Guardian Pharmacy Services, Inc. (GRDN) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion analyzes our financial condition and results of operations and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements and Risk Factor Summary.” When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. Known material factors that could affect our financial performance and actual results, and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this discussion or otherwise made by our management, are described in “Risk Factors.” Factors that could cause or contribute to such difference are not limited to those identified in “Risk Factors.”

A discussion regarding our financial condition and results of operations for the year ended December 31, 2024 compared to the year ended December 31, 2023 is presented below. Our historical results are not necessarily indicative of the results that may be expected for any future period.

Overview

We are a leading, highly differentiated pharmacy services company that provides an extensive suite of technology-enabled services designed to help residents of LTCFs adhere to their appropriate drug regimen, which in turn helps reduce the cost of care and improve clinical outcomes. We enter into contracts directly with LTCFs to serve as the principal pharmacy provider for their residents. In this capacity, we offer 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 ALFs and BHFs. Additionally, our robust capabilities enable us to serve residents in all types of LTCFs. Our services include prescription intake and adjudication management, packaging drugs into unit dose and/or multi-dose compliance packaging that are organized by date and time of administration, and electronically tracking each drug from delivery through administration to LTCF residents. We also offer training to caregivers and conduct mock audits to ensure compliance with pharmacy administration requirements, billing claims processing, government regulation and other matters. As of December 31, 2024, our 51 pharmacies served approximately 186,000 residents in approximately 7,000 LTCFs across 38 states.

While our national competitors have primarily focused on SNFs, we believe we enjoy a strong competitive position as a large and purpose-built provider of pharmacy services to ALFs and BHFs. More than two-thirds of our annual revenue for each of the past three years has been generated from residents of ALFs and BHFs, while the remainder has been generated primarily from residents of SNFs. LTCF industry trends, including aging demographics, increases in the number of assisted living residents, improving life expectancies and enhanced quality of care, have resulted in ALF and BHF resident populations that require assistance with their increasingly acute and complex healthcare needs. Through our value-added capabilities and local management model, we have been able to pass on to residents, LTCFs and health plan payors the benefits of our scale without compromising on the high-touch, localized customer service traditionally associated with an independent pharmacy. For this reason, we are well positioned to continue to serve ALFs and BHFs, which we believe to be the most attractive and highest growth sector of the LTCF market.

Our core growth strategy focuses on increasing the number of residents we serve through a combination of organic and acquired growth. Acquired growth represents growth in the number of residents served resulting from acquiring an operating pharmacy, which we measure using the number of residents served by the acquired pharmacy as of the acquisition date. Organic growth represents the increase in the number of residents served at existing pharmacies, our greenfield pharmacies, and acquired pharmacies subsequent to the acquisition date. We have generated organic growth through new and expanded LTCF relationships as well as increased resident adoption of our services in the facilities we already serve.

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Recent Developments

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, Guardian Pharmacy Services, Inc. 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 Non-Converted Subsidiaries.

The Non-Converted Subsidiaries collectively own ten 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 Non-Converted Subsidiaries.

Initial Public Offering

On September 27, 2024, we consummated the IPO of 8,000,000 shares of our Class A common stock, as described in our final prospectus dated September 25, 2024, filed with the SEC 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 us of $119.8 million, after deducting underwriting discounts of $9.0 million. In addition to the underwriting discounts, we incurred $13.0 million of offering costs, which were recorded to additional paid-in capital.

Factors Affecting the Comparability of Our Results of Operations

Our results of operations for the year ended December 31, 2024 and the year ended December 31, 2023 have been affected by the following, among other factors, which must be understood to assess the comparability of our period-to-period financial performance and condition.

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Acquisitions

Our growth strategy involves periodically acquiring institutional pharmacies servicing LTCFs and their residents as well as residents in other care settings. Our 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 year ended December 31, 2024, we completed acquisitions of various pharmacy operations (the “Acquisitions”). The operating results of the Acquisitions were a contributing factor in certain changes in the results of operations for the year ended December 31, 2024 compared to the year ended December 31, 2023. For comparative purposes, acquisition impacts are only considered for the 12 months following the acquisition date.

Share-Based Compensation (in connection with the Corporate Reorganization and IPO)

In connection with the Corporate Reorganization and IPO, Restricted Interest Unit awards associated with the Converted Subsidiaries and Guardian Pharmacy, LLC were converted into Common Units of Guardian Pharmacy, LLC, and the Common Units in Guardian Pharmacy, LLC were then converted into Class B common stock of the Company. This conversion of Restricted Interest Units was treated as a modification, requiring the units to be marked to fair value on the modification date, resulting in us recognizing $125.7 million of incremental share-based compensation expense during the year ended December 31, 2024. In addition, certain Restricted Interest Unit awards which converted into Class B common stock are subject to a one-year service period ending one year subsequent to the IPO closing date. The unamortized share-based compensation expense associated with these awards is $10.1 million as of December 31, 2024. Refer to Note 11 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail surrounding the Restricted Interest Units conversion.

Components of Results of Operations

Revenues. We recognize revenue at the time of delivery of prescriptions and other pharmacy services to the LTCF, at which time control has been transferred. Revenue recognized reflects the consideration we expect to receive in exchange for these goods and services.

Cost of goods sold. Cost of goods sold consists primarily of expenses associated with the fulfillment and delivery of the prescription. Cost of goods sold also includes associated pharmacy personnel-related expenses, including salaries and benefits, delivery charges and other supporting overhead costs (such as rent and depreciation and amortization of assets used in the fulfillment and delivery of the prescription).

Selling, general, and administrative expenses. Selling, general, and administrative expenses consist primarily of personnel-related expenses, including share-based compensation, salaries and benefits, for our employees at the pharmacies and support services engaged in other pharmacy related activities including sales and marketing, finance, legal, human resources, purchasing and other administrative functions. Selling, general, and administrative expenses also include facilities-related expenses, software expenses, sales and marketing expenses, insurance premiums, professional services expenses, including for outside legal and accounting services, other overhead costs, changes in the fair value of contingent payments related to acquisitions, depreciation related to long lived assets, and amortization of intangible assets.

Prior to the Corporate Reorganization and IPO, share-based compensation expense primarily represented non-cash recognition of changes in the value of Restricted Interest Unit awards. These awards contained a cash settlement feature and were accounted for as a liability in accordance with U.S. generally accepted accounting principles (“GAAP”). These units remained in place until they were (a) forfeited (which occurs when the employee leaves before the units are fully vested), (b) paid out (we purchase the units at a calculated value upon termination of employment) or (c) converted into shares as a result of a major capital event such as a sale or public offering. These units vest in their entirety on the third anniversary of their grant date. The value of the

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units is recognized ratably over the vesting period and is remeasured and reported at the end of each quarter based on the change in calculated value pursuant to our Restricted Interest Purchase Agreements. The primary inputs used to value the units include the accumulated vesting status of the issued units, the trailing four quarters of our adjusted earnings, inclusive of share-based compensation expense (income), and our outstanding capital and debt obligations as of the quarterly measurement date. The liability and corresponding expense are adjusted on a quarterly basis. Based on the number of participants and units outstanding, trailing earnings, forfeitures and other factors, we have experienced volatility in our share-based compensation liability. This calculation has in turn had a significant impact on our net income for the periods presented.

In connection with the Corporate Reorganization and IPO, all outstanding Restricted Interest Unit awards, other than those issued by Non-Converted Subsidiaries, were converted into shares of Class B common stock and are no longer considered a liability. As discussed above in the “—Factors Affecting the Comparability of Our Results of Operations—Share-Based Compensation (in connection with the Corporate Reorganization and IPO)”, this conversion resulted in significant incremental share-based compensation expense upon the IPO and additional expense related to the conversion will continue during the one-year period subsequent to the IPO.

Interest expense. Interest expense consists of interest on our long-term debt and line of credit under our Credit Facility and finance leases.

Other expense, net. Other expense, net consists primarily of gain (loss) on asset disposals.

Provision for income taxes. Provision for income taxes consists primarily of income taxes in certain jurisdictions in which we conduct business.

Results of Operations for the Years Ended December 31, 2023 and 2024

The following table sets forth our consolidated statements of operations data for the years ended December 31, 2023 and 2024, respectively. The year-over-year comparison of results of operations is not necessarily indicative of results for future periods.

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Revenue

Revenue for the year ended December 31, 2024 increased by $182.2 million or 17.4% compared to the year ended December 31, 2023. $55.1 million of the increase was attributable to revenue from the Acquisitions, with the remaining $127.1 million of the increase attributable to the organic growth of our business. Further, the increase was attributable to increases in the number of residents served from 163,000 residents during December 2023 to 186,000 residents during December 2024 and prescriptions dispensed from 22.2 million during the year ended December 31, 2023 to 25.1 million during the year ended December 31, 2024, as well as annual drug price inflation.

Cost of goods sold

Cost of goods sold for the year ended December 31, 2024 increased by $146.2 million or 17.4% compared to the year ended December 31, 2023. $48.1 million of the increase was attributable to the Acquisitions, with the remaining $98.1 million of the increase attributable to the organic growth of our business. Cost of goods sold as a percentage of revenue was flat at 80.1% year over year.

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Selling, general, and administrative expenses

Selling, general and administrative expenses increased $139.9 million or 83.6% for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was primarily due to share-based compensation expense (income), which was $131.5 million for the year ended December 31, 2024, compared to $(6.1) million for year ended December 31, 2023. Additionally, $21.8 million of the increase in selling, general, and administrative expenses was driven by an increase in average employee headcount, with $15.4 million resulting from organic growth and $6.4 million resulting from the Acquisitions. These increases were offset by recognition in 2023 of $23.5 million in non-recurring attorneys’ fees, settlements costs and other expenses associated with certain legal proceedings compared to $4.0 million in 2024. Selling, general and administrative expenses as a percentage of revenue increased from 16.0% to 25.0% primarily as a result of the increases in share-based compensation expense described above.

Interest expense

Interest expense increased $0.4 million or 14.7% for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase was primarily due to increased utilization of the Credit Facility (see “—Liquidity and Capital Resources” below), coupled with higher interest rates on the Company’s outstanding indebtedness.

Provision for income taxes

Income tax expense increased by $4.6 million for the year ended December 31, 2024 compared to the year ended December 31, 2023. 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. As such, no income tax expense was recorded during the year ended December 31, 2023.

Adjusted EBITDA and Other Non-GAAP Financial Measures

To supplement the results presented in our consolidated financial statements in accordance with GAAP, we also present Adjusted EBITDA and Adjusted SG&A, which are financial measures not based on any standardized methodology prescribed by GAAP.

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We define Adjusted EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization, as adjusted to exclude the impact of items and amounts that we view as not indicative of our core operating performance, including share-based compensation, acquisition accounting adjustments, certain legal and regulatory items, and IPO-related costs. We define Adjusted SG&A as GAAP selling, general, and administrative expenses adjusted to exclude the impact of share-based compensation, expenses relating to certain legal and regulatory items, and IPO-related costs. Adjusted EBITDA and Adjusted SG&A do not have a definition under GAAP, and our definition of Adjusted EBITDA and Adjusted SG&A may not be the same as, or comparable to, similarly titled measures used by other companies.

We use Adjusted EBITDA and Adjusted SG&A to better understand and evaluate our core operating performance and trends. We believe that presenting Adjusted EBITDA and Adjusted SG&A provides useful information to investors in understanding and evaluating our operating results, as it permits investors to view our core business performance using the same metrics that management uses to evaluate our performance.

There are a number of limitations related to the use of Adjusted EBITDA and Adjusted SG&A rather than the most directly comparable GAAP financial measure, including:

Because of these limitations, Adjusted EBITDA and Adjusted SG&A should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. You should consider Adjusted EBITDA and Adjusted SG&A alongside other financial measures, including net income, GAAP selling, general, and administrative expense and our other financial results presented in accordance with GAAP.

A reconciliation of Adjusted EBITDA to net income, and a reconciliation of Adjusted SG&A to GAAP selling, general, and administrative expense, the most directly comparable GAAP financial measures, are set forth below.

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Liquidity and Capital Resources

We have historically financed our business and acquisitions primarily through cash from operations and borrowings under our Credit Facility and, more recently, sales of our Class A common stock in our IPO. We use cash in the ordinary course of our operations primarily for prescription drug acquisition costs, capital expenditures, and personnel costs. As of December 31, 2024, we had $4.7 million in cash and cash equivalents. Our cash primarily consists of demand deposits held with a large regional financial institution.

On May 13, 2024, we entered into the Sixth Amendment to the Third Amended and Restated Loan and Security Agreement (the “2024 Amendment”) to the existing credit facility with Regions Bank (the “Credit Facility”). The Credit Facility provides for term loans (the “Term Loan”) and a line of credit. The 2024 Amendment extended the maturity date of the Credit Facility from April 23, 2025 to April 23, 2027. The line of credit under the Credit Facility 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. Additionally, the 2024 Amendment added a new Term Loan of $15.0 million to the Credit Facility. The interest rate of the Term Loan 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 $1.4 million 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. On December 9, 2024, the Term Loan was paid down in full. The total amount available under the line of credit as of December 31, 2024 is $40 million and we have the ability to increase our overall Credit Facility up to $75 million.

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As of December 31, 2024, we had no amounts of principal outstanding under the Term Loan and no amounts of borrowings outstanding under the line of credit.

In connection with the Corporate Reorganization and the IPO, Guardian Pharmacy, LLC and the Converted Subsidiaries made certain final distributions to their respective members relating to time periods ending before or upon the closing of the Corporate Reorganization. The total amount of such final distributions by Guardian Pharmacy, LLC and the Converted Subsidiaries to its members was $18.6 million. All of such distributions were made in ordinary course related to operating and tax distributions from cash available prior to the IPO.

We believe our existing cash and cash equivalents, expected cash from operations, and the amounts available under our Credit Facility will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months and for the foreseeable future, though we may require additional capital resources in the future.

Net Cash Flows

For the years ended December 31, 2023 and 2024, respectively, our net cash flows provided by / (used in) were as follows:

Operating Activities

Cash flows provided by operating activities consist of our net income (loss) principally adjusted for certain non-cash items, such as depreciation and amortization, provision for losses on accounts receivable, and share-based compensation expense (income). Cash flows used in operating activities consist primarily of changes in our operating assets and liabilities.

Net cash provided by operating activities for the years ended December 31, 2024 decreased by $12.9 million compared to the corresponding period in 2023. The decrease was primarily due to increases in receivables and inventories, and decreases to operating liabilities. primarily due to certain legal and regulatory matters accrued for in 2023 and paid for in 2024, offset by increases in accounts payable when compared to the corresponding period in 2023.

Investing Activities

Cash flows provided by investing activities consist primarily of proceeds from disposition of property and equipment. Cash flows used in investing activities consist primarily of capital expenditures relating to our new and existing pharmacy locations and payments related to acquisitions.

Net cash used in investing activities for the year ended December 31, 2024 increased by $17.0 million compared to the corresponding period in 2023. The increase was primarily due to increases in cash paid for the Acquisitions of $13.7 million and increases in purchases of property and equipment of $1.8 million compared to the corresponding period in 2023.

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Financing Activities

Cash flows provided by financing activities consist primarily of borrowings from the Term Loan (recorded as borrowings from notes payable) and the line of credit, and proceeds from the issuance and sale of shares of Class A common stock in connection with the IPO. Cash flows used in financing activities consist primarily of repayment of the Term Loan (recorded as repayment of notes payable) and the line of credit, and Merger Consideration payments to holders of Class B common stock. Prior to the Corporate Reorganization and IPO, cash flows used in financing activities included significant distributions to equity holders (inclusive of non-controlling interests) of Guardian Pharmacy, LLC, mostly consisting of distributions to fund tax liabilities and operational distributions, as well as return of capital.

Net cash used in financing activities for the year ended December 31, 2024 decreased by $33.6 million compared to the corresponding period in 2023. The decrease is primarily due to the net proceeds received from the IPO of $119.8 million and the 2024 Amendment resulting in $15.0 million being added to the Credit Facility, offset by the Merger Consideration payment to holders of Class B common stock of $55.2 million in connection with the Corporate Reorganization and IPO, a $14.0 million increase in net payments made on the line of credit, and $34.0 million increase in payments made on the Term loan when compared to the corresponding period in 2023.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with GAAP. Preparing our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as related disclosures. Because these estimates and judgments may change from period to period, actual results could differ materially, which may negatively affect our financial condition or results of operations. We base our estimates and judgments on historical experience and various other assumptions that we consider reasonable, and we evaluate these estimates and judgments on an ongoing basis. We refer to such estimates and judgments, discussed further below, as critical accounting estimates.

Allowance for Credit Losses

We adopted Accounting Standards Codification (“ASC”) 326, effective as of January 1, 2023, utilizing the modified retrospective method of adoption.

Collection of trade accounts receivable from customers is our primary source of operating cash flow and is critical to our operating performance and financial condition. The primary collection risk relates to facility and private pay customers, as billings to these customers can be complex and may lead to payment disputes or delays. We establish an allowance for trade accounts receivable considered to be at increased risk of becoming uncollectible to reduce the carrying value of such receivables to their estimated net realizable value.

When establishing this allowance for credit losses, we consider such factors as historical collection experience (i.e., payment history and credit losses) and creditworthiness, specifically identified credit risks, aging of accounts receivable, current and expected economic conditions, and other relevant factors. Using this information, the Company estimates future expected credit losses. The allowance for credit losses is regularly reviewed for appropriateness. Judgment is used to assess the collectability of account balances and the economic ability of customers to pay. At such time when a balance is definitively deemed to be uncollectible, the balance is written off against the allowance for credit losses.

Goodwill

Goodwill is the excess of the consideration transferred over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method of accounting. We test our goodwill

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annually during the fourth quarter of the fiscal year or when events and circumstances indicate that impairment may have occurred and requires an impairment charge to be recognized based on the difference between the carrying amount of the reporting unit and its fair value up to the amount of goodwill assigned to the reporting unit. Impairment testing of goodwill is required at the reporting unit level (operating segment or one level below operating segment). Prior to performing the quantitative impairment test, we may make a qualitative assessment of the likelihood of goodwill impairment in order to determine whether a detailed quantitative analysis is required. Our annual impairment testing date is October 1.

Income Taxes

We account for income taxes under the asset and liability approach. Deferred tax assets or liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates as well as net operating losses and credit carryforwards, which will be in effect when these differences reverse. We provide a valuation allowance against net deferred tax assets when, based upon the available evidence, it is more likely than not that the deferred tax assets will not be realized.

We prepare and file tax returns based on interpretations of tax laws and regulations. Our tax returns are subject to examination by various taxing authorities in the normal course of business. Such examinations may result in future tax, interest and penalty assessments by these taxing authorities.

In determining our tax expense for financial reporting purposes, we establish a reserve when there are transactions, calculations, and tax filing positions for which the tax determination is uncertain, and it is more likely than not that such positions would not be sustained upon examinations.

We evaluate the need for tax reserve estimates periodically based on the changes in facts and circumstances, including any examinations by, and settlements with, varying taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated tax expense of any given year is expected to include adjustments or other changes to the reserve and related estimated interest charges that are considered appropriate. Our policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of income tax expense.

Recent Accounting Pronouncements

Refer to Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for accounting pronouncements adopted and recent accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.

JOBS Act Accounting Election

The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use the extended transition period for complying with certain new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.235 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur on the last day of the relevant fiscal year if the market value of our common equity that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (c) the date on which we have issued more than $1.0 billion in non-convertible debt securities during any three-year period.

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