NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION
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 and six months
ended
June 30, 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 unaudited consolidated statement of operations for the
three months and six months
ended
June 30, 2018
:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2017
|
|
Previously Reported
|
|
Corrections
|
|
Revised
|
|
Previously Reported
|
|
Corrections
|
|
Revised
|
Net revenue
|
$
|
218,106
|
|
|
$
|
—
|
|
|
$
|
218,106
|
|
|
$
|
435,916
|
|
|
$
|
—
|
|
|
$
|
435,916
|
|
Gross profit
|
68,310
|
|
|
(699
|
)
|
|
67,611
|
|
|
133,894
|
|
|
(1,408
|
)
|
|
132,486
|
|
Total Operating Expenses
|
83,572
|
|
|
(158
|
)
|
|
83,414
|
|
|
154,784
|
|
|
(354
|
)
|
|
154,430
|
|
Interest expense
|
12,715
|
|
|
(85
|
)
|
|
12,630
|
|
|
25,459
|
|
|
(169
|
)
|
|
25,290
|
|
Loss from continuing operations, net of income taxes
|
(28,695
|
)
|
|
(456
|
)
|
|
(29,151
|
)
|
|
(47,686
|
)
|
|
(885
|
)
|
|
(48,571
|
)
|
Loss from discontinued operations, net of income taxes
|
(503
|
)
|
|
130
|
|
|
(373
|
)
|
|
(940
|
)
|
|
268
|
|
|
(672
|
)
|
Net loss
|
$
|
(29,198
|
)
|
|
$
|
(326
|
)
|
|
$
|
(29,524
|
)
|
|
$
|
(48,626
|
)
|
|
$
|
(617
|
)
|
|
$
|
(49,243
|
)
|
Certain amounts disclosed in the accompanying notes to the financial statements have been revised to reflect the corrections.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Restricted
cash balances expected to become unrestricted during the next twelve months are recorded as current assets. As of
June 30, 2018
, the Company had a restricted cash balance, in a money market account, of $
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 prior to allowance for doubtful accounts), aged based on date of service and categorized based on the three primary overall types of accounts receivable characteristics (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
0 - 180 days
|
|
Over 180 days
|
|
Total
|
|
0 - 180 days
|
|
Over 180 days
|
|
Total
|
Government
|
|
$
|
15,772
|
|
|
$
|
2,192
|
|
|
$
|
17,964
|
|
|
$
|
20,602
|
|
|
$
|
10,082
|
|
|
$
|
30,684
|
|
Commercial
|
|
69,014
|
|
|
5,091
|
|
|
74,105
|
|
|
63,767
|
|
|
18,779
|
|
|
82,546
|
|
Patient
|
|
3,359
|
|
|
1,489
|
|
|
4,848
|
|
|
2,577
|
|
|
7,627
|
|
|
10,204
|
|
Gross accounts receivable
|
|
$
|
88,145
|
|
|
$
|
8,772
|
|
|
96,917
|
|
|
$
|
86,946
|
|
|
$
|
36,488
|
|
|
123,434
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
—
|
|
|
|
|
|
|
(37,912
|
)
|
Net accounts receivable
|
|
|
|
|
|
$
|
96,917
|
|
|
|
|
|
|
$
|
85,522
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 FASB issued 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.
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. In January 2018, the FASB issued an additional amendment that provides a practical expedient giving companies the option to not evaluate existing or expired land easements that were not previously accounted for as leases under the current leases guidance. The amendment in the update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Although early adoption is permitted, the Company plans to adopt the guidance on January 1, 2019. Topic 842 requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements using a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. The Company is evaluating the effect of adoption of the updated standard on its consolidated financial statements.
NOTE 3 — REVENUE
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, the Company 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
Topic 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 to in exchange for those goods or services. Topic 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.
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|
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|
|
Three Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2018
|
Commercial
|
|
$
|
152,251
|
|
|
$
|
292,792
|
|
Government
|
|
22,397
|
|
|
48,939
|
|
Patient
|
|
1,141
|
|
|
2,642
|
|
Total Revenue
|
|
$
|
175,789
|
|
|
$
|
344,373
|
|
Absent implementation of Topic 606, the Company would have reported revenue of
$181.2 million
and
$355.2 million
, gross profit of
$65.3 million
and
$125.8 million
, and bad debt expense of
$5.4 million
and
$10.8 million
for the
three months and six months
ended
June 30, 2018
; and allowance for doubtful accounts of
$48.7 million
at
June 30, 2018
. Revenue recognized relating to performance obligations satisfied in previous periods totaled
$7.7 million
and
$9.0 million
for the
three months and six months
ended
June 30, 2018
, respectively. These amounts primarily relate to recognition of variable consideration on contracts subject to third party settlements.
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 services 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 consideration has already been received. The Company does not receive consideration 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 as an implicit price concession.
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 other operating expenses.
NOTE 4 — LOSS PER SHARE
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 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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Loss from continuing operations, net of income taxes
|
$
|
(15,124
|
)
|
|
$
|
(29,151
|
)
|
|
$
|
(28,111
|
)
|
|
$
|
(48,571
|
)
|
Loss from discontinued operations, net of income taxes
|
(15
|
)
|
|
(373
|
)
|
|
(45
|
)
|
|
(672
|
)
|
Net loss
|
$
|
(15,139
|
)
|
|
$
|
(29,524
|
)
|
|
$
|
(28,156
|
)
|
|
$
|
(49,243
|
)
|
Dividends on preferred stock
|
(2,756
|
)
|
|
(2,478
|
)
|
|
(5,413
|
)
|
|
(4,866
|
)
|
Loss attributable to common stockholders
|
$
|
(17,895
|
)
|
|
$
|
(32,002
|
)
|
|
$
|
(33,569
|
)
|
|
$
|
(54,109
|
)
|
|
|
|
|
|
|
|
|
Denominator - Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
128,038
|
|
|
121,189
|
|
|
127,906
|
|
|
119,993
|
|
|
|
|
|
|
|
|
|
Loss per Common Share:
|
|
|
|
|
|
|
|
Loss from continuing operations, basic and diluted
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.44
|
)
|
Loss from discontinued operations, basic and diluted
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
Loss per common share, basic and diluted
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.45
|
)
|
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 June 30, 2018 and 2017
excludes the effect of
13.6 million
and
18.3 million
shares, respectively, and the computation of the diluted shares for the
six months ended June 30, 2018 and 2017
excludes the effect of
11.8 million
and
18.4 million
shares, respectively, issued in connection with the PIPE Transaction, the Rights Offering, and 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.
NOTE 5 — STOCKHOLDERS’ DEFICIT
Carrying Value of Series A Preferred Stock
As of
June 30, 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
June 30, 2018
. The following table sets forth the activity recorded during the
six months ended June 30, 2018
related to the Series A Preferred Stock (in thousands):
|
|
|
|
|
Series A Preferred Stock carrying value at December 31, 2017
|
$
|
2,827
|
|
Dividends through June 30, 2018
1
|
195
|
|
Series A Preferred Stock carrying value June 30, 2018
|
$
|
3,022
|
|
1
Dividends recorded reflect the increase in the Liquidation Preference associated with unpaid dividends.
Carrying Value of Series C Preferred Stock
As of
June 30, 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
June 30, 2018
. The following table sets forth the activity recorded during the
six months ended June 30, 2018
related to the Series C Preferred Stock (in thousands):
|
|
|
|
|
Series C Preferred Stock carrying value at December 31, 2017
|
$
|
79,252
|
|
Dividends through June 30, 2018
1
|
5,217
|
|
Series C Preferred Stock carrying value June 30, 2018
|
$
|
84,469
|
|
1
Dividends recorded reflect the increase in the Liquidation Preference associated with unpaid dividends.
As of
June 30, 2018
, the Liquidation Preference of the Series A Preferred Stock and Series C Preferred Stock was
$3.1 million
and
$89.4 million
, respectively.
2017 Warrants
In connection with the Second Lien Note Facility (as defined below), the Company also 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 Warrants, dated as of June 29, 2017 (the “Warrant Agreement”); provided, however, the 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 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 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 was
$20.1 million
as of
June 30, 2018
and was included in other non-current liabilities on the accompanying Unaudited Consolidated Balance Sheet. Fair value adjustments of
$3.1 million
and
$(0.4) million
for the
three months and six months
ended
June 30, 2018
, respectively, are presented as changes in fair value of equity linked liabilities on the accompanying Unaudited Consolidated Statement of Operations.
NOTE 6 — RESTRUCTURING, ACQUISITION, INTEGRATION, AND OTHER EXPENSES, NET
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 and six months
ended
June 30, 2018
and
2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Restructuring expense
|
$
|
1,956
|
|
|
$
|
3,884
|
|
|
$
|
3,835
|
|
|
$
|
7,090
|
|
Acquisition and integration expense
|
68
|
|
|
263
|
|
|
71
|
|
|
280
|
|
Total restructuring, acquisition, integration, and other expenses, net
|
$
|
2,024
|
|
|
$
|
4,147
|
|
|
$
|
3,906
|
|
|
$
|
7,370
|
|
NOTE 7 — DEBT
As of
June 30, 2018
and
December 31, 2017
, the Company’s debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
First Lien Note Facility, net of unamortized discount
|
198,640
|
|
|
198,324
|
|
Second Lien Note Facility, net of unamortized discount
|
98,397
|
|
|
85,694
|
|
2021 Notes, net of unamortized discount
|
197,735
|
|
|
197,363
|
|
Capital leases
|
1,471
|
|
|
2,863
|
|
Less: Deferred financing costs
|
(2,977
|
)
|
|
(3,656
|
)
|
Total Debt
|
493,266
|
|
|
480,588
|
|
Less: Current portion of long-term debt
|
(957
|
)
|
|
(1,722
|
)
|
Long-term debt, net of current portion
|
$
|
492,309
|
|
|
$
|
478,866
|
|
Debt Facilities
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) had the ability to draw upon the Second Lien Note Facility and issue second lien delayed draw senior secured notes, which was exercised on June 21, 2018, in an aggregate initial principal amount of
$10.0 million
, representing the maximum borrowings allowed on this facility (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 judgments, cross-defaults to material indebtedness and events constituting a change of control. In addition, the obligations under the First Lien Note Facility will be 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 will be 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 warrants (the “2017 Warrants”) to the purchasers of the Second Lien Notes 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 Warrants, dated as of June 29, 2017 (the “Warrant Agreement”). The 2017 Warrants, considered a derivative and subject to remeasurement at each reporting period, are reflected in other non-current liabilities at a fair value of
$20.1 million
.
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 will be 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 will be 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 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
June 30, 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 our financial instruments where the carrying value and the fair value differ (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instrument
|
|
Carrying Value as of June 30, 2018
|
|
Markets for Identical Item (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
First Lien Note Facility
|
|
$
|
198,640
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
203,461
|
|
Second Lien Note Facility
|
|
98,397
|
|
|
—
|
|
|
—
|
|
|
112,693
|
|
2017 Warrants
|
|
20,120
|
|
|
—
|
|
|
20,120
|
|
|
—
|
|
2021 Notes
|
|
197,735
|
|
|
—
|
|
|
192,000
|
|
|
—
|
|
Total
|
|
$
|
514,892
|
|
|
$
|
—
|
|
|
$
|
212,120
|
|
|
$
|
316,154
|
|
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.
NOTE 8 — COMMITMENTS AND CONTINGENCIES
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.
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 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 substantial criminal and civil 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.
NOTE 9 — CONCENTRATION OF RISK
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 and six months
ended
June 30, 2018
. One commercial payor, United Healthcare, accounted for approximately
21.9%
and
22.4%
of revenue during the
three months and six months
ended
June 30, 2017
, respectively. In addition, Medicare accounted for approximately
7.7%
and
7.1%
of revenue during the
three months ended June 30, 2018 and 2017
, respectively, and
8.0%
and
7.0%
of revenue during the
six months ended June 30, 2018 and 2017
.
NOTE 10 — INCOME TAXES
The Company’s federal and state income tax provision from continuing operations for the
three months and six months
ended
June 30, 2018
and
2017
is summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Current
|
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
18
|
|
|
190
|
|
|
35
|
|
|
226
|
|
Total current
|
18
|
|
|
190
|
|
|
35
|
|
|
226
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
—
|
|
|
437
|
|
|
—
|
|
|
932
|
|
State
|
25
|
|
|
91
|
|
|
56
|
|
|
179
|
|
Total deferred
|
25
|
|
|
528
|
|
|
56
|
|
|
1,111
|
|
Total income tax expense
|
$
|
43
|
|
|
$
|
718
|
|
|
$
|
91
|
|
|
$
|
1,337
|
|
The Company’s reconciliation of the statutory rate from continuing operations to the effective income tax rate for the
three months and six months
ended
June 30, 2018
and
2017
is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Tax benefit at statutory rate
|
$
|
(3,155
|
)
|
|
$
|
(9,790
|
)
|
|
$
|
(5,884
|
)
|
|
$
|
(16,236
|
)
|
State tax expense, net of federal taxes
|
43
|
|
|
190
|
|
|
91
|
|
|
226
|
|
Valuation allowance changes affecting income tax provision
|
2,484
|
|
|
10,266
|
|
|
5,903
|
|
|
17,242
|
|
Permanent items
|
671
|
|
|
52
|
|
|
(19
|
)
|
|
105
|
|
Income tax expense
|
$
|
43
|
|
|
$
|
718
|
|
|
$
|
91
|
|
|
$
|
1,337
|
|
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 or U.S. Federal Tax Reform (the “Reform”). The enactment included broad tax changes that are applicable to BioScrip, Inc. Most notably, the Reform decreased the U.S. corporate income tax rate from a high of 35% to a flat 21% rate effective January 1, 2018. As a result, the Company has revalued its ending net deferred tax assets as of December 31, 2017. At
June 30, 2018
, the Company had Federal net operating loss (“NOL”) carry forwards of approximately
$419.5 million
, of which
$11.5 million
, is subject to an annual limitation, which will begin expiring in 2026 and later. The Company also has a carryforward of approximately
$22.1 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
$457.8 million
, the majority of which will begin expiring in 2018 and later.
NOTE 11 — STOCK-BASED COMPENSATION
BioScrip Equity Incentive Plans
Under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), approved at the annual meeting by the stockholders on May 3, 2018, the Company may issue, among other things, incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock units, stock grants, and performance units to key employees and directors. The 2018 Plan is administered by the Company’s Management Development and Compensation Committee (the “Compensation Committee”), a standing committee of the Board of Directors.
A total of
16,406,939
shares of stock are authorized for issuance under the 2018 Plan, to include shares that remained available for grant under the 2008 Plan as of the effective date of the 2018 Plan. The authorized shares were reduced by all shares granted under the 2008 Plan after December 31, 2017 in accordance with the terms of the 2018 Plan. No key employee in any calendar year will be granted more than
3,000,000
shares of Stock with respect to (i) Options to purchase shares of Stock, (ii) Stock Appreciation Rights (based on the appreciation with respect to shares of Stock); and (iii) Stock Grants and Restricted Stock Units that are intended to comply with the requirements of Section 162(m) of the Code.
As of
June 30, 2018
,
13,734,864
shares remain available for grant under the 2018 Plan.
Stock Options
The Company recognized compensation expense related to stock options of
$0.3 million
during the
three months ended June 30, 2018
and
2017
, and
$0.6 million
during the
six months ended June 30, 2018 and 2017
.
Restricted Stock
The Company recognized
$0.8 million
and a nominal amount of compensation expense related to restricted stock awards during the
three months ended June 30, 2018 and 2017
, respectively, and
$1.0 million
and
$0.3 million
of compensation expense during the
six months ended June 30, 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 awards during the
three months ended June 30, 2018 and 2017
and the
six months ended June 30, 2018 and 2017
.
The Company recognized
$0.2 million
and nominal amounts of compensation expense related to market based cash awards during the
three months ended June 30, 2018 and 2017
, respectively, and
$0.2 million
and nominal amounts of compensation expense during
six months ended June 30, 2018 and 2017
, respectively.
Employee Stock Purchase Plan
On May 3, 2018, the Company’s stockholders approved an amendment to the BioScrip, Inc. Employee Stock Purchase Plan (the “ESPP”). 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 increased the number of shares of Common Stock available for issuance under the ESPP by
1,500,000
, from
750,000
shares to
2,250,000
shares.
As of
June 30, 2018
,
1,459,209
shares remained available for grant under the ESPP. Since inception, the ESPP’s third-party service provider has purchased
790,791
shares on the open market and delivered these shares to the Company’s employees pursuant to the ESPP. During the
three months ended June 30, 2018 and 2017
, and the
six months ended June 30, 2018 and 2017
, the Company incurred less than
$0.1 million
of expense related to the ESPP.