Guardian Pharmacy Services Inc

Business

Guardian Pharmacy Services, Inc. (the “Company”) is a leading, highly differentiated pharmacy services company that provides an extensive suite of technology-enabled services designed to help residents of long-term health care facilities (“LTCFs”) adhere to their appropriate drug regimen, which in turn helps reduce the cost of care and improve clinical outcomes. We emphasize high-touch, individualized clinical, drug dispensing and administration capabilities that are tailored to serve the needs of residents in historically lower acuity LTCFs, such as assisted living facilities, and behavioral health facilities and group homes. Additionally, our robust suite of capabilities enables us to serve residents in all types of LTCFs. We are a trusted partner to residents, LTCFs and health plan payors because we help reduce errors in drug administration, manage and ensure adherence to drug regimens, and lower overall healthcare costs.

Organization

The Company was incorporated in the state of Delaware on November 16, 2021. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its common stock and related corporate reorganization transactions in order to carry on the business of Guardian Pharmacy, LLC, which was formed on July 21, 2003 as an Indiana limited liability company, as a publicly-traded entity.

Corporate Reorganization

Prior to the IPO, we conducted our business through Guardian Pharmacy, LLC, and its majority owned and wholly owned limited liability company subsidiaries, which were treated for income tax purposes as partnerships and disregarded entities, respectively. Immediately prior to the IPO, we completed a series of corporate reorganization transactions (the “Corporate Reorganization”), pursuant to which:

As a result of the Corporate Reorganization, the Company became a holding company with no material assets other than its 100% interest in Guardian Pharmacy, LLC, and the Converted Subsidiaries became wholly owned subsidiaries of Guardian Pharmacy, LLC. In addition, Guardian Pharmacy, LLC remained the majority owner of each of the

Subsidiaries.

The

Subsidiaries collectively own nine pharmacies that are (i) greenfield

start-up

pharmacies in various stages of development and integration with Guardian and do not currently have material operations or (ii) pharmacies that we recently acquired. After a period of time that would typically be sufficient to allow such pharmacies to adopt our operating practices and experience meaningful growth in residents served and earnings, we expect to acquire the minority membership interests of such

Subsidiaries.

As a result of the Corporate Reorganization, the Company recorded deferred tax assets and liabilities attributable to the business of Guardian Pharmacy, LLC. In addition, the Company received tax basis for the $55,176 in cash payments related to the Merger Consideration, which are amortizable for tax purposes. To reflect this new taxability at the corporate level and the tax

step-up,

the Company recorded an incremental net deferred tax asset/(liability) through additional

paid-in

capital of $5,973. See Note 9 for further discussion.

Initial Public Offering

On September 27, 2024, the Company consummated its IPO of 8,000,000 shares of its Class A common stock, as described in the Company’s

final

prospectus dated September 25, 2024, filed with the Securities and Exchange Commission on September 26, 2024, pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Prospectus”). Also on September 27, 2024, the underwriters for the IPO exercised in full their option to purchase an additional 1,200,000 shares of Class A common stock. The 9,200,000 shares were issued at a public offering price of $14.00 per share, resulting in net proceeds to the Company of $119,784, after deducting underwriting discounts of $9,016. In addition to the underwriting discounts, the Company incurred $13,047 of offering costs, which were recorded to additional

paid-in

capital.

Principles of consolidation

The accompanying unaudited interim consolidated financial statements include the accounts of the Company and all controlled subsidiaries (collectively, the “Company”). All intercompany transactions and accounts have been eliminated. Results of operations of the Company’s controlled subsidiaries have been included from the date of acquisition.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements are prepared in conformity with the generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial reporting. Accordingly, these unaudited interim consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. Certain footnote disclosures have been omitted that would substantially duplicate the disclosures in the Company’s audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2023 (included within the Prospectus), unless information contained in those disclosures materially changed or is required by U.S. GAAP to be included in interim financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair presentation of the unaudited interim consolidated financial statements as of and for the three and nine months ended September 30, 2023 and 2024 have been recorded. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2024, or any other period. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2023.

The Corporate Reorganization was accounted for as a combination of entities under common control. As a result, the financial reports filed with the SEC by the Company subsequent to the Corporate Reorganization are prepared “as if” Guardian Pharmacy, LLC is the accounting predecessor of the Company. The historical operations of Guardian Pharmacy, LLC are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Guardian Pharmacy, LLC prior to the Corporate Reorganization; (ii) the consolidated results of the Company and Guardian Pharmacy, LLC following the Corporate Reorganization; (iii) the assets and liabilities of the Company and Guardian Pharmacy, LLC at their historical cost; and (iv) the Company’s equity structure for all periods presented. No

step-up

basis of intangible assets or goodwill was recorded.

Guardian Pharmacy, LLC has been determined to be our predecessor for accounting purposes and, accordingly, the consolidated financial statements for periods prior to the Corporate Reorganization have been adjusted to combine the previously separate entities for presentation purposes. The Company’s financial position, results of operations and cash flows effectively represent those of Guardian Pharmacy, LLC as of and for all periods presented.

Income Taxes

The Company is a taxable entity. As discussed in Note 1, prior to the Corporate Reorganization, Guardian Pharmacy, LLC was comprised of entities treated as partnerships for income tax purposes, and the federal income taxes on taxable income or losses realized by Guardian Pharmacy, LLC were the obligation of the individual members or partners. As a result of the Corporate Reorganization, the Company is subject to federal and state corporate income taxes. The accompanying financial statements include a provision for income taxes based on the period when the Company’s operations are taxable.

The Company accounts for income taxes pursuant to the asset and liability method of ASC 740, Income Taxes, which requires it to recognize current tax liabilities or receivables for the amount of taxes it estimates are payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.

The Company recognizes the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The Company’s policy is to recognize potential interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2024 and December 31, 2023, no liability for unrecognized tax benefits was required to be reported. See Note 9 for additional disclosures regarding income taxes.

The Company and its subsidiaries file income tax returns and are subject to examinations in the U.S. federal jurisdiction and in various states. Prior to the Corporate Reorganization, Guardian Pharmacy, LLC was subject to state income taxes, which did not result in any material tax impacts.

New Accounting Pronouncements

The following table provides a description of recent accounting pronouncements that are applicable to the Company’s unaudited interim Consolidated Financial Statements:

The Company’s growth strategy involves periodically acquiring institutional pharmacies servicing LTCFs and their residents as well as residents in other care settings. The Company’s strategy includes the acquisition of freestanding institutional pharmacy businesses as well as other assets, generally less significant in size, which are combined with existing pharmacy operations to augment internal organic growth.

During the nine months ended September 30, 2024, the Company completed acquisitions of various pharmacy operations (the “Acquisitions”). Total consideration for the Acquisitions included cash of $12,460, an inventory payment payable of $722, based on the fair value of inventory on the acquisition date, and contingent earnout payments of up to $2,700 if certain revenue and earnings targets are achieved by certain acquired entities during the

two-year

period subsequent to the

respective

acquisition dates. The fair value of the contingent consideration arrangement at the acquisition dates and at September 30, 2024 was $2,700 (see the Fair Value Measurements Note 5 for more information). The total preliminary purchase consideration for the Acquisitions was $15,882.

The Acquisitions included

interests, for which the fair value was estimated to be $4,989 at the time of the Acquisitions. The fair value of the

interests was estimated by utilizing the implied fair value of the

interests, determined based on the acquisition price, and considering discounts necessary due to the lack of marketability and lack of control associated with the

interest. During 2024, we incurred an immaterial amount of acquisition costs in connection with the Acquisitions.

The Acquisitions were treated as a purchase in accordance with ASC 805, Business Combinations, which requires recognition of the estimated fair values of assets acquired and liabilities assumed in a transaction. Our recognition of the assets acquired and liabilities assumed was based on management’s judgement after evaluating several factors, including a preliminary valuation assessment. This recognition is preliminary and subject to changes, which could be material, as additional information becomes available and the valuation of assets and liabilities is finalized. There were no material measurement period adjustments recognized in periods subsequent to the Acquisitions.

The preliminary recognition of the assets and liabilities of the Acquisitions as of September 30, 2024 is as follows:

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of the identifiable net assets acquired in the Acquisitions. Goodwill represents future economic benefits expected to arise from the Company’s expanded presence in the long-term care pharmacy industry, the assembled workforce acquired, expected revenue synergies, as well as operating efficiencies and cost savings. Of the $12,373 of goodwill recorded related to the Acquisitions, $9,256 is expected to be deductible for tax purposes.

Intangible assets are comprised of customer lists and trademarks. The fair values and the weighted average useful lives for the customer lists and trademarks were $5,057 and $550, and 10 years and 5 years, respectively.

Consolidated Results of Operations

The results of operations for the Acquisitions have been included in the consolidated financial statements since the date of acquisition. During the three and nine months ended September 30, 2024, the Company’s consolidated statements of operations included $16,563 and $32,434, respectively, of revenue associated with the Acquisitions. Net income associated with the Acquisitions is not material to the consolidated financial statements.

The comparable prior period results of operations associated with the Acquisitions are not material to the consolidated financial statements, and as such, supplemental pro forma financial information is not presented.

Line of credit

On May 13, 2024, the Company entered into the Sixth Amendment to Third Amended and Restated Loan and Security Agreement (the “Amendment”) to the existing credit facility (“Credit Facility”). The amendment extended the line of credit termination date from April 23, 2025 to April 23, 2027. The line of credit now bears an interest rate equal to the

one-month

Secured Overnight Financing Rate (“SOFR”) plus an additional rate of 1.80% to 2.80% based on certain financial ratios maintained by the Company. The total amount available under the line of credit as of September 30, 2024 is $30,000.

Notes Payable

The

Amendment added a new term loan of $

15,000

to the Credit Facility and extended the maturity date of the existing and new term loan (collectively referred to as the “Term Loan”) to

April 23, 2027

. The interest rate of the Term Loan now bears an interest rate equal to the

one-month

SOFR plus an additional rate of

1.80

% to

2.80

% based on certain financial ratios maintained by the Company. The Term Loan is payable in quarterly installments of $

1,375

through March 31, 2027, with the remaining balance of the term loan due in a final lump sum payment at maturity on April 23, 2027.

Long-term debt consists of the following:

As of September 30, 2024, future principal payment obligations for long-term debt are as follows for the years ending December 31:

The Company was in compliance with all debt covenants at September 30, 2024.

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

Financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, line of credit, and notes payable. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the short-term maturity of these instruments. The Company estimates that the carrying amount of the line of credit and notes payable approximates fair value due to the fluctuation of their variable interest rates with market movement.

The following table summarizes the valuation of liabilities measured at fair value on a recurring basis on the Company’s Consolidated Balance Sheets:

The fair value measurement of the contingent consideration obligations arising from acquisitions is based upon Level 3 inputs including, in part, the estimate of future cash flows based upon the likelihood of achieving the various criteria triggering the payment of the obligations. Changes in the fair value of the contingent consideration obligations subsequent to the Acquisitions are recorded within Selling, general and administrative expenses.

The following table provides a reconciliation of the activity for the Level 3 contingent consideration fair value measurements during the nine-month period ended September 30, 2024:

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. The Company may have exposure to loss contingencies arising from pending or threatened litigation for which assessing and estimating the outcomes of these matters involve substantial uncertainties. The Company evaluates contingencies on an ongoing basis and establishes loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated. Legal expenses include attorneys’ fees, litigation expenses and settlements. The Company recorded legal expenses totaling $314 and $687 for the three months ended September 30, 2023 and 2024, respectively, and $1,457 and $4,745 for the nine months ended September 30, 2023 and September 30, 2024, respectively.

Basic earnings per share of Class A and Class B common stock is computed by dividing net income attributable to Guardian Pharmacy Services, Inc. by the weighted-average number of shares of Class A and Class B common stock outstanding during the period. The Class A and Class B common stock are identical in their rights and privileges, except that shares of Class B common stock are subject to transfer restrictions prior to their conversion into Shares of Class A common stock. Therefore, the basic earnings per share for Class A and Class B common stock will be equal. Diluted earnings per share of Class A and Class B common stock is computed by dividing net income attributable to Guardian Pharmacy Services, Inc. by the weighted-average number of shares of Class A and Class B common stock outstanding, adjusted to give effect to potentially dilutive elements. As the Company recorded a net loss in the three and nine months period ended September 30, 2024, the potential adjustments to basic earnings per share were anti-dilutive, and thus, basis earnings per share and diluted earnings per share are equal.

The $55,176 Merger Consideration payment made to Class B common stock stockholders in connection with the Corporate Reorganization and IPO did not have an impact on income available to common stockholders.

The Company analyzed the calculation of earnings per unit, related to units of Guardian Pharmacy, LLC, for periods prior to the IPO and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Further, the Company had no operations prior to the Corporate Reorganization and the number of shares issued prior to the Corporate Reorganization was 100, which we have determined is not meaningful. Therefore, earnings per share information has not been presented for the three and nine months ended September 30, 2023, and the basic and diluted earnings per share calculations for the three and nine months ended September 30, 2024 represent the post IPO period from September 27, 2024 to September 30, 2024 only.

The following table sets forth (in thousands) the computation of net income (loss) attributable to the Company used to compute basic net income (loss) per share of Class A and Class B common stock for the quarter ended September 30, 2024.

The following table sets forth the computation of basic and diluted net income per share of Class A and Class B common stock (in thousands, except share amounts, and per share amounts):

The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:

Prior to the Corporate Reorganization and IPO, share-based compensation expense (income) primarily relates to awards in the form of Restricted Interest Units. These cash-settled awards are recorded as liabilities until payout was made or the award was forfeited. These units vest in their entirety on the third anniversary of their grant date. Vesting is subject to continued service. Compensation costs are recognized ratably over the vesting period based upon the value of the awards as of period end.

The value of these awards is remeasured and reported as Share-based compensation liability on the accompanying Consolidated Balance Sheets at the end of each reporting period based on the change in calculated value of the shares pursuant to the prescribed calculation contained in the Restricted Interest Purchase Agreements. The primary inputs used to value the awards are the volume and accumulated vesting status of the issued awards and the historical adjusted earnings of the Company (inclusive of share-based compensation expense (income), outstanding capital and debt obligations of the Company as of the measurement date). The liability and corresponding expense are adjusted accordingly until the awards are settled. Vested Restricted Interest Units are typically repurchased by the Company upon termination of employment at the calculated value.

The Company recorded $15,210 and $0 of share-based compensation liability within Other liabilities on its Consolidated Balance Sheets as of December 31, 2023 and September 30, 2024, respectively.

Restricted Interest Units Conversion

In connection with the Corporate Reorganization and IPO, Restricted Interest Unit awards associated with the Converted Subsidiaries and Guardian Pharmacy, LLC were converted to Common Units of Guardian Pharmacy, LLC, with the Common Units in Guardian Pharmacy, LLC then being converted into 12,321,282 shares of Class B common stock of the Company (see Note 1 Organization and Background above for further discussion of the Corporate Reorganization and IPO). This conversion of Restricted Interest Units was treated as a modification, and as a result, the Company recognized $122,355 of share-based compensation expense during the three months ended September 30, 2024, attributable to the increased fair value of the vested units. This expense was considered an expense of the Company, as it was incurred in connection with the Corporate Reorganization and IPO, and as such, it is included in net income (loss) attributable to Guardian Pharmacy Services, Inc. on the consolidated statements of operations for the three and nine months ended September 30, 2024.

As the modified Restricted Interest Units were ultimately converted into Class B common stock of the Company, the fair value of the awards was calculated based on the fair value of Class A common stock issued in the IPO, discounted for a lack of registration, as the Class B common stock is unregistered. The discount was determined using the Finnerty Model using the following assumptions:

We estimated the future stock price volatility based on the volatility of a set of publicly traded comparable companies with a look back period consistent with the expected life. The estimated life was based on the assumed period of time required should the Company choose to register the Class B common stock. The risk-free rate is based on the rate for a U.S. government security with the same estimated life. The Class B common stock issued in connection with the Corporate Reorganization and IPO will convert to Class A common stock over a period of two years following the date of issuance, which was the closing date of the IPO, and as such, the fair value per unit is based on the IPO price of Class A common stock of $14.00.

Class B common stock, issued as incentive awards, activity is as follows during the periods indicated:

In addition to the Class B common stock issued in connection with the Corporate Reorganization and IPO, the Company has share-based compensation awards in the form of Restricted Stock Units for Class A common stock of the Company, and Restricted Interest Unit awards (related to the

Subsidiaries) of Guardian Pharmacy, LLC. The Restricted Interest Unit awards outstanding subsequent to the IPO are immaterial to the financial statements.

2024 Equity and Incentive Compensation Plan

In connection with the IPO and the Corporate Reorganization, the Company adopted the Guardian Pharmacy Services, Inc. 2024 Equity and Incentive Compensation Plan (the “2024 Plan”). The 2024 Plan became effective on September 27, 2024 upon consummation of the IPO, in accordance with its terms. The number of shares of our Class A common stock available for awards under the 2024 Plan shall be, in the aggregate,2,000,000 shares (the Overall Share Limit). The Overall Share Limit will be automatically increased on the first day of each fiscal year, beginning in 2025 and ending in 2034, by an amount equal to the lesser of (a)1% of the shares of our common stock (including both Class A common stock and Class B common stock) outstanding on the last day of the immediately preceding fiscal year and (b) such smaller number of shares as determined by our board of directors. Such shares may be shares of original issuance or treasury shares or a combination of the two.

Restricted Stock Units (“RSU”) Awards

In connection with the IPO,

and under the 2024 Plan,

the Company granted RSU awards to the independent

non-employee

directors of 10,713

shares

.

The stock price used to determine the award value was the IPO price of $14.00 per share. These awards vest into Class A common stock 6 months after the IPO date.

Restricted Stock Unit activity was as follows during the periods indicated:

Share-based compensation expense

Share-based compensation expense is recorded to selling, general, and administrative expenses in the consolidated statement of operations, and is as follows for the periods indicated:

As of September 30, 2024, unamortized share-based compensation costs related to each share-based incentive award described above is as follows (in thousands, except for the remaining service period):

The Company accounts for forfeitures as they occur for each share-based incentive award above.

Guardian Pharmacy Services, Inc. is taxed as a corporation and is subject to paying corporate federal and state and local taxes on the income allocated to it from its 100%

ownership of Guardian Pharmacy, LLC, which includes economic interest held in the Non-Converted Subsidiaries, as well as any stand-alone income or loss it generates. The Non-Converted Subsidiaries are treated as a partnership for U.S. federal and most applicable state and local income tax purposes. Prior to the Corporate Reorganization, Guardian Pharmacy, LLC was comprised of entities treated as partnerships for income tax purposes. As a partnership it was not subject to U.S. federal and certain state and local income taxes. As a result of the Corporate Reorganization, the Company is subject to federal and state corporate income taxes beginning on September 27, 2024.

The Company’s effective tax rate for the period subsequent to the Corporate Reorganization, September 27, 2024 through September 30, 2024, was

-0.1%

percent. This is lower than the federal statutory rate of 21 percent due to the $122,355 incremental share-based compensation charge upon the modification of certain Restricted Interest Units in connection with the Corporate Reorganization and IPO (see

Note 8—Share-based Compensation

for further detail on the share-based compensation charge) . These compensation costs are not deductible for federal and state income taxes.

The Company’s effective tax rate for periods prior to the Corporate Reorganization was zero percent because Guardian Pharmacy, LLC was not taxed at the entity level prior to the Corporate Reorganization.

As a result of the Corporate Reorganization, the Company received tax basis for the $55,176 in cash payments (the “tax

step-up”)

related to the Merger Consideration. To reflect this new taxability at the corporate level and the tax

step-up,

the Company recorded an incremental net deferred tax asset through additional

paid-in

capital of $5,973. At the Corporate Reorganization, the Company concluded, based on all positive and negative evidence that it is more likely than not that all deferred tax assets will be utilized.

No uncertain tax positions existed as of September 30, 2024.