NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND PRESENTATION OF FINANCIAL STATEMENTS
Corporate Organization and Business — HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care (“Option Care”).
On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”), a national provider of infusion and home care management solutions, along with certain other subsidiaries of BioScrip and HC II. The merger contemplated by the Merger Agreement (the “Merger”) was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer.
Under the terms of the Merger Agreement, shares of HC II common stock issued and outstanding immediately prior to the Merger Date were converted into 542,261,567 shares of BioScrip common stock, par value $0.0001 (the “BioScrip common stock”). BioScrip also issued an additional 28,193,428 shares to HC I in respect of certain outstanding unvested contingent restricted stock units of BioScrip, which are held in escrow to prevent dilution related to potential additional vesting on certain share-based instruments. See Note 16, Stockholders’ Equity, for additional discussion of these shares held in escrow. In conjunction with the Merger, holders of BioScrip preferred shares and certain warrants received 3,458,412 additional shares of BioScrip common stock and preferred shares were repurchased for $125.8 million of cash. In addition, all legacy BioScrip debt was settled for $575.0 million. As a result of the Merger, BioScrip’s stockholders hold approximately 19.1% of the combined company, and HC I holds approximately 80.9% of the combined company. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc. (“Option Care Health”, or the “Company”). The combined company’s stock was listed on the Nasdaq Capital Market as of September 30, 2019. See Note 3, Business Acquisitions, for further discussion on the Merger.
Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 132 locations. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other nonhospital settings. The Company operates in one segment, infusion services.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States and contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for interim financial reporting. The results of operations for the interim periods presented are not necessarily indicative of the results of operations for the entire year. These unaudited condensed consolidated financial statements do not include all of the information and notes to the financial statements required by GAAP for complete financial statements and should be read in conjunction with the 2018 audited consolidated financial statements, including the notes thereto, as presented in the definitive merger proxy with the Securities and Exchange Commission filed on June 26, 2019.
Principles of Consolidation — The Company’s unaudited condensed consolidated financial statements include the accounts of Option Care Health, Inc. and its subsidiaries. The BioScrip results have been included in the consolidated financial results since the Merger Date. All intercompany transactions and balances are eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leases — The Company has lease agreements for facilities, warehouses, office space and property and equipment. Effective as of January 1, 2019, at the inception of a contract, the Company determines if the contract is a lease or contains an embedded lease arrangement. Operating leases are included in the operating lease right-of-use asset (“ROU asset”) and operating lease liabilities in the condensed consolidated financial statements.
ROU assets, which represent the Company’s right to use the leased assets, and operating lease liabilities, which represent the present value of unpaid lease payments, are both recognized by the Company at the lease commencement date. The Company utilizes its estimated incremental borrowing rate at the lease commencement date to determine the present value of unpaid lease obligations. The rates were estimated primarily using a methodology dependent on the Company’s financial condition, creditworthiness, and availability of certain observable data. In particular, the Company considered its actual cost of borrowing for collateralized loans and its credit rating, along with the corporate bond yield curve in estimating its incremental borrowing rates. ROU assets are recorded as the amount of operating lease liability, adjusted for prepayments, accrued lease payments, initial direct costs, lease incentives, and impairment of the ROU asset. Tenant improvement allowances used to fund leasehold improvements are recognized when earned and reduce the related ROU asset. Tenant improvement allowances are amortized through the ROU asset as a reduction of expense over the term of the lease.
Leases may contain rent escalations, however the Company recognizes the lease expense on a straight-line basis over the expected lease term. The Company reviews the terms of any lease renewal options to determine if it is reasonably certain that the renewal options will be exercised. The Company has determined that the expected lease term is typically the minimum non-cancelable period of the lease.
The Company has lease agreements that contain both lease and non-lease components, which the Company has elected to account for as a single lease component for all asset classes. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet and are expensed on a straight-line basis over the term of the lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Stock Based Incentive Compensation — The Company accounts for stock-based incentive compensation expense in accordance with Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation (“ASC 718”). Stock-based incentive compensation expense is based on the grant date fair value. The Company estimates the fair value of stock option awards using a Black-Scholes option pricing model and the fair value of restricted stock unit awards using the closing price of the Company’s common stock on the grant date. For awards with a service-based vesting condition, the Company recognizes expense on a straight-line basis over the service period of the award. For awards with performance-based vesting conditions, the Company will recognize expense when it is probable that the performance-based conditions will be met. When the Company determines that it is probable that the performance-based conditions will be met, a cumulative catch-up of expense will be recorded as if the award had been vesting on a straight-line basis from the award date. The award will continue to be expensed on a straight-line basis through the remainder of the vesting period and will be updated if the Company determines that there has been a change in the probability of achieving the performance-based conditions. The Company records the impact of forfeited awards in the period in which the forfeiture occurs.
Prior to the Merger, HCI issued incentive units to certain employees of Option Care, who remained employees of the Company following the Merger. In accordance with ASC 718, the Company recognizes compensation expense on a straight-line basis over the shorter of the vesting period of the award or the employee’s expected eligibility date. HC I also issued equity incentive units to certain members of the Option Care Board of Directors, who remained members of the Board of Directors following the Merger. In accordance with ASC Topic 505, Equity Based Payment to Non-Employees, expense was recognized at grant date. See Note 15, Stock-Based Incentive Compensation, for a further discussion of equity incentive plans.
Concentrations of Business Risk — The Company generates revenue from managed care contracts and other agreements with commercial third-party payers. Revenue related to the Company’s largest payer was approximately 15% and 13% for the three and nine months ended September 30, 2019, respectively. Revenue related to the Company’s largest payer was approximately 16% and 14% for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2019, approximately 13% and 12%, respectively, of the Company’s revenue was reimbursable through Medicare and Medicaid. For the three and nine months ended September 30, 2018, approximately 11% and 11%, respectively, of the Company’s revenue was reimbursable through Medicare and Medicaid. As of September 30, 2019 and December 31, 2018, respectively, approximately 14% and 13%, respectively, of the Company’s accounts receivable was related to these programs. Governmental programs pay for services based on fee schedules and rates that are determined by the related governmental agency. Laws and regulations pertaining to government programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change in the near term. Concentration of credit risk relating to trade accounts receivable is limited due to the Company’s diversity of patients and payers.
For the three and nine months ended September 30, 2019, approximately 69% and 72%, respectively, of the Company’s pharmaceutical and medical supply purchases were from three vendors. For the three and nine months ended September 30, 2018, approximately 75% and 76%, respectively, of the Company’s pharmaceutical and medical supply purchases were from three vendors. Although there are a limited number of suppliers, the Company believes that other vendors could provide similar
products on comparable terms. However, a change in suppliers could cause delays in service delivery and possible losses in revenue, which could adversely affect the Company’s financial condition or operating results.
Recently-Adopted Accounting Pronouncements — In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases, intended to improve financial reporting about leasing transactions. The new guidance requires entities that lease assets to recognize on their balance sheets the ROU assets and lease liabilities for the rights and obligations created by those leases and to disclose key information about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 for public entities and certain not-for-profits. The Company adopted the standard as of January 1, 2019. ASU 2016-02 allows for an optional transition method, which was elected by the Company, and permits the application of the standard as of the effective date without requiring the standard to be applied to the comparative periods presented in the unaudited condensed consolidated financial statements. The Company elected the transition package of three practical expedients allowed by ASU 2016-02, which allows the Company not to reassess prior conclusions about lease identification, lease classification and initial, direct costs. The Company did not elect the practical expedient to use hindsight and, accordingly, the initial lease term did not differ under the new standard versus prior accounting practice. The Company also made a policy election not to apply this standard to any leases with a term of 12 months or less. Adoption of ASU 2016-02 resulted in the Company recording an operating lease liability of $67.0 million and a corresponding ROU asset of $59.9 million in the unaudited condensed consolidated balance sheet as of January 1, 2019. See Note 7, Leases, for further discussion on leases.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The ASU requires that an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017 for public entities and certain not-for-profits. The Company adopted the standard as of January 1, 2018. ASU 2014-09 allows for a modified retrospective approach upon adoption, which was elected by the Company, and permits application of the standard only to contracts that are not completed at the adoption date with no adjustment to the comparative periods presented in the unaudited condensed consolidated financial statements. The Company also elected the practical expedient for the portfolio approach, allowing contracts with similar characteristics and impacts to the financial statements to be evaluated together. ASU 2014-09 requires the Company to recognize revenue as the amount of cash that is ultimately expected to be collected, which resulted in the Company treating its previously-reported provision for doubeful accounts as an implicit price concession and a reduction to revenue. Other than the treatment of bad debt expense, the adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements. See Note 4, Revenue, for further discussion on revenue.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2019-09 modifies when a change to the terms or conditions of 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 interim periods beginning after December 15, 2017. The Company adopted the standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements — In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The Amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and is to be applied using a modified retrospective transition method. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Immaterial Error Correction — During the three months ended September 30, 2019, the Company identified prior period misstatements in the recording of other noncurrent liabilities that resulted in an overstatement of goodwill and other noncurrent liabilities in the Company’s consolidated balance sheets. The Company assessed the materiality of these misstatements both quantitatively and qualitatively and determined the correction of these errors to be immaterial to the prior consolidated financial statements taken as a whole. As a result, the Company has corrected the misstatements by decreasing goodwill and other noncurrent liabilities by $6.5 million in the accompanying condensed consolidated financial statements. The misstatements had no impact on net (loss) income or net cash flows from operating, investing, or financing activities in any of the periods presented.
3. BUSINESS ACQUISITIONS
Merger with BioScrip, Inc.
Overview and Total Consideration Exchanged — As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and home care management solutions, that partnered with physicians, hospital systems, payers, pharmaceutical manufacturers and skilled nursing facilities to provide patients access to post-acute care services. The Merger of Option Care and BioScrip into Option Care Health creates an expanded national platform and the opportunity to drive economies of scale through procurement savings, facility rationalization and other operating cost savings.
The fair value of purchase consideration transferred on the closing date includes the value of the number of shares of the combined company owned by BioScrip shareholders at closing of the Merger, the value of common shares issued to certain warrant and preferred shareholders in conjunction with the Merger, the fair value of stock-based instruments that were vested or earned as of the Merger, and cash payments made in conjunction with the Merger. The fair value per share of BioScrip’s common stock was $2.67 per share. This is the closing price of the BioScrip common stock on August 6, 2019.
Under the acquisition method of accounting, the calculation of total consideration exchanged is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Number of BioScrip common shares outstanding at time of the Merger
|
|
129,181
|
|
|
Common shares issued to warrant and preferred stockholders at time of the Merger
|
|
3,458
|
|
|
Total shares of BioScrip common stock outstanding at time of the Merger
|
|
132,639
|
|
|
BioScrip share price as of August 6, 2019
|
|
$
|
2.67
|
|
|
Fair value of common shares
|
|
$
|
354,146
|
|
|
Fair value of share-based instruments
|
|
$
|
32,898
|
|
|
Cash paid in conjunction with the Merger included in purchase consideration
|
|
$
|
714,957
|
|
|
Fair value of total consideration transferred
|
|
$
|
1,102,001
|
|
|
Less: cash acquired
|
|
$
|
14,787
|
|
|
Fair value of total consideration acquired, net of cash acquired
|
|
$
|
1,087,214
|
|
Cash paid in conjunction with the Merger includes payments made for settlement of $575.0 million in legacy BioScrip debt, $125.8 million in existing BioScrip preferred shares, and $14.1 million in legacy BioScrip success-based fees owed to third-party advisors. HC II financed these payments primarily through cash on hand and debt financing, which is discussed in Note 11, Indebtedness.
Allocation of Consideration —The Company's allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Merger is based on estimated fair values as of the Merger Date. The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change, which could be significant, within the measurement period, up to one year from the August 6, 2019 acquisition date.
The following is a preliminary estimate of the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, in the Merger as of August 6, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Accounts receivable, net (1)
|
|
$
|
97,163
|
|
|
Inventories (2)
|
|
19,683
|
|
|
Property and equipment, net (3)
|
|
49,697
|
|
|
Intangible assets, net (4)
|
|
193,712
|
|
|
Deferred tax assets, net of deferred tax liabilities (5)
|
|
26,731
|
|
|
Operating lease right-of-use asset (6)
|
|
22,378
|
|
|
Operating lease liability (6)
|
|
(28,897
|
)
|
|
Accounts payable (7)
|
|
(61,420
|
)
|
|
Other assumed liabilities, net of other acquired assets (7)
|
|
(18,737
|
)
|
|
Total acquired identifiable assets and liabilities
|
|
300,310
|
|
|
Goodwill (8)
|
|
786,904
|
|
|
Total consideration transferred
|
|
$
|
1,087,214
|
|
|
|
|
|
(1)
|
Management has valued accounts receivables based on the estimated future collectability of the receivables portfolio, which approximates fair value.
|
|
|
|
|
(2)
|
Inventories are stated at fair value as of the Merger Date.
|
|
|
|
|
(3)
|
The fair value of the property and equipment was determined based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised.
|
|
|
|
|
(4)
|
The preliminary allocation of consideration exchanged to intangible assets acquired is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Weighted Average Estimated Life (in years)
|
|
Trademarks/Names
|
|
$
|
12,681
|
|
|
2
|
|
Patient referral sources
|
|
180,652
|
|
|
20
|
|
Licenses
|
|
379
|
|
|
1.5
|
|
Total intangible assets, net
|
|
$
|
193,712
|
|
|
18.8
|
The Company preliminarily valued these intangibles utilizing the multi-period excess earnings method, a form of the income approach.
|
|
|
|
(5)
|
Net deferred tax assets represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. See Note 5, Income Taxes, for additional discussion of the Company’s combined income tax position subsequent to the Merger.
|
|
|
|
|
(6)
|
The fair value of the operating lease liability and corresponding right-of-use asset (current and long-term) was based on current market rates available to the Company.
|
|
|
|
|
(7)
|
Accounts payable as well as certain other current and non-current assets and liabilities are stated at fair value as of the Merger Date.
|
|
|
|
|
(8)
|
The Merger preliminarily resulted in $786.9 million of goodwill, which is attributable to cost synergies resulting from procurement and operational efficiencies and elimination of duplicative administrative costs. The goodwill created in the Merger is not expected to be deductible for tax purposes.
|
Pro Forma — Assuming BioScrip had been acquired as of January 1, 2018, and the results of BioScrip had been included in operations beginning on January 1, 2018, the following tables provide estimated unaudited pro forma results of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands). The estimated pro forma net income adjusts for the effect of fair value adjustments related to the Merger, transaction costs and other non-recurring costs directly attributable to the Merger and the impact of the additional debt to finance the Merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net revenue
|
|
$
|
690,350
|
|
|
$
|
674,890
|
|
|
$
|
2,034,582
|
|
|
$
|
1,959,395
|
|
|
Net loss
|
|
(18,686
|
)
|
|
(7,919
|
)
|
|
(54,181
|
)
|
|
(59,670
|
)
|
Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the Merger been completed on the date indicated or the future operating results.
For the periods subsequent to the Merger Date that are included in the results of operations for the three and nine months ended September 30, 2019, BioScrip had net revenue of $119.1 million and a net loss of $19.4 million.
Transaction Expenses — Acquisition-related costs were expensed as incurred, with the exception of success-based fees that are included in consideration transferred. The Company recorded transaction costs that are expensed in selling, general and administrative expenses during the three and nine months ended September 30, 2019 of approximately $6.5 million and $19.3 million, respectively. Transaction expenses consisted of professional fees for advisory, consulting and underwriting services as well as other incremental costs directly related to the acquisition.
Baptist Health Asset Acquisition — In August 2018, pursuant to the Purchase and Sale Agreement dated August 8, 2018, Option Care completed the acquisition of certain assets of Baptist Health in Little Rock, Arkansas for a purchase price of $1.0 million.
Home I.V. Specialists, Inc. Acquisition — In September 2018, pursuant to the Stock Purchase Agreement dated September 18, 2018, Option Care completed the acquisition of 100% of the outstanding shares of Home I.V. Specialists, Inc. for a purchase price of $11.6 million, net of cash acquired.
4. REVENUE
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective approach applied to those contracts that were not completed as of that date. The Company did not record a cumulative catch-up adjustment, as the timing and measurement of revenue for the Company’s customers is similar to its prior revenue recognition model.
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 to 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.
Adoption of the standard impacted the Company’s results as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to ASC 606 Adoption
|
|
Adjustments for ASC 606
|
|
Subsequent to ASC 606 Adoption
|
|
|
|
As of September 30, 2019
|
|
Condensed Consolidated Balance Sheets
|
|
|
|
Accounts receivable, net
|
|
$
|
336,303
|
|
|
$
|
—
|
|
|
$
|
336,303
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Condensed Consolidated Statement of Comprehensive Income (Loss)
|
|
|
|
Net revenue
|
|
$
|
1,644,903
|
|
|
$
|
(55,265
|
)
|
|
$
|
1,589,638
|
|
|
Provision for doubtful accounts
|
|
(55,265
|
)
|
|
55,265
|
|
|
—
|
|
|
Operating loss
|
|
(14,600
|
)
|
|
—
|
|
|
(14,600
|
)
|
|
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
Changes in operating cash flows:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
71,029
|
|
|
—
|
|
|
71,029
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Condensed Consolidated Balance Sheets
|
|
|
|
Accounts receivable, net
|
|
$
|
310,169
|
|
|
$
|
—
|
|
|
$
|
310,169
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Condensed Consolidated Statement of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
1,479,058
|
|
|
$
|
(44,997
|
)
|
|
$
|
1,434,061
|
|
|
Provision for doubtful accounts
|
|
(44,997
|
)
|
|
44,997
|
|
|
—
|
|
|
Operating Income
|
|
24,721
|
|
|
—
|
|
|
24,721
|
|
|
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
Changes in operating cash flows:
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
(32,483
|
)
|
|
—
|
|
|
(32,483
|
)
|
Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from government payers, commercial payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.
Due to the nature of the health care industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available.
The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.
The Company provides a variety of therapies to patients. For infusion-related therapies, the Company frequently provides multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from ASC 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 payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.
The Company's outstanding performance obligations relate to contracts with a duration of less than one year. Therefore, the Company has elected to apply the practical expedient provided by ASC 606 and is not required to disclose the aggregate
amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. Any unsatisfied or partially unsatisfied performance obligations at the end of a reporting period are generally completed prior to the patient being discharged.
The following table sets forth the net revenue earned by category of payer for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Commercial payers
|
|
$
|
525,927
|
|
|
$
|
428,873
|
|
|
$
|
1,373,481
|
|
|
$
|
1,256,109
|
|
|
Government payers
|
|
80,280
|
|
|
56,511
|
|
|
194,875
|
|
|
160,939
|
|
|
Patients
|
|
9,673
|
|
|
8,544
|
|
|
21,282
|
|
|
17,013
|
|
|
Net revenue
|
|
$
|
615,880
|
|
|
$
|
493,928
|
|
|
$
|
1,589,638
|
|
|
$
|
1,434,061
|
|
5. INCOME TAXES
During the three and nine months ended September 30, 2019, the Company recorded tax expense (benefit) of $3.6 million and $(3.3) million, respectively, which represents an effective tax rate of (9.1)% and 5.2%, respectively. During the three and nine months ended September 30, 2018, the Company recorded a tax expense (benefit) of $0.4 million and $(1.7) million, respectively, which represents an effective tax rate of 17.6% and 15.6%, respectively.
As a result of the Merger, the Company recorded a full valuation allowance against all of its net U.S. federal and state deferred tax assets with the exception of $1.0 million of estimated state net operating losses (“NOL”). The initial recognition of this valuation allowance by the Company was reflected in the acquired identifiable assets and liabilities of BioScrip as of the Merger Date and did not impact the Company’s tax expense (benefit) for the nine months ended September 30, 2019. Due to the Company’s valuation allowance position as of the Merger Date, the Company recognized no tax benefit for post-Merger activity for the third quarter ended September 30, 2019.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considers the scheduled reversal of deferred tax liabilities (including the effect in available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment. On a quarterly basis, the Company evaluates all positive and negative evidence in determining if the valuation allowance is fairly stated.
Based on the Company’s full valuation allowance as noted above, the Company’s tax expense for the three months ended September 30, 2019 of $3.6 million consists of quarterly tax liabilities attributable to specific state tax returns as well as the Company’s deferred tax expense recognized during the third quarter of 2019 prior to the Merger. The Company’s tax benefit for the nine months ended September 30, 2019 consists of a deferred tax benefit recognized by the Company prior to the establishment of its valuation allowance at the time of the Merger partially offset by estimated state tax liabilities.
6. (LOSS) EARNINGS PER SHARE
The Company presents basic and diluted (loss) earnings per share for its common stock. Basic (loss) earnings per share is calculated by dividing the net (loss) income of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share is determined by adjusting the profit or loss and the weighted average number of shares of common stock outstanding for the effects of all dilutive potential common shares.
As a result of the Merger, which has been accounted for as a reverse merger, all historical per share data and number of shares and equity awards were retroactively adjusted. The (loss) earnings 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 and nine months ended September 30, 2019 excludes the effect of shares that would be issued in connection with stock options and restricted stock awards, as their inclusion would be anti-dilutive to the loss per share. There are no dilutive potential common shares for the three and nine months ended September 30, 2018.
The following table presents the Company’s basic and diluted (loss) earnings per share and shares outstanding (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(42,794
|
)
|
|
$
|
1,791
|
|
|
$
|
(60,109
|
)
|
|
$
|
(9,369
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
651,576
|
|
|
570,455
|
|
|
597,792
|
|
|
570,455
|
|
|
(Loss) Earnings per Common Share:
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share, basic and diluted
|
$
|
(0.07
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.10
|
)
|
|
$
|
(0.02
|
)
|
7. LEASES
During the three and nine months ended September 30, 2019, the Company incurred operating lease expenses of $7.4 million and $21.5 million, respectively, including short-term lease expenses, which were included as a component of selling, general and administrative expenses in the condensed consolidated statements of comprehensive income (loss). As of September 30, 2019, the weighted-average remaining lease term was 5.3 years and the weighted-average discount rate was 5.41%.
Operating leases mature as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
December 31
|
|
Minimum Payments
|
|
2019
|
|
$
|
6,793
|
|
|
2020
|
|
24,733
|
|
|
2021
|
|
19,026
|
|
|
2022
|
|
14,021
|
|
|
2023
|
|
10,614
|
|
|
After 2024
|
|
24,582
|
|
|
Total lease payments
|
|
$
|
99,769
|
|
|
Less: Interest
|
|
15,805
|
|
|
Present value of lease liabilities
|
|
$
|
83,964
|
|
In addition, the Company had $0.8 million of financing leases outstanding at September 30, 2019 which mature over the next year.
During the three months ended September 30, 2019, the Company did not enter into any significant new operating or financing leases. As of September 30, 2019, the Company did not have any significant operating or financing leases that had not yet commenced.
During the three and nine months ended September 30, 2018, the Company incurred rent expense of $4.5 million and $13.0 million, respectively, under ASC 840, Leases, which were included as a component of selling, general and administrative expenses in the unaudited condensed consolidated statements of comprehensive income (loss).
8. PROPERTY AND EQUIPMENT
Property and equipment was as follows as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Infusion pumps
|
$
|
24,786
|
|
|
$
|
20,339
|
|
|
Equipment, furniture, and other
|
60,569
|
|
|
34,433
|
|
|
Leasehold improvements
|
84,675
|
|
|
61,302
|
|
|
Computer software, purchased and internally developed
|
34,500
|
|
|
29,668
|
|
|
Assets under development
|
4,585
|
|
|
5,447
|
|
|
|
209,115
|
|
|
151,189
|
|
|
Less accumulated depreciation
|
77,133
|
|
|
58,047
|
|
|
Property and equipment, net
|
$
|
131,982
|
|
|
$
|
93,142
|
|
Depreciation expense is recorded within cost of revenue and operating expenses within the condensed consolidated statements of comprehensive income (loss), depending on the nature of the underlying fixed assets. The depreciation expense included in cost of revenue relates to revenue-generating assets, such as infusion pumps. The depreciation expense included in operating expenses is related to infrastructure items, such as furniture, computer and office equipment, and leasehold improvements. The following table presents the amount of depreciation expense recorded in cost of revenue and operating expenses for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Depreciation expense in cost of revenue
|
$
|
1,384
|
|
|
$
|
747
|
|
|
$
|
2,855
|
|
|
$
|
2,265
|
|
|
Depreciation expense in operating expenses
|
8,522
|
|
|
4,680
|
|
|
18,849
|
|
|
13,522
|
|
|
Total depreciation expense
|
$
|
9,906
|
|
|
$
|
5,427
|
|
|
$
|
21,704
|
|
|
$
|
15,787
|
|
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill consists of the following activity for the three and nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
June 30, 2019 - net book value
|
|
$
|
632,469
|
|
|
Acquisitions
|
|
786,904
|
|
|
September 30, 2019 - net book value
|
|
$
|
1,419,373
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
December 31, 2018 - net book value
|
|
$
|
632,469
|
|
|
Acquisitions
|
|
786,904
|
|
|
September 30, 2019 - net book value
|
|
$
|
1,419,373
|
|
Changes in the carrying amount of goodwill consists of the following activity for the three and nine months ended September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
June 30, 2018 - net book value
|
|
$
|
627,392
|
|
|
Acquisitions
|
|
4,492
|
|
|
September 30, 2018 - net book value
|
|
$
|
631,884
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
December 31, 2017 - net book value
|
|
$
|
627,392
|
|
|
Acquisitions
|
|
4,492
|
|
|
September 30, 2018 - net book value
|
|
$
|
631,884
|
|
The carrying amount and accumulated amortization of intangible assets consists of the following as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Gross intangible assets:
|
|
|
|
|
|
Referral sources
|
|
$
|
438,445
|
|
|
$
|
257,792
|
|
|
Trademarks/names
|
|
44,702
|
|
|
32,000
|
|
|
Other amortizable intangible assets
|
|
379
|
|
|
4,151
|
|
|
Total gross intangible assets
|
|
483,526
|
|
|
293,943
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
Referral sources
|
|
(77,749
|
)
|
|
(63,353
|
)
|
|
Trademarks/names
|
|
(10,657
|
)
|
|
(8,000
|
)
|
|
Other amortizable intangible assets
|
|
(42
|
)
|
|
(2,877
|
)
|
|
Total accumulated amortization
|
|
(88,448
|
)
|
|
(74,230
|
)
|
|
Total intangible assets, net
|
|
$
|
395,078
|
|
|
$
|
219,713
|
|
Amortization expense for intangible assets was $7.5 million and $17.3 million for the three and nine months ended September 30, 2019, respectively. Amortization expense for intangible assets was $4.9 million and $14.7 million for the three and nine months ended September 30, 2018, respectively.
The weighted average amortization period of intangible assets by class and in total as of September 30, 2019 are as follows: 17.1 years for referral sources, 4.1 years for trademarks/names, 1.5 years for other amortizable intangible assets, and 15.9 years for total intangible assets.
10. EQUITY-METHOD INVESTMENTS
The Company’s two equity-method investments totaled $16.1 million and $14.6 million as of September 30, 2019 and December 31, 2018, respectively, and are included in other noncurrent assets in the accompanying condensed consolidated balance sheets. The Company’s related proportionate share of earnings is recorded in equity in earnings of joint ventures in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). For the three and nine months ended September 30, 2019, the Company’s proportionate share of earnings in its investments was $0.8 million and $2.0 million, respectively. For the three and nine months ended September 30, 2018, the Company’s proportionate share of earnings was $0.3 million and $0.7 million, respectively.
Legacy Health Systems — The Company’s 50% ownership interest in this limited liability company, which provides infusion pharmacy services, expands the Company’s presence in the Portland, Oregon market. In 2005, Option Care’s initial cash investment in this joint venture was $1.3 million. The Company received a capital distribution from this investment of $0.5 million for the three and nine months ended September 30, 2019. The Company did not receive a capital distribution from this investment for the three or nine months ended September 30, 2018. The following presents condensed financial information as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of comprehensive income (loss) data:
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net revenue
|
|
$
|
5,814
|
|
|
$
|
5,572
|
|
|
$
|
15,210
|
|
|
$
|
15,728
|
|
|
Cost of revenue
|
|
4,083
|
|
|
3,853
|
|
|
10,882
|
|
|
11,132
|
|
|
Gross profit
|
|
1,731
|
|
|
1,719
|
|
|
4,328
|
|
|
4,596
|
|
|
Net income
|
|
670
|
|
|
402
|
|
|
1,177
|
|
|
1,225
|
|
|
Equity in net income
|
|
335
|
|
|
201
|
|
|
588
|
|
|
612
|
|
|
|
|
Consolidated balance sheet data:
|
|
|
|
As of
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Current assets
|
|
$
|
6,358
|
|
|
$
|
5,666
|
|
|
Noncurrent assets
|
|
4,072
|
|
|
3,403
|
|
|
Current liabilities
|
|
572
|
|
|
119
|
|
|
Noncurrent liabilities
|
|
740
|
|
|
8
|
|
Vanderbilt Health Services — The Company’s 50% ownership interest in this limited liability company, which provides infusion pharmacy services, expands the Company’s presence in the Nashville, Tennessee market. In 2009, Option Care contributed both cash and certain operating assets into the joint venture for a total initial investment of $1.1 million. The following presents condensed financial information as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of comprehensive income (loss) data:
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net revenue
|
|
$
|
9,638
|
|
|
$
|
7,659
|
|
|
$
|
28,701
|
|
|
$
|
22,055
|
|
|
Cost of revenue
|
|
7,473
|
|
|
5,718
|
|
|
21,989
|
|
|
16,943
|
|
|
Gross profit
|
|
2,165
|
|
|
1,941
|
|
|
6,712
|
|
|
5,112
|
|
|
Net income
|
|
982
|
|
|
199
|
|
|
2,859
|
|
|
88
|
|
|
Equity in net income
|
|
491
|
|
|
100
|
|
|
1,430
|
|
|
44
|
|
|
|
|
Consolidated balance sheet data:
|
|
|
|
As of
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Current assets
|
|
$
|
10,095
|
|
|
$
|
6,517
|
|
|
Noncurrent assets
|
|
2,206
|
|
|
1,008
|
|
|
Current liabilities
|
|
1,116
|
|
|
192
|
|
|
Noncurrent liabilities
|
|
1,061
|
|
|
68
|
|
11. INDEBTEDNESS
Long-term debt consisted of the following as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
Discount
|
|
Debt Issuance Costs
|
|
Net Balance
|
|
ABL Facility
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
First Lien Term Loan
|
|
925,000
|
|
|
(8,681
|
)
|
|
(23,590
|
)
|
|
892,729
|
|
|
Second Lien Notes
|
|
400,000
|
|
|
(11,876
|
)
|
|
(14,455
|
)
|
|
373,669
|
|
|
|
|
$
|
1,325,000
|
|
|
$
|
(20,557
|
)
|
|
$
|
(38,045
|
)
|
|
1,266,398
|
|
|
Less: current portion
|
|
|
|
|
|
|
|
(6,938
|
)
|
|
Total long-term debt
|
|
|
|
|
|
|
|
$
|
1,259,460
|
|
Long-term debt consisted of the following as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
Discount
|
|
Debt Issuance Costs
|
|
Net Balance
|
|
Previous Revolving Credit Facility
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Previous First Lien Term Loan
|
|
401,513
|
|
|
(1,062
|
)
|
|
(5,678
|
)
|
|
394,773
|
|
|
Previous Second Lien Term Loan
|
|
150,000
|
|
|
—
|
|
|
(5,398
|
)
|
|
144,602
|
|
|
|
|
$
|
551,513
|
|
|
$
|
(1,062
|
)
|
|
$
|
(11,076
|
)
|
|
539,375
|
|
|
Less: current portion
|
|
|
|
|
|
|
|
(4,150
|
)
|
|
Total long-term debt
|
|
|
|
|
|
|
|
$
|
535,225
|
|
Retired Debt Obligations — During 2015, Option Care entered into two credit arrangements administered by Bank of America, N.A. and U.S. Bank. The agreements provided for up to $645.0 million in senior secured credit facilities through an $80.0 million revolving credit facility (the “Previous Revolving Credit Facility”), a $415.0 million first lien term loan (the “Previous First Lien Term Loan”), and a $150.0 million second lien term loan (the “Previous Second Lien Term Loan”, and together with the Previous First Lien Term Loan, the “Previous Term Loans”, and the Previous Term Loans, together with the Previous Revolving Credit Facility, the “Previous Credit Facilities”). Amounts borrowed under the credit agreements were secured by substantially all of the assets of the Company.
The Company incurred an original issue discount in conjunction with entering into the Previous First Lien Term Loan of $2.1 million, and also incurred an aggregate of $21.1 million in debt issuance costs to obtain the two credit agreements. These costs were recorded as a reduction to the carrying amount in the condensed consolidated balance sheets and were being amortized over the term of the related debt using the effective interest method for the Previous Term Loans and the straight-line method for the Previous Revolving Credit Facility.
On August 6, 2019, the Company repaid the outstanding balance of Previous Term Loans and retired the outstanding Previous Credit Facilities by entering into two new credit arrangements and a notes indenture, described below under “New Debt Obligations”. At the time of repayment, the outstanding balance of the Previous First Lien Term Loan was $393.8 million, which was comprised of principal of $399.4 million, net of debt issuance costs of $0.9 million and deferred financing costs of $4.7 million. The balance of the Previous Second Lien Term Loan was $145.8 million, which was comprised of principal of $150.0 million, net of deferred financing costs of $4.2 million. Proceeds from the two new credit arrangements and notes indenture were also used, in part, to repay the outstanding debt of BioScrip as of the Merger Date of $575.0 million.
The interest rate on the Previous First Lien Term Loan was 6.10% as of December 31, 2018 and the interest rate on the Previous Second Lien Term Loan was 11.15% as of December 31, 2018. The weighted average interest rate paid on the Previous First Lien Term Loan was 6.06% and 6.20% for the three and nine months ended September 30, 2019, respectively, prior to the retirement of the debt obligations. The weighted average interest paid on the Previous Second Lien Term Loan was 11.02% and 11.36% for the three and nine months ended September 30, 2019, respectively, prior to the retirement of the debt obligations. The weighted average interest rate paid on the Previous First Lien Term Loan was 5.83% and 6.38% for the three and nine months ended September 30, 2018. The weighted average interest paid on the Previous Second Lien Term Loan was 11.09% and 10.68% for the three and nine months ended September 30, 2018.
New Debt Obligations — In conjunction with the Merger, the Company entered into an asset-based-lending revolving credit facility administered by Bank of America, N.A., as the administrative agent and a first lien term loan facility administered by Bank of America, N.A. and ACF Finco I LP, as joint lead arrangers and bookrunners. The Company also issued senior secured second lien PIK toggle floating rate notes due 2027 (the “Second Lien Notes”) under an indenture with Ankura Trust Company, LLC, as trustee and collateral agent for the Second Lien Notes. The two new credit agreements and the indenture were entered into on August 6, 2019 and provide for up to $1,475.0 million in senior secured credit facilities through a $150.0 million asset-based-lending revolving credit facility (the “ABL Facility”), a $925.0 million first lien term loan (the “First Lien Term Loan”, and together with the ABL Facility, the “Loan Facilities”), and a $400.0 million issuance of Second Lien notes.
The ABL Facility provides for borrowings up to $150.0 million, which matures on August 6, 2024. The ABL Facility bears interest at a per annum rate that is determined by the Company’s periodic selection of rate type, either the Base Rate or the Eurocurrency Rate. Interest on the ABL Facility is charged on Base Rate loans at Base Rate, as defined, plus 1.25% to 1.75%, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. Interest on the ABL Facility is charged on Eurocurrency Rate Loans at the Eurocurrency Rate, as defined, plus 2.25% to 2.75%, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. The ABL Facility contains commitment fees payable on the unused portion ranging from 0.25% to 0.375%, depending on various factors including the Company’s leverage ratio, type of loan and rate type, and letter of credit fees of 2.5%. Borrowings under the ABL Facility are secured by a first priority security interest in the Company’s and each of its subsidiaries’ inventory, accounts receivable, cash, deposit accounts and certain assets and property related thereto (the “ABL Priority Collateral”), in each case subject to certain exceptions, and a third priority security interest in the Term Loan Priority Collateral, as defined below. The Company had no outstanding borrowings under the ABL Facility at September 30, 2019. The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL of $140.4 million as of September 30, 2019.
The principal balance of the First Lien Term Loan is repayable in quarterly installments commencing in March 2020 of $2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026. Interest on the First Lien Term Loan is payable monthly on Base Rate loans at Base Rate, as defined, plus 3.25% to 3.50%, depending on the Company’s leverage ratio. Interest is charged on Eurocurrency Rate loans at the Eurocurrency Rate, as defined, plus 4.25% to 4.50%, depending on the Company’s leverage ratio. The interest rate on the First Lien Term Loan was 6.61% as of September 30, 2019. The weighted average interest rate incurred was 6.67% for the period August 6, 2019 through September 30, 2019. Amounts borrowed under the First Lien Term Loan are secured by a first priority security interest in each of the Company’s subsidiaries’ capital stock (subject to certain exceptions) and substantially all of the Company’s property and assets (other than the ABL Priority Collateral), (the “Term Loan Priority Collateral”), in each case subject to certain exceptions, and a second priority security interest in the ABL Priority Collateral.
The Second Lien Notes mature on August 6, 2027. Interest on the Second Lien Notes is payable quarterly and is at the greater of 1% or the London Interbank Offered Rate (“LIBOR”), plus 8.75%. The Company elected to pay-in-kind the first quarterly interest payment, due in November 2019, which will result in the Company capitalizing the interest payment to the principal balance on the interest payment date. The interest rate on the Second Lien Notes was 10.89% as of September 30, 2019. The weighted average interest incurred was 10.89% for the period August 6, 2019 through September 30, 2019.
The Company assessed whether the repayment of the Previous Term Loans and subsequent issuance of the First Lien Term Loan and the Second Lien Notes resulted in an insubstantial modification or an extinguishment of the existing debt for each loan in the syndication by grouping lenders as follows: (i) Lenders participating in both the Previous Credit Facilities and the new Loan Facilities and Second Lien Notes; (ii) previous lenders that exited; and (iii) new lenders. The Company determined that $226.7 million of the Previous First Lien Term Loan was extinguished and none of the Previous Second Lien Term Loan was extinguished, which is disclosed as an outflow from financing activities in the condensed consolidated statements of cash flows. The Company determined that $752.4 million of new debt was issued related to the First Lien Term Loan and $250.0 million of new debt was issued related to the Second Lien Notes, which is disclosed as an inflow from financing activities in the condensed consolidated statements of cash flows. In connection with the issuance of the First Lien Term Loan, the Second Lien Notes, and the ABL Facility, the Company incurred $59.1 million in debt issuance costs and third-party fees, of which $54.6 million was capitalized, $1.3 million was expensed as a component of other expense and $3.2 million was expensed as a loss on extinguishment as a component of other expense. Further, $21.3 million of the total fees incurred of $59.1 million was netted against the $981.1 million of proceeds from debt as a component of the cash flows from financing activities, $36.5 million was presented as deferred financing costs as a component of cash flows from financing activities, and the remaining $1.3 million was included in cash flows from operating activities.
The Company recognized a loss on extinguishment of debt of $5.5 million, of which $3.2 million related to debt issue costs incurred with the issuance of the Loan Facilities and Second Lien Notes, as discussed above, and $2.3 million related to
deferred financing fees on the Previous Credit Facilities, which were written off upon extinguishment. All remaining deferred financing fees related to the Previous Credit Facilities of $7.6 million were attributed to modified loans, which are capitalized and will be amortized over the remaining term of the Loan Facilities and Second Lien Notes.
Long-term debt matures as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year Ending December 31,
|
|
Minimum Payments
|
|
2019
|
|
$
|
—
|
|
|
2020
|
|
9,250
|
|
|
2021
|
|
9,250
|
|
|
2022
|
|
9,250
|
|
|
2023
|
|
9,250
|
|
|
2024 and beyond
|
|
1,288,000
|
|
|
Total
|
|
$
|
1,325,000
|
|
During the three and nine months ended September 30, 2019, the Company engaged in hedging activities to limit its exposure to changes in interest rates. See Note 12, Derivative Instruments, for further discussion.
The following table presents the estimated fair values of the Company’s debt obligations as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instrument
|
|
Carrying Value as of September 30, 2019
|
|
Markets for Identical Item (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
First Lien Term Loan
|
|
$
|
892,729
|
|
|
$
|
—
|
|
|
$
|
922,688
|
|
|
$
|
—
|
|
|
Second Lien Notes
|
|
373,669
|
|
|
—
|
|
|
—
|
|
|
394,653
|
|
|
Total debt instruments
|
|
$
|
1,266,398
|
|
|
$
|
—
|
|
|
$
|
922,688
|
|
|
$
|
394,653
|
|
The following table sets forth the changes in Level 3 measurements for the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Level 3 Measurements
|
|
Previous Term Loans fair value as of January 1, 2019
|
|
$
|
551,882
|
|
|
Change in fair value
|
|
(369
|
)
|
|
Repayments of debt principal
|
|
(2,075
|
)
|
|
Retirements of Previous Term Loans
|
|
(549,438
|
)
|
|
Issuance of Second Lien Notes as of August 6, 2019
|
|
388,000
|
|
|
Change in fair value
|
|
6,653
|
|
|
Second Lien Notes fair value as of September 30, 2019
|
|
$
|
394,653
|
|
See Note 13, Fair Value Measurements, for further discussion.
12. DERIVATIVE INSTRUMENTS
The Company uses derivative financial instruments for hedging and non-trading purposes to limit the Company’s exposure to increases in interest rates related to its variable interest rate debt. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative financial instrument will change. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including reviewing credit ratings when appropriate.
During 2017, Option Care entered into interest rate caps that reduce the risk of increased interest payments due to interest rates rising. The hedges offset the risk of rising interest rates through 2020 on the first $250.0 million of the Previous First Lien Term Loan. The interest rate caps perfectly offset the terms of the interest rates associated with the variable interest rate Previous First Lien Term Loan. Option Care entered into the interest rate caps as a cash flow hedge for a notional amount of $1.9 million. In April 2019, Option Care terminated its interest rate caps and received cash proceeds of $1.7 million, net of early termination fees. In conjunction with the termination of the interest rate caps, Option Care discontinued the hedge accounting associated with the interest rate caps.
In August 2019, the Company entered into interest rate swap agreements that reduce the variability in the interest rates on the newly-issued debt obligations. The first interest rate swap for $925.0 million notional was effective in August 2019 with $911.1 million designated as a cash flow hedge against the underlying interest rate on the First Lien Term Loan interest payments indexed to one-month LIBOR through August 2021. In accordance with ASU 2017-12, Targeted Improvements to Accounting for Hedges, the Company has determined that the hedges are perfectly effective. The remaining $13.9 million notional amount of the interest rate swap is not designated as a hedging instrument.
The second interest rate swap of $400.0 million notional will become effective in November 2019 and will be designated as a cash flow hedge against the underlying interest rate on the Second Lien Notes interest payments indexed to three-month LIBOR through November 2020. The interest rate designated as a cash flow hedge is expected to be perfectly effective at offsetting the terms of the interest rates associated with the Company’s variable interest rate Second Lien Notes. The following table summarizes the amount and location of the Company’s derivative instruments in the condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value - Derivatives in asset position
|
|
Derivative
|
|
Balance Sheet Caption
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Interest rate caps designated as cash flow hedges
|
|
Prepaids and other current assets
|
|
$
|
—
|
|
|
$
|
2,627
|
|
|
Total derivatives
|
|
|
|
$
|
—
|
|
|
$
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value - Derivatives in liability position
|
|
Derivative
|
|
Balance Sheet Caption
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Interest rate swaps designated as cash flow hedges
|
|
Other non-current liabilities
|
|
$
|
7,883
|
|
|
$
|
—
|
|
|
Interest rate swaps not designated as hedges
|
|
Other non-current liabilities
|
|
120
|
|
|
—
|
|
|
Total derivatives
|
|
|
|
$
|
8,003
|
|
|
$
|
—
|
|
The gain and loss associated with the changes in the fair value of the effective portion of the hedging instrument are recorded into other comprehensive (loss) income. The gain and loss associated with the changes in the fair value of the $13.9 million notional amount not designated as a hedging instrument are recognized in net income through interest expense. The following table presents the pre-tax gains (losses) from derivative instruments recognized in other comprehensive (loss) income in the Company’s condensed consolidated statements of comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Derivative
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Interest rate caps designated as cash flow hedges
|
$
|
(398
|
)
|
|
$
|
221
|
|
|
$
|
(1,103
|
)
|
|
$
|
2,165
|
|
|
Interest rate swaps designated as cash flow hedges
|
(7,883
|
)
|
|
—
|
|
|
(7,883
|
)
|
|
—
|
|
|
|
$
|
(8,281
|
)
|
|
$
|
221
|
|
|
$
|
(8,986
|
)
|
|
$
|
2,165
|
|
The following table presents the amount and location of pre-tax income (loss) recognized in the Company’s condensed consolidated statement of comprehensive income (loss) related to the Company’s derivative instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Derivative
|
|
Income Statement Caption
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Interest rate caps designated as cash flow hedges
|
|
Interest expense
|
|
$
|
269
|
|
|
$
|
89
|
|
|
$
|
(125
|
)
|
|
$
|
158
|
|
|
Interest rate swaps designated as cash flow hedges
|
|
Interest expense
|
|
129
|
|
|
—
|
|
|
129
|
|
|
—
|
|
|
Interest rate swaps not designated as hedges
|
|
Interest expense
|
|
(118
|
)
|
|
—
|
|
|
(118
|
)
|
|
—
|
|
|
|
|
|
|
$
|
280
|
|
|
$
|
89
|
|
|
$
|
(114
|
)
|
|
$
|
158
|
|
The Company expects to reclassify $5.8 million of total interest rate costs from accumulated other comprehensive loss against interest expense during the next 12 months.
13. FAIR VALUE MEASUREMENTS
Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and gives the lowest priority to unobservable inputs (Level 3 measurements). The categories within the valuation hierarchy are described as follows:
|
|
|
|
•
|
Level 1 — Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 — Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
|
|
|
|
|
•
|
Level 3 — Inputs to the fair value measurement are unobservable inputs or valuation techniques.
|
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
First Lien Term Loan: The fair value of the First Lien Term Loan is derived from a broker quote on the loans in the syndication (Level 2 inputs) See Note 11, Indebtedness, for further discussion on the carrying amount and fair value of the First Lien Term Loan.
Second Lien Notes: The fair value of the Second Lien Notes is derived from a cash flow model that discounted the cash flows based on market interest rates (Level 3 inputs) See Note 11, Indebtedness, for further discussion on the carrying amount and fair value of the Second Lien Notes.
Interest rate swaps: The fair values of interest rate swaps are derived from the interest rates prevalent in the market and future expectations of those interest rates (Level 2 inputs). The Company determines the fair value of the investments based on quoted prices from third-party brokers. See Note 12, Derivative Instruments, for further discussion on the fair value of interest rate swaps.
Interest rate caps: The fair values of interest rate caps are derived from the interest rates prevalent in the market and future expectations of those interest rates (Level 2 inputs). The Company determines the fair value of the investments based on quoted prices from third-party brokers. In April 2019, Option Care terminated its interest rate caps. The total investment in interest rate caps as Level 2 assets was $0 million and $2.6 million as of September 30, 2019 and December 31, 2018, respectively. See Note 12, Derivative Instruments, for further discussion on the fair value of interest rate caps.
There were no other assets or liabilities measured at fair value at September 30, 2019 or December 31, 2018.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings and is subject to investigations, inspections, audits, inquiries, and similar actions by governmental authorities, arising in the normal course of the Company’s business. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive
or exemplary damages, and may remain unresolved for several years. From time to time, the Company may also be involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property, and other matters. Gain contingencies, if any, are recognized when they are realized. The results of legal proceedings are often uncertain and difficult to predict, and the costs incurred in litigation can be substantial, regardless of the outcome. The Company believes that its defenses and assertions in pending legal proceedings have merit and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s condensed consolidated balance sheets. However, substantial unanticipated verdicts, fines, and rulings may occur. As a result, the Company may from time to time incur judgments, enter into settlements, or revise expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid.
15. STOCK-BASED INCENTIVE COMPENSATION
Equity Incentive Plans — Under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), approved at the annual meeting by the BioScrip stockholders on May 3, 2018, the Company may issue, among other things, incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, stock grants, and performance units to key employees and directors. The 2018 plan is administered by the Company’s Compensation Committee, a standing committee of the Board of Directors. A total of 16,406,939 shares of common stock were initially authorized for issuance under the 2018 Plan.
Stock Options — During the three and nine months ended September 30, 2019, the Company recognized compensation expense related to stock options of $0.5 million. The Company did not recognize any compensation expense related to stock options prior to the Merger.
Restricted Stock — During the three and nine months ended September 30, 2019, the Company recognized compensation expense related to restricted stock awards of $1.7 million. The Company did not recognize any compensation expense related to restricted stock awards prior to the Merger.
HC I Incentive Units — During the three and nine months ended September 30, 2019, the Company recognized compensation expense related to HC I incentive units of $0.5 million and $1.7 million, respectively. During the three and nine months ended September 30, 2018, the Company recognized compensation expense related to HC I incentive units of $0.6 million and $1.7 million, respectively. See Note 17, Related-Party Transactions, for further discussion of this management equity ownership plan.
16. STOCKHOLDERS’ EQUITY
2017 Warrants — Prior to the Merger, BioScrip issued warrants to certain debt holders pursuant to a Warrant Purchase Agreement dated as of June 29, 2017. In conjunction with the Merger, the 2017 Warrants were amended to entitle the purchasers of the warrants to purchase 8.3 million shares of common stock. The 2017 Warrants have a 10-year term and an 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 2017 Warrants were assumed by the Company in conjunction with the Merger. The 2017 Warrants are classified as equity instruments, and the fair value of these warrants of $14.1 million was recorded in paid-in capital as of the Merger Date.
2015 Warrants — Prior to the Merger, BioScrip issued warrants pursuant to a Common Stock Warrant Agreement dated as of March 9, 2015 which entitle the holders to purchase 3.7 million shares of common stock. The 2015 Warrants have a 10-year term and have exercise prices in a range of $5.17 per share to $6.45 per share. The 2015 Warrants were assumed by the Company in conjunction with the Merger and are classified as equity instruments, and the fair value of these warrants of $4.6 million was recorded in paid in capital as of the Merger Date.
Home Solutions Restricted Stock — In conjunction with BioScrip’s 2016 acquisition of Home Solutions, Inc., 7.1 million restricted shares of common stock were issued, of which 3.1 million of these units vest upon the closing price of the Company’s common stock averaging at or above $4.00 per share over 20 consecutive trading days prior to December 31, 2019 and 4.0 million of these units vest upon the closing price of the Company’s common stock averaging at or above $5.00 per share over 20 consecutive trading days prior to December 31, 2019. The restricted stock expires on December 31, 2019. As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, 28,193,428 common shares issued to HC I in conjunction with the Merger are held in escrow to prevent dilution related to the vesting of the Home Solutions restricted stock. In the event the Home Solutions restricted stock expires unvested, the 28,193,428 common shares held in escrow will be returned to the Company and canceled.
Treasury Stock — During the three and nine months ended September 30, 2019, 1,146,065 shares were surrendered to satisfy tax withholding obligations on the exercise of stock options and the vesting of restricted stock awards with a cost basis of $2.4 million. At September 30, 2019, the Company held 1,736,220 shares of treasury stock. No treasury stock existed prior to the Merger.
Preferred Stock — In conjunction with the Merger, all legacy BioScrip preferred stock was settled, and no preferred stock is outstanding as of September 30, 2019. There was no preferred stock existing as of December 31, 2018.
17. RELATED-PARTY TRANSACTIONS
Management Equity Ownership Plan — In October 2015, HC I implemented an equity ownership and incentive plan for certain officers and employees of Option Care. The officers were able to purchase membership units in HC I and could fund a portion of the purchase with a loan from Option Care. These loans were treated as a shareholder contribution in Option Care. For the nine months ended September 30, 2019 and 2018, $0 and $0.4 million, respectively, were credited to paid-in capital related to HC I membership units purchased with a loan from Option Care. There were no shareholder redemptions during the three months ended September 30, 2019. During the nine months ended September 30, 2019, shareholder redemptions totaled $2.4 million, comprised of a cash distribution to HC I of $2.0 million and notes redeemed of $0.4 million.
During the three months ended September 30, 2019, prior to the Merger, Option Care sold its notes receivable from management, along with all accrued interest expense, to a third-party bank. Option Care received cash proceeds of $1.3 million, which represented payment of $1.1 million in outstanding notes receivable from management and payment of $0.2 million in accrued interest expense. Notes receivable from management of $0 and $1.6 million remained outstanding as of September 30, 2019 and December 31, 2018, respectively. The notes receivable from management and associated interest receivable are recorded in management notes receivable as a reduction to equity on the Company’s condensed consolidated balance sheets as of December 31, 2018.
Transactions with Equity-Method Investees — The Company provides management services to its joint ventures such as accounting, invoicing and collections in addition to day-to-day managerial support of the operations of the businesses. The Company recorded management fee income of $0.6 million and $1.8 million for the three and nine months ended September 30, 2019, respectively. The Company recorded management fee income of $0.6 million and $1.6 million for the three and nine months ended September 30, 2018, respectively. Management fees are recorded in net revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).
The Company had amounts due to its joint ventures of $3.1 million as of September 30, 2019. The Company also had amounts due to its joint ventures of $0.9 million and amounts due from its joint ventures of $0.1 million as of December 31, 2018. These payables were included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets and these receivables were included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. These balances primarily relate to cash collections received by the Company on behalf of the joint ventures, offset by certain pharmaceutical inventories purchased by the Company on behalf of the joint ventures.
Forward-Looking Statements
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. This Quarterly Report contains, among others, forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in Item 1A “Risk Factors”.
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.
Do 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, the Company assumes 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.
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Unless the context requires otherwise, references in this report to "Option Care Health," the “Company,” “we,” “us” and “our” refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. (“Option Care Health”, or the “Company”) should be read in conjunction with the audited consolidated financial statements and related notes, as presented in the definitive merger proxy filed with the Securities and Exchange Commission on June 26, 2019, as well as the Company’s unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report.
Business Overview
Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 132 locations around the United States. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other nonhospital settings. Our 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, work with the physician to develop a plan of care suited to each patient’s specific needs. We provide home infusion services consisting of anti-infectives, nutrition support, bleeding disorder therapies, immunoglobulin therapy, and other therapies for chronic and acute conditions.
HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care, Inc. (“Option Care”).
On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”) (the “Merger”), a national provider of infusion and home care management solutions, which was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc. and the combined company’s stock, par value $0.0001, was listed on the Nasdaq Capital Market as of September 30, 2019. See Note 3, Business Acquisitions, of the unaudited condensed consolidated financial statements for further discussion on the Merger.
Merger Integration Execution
The Merger of Option Care and BioScrip into Option Care Health has created an opportunity to realize cost synergies while continuing to drive organic growth in chronic and acute therapies through our expanded national platform. Option Care
Health is well-positioned to leverage the investments in corporate infrastructure and drive economies of scale as a result of the Merger. The forecasted synergy categories are as follows:
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Selling, General and Administrative Expenses Savings. Merged corporate infrastructure has created significant opportunity for streamlining corporate and administrative costs, including headcount and functional spend.
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•
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Network Optimization. The previous investments in technology and compounding pharmacies, along with the overlapping geographic footprint, allows for facility rationalization and the optimization of assets.
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Procurement Savings. The enhanced scale of the Company generates supply chain efficiencies through increased purchasing leverage. The Company’s platform is also positioned to be the partner of choice for pharmaceutical manufacturers seeking innovative distribution channels and patient support models to access the market.
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We believe the achievement of these synergies will enable the delivery of high-quality, cost-effective solutions to providers across the country and help facilitate the introduction of new therapies to the marketplace while improving the profitability profile of the Company.
Changes to Medicare Reimbursement
In recent years, legislative changes have resulted in reductions in reimbursement under government healthcare programs. In December 2016, the Cures Act legislation was signed into law, which included a decrease to drug pricing for Medicare Part B Durable Medical Equipment infusion drugs administered in an alternate site setting effective January 1, 2017. The original legislation did not provide for reimbursement for the service component until 2021. Center for Medicare and Medicaid Services issued a final rule in October 2018 implementing a temporary transition benefit for Medicare Part B home infusion services, which will continue from January 1, 2019 until January 1, 2021. This temporary transition benefit defines professional services as only including nursing, and not pharmacy, care planning, care coordination, or monitoring, and only pays for an infusion day when the nurse is in the home, which continues to have a negative financial impact on our business.
Acquisitions
The Company has made strategic acquisitions to expand both its national footprint as well as its service line offering. These acquisitions are comprised of the following:
Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and home care management, who partnered with physicians, hospital systems, payers, pharmaceutical manufacturers and skilled nursing facilities to provide patients access to post-acute care services. The fair value of purchase consideration transferred, net of cash acquired, on the closing date of $1,087.2 million includes the value of the number of shares of the combined company to be owned by BioScrip shareholders at closing of the Merger, the value of common shares to be issued to certain warrant and preferred shareholders in conjunction with the Merger, the value of stock-based instruments that were vested or earned as of the Merger, and cash payments made in conjunction with the Merger. The fair value per share of BioScrip’s common stock was $2.67 per share on August 6, 2019. For additional information on this transaction, see Note 3, Business Acquisitions, of the unaudited condensed consolidated financial statements.
In September 2018, we completed the acquisition of 100% of the outstanding shares of Home I.V. Specialists, Inc. (“Home IV”), for a purchase price of $11.6 million, net of cash acquired. The Home IV acquisition expands our presence in Arkansas as we acquired Home IV’s three pharmacy locations in that state.
In August 2018, we completed the acquisition of certain assets of Baptist Health in Little Rock, Arkansas, for a purchase price of $1.0 million.
Composition of Results of Operations
The following results of operations include the accounts of Option Care Health and our subsidiaries for the three and nine months ended September 30, 2019 and 2018. The BioScrip results have been included since the August 6, 2019 Merger Date.
Net Revenue
Infusion and related health care services revenue is reported at the estimated net realizable amounts from third-party payers and patients for goods sold and services rendered. When pharmaceuticals are provided to a patient, revenue is recognized upon
delivery of the goods. When nursing services are provided, revenue is recognized when the services are rendered.
Due to the nature of the health care industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded.
Cost of Revenue
Cost of revenue consists of the actual cost of pharmaceuticals and other medical supplies dispensed to patients. In addition to product costs, cost of revenue includes warehousing costs, purchasing costs, depreciation expense relating to revenue-generating assets, such as infusion pumps, shipping and handling costs, and wages and related costs for the pharmacists, nurses, and all other employees and contracted workers directly involved in providing service to the patient.
The Company receives volume-based rebates and prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These payments are recorded as a reduction of inventory and are accounted for as a reduction of cost of revenue when the related inventory is sold.
Operating Costs and Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist principally of salaries for administrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees.
Depreciation and Amortization Expense. Depreciation within this caption includes infrastructure items such as computer hardware and software, office equipment and leasehold improvements. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue.
Other Income (Expense)
Interest Expense, Net. Interest expense consists principally of interest payments on the Company’s outstanding borrowings under the ABL Facility, the First Lien Term Loan and Second Lien Notes, as well as the amortization of discount and deferred financing fees. Refer to the “Liquidity and Capital Resources” section below for further discussion of these outstanding borrowings.
Equity in Earnings of Joint Ventures. Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion joint ventures with health systems.
Other, Net. Other income (expense) primarily includes third-party fees paid in conjunction with our 2019 debt issuance of the Loan Facilities and Second Lien Notes and loss on extinguishment of debt for the Company’s Previous Credit Facilities.
Income Tax (Benefit) Expense. The Company is subject to taxation in the United States and various states. The Company’s income tax (benefit) expense is reflective of the current federal tax rates.
Change in unrealized (losses) gains on cash flow hedges, net of income taxes. Change in unrealized (losses) gains on cash flow hedges, net of income taxes, consists of the gains and losses associated with the changes in the fair value of hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes.
Results of Operations
The following table presents Option Care Health’s consolidated results of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2019 (unaudited)
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2018 (unaudited)
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2019 (unaudited)
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2018 (unaudited)
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Amount
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% of Revenue
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Amount
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% of Revenue
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Amount
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% of Revenue
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Amount
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% of Revenue
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NET REVENUE
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$
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615,880
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100.0
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%
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$
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493,928
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100.0
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%
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$
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1,589,638
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100.0
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%
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$
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1,434,061
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100.0
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%
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COST OF REVENUE
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478,107
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77.6
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%
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385,683
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78.1
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%
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1,252,281
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78.8
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%
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1,122,846
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78.3
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%
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GROSS PROFIT
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137,773
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22.4
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%
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108,245
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21.9
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%
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337,357
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21.2
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%
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311,215
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21.7
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%
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OPERATING COSTS AND EXPENSES:
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Selling, general and administrative expenses
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133,475
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21.7
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%
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85,929
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17.4
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%
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315,815
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19.9
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%
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258,314
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18.0
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%
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Depreciation and amortization expense
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16,023
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2.6
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%
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9,557
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1.9
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%
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36,142
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2.3
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%
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28,180
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2.0
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%
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Total operating expenses
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149,498
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24.3
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%
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95,486
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19.3
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%
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351,957
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22.1
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%
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286,494
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20.0
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%
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OPERATING (LOSS) INCOME
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(11,725
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(1.9
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)%
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12,759
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2.6
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%
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(14,600
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)
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(0.9
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)%
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24,721
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1.7
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%
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OTHER INCOME (EXPENSE):
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Interest expense, net
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(21,509
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(3.5
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)%
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(11,025
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(2.2
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)%
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(44,117
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)
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(2.8
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)%
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(34,313
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)
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(2.4
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)%
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Equity in earnings of joint ventures
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826
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0.1
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%
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301
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0.1
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%
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2,018
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0.1
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%
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656
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—
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%
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Other, net
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(6,810
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)
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(1.1
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)%
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139
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—
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%
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(6,679
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)
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(0.4
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)%
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(2,170
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)
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(0.2
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)%
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Total other expense
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(27,493
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(4.5
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)%
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(10,585
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(2.1
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)%
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(48,778
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)
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(3.1
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)%
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(35,827
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(2.5
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)%
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(LOSS) INCOME BEFORE INCOME TAXES
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(39,218
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(6.4
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)%
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2,174
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0.4
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%
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(63,378
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)
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(4.0
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)%
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(11,106
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)
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(0.8
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)%
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INCOME TAX EXPENSE (BENEFIT)
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3,576
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0.6
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%
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383
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0.1
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%
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(3,269
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)
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(0.2
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)%
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(1,737
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)
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(0.1
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)%
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NET (LOSS) INCOME
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$
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(42,794
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)
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(6.9
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)%
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$
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1,791
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0.4
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%
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$
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(60,109
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)
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(3.8
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)%
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$
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(9,369
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)
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(0.7
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)%
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OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
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Change in unrealized (losses) gains on cash flow hedges, net of income taxes of $32, ($34), $259 and ($530), respectively
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(8,249
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)
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(1.3
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)%
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187
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—
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%
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(8,727
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(0.5
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)%
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1,635
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0.1
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%
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OTHER COMPREHENSIVE (LOSS) INCOME
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(8,249
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)
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(1.3
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)%
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187
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—
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%
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(8,727
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)
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(0.5
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)%
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1,635
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0.1
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%
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NET COMPREHENSIVE (LOSS) INCOME
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$
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(51,043
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)
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(8.3
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)%
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$
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1,978
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0.4
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%
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$
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(68,836
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)
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(4.3
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)%
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$
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(7,734
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)
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(0.5
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)%
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Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018
The following tables present selected consolidated comparative results of operations from Option Care Health’s unaudited condensed consolidated financial statements for the three month periods ended September 30, 2019 and September 30, 2018.
Net Revenue
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Three Months Ended
September 30,
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2019
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2018
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(unaudited)
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Variance
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(unaudited)
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(in thousands, except for percentages)
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Net revenue
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$
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615,880
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$
|
121,952
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24.7
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%
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$
|
493,928
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The 24.7% increase in net revenue was primarily driven by additional revenue following the Merger of $119.1 million.
Cost of Revenue
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Three Months Ended
September 30,
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2019
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2018
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(unaudited)
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Variance
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(unaudited)
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(in thousands, except for percentages)
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Cost of revenue
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$
|
478,107
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$
|
92,424
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24.0
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%
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$
|
385,683
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Gross profit margin
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22.4
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%
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21.9
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%
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The increase in cost of revenue was driven by organic growth and the impact of the Merger. The increase in gross margin percentage was driven by therapy mix shift.
Operating Expenses
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|
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Three Months Ended
September 30,
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2019
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2018
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|
(unaudited)
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Variance
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(unaudited)
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(in thousands, except for percentages)
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Selling, general and administrative expenses
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$
|
133,475
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|
|
$
|
47,546
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|
55.3
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%
|
|
$
|
85,929
|
|
|
Depreciation and amortization expense
|
16,023
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|
|
6,466
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|
|
67.7
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%
|
|
9,557
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|
|
Total operating expenses
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$
|
149,498
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|
$
|
54,012
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|
56.6
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%
|
|
$
|
95,486
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|
Operating expenses increased for the three months ended September 30, 2019 due to transaction and integration expenses of $21.2 million during the quarter as well as the impact of the Merger.
The increase in depreciation and amortization was primarily related to the depreciation of the fixed assets acquired and the amortization of the intangibles acquired from the Merger of $3.0 million and $2.6 million, respectively.
Other Income (Expense)
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
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|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
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(in thousands, except for percentages)
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|
Interest expense, net
|
$
|
(21,509
|
)
|
|
$
|
(10,484
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)
|
|
95.1
|
%
|
|
$
|
(11,025
|
)
|
|
Equity in earnings of joint ventures
|
826
|
|
|
525
|
|
|
174.4
|
%
|
|
301
|
|
|
Other, net
|
(6,810
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)
|
|
(6,949
|
)
|
|
(4,999.3
|
)%
|
|
139
|
|
|
Total other expense
|
$
|
(27,493
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)
|
|
$
|
(16,908
|
)
|
|
159.7
|
%
|
|
$
|
(10,585
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)
|
The $10.5 million increase in interest expense was primarily attributable to the interest expense on the new debt issued to us in conjunction with the Merger. The balance of long-term debt increased from $551.5 million at December 31, 2018 to $1,325.0 million at September 30, 2019. See Note 11, Indebtedness, of the unaudited condensed consolidated financial statements.
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
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|
(in thousands, except for percentages)
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|
Income tax expense (benefit)
|
$
|
3,576
|
|
|
$
|
3,193
|
|
|
833.7
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%
|
|
$
|
383
|
|
As a result of the Merger, the Company recorded a full valuation allowance against all of its net U.S. federal and state deferred tax assets with the exception of $1.0 million of estimated state net operating losses (“NOL”). Because of the Company’s full valuation allowance, the Company’s tax expense for the three months ended September 30, 2019 is only composed of quarterly tax liabilities attributable to separate company state tax returns as well as the Company’s deferred tax expense recognized during the third quarter of 2019 prior to the Merger. These tax expense items created a negative quarterly effective tax rate of 9.1% during the three months ended September 30, 2019. During the three months ended September 30, 2018, the effective tax rate was 17.6%. These quarterly rates differ from the Company’s 21% federal statutory rate primarily due to certain state and local taxes, non-deductible costs, and resolution of certain tax matters.
Net (Loss) Income and Other Comprehensive (Loss) Income
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
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|
Net (loss) income
|
$
|
(42,794
|
)
|
|
$
|
(44,585
|
)
|
|
(2,489.4
|
)%
|
|
$
|
1,791
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized (losses) gains on cash flow hedges, net of income taxes
|
(8,249
|
)
|
|
(8,436
|
)
|
|
(4,511.2
|
)%
|
|
187
|
|
|
Other comprehensive (loss) income
|
(8,249
|
)
|
|
(8,436
|
)
|
|
(4,511.2
|
)%
|
|
187
|
|
|
Net comprehensive (loss) income
|
$
|
(51,043
|
)
|
|
$
|
(53,021
|
)
|
|
(2,680.5
|
)%
|
|
$
|
1,978
|
|
The change in net (loss) income of $44.6 million was primarily related to the transaction-related expenses incurred in conjunction with the Merger, as well as the increased interest expense on the increased indebtedness.
Changes in unrealized (losses) gains on cash flow hedges, net of income taxes, decreased $8.4 million. The decrease in the variable interest rates during the third quarter of 2019 and projected as of September 30, 2019 resulted in a corresponding liability on the fair value of the interest rate swap. The three months ended September 30, 2018 related to fluctuations on interest rate caps on $250.0 million of the Previous First Lien Term Loan.
Net comprehensive loss was $51.0 million for the three months ended September 30, 2019, compared to net comprehensive income of $2.0 million for the three months ended September 30, 2018, as a result of the changes in net (loss) income, discussed above, further reduced by the impact of the fair value of the interest rate swaps on the first $911.1 million of First Lien Term Loan.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
The following tables present selected consolidated comparative results of operations from the Company’s unaudited condensed consolidated financial statements for the nine month periods ended September 30, 2019 and September 30, 2018.
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
Net revenue
|
$
|
1,589,638
|
|
|
$
|
155,577
|
|
|
10.8
|
%
|
|
$
|
1,434,061
|
|
The 10.8% increase in net revenue was driven by additional revenue following the Merger for $119.1 million, as well as growth in the Company’s portfolio of therapies.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
Cost of revenue
|
$
|
1,252,281
|
|
|
$
|
129,435
|
|
|
11.5
|
%
|
|
$
|
1,122,846
|
|
|
Gross profit margin
|
21.2
|
%
|
|
|
|
|
|
21.7
|
%
|
The 11.5% increase in cost of revenue was primarily attributable to the increase in revenue. The decrease in gross margin was driven by the therapy mix shift.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
Selling, general and administrative expenses
|
$
|
315,815
|
|
|
$
|
57,501
|
|
|
22.3
|
%
|
|
$
|
258,314
|
|
|
Depreciation and amortization expense
|
36,142
|
|
|
7,962
|
|
|
28.3
|
%
|
|
28,180
|
|
|
Total operating expenses
|
$
|
351,957
|
|
|
$
|
65,463
|
|
|
22.8
|
%
|
|
$
|
286,494
|
|
Spending leverage declined by 1.9% from 18.0% of revenue for the nine months ended September 30, 2018 to 19.9% for the nine months ended September 30, 2019 driven by transaction and integration expenses of $38.8 million during the nine months as well as the impact of the Merger.
The increase in depreciation and amortization was primarily related to the additional expense resulting from the Merger, as well as the investment in capital expenditures in 2018.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
Interest expense, net
|
$
|
(44,117
|
)
|
|
$
|
(9,804
|
)
|
|
28.6
|
%
|
|
$
|
(34,313
|
)
|
|
Equity in earnings of joint ventures
|
2,018
|
|
|
1,362
|
|
|
207.6
|
%
|
|
656
|
|
|
Other, net
|
(6,679
|
)
|
|
(4,509
|
)
|
|
207.8
|
%
|
|
(2,170
|
)
|
|
Total other expense
|
$
|
(48,778
|
)
|
|
$
|
(12,951
|
)
|
|
36.1
|
%
|
|
$
|
(35,827
|
)
|
The increase in interest expense of 28.6% was primarily attributable to the additional expense related to the new debt issued at the close of the Merger, discussed above.
Income Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
Income tax expense (benefit)
|
$
|
(3,269
|
)
|
|
$
|
(1,532
|
)
|
|
88.2
|
%
|
|
$
|
(1,737
|
)
|
The Company’s tax benefit for the nine months ended September 30, 2019 is primarily comprised of estimated state tax liabilities, as no net deferred benefit or expense was realized during 2019 due to the establishment of the valuation allowance at the time of the Merger. This results in an effective tax rate of 5.2% for the nine months ended September 30, 2019. During the nine months ended September 30, 2018, the effective tax rate was 15.6%. These rates differ from the Company’s 21% federal statutory rate primarily due to certain state and local taxes, non-deductible costs, and resolution of certain tax matters.
Net (Loss) Income and Other Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(in thousands, except for percentages)
|
|
Net (loss) income
|
$
|
(60,109
|
)
|
|
$
|
(50,740
|
)
|
|
541.6
|
%
|
|
$
|
(9,369
|
)
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Changes in unrealized (losses) gains on cash flow hedges, net of income taxes
|
(8,727
|
)
|
|
(10,362
|
)
|
|
(633.8
|
)%
|
|
1,635
|
|
|
Other comprehensive (loss) income
|
(8,727
|
)
|
|
(10,362
|
)
|
|
(633.8
|
)%
|
|
1,635
|
|
|
Net comprehensive (loss) income
|
$
|
(68,836
|
)
|
|
$
|
(61,102
|
)
|
|
790.0
|
%
|
|
$
|
(7,734
|
)
|
Net loss increased $50.7 million primarily driven by increased depreciation and amortization expense, transaction expenses and integration costs for the Merger, increased interest expense, as well as the loss on the extinguishment of debt and third-party fees on the debt.
Changes in unrealized (losses) gains on cash flow hedges, net of income taxes, decreased as a result of the decrease in the variable interest rates during 2019. The interest rate swaps in 2019 are hedging against the first $911.1 million of the First Lien Term Loan, whereas the interest rate caps in 2018 through April 2019 were on the first $250.0 million of the Previous First Lien Term Loan resulting in a larger impact on unrealized (losses) gains on cash flow hedges in 2019.
Net comprehensive loss increased $61.1 million for the nine months ended September 30, 2019 as a result of the changes in net loss, discussed above, further reduced by the impact of the fair value of the hedging instruments.
Liquidity and Capital Resources
For the nine months ended September 30, 2019 and the twelve months ended December 31, 2018, the Company’s primary sources of liquidity were cash on hand of $52.8 million and $36.4 million, respectively, as well as borrowings under its credit facilities, described further below. During the nine months ended September 30, 2019 and the year ended December 31, 2018, the Company’s positive cash flows from operations have enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as pursue acquisitions.
The Company’s primary uses of cash include supporting our ongoing business activities and investment in various acquisitions and our infrastructure to support additional business volumes. Ongoing operating cash outflows are associated with procuring and dispensing prescription drugs, personnel and other costs associated with servicing patients, as well as paying cash interest on the outstanding debt. Ongoing investing cash flows are primarily associated with capital projects related to business acquisitions, the improvement and maintenance of our pharmacy facilities and investment in our information technology systems. Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt. In addition to these ongoing investing and financing activities, during the three months ended September 30, 2019, the Company entered into the Merger Agreement, and the Merger resulted in one-time cash used in investing activities of $700.2 million and net cash provided by financing activities of $717.8 million.
Our business strategy includes the selective acquisition of additional infusion pharmacies and other related healthcare businesses. We continue to evaluate acquisition opportunities and view acquisitions as a key part of our growth strategy. The Company historically has funded its acquisitions with cash with the exception of the Merger. The Company may require additional capital in excess of current availability in order to complete future acquisitions. It is impossible to predict the amount of capital that may be required for acquisitions, and there is no assurance that sufficient financing for these activities will be available on acceptable terms.
Short-Term and Long-Term Liquidity Requirements
The Company’s ability to make principal and interest payments on any borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations and planned capital expenditures, we believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans.
Credit Facilities
On August 6, 2019, the Company repaid the outstanding balance of the Previous Term Loans and retired the outstanding credit arrangements for $551.7 million. Proceeds of $575.0 million from the two new credit arrangements and indenture, discussed below, were also used, in part, to repay the outstanding debt of BioScrip as of the Merger.
In conjunction with the Merger, the Company entered into an asset-based-lending revolving credit facility and a first lien term loan facility. The Company also issued senior secured second lien PIK toggle floating rate notes due 2027 (the “Second Lien Notes”). The two new credit agreements and the indenture were entered into on August 6, 2019 and provide for up to $1,475.0 million in senior secured credit facilities through a $150.0 million asset-based-lending revolving credit facility (the “ABL Facility”), a $925.0 million first lien term loan (the “First Lien Term Loan”, and together with the ABL Facility, the “Loan Facilities”), and a $400.0 million issuance of Second Lien Notes. Amounts borrowed under the credit agreements are secured by substantially all of the assets of the Company.
The ABL Facility credit agreement provides for borrowings up to $150.0 million, which matures on August 6, 2024. The ABL Facility bears interest at a per annum rate that is determined by the Company’s periodic selection of rate type, either the Base Rate or the Eurocurrency Rate. The Base Rate is charged between 1.25% and 1.75% and the Eurocurrency Rate is charged between 2.25% and 2.75% based on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. The revolving credit facility contains commitment fees payable on the unused portion of the ABL ranging from 0.25% to 0.375%, depending on various factors including the Company’s leverage ratio, type of loan and rate type, and letter of credit fees of 2.5%. The Company had no outstanding borrowings under the ABL Facility at September 30, 2019. The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL of $140.4 million as of September 30, 2019.
The principal balance of the First Lien Term Loan is repayable in quarterly installments of $2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026. The quarterly principal payments will commence in March of 2020. Interest on the First Lien Term Loan is payable monthly on Base Rate loans at Base Rate, as defined, plus 3.25% to 3.50%, depending on the Company’s leverage ratio. Interest is charged on Eurocurrency Rate loans at the Eurocurrency Rate, as defined, plus 4.25% to 4.50%, depending on the Company’s leverage ratio. The interest rate on the First Lien Term Loan was 6.61% as of September 30, 2019.
The Second Lien Notes mature on August 6, 2027. Interest on the Second Lien Notes is payable quarterly and is at the greater of 1% or LIBOR, plus 8.75%. The Company elected to pay-in-kind the first quarterly interest payment, due in November 2019, which will result in the Company capitalizing the interest payment to the principal balance on the interest payment date; The interest rate on the Second Lien Notes was 10.89% as of September 30, 2019.
Cash Flows
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
The following table presents selected data from Option Care Health’s unaudited condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
|
2018
|
|
|
(unaudited)
|
|
Variance
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
$
|
16,570
|
|
|
$
|
4,372
|
|
|
$
|
12,198
|
|
|
Net cash used in investing activities
|
(712,684
|
)
|
|
(682,051
|
)
|
|
(30,633
|
)
|
|
Net cash provided by (used in) financing activities
|
712,512
|
|
|
715,624
|
|
|
(3,112
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
16,398
|
|
|
37,945
|
|
|
(21,547
|
)
|
|
Cash and cash equivalents - beginning of period
|
36,391
|
|
|
(16,725
|
)
|
|
53,116
|
|
|
Cash and cash equivalents - end of period
|
$
|
52,789
|
|
|
$
|
21,220
|
|
|
$
|
31,569
|
|
Cash Flows from Operating Activities
For the nine months ended September 30, 2019, Option Care Health generated $16.6 million in cash flow from operating activities, a $4.4 million increase over the nine months ended September 30, 2018. The primary drivers of the cash provided by operating activities for the nine months ended September 30, 2019 are discussed below:
(i)The positive change in accounts receivable for the nine months ended September 30, 2019 of $71.0 million primarily related to the Company’s efforts to increase cash velocity and improve the aging of the receivables balance. The negative change in accounts receivable for the nine months ended September 30, 2018 of $32.5 million was primarily related to the disruption from the deployment of the new pharmacy dispensing system over the course of the year causing a more aged accounts receivable profile.
(ii)The negative change in accounts payable of $36.2 million in 2019 related to timing of vendor payments in the ordinary course of business as well as a net pay down of $9.2 million of acquired payables from the Merger. The positive change in accounts payable of $8.7 million in 2018 related to timing of vendor payments in the ordinary course of business.
Cash Flows from Investing Activities
For the nine months ended September 30, 2019, Option Care Health used $712.7 million in cash for investing activities as compared to $30.6 million for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, the cash used was primarily attributable to the Merger of $700.2 million as well as investments in pharmacy and information technology infrastructure of $13.2 million. Similarly, for the nine months ended September 30, 2018, $20.7 million was invested in our pharmacies and information technology and $9.9 million was deployed for the Baptist Health and Home IV, Inc. acquisitions.
Cash Flows from Financing Activities
Cash flows from financing increased $715.6 million from cash used in financing activities of $3.1 million for the nine months ended September 30, 2018 to cash provided by financing activities of $712.5 million for the nine months ended September 30, 2019. The change is primarily related to the proceeds from the issuance of new debt of $981.1 million, partially offset by the retirement of the Company’s previous debt of $226.7 million and the payment of deferred financing costs of $36.5 million for the nine months ended September 30, 2019. Cash used in financing activities for the nine months ended September 30, 2018 primarily related to repayments of the Previous Credit Facilities.
Commitments and Contractual Obligations
The following table presents Option Care Health’s commitments and contractual obligations as of September 30, 2019, as well as its long-term obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than 1 year
|
|
1 - 3 years
|
|
3-5 years
|
|
More than 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Long-term debt obligations (1)
|
|
$
|
1,325,000
|
|
|
$
|
6,938
|
|
|
$
|
18,500
|
|
|
$
|
18,500
|
|
|
$
|
1,281,062
|
|
|
Interest payments on long-term debt obligations (2)
|
|
809,460
|
|
|
106,010
|
|
|
219,212
|
|
|
207,732
|
|
|
276,506
|
|
|
Operating lease obligations
|
|
99,769
|
|
|
25,891
|
|
|
35,384
|
|
|
19,804
|
|
|
18,690
|
|
|
Total
|
|
$
|
2,234,229
|
|
|
$
|
138,839
|
|
|
$
|
273,096
|
|
|
$
|
246,036
|
|
|
$
|
1,576,258
|
|
|
|
|
|
(1)
|
Includes aggregate principal payment on the new indebtedness from the First Lien Term Loan and the Second Lien Notes incurred in 2019.
|
|
|
|
|
(2)
|
Interest payments calculated based on LIBOR rate as of September 30, 2019. Actual payments are based on changes in LIBOR. Calculated interest payments exclude interest rate swap agreements the Company entered into in connection with the new indebtedness incurred in 2019.
|
Other long-term liabilities were excluded from this table, as the Company is unable to determine the timing of future payments. There were no significant capital expenditure commitments as of September 30, 2019. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.
Off-Balance Sheet Arrangements
As of September 30, 2019, Option Care Health did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
The Company prepares its unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments are based on historical experience and on various other factors that are believed 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. The Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates.
There have been no significant changes in the critical accounting estimates from those described in the Company’s audited consolidated financial statements and related notes, as presented in the definitive merger proxy filed on June 26, 2019, and those financial statements incorporated by reference therein.