OPTION CARE HEALTH, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2017
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number: 001-11993
BioScrip, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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05-0489664
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(State of incorporation)
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(I.R.S. Employer Identification No.)
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1600 Broadway, Suite 700, Denver, Colorado
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80202
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
720-697-5200
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes
þ
No
o
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
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.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
On
May 7, 2018
, there were
127,951,915
shares of the registrant’s Common Stock outstanding.
TABLE OF CONTENTS
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Page
Number
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PART I
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PART II
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2
FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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3
BIOSCRIP, INC. AND SUBSIDIARIES
(in thousands, except share amounts)
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March 31,
2018 |
December 31,
2017 |
||||||
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(unaudited)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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30,352
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$
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39,457
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Restricted cash
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4,950
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4,950
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Receivables, less allowance for doubtful accounts of $37,912 as of December 31, 2017
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88,185
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85,522
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Inventory
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41,549
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38,044
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Deferred taxes
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1,066
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1,098
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Prepaid expenses and other current assets
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9,848
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18,620
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Total current assets
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175,950
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187,691
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Property and equipment, net
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24,971
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26,973
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Goodwill
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367,198
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367,198
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Intangible assets, net
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16,681
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19,114
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Other non-current assets
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2,082
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2,116
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Total assets
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$
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586,882
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$
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603,092
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities
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Current portion of long-term debt
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$
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1,055
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$
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1,722
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Accounts payable
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68,835
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65,963
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Amounts due to plan sponsors
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3,652
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4,621
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Accrued interest
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2,219
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6,706
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Accrued expenses and other current liabilities
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27,933
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26,118
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Total current liabilities
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103,694
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105,130
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Long-term debt, net of current portion
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480,382
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478,866
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Other non-current liabilities
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18,282
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21,769
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Total liabilities
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602,358
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605,765
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Series A convertible preferred stock, $.0001 par value; 825,000 shares authorized; 21,643 and 21,645 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively; and $2,998 and $2,916 liquidation preference as of March 31, 2018 and December 31, 2017, respectively
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2,923
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2,827
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Series C convertible preferred stock, $.0001 par value; 625,000 shares authorized; 614,177 shares issued and outstanding as of March 31, 2018 and December 31, 2017; and $86,952 and $84,555 liquidation preference as of March 31, 2018 and December 31, 2017, respectively
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81,813
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79,252
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Stockholders’ deficit
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Preferred stock, $.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
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—
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—
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Common stock, $.0001 par value; 250,000,000 shares authorized; 127,793,785 and 127,634,012 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
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13
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13
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Treasury stock, 96,467 and 5,106 shares outstanding, at cost, as of March 31, 2018 and December 31, 2017
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(354
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(16
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)
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Additional paid-in capital
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622,657
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624,762
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Accumulated deficit
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(722,528
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)
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(709,511
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)
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Total stockholders’ deficit
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(100,212
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)
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(84,752
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)
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Total liabilities and stockholders’ deficit
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$
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586,882
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$
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603,092
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See accompanying Notes to Unaudited Consolidated Financial Statements.
4
BIOSCRIP, INC. AND SUBSIDIARIES
(in thousands, except per share amounts)
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Three Months Ended
March 31, |
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2018
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2017
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Net revenue
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$
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168,584
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$
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217,810
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Cost of revenue (excluding depreciation expense)
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113,536
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152,936
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Gross profit
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55,048
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64,874
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Other operating expenses
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39,299
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44,319
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Bad debt expense
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—
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7,042
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General and administrative expenses
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10,669
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9,266
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Restructuring, acquisition, integration, and other expenses, net
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1,882
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3,223
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Change in fair value of equity linked liabilities
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(3,439
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)
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—
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Depreciation and amortization expense
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6,486
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7,165
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Interest expense
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13,395
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12,659
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Gain on dispositions
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(305
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)
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—
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Loss from continuing operations, before income taxes
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(12,939
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)
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(18,800
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)
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Income tax expense
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48
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619
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Loss from continuing operations, net of income taxes
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(12,987
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)
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(19,419
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)
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Loss from discontinued operations, net of income taxes
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(30
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)
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(299
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)
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Net loss
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$
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(13,017
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)
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$
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(19,718
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)
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Accrued dividends on preferred stock
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(2,481
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)
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(2,214
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)
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Deemed dividends on preferred stock
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(176
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)
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(174
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)
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Loss attributable to common stockholders
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$
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(15,674
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)
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$
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(22,106
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)
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Loss per common share:
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Loss from continuing operations, basic and diluted
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$
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(0.12
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)
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$
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(0.18
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)
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Loss from discontinued operations, basic and diluted
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—
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—
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Loss per common share, basic and diluted
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$
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(0.12
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$
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(0.18
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)
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Weighted average common shares outstanding, basic and diluted
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127,772
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118,783
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See accompanying Notes to Unaudited Consolidated Financial Statements.
5
BIOSCRIP, INC. AND SUBSIDIARIES
(in thousands)
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Three Months Ended
March 31, |
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2018
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2017
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Cash flows from operating activities:
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Net loss
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$
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(13,017
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)
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$
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(19,718
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)
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Less: Loss from discontinued operations, net of income taxes
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(30
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)
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(299
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)
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Loss from continuing operations, net of income taxes
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(12,987
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)
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(19,419
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)
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Adjustments to reconcile net loss from continuing operations, net of income taxes to net cash used in operating activities:
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Depreciation and amortization
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6,486
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7,165
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Amortization of deferred financing costs and debt discount
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2,023
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1,318
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Change in fair value of equity linked liabilities
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(3,439
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)
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—
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Change in deferred income tax
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31
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619
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Compensation under stock-based compensation plans
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556
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521
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Gain on dispositions
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(305
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)
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—
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Changes in assets and liabilities:
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Receivables
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(2,663
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)
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2,210
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Inventory
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(3,505
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)
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5,616
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Prepaid expenses and other assets
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8,807
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3,601
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Accounts payable
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2,872
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(10,936
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)
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Amounts due to plan sponsors
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(969
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)
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645
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Accrued interest
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(4,487
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)
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(1,157
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)
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Accrued expenses and other liabilities
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2,418
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(917
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)
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Net cash used in operating activities from continuing operations
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(5,162
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)
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(10,734
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)
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Net cash used in operating activities from discontinued operations
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(30
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)
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(299
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)
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Net cash used in operating activities
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(5,192
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)
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(11,033
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)
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Cash flows from investing activities:
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Purchases of property and equipment
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(2,646
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)
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(1,684
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)
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Net cash used in investing activities
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(2,646
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)
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(1,684
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)
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Cash flows from financing activities:
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Proceeds from priming credit agreement, net
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—
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23,060
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Proceeds from private issuances, net
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—
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5,052
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Borrowings on revolving credit facility
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—
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563
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Repayments on revolving credit facility
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—
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(1,000
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)
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Principal payments of long-term debt
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—
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(3,137
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)
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Repayments of capital leases
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(967
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)
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(238
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)
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Net activity from exercises of employee stock awards
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(300
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)
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(51
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)
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Net cash (used in) provided by financing activities
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(1,267
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)
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24,249
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Net change in cash and cash equivalents
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(9,105
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)
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11,532
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Cash, cash equivalents, and restricted cash - beginning of period
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44,407
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9,569
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Cash, cash equivalents, and restricted cash - end of period
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$
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35,302
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$
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21,101
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DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the period for interest
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$
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15,883
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$
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12,548
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Cash (refunded) paid during the period for income taxes
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$
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(82
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)
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$
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125
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See accompanying Notes to Unaudited Consolidated Financial Statements.
6
BIOSCRIP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
These Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements, including the notes thereto, and other information included in the Annual Report on Form 10-K of BioScrip, Inc. and its wholly-owned subsidiaries (the “Company”) for the year ended
December 31, 2017
(the “Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”). These Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
The information furnished in these Unaudited Consolidated Financial Statements reflects all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the
three months
ended
March 31, 2018
require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes and are not necessarily indicative of the results that may be expected for the full year ending
December 31, 2018
.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Prior period financial statement amounts have been reclassified to conform to current period presentation.
Immaterial Error Correction
During the fourth quarter of 2017, the Company determined that certain prior period balances contained errors, predominantly due to a failure to appropriately account for and resolve transactions specific to suspense and clearing accounts. Management evaluated the materiality of the errors quantitatively and qualitatively, and concluded that they were not material to the financial statements of any period presented, but has elected to correct them in the accompanying prior period consolidated financial statements.
The following tables set forth the effect these corrections had on the Company’s March 31, 2017 statement of operations:
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Three Months Ended March 31, 2017
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|||||||||||
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Previously Reported
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Corrections
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Revised
|
|||||||||
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Net revenue
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$
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217,810
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$
|
—
|
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$
|
217,810
|
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||
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Gross profit
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65,584
|
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(710
|
)
|
64,874
|
|
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Total Operating Expenses
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71,212
|
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(197
|
)
|
71,015
|
|
|||||
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Interest expense
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12,744
|
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(85
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)
|
12,659
|
|
|||||
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Loss from continuing operations, net of income taxes
|
(18,991
|
)
|
(428
|
)
|
(19,419
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)
|
|||||
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Loss from discontinued operations, net of income taxes
|
(437
|
)
|
138
|
|
(299
|
)
|
|||||
|
Net loss
|
$
|
(19,428
|
)
|
$
|
(290
|
)
|
$
|
(19,718
|
)
|
||
Certain amounts disclosed in the accompanying notes to the financial statements have been revised to reflect the corrections.
Cash and Cash Equivalents and Restricted Cash
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents. Restricted cash consists of cash balances held by financial institutions as collateral for letters of credit. These balances are reclassified to cash and cash equivalents when the underlying obligation is satisfied, or in accordance with the governing agreement. As of
7
March 31, 2018
, the Company had a restricted cash balance, in a money market account, of approximately $
5.0 million
to cash collateralize outstanding letters of credit.
Collectability of Accounts Receivable
The following table sets forth the aging of our net accounts receivable (net of allowance for contractual adjustments and implicit price concessions as of
March 31, 2018
, and net of allowance for contractual adjustments, prior to allowance for doubtful accounts, as of
March 31, 2017
), aged based on date of service and categorized based on the three primary overall types of accounts receivable characteristics (in thousands):
|
March 31, 2018
|
December 31, 2017
|
|||||||||||||||||||||||
|
|
0 - 180 days
|
Over 180 days
|
Total
|
0 - 180 days
|
Over 180 days
|
Total
|
||||||||||||||||||
|
Government
|
$
|
18,367
|
|
$
|
1,604
|
|
$
|
19,971
|
|
$
|
20,602
|
|
$
|
10,082
|
|
$
|
30,684
|
|
||||||
|
Commercial
|
61,561
|
|
2,019
|
|
63,580
|
|
63,767
|
|
18,779
|
|
82,546
|
|
||||||||||||
|
Patient
|
3,819
|
|
815
|
|
4,634
|
|
2,577
|
|
7,627
|
|
10,204
|
|
||||||||||||
|
Gross accounts receivable
|
$
|
83,747
|
|
$
|
4,438
|
|
88,185
|
|
$
|
86,946
|
|
$
|
36,488
|
|
123,434
|
|
||||||||
|
Allowance for doubtful accounts
|
—
|
|
(37,912
|
)
|
||||||||||||||||||||
|
Net accounts receivable
|
$
|
88,185
|
|
$
|
85,522
|
|
||||||||||||||||||
Implementation of Topic 606 effectively eliminated the allowance for doubtful accounts as we provided implicit price concessions to payors, and patients with co-pays, deductibles, and co-insurance. Amounts presented reflect reductions from the amounts billed to reflect the estimated transaction price, net of estimated implicit price concessions and contractual adjustments.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09—Revenue from Contracts with Customers (Topic 606). The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The FASB delayed the effective date to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company did not elect early adoption and applied the modified retrospective approach upon adoption which results in application of the new guidance only to contracts that are not completed at the adoption date and does not require adjustment of prior reporting periods. Assessment of the new guidance did not result in an opening retained earnings adjustment, but did result in the adjustment of accounts receivable as the allowance for doubtful accounts was eliminated upon implementation. Pursuant to the requirements of Topic 606, the transaction price to be recognized as revenue is estimated based upon the amount of cash ultimately expected to be collected. Therefore, amounts expected to be written off are reflected in the amount of revenue recognized upon fulfillment of the performance obligation. The new standard resulted in the recognition of amounts previously reported as bad debt expense as a reduction to revenue upon implementation; see Note 3 - Revenue.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The effective date for ASU 2017-11 is for annual or any interim periods beginning after December 15, 2018. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09—Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 modifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The effective date for ASU 2017-09 is for annual or any interim periods beginning after December 15, 2017. The Company adopted this ASU effective January 1, 2018. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
8
In November 2016, the FASB issued ASU 2016-18—Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The effective date for ASU 2016-18 is for annual or any interim periods beginning after December 15, 2017. The Company adopted this ASU effective January 1, 2018. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU effective January 1, 2018. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02—Leases (Topic 842), requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard may be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The Company is evaluating the effect that the updated standard will have on its consolidated financial statements.
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not restated and continue to be reported in accordance with accounting standards in effect for those periods.
Infusion Revenues
The Company generates revenue principally through the provision of infusion services to provide clinical management services and the delivery of cost effective prescription medications. Prescription drugs are dispensed either through a pharmacy participating in the Company’s pharmacy network or a pharmacy owned by the Company. Fee-for-service agreements include pharmacy agreements, under which we dispense prescription medications through the Company’s pharmacy facilities.
The Company provides a variety of therapies to patients. For infusion-related therapies, the Company frequently provides multiple deliverables of drugs and related nursing services. After applying the criteria from Topic 606, the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third party payor contracts. Drug revenue is recognized at the time the drug is shipped, and nursing revenue is recognized on the date of service.
Revenue Recognition
ASC 606 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled in exchange for those goods or services. ASC 606 requires application of a five-step model to determine when to recognize revenue and at what amount. The revenue standard applies to all contracts with customers and revenues are to be recognized when control of the promised goods or services is transferred to the Company’s patients in an amount that reflects consideration expected to be received in exchange for those goods or services.
The following table presents our revenues at amounts initially recognized for each associated payor class during the first quarter of 2018 (in millions). Sales and usage-based taxes are excluded from revenues.
9
|
Three Months Ended March 31, 2018
|
||||
|
Commercial
|
$
|
140,541
|
|
|
|
Government
|
26,542
|
|
||
|
Patient
|
1,501
|
|
||
|
Total Revenue
|
$
|
168,584
|
|
|
Absent implementation of Topic 606, the Company would have reported revenue of
$174.0 million
, gross profit of
$60.5 million
, bad debt expense of
$5.5 million
, and allowance for doubtful accounts of
$41.2 million
for the
three months ended March 31, 2018
.
Contract Assets and Liabilities
In accordance with Topic 606, contract assets are to be recognized when an entity has the right to receive consideration in exchange for goods or service that have been transferred to a customer when that right is conditional on something other than the passage of time. The Company does not recognize contract assets as the right to receive consideration is unconditional in accordance with the passage of time criteria. Also in accordance with Topic 606, contract liabilities are to be recognized when an entity is obligated to transfer goods or services for which revenue has already been received. The Company does not receive revenue prior to the transfer of goods or services and, therefore, will not recognize contract liabilities
Significant Judgments
The Company determines implicit price concessions based on historical collection experience using a portfolio approach. The Company determines the transaction price based on gross charges for services provided, reduced by contractual adjustments based on contractual agreements and historical experience. Pursuant to the requirements of Topic 606, the transaction price to be recognized as revenue is estimated based upon the amount of cash ultimately expected to be collected. Therefore, amounts expected to be written off are reflected in the amount of revenue recognized upon fulfillment of the performance obligation.
The Company elected a practical expedient to expense sales commissions when incurred as the amortization period associated therewith is generally one year or less and the total paid is representative of less than
1.0%
of total revenue. These costs are recorded in operating expenses.
The Company elected the practical expedient to continue to expense costs associated with obtaining and fulfilling its contracts. These costs are recorded in operating expenses.
The Company presents basic and diluted loss per share for its common stock, par value
$0.0001
per share (“Common Stock”). Basic loss per share is calculated by dividing the net loss attributable to common stockholders of the Company by the weighted average number of shares of Common Stock outstanding during the period. Diluted loss per share is determined by adjusting the profit or loss attributable to stockholders and the weighted average number of shares of Common Stock outstanding adjusted for the effects of all dilutive potential common shares comprised of options granted, unvested restricted stocks, stock appreciation rights, warrants and Series A and Series C Preferred Stock (as defined below). Potential Common Stock equivalents that have been issued by the Company related to outstanding stock options, unvested restricted stock and warrants are determined using the treasury stock method, while potential common shares related to Series A and Series C Preferred Stock are determined using the “if converted” method.
The Company's Series A Convertible Preferred Stock, par value
$0.0001
per share (the “Series A Preferred Stock”), and Series C Convertible Preferred Stock, par value
$0.0001
per share (the “Series C Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”), is considered a participating security, which means the security may participate in undistributed earnings with Common Stock. The holders of the Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of Common Stock were to receive dividends. The Company is required to use the two-class method when
10
computing loss per share when it has a security that qualifies as a participating security. The two-class method is an earnings allocation formula that determines loss per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding during the period. Diluted loss per share for the Company’s Common Stock is computed using the more dilutive of the two-class method or the if-converted method.
The following table sets forth the computation of basic and diluted loss per common share (in thousands, except for per share amounts):
|
Three Months Ended
March 31, |
|||||||
|
|
2018
|
2017
|
|||||
|
Numerator:
|
|
|
|||||
|
Loss from continuing operations, net of income taxes
|
$
|
(12,987
|
)
|
$
|
(19,419
|
)
|
|
|
Income (loss) from discontinued operations, net of income taxes
|
(30
|
)
|
(299
|
)
|
|||
|
Net loss
|
$
|
(13,017
|
)
|
$
|
(19,718
|
)
|
|
|
Accrued dividends on preferred stock
|
(2,481
|
)
|
(2,214
|
)
|
|||
|
Deemed dividend on preferred stock
|
(176
|
)
|
(174
|
)
|
|||
|
Loss attributable to common stockholders
|
$
|
(15,674
|
)
|
$
|
(22,106
|
)
|
|
|
Denominator - Basic and Diluted:
|
|
|
|
|
|||
|
Weighted average common shares outstanding
|
127,772
|
|
118,783
|
|
|||
|
Loss per Common Share:
|
|||||||
|
Loss from continuing operations, basic and diluted
|
$
|
(0.12
|
)
|
$
|
(0.18
|
)
|
|
|
Loss from discontinued operations, basic and diluted
|
—
|
|
—
|
|
|||
|
Loss per common share, basic and diluted
|
$
|
(0.12
|
)
|
$
|
(0.18
|
)
|
|
The loss attributable to common stockholders is used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. Accordingly, the computation of diluted shares for the
three months ended March 31, 2018 and 2017
excludes the effect of
18.8 million
and
19.4 million
shares, respectively, issued in connection with the PIPE Transaction and the Rights Offering, the 2017 Warrants (see Note 5 - Stockholders’ Deficit), stock options and restricted stock awards, as their inclusion would be anti-dilutive to loss attributable to common stockholders.
Carrying Value of Series A Preferred Stock
As of
March 31, 2018
, the following values were accreted pursuant to the terms of the Exchange Agreement, dated as of June 10, 2016, among the Company and the signatories thereto and recorded as a reduction of additional paid in capital in Stockholders’ Deficit and a deemed dividend on the Unaudited Consolidated Statements of Operations. In addition, dividends were accrued at
11.5%
from the date of issuance to
March 31, 2018
. The following table sets forth the activity recorded during the
three months ended March 31, 2018
related to the Series A Preferred Stock (in thousands):
|
Series A Preferred Stock carrying value at December 31, 2017
|
$
|
2,827
|
|
|
Accretion of discount related to issuance costs
|
13
|
|
|
|
Dividends recorded through March 31, 2018
1
|
83
|
|
|
|
Series A Preferred Stock carrying value March 31, 2018
|
$
|
2,923
|
|
1
Dividends recorded reflect the increase in the Liquidation Preference associated with unpaid dividends.
11
Carrying Value of Series C Preferred Stock
As of
March 31, 2018
, the following values were accreted pursuant to the terms of the Exchange Agreement, dated as of June 16, 2016, among the Company and the signatories thereto and recorded as a reduction of additional paid in capital in Stockholders’ Deficit and a deemed dividend on the Unaudited Consolidated Statements of Operations. In addition, dividends were accrued at
11.5%
from the date of issuance to
March 31, 2018
. The following table sets forth the activity recorded during the
three months ended March 31, 2018
related to the Series C Preferred Stock (in thousands):
|
Series C Preferred Stock carrying value at December 31, 2017
|
$
|
79,252
|
|
|
Accretion of discount related to issuance costs
|
163
|
|
|
|
Dividends recorded through March 31, 2018
1
|
2,398
|
|
|
|
Series C Preferred Stock carrying value March 31, 2018
|
$
|
81,813
|
|
1
Dividends recorded reflect the increase in the Liquidation Preference associated with unpaid dividends.
As of
March 31, 2018
, the Liquidation Preference of the Series A Preferred Stock and Series C Preferred Stock was
$3.0 million
and
$87.0 million
, respectively.
First Quarter 2017 Private Placement
On March 1, 2017, the Company entered into a Stock Purchase Agreement (the “First Quarter Stock Purchase Agreement”) with Venor Capital Master Fund Ltd., Map 139 Segregated Portfolio of LMA SPC, Venor Special Situations Fund II LP and Trevithick LP (the “First Quarter Stockholders”). Pursuant to the First Quarter Stock Purchase Agreement, the Company sold an aggregate of
3.3 million
shares of its common stock (the “First Quarter Shares”) for aggregate gross proceeds of approximately
$5.1 million
in a private placement transaction (the “First Quarter 2017 Private Placement”). The purchase price for each Share was
$1.5366
, which was negotiated between the Company and the First Quarter Stockholders based on the volume-weighted average price of the Company's common stock on the NASDAQ Global Market on March 1, 2017.
Proceeds from the First Quarter 2017 Private Placement were used for working capital and general corporate purposes.
2017 Warrants
In connection with the Second Lien Note Facility (as defined below), the Company issued warrants (the “2017 Warrants”) to the purchasers of the Second Lien Notes (as defined below) pursuant to a Warrant Purchase Agreement dated as of June 29, 2017 (the “Warrant Purchase Agreement”). The 2017 Warrants entitle the purchasers of the Warrants to purchase shares of Common Stock, representing at the time of any exercise of the 2017 Warrants an equivalent number of shares equal to
4.99%
of the Common Stock of the Company on a fully diluted basis, subject to the terms of the Warrant Agreement governing the 2017 Warrants, dated as of June 29, 2017 (the “Warrant Agreement”); provided, however, the 2017 Warrants may not be converted to the extent that, after giving effect to such conversion, the holders of the 2017 Warrants would beneficially own, in the aggregate, in excess of (i)
19.99%
of the shares of Common Stock outstanding as of June 29, 2017 (the “Closing Date”) minus (ii) the shares of Common Stock that were sold pursuant to the Second Quarter 2017 Private Placement (as defined below) (the “Conversion Cap”). The Conversion Cap will not apply to the 2017 Warrants if the Company obtains the approval of its stockholders for the removal of the Conversion Cap, which the Company is required to take certain steps to attempt to obtain, subject to the terms of the Warrant Agreement.
The 2017 Warrants have a
10
year term and an initial exercise price of
$2.00
per share, and may be exercised by payment of the exercise price in cash or surrender of shares of Common Stock into which the 2017 Warrants are being converted in an aggregate amount sufficient to pay the exercise price. The exercise price and the number of shares that may be acquired upon exercise of the 2017 Warrants is subject to adjustment in certain situations, including price based anti-dilution protection whereby, subject to certain exceptions, if the Company later issues Common Stock or certain Common Stock Equivalents (as defined in the Warrant Agreement) at a price less than either the then-current market price per share or exercise price of the 2017 Warrants, then the exercise price will be decreased and the percentage of shares of Common Stock issuable upon exercise of the 2017 Warrants will remain the same, giving effect to such issuance. Additionally, the 2017 Warrants have standard anti-dilution protections if the Company effects a stock split, subdivision, reclassification or combination of its Common Stock or fixes a record date for the making of a dividend or distribution to stockholders of cash or certain assets. Upon the occurrence of certain business combinations the 2017 Warrants will be converted into the right to acquire shares of stock or other securities or property (including cash) of the successor entity. The 2017 Warrants are reflected as a liability in other non-current liabilities on the balance sheet and are adjusted to fair value at the end of each reporting period through an adjustment to earnings. The fair value of the 2017 Warrants, subsequent to a remeasurement adjustment of
$3.4 million
, is
$17.1 million
at
March 31, 2018
in the Statement of Operations.
12
Second Quarter 2017 Private Placement
On June 29, 2017, the Company entered into a Stock Purchase Agreement (the “Second Quarter Stock Purchase Agreement”) with a fund managed by Ares Management L.P. (“Ares” or the “Second Quarter Stock Purchaser”). Pursuant to the terms of the Second Quarter Stock Purchase Agreement, the Company issued and sold to the Second Quarter Stock Purchaser in a private placement (the “Second Quarter 2017 Private Placement”)
6,359,350
shares of Common Stock (the “Second Quarter Shares”) at a price of
$2.50
per share, for proceeds of approximately
$15.9 million
, net of
$0.2 million
in associated costs.
Second Quarter 2017 Registration Rights Agreement
In connection with the 2017 Warrants and the Second Quarter 2017 Private Placement, the Company entered into a Registration Rights Agreement (the “Second Quarter 2017 Registration Rights Agreement”) with the holders of the 2017 Warrants and the Second Quarter Stock Purchaser. Pursuant to the Second Quarter 2017 Registration Rights Agreement, subject to certain exceptions, the Company is required, upon the request of the Second Quarter Stock Purchaser and holders of the 2017 Warrants, to register the resale of the Second Quarter Shares and the shares of Common Stock issuable upon exercise of the 2017 Warrants. Pursuant to the terms of the Second Quarter 2017 Registration Rights Agreement, these registration rights will not become effective until twelve months after the Closing Date, and the costs incurred in connection with such registrations will be borne by the Company.
Restructuring, acquisition, integration and other expenses include non-operating costs associated with restructuring, acquisition, and integration initiatives such as employee severance costs, certain legal and professional fees, training costs, redundant wage costs, impacts recorded from the change in contingent consideration obligations, and other costs related to contract terminations and closed branches/offices.
Restructuring, acquisition, integration, and other expenses, net in the Unaudited Consolidated Statements of Operations for the
three months
ended
March 31, 2018
and
2017
consisted of the following (in thousands):
|
Three Months Ended
March 31, |
|||||||
|
2018
|
2017
|
||||||
|
Restructuring and other expenses
|
$
|
1,879
|
|
$
|
3,206
|
|
|
|
Acquisition and integration expense
|
3
|
|
17
|
|
|||
|
Total restructuring, acquisition, integration, and other expense, net
|
$
|
1,882
|
|
$
|
3,223
|
|
|
As of
March 31, 2018
and
December 31, 2017
, the Company’s debt consisted of the following (in thousands):
|
March 31,
2018 |
December 31,
2017 |
||||||
|
First Lien Note Facility, net of unamortized discount
|
198,481
|
|
198,324
|
|
|||
|
Second Lien Note Facility, net of unamortized discount
|
87,038
|
|
85,694
|
|
|||
|
2021 Notes, net of unamortized discount
|
197,547
|
|
197,363
|
|
|||
|
Capital leases
|
1,689
|
|
2,863
|
|
|||
|
Less: Deferred financing costs
|
(3,318
|
)
|
(3,656
|
)
|
|||
|
Total Debt
|
481,437
|
|
480,588
|
|
|||
|
Less: Current portion
|
(1,055
|
)
|
(1,722
|
)
|
|||
|
Long-term debt, net of current portion
|
$
|
480,382
|
|
$
|
478,866
|
|
|
13
Debt Facilities
The Company was previously obligated under (i) a senior secured first-lien revolving credit facility in an aggregate principal amount of
$75.0 million
(the “Revolving Credit Facility”), (ii) a senior secured first-lien term loan B in an aggregate principal amount of
$250.0 million
(the “Term Loan B Facility”) and (iii) a senior secured first-lien delayed draw term loan B in an aggregate principal amount of
$150.0 million
(the “Delayed Draw Term Loan Facility” and, together with the Revolving Credit Facility and the Term Loan B Facility, the “Senior Credit Facilities”) with SunTrust Bank (“SunTrust”), Jefferies Finance LLC and Morgan Stanley Senior Funding, Inc., originally entered on July 31, 2013 and amended from time to time.
On January 6, 2017, the Company entered into a credit agreement (the “Priming Credit Agreement” and, together with the Senior Credit Facilities, the “Prior Credit Agreements”) with certain existing lenders under the Senior Credit Facilities and SunTrust, as administrative agent for itself and the lenders. The Priming Credit Agreement provided an aggregate borrowing commitment of
$25.0 million
, which was fully drawn at closing.
On June 29, 2017 (the “Closing Date”), the Company entered into (i) a first lien note purchase agreement (the “First Lien Note Facility”), among the Company, which is the issuer under the agreement, the financial institutions and note purchasers from time to time party to the agreement (the “First Lien Note Purchasers”), and Wells Fargo Bank, National Association, in its capacity as collateral agent for itself and the First Lien Note Purchasers (the “First Lien Collateral Agent”), pursuant to which the Company issued first lien senior secured notes in an aggregate principal amount of
$200.0 million
(the “First Lien Notes”); and (ii) a second lien note purchase agreement (the “Second Lien Note Facility” and, together with the First Lien Note Facility, the “Notes Facilities”) among the Company, which is the issuer under the agreement, the financial institutions and note purchasers from time to time party to the agreement (the “Second Lien Note Purchasers”), and Wells Fargo Bank, National Association, in its capacity as collateral agent for itself and the Second Lien Note Purchasers (the “Second Lien Collateral Agent” and, together with the First Lien Collateral Agent, the “Collateral Agent”), pursuant to which the Company (a) issued second lien senior secured notes in an aggregate initial principal amount of
$100.0 million
(the “Initial Second Lien Notes”) and (b) has the ability to draw upon the Second Lien Note Facility and issue second lien delayed draw senior secured notes in an aggregate initial principal amount of
$10.0 million
for a period of
18
months after the Closing Date, subject to certain terms and conditions (the “Second Lien Delayed Draw Notes” and, together with the Initial Second Lien Notes, the “Second Lien Notes”; the Second Lien Notes, together with the First Lien Notes, the “Notes”). Funds managed by Ares are acting as lead purchasers for the Notes Facilities.
The Company used the proceeds of the sale of the First Lien Notes and the Initial Second Lien Notes to repay in full all amounts outstanding under the Prior Credit Agreements and extinguished the liability. Each of the Prior Credit Agreements was terminated following such repayment. The Company used the remaining proceeds of
$15.9 million
, net of
$0.2 million
in issuance costs, from the Notes Facilities and the Second Quarter 2017 Private Placement for working capital and general corporate purposes.
The First Lien Notes accrue interest, payable monthly in arrears, at a floating rate or rates equal to, at the option of the Company, (i) the base rate (defined as the highest of the Federal Funds Rate plus
0.5%
per annum, the Prime Rate as published by The Wall Street Journal and the one-month London Interbank Offered Rate (“LIBOR”) (subject to a
1.0%
floor) plus
1.0%
), or (ii) the one-month LIBOR rate (subject to a
1.0%
floor), plus a margin of
6.0%
if the base rate is selected or
7.0%
if the LIBOR Option is selected. The First Lien Notes mature on August 15, 2020, provided that if the Company’s existing
8.875%
Senior Notes due 2021 (the “2021 Notes”) are refinanced prior to August 15, 2020, then the scheduled maturity date of the First Lien Notes shall be June 30, 2022.
The First Lien Notes will amortize in equal quarterly installments equal to
0.625%
of the aggregate principal amount of the First Lien Note Facility, commencing on September 30, 2019, and on the last day of each third month thereafter, with the balance payable at maturity. The First Lien Notes are pre-payable at the Company’s option at specified premiums to the principal amount that will decline over the term of the First Lien Note Facility. If the First Lien Notes are prepaid prior to the second anniversary of the Closing Date, the Company will be required to pay a make-whole premium based on the present value (using a discount rate based on the specified treasury rate plus
50
basis points) of all remaining interest payments on the First Lien Notes being prepaid prior to the second anniversary of the Closing Date, plus
4.0%
of the principal amount of First Lien Notes being prepaid. On or after the second anniversary of the Closing Date, the prepayment premium is
4.0%
, which declines to
2.0%
on or after the third anniversary of the Closing Date, and declines to
0.0%
on or after the fourth anniversary of the Closing Date. At any time, the Company may pre-pay up to
$50.0 million
in aggregate principal amount of the First Lien Notes from internally generated cash without incurring any make-whole or prepayment premium. The occurrence of certain events of default may increase the applicable rate of interest by
2.0%
and could result in the acceleration of the Company’s obligations under the First Lien Note Facility prior to stated maturity and an obligation of the Company to pay the full amount of its obligations under the First Lien Note Facility.
The First Lien Note Facility contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material
14
judgments, cross-defaults to material indebtedness and events constituting a change of control. In addition, the obligations under the First Lien Note Facility are guaranteed by joint and several guarantees from the Company’s subsidiaries.
In connection with the First Lien Note Facility, the Company, its subsidiaries and the First Lien Collateral Agent entered into a First Lien Guaranty and Security Agreement, dated as of June 29, 2017 (the “First Lien Guaranty and Security Agreement”). Pursuant to the First Lien Guaranty and Security Agreement, the obligations under the First Lien Notes are secured by first priority liens on, and security interests in, substantially all of the assets of the Company and its subsidiaries.
The Second Lien Notes accrue interest, payable monthly in arrears, at a floating rate or rates equal to, at the option of the Company, (i) one-month LIBOR (subject to a
1.25%
floor) plus
9.25%
per annum in cash, (ii) one-month LIBOR (subject to a
1.25%
floor) plus
11.25%
per annum, which amount will be capitalized on each interest payment date, or (iii) one-month LIBOR (subject to a
1.25%
floor) plus
10.25%
per annum, of which one-half LIBOR plus
4.625%
per annum will be payable in cash and one-half LIBOR plus
5.625%
per annum will be capitalized on each interest payment date, provided that, in each case, if any permitted refinancing indebtedness with which the 2021 Notes are refinanced requires or permits the payment of cash interest, all of the interest on the Second Lien Notes shall be paid in cash. The Second Lien Notes mature on August 15, 2020, provided that if the 2021 Notes are refinanced prior to August 15, 2020, then the scheduled maturity date of the Second Lien Notes shall be June 30, 2022.
In connection with the Second Lien Note Facility, the Company also issued the 2017 Warrants to the purchasers of the Second Lien Notes pursuant to the Warrant Purchase Agreement. The 2017 Warrants entitle the purchasers of the 2017 Warrants to purchase shares of Common Stock, representing at the time of any exercise of the 2017 Warrants an equivalent number of shares equal to
4.99%
of the Common Stock of the Company on a fully diluted basis, subject to the terms of the Warrant Agreement. The 2017 Warrants, considered a derivative and subject to remeasurement at each reporting period, are reflected in other non-current liabilities in the unaudited consolidated balance sheet. The 2017 Warrants, subsequent to a remeasurement adjustment of
$(3.4) million
, are carried at a fair value of
$17.1 million
at
March 31, 2018
.
The Second Lien Notes are not subject to scheduled amortization installments. The Second Lien Notes are pre-payable at the Company’s option at specified premiums to the principal amount that will decline over the term of the Second Lien Note Facility. If the Second Lien Notes are prepaid prior to the third anniversary of the Closing Date, the Company will need to pay a make-whole premium based on the present value (using a discount rate based on the specified treasury rate plus
50
basis points) of all remaining interest payments on the Second Lien Notes being prepaid prior to the third anniversary of the Closing Date, plus
4.0%
of the principal amount of Second Lien Notes being prepaid. On or after the third anniversary of the Closing Date, the prepayment premium is
4.0%
, which declines to
2.0%
on or after the fourth anniversary of the Closing Date, and declines to
0.0%
on or after the fifth anniversary of the Closing Date. The occurrence of certain events of default may increase the applicable rate of interest by
2.0%
and could result in the acceleration of the Company’s obligations under the Second Lien Note Facility prior to stated maturity and an obligation of the Company to pay the full amount of its obligations under the Second Lien Note Facility.
The Second Lien Note Facility contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross-defaults to material indebtedness and events constituting a change of control. In addition, the obligations under the Second Lien Note Facility are guaranteed by joint and several guarantees from the Company’s subsidiaries.
In connection with the Second Lien Note Facility, the Company, its subsidiaries and the Second Lien Collateral Agent entered into a Second Lien Guaranty and Security Agreement, dated as of June 29, 2017 (the “Second Lien Guaranty and Security Agreement”). Pursuant to the Second Lien Guaranty and Security Agreement, the obligations under the Second Lien Notes are secured by second priority liens on, and security interests in, substantially all of the assets of the Company and its subsidies.
In connection with the First Lien Note Facility and the Second Lien Note Facility, the Company, the First Lien Collateral Agent and the Second Lien Collateral Agent, entered into an intercreditor agreement containing customary provisions to, among other things, subordinate the lien priority of the liens granted under the Second Lien Note Facility to the liens granted under the First Lien Note Facility.
2021 Notes
On February 11, 2014, the Company issued
$200.0 million
aggregate principal amount of the 2021 Notes. The 2021 Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed by all existing and future subsidiaries of the Company.
Interest on the 2021 Notes accrues at a fixed rate of
8.875%
per annum and is payable in cash semi-annually on February 15 and August 15 of each year. The debt discount of
$5.0 million
at issuance is being amortized as interest expense through maturity
15
which will result in the accretion over time of the outstanding debt balance to the principal amount. The 2021 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness.
The 2021 Notes are guaranteed on a full, joint and several basis by each of the Company’s existing and future domestic restricted subsidiaries that is a borrower under any of the Company’s credit facilities or that guarantees any of the Company’s debt or that of any of its restricted subsidiaries, in each case incurred under the Company’s credit facilities. As of
March 31, 2018
, the Company does not have any independent assets or operations, and as a result, its direct and indirect subsidiaries (other than minor subsidiaries), each being 100% owned by the Company, are fully and unconditionally, jointly and severally, providing guarantees on a senior unsecured basis to the 2021 Notes.
Fair Value of Financial Instruments
The following details the carrying value and the fair value of our financial instruments (in thousands):
|
Financial Instrument
|
Carrying Value as of March 31, 2018
|
Markets for Identical Item (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
||||||||||||
|
First Lien Note Facility
|
$
|
198,481
|
|
$
|
—
|
|
$
|
—
|
|
$
|
202,713
|
|
||||
|
Second Lien Note Facility
|
87,038
|
|
—
|
|
—
|
|
101,855
|
|
||||||||
|
2017 Warrants
|
17,056
|
|
—
|
|
17,056
|
|
—
|
|
||||||||
|
2021 Notes
|
197,547
|
|
—
|
|
186,682
|
|
—
|
|
||||||||
|
Total
|
$
|
500,122
|
|
$
|
—
|
|
$
|
203,738
|
|
$
|
304,568
|
|
||||
The fair value hierarchy for disclosure of fair value measurements is as follows:
Level 1
: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
: Quoted prices, other than quoted prices included in Level 1, which are observable for the assets or liabilities, either directly or indirectly.
Level 3
: Inputs that are unobservable for the assets or liabilities.
Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable, and capital leases. The carrying value of these financial assets and liabilities approximates fair value due to their short maturities.
Legal Proceedings
The Company is a party to various legal, regulatory and governmental proceedings incidental to its business. Based on current knowledge, management does not believe that loss contingencies arising from pending legal, regulatory and governmental matters, including the matters described herein, will have a material adverse effect on the consolidated financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in pending legal, regulatory and governmental matters, some of which are beyond the Company’s control, and the indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
With respect to all legal, regulatory and governmental proceedings, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the possible loss or range of loss. However, the Company is unable to estimate a possible loss or range of loss in some instances based on the significant uncertainties involved in, and/or the preliminary nature of, certain legal, regulatory and governmental matters.
16
Breach of Contract Litigation in the Delaware Court of Chancery
On November 3, 2015, Walgreen Co. and various affiliates (“Walgreens”) filed a lawsuit in the Delaware Court of Chancery against the Company and certain of its subsidiaries (collectively, the “Defendants”). The complaint alleges that the Company breached certain non-compete provisions contained in the Community Pharmacy and Mail Business Purchase Agreement dated as of February 1, 2012, by and among Walgreens and certain subsidiaries and the Company and certain subsidiaries. The complaint seeks both money damages and injunctive relief. On December 7, 2015, the Defendants filed a motion to dismiss the case. Walgreens filed an answering brief on January 11, 2016, and the Defendants filed a reply on January 25, 2016. On March 11, 2016, the Court held oral argument on the Company’s motion to dismiss and granted the motion, holding that Walgreens’ breach of contract claims for money damages must be resolved in accordance with the 2012 Purchase Agreement’s alternative dispute resolution procedure. On March 15, 2016, Walgreens informed the Court that it would not be pursuing any claims for injunctive relief in the Court at that time, but instead would engage in the required alternative dispute resolution procedure. Walgreens requested that the Court keep the case open pending the results of that process. On March 16, 2016, the Court stayed the lawsuit and removed the trial from its calendar, but did not grant Walgreens any other relief or enjoin the Company from taking any action. On December 8, 2016, the parties submitted the dispute to an arbitrator. On December 28, 2016, the arbitrator rendered its decision, finding that the Company had not violated the non-compete, except for certain limited sales of oral oncology, HIV and transplant pharmaceuticals, constituting approximately
3 percent
of the total sales that Walgreens claimed were made in violation of the agreement. The arbitrator also concluded that Walgreens was not entitled to recover its lost profits or lost revenues as a result of any such sales. Despite that ruling, the arbitrator awarded Walgreens
$5.8 million
in damages, or approximately
20 percent
of the total amount requested. On January 13, 2017, the Company filed a motion to vacate the arbitration award. On February 10, 2017, Walgreens opposed the Company’s motion and filed a motion to confirm the arbitration award and for other relief. On July 19, 2017, the Court confirmed the arbitration award and denied Walgreens’ request for injunctive relief. Following that decision, the parties entered into a global settlement of all disputes related to the non-compete provisions and the lawsuit was dismissed. The Company paid the settlement amount in August 2017.
Derivative Lawsuit in the Delaware Court of Chancery
On May 7, 2015, a derivative complaint was filed in the Delaware Court of Chancery (the “Derivative Complaint”) by the Park Employees’ & Retirement Board Employees’ Annuity & Benefit Fund of Chicago (the “Derivative Plaintiff”). The Derivative Complaint names as defendants certain current and former directors of the Company, consisting of Richard M. Smith, Myron Holubiak, Charlotte Collins, Samuel Frieder, David Hubers, Richard Robbins, Stuart Samuels and Gordon Woodward (collectively, the “Director Defendants”), certain current and former officers of the Company, consisting of Kimberlee Seah, Hai Tran and Patricia Bogusz (collectively the “Officer Defendants”), Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C., Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V, L.P., KOCO Investors V, L.P., and Jefferies LLC. The Company is also named as a nominal defendant in the Derivative Complaint. The Derivative Complaint was filed in the Delaware Court of Chancery as
Park Employees and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Richard M. Smith, Myron Z. Holubiak, Charlotte W. Collins, Samuel P. Frieder, David R. Huber, Richard L. Robbins, Stuart A. Samuels, Gordon H. Woodward, Kimberlee C. Seah, Hai V.Tran, Patricia Bogusz, Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C., Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V, L.P., KOCO Investors V, L.P., Jefferies LLC and BioScrip, Inc., C.A. No. 11000-VCG (Del. Ch. Ct., May 7, 2015).
The Derivative Complaint alleged generally that certain defendants breached their fiduciary duties with respect to the Company’s public disclosures, oversight of Company operations, secondary stock offerings and stock sales. The Derivative Complaint also contended that certain defendants aided and abetted those alleged breaches. The damages sought were not quantified but included, among other things, claims for money damages, restitution, disgorgement, equitable relief, reasonable attorneys’ fees, costs and expenses, and interest. The Derivative Complaint incorporated the same factual allegations from
In re BioScrip, Inc., Securities Litigation
. On April 18, 2017, the Court granted the defendants’ motion to dismiss, and on November 27, 2017 the Delaware Supreme Court affirmed the dismissal. Additional demands and lawsuits related to the same facts and circumstances, however, could be pursued in the future. In that event, there is no assurance that any defenses will be successful or that insurance will be available or adequate to fund any settlement, judgment or litigation costs associated with this action. Certain of the defendants may also seek indemnification from the Company pursuant to certain indemnification agreements, for which there may be no insurance coverage.
While no assurance can be given as to the ultimate outcome of this matter, the Company believes that the final resolution of this action is not likely to have a material adverse effect on results of operations, financial position, liquidity or capital resources.
On December 18, 2017, a commercial payor of the Company sent a letter that claimed an alleged breach of the Company’s obligation under its provider contracts. No legal proceeding has been filed. The Company is not able to estimate the amount of
17
any possible loss. The Company believes this claim is without merit and intends to vigorously defend against this claim if any such legal proceeding is commenced.
Government Regulation
Various federal and state laws and regulations affecting the healthcare industry impact or may in the future impact the Company’s current and planned operations, including, without limitation, federal and state laws and regulations prohibiting kickbacks in connection with healthcare services prohibiting certain conduct deemed to be anti-competitive (antitrust laws) and restricting drug distribution. Other laws and regulations that may affect our business include, but are not limited to, consumer protection, insurance, licensure, and privacy. There can be no assurance the Company will be able to obtain or maintain any of the regulatory approvals that may be required to operate its business, and the failure to do so could have a material effect on the Company’s financial statements.
From time to time, the Company responds to investigatory subpoenas and requests for information from governmental agencies and private parties. The Company cannot predict with certainty what the outcome of any of the foregoing might be. While the Company believes it is in substantial compliance with all existing laws and regulations material to the operation of its business. Such laws and regulations are often uncertain in their application to our business practices as they evolve and are subject to rapid change. As controversies continue to arise in the healthcare industry, federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which cannot be predicted. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more regulations or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material effect upon the Company’s Consolidated Financial Statements. A violation of the federal Anti-Kickback Statute, for example, may result in criminal penalties, substantial civil monetary penalties, as well as suspension or exclusion from the Medicare and Medicaid programs. Moreover, the costs and expenses associated with defending these actions, even where successful, can be significant.
Customer and Credit Concentration Risk
The Company provides trade credit to its customers in the normal course of business. No commercial payors accounted for more than
10.0%
of revenue during the
three months ended March 31, 2018
. One commercial payor, United Healthcare, accounted for approximately
22.8%
of revenue during the
three months ended March 31, 2017
. In addition, Medicare accounted for approximately
8.4%
and
6.9%
of revenue during the
three months ended March 31, 2018 and 2017
, respectively.
18
The Company’s federal and state income tax provision from continuing operations for the
three months
ended
March 31, 2018
and
2017
is summarized in the following table (in thousands):
|
|
Three Months Ended
March 31, |
||||||
|
|
2018
|
2017
|
|||||
|
Current
|
|
|
|||||
|
Federal
|
$
|
—
|
|
$
|
—
|
|
|
|
State
|
17
|
|
—
|
|
|||
|
Total current
|
17
|
|
—
|
|
|||
|
Deferred
|
|
|
|
|
|||
|
Federal
|
—
|
|
495
|
|
|||
|
State
|
31
|
|
124
|
|
|||
|
Total deferred
|
31
|
|
619
|
|
|||
|
Total income tax expense
|
$
|
48
|
|
$
|
619
|
|
|
The Company’s reconciliation of the statutory rate from continuing operations to the effective income tax rate for the
three months
ended
March 31, 2018
and
2017
is summarized as follows (in thousands):
|
Three Months Ended
March 31, |
|||||||
|
2018
|
2017
|
||||||
|
Tax benefit at statutory rate
|
$
|
(2,729
|
)
|
$
|
(6,445
|
)
|
|
|
State tax expense, net of federal taxes
|
48
|
|
36
|
|
|||
|
Alternative minimum tax receivable
|
—
|
|
—
|
|
|||
|
Valuation allowance changes affecting income tax provision
|
3,419
|
|
6,976
|
|
|||
|
Non-deductible transaction costs and other
|
(690
|
)
|
52
|
|
|||
|
Income tax expense
|
$
|
48
|
|
$
|
619
|
|
|
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 or US Federal Tax Reform (the “Reform”). The enactment included broad tax changes that are applicable to Bioscrip, Inc. Most notably, the Reform has established the U.S. corporate tax rate decrease from a high of 35% to a flat 21% income tax rate effective January 1, 2018. As a result, the Company has revalued its ending net deferred tax assets as of December 31, 2017. At
March 31, 2018
, the Company had Federal net operating loss (“NOL”) carry forwards of approximately
$415.5 million
, of which
$12.2 million
, is subject to an annual limitation, which will begin expiring in 2026 and later. The Company also has a carryforward of approximately
$11.5 million
related to the interest expense limitation, which is not subject to an expiration period. The Company has post-apportioned state NOL carry forwards of approximately
$454.7 million
, the majority of which will begin expiring in 2018 and later.
BioScrip Equity Incentive Plans
Under the Company’s Amended and Restated 2008 Equity Incentive Plan (the “2008 Plan”), the Company may issue, among other things, incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock grants, restricted stock units, performance shares and performance units to key employees and directors. While SARs are authorized under the 2008 Plan, they may also be issued outside of the plan. The 2008 Plan is administered by the Company’s Management Development and Compensation Committee (the “Compensation Committee”), a standing committee of the Board of Directors.
On November 30, 2016, at a special meeting, the stockholders approved (i) an amendment to the Company’s Second Amended and Restated Certificate of Incorporation to increase the number of shares of Common Stock that the Company is authorized to issue from
125 million
shares to
250 million
shares (the “Charter Amendment”); (ii) an amendment to the 2008 Plan to (a) increase the number of shares of Common Stock in the aggregate that may be subject to awards by
5,250,000
shares, from
9,355,000
to
14,605,000
shares and (b) increase the annual grant caps under the Company’s 2008 Plan from
500,000
Options,
500,000
Stock Appreciation Rights and
350,000
Stock Grants and Restricted Stock Units that are intended to comply with the requirements of
19
Section 162(m) of the Code to a cap of no more than a total of
3,000,000
Options, Stock Appreciation Rights, Stock Grants and Restricted Stock Units that are intended to comply with the requirements of Section 162(m) of the Code combined; and (iii) if necessary, an adjournment of the Stockholders’ Meeting if there were insufficient votes in favor of the Charter Amendment.
As of
March 31, 2018
,
5,470,536
shares remain available for grant under the 2008 Plan.
Stock Options
The Company recognized compensation expense related to stock options of
$0.3 million
during both the
three months ended March 31, 2018
and
2017
, respectively.
Restricted Stock
The Company recognized
$0.2 million
of compensation expense related to restricted stock awards during both the
three months ended March 31, 2018 and 2017
, respectively.
Stock Appreciation Rights and Market Based Cash Awards
The Company recognized nominal amounts of compensation expense related to stock appreciation rights and market based cash awards during the
three months ended March 31, 2018 and 2017
, respectively.
The Company recognized nominal compensation expense related to market based cash awards during the
three months ended March 31, 2018 and 2017
.
Employee Stock Purchase Plan
On May 7, 2013, the Company’s stockholders approved the BioScrip, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP is administered by the Compensation Committee. The ESPP provides all eligible employees, as defined under the ESPP, the opportunity to purchase up to a maximum number of shares of Common Stock of the Company as determined by the Compensation Committee. Participants in the ESPP may acquire the Common Stock at a cost of
85%
of the lower of the fair market value on the first or last day of the quarterly offering period. The Company filed a Registration Statement on Form S-8 to register
750,000
shares of Common Stock, par value
$0.0001
per share, for issuance under the ESPP.
As of
March 31, 2018
,
7,884
shares remained available for grant under the ESPP. Since inception, the ESPP’s third-party service provider has purchased
742,116
shares on the open market and delivered these shares to the Company’s employees pursuant to the ESPP. The Company incurred nominal expense during the
three months ended March 31, 2018 and 2017
, respectively.
20
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
The following discussion should be read in conjunction with the Audited Consolidated Financial Statements, including the notes thereto, and 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, 2017
(the “Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”), as well as our Unaudited Consolidated Financial Statements and the related notes thereto included elsewhere in this report.
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Specifically, this Quarterly Report contains, among others, forward-looking statements about:
|
•
|
our ability to make principal and interest payments on our debt and satisfy the other covenants contained in our debt agreements;
|
|
•
|
our high level of indebtedness;
|
|
•
|
our expectations regarding financial condition or results of operations in future periods;
|
|
•
|
our future sources of, and needs for, liquidity and capital resources;
|
|
•
|
our expectations regarding economic and business conditions;
|
|
•
|
our expectations regarding potential legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs;
|
|
•
|
periodic reviews and billing audits from governmental and private payors;
|
|
•
|
our expectations regarding the size and growth of the market for our products and services;
|
|
•
|
our business strategies and our ability to grow our business;
|
|
•
|
the implementation or interpretation of current or future regulations and legislation, particularly governmental oversight of our business;
|
|
•
|
our expectations regarding the outcome of litigation;
|
|
•
|
our ability to maintain contracts and relationships with our customers;
|
|
•
|
our ability to avoid delays in payment from our customers;
|
|
•
|
sales and marketing efforts;
|
|
•
|
the status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements;
|
|
•
|
future capital expenditures;
|
|
•
|
our ability to hire and retain key employees;
|
|
•
|
our ability to execute our acquisition and growth strategy; and
|
|
•
|
our ability to successfully integrate other businesses we may acquire.
|
Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. Important factors that could cause such differences include, among other things:
|
•
|
risks associated with increased or changing government regulation related to the health care and insurance industries in general, and more specifically, home infusion providers;
|
|
•
|
our ability to comply with debt covenants in our Notes Facility (as defined below) and unsecured notes indenture;
|
|
•
|
risks associated with our issuance of the 2017 Warrants (as defined below);
|
|
•
|
risks associated with the retention or transition of executive officers and key employees
|
|
•
|
our expectation regarding the interim and ultimate outcome of commercial disputes, including litigation;
|
|
•
|
unfavorable economic and market conditions;
|
|
•
|
disruptions in supplies and services resulting from force majeure events such as war, strike, riot, crime, or “acts of God” such as hurricanes, flooding, blizzards or earthquakes;
|
|
•
|
reductions in federal and state reimbursement for our products and services;
|
|
•
|
delays or suspensions of Federal and state payments for services provided;
|
|
•
|
efforts to reduce healthcare costs and alter health care financing, which may involve reductions in reimbursement for our products and services;
|
|
•
|
the effect of health reform efforts including the 21st Century Cures Act (the “Cures Act”);
|
21
|
•
|
the effect of health reform efforts, including the Patient Protections and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together the “Affordable Care Act”) and value based payment initiatives, including related accountable care organizations;
|
|
•
|
existence of complex laws and regulations relating to our business;
|
|
•
|
availability of financing sources;
|
|
•
|
declines and other changes in revenue due to the expiration of short-term contracts;
|
|
•
|
network lockouts and decisions to in-source by health insurers including lockouts with respect to acquired entities;
|
|
•
|
unforeseen contract terminations;
|
|
•
|
difficulties in the implementation and ongoing evolution of our operating systems;
|
|
•
|
difficulties with the implementation of our growth strategy and integrating businesses we have acquired or will acquire;
|
|
•
|
increases or other changes in our acquisition cost for our products;
|
|
•
|
increased competition from competitors having greater financial, technical, reimbursement, marketing and other resources could have the effect of reducing prices and margins;
|
|
•
|
disruptions in our relationship with our primary supplier of prescription products;
|
|
•
|
the level of our indebtedness and its effect on our ability to execute our business strategy and increased risk of default under our debt obligations;
|
|
•
|
introduction of new drugs, which can cause prescribers to adopt therapies for existing patients that are less profitable to us;
|
|
•
|
changes in industry pricing benchmarks, which could have the effect of reducing prices and margins; and
|
|
•
|
other risks and uncertainties described from time to time in our filings with the SEC.
|
You should not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
Business Overview
We are a national provider of infusion solutions. We partner with physicians, hospital systems, skilled nursing facilities, and healthcare payors to provide patients access to post-acute care services. We operate with a commitment to bring customer-focused healthcare infusion therapy services into the home or alternate site setting. By collaborating with the full spectrum of healthcare professionals and the patient, we aim to provide cost-effective care that is driven by clinical excellence, customer service and values that promote positive outcomes and an enhanced quality of life for those whom we serve. As of the filing of this Quarterly Report, we have a total of
65
service locations in
27
states.
Our platform provides nationwide service capabilities and the ability to deliver clinical management services that offer patients a high-touch, community-based and home-based care environment. Our core services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, works with the physician to develop a plan of care suited to our patient’s specific needs. Whether in the home, physician office, ambulatory infusion center, skilled nursing facility or other alternate sites of care, we provide products, services and condition-specific clinical management programs tailored to improve the care of individuals with complex health conditions such as gastrointestinal abnormalities, infectious diseases, cancer, multiple sclerosis, organ and blood cell transplants, bleeding disorders, immune deficiencies and heart failure.
We operate in one segment, Infusion Services, and accordingly, we do not present disaggregated segment information.
Regulatory Matters Update
Approximately
15.7%
and
16.3%
of revenue for the
three months ended March 31, 2018 and 2017
, respectively was derived directly from Medicare, state Medicaid programs and other government payors. We also provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs indirectly through managed care entities. Medicare Part D, for example, is administered through managed care entities. In the normal course of business, we and our customers are subject to legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs.
State Medicaid Programs
Medicaid coverage of infusion therapy varies by state. We are sensitive to possible changes in state Medicaid programs. Budgetary concerns in many states have resulted in, and may continue to result in, reductions to Medicaid reimbursement and delays in payment of outstanding claims. In addition, many states have implemented or are considering strategies to reduce coverage, restrict eligibility, or enroll Medicaid recipients in managed care programs.
22
Each individual state Medicaid program represents less than
5%
of our consolidated revenue for the
three months
ended
March 31, 2018
, and no individual state Medicaid reimbursement reduction is expected to have a material effect on our Consolidated Financial Statements. We are continually assessing the impact of the state Medicaid reimbursement cuts as states propose, finalize and implement various cost-saving measures.
Given the reimbursement pressures, we continue to improve operational efficiencies and reduce costs to mitigate the impact on results of operations where possible. In some cases, reimbursement rate reductions may result in negative operating results, and we would likely exit some or all services where rate reductions result in unacceptable returns to our stockholders.
Medicare
We receive reimbursement for infusion therapy under the Medicare program. Coverage is limited based on the place of service, diagnosis, and method of drug delivery. In recent years, legislative and regulatory changes have resulted in limitations and reductions in reimbursement under government healthcare programs. For example, the Cures Act, which Congress passed in December 2016, changed the payment methodology for certain infusion drugs under the Part B DME benefit. Significant reductions to the amount paid by Medicare for many infusion drugs took effect January 1, 2017. In addition, the Cures Act provides for the implementation of a clinical services payment under Part B for “qualified home infusion therapy suppliers.” Under this new payment system, Medicare will reimburse home infusion therapy suppliers based on a single, all-inclusive rate. The services payment provision does not take effect until January 1, 2021. However, the Bipartisan Budget Act of 2018 provides for temporary transitional benefit payments, starting January 1, 2019, for Medicare Part B home infusion services. This temporary benefit will continue until January 1, 2021 when the services payment in the Cures Act takes effect.
There are also more general efforts to reduce federal spending. For example, the Budget Control Act of 2011 (the “BCA”) requires automatic spending reductions to reduce the federal deficit, including Medicare spending reductions of up to 2% per fiscal year, with a uniform percentage reduction across all Medicare programs. CMS began imposing a 2% reduction on Medicare claims in 2013. These reductions have been extended through 2027.
Approximately
8.4%
and
6.9%
of revenue for the
three months ended March 31, 2018 and 2017
was derived from Medicare, respectively.
Critical Accounting Estimates
Our Unaudited Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from these estimates.
We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. Our critical accounting estimates have not changed from the description provided in our Annual Report, except for the changes related to the implementation of ASU 2014-09 as they relate to transaction price and implicit price concessions; see Note 3 - Revenue. For a full description of our accounting policies please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.
23
Collectability of Accounts Receivable
The following table sets forth the aging of our net accounts receivable (net of allowance for contractual adjustments and implicit price concessions as of
March 31, 2018
, and net of allowance for contractual adjustments, prior to allowance for doubtful accounts, as of
March 31, 2017
), aged based on date of service and categorized based on the three primary overall types of accounts receivable characteristics (in thousands):
|
March 31, 2018
|
December 31, 2017
|
|||||||||||||||||||||||
|
|
0 - 180 days
|
Over 180 days
|
Total
|
0 - 180 days
|
Over 180 days
|
Total
|
||||||||||||||||||
|
Government
|
$
|
18,367
|
|
$
|
1,604
|
|
$
|
19,971
|
|
$
|
20,602
|
|
$
|
10,082
|
|
$
|
30,684
|
|
||||||
|
Commercial
|
61,561
|
|
2,019
|
|
63,580
|
|
63,767
|
|
18,779
|
|
82,546
|
|
||||||||||||
|
Patient
|
3,819
|
|
815
|
|
4,634
|
|
2,577
|
|
7,627
|
|
10,204
|
|
||||||||||||
|
Gross accounts receivable
|
$
|
83,747
|
|
$
|
4,438
|
|
88,185
|
|
$
|
86,946
|
|
$
|
36,488
|
|
123,434
|
|
||||||||
|
Allowance for doubtful accounts
|
—
|
|
(37,912
|
)
|
||||||||||||||||||||
|
Net accounts receivable
|
$
|
88,185
|
|
$
|
85,522
|
|
||||||||||||||||||
Implementation of Topic 606 effectively eliminated the allowance for doubtful accounts as we provided implicit price concessions to payors, and patients with co-pays, deductibles, and co-insurance. Amounts presented reflect reductions from the amounts billed to reflect the estimated transaction price, net of estimated implicit price concessions and contractual adjustments.
24
Results of Operations
The following consolidated statements have been derived from our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. The discussion set forth below compares our results of operations for the
three months
ended
March 31, 2018
with the results of operations for the corresponding periods in
2017
.
Three months ended March 31, 2018
compared to
three months ended March 31, 2017
|
|
Three Months Ended March 31,
|
As a Percentage of Revenue
|
|||||||||||
|
(in thousands)
|
|||||||||||||
|
|
2018
|
2017
|
2018
|
2017
|
|||||||||
|
Net revenue
|
$
|
168,584
|
|
$
|
217,810
|
|
100.0
|
%
|
100.0
|
%
|
|||
|
Gross profit, excluding depreciation expense
|
55,048
|
|
64,874
|
|
32.7
|
%
|
29.8
|
%
|
|||||
|
Other operating expenses
|
39,299
|
|
44,319
|
|
23.3
|
%
|
20.3
|
%
|
|||||
|
Bad debt expense
|
—
|
|
7,042
|
|
—
|
%
|
3.2
|
%
|
|||||
|
General and administrative expenses
|
10,669
|
|
9,266
|
|
6.3
|
%
|
4.3
|
%
|
|||||
|
Restructuring, acquisition, integration, and other expenses, net
|
1,882
|
|
3,223
|
|
1.1
|
%
|
1.5
|
%
|
|||||
|
Depreciation and amortization expense
|
6,486
|
|
7,165
|
|
3.8
|
%
|
3.3
|
%
|
|||||
|
Interest expense
|
13,395
|
|
12,659
|
|
7.9
|
%
|
5.8
|
%
|
|||||
|
Change in fair value of equity linked liabilities
|
(3,439
|
)
|
—
|
|
(2.0
|
)%
|
—
|
%
|
|||||
|
Gain on dispositions
|
(305
|
)
|
—
|
|
(0.2
|
)%
|
—
|
%
|
|||||
|
Loss from continuing operations, before income taxes
|
(12,939
|
)
|
(18,800
|
)
|
(7.7
|
)%
|
(8.6
|
)%
|
|||||
|
Income tax expense
|
48
|
|
619
|
|
—
|
%
|
0.3
|
%
|
|||||
|
Loss from continuing operations, net of income taxes
|
(12,987
|
)
|
(19,419
|
)
|
(7.7
|
)%
|
(8.9
|
)%
|
|||||
|
Loss from discontinued operations, net of income taxes
|
(30
|
)
|
(299
|
)
|
—
|
%
|
(0.1
|
)%
|
|||||
|
Net loss
|
$
|
(13,017
|
)
|
$
|
(19,718
|
)
|
(7.7
|
)%
|
(9.1
|
)%
|
|||
Net Revenue.
Net revenue for the
three months ended March 31, 2018
decreased
$49.2 million
, or
22.6%
, to
$168.6 million
, compared to net revenue of
$217.8 million
for the same period in
2017
. The decrease in net revenue primarily reflects the Company’s shift in strategy to focus on growing its core revenue mix, including the impact of the UnitedHealthcare contract transition effective September 30, 2017, and lower patient volumes in certain product lines, including the impact of temporary closures of Company branches due to inclement winter weather. Finally, implementation of Topic 606 during the first quarter of 2018 resulted in the recognition of amounts previously recorded as bad debt expense as a reduction to revenue. The impact of the change in accounting principle during the quarter was a
$5.5 million
, or
3.1%
, reduction to revenue. Prior period amounts have not been reclassified, consistent with the modified retrospective implementation approach, as outlined in Topic 606.
Gross Profit, Excluding Depreciation Expense
. Gross profit consists of revenue less cost of revenue. The cost of revenue primarily includes the costs of prescription medications, supplies, nursing services, shipping and other direct and indirect costs. Gross profit as a percentage of revenue improved by
2.9%
for the
three months ended March 31, 2018
as compared to the same period in
2017
due to an improved mix of higher margin core therapy revenues versus lower margin non-core therapy revenues, coupled with decreased cost of prescription medicines as a result of improved supply chain management. The decrease in gross profit of
$9.8 million
, or
15.1%
, for the
three months ended March 31, 2018
as compared to the same period in
2017
was primarily driven by lower revenues from the impact of the UnitedHealthcare contract transition effective September 30, 2017, lower patient volumes in certain product lines, including the impact of temporary closures of Company branches due to inclement winter weather, and higher costs associated with temporary product shortages, and the decrease in revenue of
$5.5 million
associated with the impact of implementation of ASC Topic 606 (see Note 3 - Revenue).
Other Operating Expenses.
Other operating expenses consist primarily of wages and benefits, travel expenses, professional service and field office expenses for our healthcare professionals engaged in providing infusion services to our patients. Other operating expenses for the
three months ended March 31, 2018
decreased
$5.0 million
, or
11.3%
, compared to the same period in
2017
due to decreased wage, benefit, and other employee costs as a result of integration, restructuring, and other workforce optimization efforts.
Bad Debt Expense.
Bad debt expense decreased
$7.0 million
during the
three months ended March 31, 2018
as compared to the same period in
2017
consistent with the implementation of ASC Topic 606 (see Note 3 - Revenue) which resulted in the
25
recognition of all of the Company’s bad debt expense as a reduction to revenue for the
three months ended March 31, 2018
. Bad debt expense as a percentage of revenue was
3.2%
during the same period in
2017
.
General and Administrative Expenses
. General and administrative expenses consist of wages and benefits for corporate overhead personnel and certain corporate level professional service fees, including legal, accounting, and IT fees. The increase in general and administrative expenses of
$1.4 million
or
15.1%
resulted primarily from investments in our field force including our National Meeting, sales force effectiveness tools and strategies, and additional professional service fees including legal and accounting.
Restructuring, Acquisition, Integration, and Other Expenses, Net.
The restructuring, acquisition, integration, and other expenses, net, decreased by
$1.3 million
, or
41.6%
, during the
three months ended March 31, 2018
. The decrease was driven by the decreased acquisition and integration activity during the current quarter. The restructuring, acquisition, integration, and other expenses consist primarily of employee severance and other benefit-related costs, third-party consulting costs, redundant facility and personnel-related costs and certain other costs associated with our restructuring, acquisition, and integration activities.
Depreciation and Amortization Expense.
Depreciation and amortization expense includes the depreciation of property and equipment and the amortization of intangible assets such as customer relationships, trademarks, and non-compete agreements with estimable lives. During the
three months ended March 31, 2018
and
2017
, we recorded depreciation expense of
$4.1 million
and
$4.0 million
, respectively, and amortization expense of intangibles of
$2.4 million
and
$3.2 million
, respectively. The decrease in depreciation and amortization expense during the
three months ended March 31, 2018
as compared to the same period in
2017
is attributable to declining property and equipment, net balances and full amortization of certain intangible assets.
Interest Expense
. Interest expense consists of interest expense and amortization of deferred financing costs, net of interest income. During the
three months ended March 31, 2018
and
2017
, we recorded interest expense of
$13.4 million
and
$12.7 million
, respectively, including
$2.0 million
and
$1.3 million
of amortization of deferred financing costs, respectively. The increase in interest expense during the
three months ended March 31, 2018
as compared to the same period in 2016 is the result of the changes in debt structure (see Note 7 - Debt).
Change in Fair Value of Equity Linked Liabilities
. The change in the fair value of equity linked liabilities of
$3.4 million
during the
three months ended March 31, 2018
represents the mark to market adjustment associated with the issuance of the 2017 Warrants in connection with the Second Lien Note Facility (see Note 7 - Debt).
Loss (Gain) on Dispositions.
Gain on dispositions of
$0.3 million
during the
three months ended March 31, 2018
is due to the disposal of certain property and equipment.
Income Tax Expense (Benefit).
Income tax expense for the
three months ended March 31, 2018
is nominal and includes a federal tax benefit of
$2.7 million
and nondeductible items of
$0.7 million
, offset by a
$3.4 million
adjustment to deferred tax asset valuation allowances and nominal state tax expense. The nominal income tax expense for the
three months ended March 31, 2017
includes a federal tax benefit of
$6.4 million
and an insignificant state tax benefit, partially offset by a
$7.0 million
adjustment to deferred tax asset valuation allowances and transaction costs of
$0.1 million
.
26
Non-GAAP Measures
The following table reconciles GAAP loss from continuing operations, net of income taxes to consolidated Adjusted EBITDA. Adjusted EBITDA is net income (loss) adjusted for interest expense, changes in the fair value of equity linked liabilities, gain (loss) on dispositions, income tax expense (benefit), depreciation and amortization, loss on extinguishment of debt, and stock-based compensation expense. Adjusted EBITDA also excludes restructuring, acquisition, integration and other expenses including non-operating costs associated with restructuring, acquisition and integration initiatives such as employee severance costs, certain legal and professional fees, training costs, redundant wage costs, impacts recorded from the change in contingent consideration obligations, and other costs related to contract terminations and closed branches/offices.
Consolidated Adjusted EBITDA is a measure of earnings that management monitors as an important indicator of financial performance, particularly future earnings potential and recurring cash flow. Adjusted EBITDA is also a primary objective of the management bonus plan. Inclusion of Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company.
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Our calculation of Non-GAAP Adjusted EBITDA, as presented, may differ from similarly titled measures reported by other companies. We encourage investors to review these reconciliations and we qualify our use of non-GAAP financial measures with cautionary statements as to their limitations.
|
Three Months Ended
March 31, |
|||||||
|
2018
|
2017
|
||||||
|
(in thousands)
|
|||||||
|
Loss from continuing operations, net of income taxes
|
$
|
(12,987
|
)
|
$
|
(19,419
|
)
|
|
|
Interest expense
|
(13,395
|
)
|
(12,659
|
)
|
|||
|
Change in fair value of equity linked liabilities
|
3,439
|
|
—
|
|
|||
|
Gain on dispositions
|
305
|
|
—
|
|
|||
|
Income tax expense
|
(48
|
)
|
(619
|
)
|
|||
|
Depreciation and amortization expense
|
(6,486
|
)
|
(7,165
|
)
|
|||
|
Stock-based compensation expense
|
(556
|
)
|
(594
|
)
|
|||
|
Restructuring, acquisition, integration, and other expenses, net
|
(1,882
|
)
|
(3,223
|
)
|
|||
|
Consolidated Adjusted EBITDA
|
$
|
5,636
|
|
$
|
4,841
|
|
|
Consolidated Adjusted EBITDA increased during the
three months
ended
March 31, 2018
compared to the same period of the prior year primarily due to the overall impact of the Company’s shift in strategy to focus on growing its core revenue mix, including the UnitedHealthcare contract transition effective September 30, 2017, and restructuring and integration efforts which optimized operations.
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
As of
March 31, 2018
, we did not have any material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Sources and Uses of Funds
Net cash used in operating activities from continuing operations totaled
$5.2 million
during the
three months ended March 31, 2018
compared to
$10.7 million
during the
three months ended March 31, 2017
, a
$5.5 million
improvement. Excluding interest payments, which increased by
$3.4 million
, operational cash flow improved by
$8.9 million
as a result of improved operating performance and working capital management.
27
Net cash used in investing activities from continuing operations during the
three months ended March 31, 2018
was
$2.6 million
compared to
$1.7 million
in cash used during the same period in
2017
. The increase in cash used in investing was primarily due to increased purchases of property and equipment.
Net cash used in financing activities from continuing operations during the
three months ended March 31, 2018
was
$1.3 million
compared to
$24.2 million
in cash provided by financing activities during the same period in
2017
driven primarily by the first quarter 2017 private placement (see Note 5) and first quarter 2017 Priming Credit Agreement (see Note 7).
At
March 31, 2018
, we had working capital of
$72.3 million
, including
$30.4 million
of cash on hand, compared to working capital of
$82.6 million
at
December 31, 2017
. The
$10.3 million
decrease in working capital resulted primarily from the decrease in our cash and cash equivalents of
$9.1 million
. Additional liquidity of $10.0 million is provided by the delayed draw capacity in our Second Lien Note Facility described below. At
March 31, 2018
and
December 31, 2017
, we had outstanding letters of credit totaling
$4.8 million
, collateralized by restricted cash of
$5.0 million
.
For a summary of the Company’s debt please refer to Note 7 within the financial statements section of this document.
Future Cash Requirements
Net cash used in operating activities from continuing operations totaled
$5.2 million
during the
three months ended March 31, 2018
. Our working capital decreased
$10.3 million
as of
March 31, 2018
compared to
December 31, 2017
. At
March 31, 2018
, we had
$30.4 million
of unrestricted cash on hand and, until December 2018, $10.0 million of delayed draw capacity under the Second Lien Notes Facility to supplement our working capital needs.
If we cannot successfully execute our strategic plans we will likely require additional or alternative sources of liquidity, including additional borrowings.
On June 29, 2017, we entered into the Notes Facilities pursuant to which we issued new senior secured notes and refinanced our existing senior secured credit facilities. Please refer to “Debt Facilities” in this section.
We regularly evaluate market conditions and financing options to improve our current liquidity profile and enhance our financial flexibility. These options may include opportunities to raise additional funds through the issuance of various forms of equity and/or debt securities or other instruments, the sale of assets or refinancing all or a portion of our indebtedness. However, there is no assurance that, if necessary, we would be able to raise capital to provide required liquidity.
Additionally, we will pursue our operational and strategic plan and will also review a range of strategic alternatives, which could include, among other things, transitioning chronic therapies to alliance partners, a potential sale or merger of our company, or continuing to pursue our operational and strategic plan. Additionally, we may pursue joint venture arrangements, additional business acquisitions and other transactions designed to expand our business.
As of the filing of this Quarterly Report, we expect that our cash on hand and cash from operations will be sufficient to fund our anticipated working capital, scheduled interest repayments and other cash needs for at least the next 12 months. Principal payments on the Notes Facilities are not required until September 30, 2019.
The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates realization of assets and satisfaction of liabilities in the ordinary course of business. As such, they do not include any adjustments to the recoverability and reclassification of recorded amounts that might be necessary should we be unable to continue as a going concern.
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risks
|
There have been no material changes to our exposure to market risk since the Annual Report.
|
Item 4.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Under the
28
supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, management evaluated the effectiveness of the Company’s disclosure controls and procedures as of
March 31, 2018
. Based on that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that, as a result of not having completed the remediation of the material weakness in internal control over financial reporting identified and described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2017, our disclosure controls and procedures were not effective as of
March 31, 2018
.
Remediation Plans
Management is actively remediating the identified material weakness, and has identified the following remediation steps:
|
•
|
Enhance risk assessment processes and monitoring activities to ensure the Company designs, implements, and operates effective controls that are responsive to identified risks.
|
|
•
|
Implementation of controls to validate key inputs and calculations used in spreadsheets used to determine financial statement amounts and disclosures.
|
|
•
|
Implementation of controls to identify and clear unmatched transactions in suspense accounts.
|
|
•
|
Implementation of monitoring controls to be operated by a centralized resource to ensure periodic counts of inventory and fixed assets are completed and differences are timely processed by our accounting systems.
|
|
•
|
Enhance controls surrounding the timely and accurate recognition of fixed asset disposals and abandonments.
|
Changes in Internal Control Over Financial Reporting
Aside from actions taken as described above in “Remediation Plans”, there have been no changes in our internal control over financial reporting that occurred during the three months ended
March 31, 2018
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
For a summary of legal proceedings please refer to Note 8 within the financial statements section of this document.
|
Item 1A.
|
Risk Factors
|
The risk factors disclosed in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended
December 31, 2017
are hereby incorporated by reference.
|
Item 5.
|
Other Information
|
None.
29
|
Item 6.
|
Exhibits
|
(a) Exhibits.
|
Exhibit Number
|
Description
|
|
2.1+
|
|
|
2.2
|
|
|
2.3
|
|
|
2.4
|
|
|
3.1
|
|
|
3.2
|
|
|
3.3
|
|
|
3.4
|
|
|
3.5
|
|
|
3.6
|
|
|
3.7
|
|
|
3.8
|
|
|
31.1
|
|
|
31.2
|
|
|
32.1
|
|
|
32.2
|
|
|
101
|
|
|
+
|
Certain schedules attached to the Home Solutions Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish the omitted schedules to the Securities and Exchange Commission upon request by the Commission.
|
|
SIGNATURES
Pursuant to the requirements 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, on
May 10, 2018
.
30
|
BIOSCRIP INC.
|
|
|
|
/s/ Alex Schott
|
|
Alex Schott
|
|
Senior Vice President, Strategic Operations (Acting Principal Accounting Officer)
|
31
TABLE OF CONTENTS
Part IItem 1. Financial StatementsNote 1 Basis Of PresentationNote 2 Summary Of Significant Accounting PoliciesNote 3 RevenueNote 4 Loss Per ShareNote 5 Stockholders DeficitNote 6 Restructuring, Acquisition, Integration, and Other Expenses, NetNote 7 DebtNote 8 Commitments and ContingenciesNote 9 Concentration Of RiskNote 10 Income TaxesNote 11 Stock-based CompensationItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RisksItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 5. Other InformationItem 6. Exhibits