respectively. The increase in Cost of sales as a percentage of Net sales was due primarily to the $9,000 impact of the rebate penalty.

34

Liquidity and Capital Resources

Overview

Our primary uses of cash include funding our ongoing working capital needs, debt service, acquiring and maintaining property and equipment, and internal use software, and business acquisitions. Our primary source of liquidity for our working capital is cash flows generated from operations. At various times during the course of the year, we may be in an operating cash usage position, which may require us to borrow on our revolving line of credit. We continuously monitor our working capital position and associated cash requirements and explore opportunities to more effectively manage our inventory and capital spending. As of September 30, 2019 and December 31, 2018, we had $8,420 and $9,485, respectively, of cash and cash equivalents. We had $105,000 and $176,300 outstanding on our revolving line of credit at September 30, 2019 and December 31, 2018, respectively. Our available borrowing capacity under our revolving line of credit was $95,000 and $73,700 at September 30, 2019 and December 31, 2018, respectively.

We believe that funds generated from operations, cash and equivalents on hand, and available borrowing capacity under our credit facility will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months and that we will be able to continue to service our debt and other trade obligations in the ordinary course of business; however, as our results for 2019 and future forecasts have deteriorated, we believe that it is probable that we will be in violation of certain financial debt covenants in our credit agreement, specifically the total net leverage and interest coverage ratio covenants, for the period ending December 31, 2019, absent the consummation of  our mitigating plans (i.e., execution of potential strategic alternatives or renegotiating or refinancing our credit agreement), which violation would give the lenders the right to terminate funding of our credit facility, accelerate our debt (including amounts under our term loans), or foreclose on our assets, if our mitigating plans are not executed prior to such date. The Company’s plan is to alleviate any potential violation of its financial debt covenants through the execution of potential strategic alternatives, as discussed above. In addition, the Company intends to actively work with its lenders to renegotiate its covenants or restructure its credit agreement, as appropriate.

Although we may breach certain of the financial debt covenants, the Company has a history of positive cash flow from operations and positive adjusted EBITDA. Despite recent performance below expectations and deteriorating forecasts, the Company continues to expect to have positive adjusted EBITDA, positive cash flows from operations, and positive working capital balances. In addition, the events driving net losses recently reported by the Company mainly include various non-cash items such as impairment losses, significant stock compensation and depreciation and amortization costs. In the event the Company were to breach its financial debt covenants and the revolving line of credit were terminated or the indebtedness thereafter was accelerated, the Company would not have sufficient liquidity to pay its indebtedness without raising additional debt or equity to refinance such indebtedness, which may be available only on onerous terms if it is available at all. As noted, the Company intends to actively work with the lenders to renegotiate its debt covenants or restructure its debt in the fourth quarter of 2019.

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.

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.

35

The following table and summaries below provide cash flow data for each of the periods presented:

	Nine Months Ended
	September 30,
	2019		2018
Net cash provided by operating activities	$	108,045	$	33,207
Net cash used in investing activities		(25,037)		(17,709)
Net cash used in financing activities		(84,073)		(91,535)
Net decrease in cash and equivalents	$	(1,065)	$	(76,037)

Cash Flows from Operating Activities

Cash flows from operating activities consists of net loss, adjusted for noncash items, and changes in various working capital items, including accounts receivable, inventories, accounts payable and other assets/liabilities.

The $74,838 increase in cash provided by operating activities for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was due to a $136,743 change in net working capital flows primarily due to concentrated efforts to manage and reduce inventory levels and increased payables driven by the change in payment terms for a key supplier, offset by a $346,799 increase in net loss which was primarily driven by non-cash impairment charges of goodwill of $244,967 and certain definite-lived intangible assets of $52,152, and a $12,225 decrease in non-cash adjustments to net loss.

Cash Flows from Investing Activities

Our primary investing activities consisted of cash payments made to purchase InTouch, labor and other costs associated with capitalized software for internal use, capital expenditures to purchase computer equipment, software, furniture and fixtures, as well as building improvements to support the expansion of our infrastructure and workforce. As costs related to the implementation of our new specialty pharmacy software platform begin to wind down, we expect our capital expenditures to decrease in the long-term.

The $7,328 increase in cash used in investing activities during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily related to cash payments made to purchase InTouch and cash used in the ongoing implementation of a new specialty pharmacy software platform with more costs being incurred on the software project than in the prior year period.

Cash Flows from Financing Activities

Our primary financing activities consisted of debt borrowings and repayments, payment of debt issuance costs and proceeds from stock option exercises.

The $7,462 decrease in cash used in financing activities during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 was primarily related to a voluntary prepayment of $74,000 on our Term Loan B in 2018.  Offsetting this decrease, in the nine months ended September 30, 2019, our net payments on our revolving line of credit increased $61,300 from the comparable period in 2018.

Debt

The Company has a credit agreement with JP Morgan Chase Bank, N.A., and Capital One, National Association, that currently provides for a $200,000 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. The revolving line of credit and Term Loan A mature on December 20, 2022 and Term Loan B matures on December 20, 2024.

36

Interest on the revolving line of credit and Term Loan A is accrued at a rate equal to (i) the monthly LIBOR rate 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 our option. The applicable margin is adjusted quarterly based on our 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 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. We are charged a monthly unused commitment fee ranging from 0.3 percent to 0.4 percent on the average unused daily balance on our $200,000 revolving line of credit.

Our weighted average borrowings on the revolving line of credit was $137,521 and $163,380 and maximum borrowings on the revolving line of credit was $196,300 and $231,200 during the nine months ended September 30, 2019 and 2018, respectively. We had $95,000 and $73,700 available borrowing capacity on our revolving line of credit at September 30, 2019 and December 31, 2018, respectively. We had $455,875 and $464,500 in outstanding term loans as of September 30, 2019 and December 31, 2018, respectively. We also had $105,000 and $176,300 outstanding on our revolving line of credit as of September 30, 2019 and December 31, 2018, respectively.

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

Our credit facility contains certain financial and non-financial covenants, including covenants imposing (i) a maximum total net leverage ratio and (ii) a minimum interest coverage ratio limiting the amount of debt that the Company may have outstanding.  Effective August 9, 2019, the Company amended its credit agreement and revised the total net leverage ratio covenant which is now set at 6.00 to 1.0 as of September 30, 2019, stepping up to 6.75 to 1.0 as of December 31, 2019 through March 31, 2020, with subsequent step downs thereafter to the ratios as originally issued. The minimum interest coverage ratio was also revised concurrently and set at 2.50 to 1.0 as of September 30, 2019, stepping down to 2.25 to 1.0 as of December 31, 2019 through March 31, 2020, and eventually stepping back up to 3.00 to 1.0 as of March 31, 2021 and thereafter. In order to effect the amendment, the Company permanently reduced its revolving line of credit from $250,000 to $200,000. In addition, the amendment to the credit agreement contained certain covenant trigger events that include: investments in or loans to non-guarantor parties, the incurrence of certain indebtedness, the creation of unrestricted subsidiaries and the making of certain distributions or prepayment of indebtedness, and failure to deliver quarterly projected financial statements and require the use of net cash proceeds realized from certain assets dispositions to prepay term loans. Should a covenant trigger event occur, the total net leverage ratio covenant level shall be reduced by 3.00 to 1.00 and the interest coverage ratio level will be increased by 3.00 to 1.00. As of September 30, 2019, the Company is in compliance with all such covenants.  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.  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 balances under Term Loan A and Term Loan B as of September 30, 2019 as current in the condensed consolidated balance sheet.

Based on our results for 2019 and future forecasts, however, the Company may breach its debt covenants for the period ending December 31, 2019. Despite this potential breach, the Company expects to continue to service its debt and other trade obligations in the ordinary course. Furthermore, the Company plans to alleviate the issues related to its debt covenants through the execution of strategic alternatives, actively working with its lenders to renegotiate its covenants or restructure its credit agreement, as appropriate, and continuing to pursue cost-cutting initiatives. While the Company currently believes that these actions should be completed prior to breaching the debt covenants and, if completed, could  successfully mitigate the conditions that would give rise to the potential breach of its debt covenants, the execution of these plans is reliant upon third-parties and, therefore, outside the control of the Company, it cannot be considered probable that management will be able to effectively implement its plans and avoid the potential breach of its debt covenants. See “Liquidity and Capital Resources—Overview” for additional information.

37

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. Application of these principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results might differ from these estimates under different assumptions or conditions and, to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

During the nine months ended September 30, 2019, there were no significant changes to our critical accounting policies and use of estimates, which are disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Recently Issued Accounting Guidance

Refer to Note 2, New Accounting Standards, to our unaudited condensed consolidated financial statements included in Item 1. Financial Statements, for a discussion of recently issued accounting guidance and related impact on our financial condition and results of operations.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are solely in the United States of America (“U.S.”) and U.S. Territories and are exposed to market risks in the ordinary course of our business, which consists of interest rate risk. We are exposed to interest rate fluctuations with regard to future issuances of fixed-rate debt, and existing and future issuances of floating-rate debt. Primary exposures include the LIBOR, the Federal Funds Effective Rate, the Overnight Bank Funding Rate and our administrative agent’s prime rate in effect at its principal office in New York City related to debt outstanding under our credit facility. A 100-basis point change in 2019 interest rates would have changed our pre-tax loss for the three and nine months ended September 30, 2019 by approximately $1.4 million and $4.5 million, respectively.

In an effort to manage our exposure to interest rate fluctuations, in 2018, we became a party to 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 $286,125 at September 30, 2019.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

As previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, management concluded that a material weakness in internal control over financial reporting exists for LDI Holding Company LLC, doing business as LDI Integrated Pharmacy Services (“LDI”), acquired in December 2017 and Pharmaceutical Technologies, Inc., doing business as National Pharmaceutical Services (“NPS”) acquired in November 2017, which comprise our PBM segment. Specifically, the material weakness relates to the operating effectiveness of our evaluation and review of initial client set up and monitoring of changes to customer contract terms; revenue reconciliations; rebate accruals and reconciliations;  monitoring of client performance guarantees; completeness

38

and accuracy of reports and spreadsheets used in the operation of certain internal controls over financial reporting for revenues; and user access administration and program change reviews related to revenue applications.

Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of September 30, 2019. Based on these evaluations, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures required by paragraph (b) of Rule 13a-15 or 15d-15 were not effective as of September 30, 2019.

Notwithstanding the identified material weakness, our management has concluded that the condensed consolidated financial statements included in this quarterly report on Form 10-Q, fairly presents, in all material respects, our financial position, results of operations, cash flows, and changes in shareholders’ equity in accordance with U.S. GAAP.

Remediation Plan

Management is actively implementing a remediation plan to ensure that deficiencies contributing to the material weakness are remediated such that these controls will operate effectively, which includes enhancement of the management review controls over revenue reconciliations and monitoring of client performance. The remediation actions we are taking also include: (i) assessing management resources in various departments, including finance and accounting, at LDI and NPS to ensure there is an appropriate level of knowledge, experience and training as well as the appropriate reporting structure to establish and maintain adequate internal control over financial reporting; and (ii) enhancement of the LDI and NPS quality assurance review process over initial contract pricing setup and ongoing changes. We have also engaged a consultant to assist in the remediation process and implementation of internal controls.

We believe that these actions, and the improvements we expect to achieve as a result, will effectively remediate the material weakness. However, until the remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively, the material weakness in our internal control over financial reporting and disclosure controls and procedures will not be considered remediated. While we were targeting completion of the remediation of this material weakness by the end of 2019, we now believe that remediation of this material weakness will not be successful until 2020.

Changes in Internal Control over Financial Reporting

We continue to implement internal controls in conjunction with our remediation plan as described above. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

39

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 $14.1 million 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 actions 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.

ITEM 1A. RISK FACTORS

The additional risk factors listed below updates our risk factors that were disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

We may breach certain financial debt covenants in our credit agreement in the near term which raises substantial doubt about our ability to continue as a going concern and may negatively impact our liquidity.

Our forecasts have deteriorated, and we believe it is probable that we will breach certain financial debt covenants in our credit agreement, specifically the total net leverage and interest coverage ratio covenants, for the period ending December 31, 2019, absent the consummation of our mitigating plans (i.e., execution of potential strategic alternatives or renegotiating or refinancing our credit agreement). In the event the Company were to violate its debt covenants, we would be in default thereunder, and our lenders have the right to terminate funding of our revolving credit facility, accelerate the indebtedness, including our outstanding term loans, or foreclose on our assets.

The Company plans to alleviate the potential breach of its financial debt covenants through its mitigation plans of the execution of potential strategic alternatives, working with its lenders to renegotiate its covenants or restructure its credit agreement, as appropriate, and continuing to pursue cost-cutting initiatives. There can be no assurance that these efforts will be successful. In the event that the Company breaches the financial debt covenants in the credit agreement and the Company is unable to renegotiate or restructure its credit agreement, we would be in default thereunder and the Company’s

40

indebtedness may be accelerated and become immediately due and payable. The Company does not have sufficient liquidity to pay its indebtedness if it is accelerated and becomes immediately due and payable.

Under such circumstances, other sources of capital may not be available to us on reasonable terms or at all. There is no guarantee the Company will be able to repay or replace its indebtedness. Our ability to arrange additional financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. There can be no assurance that we will be able to obtain additional financing or refinancing and failure to obtain such additional financing or refinancing could have a material adverse impact on our operations. Furthermore, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our inability to refinance existing indebtedness or otherwise access the credit markets could have a material adverse effect on our business and results of operations and your investment in our common stock. If the Company is not successful in its plans to renegotiate the covenants in its credit agreement or execute on potential strategic alternatives, we could not assure you of our ability to continue operations and may need to seek protection under applicable bankruptcy or insolvency laws.

Our failure to execute our mitigation plans may cause us to experience liquidity issues and result in uncertainty about our business.

Should we experience liquidity issues it may cause, among other things:

• third parties to lose confidence in our ability to provide our services and meet our contractual obligations, resulting in a significant decline in our revenues, profitability and cash flow;

• difficulty retaining, attracting or replacing key employees;

• employees to be distracted from performance of their duties or more easily attracted to other career opportunities; and

• our suppliers, vendors, hedge counterparties and service providers to renegotiate the terms of our agreements, terminate their relationship with us or require financial assurances from us.

These events may have a material adverse effect on our business and operations.

Our review of strategic alternatives may result in significant transaction expenses and unexpected liabilities and could adversely impact our business and our stock price.

On August 9, 2019, the Company announced that, at the direction of its Board of Directors, it is reviewing strategic alternatives focused on maximizing shareholder value. The strategic alternatives expected to be considered include, but are not limited to, a sale or merger of the Company, continuing to pursue value-enhancing initiatives or undertaking structural changes as a standalone company, or the sale or other disposition of certain of the Company’s businesses or assets. There can be no assurance that this process will result in the approval or completion of any particular strategic alternative or transaction in the future or that any such strategic alternative or transaction, if approved or completed, will yield additional shareholder value.  The Board and the Company may determine to suspend or terminate the review of strategic alternatives at any time due to various factors. In addition, the review of strategic alternatives is dependent upon a number of factors that may be beyond our control, including among other factors, market conditions, industry trends, regulatory limitations, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.

Further, the process of exploring, reviewing and pursuing strategic alternatives, the public announcement of such process or any decision or transaction resulting from such process could adversely impact our business and our stock price. We may devote a significant amount of time and resources to identifying, evaluating and pursuing potential strategic alternatives, which could result in the diversion of management’s attention from our existing businesses and focus on our current strategy. In connection with the review and pursuit of strategic alternatives, we may incur significant transaction

41

expenses (including equity compensation, severance pay and legal, accounting and financial advisory fees); fail to retain or attract key personnel; and fail to strengthen or maintain our business and relationships with our vendors, clients or customers.  As a result, we may fail to achieve financial or operating objectives, which may have a material adverse effect on our business and our stock price.

We do not intend to disclose developments or provide updates on the progress or status of our review of strategic alternatives unless and until required or when the Company determines appropriate. As such, perceived uncertainties related to the future of the Company and speculation regarding the review of strategic alternatives and related developments may result in the loss of potential business opportunities and may make it more difficult for us to attract and retain key personnel and business partners or cause our stock price to fluctuate significantly.

The specialty pharmacy and PBM industries are highly litigious, and our review of strategic alternatives may heighten our exposure to potential litigation in connection with this process and effecting any transaction or strategic alternative.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 22, 2019, in connection with the closing of our acquisition of InTouch Pharmacy LLC (“InTouch”), the Company issued 836,431 shares of its common stock to the former owner of InTouch. No cash proceeds were received by the Company as the shares represent a portion of the consideration for the acquisition. The 836,431 shares of common stock were issued and sold pursuant to exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D promulgated thereunder by the Securities and Exchange Commission.

42

ITEM 6.EXHIBITS

			Incorporated by Reference
Exhibit Number	Exhibit Description	Filed Herewith	Form	Period Ending	Exhibit / Appendix Number	Filing Date
10.1*	Amended and Restated Diplomat Pharmacy, Inc. 2014 Omnibus Incentive Plan	X
10.2*	Form of Omnibus Amendment to Award Agreement	X
10.3	Amendment No.1 to Credit Agreement, dated July 19, 2019, by and among the Company, the Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent, effective August 6, 2019		8-K		10.1	August 6, 2019
31.1	Section 302 Certification — CEO	X
31.2	Section 302 Certification — CFO	X
32.1**	Section 906 Certification — CEO	X
32.2**	Section 906 Certification — CFO	X
101.INS	XBRL Instance Document [the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document]	X
101.SCH	XBRL Taxonomy Extension Schema Document	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase	X
101.LAB	XBRL Taxonomy Extension Label Linkbase	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	X
104	Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document	X

*     Indicates a management contract or compensatory plan or arrangement.

**   This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

43

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DIPLOMAT PHARMACY, INC.
	(Registrant)
	By:	/s/ DANIEL DAVISON
		Daniel Davison
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and
		Principal Accounting Officer)
Date: November 12, 2019

44

EX-10.1

Exhibit 10.1

DIPLOMAT PHARMACY, INC.

Amended and Restated

Diplomat Pharmacy, Inc. 2014 Omnibus Incentive Plan

(Effective _____, 2019)

1.          Purposes of Plan. The purposes of this Plan are (a) to provide incentives and awards to employees, directors, consultants and advisors of the Company and its Affiliates, by encouraging their ownership of Stock and (b) to aid the Company and its Affiliates in retaining such employees, directors, consultants and advisors upon whose efforts the Company’s success and future growth depends, and attracting other such individuals.

2.          Definitions. Except as otherwise defined in the Plan, the following terms shall have the meanings set forth below:

(a)         “Affiliate” means, with respect to the Company, a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company. For purposes of clarity, Affiliate shall include all Subsidiaries of the Company.

(b)         “Award” means individually or collectively, a grant under this Plan of Non-qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units, Performance Shares, or Other Stock and Stock Unit Awards. Each Award shall be evidenced by an Award Agreement containing such terms and conditions as the Committee may approve, but such terms and conditions shall be consistent with any applicable terms and conditions specified in the Plan.

(c)         “Award Agreement” means an agreement, certificate, resolution or other form of writing or other evidence approved by the Committee which sets forth the terms and conditions of an Award. An Award Agreement may be in an electronic medium, may be limited to a notation on the Company’s books and records and, if approved by the Committee, need not be signed by a representative of the Company or a Participant.

(d)         “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act.

(e)         “Board”  or “Board of Directors” means the Board of Directors of the Company.

(f)         “Cause” means the definition of such term contained in a written employment agreement in effect between the Participant and the Company or an Affiliate or, if there is no such employment agreement in effect or if any such employment agreement does not define the term “Cause,” the term “Cause” shall mean a Participant’s (i) commission of a crime of moral turpitude or a felony that involves financial misconduct or moral turpitude or has resulted, or reasonably could be expected to result, in imprisonment of the Participant or any adverse publicity regarding the Participant or the Company or economic injury to the Company, (ii) dishonesty or willful commission or omission of any action that has resulted, or reasonably could be expected to result, in any adverse publicity regarding the Participant or the Company or has caused, or reasonably could be expected to cause, demonstrable and serious economic injury to the Company, or (iii) material breach of an Award Agreement, any other agreement entered into between a Participant and the Company or any Affiliates, or the Company’s policies and procedures as may be implemented from time to time (other than as a result of the Disability of a Participant or other factors outside of a Participant’s control) after notice and a reasonable opportunity to cure (if such breach can be cured).

(g)         “Change in Control” shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied:

(i)          The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than an Existing Shareholder, of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of 30% or more of voting securities of the Company entitled to vote generally in the election of directors (“Outstanding Voting Securities”); provided, however, that, for purposes of this subsection (i), the following acquisitions will not constitute a Change of Control: (a) any acquisition directly from the Company; (b) any acquisition by the Company; (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or an Affiliate, or (d) any acquisition by any corporation pursuant to a transaction that complies with subsection (iii) below;

(ii)         Any time at which individuals who, as of the date hereof, constitute the Board (“Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose appointment, or nomination for election, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or

(iii)       Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the voting power of the then-outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no individual, entity or group (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of the voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination.

Notwithstanding the preceding, to the extent “Change in Control” is a payment trigger, and not merely a vesting trigger, for any 409A Award, a “Change in Control” shall not be deemed to have occurred unless such “Change in Control” is also a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company, as described in Treas. Reg. Section 1.409A-3(i)(5).

(h)         “Code” means the Internal Revenue Code of 1986 and any successor statute thereto, as amended, including the rules and regulations promulgated thereunder.

A-2

(i)          “Committee” means the Compensation Committee of the Board, or any other committee of the Board to the extent designated by the Board by resolution of the Board, which committee shall be constituted as provided in Section 3 hereof.

(j)          “Company” means Diplomat Pharmacy, Inc., or any successor thereto as provided in Section 19 hereof.

(k)         “Covered Employee” means a Participant who is a “covered employee” within the meaning of Section 162(m)(3) of the Code.

(l)          “Director” means a member of the Board, or a member of the board of directors of an Affiliate.

(m)        “Disability” or “Disabled” means, with respect to any Participant, a condition under which the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.

A Participant shall not be deemed to be Disabled as a result of any condition that:

(A)       was contracted, suffered, or incurred while such Participant was engaged in, or resulted from such Participant having engaged in, a felonious activity; or

(B)       resulted from an intentionally self-inflicted injury or an addiction to drugs, alcohol, or substances which are not administered under the direction of a licensed physician as part of a medical treatment plan.

The Disability of a Participant and the date on which a Participant ceases to be employed by reason of Disability shall be determined by the Company, in accordance with uniform principles consistently applied, on the basis of such evidence as the Committee and the Company deem necessary and desirable, and its good faith determination shall be conclusive for all purposes of the Plan. The Committee or the Company shall have the right to require a Participant to submit to an examination by physicians and to submit to such reexaminations as the Committee or the Company shall require in order to make a determination concerning the Participant’s physical or mental condition; provided, however, that a Participant may not be required to undergo a medical examination more often than once each 180 days. If any Participant engages in any occupation or employment (except for rehabilitation as determined by the Committee) for remuneration or profit, which activity would be inconsistent with the finding of Disability, or if the Committee, on the recommendation of the Company, determines on the basis of a medical examination that a Participant no longer has a Disability, or if a Participant refuses to submit to any medical examination properly requested by the Committee or the Company, then in any such event, the Participant shall be deemed to have recovered from such Disability. Notwithstanding the foregoing, in the event a Participant is employed under a written employment agreement with the Company or one of its Affiliates which agreement includes a definition of “disability,” “disability” shall have the meaning set forth in such agreement; provided, however, to the extent such agreement is silent on any of the determination provisions set forth in this paragraph, such provisions shall apply.

The Committee in its discretion may revise this definition of “Disability” for any grant, except to the extent that the Disability is a payment event under a 409A Award, in which event the definition of “Disability” in Treas. Reg. Section 1.409A.-3(i)(4) shall apply and cannot be changed after the 409A Award is granted.

A-3

(n)         “Eligible Person” means any Employee, Director or a consultant or advisor of the Company or an Affiliate and includes non-Employees to whom an offer of employment has been or is being extended.

(o)         “Employee” means any person whom the Company or any Affiliate classifies as an employee (including an officer) for employment tax purposes, whether or not that classification is correct. The payment by the Company of a director’s fee to a Director shall not be sufficient to constitute “employment” of such Director by the Company.

(p)         “Exchange Act” means the Securities Exchange Act of 1934, as amended, including the rules and regulations promulgated thereunder.

(q)         “Existing Shareholder” means Philip Hagerman, his immediately family (not more remote than first cousin), any trusts for the benefit of Philip Hagerman or his immediately family, or any of their respective descendants, heirs, beneficiaries, or donees or any corporation, partnership, limited liability company or other entity, if substantially all of the economic interests in such entity are held by or for the benefit of such persons

(r)         “Fair Market Value” means the value of a Share, determined as follows: if on the Grant Date or other determination date, the Shares are listed on an established national or regional share exchange, are admitted to quotation on the New York Stock Exchange or are publicly traded on an established securities market, the Fair Market Value of a Share shall be the closing price of the Shares on such exchange or in such market (if there is more than one such exchange or market, the Committee shall determine the appropriate exchange or market) on the Grant Date or such other determination date; or if there is no such reported closing price, the Fair Market Value shall be the mean between the high and low sale prices on such trading day, or if no sale of Shares is reported, the mean between the highest bid and lowest asked price on such trading day, or, if no bid and asking price is reported for such trading day, the reported closing price on the next preceding day on which any sale shall have been reported. If the Shares are not listed on such an exchange, quoted on such system or traded on such a market, the Fair Market Value shall be the value of the Shares as determined by the Committee in good faith; provided that such valuation with respect to any Award that the Company intends to be a stock right not providing for the deferral of compensation under Treas. Reg. Section 1.409A-1(b)(5)(i) (Non-qualified Stock Options or Stock Appreciation Rights) shall be determined by the reasonable application of a reasonable valuation method, as described in Treas. Reg. Section 1.409A-1(b)(5)(iv)(B). In the case of an Incentive Stock Option, if the foregoing method of determining fair market value is inconsistent with Section 422 of the Code, then Fair Market Value shall be determined by the Committee in a manner consistent with such section of the Code and shall mean the value so determined.

(s)         “409A Award” means any Award that is treated as a deferral of compensation subject to the requirements of Section 409A of the Code.

(s)          “Grant Date” means the date on which an Award is made by the Committee or the Board of Directors under this Plan or such later date as may be specified by the Committee or the Board.

(t)         “Incentive Stock Option” or “ISO” means an option to purchase Stock, granted under Section 6 hereof, which is designated as an incentive stock option and is intended to meet the requirements of Section 422 of the Code.

(u)         “Non-qualified Stock Option” or “NQSO” means an option to purchase Stock, granted under Section 6 hereof, which is not intended to be or does not qualify as an Incentive Stock Option.

A-4

(v)        “Option” means an Incentive Stock Option or a Non-qualified Stock Option.

(w)         “Option Price” means the exercise price for each Share subject to an Option.

(x)         “Optionee” means the holder of an Option.

(y)         “Other Stock and Stock Unit Award” means awards of unrestricted Shares, or other awards that are valued in whole or in part by reference to, or are otherwise based on, Shares or other securities of the Company.

(z)       “Outside Director” means a member of the Board who is not an employee of the Company or any Affiliate.

(aa)       “Participant” means any Eligible Person who has been granted an Award under the Plan.

(bb)       “Performance Award” means a performance-based Award, which may be in the form of either Performance Shares or Performance Units.

(cc)       “Performance Measures” means one or more of the following selected by the Committee to measure Company, Affiliate, and/or business unit performance for a specified performance period, whether in absolute or relative terms (including, without limitation, terms relative to a peer group or index): (i) achieving a level of company net sales; (ii) achieving a level of earnings (including gross earnings; earnings before certain deductions, such as interest, taxes, depreciation, or amortization, or EBITDA, or other adjustments to EBITDA as determined by the compensation committee (including discontinued operations, income (loss) from equity investment, gain on bargain purchase, gain (loss) on disposal of property, plant and equipment, non-operating income (expense), impairment, severance of officers, state tax credits, and share-based compensation (income) expense); or earnings per share); (iii) achieving a level of income (including net income or income before consideration of certain factors, such as overhead) or a level of gross profits for the Company, an affiliate, or a business unit; (iv) achieving a return on the Company’s (or an affiliate’s) sales, revenues, capital, assets, or shareholders’ equity; (v) achieving a level of appreciation in the price of the shares of common stock; (vi) achieving a level of market share; (vii) achieving a share price, or a share price return relative to specified stock market indices or other benchmarks, including peer companies, over a specified period; (viii) achieving a level of earnings or income performance relative to peer companies over a specified period; (ix) achieving specified reductions of costs or targeted levels in costs; (x) achieving specified improvements in collection of outstanding accounts or specified reductions in non-performing debts; (xi) achieving a level of cash flow; (xii)  introducing one or more products into one or more new markets; (xiii) acquiring a prescribed number of (or sales volume related to) new customers in a line of business, or maintaining a prescribed number of (or sales volume related to) existing customers; (xiv) achieving a level of productivity within one or more business units; (xv) completing specified projects within or below the applicable budget; (xvi) completing acquisitions or dispositions of other businesses or assets, or integrating acquired businesses or assets; (xvii) expanding into other markets; (xviii) scientific or regulatory achievements; (xix) implementation, completion or attainment of measurable objectives with respect to research, development, patents, inventions, products, projects or facilities and other key performance indicators; and (xx) achieving any of the above performance measures on a per-prescription basis. Subject to any exceptions noted in this Section 2(dd), Section 9(d) hereof, or any Award Agreement and any exceptions approved by the Committee, each such objective shall be, to the extent applicable, determined in accordance with generally accepted accounting principles as consistently applied by the Company. Performance Measures may vary from performance period to performance period and from Participant to Participant, and may be established on a stand-alone basis, in tandem or in the alternative.

A-5

(dd)        “Performance Share” means an Award, designated as a Performance Share, granted to a Participant pursuant to Section 9 hereof, the value of which is determined by the Fair Market Value of the Stock in a manner deemed appropriate by the Committee and described in the Award Agreement.

(ee)        “Performance Unit” means an Award, designated as a Performance Unit, granted to a Participant pursuant to Section 9 hereof, the value of which is determined, in whole or in part, by the attainment of pre-established goals relating to Company financial or operating performance as deemed appropriate by the Committee and described in the Award Agreement.

(ff)       “Period of Restriction” means the period during which the transfer of and/or the entitlement to retain Shares of Restricted Stock is restricted, pursuant to Section 8 hereof.

(gg)      “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d)(3).

(hh)         “Plan” means this Diplomat Pharmacy, Inc. 2014 Omnibus Incentive Plan, as hereafter amended.

(ii)         “Related Option” means an Incentive Stock Option or a Non-qualified Stock Option granted in conjunction with the grant of a Stock Appreciation Right.

(jj)       “Restricted Stock” means an Award, designated as Restricted Stock, granted to a Participant pursuant to Section 8 hereof.

(kk)         “Restricted Stock Unit” means an Award, designated a Restricted Stock Unit, granted to a Participant pursuant to Section 8 hereof.

(ll)     “Retirement” means termination of employment or service by a Participant with the consent of the Committee on or after age 65, or any other definition established by the Committee, in its discretion, either in any Award or in writing after the grant of any Award, provided that the definition of Retirement with respect to the timing of payment (and not merely vesting) of any 409A Award cannot be changed after the Award is granted.

(mm)      “Rule 16b-3” means Rule 16b-3 adopted pursuant to Section 16(b) of the Exchange Act.

(nn)       “SAR Exercise Price” means the per share exercise price of an SAR granted to a Participant under Section 7 hereof.

(oo)       “Secretary” means the officer designated as the Secretary of the Company.

(pp)       “Section 16 Person” means a Participant who is subject to Section 16(b) of the Exchange Act with respect to transactions involving Stock.

(qq)        “Stock” or “Shares” means the common stock of the Company, no par value.

(rr)        “Stock Appreciation Right” or “SAR” means an Award, designated as a Stock Appreciation Right, granted to a Participant pursuant to Section 7 hereof.

(ss)         “Subsidiary” means a subsidiary of the Company within the meaning of Section 424(f) of the Code.

A-6

(tt)      “Substitute Award” means any Award granted or issued to a Participant in assumption of, or in substitution for, outstanding awards, or the right or obligation to make future awards by a company acquired by the Company or with which the Company combines (by merger, asset acquisition or otherwise).

(uu)       “Ten Percent Shareholder” means an individual who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding shares of the Company, its parent, or any of their Subsidiaries. In determining share ownership, the attribution rules of Section 424(d) of the Code shall be applied.

3.          Administration.

(a)         The Plan shall be administered by or pursuant to the direction of the Committee, provided that the Board may exercise all of the Committee’s powers, authority and obligations under this Plan (and any Award Agreement) at any time, in whole or in part, in the Board’s discretion. All determinations and interpretations made by the Committee shall be final, conclusive and binding on all persons, including Participants and their legal representatives and beneficiaries. No member of the Committee or the Board shall be liable to any person for any such action taken or determination made in good faith with respect to the Plan or any Award or Award Agreement. Unless the Board determines otherwise, (i) all members of the Committee shall be “outside directors” as described in Section 162(m) of the Code, and (ii) no person shall be appointed to or serve as a member of the Committee unless at the time of such appointment and service he shall be a “non-employee director,” as defined in Rule 16b-3.

(b)         The Committee, subject to the terms of the Plan, shall have plenary authority to establish such rules and regulations, make such determinations and interpretations, and take such other administrative actions as it deems necessary or advisable to the administration of the Plan, any Award or any Award Agreement. The express grant in this Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. In addition to any other powers and, subject to the provisions of the Plan, the Committee shall have the authority to:

(i)          grant Awards and determine the terms and conditions of the Awards;

(ii)         determine the Participants to whom and the times at which Awards shall be granted;

(iii)        determine all terms and provisions of each Award Agreement, which need not be identical;

(iv)        construe and interpret the Award Agreements and the Plan;

(v)         establish, amend, or waive rules or regulations for the Plan’s administration;

(vi)        to accelerate the exercisability of any Award, the end of a performance period or termination of any Period of Restriction;

(vii)       establish the rights of Participants with respect to an Award upon termination of employment or service as a Director, consultant or advisor;

(viii)     determine whether, to what extent, and under what circumstances an Award may be settled, forfeited, exchanged or surrendered;

A-7

(ix)        amend the terms of previously granted Awards so long as the terms as amended are consistent with the terms of the Plan and provided that the consent of the Participant is obtained with respect to any amendment that would be detrimental to the Participant, except that such consent will not be required if such amendment is for the purpose of complying with Rule 16b-3 or any requirement of the Code applicable to the Award; and

(x)         make all other determinations and take all other actions necessary or advisable for the administration of the Plan.

Notwithstanding the foregoing, neither the Committee nor the Board shall effect at any time directly or indirectly the repricing of any outstanding Options or SARs without shareholder approval, including without limitation a repricing by (i) the cancellation of any outstanding Options or SARs under the Plan and the grant in substitution therefor of new Options or SARs under the Plan covering the same or different amount of Shares, or (ii) the cancellation of any outstanding Options or SARs with respect to which the Option Price or SAR Exercise Price is above Fair Market Value in exchange for a cash payment.

Unless otherwise specified in an Award Agreement, the Company retains the right to cause a forfeiture of any Award, or the gain realized by a Participant in connection therewith, on account of actions taken by the Participant in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or customers of the Company or its Affiliates, any confidentiality obligation with respect to the Company or its Affiliates, or any other policy of or agreement with the Company or its Affiliates, or as otherwise permitted by applicable laws and regulations, including but not limited to, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations promulgated under each respective act.

(c)         All such actions and determinations shall be made in accordance with the Company’s governing documents and applicable law. Subject to the governing documents of the Company and applicable law, the Committee may delegate all or any portion of its authority under the Plan to a subcommittee of members of the Board and/or officers of the Company for the purposes of determining or administering Awards granted to persons who are not then subject to the reporting requirements of Section 16 of the Exchange Act and, if such Awards are intended to qualify as “qualified performance- based compensation” for purposes of Section 162(m) of the Code, who are not “covered employees” under Section 162(m) of the Code. The Committee’s prior exercise of discretionary authority shall not obligate it to exercise its authority in a similar fashion thereafter.

4.          Stock Available.

(a)         Reserved Shares. Subject to adjustment as provided in Section 13 hereof, the initial maximum aggregate number of Shares that may be issued pursuant to Awards made under the Plan shall not exceed 4,000,000 Shares, provided, however, at the beginning of each fiscal year of the Company, beginning after adoption of the Plan, the maximum aggregate number of Shares that may be issued pursuant to Awards made under the Plan shall be increased by an amount equal to 2% of the total number of Shares outstanding as of the beginning of such fiscal year. Notwithstanding the foregoing, the maximum aggregate number of Shares with respect to which incentive stock options may be granted under the Plan may not exceed the 2,000,000 Share initial maximum aggregate limit. Shares used for purposes of the Plan may be either authorized and unissued Shares, or previously issued Shares held in the treasury of the Company, or both.

A-8

(b)         Accounting for Shares.

(i)          Except as provided in this Section 4, for every Share subject to Awards, the Shares available for grant hereunder shall be reduced by one Share. Awards to be settled only in cash shall not be counted against the Share limit above.

(ii)         With respect to Performance Awards which are payable in Shares (whether in whole or in part, as elected by the Participant at the time such Award is settled), the maximum number of Shares shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan, subject to Section 4(b)(v) below.

(iii)        Awards not denominated, but potentially payable, in Shares shall be counted against the aggregate number of Shares available for granting Awards under the Plan in such amount and at such time as the Awards are settled in Shares; provided, however, that Awards that operate in tandem with (whether granted simultaneously with or at a different time from), or that are substituted for, other Awards may only be counted once against the aggregate number of Shares available, and the Committee shall adopt procedures, as it deems appropriate, in order to avoid double counting.

(iv)        Substitute Awards shall not be counted against the Shares available for granting Awards under this Plan. Shares available under a shareholder approved equity plan of another corporation acquired in a corporate acquisition or merger (each, a “pre-existing plan”) may be used for post-transaction Awards under this Plan without counting against the Shares reserved in Section 4(a) provided that (i) the number of Shares available for grant is appropriately adjusted to reflect the relative value of the Shares and the shares subject to the acquired entity’s equity plan, (ii) any such Award is not made beyond the period when it could have been granted under the pre-existing plan absent such transaction, and (iii) any such Award is not granted to individuals who were employed by the Company or its Affiliates immediately before the closing of such transaction. The provisions of this Section 4(b)(iv) shall be interpreted consistent with the applicable listing requirements.

(v)         If any Shares covered by an Award are not purchased or are forfeited, or if an Award otherwise terminates without delivery of all or a portion of the Shares subject thereto (including the settlement of any Performance Awards in cash rather than Shares), then all or a portion, as applicable, of the number of Shares related to such Award shall not be counted against the Share limit above, but shall again be available for making Awards under the Plan.

(vi)        Notwithstanding anything herein to the contrary, Shares subject to an Award under the Plan may not again be made available for issuance under the Plan if such Shares are (x) Shares that were subject to an Option or a share-settled SAR and were not issued upon the net settlement or net exercise of such Option or SAR, (y) Shares delivered to or withheld by the Company or any Affiliate to pay the exercise price or the withholding taxes under an Option or SAR or (z) Shares repurchased on the open market with the proceeds of an Option exercise.

5.          Award Eligibility and Limitations.

(a)         General Rule. Awards under the Plan may be granted to any Eligible Person, provided that only Employees shall be eligible to receive Incentive Stock Options. Awards may be granted to Eligible Persons whether or not they hold or have held Awards previously granted under the Plan or otherwise granted or assumed by the Company. In selecting Eligible Persons for Awards, the Committee may take into consideration any factors it may deem relevant, including its views of the Eligible Person’s present and potential contributions to the success of the Company and its Affiliates.

A-9

(b)         Limitations. During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act:

(i)          The maximum number of Shares subject to Options or SARs that can be awarded under the Plan to any person eligible for an Award under this Section 5 is 1,000,000 Shares per Company fiscal year. If an Option or an SAR is cancelled after being granted, the number of Shares subject to the Option or SAR shall continue to be counted against this per person Share limitation after cancellation and, for this purpose, if the Option Price of an Option or the SAR Exercise Price of an SAR is reduced after the grant of the Option or SAR, the reduction shall be treated as a cancellation of the outstanding Option or SAR and the grant of a new Option or SAR, with the Shares covered by both the outstanding and the newly-granted Option or SAR counting against this per person Share limitation.

(ii)         The maximum number of Shares that can be awarded under the Plan, other than pursuant to an Option or SAR, to any person eligible for an Award under this Section 5 is 1,000,000 Shares per Company fiscal year.

(iii)        The maximum Performance Award opportunity that may be granted to any Participant in any Company fiscal year which relates to Performance Units and is payable in cash shall not exceed $10 million.

(iv)        The preceding limitations in this Section 5(b) are subject to adjustment as provided in Section 13 hereof.

6.          Stock Options.

(a)         Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants as shall be determined by the Committee in its discretion; provided, however, ISOs may only be granted to Employees. Subject to Sections 4 and 5 hereof, the Committee shall have complete discretion in determining the number of Shares subject to Options granted to each Participant.

(b)         ISO $100,000 Limitation. To the extent that the aggregate Fair Market Value of Shares (determined at the Grant Date) with respect to which Options designated as ISOs first become exercisable by a Participant in any calendar year (under this Plan and any other plan or agreement of the Company or any Affiliate) exceeds $100,000 (or such other amount as may be specified in Section 422 of the Code), such excess Options shall be treated as Non-qualified Stock Options.

(c)         Option Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the terms of the Option, including the Option Price, the duration of the Option, the number of Shares to which the Option pertains, any conditions imposed upon the exercisability of Options in the event of retirement, death, disability, or other termination of employment or service, and such other provisions as the Committee shall determine. The Award Agreement shall also specify whether the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, or a Non-qualified Stock Option, provided that the Options will be deemed Non-qualified Stock Options in the absence of such specification.

(d)         Option Price. The Option Price shall be determined by the Committee subject to the following limitations. In the case of an ISO, the Option Price shall not be less than 100% of the Fair Market Value of the Stock subject to the Option on the Grant Date, or in the case of any Optionee who is a Ten Percent Shareholder at the Grant Date, such Option Price shall not be less than 110% of the Fair Market Value of such Stock on the Grant Date. In the case of a NQSO, the Option Price shall not be less

A-10

than 100% of the Fair Market Value of the Stock subject to the Option on the Grant Date. In no event shall the Option Price of any Option be less than the par value of the Stock.

(e)         Duration of Options. Each Option shall expire as set forth in the Award Agreement, provided, however, that no Option shall be exercisable later than the tenth anniversary date of its Grant Date and no ISO which is granted to any Optionee who, at the time such ISO is granted, is a Ten Percent Shareholder, shall be exercisable after the fifth anniversary date from such Grant Date.

(f)          Exercisability. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as set forth in the Award Agreement, which need not be the same for all Participants. An Option may not be exercised for a fraction of a Share.

(g)         Method of Exercise. In order to exercise an option, the Optionee shall deliver to the Company a properly executed exercise notice, in the form approved by the Company, specifying the number of shares of Stock to be purchased, together with cash or a certified or bank cashier’s check payable to the order of the Company in the aggregate amount of the Option Price or a Participant may satisfy such aggregate Option Price by one or more of the following methods, in each case, to the extent permitted by applicable laws: (i) reducing the Shares issuable upon exercise by that number of Shares which have a value at the time of exercise equal to the Option Price, (ii) delivery of irrevocable instructions to a stockbroker to sell immediately some or all of the Shares acquired by exercise of the Option and to promptly deliver to the Company an amount of the sale proceeds sufficient to pay the aggregate Option Price, (iii) delivery of previously owned Shares having a Fair Market Value on the date of exercise equal to the aggregate Option Price, or (iii) any other form that is consistent with, or permitted by, applicable laws, regulations and rules. If the Optionee so requests, Shares purchased upon exercise of an Option may be issued in the name of the Optionee or another person provided that the Optionee pays any documentary, transfer or other tax applicable to such issuance. An Optionee shall have none of the rights of a shareholder until the date as of which Shares are issued to him. For purposes of the payment described in (ii) above, the exercise shall be deemed to have occurred on the date the Company receives the exercise notice, accompanied by the stockbroker instructions, unless the Committee determines otherwise.

(h)         Limitation on Exercise of Options. Notwithstanding the terms of any Award Agreement to the contrary, the Committee shall have the absolute discretion to impose a “blackout” period on the exercise of an Option with respect to any or all Participants (including those whose employment or service has terminated) to the extent that it determines that doing so is required or desirable in order to comply with applicable securities laws, provided that, if any blackout period occurs, the term of the Option shall not expire until the earlier of (i) 30 days after the blackout period ends or (ii) the tenth (10th) anniversary of the Grant Date, except that the period during which an ISO may be exercised shall not be extended if such extension would cause the ISO to cease to qualify as such under Section 422 of the Code and the period during which any Option may be exercised shall not be extended if the extension would cause the Option to cease being exempt from or in compliance with Section 409A of the Code. The Committee shall have the discretion to determine whether and to what extent the vesting of Options shall be tolled during any unpaid leave of absence; provided, however, that in the absence of such determination, vesting of Options shall be tolled during any such leave of absence approved by the Company; provided, further that there shall be no tolling of the vesting of an ISO if such tolling would cause the ISO to cease to meet the requirements of Section 422 of the Code, and tolling of the vesting of any Option shall not be effectuated if such tolling would cause the Option to cease being exempt from or cease being in compliance with Section 409A of the Code.

A-11

(i)          Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement, in the event a Participant’s employment or service with the Company and its Affiliates is terminated before exercise of an Option, the following rules shall apply:

(i)          Generally. An Option may be exercised after the date of the Participant’s termination of employment or service, as applicable, only to the extent that the Option was vested as of the date of such termination. Any Option not vested at the time of a Participant’s termination of employment or service, as applicable, shall terminate and the Shares underlying such Option shall revert to the Plan and become available for future Awards. A vested Option may be exercised within the periods described below in (ii) through (iv), but not after the expiration of the Term of such Option as set forth in the Award Agreement.

(ii)         Termination upon death or Disability, If a Participant’s employment or service, as applicable, is terminated due to his death or Disability, the Participant (or the Participant’s beneficiary) may exercise the vested portion of an Option for up to one year after the date of the Participant’s termination of employment or service, as applicable, but in no event later than the date of expiration of the Option.

(iii)        Termination for Cause, If the Participant’s employment or service, as applicable, is terminated by the Company or an Affiliate for Cause, any outstanding Option (whether vested or unvested) will immediately expire and be forfeited upon such termination.

(iv)        Other Terminations. Upon any other termination of employment or service, as applicable, other than for the reasons set forth in subsections (ii) or (iii) above or as set forth in Section 12, the Participant may exercise the vested portion of the Option for up to 90 days after the date of the Participant’s termination of employment or service, as applicable, but in no event later than the date of expiration of the Option.

7.          Stock Appreciation Rights.

(a)         Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, Stock Appreciation Rights may be granted to Participants, at the discretion of the Committee, in any of the following forms:

(i)          In connection with the grant, and exercisable in lieu, of Options (“Tandem SARs”);

(ii)         In connection with, and exercisable in addition to, the grant of Options (“Additive SARs”);

(iii)        Independent of the grant of Options (“Freestanding SARs”); or

(iv)        In any combination of the foregoing.

(b)         Exercise Price. The SAR Exercise Price shall be determined in the sole discretion of the Committee and set forth in the applicable Award Agreement, and shall be no less than 100% of the Fair Market Value of a Share on the Grant Date. The SAR Exercise Price of a Tandem SAR or an Additive SAR shall be the same as the Option Price of the Related Option.

(c)         Exercise of Tandem SARs. Tandem SARs may be exercised with respect to all or part of the Shares subject to the Related Option. The exercise of Tandem SARs shall cause a reduction in the

A-12

number of Shares subject to the Related Option equal to the number of Shares with respect to which the Tandem SAR is exercised. Conversely, the exercise, in whole or part, of a Related Option shall cause a reduction in the number of Shares subject to the Tandem SAR equal to the number of Shares with respect to which the Related Option is exercised. Shares with respect to which the Tandem SAR shall have been exercised may not be subject again to an Award under the Plan.

Notwithstanding any other provision of the Plan to the contrary, a Tandem SAR shall expire no later than the expiration of the Related Option and shall be exercisable only when and to the extent the Related Option is eligible to be exercised. In addition, if the Related Option is an ISO, a Tandem SAR shall be exercised for no more than 100% of the difference between the Fair Market Value of Shares subject to the Related Option at the time the Tandem SAR is exercised and the Option Price of the Related Option.

(d)         Exercise of Additive SARs. Additive SARs shall be deemed to be exercised upon, and in addition to, the exercise of the Related Option. The deemed exercise of Additive SARs shall not reduce the number of Shares with respect to which the Related Option remains unexercised.

(e)         Exercise of Freestanding SARs. Subject to Section 20 and the other provisions of the Plan, Freestanding SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon such SARs.

(f)         Other Conditions Applicable to SARs. In no event shall the term of any SAR granted under the Plan exceed ten years from the Grant Date. A SAR may be exercised only when the Fair Market Value of a Share exceeds either (i) the Fair Market Value per Share on the Grant Date in the case of a Freestanding SAR or (ii) the Option Price of the Related Option in the case of either a Tandem SAR or Additive SAR. A SAR shall be exercised by delivery to the Committee of a notice of exercise in the form prescribed by the Committee.

(g)         Payment Upon Exercise of SARs. Subject to the provisions of the Award Agreement, upon the exercise of a SAR, the Participant shall be entitled to receive, without any payment to the Company (other than required tax withholding amounts), an amount equal to the product of multiplying (i) the number of Shares with respect to which the SAR is exercised by (ii) an amount equal to the excess of (A) the Fair Market Value per Share on the date of exercise of the SAR over (B) SAR Exercise Price.

Payment to the Participant shall be made in Shares, valued at the Fair Market Value of the date of exercise, in cash, or a combination thereof, as the Committee may provide in the Award Agreement. To the extent required to satisfy the conditions of Rule 16b-3(e) or as otherwise provided in the Award Agreement, the Committee shall have the sole discretion to consent to or disapprove the election of any Participant to receive cash in full or partial settlement of an SAR. In cases where an election of settlement in cash must be consented to by the Committee, the Committee may consent to, or disapprove, such election at any time after such election, or within such period for taking action as is specified in the election, and failure to give consent shall be disapproval. Consent may be given in whole or as to a portion of the SAR exercised by the Participant. If the election to receive cash is disapproved in whole or in part, the SAR shall be deemed to have been exercised for Shares, or, if so specified in the notice of exercise and election, not to have been exercised to the extent the election to receive cash is disapproved.

8.          Restricted Stock and Restricted Stock Units.

(a)         Grant of Restricted Stock or Restricted Stock Units. Subject to the terms and provisions of the Plan, the Committee may grant awards of Restricted Stock or Restricted Stock Units under the Plan to such Participants and in such amounts as it shall determine. Participants receiving such awards shall

A-13

not be required to pay the Company therefor (except for applicable tax withholding) other than the rendering of services and/or until other conditions are satisfied as determined by the Committee in its sole discretion, unless required by applicable law. Any grant of an Award under this Section 8 or the vesting thereof may be further conditioned upon the attainment of Performance Measures established by the Committee in accordance with the applicable provisions of Section 9 regarding Performance Awards.

(b)         Award Agreement. Each award of Restricted Stock or Restricted Stock Units shall be evidenced by an Award Agreement that shall specify the additional terms of the Award, including the Period of Restriction, the conditions which must be satisfied prior to removal of the restriction, the number of Shares granted or relating to such award, and such other provisions as the Committee shall determine.

(c)         Other Restrictions. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions under applicable Federal or state securities laws, and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. Alternatively, the Committee, in its sole discretion, may have Shares of Restricted Stock issued without legend and held by the Secretary until such time that all restrictions are satisfied.

(d)         Restricted Stock Certificate Legend. In the event that the Committee elects to legend the certificates representing Restricted Stock, and in addition to any legends placed on certificates pursuant to Section 8(d) hereof, each certificate representing shares of Restricted Stock granted pursuant to the Plan shall bear the following legend:

“The sale or other transfer of the shares of Stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Amended & Restated Diplomat Pharmacy, Inc. 2014 Omnibus Incentive Plan, effective _______________, 2019, as amended, and in a Restricted Stock Agreement dated _______, 20___. A copy of the Plan and such Restricted Stock Agreement may be obtained from the Secretary of Diplomat Pharmacy, Inc.”

(e)         Removal of Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock shall become freely transferable by the Participant after the last day of the Period of Restriction and/or upon the satisfaction of other conditions as determined by the Committee in its sole discretion. Once the Shares are released from the restrictions, the Participant shall be entitled to have removed any legend that may have been placed on the certificates representing such Shares pursuant to Sections 8(c) and 8(d) hereof.

(f)         Rights of Holders of Shares of Restricted Stock. Unless the Committee otherwise provides in an Award Agreement, holders of Shares of Restricted Stock shall have the right to vote such Shares and the right to receive any dividends or distributions declared or paid with respect to such Shares. All distributions, if any, received by a Participant with respect to Restricted Shares as a result of any share split, share dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the original Award. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability as the Shares of Restricted Stock with respect to which they were distributed and any certificates for the Shares shall bear legends reflecting such restrictions (if and for so long as the certificates for the Restricted Stock with respect to which the Shares are distributed bear such legends).

A-14

(g)         Rights of Holders of Restricted Stock Units. Unless the Committee otherwise provides in an Award Agreement, holders of Restricted Stock. Units shall have no rights as shareholders of the Company. The Committee may provide in an Award Agreement evidencing a grant of Restricted Stock Units that the holder of such Restricted Stock Units shall be entitled to receive, upon the payment of a cash dividend or distribution on outstanding Shares, or at any time thereafter, a cash payment for each Restricted Stock Unit held equal to the per-share dividend or distribution, which payment would be paid in accordance with rules set forth by the Committee at such time as shall result in such payment being exempt from or in compliance with Section 409A of the Code. A holder of Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.

(h)         Settlement of Restricted Stock Units. Settlement of earned Restricted Stock Units will be made upon the date(s) determined by the Committee and set forth in the Award Agreement, which settlement date(s) shall cause the Restricted Stock Units to be exempt from or to comply with Section 409A of the Code. The Committee may, in its sole discretion, settle earned Restricted Stock Units in cash, Shares, or a combination of both.

(i)          Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement, in the event a Participant’s employment or service with the Company and its Affiliates is terminated before vesting of any Shares of Restricted Stock or of any Restricted Stock Units, any Share of Restricted Stock or any Restricted Stock Unit that is not vested at the time of a Participant’s termination of employment or service, as applicable, shall be forfeited. Upon forfeiture, the Participant shall have no further rights with respect to such Award, including the right to vote Restricted Stock, the right to receive dividends with respect to Restricted Stock or Restricted Stock Units, or the right to settlement of Restricted Stock Units.

9.          Performance Awards.

(a)         Grant of Performance Awards. Subject to the terms and provisions of the Plan, the Committee may authorize grants of Performance Awards to Participants in the form of either Performance Units or Performance Shares, and such Awards shall be evidenced by an Award Agreement. Each Award Agreement shall specify the additional terms of the Performance Awards, including the number of Performance Units or Performance Shares (subject to Section 13 hereof), the time and manner in which such Award shall be settled, the performance period to which it relates, the applicable Performance Measures, and such other terms and conditions as the Committee determines consistent with the terms of the Plan. Subject to Section 4 and 5 hereof, the Committee shall have complete discretion in determining the size of any Performance Award granted to Participants hereunder. Participants receiving Performance Awards shall not be required to pay the Corporation therefor (except for applicable tax withholding) unless required by applicable law.

(b)         Performance Period. The performance period with respect to each Performance Award shall be set forth in the Award Agreement, and may be subject to earlier termination in the event of a termination of employment or service.

(c)         Performance Measures. Each Award Agreement for Performance Awards shall specify the Performance Measures that must be achieved by the Participant and a formula for determining the settlement amount to be paid (in the form provided in Section 9(f) hereof) if the Performance Measures are achieved. The Committee may establish a pool that will be funded based on the achievement of Performance Measures or a percentage of any of the underlying business criteria, provided that if such design feature is intended to apply to Covered Employees, such feature must meet the requirements of

A-15

Section 162(m) of the Code if such Performance Award is intended to qualify as “qualified performance based compensation” under such provision. In addition, the Committee may exercise negative discretion to reduce the amount of, or eliminate, a Performance Award that otherwise would be payable pursuant to this Section 9, but may not increase any amount payable under a Performance Award granted to a Covered Employee if intended to qualify as “qualified performance-based compensation” for purposes of Section 162(m) of the Code.

(d)         Adjustments relating to Performance Measures. The Committee is authorized to exclude one or more of the following items in establishing Performance Measures for Performance Awards: (1) extraordinary items outside the ordinary course of business, including acquisitions, dispositions, or restructurings and related expenses; (2) accounting policy changes required by the U.S. Securities and Exchange Commission or the U.S. Financial Accounting Standards Board; (3) the effects of any statutory adjustments to corporate tax rates; (4) the effect of any change in the outstanding shares of Stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common shareholders other than regular cash dividends; and (5) any other objective criteria established by the Committee. Notwithstanding the foregoing, any determinations by the Committee to exclude such items with respect to a Performance Award granted to a Covered Employee and intended to constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code must be made before the first to occur of 90 days after the commencement of the period of service to which the performance goals relate and the lapse of 25% of the period of service to which the performance goals relate.

(e)         Performance Awards Granted to Designated Covered Employees. If and to the extent that the Committee determines that a Performance Award to be granted to a Participant who is designated by the Committee as likely to be a Covered Employee should qualify as “qualified performance-based compensation” for purposes of Section 162(m) of the Code, the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of pre-established, objective and nondiscretionary performance goals and other terms set forth in this Section 9(e).

(i)          Performance Goals Generally. The performance goals for such Performance Awards shall consist of one or more Performance Measures, as specified by the Committee and meet the requirements of this Section 9(e). Performance goals shall be objective and shall otherwise meet the requirements of Section 162(m) of the Code, including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being “substantially uncertain.” The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants.

(ii)         Timing For Establishing Performance Goals. Performance goals shall be established, in writing, not later than the first to occur of 90 days after the commencement of the period of service to which the performance goals relate and the lapse of 25% of the period of service to which the performance goals relate, or at such other date as may be required for the Award to constitute “qualified performance-based compensation” under Section 162(m) of the Code.

(iii)       Committee Certification. Prior to the settlement of any Award that is contingent on the achievement of one or more Performance Measures, if required in order for the Award to be “qualified performance-based compensation” under Section 162(m) of the Code, the Committee shall certify in writing that the applicable performance goals and any other material terms of the Award were in

A-16

fact satisfied. For purposes of this Section 9(e)(iv), approved minutes of the Committee shall be adequate written certification.

(iv)        Status of Performance Awards Under Section 162(m) of the Code. It is the intent of the Company that Performance Awards under this Section 9(e) granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Section 162(m) of the Code shall, if so designated by the Committee, constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code. Accordingly, the terms of this Section 9(e), including the definitions of Covered Employee and other terms used herein, shall be interpreted in a manner consistent with Section 162(m) of the Code. The foregoing notwithstanding, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of Performance Awards, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any Award Agreement relating to such Performance Awards does not comply or is inconsistent with the requirements of Section 162(m) of the Code, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.

(f)          Form of Payment. Payment of the amount to which a Participant shall be entitled upon the settlement of a Performance Award shall be made in cash, Stock, other property or a combination thereof as set forth in the Award Agreement. Payment may be made in a lump sum or installments as prescribed by the Committee. After the date of grant of a Performance Award, the Committee may change the originally prescribed payment date(s) applicable to the Award, provided that (i) such change does not cause the Award to cease to be exempt from or to fail to comply with Section 409A of the Code, (ii) if the payment date(s) is accelerated, the amount payable must be discounted to reasonably reflect the time value of money, and (iii) if the payment date(s) is deferred or further deferred, any increase in the amount originally payable my not exceed an amount reflecting a reasonable rate of interest or the performance of an actual investment (whether or not assets associated with the amount originally owed are actually invested therein) such that the amount payable to the Participant at the later date(s) shall reflect the actual rate of return of a specific investment (including any decrease as well as any increase in the value of an investment).

(g)         Dividends or Dividend Equivalent Rights for Performance Awards. Notwithstanding anything to the contrary in the Plan, the right to receive dividends, dividend equivalent rights or distributions with respect to a Performance Award shall only be earned by a Participant if and to the extent that the underlying Performance Award is earned by the Participant, and shall be paid at the same time and in the same manner as the underlying Performance Award. A Participant may not be granted the right to receive dividend equivalents that is contingent upon exercise of an Option or an SAR, unless (i) in the case of a Participant who is a Covered Employee, such right would not cause the Option or SAR to fail to be “qualified performance-based compensation” within the meaning of Section 162(m) of the Code if the Award is intended to qualify as such, (ii) such right would not cause the Option or SAR to fail to be exempt from or in compliance with Section 409A of the Code, and (iii) in the case of an Option intended to be an ISO, such right would not prevent the Option from qualifying as an ISO.

(h)         Voting Rights. During the performance and vesting periods, Participants in whose name Performance Shares are granted hereunder may not exercise voting rights with respect to those Shares.

(i)          Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement, in the event a Participant’s employment or service with the Company and its Affiliates is terminated before the Performance Shares or Performance Units are earned and vested, such Performance Shares and/or Performance Units shall be forfeited.

A-17

10.        Other Stock and Stock Unit Awards.

(a)         Grant. The Committee is authorized to grant to Participants, either alone or in addition to other Awards made under the Plan, Other Stock and Stock Unit Awards to be issued at such times, subject to or based upon achievement of such performance or other goals and on such other terms and conditions as the Committee shall deem appropriate and specify in the Award Agreement relating thereto, which need not be the same with respect to each Participant. Stock or other securities granted pursuant to Other Stock and Stock Unit Awards may be issued for no cash consideration or for such minimum consideration as may be required by applicable law.

(b)         Termination of Service. Unless otherwise set forth in the Award agreement, if, with respect to any Other Stock or Stock Unit Award, a Participant’s termination of employment or service, as applicable, occurs before the end of any period of restriction or non-transfer, or the vesting date applicable to such Award (or the applicable portion of such Award), or any performance goals or other vesting conditions are not achieved in whole or in part (as determined by the Committee) by the end of the period for measuring such goals and conditions, then all such then unvested and/or unearned Other Stock or Stock Unit Awards shall be forfeited by the Participant.

11.        Effect of Termination of Employment or Service on Awards; Forfeiture.

(a)         Generally. Subject to Section 3(b) hereof, the Committee may provide in any Award Agreement the circumstances in which Awards shall be exercised, vested, paid or forfeited in the event a Participant’s service or employment with the Company or an Affiliate terminates prior to the end of a performance period, Period of Restriction or the exercise, vesting or settlement of such Award. Notwithstanding any other provision of this Plan to the contrary, in the event of a Participant’s termination of employment or service (including by reason of death, Disability, or Retirement), or business divestiture, leave of absence approved by the Company, or in the event of hardship or other special circumstances, the Committee may in its sole discretion take any action that it deems to be equitable under the circumstances or in the best interests of the Company, including, without limitation, waiving or modifying any limitation or requirement with respect to any Award under this Plan. However, any such actions taken by the Committee shall be subject to Section 3(b) hereof and shall comply with or be exempt from the requirements of Code Sections 409A and 162(m) (and, with the latter, only to the extent such award is to a Covered Employee and intended to constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code).

(b)         Transfers between Employers. Awards under the Plan shall not be affected by the change of a Participant’s status within or among the Company and any Affiliate, so long as the Participant continues to be employed by or provide services to the Company or an Affiliate. For purposes of the Plan and any Award hereunder, if an entity that a Participant is employed by or otherwise providing services to ceases to be an Affiliate, a Participant shall be deemed to terminate employment or service, as applicable, on the date of the entity’s change in status, unless the Participant continues as a service provider in respect of the Company or another Affiliate (after giving effect to the change in status), or unless otherwise provided for in the documentation governing the transaction by which the entity ceases to be an Affiliate.

12.        Change in Control. Except as otherwise provided in an Award Agreement, in the event of a Change in Control or immediately prior to a Change in Control of the Company, the Committee may, but is not obligated to, without Participant consent: (A) by written notice to each holder of an outstanding Option or Stock Appreciation Right provide that such holder’s Options or Stock Appreciation Rights shall be cancelled unless exercised within such period as the Committee shall determine after the date of such notice; (B) provide for the termination or cancellation of an Option or Stock Appreciation Right (whether or not such Option or Stock Appreciation Right is otherwise exercisable) in exchange for an amount in cash, securities and/or other property (or a combination thereof) with an aggregate value equal to: (x) the

A-18

excess, if any, of the aggregate Fair Market Value as of the date of such Change in Control of the Common Stock then subject to the Option or Stock Appreciation Right over the product of the number of shares of Common Stock then subject to the Option or Stock Appreciation Right multiplied by the per share exercise price, less (y) an amount equal to the federal, state, local and foreign taxes, if any, required to be withheld, collected, accounted for or paid as a result of such payment (“Withholding Taxes”); (C) provide for the cancellation of outstanding Other Stock and Stock Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Share Awards, or other Awards (whether or not such Awards are vested or restricted) in exchange for payments of cash, securities and/or other property (or a combination thereof) having an aggregate value equal to the value of such Award, as determined by the Committee, in its sole discretion (less Withholding Taxes); (D) provide for the payment (less Withholding Taxes) of a Participant’s Award including Performance Measures at target level and/or based upon performance for the abbreviated performance period ending with the Change in Control; (E) substitute other property (including, without limitation, cash or other securities of the Company and securities of an entity other than the Company); (F) for purposes of any Section 16 Persons, to conform any release or acceleration of restrictions or conditions in accordance with Rule 16b-3; and/or (G) make any other adjustments, or take other reasonable action, as the Committee deems appropriate provided that no such other action impairs any rights that a Participant has under the Plan without such Participant’s consent. Notwithstanding any of the foregoing, the Committee has the discretion to require that a Participant experience a termination of employment or service, as of the Change of Control or within some period thereafter, or satisfy other conditions, before taking any of the actions described in this Section 12.

13.        Adjustment for Changes in Stock Subject to Plan and Other Events. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering, or any other change in the corporate structure or Shares of the Company, the Committee shall make such adjustments, if any, as it deems appropriate in the number and kind of Shares subject to the Plan, in the number and kind of Shares covered by outstanding Awards, in the Option price per Share of outstanding Options or the SAR Exercise Price of outstanding SARs, and in the maximum number of Shares that may be issued to any Participant pursuant to Awards made under the Plan. If the adjustment would produce fractional Shares with respect to any then outstanding Awards, the Committee may adjust appropriately the number of Shares covered by the outstanding Awards so as to eliminate the fractional Shares. Any adjustment made under this Section 13 shall be done in a manner that complies with or is exempt from Section 409A of the Code, and any adjustments made with respect to Incentive Stock Options shall comply with and not cause loss of qualification of Incentive Stock Options under Sections 422 and 424 of the Code.

14.        Transferability of Awards.

(a)         Except as provided below, no Award (other than Other Stock and Stock Unit Awards representing unrestricted Shares) and no right under the Plan, contingent or otherwise, shall be subject to any encumbrance, pledge or charge of any nature or shall be assignable, alienable, saleable, or transferable by a Participant, in each case, until the termination of the applicable Period of Restriction or satisfaction of the applicable Performance Measures, or earlier satisfaction of such other conditions as may be specified by the Committee in its sole discretion in this Plan or an Award Agreement, except (i) that a beneficiary may be designated in respect of the Award in the event of the death of the holder of the Award and except, also, that if the beneficiary shall be the executor or administrator of the estate of the holder of the Award, any rights in respect to such Award may be transferred to the person or persons or entity (including a trust) entitled thereto under the will of the holder of such Award or under the laws relating to descent and distribution, including the ability to exercise such Award to the extent and during the period Grantee was allowed to exercise an Award at the date of Grantee’s death, and (ii) to the extent the Committee otherwise allows a Participant to transfer an Award as set forth in this Plan or an Award Agreement. All rights with respect to any Award granted to a Participant under the Plan shall inure during

A-19

his or her lifetime only to or for the benefit of such Participant or his or her guardian or legal representative and such Award may be exercised during the life of the Participant only by the Participant or the Participant’s guardian or legal representative. Where transfer is permitted, references to “Eligible Person” and “Participant” shall be construed, as the Committee deems appropriate, to include any permitted transferee to whom the Award is transferred.

(b)         To the extent the Committee allows for the transfer of any Award pursuant to Section 14(a)(ii) above, such transfer shall only be permitted to the extent that (i) it is consistent with applicable laws and registration requirements; (ii) no consideration is paid for the transfer and (iii) for Awards granted to Section 16 Persons, such transferability would not result in the loss of any Rule 16b-3 exemptions for nontransferable Awards granted or to be granted under the Plan; provided, that, in the absence of such provisions in an Award Agreement, the Award will be non-transferable except as provided in Section 14(a)(i) hereof. The transferee of an Award shall be bound by and subject to all terms, conditions and restrictions of the Plan, the Award Agreement and the Award prior to its transfer and shall execute an agreement satisfactory to the Company evidencing its agreement with such terms, conditions and restrictions; and provided further that each such Participant shall remain bound by the terms and conditions of the Plan, the Award Agreement and the Award. In addition, the Committee may impose on any transferable Award and on Stock issued upon the exercise or vesting of an Award such limitations and conditions as the Committee deems appropriate.

15.        Other Terms and Conditions. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant, vesting, exercise or settlement of Awards or issuance of Shares in connection therewith, as it deems advisable.

16.        Effectiveness of Plan. This Plan will be effective upon the approval by a majority of the votes cast by the shareholders of the Company at a meeting of shareholders duly called and held for such purpose, by written consent or as otherwise permitted by the Company’s articles of incorporation and bylaws, within twelve months of adoption of this Plan by the Board. Only Options may be granted prior to such shareholder approval, and such Options may not be exercisable prior to such shareholder approval.

17.        Amendment, Modification, and Termination of Plan.

(a)         Amendment, Modification and Termination. Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan shall terminate on, and no Award shall be granted hereunder after the close of business on the next day preceding the tenth anniversary of the date the Board adopts the Plan. The Board may terminate, amend, or modify the Plan in its discretion, and any amendment or modification may be without shareholder approval except to the extent that such approval is required by the Code, pursuant to the rules under Section 16 of the Exchange Act, by any national securities exchange or system on which the Stock is then listed or reported, by any regulatory body having jurisdiction with respect thereto, or under any other applicable laws, rules, or regulations. The Board is specifically authorized to amend the Plan and any Award Agreement and take such other action as it deems necessary or appropriate to comply with or be exempt from Sections 162(m), 422 and 409A of the Code, or with Rule 16b-3.

(b)         Awards Previously Granted. No termination, amendment, or modification of the Plan, shall adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant.

18.        Withholding. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person

A-20

under this Plan, it shall be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of all such taxes required to be withheld. At the discretion of the Committee, such arrangements may include relinquishment of a portion of such benefit and any form of cashless satisfaction of the withholding obligation permitted by law. The Fair Market Value of any Shares (determined at the date of withholding) withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined using the applicable minimum statutory tax withholding rates. For the avoidance of doubt, the Participants shall have no legal right to own or receive any Shares withheld from delivery for such purpose, and otherwise shall have no rights in respect of such Shares whether as a shareholder or otherwise. The Company shall have the power and the right to deduct or withhold from any other payments due to a Participant, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any grant, exercise, vesting, payment or other event under or as a result of this Plan.

19.        Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

20.        Section 409A of the Code.

(a)         Generally. This Plan and any Award granted hereunder is intended to comply with, or be exempt from, the provisions of Section 409A of the Code, and shall be interpreted and administered in a manner consistent with that intention. Under no circumstances, however, shall the Company or an Affiliate be liable to a Participant for any tax, interest or penalty imposed upon the Participant, or for any damage suffered by a Participant, on account of any Award to the Participant not being exempt from or not complying with Section 409A of the Code. In the event installment payments are owing to a Participant under an Award Agreement, each installment shall be treated as a separate payment and not part of a single aggregate payment for purposes of Section 409A of the Code.

(b)         409A Awards. The provisions of this Section 20 shall apply to any 409A Award or any portion an Award that is or becomes subject to Section 409A of the Code, notwithstanding any provision to the contrary contained in the Plan or the Award Agreement applicable to such Award. 409A Awards include, without limitation:

(i)          Any Non-qualified Stock Option or SAR that permits the deferral of compensation other than the deferral of recognition of income until the exercise of the Award; and

(ii)         Unless otherwise exempt from Section 409A of the Code, any other Award that provides by its terms for settlement of all or any portion of the Award on one or more dates following the Short-Term Deferral Period (as defined below).

Subject to any applicable U.S. Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance, the term “Short-Term Deferral Period” means the period ending on the later of (i) the date that is 21/2 months from the end of the Company’s fiscal year in which the applicable portion of the Award is no longer subject to a “substantial risk of forfeiture”, or (ii) the date that is 21/2 months from the end of the Participant’s taxable year in which the applicable portion of the Award is no longer subject to a substantial risk of forfeiture. For this purpose, the term “substantial risk of forfeiture” shall have the meaning set forth in any applicable U.S. Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance.

A-21

(c)         Subsequent Elections. Any 409A Award which permits a subsequent election to delay the payment or change the form of payment in settlement of such Award shall comply with the following requirements:

(i)          No subsequent election may take effect until at least 12 months after the date on which the subsequent election is made;

(ii)         Each subsequent election related to a payment in settlement of an Award (other than upon the Participant’s death or Disability or upon an Unforeseeable Emergency) must result in a delay of the payment for a period of not less than five years from the date such payment would otherwise have been made; and

(iii)        No subsequent election related to a payment to be made at a specified time shall be made less than twelve months prior to such time.

(d)         Payments of 409A Awards. Except as otherwise permitted by the Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance, no payment in settlement of a 409A Award may be made earlier than:

(i)          Separation from Service (as determined pursuant to Treasury Regulations or other applicable guidance);

(ii)         The date the Participant becomes Disabled;

(iii)        Death;

(iv)        A specified time (or pursuant to a fixed schedule) that is either (i) specified by the Committee upon the grant of an Award and set forth in the Award Agreement evidencing such Award, or (ii) specified by the Participant in an Election complying with the requirements of Section 20(c) hereof, as applicable;

(v)         To the extent provided by Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance, a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company; or

(vi)        The occurrence of an “Unforeseeable Emergency” (as defined in Section 409A of the Code).

(e)         Six Month Delay. Notwithstanding anything else to the contrary in the Plan, to the extent that a Participant is a “Specified Employee” (as determined in accordance with the requirements of Section 409A of the Code), no payment on account of the Participant’s Separation from Service in settlement of a 409A Award may be made before the date which is six months after such Participant’s date of Separation from Service, or, if earlier, the date of the Participant’s death.

(f)         Unforeseeable Emergency. The Committee shall have the authority to provide in the Award Agreement evidencing any 409A Award for payment, or otherwise permit payment, in settlement of all or a portion of such Award in the event that a Participant establishes, to the satisfaction of the Committee, the occurrence of an Unforeseeable Emergency. In such event, the amount(s) distributed with respect to such Unforeseeable Emergency cannot exceed the amounts necessary to satisfy such Unforeseeable Emergency, plus amounts necessary to pay taxes reasonably anticipated as a result of such payment(s), after taking into account the extent to which such hardship is or may be relieved through

A-22

reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). All payments with respect to an Unforeseeable Emergency may be made in a lump sum as soon as practicable following the Committee’s determination that an Unforeseeable Emergency has occurred. The occurrence of an Unforeseeable Emergency shall be judged and determined by the Committee. The Committee’s decision with respect to whether an Unforeseeable Emergency has occurred and the manner in which, if at all, the payment in settlement of an Award shall be altered or modified, shall be final, conclusive, and not subject to approval or appeal.

(g)         No Acceleration of Payments. Notwithstanding anything to the contrary in this Plan, this Plan does not permit (and no Award Agreement may permit) the acceleration of the time or schedule of any payment under this Plan in settlement of a 409A Award, unless and to the extent permitted by Section 409A of the Code and/or Treasury Regulations promulgated pursuant to Section 409A of the Code or other applicable guidance.

21.        General.

(a)         Requirements of Law. The granting of Awards and the issuance of Shares under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies as may be required. No Shares shall be issued or transferred pursuant to this Plan unless and until all legal requirements applicable to such issuance or transfer have, in the opinion of counsel to the Company, been complied with. In connection with any such issuance or transfer, the person acquiring the Shares shall, if requested by the Company, give assurances satisfactory to counsel to the Company in respect to such matters as the Company may deem desirable to assure compliance with all applicable legal requirements.

(b)         Effect of the Plan. The establishment of the Plan shall not confer upon any Participant any legal or equitable right against the Company, any Affiliate or the Committee or the Board, except as expressly provided in the Plan. Neither the Plan nor any Award Agreement shall constitute a contract of employment or service between the Company or any of its Affiliates and any Participant. Participation in the Plan shall not give any Participant any right to be retained in the employment or service of the Company or any of its Affiliates or to provide service on the Board.

(c)         Nonexclusivity of the Plan. Neither the adoption of the Plan nor the submission of the Plan to the Company’s shareholders for approval shall be construed as creating any limitations upon the right and authority of the Board to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Board in its discretion determines desirable, including, without limitation, the granting of options otherwise than under the Plan.

(d)         Not Benefit Plan Compensation. Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of Participant’s compensation for purposes of determining the Participant’s benefits under any other benefit plans or arrangements provided by the Company or an Affiliate, except where the Committee expressly provides otherwise in writing or if otherwise required by law.

(e)         Parachute Limitations. Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Participant with the Company or any Affiliate, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an “Other Agreement”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of

A-23

compensation to the Participant (including groups or classes of Participants or beneficiaries of which the Participant is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Participant (a “Benefit Arrangement”), if the Participant is a “disqualified individual,” as defined in Section 280G(c) of the Code, any Options, SARs, Restricted Stock, Performance Shares, Performance Units or other Awards hereunder held by that Participant and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Participant under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Participant under this Plan to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect (a “Parachute Payment”) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Participant from the Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Participant without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Participant under any Other Agreement or any Benefit Arrangement would cause the Participant to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Participant as described in clause (ii) of the preceding sentence, then the Participant shall have the right, in the Participant’s sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Participant under this Plan be deemed to be a Parachute Payment, provided that any such payment or benefit that is excluded from the coverage of Section 409A of the Code shall be reduced or eliminated prior to the reduction or elimination of any benefit that is related to a 409A Award.

(f)         Creditors. The interests of any Participant under the Plan or any Award Agreement shall not be subject to the claims of creditors and may not, in any way, be assigned, alienated, or encumbered.

(g)         Governing Law. The Plan, and all Award Agreements made pursuant hereto, shall be governed, construed, and administered in accordance with and governed by the laws of the State of Michigan (regardless of the laws that might otherwise govern under applicable principles of conflicts of laws of such jurisdiction or any other jurisdiction).

(h)         Section 16 of the Exchange Act. It is the intent of the Company that Awards and transactions permitted by Awards be interpreted in a manner that, in the case of Participants who are or may be subject to Section 16 of the Exchange Act, qualify, to the maximum extent compatible with the express terms of the Awards, for the exemption from liability provided in Rule 16b-3 promulgated under the Exchange Act. The Company shall have no liability to any Participant or other person for Section 16 consequences of Awards or events in connection with Awards if an Award or related event does not so qualify.

(i)          Changes in Laws, Rules or Regulations. References in the Plan to any law, rule or regulation shall include a reference to any corresponding rule (or number redesignation) of any amendments or restatements to such law, rule or regulation adopted after the effective date of the Plan’s adoption.

(j)          Headings. Headings are given to the sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

A-24

(k)         Number and Gender. Under the Plan, the singular form of a word shall include the plural form, the masculine gender shall include the feminine gender and similar interpretations shall prevail as the context requires.

(l)          Severability. In the event that any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

(m)        Other Actions. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including but not by way of limitation, the right of the Company to grant or issue options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation, or association.

(n)         Complete Statement of Plan. This document is a complete statement of the Plan. * * *

A-25

EX-10.2

Exhibit 10.2

DIPLOMAT PHARMACY, INC.

FORM OF OMNIBUS AMENDMENT TO AWARD AGREEMENTS

This Omnibus Amendment to Award Agreements (“Amendment”) is made and entered into, as of the date set forth on the signature page hereto, by and between Diplomat Pharmacy, Inc., a Michigan corporation (“Company”), and __________ (“Grantee”).

RECITALS

A.    The Company has established and maintains the Amended and Restated Diplomat Pharmacy, Inc. 2014 Omnibus Incentive Plan (the “Plan”) in order to provide incentives and awards to employees, directors, consultants and advisors of the Company and its Affiliates, by encouraging their ownership of Stock and to aid the Company and its Affiliates in retaining such employees, directors, consultants and advisors.

B.    The Company amended and restated the Plan effective as of _________, 2019, and it desires to amend prior Award Agreements for specified Grantees to give effect to the terms and conditions of the Plan, as amended and restated.

C.     The Company has adopted various forms of Award Agreements as follows:

i.      Form of Stock Option Award Agreement (Time-Based) (2014 Omnibus Incentive Plan), approved September 15, 2014, December 5, 2016 and March 27, 2018 (collectively, the “Form of Stock Option Award Agreements”);

ii.     Form of Stock Option Award Agreement (Performance-Based) (2014 Omnibus Incentive Plan), approved June 5, 2015;

iii.    Form of Restricted Stock Award Agreement (2014 Omnibus Incentive Plan), approved September 15, 2014;

iv.    Form of Restricted Stock Award Agreement (Non-Employee Directors) (2014 Omnibus Incentive Plan), approved September 15, 2014;

v.     Form of Restricted Stock Unit Award Agreement (Time-Based), approved April 4, 2017;

vi.    Form of Restricted Stock Unit Award Agreement (Performance-Based), approved March 27, 2018;

vii.   Form of Restricted Stock Unit Award Agreement (Performance-Based) Sign-On Inducement Equity Award, approved April 24, 2018;

viii.  Form of Restricted Stock Unit Award Agreement Sign-On Inducement Equity Award, approved April 24, 2018;

ix.    Form of Restricted Stock Unit Award Agreement (Performance-Based) Make-Whole Inducement Equity Award, approved April 24, 2018;

x.     Form of Restricted Stock Unit Award Agreement Make-Whole Inducement Equity Award, approved April 24, 2018; and

1

xi.    Form of Stock Option Award Agreement Make-Whole Inducement Equity Award, approved April 24, 2018.

D.    Grantee is a Participant subject to the terms of the Plan and has been granted one or more Awards evidenced by one or more Award Agreements.

E.     Grantee and Company desire to amend certain terms and conditions of the Award Agreements, as applicable, as more particularly set forth herein.

F.     All capitalized terms used but not defined herein shall have the meanings ascribed to those terms by the Plan or Award Agreement, as applicable.

AMENDMENT

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree that the following provisions of each form of Award Agreement,  as applicable, are amended as follows:

1.     Form of Stock Option Award Agreements. Section 7 is deleted in its entirety and replaced as follows:

“Section 7 - Non-Transferability of Option. The Option is personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the Option is not transferable by Grantee.”

2.     Form of Stock Option Award Agreement (Performance-Based) (2014 Omnibus Incentive Plan). Section 7 is deleted in its entirety and replaced as follows:

“Section 7 - Non-Transferability of Option. The Option is personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the Option is not transferable by Grantee.”

3.     Form of Restricted Stock Award Agreement (2014 Omnibus Incentive Plan). Section 2(a) is deleted in its entirety and replaced as follows:

“(a) Shares of Restricted Stock that have not yet become vested under Paragraph 3 of this Agreement may not be transferred by Grantee, unless permitted otherwise in the discretion of the Committee or as provided under the Plan.”

4.     Form of Restricted Stock Award Agreement (Non-Employee Directors) (2014 Omnibus Incentive Plan). Section 2(a) is deleted in its entirety and replaced as follows:

“(a) Shares of Restricted Stock that have not yet become vested under Paragraph 3 of this Agreement may not be transferred by Grantee, unless permitted otherwise in the discretion of the Committee or as provided under the Plan.”

5.     Form of Restricted Stock Unit Award Agreement (Time-Based). Section 6 is deleted in its entirety and replaced as follows:

Section 6 - Non-Transferability of RSUs. The RSUs are personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the RSUs are not transferable by Grantee.

2

6.     Form of Restricted Stock Unit Award Agreement (Performance-Based). Section 9 is deleted in its entirety and replaced as follows:

Section 9 - Non-Transferability of RSUs. The RSUs are personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the RSUs are not transferable by Grantee.

7.     Form of Restricted Stock Unit Award Agreement (Performance-Based) Sign-On Inducement Equity Award. Section 9 is deleted in its entirety and replaced as follows:

Section 9 - Non-Transferability of RSUs. The RSUs are personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the RSUs are not transferable by Grantee.

8.     Form of Restricted Stock Unit Award Agreement Sign-On Inducement Equity Award. Section 6 is deleted in its entirety and replaced as follows:

Section 6 - Non-Transferability of RSUs. The RSUs are personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the RSUs are not transferable by Grantee.

9.     Form of Restricted Stock Unit Award Agreement (Performance-Based) Make-Whole Inducement Equity Award. Section 9 is deleted in its entirety and replaced as follows:

Section 9 - Non-Transferability of RSUs. The RSUs are personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the RSUs are not transferable by Grantee.

10.   Form of Restricted Stock Unit Award Agreement Make-Whole Inducement Equity Award. Section 6 is deleted in its entirety and replaced as follows:

Section 6 - Non-Transferability of RSUs. The RSUs are personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the RSUs are not transferable by Grantee.

11.   Form of Stock Option Award Agreement Make-Whole Inducement Equity Award. Section 7 is deleted in its entirety and replaced as follows:

“Section 7 - Non-Transferability of Option. The Option is personal to Grantee. Unless permitted otherwise in the discretion of the Committee or as provided under the Plan, the Option is not transferable by Grantee.”

12.   Except as expressly provided for in this Amendment, no other term or provision of any form of Award Agreement is amended or modified in any respect and such other terms and provisions shall continue in full force and effect.

[Signature page follows]

3

Diplomat Pharmacy, Inc.

By_______________________________

Name:____________________________

Its: ________________

The undersigned hereby acknowledges having read this Amendment agrees to be bound by all provisions set forth herein.

Dated as of _______________________________	GRANTEE:__________________________
	Name:_______________________________

4

EX-31.1

Exhibit 31.1

CHIEF EXECUTIVE OFFICER’S 302 CERTIFICATION

I, Brian T. Griffin, certify that:

1.I have reviewed this quarterly report on Form 10‑Q of Diplomat Pharmacy, Inc. (the “Company”) for the quarter ended September 30, 2019;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the Company and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 12, 2019
	By:	/s/ BRIAN T. GRIFFIN
		Brian T. Griffin
		Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

PRINCIPAL FINANCIAL OFFICER’S 302 CERTIFICATION

I, Daniel Davison, certify that:

1.I have reviewed this quarterly report on Form 10‑Q of Diplomat Pharmacy, Inc. (the “Company”) for the quarter ended September 30, 2019;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a‑15(f) and 15d‑15(f)) for the Company and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: November 12, 2019
	By:	/s/ DANIEL DAVISON
		Daniel Davison
		Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Diplomat Pharmacy, Inc. (the “Company”) on Form 10‑Q for the quarterly period ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian T. Griffin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 12, 2019
	By:	/s/ BRIAN T. GRIFFIN
		Brian T. Griffin
		Chief Executive Officer
		(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Diplomat Pharmacy, Inc. (the “Company”) on Form 10‑Q for the quarterly period ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel Davison, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 12, 2019
	By:	/s/ DANIEL DAVISON
		Daniel Davison
		Chief Financial Officer
		(Principal Financial Officer)

XML

GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS - Definite-lived intangible assets (Details) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended		12 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
DEFINITE-LIVED INTANGIBLE ASSETS
Gross Carrying Amount	$ 307,779			$ 307,779		$ 384,039
Accumulated Amortization	(151,981)			(151,981)		(143,229)
Net Carrying Amount	155,798			155,798		$ 240,810
Amortization expense	11,962		$ 17,190	39,520	$ 51,360
Impairment	34,173	$ 17,979		$ 52,152
Customer relationships
DEFINITE-LIVED INTANGIBLE ASSETS
Weighted Average Amortization Period (in years)				9 years 3 months 18 days		9 years 9 months 18 days
Gross Carrying Amount	52,000			$ 52,000		$ 100,200
Accumulated Amortization						(1,238)
Net Carrying Amount	52,000			$ 52,000		$ 98,962
Patient relationships
DEFINITE-LIVED INTANGIBLE ASSETS
Weighted Average Amortization Period (in years)				5 years 3 months 18 days		5 years 10 months 24 days
Gross Carrying Amount	174,500			$ 174,500		$ 170,100
Accumulated Amortization	(81,535)			(81,535)		(67,964)
Net Carrying Amount	92,965			$ 92,965		$ 102,136
Trade names and trademarks
DEFINITE-LIVED INTANGIBLE ASSETS
Weighted Average Amortization Period (in years)				2 years 8 months 12 days		1 year 9 months 18 days
Gross Carrying Amount	29,620			$ 29,620		$ 30,650
Accumulated Amortization	(25,171)			(25,171)		(20,270)
Net Carrying Amount	4,449			$ 4,449		$ 10,380
Non-compete employment agreements
DEFINITE-LIVED INTANGIBLE ASSETS
Weighted Average Amortization Period (in years)				1 year 3 months 18 days		1 year 7 months 6 days
Gross Carrying Amount	51,659			$ 51,659		$ 61,389
Accumulated Amortization	(45,275)			(45,275)		(44,100)
Net Carrying Amount	$ 6,384			$ 6,384		$ 17,289
Physician relationships
DEFINITE-LIVED INTANGIBLE ASSETS
Weighted Average Amortization Period (in years)						4 years 9 months 18 days
Gross Carrying Amount						$ 21,700
Accumulated Amortization						(9,657)
Net Carrying Amount						$ 12,043

XML

FAIR VALUE MEASUREMENTS - Recurring Basis (Details) - Recurring - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Contingent consideration
FAIR VALUE MEASUREMENTS
Asset (Liability)	$ (10,471)	$ (6,895)
Interest rate swaps
FAIR VALUE MEASUREMENTS
Asset (Liability)	(10,084)	(4,292)
Level 2 | Interest rate swaps
FAIR VALUE MEASUREMENTS
Asset (Liability)	(10,084)	(4,292)
Level 3 | Contingent consideration
FAIR VALUE MEASUREMENTS
Asset (Liability)	$ (10,471)	$ (6,895)

XML

CONTINGENCIES (Details) $ in Thousands	Apr. 22, 2019 USD ($)
CONTINGENCIES
Payments to resolve the litigation	$ 14,100

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2019

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

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

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

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.

XML

GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS (Tables)

9 Months Ended

Sep. 30, 2019

GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS

Schedule of changes in goodwill by segment

	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.

Schedule of definite-lived intangible assets

	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

XML

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.

XML

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.

XML

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.

XML

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

XML

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

XML

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.

XML

NEW ACCOUNTING STANDARDS - Adoption of New Accounting Standards (Details) - USD ($) $ in Thousands		9 Months Ended
	Jan. 01, 2019	Sep. 30, 2019
Adoption of New Accounting Standards
Operating lease right-of-use assets		$ 26,863
Net lease liabilities		$ 28,104
Lease, Practical Expedients, Package [true false]		true
Lease, Practical Expedient, Use of Hindsight [true false]		false
ASU 2016-02
Adoption of New Accounting Standards
Operating lease right-of-use assets	$ 28,400
Net lease liabilities	29,300
Cumulative-effect adjustment, after tax	5,652
Net deferred taxes	$ 1,387

XML

INCOME TAXES (Tables)

9 Months Ended

Sep. 30, 2019

INCOME TAXES

Schedule of reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax benefit (expense)

	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)

XML

SHARE-BASED COMPENSATION - Information and Valuation Assumptions (Details)	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Assumptions used to determine the valuation of granted options
Expected dividend yield (as a percent)	0.00%
Expected term (in years)	6 years
Key employees
Share-based compensation
Percentage of options exercisable in installments beginning on the first anniversary of the grant date	33.30%
Maximum term of stock option plan	10 years
2014 Plan | Key employees
Share-based compensation
Granted (in shares) | shares	366,330
Minimum
Assumptions used to determine the valuation of granted options
Exercise price | $ / shares	$ 4.81
Expected volatility (as a percent)	49.12%
Risk-free rate for expected term (as a percent)	1.95%
Maximum
Assumptions used to determine the valuation of granted options
Exercise price | $ / shares	$ 5.94
Expected volatility (as a percent)	49.47%
Risk-free rate for expected term (as a percent)	2.38%
Make-whole inducement award | Key employees
Share-based compensation
Granted (in shares) | shares	87,478
Stock Options
Share-based compensation
Granted (in shares) | shares	453,808
Weighted average grant-date fair value of options granted (in dollars per share) | $ / shares	$ 2.53

XML

RELATED PARTY TRANSACTION (Details) - ReactiveCore - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Sep. 30, 2019	Mar. 31, 2019	Sep. 30, 2019	Jan. 01, 2019
RELATED PARTY TRANSACTION
Definitive agreement term	3 years
Base fee payable					$ 2,400
License fee			$ 1,946
Service fee		$ 819		$ 819

XML

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.

XML

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.

XML

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.

XML

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.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Receivables
Receivables, net	$ 338,321	$ 326,602
Trade receivables terms after sale of product or performance of service	30 days
Inventories
Maximum period before expiration within which Inventory is returnable and fully refundable	9 months
Trade receivables
Receivables
Receivables, net	$ 329,141	299,407
Allowance for trade receivables	(31,344)	(25,342)
Rebate receivables
Receivables
Receivables, net	6,450	22,375
Other receivables
Receivables
Receivables, net	$ 2,730	$ 4,820

XML

LEASES (Tables)

9 Months Ended

Sep. 30, 2019

LEASES

Operating lease expense information

	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

Maturity of lease liabilities

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

Schedule of Other information

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	%

XML

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

XML

SHARE-BASED COMPENSATION - Restricted Stock Units and Restricted Stock Awards (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Sep. 30, 2018	Jun. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Restricted Stock Units
Number of Shares Subject to Restriction
Outstanding at the beginning of the period (in shares)					1,869,029
Granted (in shares)					5,908,924
Vested and issued (in shares)					(349,849)
Cancelled/expired (in shares)					(1,124,650)
Outstanding at the end of the period (in shares)	6,303,454				6,303,454
Weighted Average Grant Date Fair Value
Outstanding at the beginning of the period (in dollars per share)					$ 21.67
Granted (in dollars per share)					5.30
Vested and issued (in dollars per share)					20.17
Forfeited (in dollars per share)					19.13
Outstanding at the end of the period (in dollars per share)	$ 6.78				$ 6.78
Performance-based RSUs
Additional disclosures
Share-based compensation expense	$ 1,080		$ 1,034		$ 2,154	$ 1,886
Percentage of performance-based RSUs granted shares accounted will be earned					28.70%
Total compensation cost not yet recognized	$ 2,947				$ 2,947
Weighted average period to recognize compensation cost related to non-vested options not yet recognized					1 year 2 months 12 days
Performance-based RSUs | Scenario, Plan [Member]
Additional disclosures
Percentage of performance-based RSUs granted shares accounted will be earned					29.80%
Make-whole inducement award, performance-based RSUs | Key employees
Number of Shares Subject to Restriction
Granted (in shares)		172,838
Make-whole inducement award, service-based RSUs | Key employees
Number of Shares Subject to Restriction
Granted (in shares)					243,209
Sign-on inducement award, performance-based RSUs | Executive
Number of Shares Subject to Restriction
Granted (in shares)				1,498,500
Restricted Stock Awards
Number of Shares Subject to Restriction
Outstanding at the beginning of the period (in shares)					43,355
Granted (in shares)					186,969
Vested and issued (in shares)					(20,829)
Cancelled/expired (in shares)					(5,929)
Outstanding at the end of the period (in shares)	203,566				203,566
Weighted Average Grant Date Fair Value
Outstanding at the beginning of the period (in dollars per share)					$ 20.91
Granted (in dollars per share)					4.51
Vested and issued (in dollars per share)					22.20
Forfeited (in dollars per share)					21.63
Outstanding at the end of the period (in dollars per share)	$ 5.69				$ 5.69
Additional disclosures
Vesting period					1 year
Share-based compensation expense	$ 291		138		$ 632	415
Total compensation cost not yet recognized	568				$ 568
Weighted average period to recognize compensation cost related to non-vested options not yet recognized					8 months 12 days
Weighted average service-based RSUs
Additional disclosures
Share-based compensation expense	2,460		$ 2,404		$ 6,258	$ 7,245
Total compensation cost not yet recognized	$ 20,762				$ 20,762
Weighted average period to recognize compensation cost related to non-vested options not yet recognized					2 years 1 month 6 days
Minimum | Restricted Stock Units
Additional disclosures
Vesting period					1 year
Minimum | Performance-based RSUs
Additional disclosures
Percentage of performance-based RSUs granted shares accounted will be earned		0.00%
Maximum | Restricted Stock Units
Additional disclosures
Vesting period					3 years
Maximum | Performance-based RSUs
Additional disclosures
Percentage of performance-based RSUs granted shares accounted will be earned		30.00%
2014 Plan | Performance-based RSUs | Key employees
Number of Shares Subject to Restriction
Granted (in shares)		1,835,000
2014 Plan | Restricted Stock Awards | Non-employee director
Number of Shares Subject to Restriction
Granted (in shares)					186,969
2014 Plan | Weighted average service-based RSUs | Key employees
Number of Shares Subject to Restriction
Granted (in shares)					2,159,377

XML

INCOME TAXES - Reconciliation of income taxes (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Reconciliation of income taxes computed at the United States federal statutory tax rate to income tax benefit (expense)
Income tax benefit (expense) at U.S. statutory rate	$ 37,656	$ (10)	$ 73,925	$ 734
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)
Valuation allowance	$ 60,224		$ 60,224

XML

DEBT - Outstanding debt (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Debt
Short-term debt, borrowings on revolving line of credit	$ 105,000	$ 176,300
Long-term debt	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
Term Loan A
Debt
Long-term debt	136,875	142,500
Term Loan B
Debt
Long-term debt	319,000	322,000
Revolving line of credit
Debt
Short-term debt, borrowings on revolving line of credit	$ 105,000	$ 176,300

XML

FAIR VALUE MEASUREMENTS - Roll forward of Level 3 Measurements (Details) - USD ($) $ in Thousands		9 Months Ended
	Jul. 22, 2019	Sep. 30, 2019
Contingent consideration
Level 3 measurements
Balance at beginning of the period		$ (6,895)
Change in fair value		(49)
Payments		3,575
Balance at end of the period		(10,471)
InTouch Pharmacy LLC
Level 3 measurements
InTouch Acquisition	$ (7,102)
InTouch Pharmacy LLC | Contingent consideration
Level 3 measurements
InTouch Acquisition	$ (7,102)	$ (7,102)

XML

LEASES - Other Information (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
LEASES
Operating cash flows for operating leases	$ 3,552
Weighted average remaining lease term (in years)	7 years 4 months 2 days
Weighted average discount rate	6.76%

XML

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	$	1,212,298	$	(1,178,918)	$	(1,145,288)	$	64,530	$	67,010
PBM		82,500		169,933		(83,645)		(143,585)		(1,145)		26,348
Inter-segment eliminations		(24,751)		(8,897)		24,751		8,897		—		—
	$	1,301,197	$	1,373,334	$	(1,237,812)	$	(1,279,976)	$	63,385	$	93,358

	Nine Months Ended September 30,
	Net Sales				Cost of Sales				Gross Profit
	2019		2018		2019		2018		2019		2018
Specialty	$	3,627,582	$	3,599,023	$	(3,432,506)	$	(3,386,653)	$	195,076	$	212,370
PBM		270,730		550,148		(250,474)		(480,365)		20,256		69,783
Inter-segment eliminations		(52,683)		(17,275)		52,683		17,275		—		—
	$	3,845,629	$	4,131,896	$	(3,630,297)	$	(3,849,743)	$	215,332	$	282,153

Total assets by segment are as follows:

	September 30,		December 31,
	2019		2018
Specialty	$	968,956	$	1,045,174
PBM		193,647		431,185
	$	1,162,603	$	1,476,359

XML

FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Sep. 30, 2019

FAIR VALUE MEASUREMENTS

Schedule of liabilities 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

Schedule of change in contingent consideration Level 3 measurements

	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)

XML

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($) segment	Sep. 30, 2018 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)
Number of reportable segments | segment	2
Cash and equivalents	$ 8,420	$ 8,214	$ 9,485	$ 84,251
Outstanding under term loans	455,875		$ 464,500
Net cash provided by operating activities	108,045	$ 33,207
Revolving line of credit
Borrowings under line of credit	105,000
Available borrowing capacity	95,000
Term Loan
Outstanding under term loans	$ 456,000

XML

LOSS PER COMMON SHARE (Tables)

9 Months Ended

Sep. 30, 2019

LOSS PER COMMON SHARE

Schedule of the calculation for basic and diluted income 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)

Schedule of weighted average effect of shares were excluded from the computation of weighted average diluted shares outstanding

	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

XML

ACQUISITION OF INTOUCH PHARMACY LLC - Asset and Liabilities Recognized (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jul. 22, 2019	Dec. 31, 2018
Business Acquisition [Line Items]
Goodwill	$ 371,569		$ 609,592
InTouch Pharmacy LLC
Business Acquisition [Line Items]
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
Net Asset Acquired		$ 18,492

XML

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

XML

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

XML

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.

XML

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.

XML

LEASES (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Operating Leases
Rent expense		$ 2,265		$ 6,291
Components of lease expense
Operating lease cost	$ 1,775		$ 5,082
Variable lease cost	218		1,409
Short-term lease cost	107		348
Total	$ 2,100		$ 6,839
Minimum
Operating Leases
Initial term (in years)	3 years		3 years
Renewal term (in years)	5 years		5 years
Maximum
Operating Leases
Initial term (in years)	12 years		12 years
Renewal term (in years)	10 years		10 years

XML

REVENUE (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		6 Months Ended	9 Months Ended
	Aug. 31, 2019	Sep. 30, 2019	Sep. 30, 2018	Jun. 30, 2019	Sep. 30, 2019	Sep. 30, 2018
Revenue
Revenue		$ 1,301,197	$ 1,373,334		$ 3,845,629	$ 4,131,896
Manufacturer's rebates earned on total gross profit (in percent)		(5.50%)	22.10%		5.90%	17.20%
Rebate adjustments		$ 9,000
Rebate penalty	$ 9,000			$ 6,000
Accrual for litigation relating to rebate dispute with a terminated customer		3,900			$ 3,900
Inter-segment eliminations
Revenue
Revenue		(24,751)	$ (8,897)		(52,683)	$ (17,275)
Specialty
Revenue
Revenue		1,243,448	1,212,298		3,627,582	3,599,023
PBM
Revenue
Revenue		82,500	169,933		270,730	550,148
Oncology | Specialty
Revenue
Revenue		718,859	701,206		2,123,574	2,094,394
Specialty infusion | Specialty
Revenue
Revenue		209,767	178,890		580,254	525,857
Immunology | Specialty
Revenue
Revenue		135,740	135,397		412,268	413,948
Other | Specialty
Revenue
Revenue		179,082	196,805		511,486	564,824
Retail networks | PBM
Revenue
Revenue		48,604	126,082		173,800	417,370
Specialty pharmacy | PBM
Revenue
Revenue		23,156	22,470		57,323	67,784
Mail order | PBM
Revenue
Revenue		7,976	16,019		30,758	50,029
Other | PBM
Revenue
Revenue		$ 2,764	$ 5,362		$ 8,849	$ 14,965

XML

LOSS PER COMMON SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Numerator:
Net (loss) income	$ (177,280)	$ 169	$ (351,043)	$ (4,244)
Denominator:
Weighted average common shares outstanding, basic (in shares)	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 (in shares)	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)
Scenario, Plan [Member]
Denominator:
Weighted average dilutive effect of stock options, RSAs and RSUs	235,830		399,746	383,742

XML

SEGMENT REPORTING (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) segment	Sep. 30, 2018 USD ($)
Segment reporting information
Number of reportable segments | segment			2
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
Inter-segment eliminations
Segment reporting information
Net sales	(24,751)	(8,897)	(52,683)	(17,275)
Cost of Sales	24,751	8,897	52,683	17,275
Specialty
Segment reporting information
Net sales	1,243,448	1,212,298	3,627,582	3,599,023
Specialty | Operating Segments
Segment reporting information
Net sales	1,243,448	1,212,298	3,627,582	3,599,023
Cost of Sales	(1,178,918)	(1,145,288)	(3,432,506)	(3,386,653)
Gross Profit	64,530	67,010	195,076	212,370
PBM
Segment reporting information
Net sales	82,500	169,933	270,730	550,148
PBM | Operating Segments
Segment reporting information
Net sales	82,500	169,933	270,730	550,148
Cost of Sales	(83,645)	(143,585)	(250,474)	(480,365)
Gross Profit	$ (1,145)	$ 26,348	$ 20,256	$ 69,783

XML

GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS (Details) $ in Thousands	3 Months Ended		6 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Jun. 30, 2019 USD ($)	Jun. 30, 2019	Sep. 30, 2019 USD ($) item
Changes in the carrying amount of goodwill
Number of reporting units | item				3
Goodwill impairments	$ 122,076	$ 122,891		$ 244,967
Impairments of definite-lived intangible assets	34,173	17,979		$ 52,152
DSP
Changes in the carrying amount of goodwill
Goodwill impairments		16,772
Discount rate used in annual reporting unit valuations			10.50%
PBM
Changes in the carrying amount of goodwill
Goodwill impairments	34,173	1,207
Discount rate used in annual reporting unit valuations			11.75%	13.50%
PBM
Changes in the carrying amount of goodwill
Goodwill impairments	$ 122,076	54,673
Specialty
Changes in the carrying amount of goodwill
Goodwill impairments		$ 68,218

XML

ACQUISITION OF INTOUCH PHARMACY LLC - Narrative (Details) - InTouch Pharmacy LLC - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended	9 Months Ended
	Jul. 22, 2019	Sep. 30, 2019	Sep. 30, 2019
Business Acquisition [Line Items]
Definite-lived intangible assets	$ 6,660
Contingent consideration at fair value	$ 7,102
Restricted common shares issued	836,431
Issue price of common stock (In Dollar per share)	$ 5.18
Percentage of share price accounted for consideration	90.00%
Contingent consideration	$ 7,102
Acquisition Related Cost		$ 174
Accounts receivable	6,939
Gross Accounts Receivable	7,695
Uncollectable Accounts Receivable	756
Contingent consideration
Business Acquisition [Line Items]
Contingent consideration at fair value	7,102		$ 7,102
Maximum
Business Acquisition [Line Items]
Contingent consideration	$ 8,000

XML

INTEREST RATE SWAPS (Details) $ in Thousands	3 Months Ended					9 Months Ended		12 Months Ended
	Sep. 30, 2019 USD ($)	Jun. 30, 2019 USD ($)	Mar. 31, 2019 USD ($)	Sep. 30, 2018 USD ($)	Jun. 30, 2018 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Dec. 31, 2018 USD ($) item
Deferred tax benefit						$ (1,322)	$ (2,034)
Other comprehensive (loss) income, net of tax	$ (307)	$ (3,358)	$ (2,127)	$ 918	$ (962)	(5,792)	$ (44)
Interest rate swaps
Number of interest rate swap agreements | item								2
Notional amount	286,100					286,100		$ 290,600
Derivative liability	$ 10,084					10,084		4,292
Deferred tax benefit						$ (2,582)		$ (1,099)

XML

DEBT (Tables)

9 Months Ended

Sep. 30, 2019

DEBT

Schedule of outstanding debt

	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

XML

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	%

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2019

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of receivables, net

	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

XML

SEGMENT REPORTING - Total Assets by Segment (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Segment reporting information
Total assets	$ 1,162,603	$ 1,476,359
Specialty
Segment reporting information
Total assets	968,956	1,045,174
PBM
Segment reporting information
Total assets	$ 193,647	$ 431,185

XML

DEBT - Summary (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		9 Months Ended
	Jul. 31, 2019	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Aug. 06, 2019	Aug. 05, 2019	Dec. 31, 2018
Debt
Unamortized debt issuance costs		$ 12,551		$ 12,551				$ 14,631
Amortization of debt issuance costs				3,101	$ 3,703
Write-off of debt issuance costs				731
Revolving line of credit
Debt
Maximum borrowing capacity		105,000		105,000
Amount of borrowings available under the credit agreement		95,000		95,000
Letters of credit
Debt
Maximum borrowing capacity		10,000		10,000
Swingline loans
Debt
Maximum borrowing capacity		20,000		$ 20,000
JPMorgan Chase Bank N.A. And Capital One National Association | Minimum
Debt
Monthly unused commitment fee (as a percent)				0.30%
JPMorgan Chase Bank N.A. And Capital One National Association | Maximum
Debt
Monthly unused commitment fee (as a percent)				0.40%
JPMorgan Chase Bank N.A. And Capital One National Association | Revolving line of credit
Debt
Amount of borrowing		$ 200,000		$ 200,000		$ 200,000	$ 250,000
Interest rate (as a percent)		4.55%		4.55%				5.19%
Weighted average borrowings		$ 137,521	$ 163,380
Maximum borrowings		196,300	$ 231,200	$ 196,300	231,200
Amount of borrowings available under the credit agreement		95,000		95,000				$ 73,700
JPMorgan Chase Bank N.A. And Capital One National Association | Revolving line of credit | Other noncurrent assets
Debt
Unamortized debt issuance costs		4,964		4,964				$ 4,246
Write-off of debt issuance costs	$ 731
Debt issuance costs	$ 2,346
JPMorgan Chase Bank N.A. And Capital One National Association | Term Loan A
Debt
Amount of borrowing		$ 150,000		$ 150,000
Interest rate (as a percent)		4.55%		4.55%				4.78%
Quarterly principal payments				$ 1,875
JPMorgan Chase Bank N.A. And Capital One National Association | Term Loan B
Debt
Amount of borrowing		$ 400,000		$ 400,000
Interest rate (as a percent)		6.55%		6.55%				7.03%
Quarterly principal payments				$ 1,000
Voluntary prepayment of debt					$ 74,000
JPMorgan Chase Bank N.A. And Capital One National Association | Term Loan B | LIBOR
Debt
Interest rate margin (as a percent)				4.50%
JPMorgan Chase Bank N.A. And Capital One National Association | Term Loan B | Base Rate
Debt
Interest rate margin (as a percent)				3.50%
JPMorgan Chase Bank N.A. And Capital One National Association | Revolving line of credit and Term loan A | LIBOR
Debt
Interest rate margin (as a percent)				2.50%
JPMorgan Chase Bank N.A. And Capital One National Association | Revolving line of credit and Term loan A | Base Rate
Debt
Interest rate margin (as a percent)				1.50%

XML

GOODWILL AND DEFINITE-LIVED INTANGIBLE ASSETS - Goodwill Rollforward by reporting segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Sep. 30, 2019	Dec. 31, 2018
Acquired Intangible Assets
Goodwill	$ 841,502		$ 841,502	$ 834,558
Accumulated impairment losses	(469,933)		(469,933)	(224,966)
Balance as of beginning of period			609,592
Impairment losses	(122,076)	$ (122,891)	(244,967)
Other			(138)
Balance as of end of period	371,569		371,569
InTouch Pharmacy LLC
Acquired Intangible Assets
Goodwill acquired during the period			7,082
PBM
Acquired Intangible Assets
Goodwill	447,984		447,984	448,122
Accumulated impairment losses	(355,939)		(355,939)	(179,190)
Balance as of beginning of period			268,932
Impairment losses	(122,076)	(54,673)
Other			(138)
Balance as of end of period	92,045		92,045
Specialty
Acquired Intangible Assets
Goodwill	393,518		393,518	386,436
Accumulated impairment losses	(113,994)		(113,994)	$ (45,776)
Balance as of beginning of period			340,660
Impairment losses		$ (68,218)
Balance as of end of period	$ 279,524		279,524
Specialty | InTouch Pharmacy LLC
Acquired Intangible Assets
Goodwill acquired during the period			$ 7,082

XML

ACQUISITION OF INTOUCH PHARMACY LLC - Definite-lived Intangible Assets (Details) - InTouch Pharmacy LLC $ in Thousands	Jul. 22, 2019 USD ($)
Acquired Finite-Lived Intangible Assets [Line Items]
Definite-lived intangible assets	$ 6,660
Patient relationships
Acquired Finite-Lived Intangible Assets [Line Items]
Definite-lived intangible assets	$ 4,400
Useful Life	8 years
Non-compete employment agreements
Acquired Finite-Lived Intangible Assets [Line Items]
Definite-lived intangible assets	$ 260
Useful Life	5 years
Trade names and trademarks
Acquired Finite-Lived Intangible Assets [Line Items]
Definite-lived intangible assets	$ 2,000
Useful Life	5 years

XML

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.

XML

ACQUISITION OF INTOUCH PHARMACY LLC (Tables)

9 Months Ended

Sep. 30, 2019

ACQUISITION OF INTOUCH PHARMACY LLC

Schedule of 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

Schedule of estimated fair values of the assets acquired and liabilities assumed

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

Schedule of estimated fair value of the definite-lived intangible assets

	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

XML

REVENUE (Tables)

9 Months Ended

Sep. 30, 2019

REVENUE

Schedule of disaggregation of 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

XML

ACQUISITION OF INTOUCH PHARMACY LLC - Consideration Transferred (Details) - InTouch Pharmacy LLC $ in Thousands	Jul. 22, 2019 USD ($)
Business Acquisition [Line Items]
Cash	$ 7,491
Restricted common stock (836,431 shares)	3,899
Contingent consideration at fair value	7,102
Total	$ 18,492

XML

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.

XML

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

XML

SEGMENT REPORTING (Tables)

9 Months Ended

Sep. 30, 2019

SEGMENT REPORTING

Schedule of information by segment

	Three Months Ended September 30,
	Net Sales				Cost of Sales				Gross Profit
	2019		2018		2019		2018		2019		2018
Specialty	$	1,243,448	$	1,212,298	$	(1,178,918)	$	(1,145,288)	$	64,530	$	67,010
PBM		82,500		169,933		(83,645)		(143,585)		(1,145)		26,348
Inter-segment eliminations		(24,751)		(8,897)		24,751		8,897		—		—
	$	1,301,197	$	1,373,334	$	(1,237,812)	$	(1,279,976)	$	63,385	$	93,358

	Nine Months Ended September 30,
	Net Sales				Cost of Sales				Gross Profit
	2019		2018		2019		2018		2019		2018
Specialty	$	3,627,582	$	3,599,023	$	(3,432,506)	$	(3,386,653)	$	195,076	$	212,370
PBM		270,730		550,148		(250,474)		(480,365)		20,256		69,783
Inter-segment eliminations		(52,683)		(17,275)		52,683		17,275		—		—
	$	3,845,629	$	4,131,896	$	(3,630,297)	$	(3,849,743)	$	215,332	$	282,153

Total assets by segment are as follows:

	September 30,		December 31,
	2019		2018
Specialty	$	968,956	$	1,045,174
PBM		193,647		431,185
	$	1,162,603	$	1,476,359

XML

SHARE-BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2019

SHARE-BASED COMPENSATION

Summary of entity's stock option activity

				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

Schedule of assumptions used to determine the valuation of granted options

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

Summary of restricted stock units activity

		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

Summary of restricted stock awards activity

	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

XML

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.

XML

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

XML

SHARE-BASED COMPENSATION - Stock Options (Details) - Stock Options - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Number of Options
Outstanding at beginning of period (in shares)			5,186,025
Granted (in shares)			453,808
Exercised (in shares)			(131,966)
Expired/cancelled (in shares)			(1,732,525)
Outstanding at end of period (in shares)	3,775,342		3,775,342		5,186,025
Exercisable at end of period (in shares)	1,670,724		1,670,724
Weighted Average Exercise Price
Outstanding at beginning of period (in dollars per share)			$ 18.42
Granted (in dollars per share)			5.19
Exercised (in dollars per share)			4.54
Expired/cancelled (in dollars per share)			17.40
Outstanding at end of period (in dollars per share)	$ 17.57		17.57		$ 18.42
Exercisable at end of period (in dollars per share)	$ 21.25		$ 21.25
Weighted Average Remaining Contractual Life
Outstanding (in years)			7 years 7 months 6 days		8 years
Exercisable (in years)			7 years 1 month 6 days
Aggregate Intrinsic Value
Outstanding at end of period	$ 26		$ 26		$ 2,910
Exercisable at end of period	0		0
Additional disclosures
Allocated Share-based Compensation Expense	946	$ 2,073	3,588	$ 6,225
Total compensation cost related to non-vested options not yet recognized	$ 7,985		$ 7,985
Weighted average period to recognize compensation cost related to non-vested options not yet recognized			1 year 9 months 18 days

XML

LOSS PER COMMON SHARE - Shares excluded from the computation of weighted average diluted shares outstanding (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Anti-dilutive securities excluded
Anti-dilutive securities excluded (in shares)	4,872,337	7,056,109	4,952,862	5,950,923
Service-based and earned performance-based stock options
Anti-dilutive securities excluded
Anti-dilutive securities excluded (in shares)	3,634,546	3,907,277	3,556,237	3,983,767
Unearned performance-based stock options
Anti-dilutive securities excluded
Anti-dilutive securities excluded (in shares)	574,138	574,138	574,138	574,138
Weighted average service-based RSUs
Anti-dilutive securities excluded
Anti-dilutive securities excluded (in shares)	663,653	285,386	804,761	367,970
Weighted average performance based RSUs
Anti-dilutive securities excluded
Anti-dilutive securities excluded (in shares)		2,267,384		1,015,331
Weighted average RSAs
Anti-dilutive securities excluded
Anti-dilutive securities excluded (in shares)		21,924	17,726	9,717

XML

LEASES - Maturity of lease liabilities (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Maturities of lease liabilities
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	(8,208)
Lease liabilities	$ 28,104