UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 20182019 |
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| o | PERIODICTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission file number: 001-11993
BioScrip, Inc.OPTION CARE HEALTH, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | 05-0489664 |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
1600 Broadway,3000 Lakeside Dr. Suite 700, Denver, Colorado300N, Bannockburn, IL | 8020260015 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
720-697-5200312-940-2443
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, $0.0001 par value per share | OPCH | Nasdaq Global Select Market |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ��Yes þ No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o Emerging growth company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of June 30, 2018,2019, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $373,541,920$337,013,747 based on the closing price of the registrant’s Common Stock on the Nasdaq Global Select Market on such date.
As of March 7, 2019,3, 2020, there were 128,155,291176,703,983 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 20192020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days after the close of the registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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| PART I |
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PART II |
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| PART III |
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PART IV |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Forward-Looking Statements
This Annual Report on Form 10-K (“Annual Report”) contains statements that are not purely historical and which may be considered “forward-looking statements”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”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”“potential,” and similar expressions. Specifically, thisThis Annual Report contains, among others, forward-looking statements about:
our ability to make principalbased upon current expectations that involve numerous risks and interest payments on our debt and unsecured notes and satisfy the other covenants containeduncertainties, including those described in our Notes Facilities (as defined below);
our high level of indebtedness;
our expectations regarding financial condition or results of operations in future periods;
our future sources of, and needs for, liquidity and capital resources;
our expectations regarding economic and business conditions;
our expectations regarding legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs;
periodic reviews and billing audits of payments from governmental reimbursement programs and private payors;
our expectations regarding the size and growth of the market for our products and services;
our business strategies and our ability to grow our business;
the implementation or interpretation of current or future regulations and legislation, particularly governmental oversight of our business;
our expectations regarding the outcome of litigation;
our ability to maintain contracts and relationships with our customers;
our ability to avoid delays in payment from our customers;
sales and marketing efforts;
status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements;
future capital expenditures;
our ability to hire and retain key employees;
our ability to execute our strategy;
our ability to successfully integrate businesses we may acquire.
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. Important factors that could cause such differences include, among other things:
risks associated with increased and complex government regulation related to the health care and insurance industries in general, and more specifically, home infusion providers;
our ability to comply with debt covenants in our Notes Facilities and unsecured notes indenture;
risks associated with our issuance of Preferred Stock and PIPE Warrants to the PIPE Investors and the 2017 Warrants (as defined below);
risks associated with the retention or transition of executive officers and key employees;
our expectation regarding the interim and ultimate outcome of commercial disputes, including litigation;
unfavorable economic and market conditions;
disruptions in supplies and services resulting from force majeure events such as war, strike, riot, crime, or “acts of God” such as hurricanes, flooding, blizzards or earthquakes;
delays or suspensions of federal and state payments for services provided;
efforts to reduce healthcare costs and alter health care financing, which may involve reductions in reimbursement for our products and services;
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• | effects of the 21st Century Act (the “Cures Act”);
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the effect of health reform efforts including the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together the “Affordable Care Act”), and value-based payment initiatives, including accountable care organizations (“ACOs”);
availability of financing sources;
declines and other changes in revenue due to the expiration of short-term contracts;
network lockouts and decisions to in-source by health insurers including lockouts with respect to acquired entities;
unforeseen contract terminations;
difficulties in the implementation and ongoing evolution of our operating systems;
difficulties with the implementation of our growth strategy and integrating businesses we have acquired or will acquire;
increases or other changes in our acquisition cost for our products;
increased competition from competitors having greater financial, technical, reimbursement, marketing and other resources could have the effect of reducing prices and margins;
disruptions in our relationship with our primary supplier of prescription products;
the level of our indebtedness and its effect on our ability to execute our business strategy and increased risk of default under our debt obligations;
introduction of new drugs, which can cause prescribers to adopt therapies for patients that are less profitable to us;
changes in industry pricing benchmarks, which could have the effect of reducing prices and margins; and
other risks and uncertainties described from time to time in our filings with the SEC.
We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. You shouldDo not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, we assumeOption Care Health, Inc. 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.
PART I
PART I
Item 1. Business
Overview
BioScrip,Option Care Health, Inc. (“BioScrip”Option Care Health”, “we”, “us”, “our”, or the “Company”) is the largest independent provider of home and alternate site infusion services through its national network of 158 locations in 45 states. Option Care Health draws on nearly 40 years of clinical care experience to offer patient-centered, cost-effective infusion therapy. Option Care Health’s infusion services include the clinical management of infusion therapy, nursing support and care coordination. Option Care Health’s multidisciplinary team of approximately 2,900 clinicians, including pharmacists, pharmacy technicians, nurses and dietitians, are able to provide infusion service coverage for nearly all patients across the United States needing treatment for complex and chronic medical 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”), a national provider of infusion and home care management solutions. We partnersolutions, 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. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc.
Option Care Health contracts with managed care organizations, third-party payers, hospitals, physicians, hospital systems, payors, pharmaceutical manufacturers and skilled nursing facilitiesother referral sources to provide pharmaceuticals and complex compounded solutions to patients access to post-acute carefor intravenous delivery in the patients’ homes or other nonhospital settings. The Company operates in one segment, infusion services. We operate with a commitment to bring customer-focused pharmacy and related healthcare infusion therapy services into the home or alternate-site setting. By collaborating with the full spectrum of healthcare professionals and the patient, we aim
The Company’s operating model enables it to provide cost-effective care that is driven by clinical excellence, customer service and values that promote positivefavorable outcomes and an enhancedto its stakeholders as follows:
Patients. The Company improves patients’ quality of life for those whom we serve.
Our platform provides nationwide service capabilitiesby allowing them to receive infusion therapy at home or at one of its ambulatory infusion suites. In addition, the Company helps manage patients’ conditions through counseling and the abilityeducation regarding their treatment and by providing ongoing monitoring to deliver clinical management services that offer patients a high-touch, community-based and home-based care environment. Our core services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, workencourage patient compliance with the physician to develop a plan of care suited to each patient’s specific needs. Whether in the home, physician office, ambulatory infusion center, skilled nursing facility or other alternate sites of care, we provide products, services and condition-specific clinical management programs tailored to improve the care of individuals with complex health conditions such as gastrointestinal abnormalities, infectious diseases, cancer, multiple sclerosis, organ and blood cell transplants, bleeding disorders, immune deficiencies and heart failure.
We were incorporated in Delaware in 1996 as MIM Corporation, with our primary business and operations at the time consisting of pharmacy benefit management services.
On September 9, 2016, we acquired substantially all of the assets and assumed certain liabilities of HS Infusion Holdings, Inc. and its subsidiaries pursuant to an Asset Purchase Agreement dated June 11, 2016, by and among Home Solutions, a Delaware corporation, certain subsidiaries of Home Solutions, theprescribed therapy. The Company and HomeChoice Partners, Inc., a Delaware corporation. Home Solutions, a privately held company, provided home infusion and home nursing products andalso provides services to help patients suffering from chronic and acute medical conditions.receive reimbursement benefits.
On August 27, 2015, we completed the sale of substantially all of our pharmacy benefit management services segment. We used the net proceeds from the PBM Sale to pay down a portion of our outstanding debt.
Our Strengths
Our company has a number of competitive strengths, including:
Local Competitive Market Position within Our National Platform and Infrastructure
As of December 31, 2018, we had a total of 68 service locations in 27 states. Our model combines local presencePayers. The Company provides payers with comprehensive clinical programs for multiple therapies and specific delivery technologies (infusible and injectable). We have the capabilities and payor relationships to dispense prescriptions to all 50 states. We have relationships with approximately 1,000 payors, including Managed Care Organizations (“MCOs”), government programs such as Medicare and Medicaid and commercial insurers (“Third Party Payors”). We believe payors generally favor fully integrated vendors that can provide high-touch pharmacy solutions to their patients. We believe we are one of a limited number of pharmacy providers that can offer a truly national, integrated and comprehensive approach to managingmeeting their pharmacy service needs and providing a cost-effective solution. The Company’s provision of infusion pharmacy services in the patient’s chronichome or acute conditions.at one of its local ambulatory infusion suites offers a lower cost alternative to providing these therapies in a hospital setting. The Company also provides payers with utilization and outcome data to evaluate therapy effectiveness.
Physicians. The Company provides physicians with timely patient clinical support by providing care management related to their patients’ pharmacy needs and improving compliance with therapy protocols. The Company eliminates the need for physicians to carry inventories of high cost prescriptions by distributing the medications directly to patients’ homes. The Company either bills the payer directly or assists the patient in the submission of claims to the payer.
DiversifiedPharmaceutical Manufacturers. The Company collaborates with pharmaceutical manufacturers to provide a broad distribution channel for their existing pharmaceuticals and Favorable Payor Basetheir new product launches. The Company implements patient monitoring programs that encourage compliance with the prescribed therapy. The Company also provides valuable clinical information in the form of outcomes and compliance data to manufacturers to aid in their evaluation of the efficacy of their products.
Quality
We provide prescription drugs, infusion therapyQuality is at the core of the Company’s mission as it strives to deliver quality healthcare, leading to favorable outcomes and clinical managementmore cost-effective care. The Company offers comprehensive services forthat align with specific healthcare provider needs and has demonstrated success in improving outcomes across a broad range of commercialtherapies through improved clinical-reported patient adherence rates and governmental payors. Approximately 81%decreased rates of our payor base is comprised of commercial payors that operate at a national, regional or local level. Aetna Health Management, LLC accounted for approximately 10% of consolidated net revenue during the year ended December 31, 2018 and UnitedHealthcare Insurance Company accounted for 18% and 24% of consolidated net revenue during the years ended December 31, 2017 and 2016. Government payors, including Medicare, state Medicaid and other government payors, accounted for 18% of consolidated revenue during the year ended December 31, 2018. For the year ended December 31, 2018, Medicare accounted for 8% of our consolidated net revenue.un-planned hospital re-admissions.
The costs savings realizedCompany’s commitment to continuous quality improvement to provide optimal outcomes for its patients is evidenced by administering infusion therapiesits national accreditations, including accreditations from Accreditation Commission for Health Care (“ACHC”), Pharmacy Compounding Accreditation Board (“PCAB”), American Society of Health-System Pharmacists (“ASHP”) and Utilization Review Accreditation Commission (“URAC”).
ACHC accreditation is awarded to healthcare organizations that meet regulatory requirements and accreditation standards, and PCAB accreditation offers the most comprehensive compliance solution in the industry based on more than 40 sterile compounding standards in the U.S. Pharmacopeia Pharmaceutical Compounding - Sterile Preparations Standards (“USP 797”).
Services
The Company is the largest independent provider of home versus hospitals, skilled nursing facilities or other post-acute care facilities positions our business to benefit from healthcare reform initiatives that focus on cost savings. Medicare currently offers limited reimbursement for homeand alternate site infusion therapy products and services. Although the Cures Act significantly reduced the level of reimbursement for certain of the therapies that we provide, we believe that home infusion and other low-cost in-home therapeutic alternatives will be impacted favorably by health reform initiatives focused on cost-reduction. Significant health plan cost savings per infusion can be achieved when therapy is provided at an alternative treatment site compared to other patient settings.
Effective Care Management Clinical Programs that are Designed to Produce Positive Clinical Outcomes and Reduce Readmissions
Our diversified and comprehensive clinical programs, which span numerous therapeutic areas, are designed to improve patient outcomes.Our home infusion business provides traditional infusion therapies for acute conditions with accompanying clinical management and home care. Our infusion product offerings andThe Company’s services are also designed to treat patients with chronic infusion needs. Chronic conditions require long-term treatment, ongoing caregiver and patient counseling and education, and ongoing monitoring and communication with physicians to encourage patients to follow therapies prescribed by their physicians.
Our Centers of Excellence focus on interdisciplinary teams to provide clinical excellence with outstanding personal service. Externally qualified by a panel of leading industry experts, these centers employ evidence-based standards of care, policies and procedures built on industry-recognized best practices. They are led by specialists with advanced certifications and training who are dedicated to developing, improving and sustaining clinical services to achieve optimal patient outcomes and exceed the expectations of patients and referral sources.
Our clinical management programs in multiple disease-state therapy provide us opportunities to cross-sell services. We believe we have earned a positive reputation among patients, physicians, payors and pharmaceutical manufacturers by providing quality service and favorable clinical outcomes. We believe our platform provides the necessary programs and services for better and more efficient clinical outcomes for our patients.
Services
We are one of the largest providers of home infusion services in the United States. Home infusion involves the preparation, delivery, administration and clinical monitoring of pharmaceutical treatments that are administered to a patient via intravenous (into the vein), subcutaneous (into the fatty layer under the skin), intramuscular (into the muscle), intra-spinal (into the membranes around the spinal cord) and enteral (into the gastrointestinal tract) methods. These methods are employed when a physician determines that the best outcome can be achieved through utilization of one or more of the therapies provided through the routes of administration described above.
Our home infusion services primarily involve the intravenous administration of medications to treat a wide range of acute and chronic conditions, such as infections, nutritional deficiencies, various immunologic and neurologic disorders, cancer, pain and palliative care. Our services are usuallymost typically provided in the patient’s home, but may also be provided at outpatient clinics, skilled nursing facilities, physician officesthe physician’s office or at one of ourits ambulatory infusion centers. We receive payment for oursuites. The Company provides a broad therapy portfolio through its network of 115 full service pharmacies and 43 stand-alone ambulatory infusion suites. The Company’s home infusion services include medication and medications, pursuantsupplies for administration and use at home or within one of its ambulatory infusion suites, consultation and education regarding the patient’s condition and the prescribed medication nursing support, clinical monitoring and assistance in monitoring potential side effects, and assistance in obtaining reimbursement. The Company administers a wide variety of therapies and services, including the following:
Immunoglobulin Infusion. The Company offers industry-leading expertise, access, and support in immunoglobulin (“IG”) infusion therapy designed to provider agreements with government sources,treat immune deficiencies. Immune deficiencies are disorders that reduce the patient’s ability to identify and destroy substances that do not belong in the human body and are characterized by reduced levels of antibodies. Intravenous IG infusions are concentrated antibodies that have been purified from large numbers of human blood donors.
Anti-Infectives Infusion. The Company provides comprehensive home infusion services to combat serious infections in patients of all ages. The Company’s anti-infective therapy and services help avoid hospitalizations for many infections that can be safely treated at home.
Nutrition Support Infusion. The Company delivers comprehensive nutrition support across pediatric, adult, and geriatric patients. The Company’s expert team provides home parenteral nutrition and enteral nutrition support for numerous acute and chronic conditions negatively affecting nutritional status, such as Medicarestroke, cancer, and Medicaid programs, MCOs and Third Party Payors.gastrointestinal diseases.
We provideBleeding Disorders Infusion. As a wide arrayleading provider of home infusion productstherapy for hemophilia and services to meetvon Willebrand disease, the diverse needs and preferences of physicians, patients and payors. Diseases commonly requiring infusion therapy include infections that are unresponsive to oral antibiotics, cancer and cancer-related pain, dehydration and gastrointestinal diseases or disorders that require IV fluids, parenteral or enteral nutrition. Other conditions that may be treatedCompany streamlines the administrative burdens associated with infusion therapies for bleeding disorders. The Company works with medical specialists across the country to offer access to all approved factor products, a full range of therapies, and dedicated support services. Hemophilia is one of the most costly diseases to treat. The treatment goal is to raise the level of the deficient clotting factor and maintain it to stop the bleeding. Treatments include chronic diseases such asinfusion of the clotting factor products and other biologic prescription drugs. The length of treatment depends on the severity of the bleeding episode, and the need for treatment continues throughout the life of the patient.
Other. The Company offers a range of other infusion therapies to treat a variety of conditions, including heart failure, Crohn’s disease, hemophilia, immune deficiencies, multiple sclerosis, rheumatoid arthritis, growth disorderspain management, chemotherapy and genetic enzyme deficiencies, suchrespiratory medication.
The Company also provides nursing services to support the above therapies, comprised of its nursing team of approximately 1,300 employees, and through its network of sub-contracted nursing agencies.
Sales and Marketing
The Company’s sales and marketing efforts focus on three primary objectives: (1) building new relationships and expanding existing contracts with managed care organizations; (2) establishing, maintaining and strengthening relationships with local and regional patient referral sources; and (3) establishing, maintaining existing and developing new relationships with pharmaceutical manufacturers to gain distribution access as Gaucher’s or Pompe’s disease. they release new products.
The therapiesCompany’s sales structure is focused on maintaining and products most commonly provided are listed below:
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Therapy Type | Description |
Parenteral Nutrition (PN) | Provide intravenous nutrition customized to the nutritional needs of the patient. PN is used in patients that cannot meet their nutritional needs via other means due to disease process or as a complication of a disease process, surgical procedure or congenital anomaly. PN may be used short term or chronically. |
Enteral Nutrition (EN) | Provide nutrition directly to the stomach or intestine in patients who cannot chew or swallow nutrients in the usual manner. EN may be delivered via a naso-gastric tube or a tube placed directly into the stomach or intestine. EN may be used short term or chronically. |
Antimicrobial Therapy (AT) | Provide intravenous antimicrobial medications used in the treatment of patients with various infectious processes such as: wound infections, pneumonia, osteomyelitis, cystic fibrosis, Lyme disease and cellulitis. AT may also be used in patients with disease processes or therapies that may lead to infections when oral antimicrobials are not effective. |
Chemotherapy | Provide injectable and/or infused medications in the home or the prescriber’s office for the treatment of cancer. Adjuvant medications may also be provided to minimize the side effects associated with chemotherapy. |
Immune Globulin (IG) Therapy | Provide immune globulins intravenously or subcutaneously on an as-needed basis in patients with immune deficiencies or auto-immune diseases. This therapy may be chronic based on the etiology of the immune deficiency. |
Pain Management | Provide analgesic medications intravenously, subcutaneously or epidurally. This therapy is generally administered as a continuous infusion via an internal or external infusion pump to treat severe pain associated with diseases such as COPD, cancer and severe injury. |
Blood Factor Therapies | Provide medications to patients with one of several inherited bleeding disorders in which a patient does not manufacture the clotting factors necessary, or use the clotting factors their liver makes, appropriately in order to halt an external or internal bleed in response to a physical injury or trauma. |
Inotropes Therapy | Provide intravenous inotropes in the home for the treatment of heart failure, either in anticipation of cardiac transplant or to provide palliation of heart failure symptoms. Inotropes increase the strength of weak heart muscles to pump blood. The therapy is only started in late phase heart failure when alternative therapies proved inadequate. |
Respiratory Therapy/Home Medical Equipment | Provide oxygen systems, continuous or bi-level positive airway pressure devices, nebulizers, home ventilators, respiratory devices, respiratory medications and other medical equipment. |
Patients generally are referredexpanding its relationships with drug manufacturers to usestablish its position as a participating provider when they release new products. In addition, the Company’s sales structure allows it to leverage its national managed care relationships to provide sales and contract pull-through by the Company’s local field-based sales personnel. This cross-utility enables the Company to market its services to numerous sources of patient referrals, including physicians, hospital discharge planners, MCOshospital personnel, Health Maintenance Organizations (“HMOs”) and Preferred Provider Organizations (“PPOs”).
Competition
The Company competes in the large and highly fragmented home infusion market for contracts with managed care organizations and other referral sources. Our medications are compoundedthird party payers to receive referrals from physicians, case managers and dispensed underhospital discharge planners. Competition in the supervisionhome infusion market is based on quality of care, clinical outcomes, pricing and cost of service, reputation, and reliability of service. Its competitors within the home infusion market include Coram CVS/specialty infusion services (a division of CVS Health), Accredo Health Group, Inc. (a unit of Cigna), Briova (a subsidiary of OptumRx, which is a registered pharmacistunit of the United Healthcare Insurance Company) and various regional and local providers. The Company believes that its reputation for providing quality services, the strength of its growing national presence and its ability to effectively market its services at national, regional and local levels places it in a state licensed pharmacystrong position against existing and potential competitors. The Company believes that is accreditedthe value created by an independent accrediting organization. We compound pursuantthe Merger has put the Company in a unique position to a patient specific prescriptionefficiently capture market share through its expanded footprint and do so consistently with U.S. Pharmacopeial Convention (“USP”) 797 standards. A national accrediting organization surveys our pharmacies for compliance with the USP 797 standards for sterile drug compounding pharmacies and has confirmed that we operate consistently with those standards. Therapies are typically administered in the patient’s home by a registered nurse or trained caregiver. Depending on the preferences of the patient or the payor, these services may also be provided at one of our ambulatory infusion centers, a physician's office or another alternate site of administration.
We currently have relationships with a large number of MCOs and other Third Party Payors to provide home infusion services. These relationships are at a national, regional or local level. A key element of our business strategy is to leverage our relationships, geographic coverage, clinical expertise and reputation in order to gain contracts with payors. Our infusion service contracts typically provide for us to receive a fee for preparing and delivering medications and related equipment to patients in their homes or in Ambulatory Infusion Sites (“AIS”). Pricing for pharmaceutical products is typically negotiated in advance on the basis of Average Wholesale Price (“AWP”) minus some percentage of contractual discount, or Average Sales Price (“ASP”) plus some percentage. In addition, we typically receive a per diem payment for additional services and supplies provided to patients in connection with infusion services. An additional payment is made for nursing services when services are provided.
Sales and Marketing
We have over 260 sales and marketing representatives and approximately 1,000 payor relationships including MCOs, Medicare Part D pharmacy networks, other government programs such as Medicare and Medicaid and other Third Party Payors. Our sales and marketing efforts are focused on payors, healthcare systems and physician prescribers and are driven by dedicated managed care and physician sales teams as well as home health care consultants. Our sales and marketing strategies include the development of strong relationships with key referral sources, such as physicians, hospital discharge planners, case managers, long-term care facilities and other healthcare professionals, primarily through regular contact with the referral sources and by fulfilling the care and service expectations of our many customers. Contracts with Third Party Payors, including MCOs, are an integral component for sales success.
synergies.
Intellectual Property
We own and useThe Company owns a variety of trademarks, trade nameslicenses, and service marks, including without limitationbut not limited to: “Option Care Health”, “Option Care”, “Critical Care Systems”, “Clinical Specialties”, “BioScrip”, “BioScrip Infusion Services”, “BioScrip Nursing Services”, “BioScrip Pharmacy Services”, “CarePoint Partners”, “HomeChoice Partners”, “InfuScience”, “InfusionCare”, “Infusion Partners”, “Infusion Solutions”, “New England Home Therapies”, “Option Health”, “Professional Home Care Services”, “Wilcox Home Infusion”, and “Home Solutions”, each of which has either been registered at the state or federal level or is being used pursuant to common law rights. We are recognized in local markets byas well as several of these trade names, but we do not consider the marks material to our business.others.
Competition
Suppliers
The home infusion services marketCompany purchases pharmaceuticals and medical supplies through pharmaceutical manufacturers, distributors and group purchasing organizations. Through the coverage and clinical expertise of its 115 full service pharmacies, the Company provides pharmaceutical manufacturers with a broad distribution channel for its existing pharmaceutical products. Many of the pharmaceuticals that the Company purchases are available from multiple sources and are available in sufficient quantities to meet its needs and the needs of its patients. However, some drugs are only available through the manufacturer and may be subject to limits on distribution. In such cases, it is highly competitiveimportant the Company establishes and includesmaintains good working relations with the manufacturer to secure sufficient supply to meet its patients’ needs. Additionally, certain drugs may become subject to supply shortages. Such shortages can result in cost increases or hamper the Company’s ability to obtain sufficient quantities to meet the needs of its patients. The Company actively manages its relationships with direct manufacturers and distributors to ensure consistent supply and cost-effective procurement. These relationships provide the Company the opportunity to become a selected partner in the launch of their new products. The Company may receive fees, which it records as other revenue, from certain biotech manufacturers for providing them with clinical outcomes data. The Company’s continued growth will be dependent on maintaining its existing relationships with manufacturers and establishing new relationships with additional manufacturers as the Company launches new specialty products.
For the year ended December 31, 2019, approximately 70% of the Company’s pharmaceutical and medical supply purchases are 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.
Through the purchasing power of its national providersplatform, the Company is able to negotiate favorable terms and numerous localeconomics, including volume purchase rebates and regional companies. Providers strivevendor administration fees. Such fees are recorded as reductions to differentiate their services based on their responsiveness to patient needs, quality of care, reputation, outcomes, and cost of service. Our Centersrevenue when the pharmaceuticals are delivered to the patient.
Billing & Significant Payers
The Company generates most of Excellence offer a high touch, high service approach toits revenue from contracts with third party payers, including managed care organizations, insurance companies, self-insured employers, Medicare, and Medicaid programs. Where permissible, the Company bills patients for any amounts not reimbursed by third party payers. The majority of the Company’s infusion pharmacy revenue consists of reimbursement for both the cost of the pharmaceuticals sold and the cost of services provided. Pharmaceuticals are typically reimbursed on a local basis, which we believe differentiates our service.
Our competitors withinpercentage discount from the home infusion market include Option Care, Coram CVS/specialty infusionpublished average wholesale price (“AWP”) of each drug or on a percentage premium to average sales price (“ASP”). Nursing services (a division of CVS Health), Accredo Health Group, Inc. (a unit of Cigna), Briova (a subsidiary of OptumRx, which is a unit of the UnitedHealthcare Insurance Company) and various regional and local providers of alternate site healthcareare typically billed separately, while other patient support services, such as hospitalspharmacy compounding service, delivery service and physician practices.ancillary medical supplies are reimbursed either separately or on a per diem basis, where applicable.
The Company’s largest payer is with United Health Group, which represented approximately 16% of its revenue for the year ended December 31, 2019. No other single payer represented more than 10% of its revenue. The Company also provides services that are reimbursable through government healthcare programs such as Medicare and state Medicaid programs. For the
Governmentyear ended December 31, 2019, approximately 12% of the Company’s revenue was directly reimbursable through governmental programs, such as Medicare and Medicaid.
Governmental Regulation
The healthcarehome infusion industry is subject to extensive regulation by a number of governmental entities at the federal, state and local level.governmental entities. The industry is also subject to frequent regulatory change. Laws and regulations in the healthcare industry are extremely complex and, in many instances, the industry does not have the benefit offrom significant regulatory or judicial interpretation. Our business is impacted not only by thoseinterpretation that would clarify how these laws and regulations that are directly applicable to us butshould be applied. Moreover, the Company’s business is also impacted by certain laws and regulations that are applicable to our payors, vendorsits managed care and referral sources. While our management believes we are in substantial complianceother clients. If the Company fails to comply with all of the existing laws and regulations directly applicable to us, such lawsits business, the Company could suffer civil and/or criminal penalties, and regulations are subject to rapid change and often are uncertainthe Company could be excluded from participating in their application and enforcement. Further, to the extent we engage in new business initiatives, we must continue to evaluate whether new laws and regulations are applicable to us. There can be no assurance that we will not be subject to scrutiny or challenge under one or more of these laws or that any enforcement actions would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon our business and consolidated financial statements.
Among the various federal and state laws and regulations that may govern or impact our current and planned operations are the following:
Medicare and Medicaid Reimbursement
Many of the products and services that we provide are reimbursed by Medicare and state Medicaid programs and are therefore subject to extensive government regulation.
Medicare is a federally funded program that provides health insurance coverage for qualified persons age 65 or older, some disabled persons, and persons with end-stage renal disease and persons with Lou Gehrig’s disease. Medicaid programs are jointly funded by the federal and state governments and are administered by states under approved plans.
Medicaid provides medical benefits to eligible people with limited income and resources and people with disabilities, among others. Although the federal government establishes general guidelines for the Medicaid program, each state sets its own guidelines regarding eligibility and covered services. Some individuals, known as dual eligibles, may be eligible for benefits under both Medicare and a state Medicaid program. Reimbursement under the Medicare and Medicaid programs is contingent on the satisfaction of numerous rules and regulations, including those requiring certification and/or licensure. Congress often enacts legislation that affects the reimbursement rates under government healthcare programs.
Approximately 18% of our revenue for the year ended December 31, 2018 was derived directly from Medicare, Medicaid or other government-sponsored healthcare programs. Also, we indirectly provide services to beneficiaries of Medicare, Medicaid and other government-sponsoredfederal and state healthcare programs, through managed care entities. Should there be material changes to federal or state reimbursement methodologies, regulations or policies, our direct reimbursements from government-sponsoredwhich would have an adverse impact on its business.
Professional Licensure
Nurses, pharmacists and certain other healthcare programs, as well as service fees that relate indirectly to such reimbursements, could be adversely affected.
Medicare
We receive reimbursement for infusion therapy under the Medicare program, which has four parts. Medicare Part A generally covers inpatient hospital, skilled nursing facility, home nursing and hospice services; Medicare Part B covers physicians' services, outpatient services, items and services provided by medical suppliers and a limited number of prescription drugs; Medicare Part C allows beneficiaries to enroll in private healthcare plans (known as Medicare Advantage plans); and Medicare Part D provides for a voluntary prescription drug benefit.
Medicare fee-for-service programs, Part A and Part B, generally cover infusion therapy provided in hospitals and hospital outpatient departments, skilled nursing facilities, and physician offices. Part A covers infusion therapy services under the home health benefit if the services are rendered by a Medicare-certified home health agency and the beneficiary meets criteria for homebound status. Part B generally does not cover the full range of services for infusion therapies in a patient’s home but it covers a limited number of drugs administered using an external infusion pump under the durable medical equipment (“DME”) benefit. Although Medicare Part D covers payment for drugs (including many not covered under Part B) and a retail-based dispensing fee, Part D does not cover infusion-related services, equipment and supplies. For eligible Medicare beneficiaries, the cost of equipment and supplies associated with infused drugs covered under Medicare Part D may be reimbursed on a limited basis under Part A or Part B, and the cost of associated professional services may be reimbursed on a limited basis under Medicare Part A. CMS has attempted to clarify the relationship of Part B and Part D with regard to coverage of infused drugs. CMS has stated that coverage is generally determinedprofessionals employed by the diagnosis and the method of drug delivery.
The U.S. Department of Health and Human Services (“HHS”), Office of the Inspector General (“OIG”) and CMS continue to issue regulations and guidance with regard to the Medicare Part D program and compliance by Medicare Part D sponsors and their subcontractors. The receipt of funds made available through Medicare Part D is subject to compliance with government laws and regulations and provisions in contracts with prescription drug plans. There are many uncertainties about the financial and regulatory risks of participating in the Medicare Part D program, and these risks could negatively impact our business in future periods.
Medicare Advantage
Under Medicare Part C, also known as Medicare Advantage, beneficiaries can choose to enroll in a health insurance plan administered by an MCO. Medicare Advantage plansCompany are required to offer the benefits coveredbe individually licensed or certified under Medicare Part A and Part B, with the exception of hospice care, and may include additional benefits. To serve Medicare Advantage beneficiaries, a provider must contract with a Medicare Advantage plan. Reimbursementapplicable state law. The Company performs criminal and other requirements imposedbackground checks on the provider are governed by the agreement with the Medicare Advantage plan rather than by statute or regulationemployees and as such vary from plan to plan. Medicare Advantage plans are permitted to cover certain services that fee-for-service Medicare does not cover. Home infusion therapy services are covered under many Medicare Advantage plans. We currently have contracts with a number of Medicare Advantage plans.
Changes to Medicare Reimbursement
In recent years, legislative and regulatory changes have resulted in limitations and reductions in reimbursement under government healthcare programs. For example, the Cures Act, which Congress passed in December of 2016, changed the payment methodology for certain infusion drugs under the Part B DME benefit. Significant reductions to the amount paid by Medicare for many infusion drugs took effect January 1, 2017. In addition, the Cures Act provides for the implementation of a clinical services payment under Part B for “qualified home infusion therapy suppliers.” Under this new payment system, Medicare will reimburse home infusion therapy suppliers based on a single, all-inclusive rate. The services payment provision does not take effect until
January 1, 2021. However, the Bipartisan Budget Act of 2018 provides for temporary transitional benefit payments, starting January 1, 2019, for Medicare Part B home infusion services. CMS finalized a rule in October 2018 to implement this temporary benefit, which will continue until January 1, 2021 when the services payment in the Cures Act takes effect. We have taken steps to mitigateensure that its employees possess all necessary licenses and certifications, and the impact of the Cures Act on our business, but the Act has had aCompany believes that its employees comply in all material negative impact on our revenuesrespects with applicable licensure laws.
Pharmacy Licensing and profitability.
Medicaid
Medicaid coverage of infusion therapy varies by state. We are sensitive to possible changes in state Medicaid programs. Budgetary concerns in many states have resulted in, and may continue to result in, reductions to Medicaid reimbursement and delays in payment of outstanding claims. In addition, many states have implemented or are considering strategies to reduce coverage, restrict eligibility, or enroll Medicaid recipients in managed care programs. As of January 1, 2018, all pharmacies participating in a Medicaid managed care program must be registered with the state Medicaid agency. Any reductions to or delays in collecting amounts reimbursable by state Medicaid programs for our products or services, or changes in regulations governing such reimbursements, could cause our revenue and profitability to decline and increase our working capital requirements. Effective January 1, 2018, CMS limited Medicaid reimbursement for DME to no more than Medicare payment rates. For further discussion on state Medicaid reductions, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7.
In addition, some Medicaid programs only allow for reimbursement to pharmacies residing in the state or in a border state. While we believe we can service our current Medicaid patients through our existing infusion pharmacies, there can be no assurance that additional states will not enact in-state dispensing requirements for their Medicaid programs. To the extent such requirements are enacted, certain therapeutic pharmaceutical reimbursements could be adversely affected.
Registration
State Legislation and Other Matters Affecting Drug Prices
Many states have adopted “most favored nation” legislation, which limits the amount a pharmacy participating in the state Medicaid program is paid based on the pharmacy’s prices applicable to third party plans, or in some instances, self-pay patients. Because of these limitations, we may not receive the full Medicaid fee schedule amounts in some instances. There is wide variation in drafting, interpretation and enforcement of state “most favored nation” legislation. Our management carefully considers these laws and believesrequire that each of our respective companies is in material compliance with them; however, we cannot predict whether the regulators will disagree with our interpretation or change their interpretation of the laws or their enforcement priorities.
Pricing benchmarks in theits pharmacy industry are published by third-parties suchlocations be licensed as First DataBank, Medi-Span, Micromedex, RJ Health, and CMS. The Average Wholesale Price (“AWP”) is one of the most commonly used benchmarks. Although various payors have discussed establishing a new benchmark and First DataBank ceased publication of the AWP, the industry has not yet developed a viable generally accepted alternative to the AWP benchmark. See “Risk Factors - Risks Related to Our Business - Changes in industry pricing benchmarks could adversely affect our financial performance.”
Healthcare Reform
In recent years, federal and state governments have considered and enacted policy changes designed to reform the healthcare industry. The most prominent of these healthcare reform efforts, the Affordable Care Act, has resulted in sweeping changes to the U.S. system for the delivery and financing of health care. As currently structured, the Affordable Care Act increases the number of persons covered under government programs and private insurance; furnishes economic incentives for measurable improvements in health care quality outcomes; promotes a more integrated health care delivery system and the creation of new health care delivery models; revises payment for health care services under the Medicare and Medicaid programs; and increases government enforcement tools and sanctions for combating fraud and abuse. In addition, the Affordable Care Act reduced cost sharing for Medicare beneficiaries under the Part D prescription drug benefit program and expanded medication therapy management services for individuals with chronic conditions.
However, the future of the Affordable Care Act is uncertain. The Affordable Care Act has been subject to legislative and regulatory changes and court challenges, and the presidential administration and certain members of Congress have expressed their intent to repeal or make additional significant changes to the Affordable Care Act, its implementation or interpretation. The president has signed an executive order that directs agencies to minimize “economic and regulatory burdens” of the Affordable Care Act. Final rules issued in 2018 expand the availability of association health plans and allow the sale of short-term, limited-duration health plans, neither of which are required to cover all of the essential health benefits mandated by the Affordable Care Act. Effective January 1, 2019, Congress eliminated the financial penalty associated with the individual mandate. These changes may affect the number of individuals electing to purchase health insurance or the scope of such coverage, if purchased. Further, because the financial penalty associated with individual mandate was eliminated, a federal court in Texas ruled in December 2018
that the entire Affordable Care Act was unconstitutional. However, the law remains in place pending appeal. The impact of these developments or repeal of or further changes to the Affordable Care Act, as well as the impact of any alternative provisions, on the healthcare industry and our business is unknown. Members of Congress have also proposed measures that would expand government-funded coverage, such as single-payor proposals. Other industry participants, such as private payors and large employer groups and their affiliates, may also introduce financial or delivery system reforms. We are unable to predict the nature and success of such initiatives.
Regulation of the Pharmacy Industry
For each physical pharmacy location in a state, laws require maintenance of an in-state pharmacy license to dispense pharmaceuticals. Pharmacy and controlled substances laws often address the qualifications of personnel, the adequacy of prescription fulfillment and inventory control practices and the adequacy of facilities. We believe ourpharmaceuticals in that state. Certain states also require that its pharmacy locations be licensed as an out-of-state pharmacy if the Company delivers prescription pharmaceuticals into those states from locations outside of the state. The Company believes that it materially complycomplies with all applicable state licensing laws applicable to their practice.laws. If our pharmacy locations become subject to additional licensure requirements, arethe Company is unable or otherwise fail to maintain their requiredits licenses or if states place overly burdensome restrictions or limitationsregulations on non-resident pharmacies, ourits ability to operate in some states would be limited, which could have an adverse impact on ourits business. We believe the impact of any such requirements would be mitigated by our ability to shift business among our numerous locations.
Many states, as well as the federal government, are considering imposing, or have already begun to impose, more stringent requirements on compounding pharmacies including the Drug Quality and Security Act (“DQSA”) (see Food, Drug, and Cosmetic Act below). We believe that our compounding is done in safe environments with clinically appropriate policies and procedures in place. Those compounding pharmacies adhere to rigorous safety and quality standards for compounded sterile preparations and only fill prescriptions for individually identified patients pursuant to a valid prescription from a prescriber. All compounding is done consistently with USP 797 standards.
Many of the states into which we deliver pharmaceuticals have laws and regulations that require out-of-state pharmacies to register with or be licensed by the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located. However, various state pharmacy boards have enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed in that state. To the extent that such laws or regulations are applicable to our operations, we believe we comply with them. To the extent that the foregoing laws or regulations prohibit or restrict the operation of out-of-state pharmacies and are found to be applicable to us, they could have an adverse effect on our operations.
Laws enforced by the U.S. Drug Enforcement Administration (“DEA”), as well as some similar state agencies, require each of ourits pharmacy locations to individually register with the DEA in order to handle and dispense controlled substances.substances, including prescription pharmaceuticals. A separate registration is required at each principal place of business where we dispensethe Company dispenses controlled substances. Federal and state laws also require us tothat the Company follow specific labeling, reporting and record-keeping requirements for controlled substances. We maintainThe Company maintains federal and state controlled substance registrations for each of ourits facilities that require such registration and followfollows procedures intended to comply with all applicable federal and state requirements regarding controlled substances. These laws can change from time to time. We continuously review these changes to laws and believe we are in material compliance with the applicable federal and state controlled substances laws. If any of our pharmacy locations is deemed to be out of compliance, it could have an adverse impact on our business.
Many states in which we operatethe Company operates also require home infusion companies to be licensed as home health agencies. We believe we are compliantThe Company believes it is in compliance with these laws, as applicable.
The Company believes that it materially complies with all applicable state licensing laws, including any applicable change of control requirements that may have triggered in all material respects. If our infusion locations become subjectconnection with the Merger.
Matters Affecting Drug Prices
Pricing benchmarks in the pharmacy industry are periodically published by third parties such as First DataBank, Medi-Span, RJ Health, and CMS, and the benchmark reimbursement varies by payer contract. The most commonly used benchmarks are AWP and ASP. AWP is based on self-reported prices charged by wholesalers and manufacturers. Reimbursement is generally AWP minus a percentage and may include a per diem fee or a fixed dispensing fee. ASP is based on actual sales transactions reported by wholesalers, and is generally lower than AWP. Reimbursement is generally ASP plus a percentage. The Company may also receive a fixed dispensing fee or a per diem fee for each day a patient is on service. Changes to new licensure requirements, are unable to maintain required licenses or if states place burdensome restrictions or limitations on home health agencies or home nursing agencies, our infusion locations’ ability to provide nursing services in some states would be limited, which couldthese pricing benchmarks may have an adversea significant impact on ourthe profitability of the Company’s business.
Privacy and Security Requirements
EachThe Health Insurance Portability and Accountability Act of our pharmacies1996 (“HIPAA”) as amended by the Health Information Technology for Economic and infusion locationsClinical Health Act (“HITECH”), and its implementing regulations regulate the use, disclosure, confidentiality, availability and integrity of individually identifiable health information, known as “protected health information,” and provide for a number of individual rights with respect to such information. The federal privacy regulations (the “Privacy Regulations”) are eligibledesigned to participate in Medicare and Medicaid programs. If any provider wereprotect health-related information that could be used to lose its Medicare or Medicaid certification, the provider would be unable to receive reimbursement from federal healthcare programs. The conditions for Medicare and Medicaid participation vary depending on the type of facility, but, in general, require our facilities to meet specified standards relating to licensure, personnel, patient rights, patient care, patient records, physical site, administrative reporting and legal compliance. The requirements for certification are subject to change and, in order to remain qualified, it may become necessary for us to make changes in our facilities, equipment, personnel and services. For example, in October 2018, CMS finalized a rule that implements quality standards for home infusion suppliers.
identify an individual’s protected health information.
The requirements for licensure, certificationimposed by HIPAA are extensive, and accreditation also include notification or approvalthe Company has taken and intends to continue to take steps to ensure its policies and procedures are in compliance with the event of the transfer or change of ownership or certain other changes. Failure to provide required notifications or obtain necessary approvals in these circumstances can result in the inability to complete an acquisition or change of ownership, loss of licensure, lapses in reimbursement or other penalties.applicable provisions.
Professional LicensureRegulations
Nurses, pharmacists and certain other professionals employed by us are required to be individually licensed and/or certified under applicable state law. We perform criminal and other background checks on employees to the extent allowed by state law and confirm that our employees possess all licenses and certifications required in order to provide healthcare-related services. We believe our employees comply with applicable licensure laws.
Food, Drug and Cosmetic Act
Pharmacy operations
Act. Certain provisions of the Federal Food, Drug and Cosmetic Act (“FDCA”) govern the preparation, handling storage, marketing and distribution of pharmaceutical products. Many of theThis law exempts many pharmaceuticals and medical devices we dispense are exempt from certain federal labeling and packaging requirements as long as they are not adulterated or misbranded and are dispensed in accordance with and pursuant to a valid prescription.
The FDA directly regulates outsourcing facilities, but does not directly regulate non-outsourcing facilities or pharmacies. Outsourcing facilities are pharmacies that are engaged in sterile compounding of drugs that are notCompany believes it complies with all applicable requirements. The FDCA also governs interstate commerce for an individually identifiable patient. Outsourcing facilities are subject to standards relating to sterilization and the physical facility including the Current Good Manufacturing Practice (“cGMP”) regulations. Because our compounding activities are limited to products compounded pursuant to valid prescriptions for individually identifiable patients, we do not qualify as an outsourcing facility, and therefore, should not be required to comply with the cGMP standards.pharmaceutical products. The FDA has been conducting inspections of pharmacies that engage in compounding, including ours, and has been attempting to apply the cGMP standards even though those pharmacies are not outsourcing facilities. While the FDA has issued reports following their surveys, to date, no enforcement action has been taken against us. We cannot predict what further actions the FDA may take. We believe our operations are in compliance with applicable laws and that the requirements for outsourcing facilities are not applicable to our operations. WeCompany cannot predict the impact of increased scrutinyany proposed FDCA regulations on or new regulation of compounding pharmacies.
In addition, the FDCA governs pharmaceutical products’ movement in interstate commerce. The FDA has begun scrutinizing more closely compounding pharmacies’ operations and compounded pharmaceuticals’ movement in interstate commerce. Specifically, the FDA has proposed regulations that could have the effect of limiting ourits ability to ship prescriptions outdrugs to different states from its pharmacies.
The Drug Quality and Security Act (“DQSA”) amended the FDCA to grant the Food and Drug Administration (“FDA”) authority to regulate the manufacturing of state by pharmacies that hold valid licenses but do not complycompounded pharmaceutical drugs. The Company complies with cGMP standards. We do not know if these regulations, as proposed, will be adopted, but if they are, we will likely need to modify our operations to comply. While we cannot predict changes to the regulatory environment under the DQSA, we believe we complyPCAB and Accreditation Standards for Sterile and Non-Sterile Pharmacy Compounding, and aggressively pursues accreditation from quality associations. The Company believes it complies in all material respects with all applicable requirements of a non-outsourcing-facility pharmacy.
Infusion services
The FDA also regulates certain medical devices, (e.g.,such as infusion pumps) essentialpumps the Company uses to the Company’s infusionprovide its services. An infusion pump, like any medical device, is subject to failure. Since 2010, due toIn recent years, the relatively large number of adverse events associated with the use of infusion pumps, FDA has increased its oversight of infusion pumps. Changes have included higher levels of scrutiny, intensifying manufacturer engagement and bolstering userpumps, resulting in additional requirements around patient education and adverse event reporting. The shifting regulatory climate around infusion pumps; the requirement to maintain high levels of proficiency in using and training patients in the safe use of infusion pumps; cybersecurity issues, including modification and misuse of infusion pumps, and unauthorized use of information that is stored on or accessed from infusion pumps; and, finally, the need to stay current in infusion pump design and “best practices,” present elements of risk. Nevertheless, we believe we complyCompany believes it complies in all material respects with all applicable requirements and that ourits employees are adequately trained and equippedhave the level of proficiency required to use these devices.devices and provide training to its patients.
Fraud and Abuse Laws
Anti-Kickback Laws
Statute. The federal Anti-Kickback Statute makes it a felony for a person or entity toprohibits individuals and entities from knowingly and willfully offer, pay, solicit,paying, offering, receiving, or receive any remuneration with the intentsoliciting money or anything else of inducingvalue in order to induce the referral of an individualpatients or theto induce a person to purchase, lease, or order, (or the arranging
arrange for, or recommending of the purchase, leaserecommend services or order) ofgoods covered by Medicare, Medicaid, or other government healthcare items or services paid for in whole or in part by a federal healthcare program such as Medicare or Medicaid. Courts have held that there is a violation of the statute even if only one purpose of a payment arrangement is to induce referrals, even if there are other lawful purposes. Violations of the federalprograms. The Anti-Kickback Statute could subject us to criminal and/or civil penalties, including suspension or exclusion from Medicareis broad and Medicaid programs and other government-funded healthcare programs. In addition, submission of a claim for items or services generated in violation of the Anti-Kickback Statute may also be the basis of liability under the federal False Claims Act (“False Claims Act”).
The federal Anti-Kickback Statute has been interpreted broadly by courts, the OIG and other administrative bodies. For example, although the term “remuneration” is not defined in the federal Anti-Kickback Statute, it has been broadly interpreted to include anything of value, including for example, gifts, donations, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payment, ownership interests and providing any item, service, or compensation for something other than fair market value. Because of the broad scope of the statute, there are several statutory exceptions to the law, and federal regulations establish certain safe harbors from liability. For example, there are safe harbors relating to certain discounts received from vendors, investment interests, group purchasing organizations, managed care and waivers of copayment obligations. A practice that does not fall within a safe harbor is not necessarily unlawful, but may be subject to increased scrutiny and challenge by government enforcement authorities.
Governmental entities have investigated pharmacies and their dealings with pharmaceutical manufacturers concerning, among other things, retail distribution, sales and marketing practices and product conversion or product switching programs. Governmental entities have also investigated pharmacies with respect to their relationships with physicians and other referral sources, including marketing practices. There can be no assurance that we will not receive subpoenas or be requested to produce documents in pending investigations or litigation from time to time. In addition, we may be the target or subject of one or more such investigations or named parties in corresponding actions.
In 2003, the OIG released Compliance Program Guidance for Pharmaceutical Manufacturers (the “Guidance”), which provides voluntary, nonbinding guidance in devising effective compliance programs to assist companies that develop, manufacture, market and sell pharmaceutical products or biological products. The Guidance sets forth the fundamental elements of a pharmaceutical manufacturer’s compliance program and principles that should be considered when creating, implementing, and maintaining an effective compliance program. While we are not a manufacturer, we believe thatpotentially covers many aspects of it are useful to ourstandard business and therefore we currently maintain a compliance program that includes the key compliance program elements described in the Guidance. We believe the fundamental elements of our compliance programs are consistent with the principles, policies and intent of the Guidance.
arrangements. A number of states have enacted anti-kickback laws that may apply not only to state-sponsored healthcare programs, but also to items or services that are paid for by private insurance and self-pay patients. State anti-kickback laws can vary considerably in their applicability and scope and sometimes have fewer statutory and regulatory exceptions than does the federal law. Our management carefully considers the importance of such anti-kickback laws when structuring each company’s operations and believes that each of our respective companies is in compliance therewith.
The Stark Laws
The federal physician self-referral law, commonly known as the “Stark Law,” prohibits physicians from referring Medicare and Medicaid patients for “designated health services” to an entity with which the physician, or an immediate family member of the physician, has a direct or indirect financial relationship, unless the financial relationship is structured to meet an applicable exception. Designated health services include outpatient prescription drugs, DME and supplies, parenteral and enteral nutrient, equipment and supplies, and home health services. An entity that bills Medicare or Medicaid for designated health services that result from a prohibited referral is required to refund amounts collected pursuant to the prohibited referral on a timely basis. Penalties for violation of the Stark Law include denial of payment, civil monetary penalties and exclusion from federal healthcare programs. A knowing violation of the Stark Law can also constitute a violation of the federal False Claims Act. Our management carefully considers the Stark Law and its accompanying regulations in structuring our financial relationships with physicians and believes we are in compliance therewith.
We are also subject to state statutes and regulations that prohibit self-referral arrangements.the same general types of conduct as those prohibited by the Anti-Kickback Statute described above. Violations can lead to significant criminal or civil penalties, including imprisonment. The lawsOffice of the Inspector General (“OIG”) of the U.S. Department of Health and exceptions orHuman Services (“HHS”) has published clarifying regulations that identify a limited number of safe harbors may vary from the federal Stark Law and vary significantly from statecriminal enforcement or civil administrative actions. The Company attempts to state. Some ofstructure its business relationships to comply with these state statutes mirror the federal Stark Law while others are broader. For example, some state statutes and regulations apply to services reimbursed by governmentalsatisfy an applicable safe harbor where applicable. However, in situations where a business relationship does not fully satisfy the elements of a safe harbor, or where no safe harbor exists, the Company attempts to satisfy as wellmany elements of an applicable safe harbor as private payors, and some extend to providers other than physicians. Violation of these laws may result in prohibition of payment for services rendered, loss of pharmacy or health provider licenses, fines and criminal penalties. The state laws are often vague and, in many cases, have not been widely interpreted by courts or regulatory agencies. We believe we are in compliance with such laws.possible.
Statutes Prohibiting False Claims Act. The Company is subject to state and Fraudulent Billing Activities
A rangefederal laws that govern the submission of claims for reimbursement. These laws generally prohibit an individual or entity from knowingly and willfully presenting a claim or causing a claim to be presented for payment from a federal healthcare program that is false or fraudulent. The standard for “knowing and willful” may include conduct that amounts to a reckless disregard for the accuracy of information presented to payers. Penalties under these statutes include substantial civil and criminal laws targetfines, exclusion from the submission of false claimsMedicare or Medicaid programs and fraudulent billing activities.imprisonment. One of the most significantprominent of these laws is the federal False Claims Act, which provides for liability of treble damages and civil penalties for knowingly makingmay be enforced by the federal government directly or causing to be made false claims in order to secure reimbursement from government-sponsored programs, such as Medicare and Medicaid. Investigations or actions commenced underby a private plaintiff by filing a qui tam lawsuit on the government’s behalf. Under the False Claims Act, the government and private plaintiffs, if any, may be brought eitherrecover monetary penalties in the amount of $5,500 to $11,000 per false claim, as well as an amount equal to three times the amount of damages sustained by the government or by private individuals on behalfas a result of the government, through a “whistleblower” or “qui tam” action. The False Claims Act authorizes the payment of a portion of any recovery to the individual bringing suit. Such actions are initially required to be filed under seal pending their review by the Department of Justice. If the government intervenes in the lawsuit and prevails, the whistleblower (or plaintiff filing the initial complaint) may share with the federal government in any settlement or judgment. If the government does not intervene in the lawsuit, the whistleblower plaintiff may pursue the action independently. The False Claims Act may result in substantial financial penalties for small billing errors that are replicated in a largefalse claim. A number of states, including states in which the Company operates, have adopted their own false claims statutes as each individual claim could be deemed to be a separate violation of the False Claims Act. Significantly, the Affordable Care Act amended the False Claims Act to impose liability for knowing failures to return overpayments which, under the Affordable Care Act’s 60-Day Rule, include failures to report and return an overpayment to the government within 60 days after it is identified.
The False Claims Act has been used by the federal government and private whistleblowers to bring enforcement actions under fraud and abuse laws like the federal Anti-Kickback Statute and the Stark Law, increasing potential financial exposure for alleged violations. Such actions are based on the theorywell as statutes that when an entity submits a claim, it either expressly or impliedly certifies that it has provided the underlying services in compliance with material laws, including the Anti-Kickback Statute or Stark Law. Liability may result even if the claims are otherwise billed accurately for appropriate and medically necessary services. These actions are costly and time-consuming to defend.
Some states also have enacted statutes similar to the False Claims Act, which may include criminal penalties, substantial fines, and treble damages, and some allow individuals to bring qui tam actions. Federal law provides an incentive to states to enact false claims laws comparable to the federal False Claims Act.
In recent years, federal and state governments have launched several initiatives aimed at uncovering practicesThe Company believes that violate false claims or fraudulent billing laws. We have experienced increasing audit activity by enforcement entities, and we may be the subject of future audits. We believe we haveit has procedures in place to ensure the accuracy of ourits claims. While we believe we are
Medicare Home Health CY 2020 Home Health Prospective Payment Systems Rate Update. On October 31, 2019, the Centers for Medicare & Medicaid Services (“CMS”) issued a final rule that includes updates to payment policies, payment rates, and quality provisions for services. The final rule set forth routine updates to the home infusion therapy services for calendar year 2021 and subsequent years, and solicits comments on options to enhance future efforts to improve policies related to coverage of eligible drugs for home infusion therapy.
Ethics in compliancePatient Referrals Law (Stark Law)
The Stark Law exempts certain business relationships that meet its exception requirements. However, unlike the Anti-Kickback Statute under which an activity may fall outside a safe harbor and still be lawful, a referral for certain Designated Health Services (“DHS”) that does not fall within an exception is strictly prohibited by the Stark Law. In addition to the Stark Law, many of the states in which the Company operates have comparable restrictions on the ability of physicians to refer patients for certain services to entities with Medicaid and Medicare billing rules and requirements, there canwhich the Company has a financial relationship. Certain of these state statutes
mirror the Stark Law while others may be no assurance that regulators would agreemore restrictive. The Company attempts to structure all of its business relationships with physicians to comply with the methodology employed by us in billing for our productsStark Law and services. A material disagreement with governmental agencies on the manner in which we provide or bill for products or services could have a material adverse effect on our business and Consolidated Financial Statements.
Civil Monetary Penalties Act
any applicable state self-referral laws.
The Civil Monetary Penaltiesfederal Stark Law authorizesgenerally prohibits a physician from making referrals for certain DHS, reimbursable by Medicare or Medicaid, to entities with which the U.S. Secretary of HHSphysician or an immediate family member has a financial relationship, unless an exception applies. A financial relationship is generally defined as an ownership, investment or compensation relationship. DHS includes outpatient pharmaceuticals, parenteral and enteral nutrition products, home health services, durable medical equipment, physical and occupational therapy services, and inpatient and outpatient hospital services. Among other sanctions, a civil monetary penalty may be imposed for each bill or claim for a service a person knows or should know is for a service for which payment may not be made due to impose civil money penalties, assessments and program supervisionthe Stark Law. Such persons or entities are also subject to exclusion for various forms of fraud and abuse involvingfrom the Medicare and Medicaid programs. Penalties of upAny person or entity participating in a circumvention scheme to $100,000avoid the referral prohibitions is liable for each violationcivil monetary penalties, and additional fines may be imposed depending on the specific misconduct involved. These penalties are updated annually based on changes to the consumer price index. In some cases, violations of the Civil Monetary Penalty Law may result in penalties of up to three times the remuneration offered, paid, solicited or received, and may also result in exclusion from government healthcare programs. The availability of the Civil Money Penalties Law to enforce alleged fraud and abuse violations has increased the potential for enforcement actions, as it requires a lower burden of proof than some criminal statutes, and it has increased the potential financial exposure for such actions. These actions are costly and time-consuming to defend.
Other Fraud & Abuse Laws
We are also subject to additional fraud and abuse laws, including federal criminal statutes that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Federal enforcement authorities may exclude from Medicare and Medicaid any business entities and any investors, officers and managing employees associated with business entities that have committed health care fraud. Officers and managing employees may be excluded even if they had no knowledge of the fraud.
We may also be subject to laws promoting transparency of financial relationships with providers and other potential referral sources. For example, the Physician Payment Sunshine Act requires pharmaceutical, biological, device, and medical supply
manufacturers to report payments or other transfers of value to physicians and teaching hospitals, as well as physician ownership and investment interests. These initiatives may result in increased scrutiny by government enforcement authorities or impact our public reputation.
Confidentiality, Privacy and HIPAA
Many of our activities involve the receipt, use and/or disclosure of confidential medical, pharmacy or other health-related information concerning individual patients, including the disclosure of such confidential information to an individual's health plan.
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and its implementing regulations, as amended, give people greater control over the privacy of their medical information. The federal privacy regulations (the “Privacy Regulations”) are designed to protect health-related information that could be used to identify an individual, also known as protected health information (“PHI”). Among numerous other requirements, the Privacy Regulations: (i) limit permissible uses and disclosures of PHI; (ii) limit most uses and disclosures of PHI to the minimum necessary to accomplish the intended purpose; (iii) require patient authorization for uses and disclosures of PHI unless an exception applies; and (iv) guarantee patients the right to access their medical records and to receive an accounting of certain disclosures. The federal security regulations (the “Security Regulations”) set certain standards regarding the storage, utilization of, access to and transmission of electronic PHI. The federal breach notification regulations (the “Breach Notification Regulations”) require notification to individuals, the federal government and, in some cases, the media in the event of a breach of unsecured PHI.
These regulations apply to “covered entities,” which include most healthcare providers and health plans, and some of these regulations apply to “business associates,” which are persons or entities that perform or assist in performing services or activities for or on behalf of a covered entity, if the performance of those services or activities involves the creation, receipt, maintenance or transmission of PHI. HIPAA also requires that a covered entity and its business associates enter into written contracts whereby the business associate agrees to restrict its use and disclosure of PHI. We provide a varied line of services to patients and other entities. When we are acting as a pharmacy or health care provider, we function as a covered entity. There may also be situations when we act on behalf of another covered entity as a business associate.
The requirements imposed by HIPAA are extensive, and it has required substantial cost and effort to assess and implement measuresfailure to comply with those requirements. We have takenreporting requirements regarding an entity’s ownership, investment and intendcompensation arrangements for each day for which reporting is required to continue to take steps that we believe are reasonably necessary to ensure our policies and procedures are in compliance with the Privacy Regulations, the Security Regulations and the Breach Notification Regulations. The requirements imposed by HIPAA have increased our burden and costs of regulatory compliance (including our health improvement programs and other information-based products), altered our reporting and reduced the amount of information we can use or disclose if patients do not authorize such uses or disclosures.
Some federal and state privacy-related laws are more restrictive than HIPAA and could result in additional penalties. For example, the Federal Trade Commission uses its consumer protection authority to initiate enforcement actions in response to data breaches. In addition, most states have enacted privacy and security laws, including laws that protect particularly sensitive medical information (such as HIV status or mental health records) and breach notification laws that may impose an obligation to notify persons if their personal information has or may have been accessed by an unauthorized person. Some of these laws apply to our business and have increased and will continue to increase our burden and costs of privacy and security-related regulatory compliance.
made under the Stark Law.
Employees
As of December 31, 2018, we had 1,6572019, the Company employed 5,081 persons on a full-time 47basis and 822 persons on a part-time and 339 per diem employees. Per diembasis. The majority of its part-time employees are defined as those available on an as-needed basis. Noneclinicians due to the nature and timing of our employees are represented by any union and, in our opinion, relations with our employees are satisfactory.
the services the Company provides.
Available Information
Our principal executive offices areThe Company’s corporate headquarters is located at 1600 Broadway,3000 Lakeside Drive, Suite 700, Denver, CO 80202, our telephone number is 720-697-5200, and our Internet address is www.bioscrip.com.300N, Bannockburn, IL 60015. The Company maintains a website at http://www.optioncarehealth.com. The information contained on our website is not incorporated by reference into this Annual Report and should not be considered part of this report. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statements are available through our website at https://investors.optioncarehealth.com/, free of charge, as soon as reasonably practicable after they are filed with or furnished to the SEC.
The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
Item 1A. Risk Factors
Risks Related to Investors should carefully consider the following risk factors.
Our Business
Delays in reimbursement may adversely affect our liquidity, cash flowsrevenue and operating results.
The reimbursement process forprofitability will decline if the pharmaceutical industry undergoes certain changes, including limiting or discontinuing research, development, production and marketing of the pharmaceuticals that are compatible with the services we provide is time consuming and complex, resulting in delays between the time we bill for a service and receipt of payment that can be significant. Reimbursement and procedural issues often require us to resubmit claims several times and respond to multiple administrative requests before payment is remitted. The collection of accounts receivable is a significant challenge, requires constant focus and involvement by management and ongoing enhancements to information systems and billing center operating procedures. While management believes that our controls and processes are satisfactory, there can be no assurance that collections of accounts receivable will continue at historical rates. The risks associated with third-party payors and the inability to collect outstanding accounts receivable could have a material adverse effect on our liquidity, cash flows and operating results.
Pressures relating to downturns in the economy could adversely affect our business and consolidated financial statements.
Medicare and other federal and state payors account for a significant portion of our revenues. During economic downturns and periods of stagnant or slow economic growth, federal and state budgets are typically negatively affected, resulting in reduced reimbursements or delayed payments by the federal and state government health care coverage programs in which we participate, including Medicare, Medicaid, and other federal or state assistance plans. Government programs could also slow or temporarily suspend payments, negatively impacting our cash flow and increasing our working capital needs and interest payments. We have seen, and believe we will continue to see, Medicare and state Medicaid programs institute measures aimed at controlling spending growth, including reductions in reimbursement rates.
Higher unemployment rates and significant employment layoffs and downsizings may lead to lower numbers of patients enrolled in employer-provided plans. Adverse economic conditions could also cause employers to stop offering, or limit, healthcare coverage, or modify program designs, shifting more costs to the individual and exposing us to greater credit risk from patients or the discontinuance of therapy.
Existing and new government legislative and regulatory action could adversely affect our business and financial results.provide.
Our business is subjecthighly dependent on the ability of pharmaceutical manufacturers to numerous federal, statedevelop, supply and local lawsmarket pharmaceuticals that are compatible with the services we provide. Our revenue and regulations. See “Business - Government Regulation.” These laws and regulations, and their interpretations, are subjectprofitability will decline if those companies were to change. Changes in these existing laws and regulations may require extensive changes to our systems and, or their interpretations, or the enactment of new laws or regulations could have a material adverse effect on our business and consolidated financial condition, results of operations, and cash flows.
These changes may be difficult to implement. Further, we cannot predict the timing or impact of any future legislative, rulemaking, or other regulatory actions. Untimely compliance or noncompliance with applicable laws and regulations could adversely affect the continued operation of our business as a result of civil or criminal penalties, including, but not limited to: imposition of monetary penalties; suspension of payments from government programs; loss of required government certifications or approvals; suspension or exclusion from participation in government reimbursement programs; or loss of licensure. Reductions in reimbursement by Medicare, Medicaid and other governmental payors could adversely affect our business as well. The law and regulations to which we are subject include, but are not limitedsell pharmaceuticals directly to the federal Anti-Kickback Statute and Stark Law, and state counter-parts; HIPAA; False Claims Act; Civil Monetary Penalties Act; regulations promulgated bypublic, fail to support existing pharmaceuticals or develop new pharmaceuticals with different administration requirements than our service offerings are currently equipped to handle. Our business could also be harmed if the FDA, U.S. Federal Trade Commission, DEA, HHS and CMS, and regulations of individual state regulatory authorities. In that regard, our business and consolidated financial statements could be affected by one or more of the following:
federal and state laws and regulations governing the purchase, distribution, management, compounding, dispensing and reimbursement of prescription drugs and related services, including state and federal controlled substances laws and regulations;
rules and regulations issued pursuant to HIPAA and HITECH; and other federal and state laws affecting the use, disclosure and transmission of health information, such as state security breach notification laws and state laws limiting the use and disclosure of prescriber information;
administration of Medicare and state Medicaid programs, including legislative changes and/or rulemaking and interpretation;
federal and state laws and regulations that require reporting and public dissemination of payments to and between various health care providers and otherpharmaceutical industry participants;
government regulation of the development, administration, review and updating of formularies and drug lists;
managed care reform and plan design legislation, including state laws regarding out-of-network charges and participation;
states’ restrictions on new home infusion care entrants into their market via licensing, certificating, and permitting requirements; and
federal or state laws governing our relationships with physicians or others in a position to refer to us.
The Affordable Care Act and other healthcare reform efforts could have a material adverse effect on our business.
In recent years, healthcare reform efforts at federal and state levels of government have resulted in sweeping changes to the delivery and financing of health care. The Affordable Care Act is the most prominent of these efforts. However, there is substantial uncertainty regarding its net effect and its future. The Affordable Care Act has been subject to legislative and regulatory changes and court challenges. The presidential administration and certain members of Congress continue to attempt to repeal or make significant changes to the Affordable Care Act, its implementation and its interpretation. Effective January 2019, Congress eliminated the financial penalty associated with the individual mandate to maintain health insurance coverage. Because the penalty associated with the individual mandate was eliminated, a federal court in Texas ruled in December 2018 that the entire Affordable Care Act was unconstitutional. However, the law remains in place pending appeal. It is impossible to predict the full impact of the Affordable Care Act and related regulations or the impact of its modification on our operations in light of the uncertainty regarding whether, when or how the law will be changed and what alternative reforms, such as single-payor proposals, may be enacted. Health reform efforts may adversely affect our customers, which may cause them to reduce or delay use of our products and services. As such, we cannot predict the impact of the Affordable Care Act on our business, operations or financial performance.
Federal actions and legislation may reduce reimbursement rates from governmental payors and adversely affect our results of operations.
In recent years, Congress has passed legislation reducing payments to health care providers. The Budget Control Act of 2011, as amended, requires automatic spending reductions to reduce the federal deficit, including Medicare spending reductions of up to 2% per fiscal year that extend through 2027. CMS began imposing a 2% reduction on Medicare claims on April 1, 2013. The Affordable Care Act provides for material reductions in the growth of Medicare program spending. More recently, the Cures Act significantly reduced the amount paid by Medicare for drug costs, while delaying the implementation of a clinical services payment, although Congress also passed a temporary transitional service payment that takes effect January 1, 2019. In addition, from time to time, CMS revises the reimbursement systems used to reimburse health care providers, which may result in reduced Medicare payments.
Because most states must operate with balanced budgets and because the Medicaid program is often a state’s largest program, some states have enacted or may consider enacting legislation designed to reduce their Medicaid expenditures. Further, many states have taken steps to reduce coverage and/or enroll Medicaid recipients in managed care programs. The current economic environment has increased the budgetary pressures on many states, and these budgetary pressures have resulted, and likely will continue to result, in decreased spending, or decreased spending growth, for Medicaid programs and the Children’s Health Insurance Program in many states.
In some cases, Third Party Payors rely on all or portions of Medicare payment systems to determine payment rates. Changes to government healthcare programs that reduce payments under these programs may negatively impact payments from Third Party Payors. Current or future healthcare reform and deficit reduction efforts, changes in other laws or regulations affecting government healthcare programs,experiences any supply shortages, pharmaceutical recalls, changes in the administrationFDA approval processes, or changes to how pharmaceutical manufacturers finance, promote or sell pharmaceutical products. A reduction in the supply of government healthcare programs and changes by Third Party Payors couldmarket for pharmaceuticals that are compatible with the services we provide may have a material adverse effect on our financial positioncondition and results of operations.
In addition, many Third Party Payors are increasingly considering new metrics as the basis for reimbursement rates. It is possible that the pharmaceutical industry or regulators may evaluate and/or develop an alternative pricing referenceIf we lose relationships with managed care organizations (“MCOs”) and other non-governmental third party payers, we could lose access to replace average wholesale price. Future changes to the pricing benchmarks used to establish pharmaceutical pricing, including changes in the basis for calculating reimbursement by third-party payers,a significant number of patients and our revenue and profitability could adversely affect us.decline.
We face periodic reviewsare highly dependent on reimbursement from MCOs, government programs such as Medicare and billing audits by governmentalMedicaid and private payors,commercial insurers (collectively, “Third Party Payers”). For the year ended December 31, 2019, 87% of our revenue came from managed care organizations and these audits couldother nongovernmental payers, including Medicare Advantage plans, Managed Medicaid plans, pharmacy benefit managers (“PBM’s”), and self-pay patients. Many payers seek to limit the number of providers that supply pharmaceuticals to their enrollees in order to build volume that justifies their discounted pricing. From time to time, payers with whom we have adverse findingsrelationships require that may negatively impactwe bid against our business.
competitors to keep their business. As a result of our participation in the Medicarethis bidding process, we may not be retained, and Medicaid programs,even if we are subjectretained, the prices at which we are able to various governmental reviews and audits to verify our compliance with these programs and applicable laws and regulations. We also are subject to audits under various government programs in which third party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potential improper payments underretain the Medicare program. Third Party Payors may also conduct audits. Disputes with payors can arise from these reviews. Payors can claim that payments based on certain billing practices or
billing errors were made incorrectly. If billing errors are identified in the sample of reviewed claims, the billing error can be extrapolated to all claims filed which could result in a larger overpayment than originally identified in the sample of reviewed claims. Our costs to respond to and defend claims, reviews and auditsbusiness may be significantreduced. The loss of a payer relationship could significantly reduce the number of patients we serve and could have a material adverse effect on our businessrevenue and consolidated financial condition, results of operationsnet income, and cash flows. Moreover, an adverse claim, review or audita reduction in pricing could result in:
required refunding or retroactive adjustment of amounts we have been paid by governmental payors or Third Party Payors;
state or federal agencies imposing fines, penaltiesreduce our gross margins and other sanctions on us;
suspension or exclusion from the Medicare program, state programs, or one or more Third Party Payor networks; or
damage to our business and reputation in various markets.
These results could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
If any of our pharmacies fail to comply with the conditions of participation in the Medicare program, that pharmacy could be terminated from Medicare, which could adversely affect our consolidated financial statements.
Our pharmacies must comply with the extensive conditions of participation in the Medicare program. If a pharmacy fails to meet any of the Medicare supplier standards, that pharmacy could be terminated from the Medicare program. We respond in the ordinary course to deficiency notices issued by surveyors, and none of our pharmacies has ever been terminated from the Medicare program for failure to comply with the supplier standards. Any termination of one or more of our pharmacies from the Medicare program for failure to satisfy the Medicare supplier standards could adversely affect our consolidated financial statements.
We cannot predict the impact of changing requirements on compounding pharmacies.
Compounding pharmacies are closely monitored by federal and state governmental agencies. We believe that our compounding is done in safe environments and we have clinically appropriate policies and procedures in place. We only compound pursuant to a patient-specific prescription and do so in compliance with USP 797 standards. In 2013, Congress passed the DQSA, which creates a new category of compounders called outsourcing facilities, which are regulated by the FDA. We do not believe that our current compounding practices qualify us as an outsourcing facility and therefore we continue to operate consistently with USP 797 standards. Should state regulators or the FDA disagree, or should our business practices change to qualify us as an outsourcing facility, there is a risk of regulatory action and/or increased resources required to comply with federal requirements imposed pursuant to the DQSA on outsourcing facilities that could significantly increase our costs or otherwise affect our results of operations. Furthermore, we cannot predict the overall impact of increased scrutiny on compounding pharmacies.
Competition in the healthcare industry may adversely affect our business.net income.
The healthcare industry is veryhighly competitive. Our competitors include large and well-established companies that may have greater financial, marketing and technological resources than we do. As a result, they may be better able to compete for market share, even in areas in which our services may be superior.
The healthcare industry is highly competitive. We compete directly with national, regional and local healthcare providers. There are many other companies and individuals currently providing healthcare services that we provide, many of which have been in business longer and/or have substantially more resources. Other companies could enter the healthcare industry in the future and divert some or all of our business. We expect to continue to encounter competition in the future that could limit our ability to grow revenue and/or maintain acceptable pricing levels.
Some of our competitors have vertically integrated business models with commercial payers, or are under common control with, or owned by, pharmaceutical wholesalers and distributors, managed care organizations, pharmacy benefit managersPBMs or retail pharmacy chains and may be better positioned with respect to the cost-effective distribution of pharmaceuticals. In addition, some of our competitors may have secured long-term supply or distribution arrangements for prescription pharmaceuticals necessary to treat certain chronic disease states on price terms substantially more favorable than the terms currently available to us. As a result of such advantageous pricing,Consequently, we may be less price competitive than some of these competitors with respect to certain pharmaceutical products. ACOs
Accountable Care Organizations (“ACOs”) and other clinical integration models may result in lower reimbursement rates. Some of our competitors may negotiate exclusivity provisions with managed care plans or otherwise interfere with the ability of managed care companies to contract with us. Increasing consolidation in the payer and supplier industries, including vertical integration efforts among insurers, providers, and suppliers, and cost-reduction strategies by large employer groups and their affiliates may limit our ability to negotiate favorable terms and conditions in our contracts and otherwise intensify competitive pressure. In addition, our competitive position could be adversely affected by any inability to obtain access to new biotech pharmaceutical products.
Delays in reimbursement may adversely affect our liquidity, cash flows and operating results.
The reimbursement process for the services we provide is complex, resulting in delays between the time we bill for a service and receipt of payment that can be significant. Reimbursement and procedural issues often require us to resubmit claims multiple times and respond to multiple administrative requests before payment is remitted. The collection of accounts receivable is challenging, and requires constant focus and involvement by management and ongoing enhancements to information systems and billing center operating procedures. While management believes that our controls and processes are satisfactory, there can be no assurance that collections of accounts receivable will continue at historical rates. The risks associated with Third Party Payers and the inability to collect outstanding accounts receivable could have a material adverse effect on our liquidity, cash flows and operating results.
We are subject to pricing pressures and other risks involved with Third Party Payers.
Competition to provide healthcare services, efforts by traditional Third Party Payers to contain or reduce healthcare costs, and the increasing influence of managed care payers such as health maintenance organizations, has resulted in reduced rates of reimbursement for home infusion and specialty pharmacy services. Changes in reimbursement policies of governmental Third Party Payers, including policies relating to Medicare, Medicaid and other federal and state funded programs, could reduce the amounts reimbursed to our customers for our products and, in turn, the amount these customers would be willing to pay for our products and services, or could directly reduce the amounts payable to us by such payers. Pricing pressures by Third Party Payers may continue, and these trends may adversely affect our business.
Also, continued growth in managed care plans has pressured healthcare providers to find ways of becoming more cost competitive. MCOs have grown substantially in terms of the percentage of the population they cover and in terms of the portion of the healthcare economy they control. MCOs have continued to consolidate to enhance their ability to influence the delivery of healthcare services and to exert pressure to control healthcare costs. A rapid concentration of revenue derived from individual managed care payers could harm our business.
If we are unable to maintain relationships with existing patient referral sources, our business and consolidated financial condition, results of operations, and cash flows could be materially adversely affected.
Our success depends on referrals from physicians, hospitals, and other sources in the communities we serve and on our ability to maintain good relationships with existing referral sources. Our referral sources are not contractually obligated to refer patients to us and may refer their patients to other providers. Our growth and profitability depends, in part, on our ability to establish and maintain close working relationships with these patient referral sources, and to increase awareness and acceptance of the benefits of home infusion by our referral sources and their patients. Our loss of, or failure to maintain, existing
relationships or our failure to develop new referral relationships could have a material adverse effect on our business and consolidated financial condition, results of operations, and cash flows.
If we are unable to maintain our corporate reputation, our business may suffer.
Our success depends on our ability to maintain our corporate reputation, including our reputation for providing quality patient care and for compliance with Medicare requirements and the other laws to which we are subject. Adverse publicity surrounding any aspect of our business, including the death or disability of any of our patients due to our failure to provide proper care, or due to any failure on our part to comply with Medicare requirements or other laws to which we are subject, could negatively affect our Company’s overall reputation and the willingness of referral sources to refer patients to us.
Changes in the case mix of patients, as well as payment methodologies, payor mix or pricing could adversely affect our consolidated financial statements.
The sources and amounts of our patient revenue are determined by a number of factors, including the mix of patients and the rates of reimbursement among payors. Changes in the case mix of the patients, payment methodologies, payor mix or pricing among private pay, Medicare and Medicaid may significantly affect our consolidated financial statements, results of operations, and cash flows.
Changes in industry pricing benchmarks could adversely affect our financial performance.
Contracts within our businessOur contracts generally use certain published benchmarks to establish pricing for the reimbursement of prescription medications dispensed by us.we dispense. These benchmarks include AWP, wholesale acquisition cost, and average manufacturer price. Many of our contracts utilize the AWP benchmark. Publication of the AWP benchmark was expected to cease in 2011 as a result of the settlement of class-action lawsuits brought against First DataBank and Medi-Span, third-party publishers of various pricing benchmarks. However, Medi-Span continues to publish the AWP benchmark and has indicated that it will continue to do so until a new benchmark is widely accepted. Several industry participants have explored establishing a new benchmark but there is not currently a viable generally accepted alternative to the AWP benchmark. Without a suitable pricing benchmark in place, many of our contracts will have to be modified and could potentially change the economic structure of our agreements.
Contract renewals, or lack thereof, with key revenue sources and key business relationships could result in less favorable pricing, loss of exclusivity and/or reduced distribution and access to customers, which could have an adverse effect on our business, financial condition, and results of operations.
We have contractual and business relationships with key revenue sources, including Third Party Payors. Our future growth and success depends on our ability to maintain these relationships and renew such contracts on acceptable terms. However, we may not be able to continue to maintain these relationships. We may have disputes with Third Party Payors regarding these contractual relationships; these disputes may also disrupt our ongoing contractual relationships with these payors. Any break in these key business relationships could result in lost contracts and reduce our access to certain customers and distribution channels. Further, when these contracts near expiration, we may not be able to successfully renegotiate acceptable terms. Any increase in pricing or loss of exclusivity could result in reduced margins. Accordingly, it is possible that our ongoing efforts to renew contracts and business relationships with such key revenue sources as Third Party Payors could result in less favorable pricing or even reduced access to customers and distribution channels, any of which could have an adverse effect on our business, financial condition, and results of operations. In addition, even when such contracts are renewed, they may be renewed for only a short term or may be terminable on relatively short notice.
We and certain of our former directors and executive officers were named as defendants in a derivative complaint and we may be subject to similar lawsuits in the future.
Certain of our current and former directors and executive officers were named as defendants in a derivative complaint (the “Derivative Complaint”) that generally alleged that certain defendants breached their fiduciary duties with respect to the Company’s
public disclosures, oversight of Company operations, secondary stock offerings, and stock sales. The Company was also named as a nominal defendant in the Derivative Complaint. The Derivative Complaint also contended that certain defendants aided and abetted those alleged breaches. On April 18, 2017, the Court granted the defendants’ motion to dismiss, and on November 27, 2017, the Delaware Supreme Court affirmed the dismissal. Additional demands and lawsuits related to the same facts and circumstances, however, could be pursued in the future.
In that event, there is no assurance that any defenses will be successful or that insurance will be available or adequate to fund any settlement, judgment or litigation costs associated with this action. Certain of the defendants may also seek indemnification from the Company pursuant to certain indemnification agreements, for which there may be no insurance coverage.
Any conclusion in this matter or in any related manner adverse to us would have an adverse effect on our financial condition and business and the Company. We could incur substantial costs not covered by our directors’ and officers’ liability insurance, suffer a significant adverse impact on our reputation and divert management’s attention and resources from other priorities, including the execution of business plans and strategies that are important to our ability to grow our business, any of which could have an adverse effect on our business.
Pending and future litigation could subject us to significant monetary damages and/or require us to change our business practices.
We employ pharmacists, dieticians, nurses and other health care professionals. We are subject to liability for negligent acts, omissions, or injuries occurring at one of these clinics or caused by one of our employees. We are subject to risks relating to asserted claims, litigation and other proceedings in connection with our operations. We are or may face claims or become a party to a variety of legal actions that affect our business, including breach of contract actions, employment and employment discrimination-related suits, employee benefit claims, stockholder suits and other securities laws claims, and tort claims. . Due to the nature of our business, we, through our employees and caregivers who provide services on our behalf, may be the subject of medical malpractice claims. A court could find these individuals should be considered our agents, and, as a result, we could be held liable for their acts or omissions.
We may incur substantial expenses in defending such claims or litigation, regardless of merit, and such claims or litigation could result in a significant diversion of the efforts of our management personnel. Successful claims against us may result in monetary liability or a material disruption in the conduct of our business. Similarly, if we settle such legal proceedings, it may affect how we operate our business. See Item 3-Legal Proceedings3 for a description of material proceedings pending against us. We believe that these suits are without merit and, to the extent not already concluded, intend to contest them vigorously. However, an adverse outcome in one or more of these suits may have a material adverse effect on our consolidated results of operations, consolidated financial position, and/or consolidated cash flow from operations, or may require us to make material changes to our business practices.
We periodically respond to subpoenas and requests for information from governmental agencies. To our knowledge, we are not a target or a potential subject of a criminal investigation, but we cannot predict with certainty whether we may in the future become a target or potential target of an investigation or the subject of further inquiries or ultimately settlements with respect to the subject matter of any subpoenas. In addition to potential monetary liability arising from suits and proceedings, from time to time we incur costs in providing documents to government agencies. Current pending claims and associated costs may be covered by our insurance, but certain other costs are not insured. Such costs may increase and/or continue to be material to our performance in the future.
In addition, as we continue our strategic assessment and cost reduction efforts, there is an increased risk of employment and workers’ compensation-related litigation and/or administrative claims brought against us. We would defend against any and all such litigation and claims, as appropriate. Such claims could have a material adverse effect on our consolidated financial statements in any particular reporting period.
Our acquisition strategy exposes us to a variety of operational and financial risks.
A principal element of our historic business strategy has been to grow by acquiring other companies and assets in the home infusion and complementary businesses. Growth, especially rapid growth, through acquisitions exposes us to a variety of operational and financial risks. We summarize the most significant of these risks below.
Integration risks. We must integrate our acquisitions with our existing operations. This process includes the integration of the various components of our business (including the following) and of the businesses we have acquired or may acquire in the future:
health care professionals and employees who are not familiar with our policies and procedures;
clients who may terminate their relationships with us;
key employees who may seek employment elsewhere;
patients who may elect to switch to another health care provider;
regulatory compliance programs; and
disparate operating, information and record keeping systems and technology platforms.
Integrating an acquisition could be expensive and time consuming and could disrupt our ongoing business, negatively affect cash flow and distract management and other key personnel from day-to-day operations.
We may not be able to combine successfully the operations of acquired companies with our operations, and, even if such integration is accomplished, we may never realize the potential benefits of the acquisition. The integration of acquisitions requires significant attention from management, may impose substantial demands on our operations or other projects and may impose challenges on the combined business including, but not limited to, consistencies in business standards, procedures, policies and business cultures. If we fail to complete ongoing integration efforts, we may never fully realize the potential benefits of the related acquisitions.
Benefits may not materialize. When evaluating potential acquisition targets, we identify potential synergies and cost savings that we expect to realize upon the successful completion of the acquisition and the integration of the related operations. We may, however, be unable to achieve or may otherwise never realize the expected benefits. Our ability to realize the expected benefits from improvements to companies we acquire are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, such as changes to government regulation governing or otherwise impacting our industry, reductions in reimbursement rates from Third Party Payors, reductions in service levels under our contracts, operating difficulties, client preferences, changes in competition and general economic or industry conditions. If we are unsuccessful in implementing these improvements or if we do not achieve our expected results, it may adversely impact our results of operations.
Assumptions of unknown liabilities. Companies that we acquire may have unknown or contingent liabilities, including, but not limited to, liabilities for failure to comply with healthcare laws and regulations. We may incur material liabilities for the past activities of acquired operations. Such liabilities and related legal or other costs and/or resulting damage to our reputation could negatively impact our business through lower-than-expected operating results, charges for impairment of acquired intangible assets or otherwise.
Competing for acquisitions. We face competition for acquisition candidates primarily from other home infusion and other healthcare companies. Some of our competitors have greater resources than we do. As a result, we may pay more to acquire a target business or may agree to less favorable deal terms than we would have otherwise. Accurately assessing the value of acquisition candidates is often very challenging. Also, suitable acquisitions may not be available due to unfavorable terms.
Further, the cost of an acquisition could result in a dilutive effect on our results of operations, depending on various factors, including employee severance costs, certain legal and professional fees, training costs, redundant wage costs, impacts recorded from the change in contingent consideration obligations, and other costs related to contract terminations and closed branches/offices.
Improving financial results. Some of the operations we have acquired or may acquire in the future may have had significantly lower operating margins than our current operations. If we fail to improve the operating margins of the companies we acquire, operate such companies profitably or effectively integrate the operations of the acquired companies, our results of operations could be negatively impacted.
Acquisitions, strategic investments and strategic relationships involve certain risks.
We may pursue opportunistic acquisitions, strategic investments in, or strategic relationships with businesses and technologies. Acquisitions may entail numerous risks, including difficulties in assessing values for acquired businesses, intangible assets and technologies, difficulties in the assimilation of acquired operations and products, diversion of management’s attention from other business concerns, assumption of unknown material liabilities of acquired companies, amortization of acquired intangible assets which could reduce future reported earnings, and potential loss of clients or key employees of acquired companies. We may not be able to successfully fully integrate the operations, personnel, services or products that we have acquired or may acquire in the
future. Strategic investments may also entail some of the risks described above. If these investments are unsuccessful, we may need to incur charges against earnings. We may also pursue a number of strategic relationships. These relationships and others we may enter into in the future may be important to our business and growth prospects. We may not be able to maintain these relationships or develop new strategic alliances.
We may incur significant costs in connection with our evaluation of new business opportunities and suitable acquisition candidates.
Our management intends to identify, analyze and evaluate potential new business opportunities, including possible acquisition and merger candidates. We may incur significant costs, such as due diligence and legal and other professional fees and expenses, as part of these efforts. Notwithstanding these efforts and expenditures, we may not be able to identify an appropriate new business opportunity, or any acquisition opportunity, in the near term, or at all.
We may be subject to liability claims for damages and other expenses that are not covered by insurance.
As a result of operating in the home infusion industry, our business entails an inherent risk of claims, losses and potential lawsuits alleging incidents involving our employees that are likely to occur in a patient’s home. We maintain professional liability insurance to provide coverage to us and our subsidiaries against these risks. A successful product or professional liability claim in excess of our insurance coverage could harm our consolidated financial statements. Various aspects of our business may subject us to litigation and liability for damages. For example, a prescription drug dispensing error could result in a patient receiving the wrong or incorrect amount of medication, leading to personal injury or death. Our business and consolidated financial statements could suffer if we pay damages or defense costs in connection with a claim that is outside the scope of any applicable contractual indemnity or insurance coverage.
Our insurance coverage also includes fire, property damage and general liability with varying limits. We cannot assure you that the insurance we maintain will satisfy claims made against us or that insurance coverage will continue to be available to us at commercially reasonable rates, in adequate amounts or on satisfactory terms. Any claims made against us, regardless of their merit or eventual outcome, could damage our reputation and business.
Pressures relating to downturns in the economy could adversely affect our business and consolidated financial statements.
Medicare and other federal and state payers account for a portion of our revenues. During economic downturns and periods of stagnant or slow economic growth, federal and state budgets are typically negatively affected, resulting in reduced reimbursements or delayed payments by the federal and state government health care coverage programs in which we participate, including Medicare, Medicaid, and other federal or state assistance plans. Government programs could also slow or temporarily suspend payments, negatively impacting our cash flow and increasing our working capital needs and interest
payments. We have seen, and believe we will continue to see, Medicare and state Medicaid programs institute measures aimed at controlling spending growth, including reductions in reimbursement rates.
Higher unemployment rates and significant employment layoffs and downsizings may lead to lower numbers of patients enrolled in employer-provided plans. Adverse economic conditions could also cause employers to stop offering, or limit, healthcare coverage, or modify program designs, shifting more costs to the individual and exposing us to greater credit risk from patients or the discontinuance of therapy.
Acquisitions, strategic investments and strategic relationships involve certain risks.
We may pursue acquisitions, strategic investments in, or strategic relationships with businesses and technologies. Acquisitions may entail numerous risks, including difficulties in assessing values for acquired businesses, intangible assets and technologies, difficulties in the assimilation of acquired operations and products, diversion of management’s attention from other business concerns, assumption of unknown material liabilities of acquired companies, amortization of acquired intangible assets which could reduce future reported earnings, and potential loss of clients or key employees of acquired companies. We may not be able to successfully fully integrate the operations, personnel, services or products that we have acquired or may acquire in the future. Strategic investments may also entail some of the risks described above. If these investments are unsuccessful, we may need to incur charges against earnings. We may also pursue a number of strategic relationships. These relationships and others we may enter into in the future may be important to our business and growth prospects. We may not be able to maintain these relationships or develop new strategic alliances.
Changes in our relationships with pharmaceutical suppliers, including changes in drug availability or pricing, could adversely affect our business and financial results.
We have contractual relationships with pharmaceutical manufacturers to purchase the drugspharmaceuticals that we dispense. In order to have access to these pharmaceuticals, and to be able to participate in the launch of new pharmaceuticals, we must maintain a good working relationship with these manufacturers. Most of the manufacturers of the pharmaceuticals we sell have the right to cancel their supply contracts with us without cause and after giving only minimal notice. Any changes to these relationships, including, but not limited, to loss of a manufacturer relationship, drug shortages or changes in pricing, could have an adverse effect on our business and financial results.
Some pharmaceutical manufacturers attempt to limit the number of preferred distributors that may market certain of their pharmaceutical products. We purchasecannot provide assurance that we will be selected and retained as a majority ofpreferred distributor or can remain a preferred distributor to market these products. Although we believe we can effectively meet our pharmaceutical products from one vendor and a disruption in our purchasing arrangements could adversely impact our business.
We purchase a majority of our prescription products, subject to certain minimum periodic purchase levels and excluding purchases of therapeutic plasma products, from a single wholesaler, AmerisourceBergen Drug Corporation (“ABDC”), pursuant to a prime vendor agreement. The term of this agreement extends until December 2019, subject to extension for up to two additional years. Any significant disruption in our relationship with ABDC, or in ABDC’s supply and timely delivery of products to us, would make it difficult and possibly costlier for us to continue to operate our business untilsuppliers’ requirements, we are able to execute a replacement wholesaler agreement. Ifcannot provide assurance that were to occur, we may notwill be able to findcompete effectively with other providers to retain our position as a replacement wholesalerdistributor of each of our core products. Adverse developments with respect to this trend could have a material adverse effect on a timely basis. Further, such wholesaler may not be able to fulfill our demands on similar financial termscondition and service levels. If we are unable to identify a replacement on substantially similar financial terms and/or service levels, our consolidated financial statements may be materially and adversely affected.
results of operations.
A disruption in supply could adversely impact our business.
We also source pharmaceuticals,For the year ended December 31, 2019, approximately 70% of our pharmaceutical and medical supplies and equipmentsupply purchases are from other manufacturers, distributors and wholesalers.three vendors. Most of the pharmaceuticals that we purchase are available from multiple sources, and we believe they are available in sufficient quantities to meet our needs and the needs of our patients. We keep safety stock to ensure continuity of service for reasonable, but limited, periods of time. Should a supply disruption result in the inability to obtain especially high margin drugs and compound components necessary for patient care, our consolidated financial statements could be negatively impacted.
Prescription volumes may decline, and our net revenues and profitability may be negatively impacted, when products are withdrawn from the market or when increased safety risk profiles of specific drugs result in utilization decreases.
We dispense significant volumes of prescription medications from our pharmacies. Our dispensing volume is the principal driver of revenue and profitability. When products are withdrawn by manufacturers, or when increased safety risk profiles of specific drugs or classes of drugs result in utilization decreases, physicians may cease writing or reduce the numbers of prescriptions written for these higher-risk drugs. Additionally, negative media reports regarding drugs with higher safety risk profiles may result in reduced consumer demand for such drugs. In cases where there are no acceptable prescription drug equivalents or alternatives for these prescription drugs, our prescription volumes, net revenues, profitability and cash flows may decline.
Home infusion joint ventures formed with hospitals could adversely affect our financial results.
The home infusion industry is currently seeing renewed activity in the formation of equity-based infusion joint ventures formed with hospitals. This activity stems, in part, from hospitals seeking to position themselves for new paradigms in the delivery of coordinated healthcare and new methods of payment, including an emerging interdisciplinary care model known as ACOs. These organizations are encouraged by the Affordable Care Act. These entities are designed to save money and improve quality of care by better integrating care, with the healthcare provider possibly sharing in the financial benefits of the new efficiencies.
Participation in equity-based joint ventures offer hospitals and other providers an opportunity to more efficiently transfer patients to less expensive care settings, while keeping the patient within its network. Additionally, it provides many hospitals with a mechanism to invest accumulated profits in a growing sector with attractive margins.
If these home infusion joint ventures continue to expand, then we could lose referrals and our consolidated financial statements could be adversely affected. Also, there are risks and costs associated with joint venture participation. We consider joint ventures with hospitals from time to time.
A shortage of qualified registered nursing staff, pharmacists and other professionals could adversely affect our ability to attract, train and retrain qualified personnel and could increase operating costs.
Our business relies significantly on itsour ability to attract and retain nursing staff, pharmacists and other professionals who possess the skills, experience and licenses necessary to meet the requirements of their job responsibilities. From time to time and particularly in recent years, there have been shortages of nursing staff, pharmacists and other professionals in certain local and regional markets. As a result, we are often required to compete for personnel with other healthcare systems and our competitors. Our ability to attract and retain personnel depends on several factors, including our ability to provide them with engaging assignments and competitive salaries and benefits. We may not be successful in any of these areas.
In addition, where labor shortages arise in markets in which we operate, we may face higher costs to attract personnel, and we may have to provide them with more attractive benefit packages than originally anticipated or are being paid in other
markets where such shortages don’tdo not exist at the time. In either case, such circumstances could cause our profitability to decline. Finally, if we expand our operations into geographic areas where healthcare providers historically have unionized or unionization occurs in our existing geographic areas, negotiating collective bargaining agreements may have a negative effect on our ability to timely and successfully recruit qualified personnel and on our financial results. If we are unable to attract and retain nursing staff, pharmacists and other professionals, the quality of our services may decline and we could lose patients and referral sources, which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash flows.
Introduction of new drugs or accelerated adoption of existing lower margin drugs could cause us to experience lower revenues and profitability when prescribers prescribe these drugs for their patients or they are mandated by third party payors.
Third Party Payers.
The pharmaceutical industry pipeline of new drugs includes many drugs that over the long term may replace older, more expensive therapies. As a result of such older drugs going offlosing patent protection and being replaced by generic substitutes, new and less expensive delivery methods (such as when an infusion or injectable drug is replaced with an oral drug) or additional products are added to a therapeutic class, thereby increasing price competition among competing manufacturer’s products in that therapeutic category. In such cases, manufacturers have the ability to increase drug acquisition costs or lower the selling price of replaced products. This could have the effect of loweringnegatively impact our revenues and/or margins.
Failure to develop new services or adapt to changes and trends within the industry may adversely affect our business.
We operate in a highly competitive environment. We develop new services from time to time to assist our clients. If we are unsuccessful in developing innovative services, our ability to attract new clients and retain existing clients may suffer.
Technology, including the ability to capture and report outcomes, is also an important component of our business as we continue to utilize new and better channels to communicate and interact with our clients, members and business partners. If our competitors are more successful than us in employing this technology, our ability to attract new clients, retain existing clients and operate efficiently may suffer. Any significant shifts in the structure of the healthcare products and services industry in general could alter the industry dynamics and adversely affect our ability to attract or retain clients. Our failure to anticipate or appropriately adapt to changes in the industry could negatively impact our competitive position and adversely affect our business and results of operations.
Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to operate effectively and may cause our business and reputation to suffer.
Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We rely on our information systems to provide security for processing, transmission and storage of confidential information about our patients, customers and personnel, such as names, addresses and other individually identifiable information protected by HIPAA and other privacy laws. Cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks are increasingly more common, including in the health care industry. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and changing requirements. Compliance with changes in privacy and information security laws and with rapidly evolving industry standards may result in our incurring significant expense due to increased investment in technology and the development of new operational processes.
We have not experienced any known attacks on our information technology systems that compromised any confidential information. We maintain our information technology systems with safeguard protection against cyber-attacks including passive intrusion protection, firewalls and virus detection software. However, these safeguards do not ensure that a significant cyber-attack could not occur. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks.
Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches can create system disruptions or shutdowns or the unauthorized use or disclosure of confidential information. If personal information or protected health information is improperly accessed, tampered with or disclosed as a result of a security breach, we may incur significant costs to notify and mitigate potential harm to the affected individuals, and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential personal information. In addition, a security breach of our information
systems could damage our reputation, subject us to liability claims or regulatory penalties for compromised personal information and could have a material adverse effect on our business, financial condition, and results of operations.
Our business is dependent on the services provided by third party information technology vendors.
Our information technology infrastructure includes hosting services provided by third parties. While we believe these third parties are high-performing organizations with secure platforms and customary certifications, they could suffer a security breach or business interruption which in turn could impact our operations negatively. In addition, changes in pricing terms charged by our technology vendors may adversely affect our financial performance.
Changes in future business conditions could cause business investments and/or recorded goodwill to become impaired, and our financial condition, and results of operations could suffer if there is an impairment of goodwill.
Our acquisitions resulted in significant goodwill reported on our financial statements. Goodwill results when the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired. We may not realize the full value of this goodwill. As such, we evaluate on at least an annual basis whether events and circumstances indicate that all or some of the carrying value of goodwill is no longer recoverable, in which case we would recognize the unrecoverable goodwill as a charge against our earnings. When evaluating goodwill for potential impairment, we compare the fair value of our reporting units to their respective carrying amounts. We estimate the fair value of our reporting units using the income approach. If the carrying amount of a reporting unit exceeds its estimated fair value, a goodwill impairment loss is recognized in an amount equal to the excess to the extent of the goodwill balance. The income approach requires us to estimate a number of factors for our reporting units, including projected future operating results, economic projections, anticipated future cash flows, and discount rates. The fair value determined using the income approach is then compared to marketplace fair value data from within a comparable industry grouping for reasonableness. Because of the significance of our goodwill, any future impairment could result in material non-cash charges to our results of operations, which could have an adverse effect on our financial condition and results of operations.
Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 (the “Exchange Act”), and is required to evaluate the effectiveness of these controls and procedures on a periodic basis and publicly disclose the results of these evaluations and related matters in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. Any failure to implement and maintain effective internal controls could result in material weaknesses or material misstatements in our consolidated financial statements.
If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we may be required to take corrective measures or restate the affected historical financial statements. In addition, we may be subjected to investigations and/or sanctions by federal and state securities regulators, and/or civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in us and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.
Acts of God such as major weather disturbances could disrupt our business.
We operate in a network of prescribers, providers, patients and facilities that can be negatively impacted by local weather disturbances and other force majeure events. For example, in anticipation of major weather events, patients with impaired health may be moved to alternate sites. After a major weather event, availability of electricity, clean water and transportation can impact our ability to provide service in the home. Similarly, such events could impact key suppliers or vendors, disrupting the services or materials they provide us. In addition, acts of God and other force majeure events may cause a reduction in our business or increased costs, such as increased costs in our operations as we incur overtime charges or redirect services to other locations, delays in our ability to work with payors,payers, hospitals, physicians and other strategic partners on new business initiatives, and disruption to referral patterns as patients are moved out of facilities affected by such events or are unable to return to sites of service in the home.
Failure to develop new services
An outbreak of a pandemic or adapt to changes and trends within the industry mayepidemic disease could adversely affect our business.financial performance.
An outbreak of a pandemic or epidemic disease could result in a general economic downturn, supply chain disruption, and/or a compromise in the ability of our clinicians to access patients, any of which, or a combination of which, could have a material adverse effect on our business and financial results.
A significant change in, or noncompliance with, governmental regulations and other legal requirements could have a material adverse effect on our reputation and profitability
We operate in acomplex, highly competitive environment. We developregulated environments and could be materially and adversely affected by changes to applicable legal requirements including the related interpretations and enforcement practices, new services from timelegal requirements and/or any failure to timecomply with applicable regulations. Our home infusion and alternate site infusion businesses are subject to assist our clients. Ifnumerous federal, state and local regulations including licensing and other requirements for pharmacies and reimbursement arrangements.
The federal and state statutes and regulations to which we are unsuccessfulsubject include, but are not limited to, laws requiring the registration and regulation of pharmacies; laws governing the dispensing of pharmaceuticals and controlled substances; laws regulating the protection of the environment and health and safety matters, including those governing exposure to, and the management and disposal of, hazardous substances; laws regarding food and drug safety, including those of the FDA and DEA; applicable governmental payer regulations, including those applicable to Medicare and Medicaid; data privacy and security laws, including HIPAA and its associated regulations; federal and state fraud and abuse laws, including, but not limited to, the anti-kickback statute and false claims laws; trade regulations, including those of the U.S. Federal Trade Commission (“FTC”); the U.S. Foreign Corrupt Practices Act (the “FCPA”) and similar anti-corruption laws in developing innovativeconnection with the services provided by certain of our abilitycontractors; and the consumer protection and safety laws, including those of the Consumer Product Safety Commission.
We are required to attract new clientshold valid DEA and retain existing clients may suffer.
Technology,state-level licenses, meet various security and operating standards and comply with the federal and various state controlled substance acts and related regulations governing the sale, dispensing, disposal, holding and distribution of controlled substances. The DEA, FDA and state regulatory authorities have broad enforcement powers, including the ability to capture and report outcomes, is also an important component of our business as we continue to utilize new and better channels to communicate and interact with our clients, members and business partners. If our competitors are more successful than us in employing this technology, our ability to attract new clients, retain existing clients and operate efficiently may suffer. Any significant shifts in the structure of the healthcareseize or recall products and services industry in general could alter the industry dynamicsimpose significant criminal, civil and adversely affect our ability to attract or retain clients. Our failure to anticipate or appropriately adapt to changes in the industry could negatively impact our competitive positionadministrative sanctions for violations of these laws and adversely affect our businessregulations.
We use, disclose and results of operations.
Cybersecurity risks could compromise our information and expose us to liability, which may harm our ability to operate effectively and may cause our business and reputation to suffer.
Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We rely on our information systems to provide security for processing, transmission and storage of confidential information about our patients, customers and personnel, such as names, addresses and other individuallyotherwise process personally identifiable information, protected byincluding health information, making us subject to HIPAA and other privacy laws. Cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks are increasingly more common, including inthe health care industry. The regulatory environment surrounding information securityfederal and privacy is increasingly demanding, with the frequent imposition of new and changing requirements.Compliance with changes instate privacy and security regulations and failure to comply with those regulations or to adequately secure the information security laws and with rapidly evolving industry standards maywe hold could result in significant liability or reputational harm and, in turn, have a material adverse effect on our incurring significant expense due to increased investment in technologypatient base and the development of new operational processes.
revenue.
We have not experienced any known attacks on our information technology systems that compromised any confidential information. We maintain our information technology systems with safeguard protection against cyber-attacksare also governed by federal and state laws of general applicability, including passive intrusion protection, firewallslaws regulating matters of working conditions, health and virus detection software. However, these safeguards do not ensure that a significant cyber-attack could not occur. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage or the improper access or disclosure of personally identifiable information suchequal employment opportunity and other labor and employment matters as in the event of cyber-attacks.
Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackerswell as employee benefit, competition and similar breaches can create system disruptions or shutdowns or the unauthorized use or disclosure of confidential information. If personal information or protected health information is improperly accessed, tampered with or disclosed as a result of a security breach,antitrust matters. In addition, we may incurcould have significant costs to notify and mitigate potential harm to the affected individuals, and we may be subject to sanctions and civil or criminal penaltiesexposure if we are found to have infringed another party’s intellectual property rights.
Changes in laws, regulations and policies and the related interpretations and enforcement practices may alter the landscape in which we do business and may significantly affect our cost of doing business. The impact of new laws, regulations and policies and the related interpretations and enforcement practices generally cannot be predicted, and changes in violationapplicable laws, regulations and policies and the related interpretations and enforcement practices may require extensive system and operational changes, be difficult to implement, increase our operating costs and require significant capital expenditures. Untimely compliance or noncompliance with applicable laws and regulations could result in the imposition of civil and criminal penalties that could adversely affect the privacy or security rules under HIPAA or other similar federal or state laws protecting confidential personal information. In addition, a security breachcontinued operation of our information systemsbusinesses, including: suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in or exclusion from government programs, including the Medicare and Medicaid programs; loss of licenses; and significant fines or monetary penalties. Any failure to comply with applicable regulatory requirements could result in significant legal and financial exposure, damage our reputation, and have a material adverse effect on our business operations, financial condition and results of operations.
The Affordable Care Act and other healthcare reform efforts could have a material adverse effect on our business.
In recent years, healthcare reform efforts at federal and state levels of government have resulted in sweeping changes to the delivery and funding of health care. The Affordable Care Act is the most prominent of these efforts. However, there is substantial uncertainty regarding its net effect and its future. The Affordable Care Act has been subject us to liabilitylegislative and
regulatory changes and court challenges. Effective January 2019, Congress eliminated the financial penalty associated with the individual mandate to maintain health insurance coverage. Because the penalty associated with the individual mandate was eliminated, a federal court in Texas ruled in December 2018 that the entire Affordable Care Act was unconstitutional. However, the law remains in place pending appeal. It is impossible to predict the full impact of the Affordable Care Act and related regulations or the impact of its modification on our operations in light of the uncertainty regarding whether, when or how the law will be changed and what alternative reforms, such as single-payer proposals, may be enacted. Health reform efforts may adversely affect our customers, which may cause them to reduce or delay use of our products and services. As such, we cannot predict the impact of the Affordable Care Act on our business, operations or financial performance.
Federal actions and legislation may reduce reimbursement rates from governmental payers and adversely affect our results of operations.
In recent years, Congress has passed legislation reducing payments to health care providers. The Budget Control Act of 2011, as amended, requires automatic spending reductions to reduce the federal deficit, including Medicare spending reductions of up to 2% per fiscal year that extend through 2027. The Center for Medicare & Medicaid Services (“CMS”) began imposing a 2% reduction on Medicare claims on April 1, 2013. The Affordable Care Act provides for material reductions in the growth of Medicare program spending. More recently, the Cures Act significantly reduced the amount paid by Medicare for drug costs, while delaying the implementation of a clinical services payment, although Congress also passed a temporary transitional service payment that takes effect January 1, 2019. In addition, from time to time, CMS revises the reimbursement systems used to reimburse health care providers, which may result in reduced Medicare payments.
For the year ended December 31, 2019, 12% of our revenue is derived from reimbursement by direct federal and state programs such as Medicare and Medicaid. Reimbursement from these and other government programs is subject to statutory and regulatory requirements, administrative rulings, interpretations of policy, implementation of reimbursement procedures, retroactive payment adjustments, governmental funding restrictions and changes to or regulatory penaltiesnew legislation, all of which may materially affect the amount and timing of reimbursement payments to us. Changes to the way Medicare pays for compromised personal informationour services, including mandatory payment reductions such as sequestration, may reduce our revenue and profitability on services provided to Medicare patients and increase our working capital requirements. In addition, we are sensitive to possible changes in state Medicaid programs.
Because most states must operate with balanced budgets and because the Medicaid program is often a state’s largest program, some states have enacted or may consider enacting legislation designed to reduce their Medicaid expenditures. Further, many states have taken steps to reduce coverage and/or enroll Medicaid recipients in managed care programs. The current economic environment has increased the budgetary pressures on many states, and these budgetary pressures have resulted, and likely will continue to result, in decreased spending, or decreased spending growth, for Medicaid programs and the Children’s Health Insurance Program in many states.
In some cases, Third Party Payers rely on all or portions of Medicare payment systems to determine payment rates. Changes to government healthcare programs that reduce payments under these programs may negatively impact payments from Third Party Payers. Current or future healthcare reform and deficit reduction efforts, changes in other laws or regulations affecting government healthcare programs, changes in the administration of government healthcare programs and changes by Third Party Payers could have a material, adverse effect on our financial position and results of operations.
We face periodic reviews and billing audits by governmental and private payers, and these audits could have adverse findings that may negatively impact our business.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental reviews and audits to verify our compliance with these programs and applicable laws and regulations. We also are subject to audits under various government programs in which third party firms engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potential improper payments under the Medicare program. Third Party Payers may also conduct audits. Disputes with payers can arise from these reviews. Payers can claim that payments based on certain billing practices or billing errors were made incorrectly. If billing errors are identified in the sample of reviewed claims, the billing error can be extrapolated to all claims filed which could result in a larger overpayment than originally identified in the sample of reviewed claims. Our costs to respond to and defend claims, reviews and audits may be significant and could have a material adverse effect on our business and consolidated financial condition, and results of operations.
The success of our business depends on maintaining a well-secured and up to date business and technology infrastructure.
We are dependent on our infrastructure, including our information systems, for many aspects of our business operations. A fundamental requirement for our business is the secure storage and transmission of protected health information and other confidential data. Our business and operations may be harmed if we do not maintain our business processes and information
systems in a secure manner, and maintain and continually improve the integrity of our confidential information. Although we have developed systems and processes that are designed to protect information against security breaches, failure to protect our confidential information or mitigate harm caused by such breaches may adversely affect our operating results. Malfunctions in our business processes, breaches of our information systems or the failure to maintain effective and up-to-date information systems could disrupt our business operations, result in customer and member disputes, damage our reputation, expose us to risk of loss or litigation, result in regulatory violations and related costs and penalties, increase administrative expenses or lead to other adverse consequences.
Our business is dependent on the services provided by third party information technology vendors.
Our information technology infrastructure includes hosting services provided by third parties. While we believe these third parties are high-performing organizations with secure platforms and customary certifications, they could suffer a security breach or business interruption which in turn could impact our operations negatively. In addition, changes in pricing terms charged by our technology vendors may adversely affect our financial performance.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. federal tax purposes is subject to limitation and risk that could further limit our ability to utilize our net operating losses.
Under U.S. federal income tax law, a corporation’s ability to utilize its net operating losses (“NOLs”) to offset future taxable income may be significantly limited if it experiences an “ownership change” as defined in Section 382 of the Internal Revenue Code, as amended. In general, an ownership change will occur if there is a cumulative change in a corporation’s ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the use of its pre-ownership change NOLs equal to the value of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation for a taxable year generally is increased by the amount of any “recognized built-in gains” for such year and the amount of any unused annual limitation in a prior year. On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act (“TCJA”) was enacted in the United States. Certain provisions of the TCJA impact the ability to utilize NOLs generated in 2018 and forward; any limitation to our annual use of NOLs could require us to pay a greater amount of U.S. federal (and in some cases, state) income taxes, which could reduce our after-tax income from operations for future taxable years and adversely impact our financial condition.
Changes to federal and state income tax laws and regulations could adversely affect our position or income taxes and estimated income liabilities.
We are subject to both state and federal income taxes in the U.S. and various state jurisdictions and our operations, plans and results are affected by tax and other initiatives. The TCJA impacted our financial results in 2018. Among other things, the TCJA reduced the U.S. corporate income tax rate to 21%, this reduction resulted in changes in the valuation of our deferred tax asset and liabilities.
We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. There are uncertainties and ambiguities in the application of the TCJA and it is possible that the IRS could issue subsequent guidance or take positions on audit that differ from our interpretations and assumptions. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. Our effective tax rate could be adversely affected by changes in the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations, changes in our interpretations of tax laws, including the TCJA. Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position.cash flows. Moreover, an adverse claim, review or audit could result in:
required refunding or retroactive adjustment of amounts we have been paid by governmental payers or Third Party Payers;
The issuance of shares of our Preferred Stock reducedstate or federal agencies imposing fines, penalties and other sanctions on us;
suspension or exclusion from the percentage interests of our other stockholders, and any future exercise of the Class A and Class B WarrantsMedicare program, state programs, or the 2017 Warrants will further reduce the percentage interests of our other stockholders.
On March 9, 2015, we entered into a securities purchase agreement (the “Purchase Agreement”) with Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., and Blackwell Partners, LLC, Series A (collectively, the “PIPE Investors”). Pursuant to the terms of the Purchase Agreement, we issued and sold to the PIPE Investors in a private placement an aggregate of (a) 625,000 shares of Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), at a purchase price per share of $100.00, (b) 1,800,000 Class A warrants (the “Class A Warrants”), and (c) 1,800,000 Class B warrants (the “Class B Warrants” and, together with the Class A Warrants, the “PIPE Warrants”), for gross proceeds of $62.5 million. We
also conducted a Rights Offering (as described below) pursuant to which we sold an additional 10,822 shares of Series A Preferred Stock along with the PIPE Warrants. On June 10, 2016, in order to facilitate the 2016 Equity Offering, the Company and the PIPE Investors agreed to exchange 614,177 shares of the existing Series A Preferred Stock for an identical number of shares of Series B Preferred Stock. On June 14, 2016, in order to facilitate the 2016 Equity Offering, the Company and the PIPE Investors agreed to exchange 614,177 shares of the Series B Preferred Stock for an identical number of shares of Series C Preferred Stock (the Series C Preferred Stock, together with the Series A Preferred Stock, the “Preferred Stock”). As a result of these exchanges, there are currently (a) 21,630 shares of Series A Preferred Stock outstanding, of which 10,823 shares are owned by the PIPE Investors, (b) no shares of Series B Preferred Stock outstanding, and (c) 614,177 shares of Series C Preferred Stock outstanding, all of which are owned by the PIPE Investors.
In addition, in connection with the Second Lien Note Facility, the Company also issued the 2017 Warrants to the purchasers of the Second Lien Notes pursuant to the Warrant Purchase Agreement. The 2017 Warrants entitle the purchasers of the 2017 Warrants to purchase shares of Common Stock, representing at the time of any exercise of the 2017 Warrants an equivalent number of shares equal to 4.99% of the Common Stock of the Company on a fully diluted basis, subject to the terms of the Warrant Agreement.
As of the date of this Annual Report, if all holders of the Preferred Stock converted their shares in full, and exercised the PIPE Warrants and the 2017 Warrants in full, the Common Stock issued in respect of such conversions and exercises would represent approximately 19.6% of our outstanding Common Stock. The issuance of the Preferred Stock to the PIPE Investors reduced the relative voting power and percentage ownership interests of our other current stockholders. The future exercise of the PIPE Warrants by the holders of those securities will cause a further reduction in the relative voting power and percentage ownership interests of our other stockholders.
The PIPE Investors may exercise influence over us, including through their ability to influence matters requiring the approval of holders of our Common Stockone or Preferred Stock.
Holders of the Preferred Stock are entitled to vote on an as-converted basis upon all matters upon which holders of our Common Stock have the right to vote. The shares of Preferred Stock owned by the PIPE Investors currently represent approximately 13% of the voting rights in respect of our share capital on an as-converted basis, and accordingly the PIPE Investors may have the ability to significantly influence the outcome of most matters submitted for the vote of our stockholders. The PIPE Investors are currently the beneficial owners of 625,000 of the 635,807 shares of our Series A and Series C Preferred Stock.
Further, so long as shares of the Series C Preferred Stock represent at least 5% of our outstanding voting stock (on an as converted into Common Stock basis), the holders of our Series C Preferred Stock are entitled to designate one member of the Board by a majority of the voting power of the outstanding shares of Series C Preferred Stock. The PIPE Investors are currently the beneficial owners of all 614,177 issued and outstanding shares of our Series C Preferred Stock.
The PIPE Investors’ majority ownership of our Series A and Series C Preferred Stock will limit the ability of any current or future holders of such series of Preferred Stock to influence corporate matters requiring the approval of the holders of such series of Preferred Stock, including the right, voting as a separate class, to elect one director to our Board, and to approve certain amendments to our certificate of incorporation, or certain other changes, that would adversely affect the holders of the series of Preferred Stock. The PIPE Investors’ voting power of the Preferred Stock may also delay, defer or even prevent an acquisition by amore third party payer networks; or other change of control of our company to the extent that the consideration that would be received by the PIPE Investors and other holders of Preferred Stock in such acquisition or change of control is less than their liquidation preference, and may make some transactions more difficult or impossible without the support of the PIPE Investors, even if such events are in the best interests of our other stockholders. Accordingly, the ownership position and the governance rights of the PIPE Investors could discourage a third party from proposing a change of control or other strategic transaction with us. In any of these matters, the interests of the PIPE Investors may differ from or conflict with the interests of our other stockholders.
In addition, the PIPE Investors are in the business of making investments in companies and may, from timedamage to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers.
Changes in future business conditions could cause business investments and/or recorded goodwill to become further impaired, and our financial condition, and results of operations could suffer if there is an additional impairment of goodwill or other intangible assets with indefinite lives.
We are required to test intangible assets with indefinite lives, including goodwill, annually and on an interim basis if an event
occurs or there is a change in circumstance to indicate that the carrying value of goodwill or indefinite-lived intangible assets may no longer be recoverable. When the carrying value of a reporting unit’s goodwill exceeds its fair value, a charge to operations is recorded. If the carrying amount of an intangible asset with an indefinite life exceeds its fair value, a charge to operations is recognized. Either event would result in incremental expenses for that quarter, which would reduce any earnings or increase any loss for the period in which the impairment was determined to have occurred.
During 2015, we recorded a $251.9 million non-cash impairment charge related to goodwill associated with our Infusion Services business. The estimated impairment took into consideration our updated business outlook, pursuant to which we updated our future cash flow assumptions and calculated updated estimates of fair value. The estimated impairment loss was equal to the excess of the assets' carrying amount over its fair value as determined by an analysis of discounted future cash flows. In connection with our annual assessment of possible goodwill impairment during the fourth quarter of 2018, we concluded no further impairment charge was needed.
Our goodwill impairment analysis is sensitive to changes in key assumptions used in our analysis, such as the degree of volatility in equity and debt markets and our stock price. If the assumptions used in our analysis are not realized, it is possible that an additional impairment charge may need to be recorded in the future. We cannot accurately predict the amount and timing of any impairment of goodwill or other intangible assets. Further, as we continue to work towards a turnaround of our business, we will need to continue to evaluate the carrying value of our goodwill. Any additional impairment charges that we may take in the future could be material to our results of operations and financial condition.
Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 (the “Exchange Act”), and is required to evaluate the effectiveness of these controls and procedures on a periodic basis and publicly disclose the results of these evaluations and related matters in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. However, testing and maintaining our internal control over financial reporting can be expensive and divert our management's attention from other business matters. Any failure to implement and maintain effective internal controls could result in material weaknesses or material misstatements in our consolidated financial statements.
If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we may be required to take corrective measures or restate the affected historical financial statements. In addition, we may be subjected to investigations and/or sanctions by federal and state securities regulators, and/or civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.
New accounting pronouncements or new interpretations of existing standards could require us to make adjustments in our accounting policies that could affect our financial statements.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Financial Accounting Standards Board, the SEC, or other accounting organizations or governmental entities frequently issue new pronouncements or new interpretations of existing accounting standards. Changes in accounting standards, how the accounting standards are interpreted, or the adoption of new accounting standards can have a significant effect on our reported results, and could even retroactively affect previously reported transactions, and may require that we make significant changes to our systems, processes and controls.
Changes resulting from these new standards may result in materially different financial results and may require that we change how we process, analyze and report financial information and that we change financial reporting controls. Such changes in accounting standards may have an adverse effect on our business, financial position, and income, which may negatively impact our financial results.
In February 2016, the FASB issued ASU 2016-02-Leases (Topic 842), requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. The Company is evaluating the effect that the updated standard will have on its consolidated financial statements.
Risks Related to Our Indebtedness
We have incurred substantial indebtedness, which imposes operating and financial restrictions on us that, together with the resulting debt service obligations, may significantly limit our ability to execute our business strategy and may increase the risk of default under our debt obligations.
On June 29, 2017, the Company entered into (i) a first lien note purchase agreement, among the Company, which is the issuer under the agreement, the financial institutions and note purchasers from time to time party to the agreement, pursuant to which the Company issued first lien senior secured notes in an aggregate principal amount of $200.0 million; and (ii) a second lien note purchase agreement among the Company, which is the issuer under the agreement, the financial institutions and note purchasers from time to time party to the agreement, pursuant to which the Company (a) issued second lien senior secured notes in an aggregate initial principal amount of $100.0 million and (b) had the ability to draw upon the Second Lien Note Facility and issue second lien delayed draw senior secured notes in an aggregate initial principal amount of $10.0 million for a period of 18 months after the closing date, subject to certain terms and conditions. The Company exercised the draw on the additional $10 million during June 2018. The Company used the proceeds of the sale of the First Lien Notes and the Initial Second Lien Notes to repay in full all amounts outstanding under the Prior Credit Agreements and extinguished the liability. Each of the Prior Credit Agreements was terminated following such repayment. The Notes accrue interest, payable monthly in arrears, at a floating rate. The First Lien Notes will amortize in equal quarterly installments equal to 0.625% of the aggregate principal amount of the First Lien Note Facility, commencing on September 30, 2019, and on the last day of each third month thereafter, with the balance payable at maturity. The First Lien Notes mature on August 15, 2020, provided that if the Company’s 2021 Notes (defined below) are refinanced prior to August 15, 2020, then the scheduled maturity date of the First Lien Notes shall be June 30, 2022. Our indebtedness includes many covenants and restrictions that may significantly limit the types of strategic relationships and our ability to execute our business strategy.
In addition, we have issued $200.0 million in aggregate principal amount of 8.875% senior notes due 2021 (the “2021 Notes”). See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” The 2021 Notes are our senior unsecured obligations and are fully and unconditionally guaranteed by all existing and future subsidiaries of the Company. Interest is payable semi-annually on February 15 and August 15.
The operating and financial restrictions and covenants of our debt instruments, including the Notes Facilities and the indenture governing the 2021 Notes, may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. The terms of the Notes Facilities require us to comply with certain financial covenants.
In addition, subject to a number of important exceptions, the Notes Facilities contain certain covenants and restrictions impacting our ability to, among other things:
incur or guarantee additional indebtedness or issue certain preferred stock;
transfer or sell assets;
make certain investments and loans;
pay dividends or distributions, redeem subordinated indebtedness, or make other restricted payments;
create or incur liens;
incur dividend or other payment restrictions affecting certain subsidiaries;
issue capital stock of our subsidiaries;
enter into hedging transactions or sale and leaseback transactions;
consummate a merger, consolidation or sale of all or substantially all of our assets or the assets of any of our subsidiaries; and
enter into transactions with affiliates.
The indenture governing the 2021 Notes contains similar restrictions. Our ability to comply with these covenants, including the financial covenants, may be affected by events beyond our control. Therefore, in order to engage in some corporate actions, we may need to seek permission from our lenders or the note holders, whose interests may be different from ours. We cannot guarantee that we will be able to obtain consent from these parties when needed. If we do not comply with the restrictions and covenants in our Notes Facilities, we may not be able to finance our future operations, make acquisitions or pursue business opportunities. The restrictions contained in our Notes Facilities may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.reputation in various markets.
A breach of any of these covenants or the inability to comply with the required financial ratio could result in a default under the Notes Facilities. If any such default occurs, the lenders under the respective Notes Facilities may elect to declare all of their
respective outstanding debt, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. Under such circumstances, we may not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed on our ability to incur additional debt and to take other corporate actions might significantly impair our ability to obtain other financing.
There can be no assurance that we will be granted future waivers or amendments to the restrictions in the Notes Facilities if for any reason we are unable to comply with such restrictions or that we will be able to refinance our debt on terms acceptable to us, or at all.
The lenders under the Notes Facilities also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we were unable to pay such amounts, the lenders under the Notes Facilities could recover amounts owed to them by foreclosing against the collateral pledged to them. We have pledged a substantial portion of our assets to the lenders under the Notes Facilities, including the equity of all of the Company’s subsidiaries.
In addition, the degree to which we are leveraged could:
make us more vulnerable to general adverse economic, regulatory and industry conditions;
limit our flexibility in planning for, or reacting to, changes and opportunities in the markets in which we compete;
place us at a competitive disadvantage compared to our competitors that have less debt;
require us to dedicate a substantial portion of our cash flow to service our debt, reducing the availability of our cash flow and such proceeds to fund working capital, capital expenditures and other general corporate purposes; or
restrict us from making strategic acquisitions or exploiting other business opportunities.
To service our indebtedness and other obligations, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt obligations could harm our business, financial condition, andThese results of operations.
Our ability to make payments on and to refinance our indebtedness, including the First Lien Note Facility, for which principal payments are required beginning in 2019, the Second Lien Note Facility, and the 2021 Notes, and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. A significant reduction in our operating cash flows resulting from changes in economic conditions, changes in government reimbursement rates or methods, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business and consolidated financial statements, prospectscondition, results of operations and cash flows.
If any of our abilitypharmacies fail to comply with the conditions of participation in the Medicare program, that pharmacy could be terminated from Medicare, which could adversely affect our consolidated financial statements.
Our pharmacies must comply with the extensive conditions of participation in the Medicare program. If a pharmacy fails to meet any of the Medicare supplier standards, that pharmacy could be terminated from the Medicare program. We respond in the ordinary course to deficiency notices issued by surveyors, and none of our pharmacies has ever been terminated from the Medicare program for failure to comply with the supplier standards. Any termination of one or more of our pharmacies from the Medicare program for failure to satisfy the Medicare supplier standards could adversely affect our consolidated financial statements.
We cannot predict the impact of changing requirements on compounding pharmacies.
Compounding pharmacies are closely monitored by federal and state governmental agencies. We believe that our compounding is performed in safe environments and we have clinically appropriate policies and procedures in place. We only compound pursuant to a patient-specific prescription and do so in compliance with USP 797 standards. In 2013, Congress passed the DQSA, which creates a new category of compounding facilities called outsourcing facilities, which are regulated by the FDA. We do not believe that our current compounding practices qualify us as an outsourcing facility and therefore we continue to operate consistently with USP 797 standards and applicable state pharmacy laws. Should state regulators or the FDA disagree, or should our business practices change to qualify us as an outsourcing facility, there is a risk of regulatory action and/or increased resources required to comply with federal requirements imposed pursuant to the DQSA on outsourcing facilities that could significantly increase our costs or otherwise affect our results of operations. Furthermore, we cannot predict the overall impact of increased scrutiny on compounding pharmacies.
Our existing indebtedness could adversely affect our business and growth prospects.
As of December 31, 2019, we had $1,337.3 million of outstanding borrowings, including (i) $925.0 million under our First Lien Term Loan and (ii) $412.3 million under our Second Lien Notes. All obligations under the credit agreements and indenture governing these facilities and notes are secured by first-priority perfected security interests in substantially all of our assets and the assets of our subsidiaries, subject to permitted liens and other exceptions. Our indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of these actions on a timely basis, on terms satisfactory to us or at all.
Our indebtedness, the cash flow needed to satisfy our debt and other obligations.the covenants contained in our credit agreement and indenture have important consequences, including but not limited to:
We cannot assure you thatlimiting funds otherwise available for financing our business will generate sufficientcapital expenditures by requiring us to dedicate a portion of our cash flows from operations orto the repayment of debt and the interest on this debt;
limiting our ability to incur additional indebtedness;
limiting our ability to capitalize on significant business opportunities;
making us more vulnerable to rising interest rates; and
making us more vulnerable in the event of a downturn in our business.
Our level of indebtedness may place us at a competitive disadvantage to our competitors that future borrowings will be available to us underare not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the Note Facilities or otherwise in an amount sufficient to enable usof interest we are required to pay our indebtedness, including our indebtedness under the First Lien Note Facility, the Second Lien Note Facility, and the 2021 Notes, or to fund our other liquidity needs. Our inability to pay our debts would require us to pursue one or more alternative strategies,reduce earnings accordingly. In addition, developments in tax policy, such as selling assets, refinancing allthe disallowance of tax deductions for interest paid on outstanding indebtedness, could have an adverse effect on our liquidity and our business, financial conditions and results of operations. Further, our credit agreements and indenture contain customary affirmative and negative covenants and certain restrictions on operations that could impose operating and financial limitations and restrictions on us, including restrictions on our ability to enter into particular transactions and to engage in other actions that we may believe are advisable or necessary for our business. Our term loan facility is also subject to mandatory prepayments in certain
circumstances and requires a portionprepayment of a certain percentage of our indebtedness or selling equity capital. However,excess cash flow. This excess cash flow payment, and future required prepayments, will reduce our alternative strategies may not be feasible at the time or may not provide adequate fundscash available for investment in our business.
We expect to allow ususe cash flow from operations to paymeet current and future financial obligations, including funding our debts as they come dueoperations, debt service requirements and fundcapital expenditures. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic and other liquidity needs. In addition, some alternative strategies are likely to require the prior consent offactors beyond our Notes Facilities lenders, which we may not be able to obtain.
control.
Despite our substantial indebtedness, we may still need to incur significantly more debt. This could exacerbate the risks associated with our substantial leverage.
We may need to incur substantial additional indebtedness, including additional secured indebtedness, in the future, in connection with future acquisitions, strategic investments and strategic relationships. Although the First Lien Note Facility, the Second Lien Note Facility and the indenturefinancing documents governing the 2021 Notesour indebtedness contain covenants and restrictions on the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions, including secured debt, could be substantial. Adding additional debt to current debt levels could exacerbate the leverage-related risks described above.
We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which would also harm our ability to incur additional indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. The financing documents governing our First Lien Term Loan, our ABL Facility and our Second Lien Notes restrict our ability to conduct asset sales and/or use the proceeds from asset sales. We may not be able to consummate these asset sales to raise capital or sell assets at prices and on terms that we believe are fair and any proceeds that we do receive may not be adequate to meet any debt service obligations then due. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay all of our indebtedness.
The transition from the London Interbank Offered Rate (“LIBOR”) could negatively affect our interest rates and results of operations.
In 2017, the U.K. Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform, or replacement of LIBOR or any other benchmark rates may result in fluctuating interest rates that may have a negative impact on our interest expense and our profitability.
Continuing to combine businesses between BioScrip and Option Care may be more difficult, costly or time-consuming than expected and the anticipated benefits and cost savings of the Merger may not continue to be realized.
The continuing success of the Merger, including anticipated benefits and cost savings, depend, in part, on our ability to successfully combine and integrate both businesses.
Integration of the businesses following the Merger is a complex, costly and time-consuming process. If we experience difficulties with the continued integration process, the anticipated benefits of the Merger may not continue to be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect for an
undetermined period after completion of the Merger. In addition, the actual cost savings of the Merger could be less than anticipated.
Our future results may be adversely impacted if we do not effectively manage our expanded operations.
Following the completion of the Merger, the size of our combined business is significantly larger than the size of either Option Care or BioScrip’s respective businesses prior to the Merger. Our ability to successfully manage this expanded business depends, in part, upon management’s ability to manage the integration of two discrete companies, as well as the increased scale and scope of the combined business with its associated increased costs and complexity. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Merger.
We are a “controlled company” within the meaning of the rules of Nasdaq and, as a result, qualify for and rely on, exemptions from certain corporate governance standards, which limit the presence of independent directors on our board of directors or board committees.
Following the Merger, approximately 81% of the outstanding shares of our common stock is held by HC Group Holdings I, LLC. As a result, we are a “controlled company” for purposes of the Nasdaq listing rules and are exempt from certain governance requirements otherwise required by Nasdaq, including requirements that:
a majority of our board of directors consist of independent directors;
we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities;
we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities;
we conduct annual performance evaluation of the nominating and corporate governance and compensation committees.
Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
The shares of our common stock issued in the Merger to HC Group Holdings I, LLC as Merger consideration, or approximately 81% of the outstanding shares of our common stock as of December 31, 2019, are generally eligible for resale subject to a 12-month lockup period beginning on the Merger Date. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after the expiration of the lockup period or even the perception that these sales could occur.
As of December 31, 2019, Madison Dearborn Partners is our largest stockholder, controlling approximately 81% of our common stock, and has the ability to exercise significant influence over decisions requiring our stockholders’ approval.
As of December 31, 2019, Madison Dearborn Partners controls approximately 81% of our common stock through its control of HC Group Holding I, LLC, with an economic interest in approximately 39% of our common stock. As a result, Madison Dearborn Partners has the ability to exercise significant influence over decisions requiring approval of our stockholders including the election of directors, amendments to our certificate of incorporation and approval of significant corporate transactions, such as a Merger or other sale of us or our assets.
This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of us and may negatively affect the market price of our common stock. Also, Madison Dearborn Partners is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete with us. Madison Dearborn Partners or its affiliates may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us.
Provisions of our corporate governance documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.
In addition to HC Group Holding I, LLC’s beneficial ownership of approximately 81% of our common stock, our third amended and restated certificate of incorporation contains provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. Among other things:
these provisions allow us to authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include supermajority voting, special approval, dividend, or other rights or preferences superior to the rights of stockholders;
these provisions provide that, at any time when HC Group Holdings I, LLC beneficially owns, in the aggregate, less than 50% in voting power of our stock entitled to vote generally in the election of directors, directors may be removed with or without cause only by the affirmative vote of holders of at least 66 2∕3% in voting power of all the then-outstanding vote thereon, voting together as a single class;
these provisions prohibit stockholder action by written consent from and after the date on which HC Group Holding I, LLC beneficially owns, in the aggregate, less than 50% in voting power of our stock entitled to vote generally in the election of directors; and
these provisions provide that for as long as HC Group Holdings I, LLC beneficially owns, in the aggregate, 50% or more in voting power of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission or repeal of our bylaws or certificate of incorporation by our stockholders will require the affirmative vote of at least a majority in voting power of the outstanding shares of our stock and at any time when HC Group Holdings I, LLC beneficially owns, in the aggregate, less than 50% in voting power of all outstanding shares of our stock entitled to vote generally in the election of directors, any amendment, alteration, rescission or repeal of our bylaws or certificate of incorporation by our stockholders will require the affirmative vote of the holders of at least 66 2∕3% in voting power of all the then-outstanding shares of our stock entitled to vote thereon, voting together as a single class.
These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for shareholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities to realize value in a corporate transaction.
Moreover, Section 203 of the General Corporation Law of the State of Delaware (“DGCL”) may discourage, delay, or prevent a change of control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
Our third amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our third amended and restated certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees and stockholders to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, our third amended and restated certificate of incorporation or our bylaws or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine; provided that for the avoidance of doubt, the forum selection provision that identifies the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation, including any “derivative action”, will not apply to suits to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Our third amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have notice of and consented to the provisions of our certificate of incorporation described above. The forum selection clause in our third amended and restated certificate of incorporation may have the effect of discouraging lawsuits against us or our directors and officers and may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Our third amended and restated certificate of incorporation authorizes us to issue one or more series of preferred stock. Our Board has the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control, discouraging bids for our common stock at a premium to the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock.
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Item 1B. | Unresolved Staff Comments |
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently lease all of our properties from third parties under various lease terms expiring over periods extending through 2029, in addition to a number of non-material, month-to-month leases. Our corporate headquarters are located at 3000 Lakeside Drive, Suite 300N, Bannockburn, IL 60015. Our other properties mainly consist of infusion pharmacies equipped with clean room and compounding capabilities. Some infusion pharmacies are co-located with an ambulatory infusion center where patients receive infusion treatments. As of December 31, 20182019 our material property locations, consisting of our pharmacies, all in support of our infusion services business, were as follows:
|
| | | | | | |
| Birmingham, AL | Augusta, GA | Alexandria, LABozeman, MT | Plymouth Meeting, PA |
| Hoover, AL | Omaha, NEPeachtree Corners, GA | Charlotte, NC | York, PA |
| Mobile, AL | Savannah, GA | Fayetteville, NC | Cranston, RI |
| Jonesboro, AR | Honolulu, HI | Morrisville, NC | Smithfield, RI |
| Little Rock, AR | Urbandale, IA | Wilmington, NC | Duncan, SC |
Burbank, CATempe, AZ | Meridian, ID | Baton Rouge, LA | | Bedford, NH | Lincoln, NE | Mount Pleasant, SC |
Irvine,Bakersfield, CA | Lombard, IL | Covington, LAOmaha, NE | Knoxville, TN |
| Burbank, CA | Wood Dale, IL | Bedford, NH | Memphis, TN |
| Chico, CA | Carmel, IN | Eatontown, NJ | Nashville, TN |
| Hayward, CA | Overland Park, KS | Morris Plains, NJ | | Knoxville, TNAustin, TX |
Ontario,Irvine, CA | | Hammond, LA | Ashland, KY | Somers Point, NJ | | Memphis, TNHouston, TX (2) |
Cromwell, CT (first)Riverside, CA | Lexington, KY | Houma, LALas Vegas, NV | | Elmsford, NY | | Austin,Irving, TX |
Cromwell, CT (second)Sacramento, CA | Louisville, KY | Lafayette, LAReno, NV | | Forest Hills, NY | | Houston,Richardson, TX |
CoralSan Diego, CA | Baton Rouge, LA | College Point, NY | San Antonio, TX |
Santa Fe Springs, FLCA (2) | | Lake Charles,New Orleans, LA | | Lake Success, NY | | Richardson, TXSalt Lake City, UT |
Jacksonville, FLSun Valley, CA | | Metairie,Shreveport, LA | | Canfield, OH | | Annandale, VA |
Melbourne, FL | | Monroe, LA | | Canton, OH | Orchard Park, NY | Ashland, VA |
Tampa, FLEnglewood, CO | Marlborough, MA | Shreveport, LA | | Cincinnati,Brecksville, OH | | Chantilly, VA |
Albany, GA | Cromwell, CT (2) | Southborough, MA | | Dublin,Canfield, OH | | Newport News, VA |
Augusta, GAShelton, CT | Columbia, MD | Auburn, ME | | Sylvania,Columbus, OH | | Norfolk, VA |
Norcross, GANewark, DE | Auburn, ME | Eagan, MN | | Audubon, PA | Dublin, OH | Roanoke, VA |
Savannah, GAFort Myers, FL | Farmington Hills, MI | Chesterfield, MO | | Dunmore, PA | | Richmond, VA |
Elmhurst, IL | | Pearl, MS | | York, PA | Milford, OH | Rutland, VT |
Silvis, ILGainesville, FL | Grand Rapids, MI | Charlotte, NCSylvania, OH | Everett, WA |
| Jacksonville, FL | Southampton,Eagan, MN | Oklahoma City, OK | Kennewick, WA |
| Melbourne, FL | Roseville, MN | Bend, OR | Spokane Valley, WA |
| Miramar, FL | Sauk Rapids, MN | Portland, OR | Tukwila, WA |
| St. Petersburg, FL | Columbia, MO | Audubon, PA | Wauwatosa, WI |
| Tampa, FL | Fenton, MO | Dunmore, PA | Charleston, WV |
Lexington, KYAlbany, GA | Pearl, MS | Fayetteville, NCMonroeville, PA | | Smithfield, RI | | Fairmount,Fairmont, WV |
Item 3. Legal Proceedings
The information set forth underFor a summary of material legal proceedings, if any, refer to Note 14, “Commitments15, Commitments and Contingencies” in, of the Notes to the Consolidated Financial Statements under the caption “Legal Proceedings”consolidated financial statements included in Part II, Item 8 of this Annual Report is incorporated herein by reference.report.
| |
Item 4. | Mine Safety Disclosures |
Item 4. Mine Safety Disclosures
Item not applicable.
PART II
| |
Item 5. | Market for Registrant’s Common Equity, Related StockholderItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
Common Stock
OurDuring 2019, our Common Stock, par value $0.0001 per share, iswas traded on the Nasdaq GlobalCapital Market under the symbol “BIOS”.
On February 3, 2020, we changed our symbol to “OPCH” and began trading on the Nasdaq Global Select Market.
Holders of Record
As of March 7, 2019,3, 2020, there were 180173 stockholders of record of our Common Stock.
Dividend Policy
We have never paid cash dividends on our Common Stock and do not anticipate doing so in the foreseeable future. Our Notes Facilities contain covenants and restrictions impacting our ability to pay dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under our equity compensation plans required by thisSee Item 5 is included in our definitive proxy statement to be filed with the SEC on or before April 30, 2019 in connection with our 2019 Annual Meeting12, “Security Ownership of StockholdersCertain Beneficial Owners and is hereby incorporated by reference.
Management and Related Stockholder Matters.”
Recent SalesSale of Unregistered Securities and Use of Proceeds
The information disclosed in Note 8 - Preferred Stock and Stockholders’ Deficit under the headings “First Quarter 2017 Private Placement,” “Second Quarter 2017 Private Placement” and “2017 Warrants” is hereby incorporated by reference. The Company relied on Section 4(a)(2) of the Securities Act for the issuance of the 2017 Warrants and the Common Shares issued in both the First Quarter 2017 Private Placement and the Second Quarter 2017 Private Placement.
None.
Stock Performance Graph
The following graph compares ourthe total cumulative return to holdersreturns of our Common StockBioScrip through August 6, 2019 and Option Care Health from August 7, 2019 through December 31, 2019 with the total cumulative returns of the Nasdaq Composite Index and the Nasdaq Health Services Index for the five-year period from December 31, 20132014 through December 31, 2018.2019. The graph shows the performance of a $100 investment in our Common Stock and in each index as of December 31, 2013.2014.
| | | | Year Ended December 31, | Years Ended December 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| BioScrip, Inc. | $ | 100.00 |
| | $ | 94.46 |
| | $ | 23.65 |
| | $ | 14.05 |
| | $ | 39.32 |
| | $ | 48.24 |
| |
| Option Care Health, Inc. | | $ | 100.00 |
| | $ | 25.04 |
| | $ | 14.88 |
| | $ | 41.63 |
| | $ | 51.07 |
| | $ | 53.36 |
|
| Nasdaq Composite Index | $ | 100.00 |
| | $ | 113.40 |
| | $ | 119.89 |
| | $ | 128.89 |
| | $ | 165.29 |
| | $ | 158.87 |
| $ | 100.00 |
| | $ | 104.81 |
| | $ | 112.68 |
| | $ | 144.50 |
| | $ | 138.89 |
| | $ | 187.81 |
|
| Nasdaq Health Services Index | $ | 100.00 |
| | $ | 128.47 |
| | $ | 137.28 |
| | $ | 114.06 |
| | $ | 138.36 |
| | $ | 132.59 |
| $ | 100.00 |
| | $ | 106.86 |
| | $ | 88.78 |
| | $ | 107.70 |
| | $ | 103.21 |
| | $ | 129.87 |
|
* $100 invested on December 31, 20132014 in stock or index, including reinvestment of dividends.
Item 6. Selected Financial Data
The selected consolidated financial data presented below should be read in conjunction with, and is qualified in its entirety by reference to, Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Annual Report. Acquisitions duringThe selected consolidated financial data for the years ended December 31, 2019 and 2018 reflect the adoption of ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”) and the selected financial data for the year ended December 31, 2019 reflects the adoption of ASU 2016-02, Leases (“ASC 842”). Further discussion on the impacts of ASC 606 can be found in Note 4, Revenue, and further discussion on the impacts of ASC 842 can be found in Note 8, Leases, within the Consolidated Financial Statements included in Item 8 of this report. The below periods below include Home Solutions beginning September 2016. Divestitures during the periodsresults of operations from BioScrip, Inc. from the August 6, 2019 Merger Date onward. Prior to April 7, 2015, Option Care (the “Successor”) was a wholly owned subsidiary of Walgreen Co. operating under the name Walgreens Infusion Services, Inc. ( the Predecessor”). The Consolidated Statements of Comprehensive Income (Loss) presented below include the salePredecessor’s results of operations for the Home Health Business in March 2014,period from January 1, 2015 through April 6, 2015 and the sale of the PBM Business in August 2015. All historical amounts have been restated to reclassify amounts directly associated with these divested operations as discontinued operations. The amounts below are not necessarily indicative of what the actual results would have been if the Home Health Business and the PBM Business were divested at the beginning of the period.
demarcated by a black line.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in thousands) |
| Consolidated Balance Sheets Data: | | | | | | | | | |
Working capital (1) | $ | 67,389 |
| | $ | 81,463 |
| | $ | 43,180 |
| | $ | 29,574 |
| | $ | 25,347 |
|
Total assets (2) | $ | 583,938 |
| | $ | 603,092 |
| | $ | 604,985 |
| | $ | 528,416 |
| | $ | 801,204 |
|
| Total debt | $ | 504,674 |
| | $ | 480,588 |
| | $ | 451,934 |
| | $ | 418,121 |
| | $ | 423,803 |
|
| Stockholders’ equity (deficit) | $ | (144,004 | ) | | $ | (84,752 | ) | | $ | (33,621 | ) | | $ | (81,515 | ) | | $ | 216,589 |
|
| Total assets of discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 22,294 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| (in thousands) |
| Consolidated Balance Sheets Data: | |
|
|
|
|
|
|
|
|
| Working capital (1) (2) | $ | 228,650 |
|
| $ | 227,428 |
|
| $ | 226,535 |
|
| $ | 227,763 |
|
| $ | 229,243 |
|
| Total assets (2) | 2,589,547 |
|
| 1,428,211 |
|
| 1,429,542 |
|
| 1,405,285 |
|
| 1,377,275 |
|
| Total debt, net | 1,286,496 |
|
| 539,375 |
|
| 540,346 |
|
| 541,500 |
|
| 542,888 |
|
| Stockholders' equity | 906,827 |
|
| 602,825 |
|
| 606,105 |
|
| 600,770 |
|
| 596,121 |
|
(1) Working capital consists of total current assets less total current liabilities.
(2) Working capital and total assets for the year ended December 31, 2019 reflect the adoption of ASU 2016-02, Leases, and are, therefore, not comparable to prior periods. For a full discussion on the impacts of the adoption see Note 8. Leases, included in Item 8 of this report.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in thousands, except per share amounts) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Net revenue | $ | 708,903 |
| | $ | 817,190 |
| | $ | 935,589 |
| | $ | 982,223 |
| | $ | 922,654 |
|
Operating income (loss) (3) | $ | 10,903 |
| | $ | 2,260 |
| | $ | (10,989 | ) | | $ | (289,413 | ) | | $ | (98,025 | ) |
| Loss from continuing operations, before income taxes | $ | (51,024 | ) | | $ | (67,433 | ) | | $ | (34,157 | ) | | $ | (326,351 | ) | | $ | (138,943 | ) |
| | | | | | | | | | |
| Loss per common share: | |
| | |
| | |
| | | | |
| Loss from continuing operations, basic and diluted | $ | (0.49 | ) | | $ | (0.59 | ) | | $ | (0.48 | ) | | $ | (4.58 | ) | | $ | (2.19 | ) |
| Weighted average common shares outstanding, basic and diluted | 127,942 |
| | 123,791 |
| | 93,740 |
| | 68,710 |
| | 68,476 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Periods Ended |
| Year Ended December 31, |
| Successor |
|
| Predecessor |
| 2019 (1) |
| 2018 |
| 2017 |
| 2016 |
| April 7, 2015 -
December 31, 2015 |
|
| January 1, 2015 -
April 6, 2015 |
| | | | | | | (in thousands) | | | |
| Consolidated Statements of Comprehensive Income (Loss) | |
|
|
|
|
|
|
|
|
|
|
|
| Net revenue (2) | $ | 2,310,417 |
|
| $ | 1,939,791 |
|
| $ | 1,828,046 |
|
| $ | 1,711,438 |
|
| $ | 1,163,009 |
|
|
| $ | 379,672 |
|
| Gross profit (2) | 512,999 |
|
| 422,215 |
|
| 445,999 |
|
| 449,307 |
|
| 312,597 |
|
|
| 96,518 |
|
| Operating income (loss) | (319 | ) |
| 38,269 |
|
| 27,279 |
|
| 52,448 |
|
| 6,129 |
|
|
| (1,721 | ) |
| Net income (loss) | (75,920 | ) |
| (6,115 | ) |
| 3,878 |
|
| 3,910 |
|
| (17,696 | ) |
|
| (5,761 | ) |
| Net comprehensive income (loss) | (83,959 | ) |
| (5,341 | ) |
| 3,936 |
|
| 3,910 |
|
| (17,696 | ) |
|
| (5,761 | ) |
| Net income (loss) per share, basic and diluted (3) | (0.49 | ) |
| (0.04 | ) |
| 0.03 |
|
| 0.03 |
|
| (0.12 | ) |
|
|
|
| Weighted average common shares outstanding, basic and diluted (3) | 156,280 |
|
| 142,614 |
|
| 142,614 |
|
| 142,614 |
|
| 142,614 |
|
|
|
|
(1) 2019 includes the results of operations of BioScrip from August 6, 2019 onward and are, therefore, not comparable to prior periods.
(2) Net revenue and gross profit for the years ended December 31, 2019 and 2018 reflect the adoption of ASU 2014-09, Revenue from Contracts with Customers, and are, therefore, not comparable to prior periods. For a full discussion on the impacts of the adoption see Note 4, Revenue, included in Item 8 of this report.
| |
(1) | Working capital calculation excludes current assets and liabilities of discontinued operations and includes the impact of applying the retrospective adoption of ASU 2015-17 Balance Sheet Classification of Deferred Taxes, which requires that all deferred tax assets and liabilities be presented as non-current.(3) Predecessor period represents the period prior to the acquisition of Walgreens Infusion Services from Walgreen Co., and therefore no shares of common stock were outstanding. As a result, there is no net income (loss) per share or weighted average common shares outstanding information available for this period. |
| |
(2) | Total assets exclude total assets of discontinued operations as of December 31, 2014. |
| |
(3) | Operating loss for the year ended December 31, 2015 includes goodwill impairment of $251.9 million. |
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition andResults of Operations
|
Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to assist the reader in understanding our Consolidated Financial Statements, the changes in certain key items in those financial statements from year-to-year and the primary factors that accounted for those changes as well as how certain accounting principles affect our Consolidated Financial Statements.
Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this Annual Report and specifically under the caption “Cautionary Note Regarding Forward-Looking“Forward-Looking Statements” and under “Item 1A. Risk Factors”Factors” in this Annual Report. In addition, the following discussion of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewherein Item 8 in this Annual Report.
Business Overview
We areOption Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national providernetwork of infusion158 locations around the United States. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and home care management solutions. We partner with physicians, hospital systems, payors, pharmaceutical manufacturers and skilled nursing facilitiesother referral sources to provide pharmaceuticals and complex compounded solutions to patients access to post-acute care services. We operate with a commitment to bring customer-focused pharmacy and related healthcare infusion therapy services intofor intravenous delivery in the homepatients’ homes or alternate-site setting. By collaborating with the full spectrum of healthcare professionals and the patient, we aim to provide cost-effective care that is driven by clinical excellence, customer service and values that promote positive outcomes and an enhanced quality of life for those whom we serve. As of December 31, 2018, we had a total of 68 service locations in 27 states.
other nonhospital settings. Our platform provides nationwide service capabilities and the ability to deliver clinical management services that offer patients a high-touch, community-based and home-based care environment. Our core services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. WhetherWe 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 December 31, 2019. Effective February 3, 2020, the Company was listed on the Nasdaq Global Select Market under the ticker symbol “OPCH”. See Note 3, Business Acquisitions, of the consolidated financial statements for further discussion of 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:
Selling, General and Administrative Expenses Savings. Merged corporate infrastructure has created significant opportunity for streamlining corporate and administrative costs, including headcount and functional spend.
Network Optimization. The previous investments in technology and compounding pharmacies, along with the overlapping geographic footprint, allow for facility rationalization and the optimization of assets.
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.
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.
Since the Merger, we have worked to align our field and sales teams. We have also made strides at combining our procurement processes and contracts, all while continuing to focus on serving our patients. Patient health is personal to us, which is why, throughout the integration process, we strive to improve and set the standard for quality care that is matched by best-in-class service. After completion of the Merger, we have additional resources to invest in our people, processes and systems, providing us improved strength and scale to drive better patient outcomes.
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 decreased reimbursement 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.
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 physician office, ambulatory infusion center,care management, who partnered with physicians, hospital systems, payers, pharmaceutical manufacturers and skilled nursing facilityfacilities 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 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.
Composition of Results of Operations
The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 2019, 2018 and 2017. 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 alternate sitesmedical supplies dispensed to patients. In addition to product costs, cost of care, we provide products, servicesrevenue includes warehousing costs, purchasing costs, depreciation expense relating to revenue-generating assets, such as infusion pumps, shipping and condition-specific clinical management programs tailoredhandling costs, and wages and related costs for the pharmacists, nurses, and all other employees and contracted workers directly involved in providing service to improve the carepatient.
The Company receives volume-based rebates and prompt payment discounts from some of individualsits 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 complex 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 Expense (Benefit). 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 years ended December 31, 2019, 2018, and 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 (1) | | 2018 | | 2017 |
| | | Amount |
| | % of Revenue |
| | Amount |
| | % of Revenue |
| | Amount |
| | % of Revenue |
|
| NET REVENUE | | $ | 2,310,417 |
| | 100.0 | % | | $ | 1,939,791 |
| | 100.0 | % | | $ | 1,828,046 |
| | 100.0 | % |
| COST OF REVENUE | | 1,797,418 |
| | 77.8 | % | | 1,517,576 |
| | 78.2 | % | | 1,382,047 |
| | 75.6 | % |
| GROSS PROFIT | | 512,999 |
| | 22.2 | % | | 422,215 |
| | 21.8 | % | | 445,999 |
| | 24.4 | % |
| | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | |
| Selling, general and administrative expenses | | 459,628 |
| | 19.9 | % | | 345,884 |
| | 17.8 | % | | 338,456 |
| | 18.5 | % |
| Provision for doubtful accounts (2) | | — |
| | — | % | | — |
| | — | % | | 45,602 |
| | 2.5 | % |
| Depreciation and amortization expense | | 53,690 |
| | 2.3 | % | | 38,062 |
| | 2.0 | % | | 34,662 |
| | 1.9 | % |
| Total operating expenses | | 513,318 |
| | 22.2 | % | | 383,946 |
| | 19.8 | % | | 418,720 |
| | 22.9 | % |
| OPERATING (LOSS) INCOME | | (319 | ) | | (0.0 | )% | | 38,269 |
| | 2.0 | % | | 27,279 |
| | 1.5 | % |
| | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | |
| Interest expense, net | | (73,724 | ) | | (3.2 | )% | | (45,824 | ) | | (2.4 | )% | | (44,307 | ) | | (2.4 | )% |
| Equity in earnings of joint ventures | | 2,840 |
| | 0.1 | % | | 1,020 |
| | 0.1 | % | | 2,186 |
| | 0.1 | % |
| Other, net | | (6,991 | ) | | (0.3 | )% | | (2,233 | ) | | (0.1 | )% | | 135 |
| | 0.0 | % |
| Total other expense | | (77,875 | ) | | (3.4 | )% | | (47,037 | ) | | (2.4 | )% | | (41,986 | ) | | (2.3 | )% |
| | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | (78,194 | ) | | (3.4 | )% | | (8,768 | ) | | (0.5 | )% | | (14,707 | ) | | (0.8 | )% |
| INCOME TAX BENEFIT | | (2,274 | ) | | (0.1 | )% | | (2,653 | ) | | (0.1 | )% | | (18,585 | ) | | (1.0 | )% |
| NET (LOSS) INCOME | | $ | (75,920 | ) | | (3.3 | )% | | $ | (6,115 | ) | | (0.3 | )% | | $ | 3,878 |
| | 0.2 | % |
| | | | | | | | | | | | | |
| OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: | | | | | | | | | | | | |
| Change in unrealized (losses) gains on cash flow hedges, net of income taxes of $259, $234 and $36, respectively | | (8,039 | ) | | (0.3 | )% | | 774 |
| | 0.0 | % | | 58 |
| | 0.0 | % |
| OTHER COMPREHENSIVE (LOSS) INCOME | | (8,039 | ) | | (0.3 | )% | | 774 |
| | 0.0 | % | | 58 |
| | 0.0 | % |
| NET COMPREHENSIVE (LOSS) INCOME | | $ | (83,959 | ) | | (3.6 | )% | | $ | (5,341 | ) | | (0.3 | )% | | $ | 3,936 |
| | 0.2 | % |
(1) 2019 includes the results of operations of BioScrip from August 6, 2019 onward and are, therefore, not comparable to prior periods.
(2) Provision for doubtful accounts for the years ended December 31, 2019 and 2018 reflect the adoption of ASU 2014-09, Revenue from Contracts with Customers, and are, therefore, not comparable to prior periods. For a full discussion on the impacts of the adoption see Note 4, Revenue, included in Item 8 of this report.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following tables present selected consolidated comparative results of operations for the years ended December 31, 2019 and 2018:
Net Revenue
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Net revenue | $ | 2,310,417 |
| | $ | 1,939,791 |
| | $ | 370,626 |
|
| 19.1 | % |
The 19.1% increase in net revenue was primarily driven by additional revenue following the Merger of $308.9 million.
Additional increases in net revenue were the result of growth in the Company’s portfolio of therapies, particularly those therapies to treat chronic conditions such as gastrointestinal abnormalities, infectious diseases, cancer, multiple sclerosis, organautoimmune inflammatory disorders.
Cost of Revenue
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Cost of revenue | $ | 1,797,418 |
| | $ | 1,517,576 |
| | $ | 279,842 |
| | 18.4 | % |
| Gross profit margin | 22.2 | % | | 21.8 | % | | | | |
The 18.4% increase in cost of revenue was primarily attributable to the increase in revenue. The increase in gross margin was driven by the therapy mix shift along with favorable formulary management and blood cell transplants, bleeding disorders, immune deficiencies and heart failure.procurement contracts as we were able to take advantage of more favorable pricing due to increased buying power after the Merger.
Operating Expenses
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Selling, general and administrative expenses | $ | 459,628 |
| | $ | 345,884 |
| | $ | 113,744 |
| | 32.9 | % |
| Depreciation and amortization expense | 53,690 |
| | 38,062 |
| | 15,628 |
| | 41.1 | % |
| Total operating expenses | $ | 513,318 |
| | $ | 383,946 |
| | $ | 129,372 |
| | 33.7 | % |
Segments
We operateThe increase in one segment, infusion services. On an ongoing basis we will not report operating segment information unlessselling, general and administrative expenses in dollars and as a change in the business necessitates the need to do so.
Strategic Assessment and Transactions
We continually perform strategic assessmentspercent of our business and operations. The assessments examine our market strengths and opportunities and compare our position to that of our competitors. As a result of these ongoing assessments, we have focused our growth on investments in the infusion services business, which remains the primary driver of our growth strategy. Recent transactions which represent execution of the strategic assessments include:
On September 9, 2016, we acquired substantially all of the assets and assumed certain liabilities of Home Solutions and its subsidiaries (the “Home Solutions Transaction”) pursuant to an Asset Purchase Agreement dated June 11, 2016 (as amended, the “Home Solutions Agreement”), by and among Home Solutions, a Delaware corporation, certain subsidiaries of Home Solutions, the Company and HomeChoice Partners, Inc., a Delaware corporation. Home Solutions, a privately held company, provided home infusion and home nursing products and services to patients suffering from chronic and acute medical conditions. The aggregate consideration paid by the Company in the Transaction was equal to (i) $67.5 million in cash (the “Cash Consideration); plus (ii) (a) 3,750,000 shares of Company common stock (the “Transaction Closing Equity Consideration”) and (b) the right to receive contingent equity securities of the Company, in the form of restricted shares of Company common stock (the “RSUs”), issuable in two tranches, Tranche A and Tranche B, with different vesting conditions (collectively, the “Contingent Shares”).
On August 27, 2015, we completed the sale of substantially all of our pharmacy benefit management services segment (the “PBM Business”) pursuant to an Asset Purchase Agreement dated as of August 9, 2015 (the “PBM Asset Purchase Agreement”), by and among the Company, BioScrip PBM Services, LLC and ProCare Pharmacy Benefit Manager Inc. (the “PBM Buyer”). Under the PBM Asset Purchase Agreement, the PBM Buyer agreed to acquire substantially all of the assets used solely in connection with the PBM Business and to assume certain PBM Business liabilities (the “PBM Sale”). On the closing date, pursuant to the terms of the PBM Asset Purchase Agreement, we received total cash consideration of approximately $24.6 million, including an adjustment for estimated closing date net working capital. On October 20, 2015, we finalized working capital adjustment negotiations in relation to the PBM Sale whereby we agreed to repay approximately $1.0 million to the PBM Buyer. We used the net proceeds from the PBM Sale to pay down a portion of our outstanding debt.
Regulatory Matters Update
Approximately 18%revenue (17.8% of revenue for the year ended December 31, 2018 was derived directly from Medicare, state Medicaid programs and other government payors. We also provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs through managed care entities. Medicare Part D, for example, is administered through managed care entities. In the normal course of business, we and our customers are subject to legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs.
State Medicaid Programs
Over the last several years, increased Medicaid spending, combined with slow state revenue growth, led many states to institute measures aimed at controlling spending growth. Spending cuts have taken many forms including reducing eligibility and benefits, eliminating certain types of services, and provider reimbursement reductions. In addition, some states have been moving beneficiaries to managed care programs in an effort to reduce costs.
Each individual state Medicaid program represents less than 5% of our consolidated revenue19.9% for the year ended December 31, 2019) was driven by transaction and integration expenses related to the Merger during the year ended December 31, 2019.
The increase in depreciation and amortization was primarily related to the deprecation of fixed assets acquired and the amortization of intangibles acquired from the Merger of $6.2 million and $6.5 million, respectively.
Other Income (Expense)
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Interest expense, net | $ | (73,724 | ) | | $ | (45,824 | ) | | $ | (27,900 | ) | | 60.9 | % |
| Equity in earnings of joint ventures | 2,840 |
| | 1,020 |
| | 1,820 |
| | 178.4 | % |
| Other, net | (6,991 | ) | | (2,233 | ) | | (4,758 | ) | | 213.1 | % |
| Total other expense | $ | (77,875 | ) | | $ | (47,037 | ) | | $ | (30,838 | ) | | 65.6 | % |
The increase in interest expense of 60.9% was primarily attributable to the additional expense related to the new debt issued at the close of the Merger.
The increase in other, net of 213.1% was the result of the debt extinguishment costs incurred in 2019 of $5.5 million as a result of the extinguishment of debt in conjunction with the Merger.
Income Tax Expense (Benefit)
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Income tax expense (benefit) | $ | (2,274 | ) | | $ | (2,653 | ) | | $ | 379 |
| | (14.3 | )% |
The Company’s tax benefit for the year ended December 31, 2019 is comprised of a deferred tax benefit partially offset by a change in valuation allowance and state tax liabilities. This results in an effective tax rate of 2.9% for the year ended December 31, 2019. During the year ended December 31, 2018, the effective tax rate was 30.3%. These rates differ from the Company’s 21% federal statutory rate primarily due to a change in valuation allowance, certain state and no individual state Medicaid reimbursement reduction is expectedlocal taxes, non-deductible costs, and resolution of certain tax matters.
Net (Loss) Income and Other Comprehensive (Loss) Income
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Net (loss) income | $ | (75,920 | ) | | $ | (6,115 | ) | | $ | (69,805 | ) | | 1,141.5 | % |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Changes in unrealized (losses) gains on cash flow hedges, net of income taxes | (8,039 | ) | | 774 |
| | (8,813 | ) | | (1,138.6 | )% |
| Other comprehensive (loss) income | (8,039 | ) | | 774 |
| | (8,813 | ) | | (1,138.6 | )% |
| Net comprehensive (loss) income | $ | (83,959 | ) | | $ | (5,341 | ) | | $ | (78,618 | ) | | 1,472.0 | % |
Net loss increased $69.8 million primarily driven by increased depreciation and amortization expense, transaction expenses and integration costs related to havethe Merger, increased interest expense, as well as the loss on the extinguishment of debt.
Changes in unrealized (losses) gains on cash flow hedges, net of income taxes, decreased as a material effectresult 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 and the first $400.0 million of the Second Lien Term Loan, whereas the interest rate caps in 2018 through April 2019 were on our Consolidated Financial Statements. We are continually assessingthe 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 $78.6 million for the year ended December 31, 2019 as a result of the changes in net loss, discussed above, further reduced by the impact of the state Medicaid reimbursement cuts as states propose, finalize and implement various cost-saving measures. These measures may include strategiesfair value of the hedging instruments.
Year Ended December 31, 2018 Compared to reduce coverage, restrict enrollment, or enroll more beneficiaries in managed care programs.Year Ended December 31, 2017
Given the reimbursement pressures, we continue to improve operational efficiencies and reduce costs to mitigate the impact onThe following tables present selected consolidated comparative results of operations where possible. In some cases, reimbursement rate reductions may result in negative operating results, and we would likely exit some or all services where rate reductions result in unacceptable returns to our stockholders.
Medicare
Medicare currently covers home infusion therapy for selected therapies primarily through the durable medical equipment benefit. The Cures Act changed the new payment system for certain home infusion therapy services paid under Medicare Part B. The Cures Act significantly reduced the amount paid by Medicare for the drug costs, and also provides for the implementation of a clinical services payment. Under the Cures Act, the services payment does not take effect until 2021. However, the Bipartisan Budget Act of 2018 provides for a temporary transitional payment, starting January 1, 2019, for Medicare Part B home infusion services. CMS issued a final rule in October 2018 implementing this temporary benefit, which will continue until January 1, 2021, when the services payment in the Cures Act takes effect. We have taken steps to mitigate the impact of the Cures Act on our business, but the Act has had material negative impact on our revenues and profitability.
Approximately 8% and 7% of revenue for the years ended December 31, 2018 and 2017:
Net Revenue
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Net revenue | $ | 1,939,791 |
| | $ | 1,828,046 |
| | $ | 111,745 |
| | 6.1 | % |
The 6.1% increase in net revenue was primarily driven by growth in the Company’s portfolio of therapies to treat chronic conditions such as autoimmune inflammatory disorders, as well as a shift in commercial strategy to better leverage the capabilities of its care transition specialists to capture additional market share. The 2017 launch of additional therapies for the treatment of amyotrophic lateral sclerosis and Duchenne muscular dystrophy resulted in a $138.9 million increase in the Company’s revenue in 2018. The favorable impact of these items offset the disruption impact from the implementation of a new pharmacy system, which was deployed from November 2016 to November 2018. Additionally, 2018 net revenue reflects a
decrease of $61.3 million related to the implementation of ASC Topic 606, Revenue from Contracts with Customers, (See “Revenue Recognition” within Note 2, Summary of Significant Accounting Policies), which resulted in the previously reported provision for doubtful accounts being treated as an implicit price concession that reduces net revenue upon adoption in 2018.
Cost of Revenue
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Cost of revenue | $ | 1,517,576 |
| | $ | 1,382,047 |
| | $ | 135,529 |
| | 9.8 | % |
| Gross profit margin | 21.8 | % | | 24.4 | % | | | | |
The increase in cost of revenue was primarily attributable to the increase in revenue, combined with a number of higher cost pharmaceuticals being introduced into the Company’s therapy mix. This impact of the therapy mix shift on gross profit margin was partially offset by favorable formulary management and procurement contracts, as well as the introduction of generic alternatives. Over the course of the year, the Company focused on pharmacy efficiency through the utilization of regional compounding facilities and centers of excellence. In addition, the adoption of ASC 606 in 2018 contributed to the decline in gross margin.
Operating Expenses
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Selling, general and administrative expenses | $ | 345,884 |
| | $ | 338,456 |
| | $ | 7,428 |
| | 2.2 | % |
| Provision for doubtful accounts | — |
| | 45,602 |
| | (45,602 | ) | | (100.0 | )% |
| Depreciation and amortization expense | 38,062 |
| | 34,662 |
| | 3,400 |
| | 9.8 | % |
| Total operating expenses | $ | 383,946 |
| | $ | 418,720 |
| | $ | (34,774 | ) | | (8.3 | )% |
The $7.4 million increase in selling, general and administrative expenses was associated with the increase in sales volume, but as a percentage revenue declined to 17.8% in 2018 from 18.5% in 2017 as topline growth outpaced this incremental increase in operating costs and expenses.
Provision for doubtful accounts decreased as a result of the implementation of ASC Topic 606 (See “Revenue Recognition” within Note 2, Summary of Significant Accounting Policies) which resulted in the previously reported provision for doubtful accounts in 2017 being treated as an implicit price concession that reduces net revenue upon adoption in 2018.
The increase in depreciation and amortization expense was primarily due to the investments made into the Company’s pharmacy and information technology infrastructure in 2018.
Other Income (Expense)
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Interest expense, net | $ | (45,824 | ) | | $ | (44,307 | ) | | $ | (1,517 | ) | | 3.4 | % |
| Equity in earnings of joint ventures | 1,020 |
| | 2,186 |
| | (1,166 | ) | | (53.3 | )% |
| Other, net | (2,233 | ) | | 135 |
| | (2,368 | ) | | (1,754.1 | )% |
| Total other expense | $ | (47,037 | ) | | $ | (41,986 | ) | | $ | (5,051 | ) | | 12.0 | % |
The $1.5 million increase in interest expense was attributable to the increasing variable interest rates associated with the outstanding debt. To minimize the impact of these increasing rates, the Company repriced its first lien debt in June 2018
resulting in a lower spread over the underlying interest rate. Additionally, the interest rate cap contracts entered into in 2017 partially mitigated the increase in interest expense.
The increase in other, net was primarily due to costs incurred associated with the repricing of the Previous First Lien Term Loan.
Income Tax Expense (Benefit)
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Income tax benefit | $ | (2,653 | ) | | $ | (18,585 | ) | | $ | 15,932 |
| | (85.7 | )% |
Income tax benefit decreased $15.9 million, or 85.7%. In December 2017, the United States Government enacted the Tax Cuts and Jobs Act of 2017 (“TCJA”), which significantly changed U.S. tax law by, among other things, reducing the corporate tax rate from 35% to 21%, effective January 1, 2018. Included in the tax benefit for 2017 is a benefit of $17.0 million related to the tax rate reduction, resulting in an effective income rate of 126.4%. The Company’s 2018 income tax benefit returned to a normalized run-rate with an effective income tax rate of 30.3%.
Net (Loss) Income and Other Comprehensive (Loss) Income
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | Variance |
| | | | | | | | |
| | (in thousands, except for percentages) |
| Net (loss) income | $ | (6,115 | ) | | $ | 3,878 |
| | $ | (9,993 | ) | | (257.7 | )% |
| Other comprehensive income, net of tax: | | | | | | | |
| Changes in unrealized gains on cash flow hedges, net of income taxes | 774 |
| | 58 |
| | 716 |
| | 1,234.5 | % |
| Other comprehensive income | 774 |
| | 58 |
| | 716 |
| | 1,234.5 | % |
| Net comprehensive (loss) income | $ | (5,341 | ) | | $ | 3,936 |
| | $ | (9,277 | ) | | (235.7 | )% |
Net income decreased $10.0 million. The decrease was primarily driven by the run-rate normalization of the impact of the tax reform legislation, which had a favorable impact in 2017.
Changes in unrealized gains on cash flow hedges, net of income taxes, increased $0.7 million. The increase in the variable interest rates during 2018 resulted in a corresponding increase in the fair value of the interest rate cap.
Net comprehensive loss was $5.3 million for the twelve months ended December 31, 2018, compared to net comprehensive income of $3.9 million for the twelve months ended December 31, 2017, primarily related to the impact of the tax reform legislation previously discussed.
Liquidity and Capital Resources
For the years ended December 31, 2019 and 2018, the Company’s primary sources of liquidity were cash on hand of $67.1 million and $36.4 million, respectively, as well as borrowings under its credit facilities, described further below. During the years ended December 31, 2019 and 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, integration efforts, 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 year ended December 31, 2019, the Company entered into the Merger Agreement, and the Merger resulted in cash used in investing activities of $700.2 million and net cash provided by financing activities for net proceeds of indebtedness of $724.3 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
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.
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 2.50%. The Company had no outstanding borrowings under the ABL Facility at December 31, 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 December 31, 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 derived6.20% as of December 31, 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 1.00% or LIBOR, plus 8.75%. The Company elected to pay-in-kind the first quarterly interest payment, due in November 2019, which resulted in the Company capitalizing the interest payment to the principal balance on the interest payment date, increasing the outstanding principal balance to $412.3 million. The interest rate on the Second Lien Notes was 10.66% as of December 31, 2019.
Cash Flows
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table presents selected data from Medicare.Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2019 and 2018:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | Variance |
| | | | | | |
| | (in thousands) |
| Net cash provided by operating activities | $ | 39,467 |
| | $ | 24,428 |
| | $ | 15,039 |
|
| Net cash used in investing activities | (727,826 | ) | | (37,003 | ) | | (690,823 | ) |
| Net cash provided by (used in) financing activities | 719,024 |
| | (4,150 | ) | | 723,174 |
|
| Net increase (decrease) in cash and cash equivalents | 30,665 |
| | (16,725 | ) | | 47,390 |
|
| Cash and cash equivalents - beginning of period | 36,391 |
| | 53,116 |
| | (16,725 | ) |
| Cash and cash equivalents - end of period | $ | 67,056 |
| | $ | 36,391 |
| | $ | 30,665 |
|
Cash Flows from Operating Activities
For the year ended December 31, 2019, Option Care Health generated $39.5 million in cash flow from operating activities, a $15.0 million increase over the year ended December 31, 2018. The cash provided by operating activities for the year ended December 31, 2019 was driven by working capital efficiencies, primarily in accounts receivable, as the Company’s efforts to increase cash velocity and improve the aging of the accounts receivable balance resulted in stronger cash collections. The strong collections were partially offset by the change in accounts payable as the Company had a net pay down of acquired payables from the Merger.
Cash Flows from Investing Activities
For the year ended December 31, 2019, Option Care Health used $727.8 million in cash for investing activities as compared to $37.0 million for the year ended December 31, 2018. For the year ended December 31, 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 $28.3 million. Similarly, for the year ended December 31, 2018, $26.3 million was invested in our pharmacies and information technology and $10.7 million was deployed for the Baptist Health and Home IV, Inc. acquisitions.
Cash Flows from Financing Activities
Cash flows from financing increased $723.2 million from cash used in financing activities of $4.2 million for the year ended December 31, 2018 to cash provided by financing activities of $719.0 million for the year ended December 31, 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 $30.0 million for the year ended December 31, 2019. Cash used in financing activities for the year ended December 31, 2018 primarily related to repayments of the Previous Credit Facilities.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | Variance |
| | | | | | |
| | (in thousands) |
| Net cash provided by operating activities | $ | 24,428 |
| | $ | 37,871 |
| | $ | (13,443 | ) |
| Net cash used in investing activities | (37,003 | ) | | (24,472 | ) | | (12,531 | ) |
| Net cash used in financing activities | (4,150 | ) | | (5,150 | ) | | 1,000 |
|
| Net (decrease) increase in cash and cash equivalents | (16,725 | ) | | 8,249 |
| | (24,974 | ) |
| Cash and cash equivalents - beginning of period | 53,116 |
| | 44,867 |
| | 8,249 |
|
| Cash and cash equivalents - end of period | $ | 36,391 |
| | $ | 53,116 |
| | $ | (16,725 | ) |
Cash Flows from Operating Activities
For the year ended December 31, 2018, Option Care Health generated $24.4 million in positive cash flow from operating activities. This represented a $13.4 million decrease from the $37.9 million generated for the year ended December 31, 2017. The primary drivers of the decline in cash provided by operating activities included: (i) a reduction in accounts payable and accrued expenses and other current liabilities of $32.1 million related to timing of vendor payments in the ordinary course of business; and (ii) an increase in prepaid expenses and other current assets of $17.2 million primarily driven by the timing of vendor rebate payments. Partially offsetting these declines were the following improvements: (i) an improvement in accounts receivable of $13.0 million as the Company was recovering from the prior year disruption impact of the new pharmacy dispensing system deployment and billing center consolidation; (ii) an improvement in operating income of $11.0 million; (iii) a $6.7 million increase in accrued compensation and employee benefits related to the timing of payroll cycles; and (iv) a $6.4 million reduction in inventory.
Cash Flows from Investing Activities
For the year ended December 31, 2018, Option Care Health used $37.0 million in cash for investing activities. This was primarily attributable to capital investments in pharmacy and information technology infrastructure, as well as to fund the Baptist and Home IV acquisitions.
The increase of $12.5 million in net cash used in investing activities for the year ended December 31, 2018 compared to the year ended December 31, 2017 is due primarily to the Baptist and Home IV acquisitions.
Cash Flows from Financing Activities
For the year ended December 31, 2018, Option Care Health used $4.2 million in cash for financing activities. This was related to repayments of long-term debt.
Commitments and Contractual Obligations
The following table presents Option Care Health’s commitments and contractual obligations as of December 31, 2019, as well as its long-term obligations: |
| | | | | | | | | | | | | | | | | | | | |
| | | 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) | | $ | 1,337,256 |
| | $ | 9,250 |
| | $ | 18,500 |
| | $ | 18,500 |
| | $ | 1,291,006 |
|
Interest payments on long-term debt obligations (2) | | 741,228 |
| | 101,121 |
| | 200,498 |
| | 198,171 |
| | 241,438 |
|
| Operating lease obligations | | 94,257 |
| | 24,983 |
| | 33,160 |
| | 18,452 |
| | 17,662 |
|
| Total | | $ | 2,172,741 |
| | $ | 135,354 |
| | $ | 252,158 |
| | $ | 235,123 |
| | $ | 1,550,106 |
|
| |
| (1) | Includes aggregate principal payment on the 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 December 31, 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 noncurrent liabilities and deferred income taxes 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 December 31, 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 December 31, 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
Our Consolidated Financial Statements have been preparedThe Company prepares its consolidated financial statements in accordance with United States GAAP. In preparing our financial statements, we are requiredgenerally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate ourassumptions. The Company evaluates its estimates and judgments on an ongoing basis. We base our estimatesEstimates and judgments are based on historical experience and on various other factors that we believeare 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. OurThe Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. The following discussion highlights what we believe to be the critical accounting estimates and judgments made in the preparation of our Consolidated Financial Statements.
The following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies, within the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report.
Revenue Recognition
We generate revenue principally through the provision of home infusion services to provide clinical management services and the delivery of cost effective prescription medications. Refer to Revenue Recognition within Note 2, Summary of Significant Accounting Policies within the Notes to the Consolidated Financial Statements for full discussion of our revenue recognition policy.
Accounts Receivable
Net revenue is initially recordedreported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government 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 infusion-related therapies to patients, which frequently include 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 accounts receivable are reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions. The majority of accounts receivable are due from private insurance carriers and governmental health care programs, such as Medicare and Medicaid.
Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.
Included in accounts receivable are earned but unbilled gross receivables. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.
Prior to the adoption of ASC 606, estimates of variable consideration, consisting of (i) implicit price concessions resulting from differences between rates chargeduncollectible accounts receivable were recorded as either a pricing adjustment to revenue (“contractual adjustment”) or as an uncollectible account to provision for services performed and expected reimbursements, and (ii) retroactive revenue adjustments due to audits or reviews by our third-party payors. We regularly update our estimates of price concessionsdoubtful accounts. The Company recorded an allowance for doubtful accounts based on historical collection experience with similar payor classes, agedand a detailed assessment of the collectability of its accounts receivable. In estimating the allowance for doubtful accounts, the Company considered, among other factors, (i) the balance and aging composition of the accounts receivable, by payor class, terms(ii) the Company’s historical write-offs and recoveries, (iii) the creditworthiness of payment agreements, correspondence from payors related to revenue audits or reviews, our historical settlement activity of auditedits payers, and reviewed claims and current(iv) general economic conditions. Accounts receivable were written-off as bad debts after all reasonable collection efforts have been exhausted. Subsequent to the adoption of ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings. The Company recorded an allowance for contractual adjustment based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value. The detailed assessments included, among other factors, (i) current over/under payments which had not yet been applied to an account, (ii) historical contractual adjustments, and (iii) an estimate for contractual adjustments expected to be realized in the future. Contractual allowance estimates were adjusted to actual amounts as cash was received and claims were settled.
Goodwill
SignificantGoodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter.
Circumstances that could trigger an interim impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reporting units; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; and the results of testing for recoverability of a significant asset group within a reporting unit.
A qualitative impairment analysis was performed in the fourth quarter of 2019 to assess whether it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying value. The Company assessed relevant events and circumstances including macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and changes to our mixin the Company’s stock price. The Company determined that there was no goodwill impairment in 2019.
A quantitative impairment analysis was performed in the fourth quarter of payors, terms of payment agreements, changes to government programs, new legislation or current economic conditions could impact our estimates of variable consideration in future periods.
2018 and 2017, Warrants
Theand the Company estimated the fair value of its reporting unit using an income approach. The income approach requires the 2017 Warrants usingCompany to estimate a valuation model that considered attributes of the Company’s common stock, including the number of outstanding shares, share pricefactors for its reporting unit, including projected future operating results, economic projections, anticipated future cash flows, and volatility.discount rates. The model further considers the exercise periodfair value determined using he income approach was then compared to marketplace fair value data from within a comparable industry grouping for reasonableness. The Company determined that there was no goodwill impairment in 2018 or 2017.
The determination of the warrantsfair value and the characteristicsallocation of other convertible instruments in estimatingthat value to individual assets and liabilities within the number of shares that will be issued uponreporting unit requires the exercise of the warrants. The model considers keyCompany to make significant estimates and assumptions. These estimates and assumptions that a market participant would use in pricing the warrants when acting in their best economic interest.
Changesprimarily include, but are not limited to, the estimated fair valueselection of the warrants are primarily driven by changes to the Company’s stock price. A 1.0% changeappropriate peer group companies; control premiums appropriate for acquisitions in the Company’s stock price would changeindustries in which the estimateCompany competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures. Actual financial results could differ from those estimates due to inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the warrants by approximately $0.3 million. Refer to 2017 Warrants presented within Note 8 - Preferred Stock and Stockholders’ Deficit inreporting unit, the accompanying Notes to Consolidated Financial Statements for further discussionamount of the 2017 Warrants.goodwill impairment charge, or both.
Off-Balance Sheet Arrangements
AsThe Company accounts for business acquisitions in accordance with ASC Topic 805 (“ASC 805”), Business Combinations, with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of December 31, 2018, we didthe net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not have any off-balance sheet arrangements that have, or are reasonably likelylimited to, have, a current orthe future effect on our financial condition, changes in financial condition, revenue or expenses, resultscash flows an asset is expected to generate and the weighted-average cost of operations, liquidity, capital expenditures or capital resources that are material.capital.
Results of Operations
Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance and relevant trends going forward, and should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, in Part II, Item 8 of this Annual Report on Form 10-K.
Net Revenue
The following table summarizes our net revenue, gross profit and gross margin for the years ended December 31, 2018, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | 2016 | | 2018 v. 2017 | | 2017 v. 2016 |
| Net revenue | $ | 708,903 |
| | $ | 817,190 |
| | $ | 935,589 |
| | $ | (108,287 | ) | | (13.3 | )% | | $ | (118,399 | ) | | (12.7 | )% |
| Gross profit, excluding depreciation expense | $ | 243,038 |
| | $ | 269,242 |
| | $ | 262,082 |
| | $ | (26,204 | ) | | (9.7 | )% | | $ | 7,160 |
| | 2.7 | % |
| Gross margin | 34.3 | % | | 32.9 | % | | 28.0 | % | | | | | | | | |
Net Revenue. Net revenue for the year ended December 31, 2018 decreased primarily due to the impact of the UnitedHealthcare contract transition effective September 30, 2017 and lower patient volumes in certain product lines, including the impact of temporary closures of Company branches due to inclement winter weather during the first quarter of 2018. Additionally, implementation of ASC 606 during 2018 resulted in the recognition of amounts previously recorded as bad debt expense as a reduction to revenue of $29.9 million. Net revenue for the year ended December 31, 2017 decreased primarily due to the Company’s shift in strategy to focus on growing its core revenue mix, including the impact of the UnitedHealthcare contract transition effective September 30, 2017, the impact of the Cures Act, and the impact of the Company’s exit from the Hepatitis C market in 2016, partially offset by additional revenues resulting from the acquisition of Home Solutions.
Gross Profit. Gross profit consists of net revenue less cost of revenue (excluding depreciation expense). The cost of revenue primarily includes the costs of prescription medications, medical supplies, nursing services, shipping and other direct and indirect costs. The decrease in gross profit during 2018 as compared to 2017 was primarily driven by the decrease in revenue of $29.9 million associated with the impact of implementation of ASC Topic 606 (see Revenue Recognition within Note 2 - Summary of Significant Accounting Policies), lower revenues from the impact of the UnitedHealthcare contract transition effective September 30, 2017, and lower patient volumes in certain product lines, including the impact of temporary closures of Company branches due to inclement winter weather during the first quarter of 2018, partially offset by higher gross profit margins due to higher core mix and lower costs of prescription medications. The increase in gross profit during 2017 as compared to 2016 was primarily driven by the Home Solutions acquisition, an improved mix of higher margin core therapy revenues versus lower margin non-core therapy revenues, and a decreased cost of prescription medicines and medical supplies as a result of improved supply chain
management, partially offset by the Company’s shift in strategy to focus on growing its core revenue mix, including the UnitedHealthcare contract transition effective September 30, 2017.
Operating Expenses
The following tables summarize our operating expenses, and percentages of net revenue, for the years ended December 31, 2018, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | As a Percentage of Net Revenue |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Service location operating expenses | $ | 154,813 |
| | $ | 163,273 |
| | $ | 169,781 |
| | 21.8 | % | | 20.0 | % | | 18.1 | % |
| General and administrative expenses | 47,264 |
| | 39,625 |
| | 38,798 |
| | 6.7 | % | | 4.8 | % | | 4.1 | % |
| Depreciation and amortization expense | 23,601 |
| | 27,725 |
| | 22,025 |
| | 3.3 | % | | 3.4 | % | | 2.4 | % |
| Restructuring, acquisition, integration, and other expenses | 6,457 |
| | 12,662 |
| | 15,859 |
| | 0.9 | % | | 1.5 | % | | 1.7 | % |
| Bad debt expense | — |
| | 23,697 |
| | 26,608 |
| | — | % | | 2.9 | % | | 2.8 | % |
| Total operating expenses | $ | 232,135 |
| | $ | 266,982 |
| | $ | 273,071 |
| | 32.7 | % | | 32.6 | % | | 29.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | 2016 | | 2018 v. 2017 | | 2017 v. 2016 |
| Service location operating expenses | $ | 154,813 |
| | $ | 163,273 |
| | $ | 169,781 |
| | $ | (8,460 | ) | | (5.2 | )% | | $ | (6,508 | ) | | (3.8 | )% |
| General and administrative expenses | 47,264 |
| | 39,625 |
| | 38,798 |
| | 7,639 |
| | 19.3 | % | | 827 |
| | 2.1 | % |
| Depreciation and amortization expense | 23,601 |
| | 27,725 |
| | 22,025 |
| | (4,124 | ) | | (14.9 | )% | | 5,700 |
| | 25.9 | % |
| Restructuring, acquisition, integration, and other expenses | 6,457 |
| | 12,662 |
| | 15,859 |
| | (6,205 | ) | | (49.0 | )% | | (3,197 | ) | | (20.2 | )% |
| Bad debt expense | — |
| | 23,697 |
| | 26,608 |
| | (23,697 | ) | | (100.0 | )% | | (2,911 | ) | | (10.9 | )% |
| Total operating expenses | $ | 232,135 |
| | $ | 266,982 |
| | $ | 273,071 |
| | $ | (34,847 | ) | | (13.1 | )% | | $ | (6,089 | ) | | (2.2 | )% |
Service Location Operating Expenses. Service location operating expenses consist primarily of wages and benefits, travel expenses, and professional service and field office expenses for our healthcare professionals engaged in providing infusion services to our patients. Service location operating expenses for the year ended December 31, 2018 decreased due to lower wage, benefit, and other employee costs as a result of the UnitedHealthcare contract transition and integration, restructuring, and other workforce optimization efforts. Service location operating expenses for the year ended December 31, 2017 decreased primarily as the result of restructuring and other workforce optimization efforts.
General and Administrative Expenses. General and administrative expenses consist of wages and benefits for corporate overhead personnel and certain corporate level professional service fees, including legal, accounting, investor relations and IT fees. General and administrative expenses for the year ended December 31, 2018 increased primarily from increases in legal, accounting and other professional fees of $2.3 million, stock-based compensation expense of $1.9 million, travel related costs of $1.8 million, health and general corporate insurance costs of $1.5 million, marketing of $0.6 million, IT expenses of $0.4 million and facility rent of $0.3 million, offset by decreased payroll and benefits of $1.2 million. General and administrative expenses for the year ended December 31, 2017 increased primarily due to increased wages and benefits expense, primarily incentive based compensation expense.
Depreciation and Amortization Expense. Depreciation and amortization expense includes the depreciation of property and equipment and the amortization of intangible assets such as customer relationships, managed care contracts, licenses, trade names, and non-compete agreements with estimable lives. The decrease in depreciation expense in 2018 is attributable to the timing of placing assets in service and assets becoming fully depreciated. The decrease in amortization expense in 2018 as compared to 2017 is attributable to full amortization of certain intangible assets reducing expense by $1.1 million. The increase in amortization expense in 2017 as compared to 2016 is attributable to a $5.6 million increase in intangible asset amortization associated with the acquisition of Home Solutions in the third quarter of 2016.
Restructuring, Acquisition, Integration, and Other Expenses. Restructuring, acquisition, integration, and other expenses include non-recurring costs associated with restructuring, acquisition and integration initiatives such as employee severance costs, certain legal and professional fees, training costs, redundant wage costs, impacts recorded from the change in contingent consideration obligations, and other costs related to contract terminations and closed branches/offices. Restructuring, acquisition, integration, and other expenses, decreased during the year ended December 31, 2018 primarily due to the completion of Home Solutions integration activities in 2017. Restructuring, acquisition, integration, and other expenses decreased during the year ended December 31, 2017 primarily due to lower expenses related to the Home Solutions acquisition and integration, partially offset by restructuring and other workforce optimization efforts during 2017.
Bad Debt Expense. Bad debt expense decreased during the year ended December 31, 2018 as compared to 2017 as a result of the implementation of ASC Topic 606 (see Revenue Recognition within Note 2 - Summary of Significant Accounting Policies) which resulted in the recognition of all of the Company’s bad debt expense as a reduction to revenue for the year ended December 31, 2018. Bad debt expense for the year ended December 31, 2017 decreased primarily due to improved collections of accounts receivable.
The following table summarizes our other expenses and income and income taxes for the years ended December 31, 2018, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2018 | | 2017 | | 2016 | | 2018 v. 2017 | | 2017 v. 2016 |
| Interest expense, net | $ | 57,433 |
| | $ | 52,072 |
| | $ | 37,572 |
| | $ | 5,361 |
| | 10.3 | % | | $ | 14,500 |
| | 38.6 | % |
| Change in fair value of equity linked liabilities | 4,836 |
| | 3,587 |
| | (10,450 | ) | | 1,249 |
| | 34.8 | % | | 14,037 |
| | (134.3 | )% |
| Loss (gain) on dispositions | (342 | ) | | 581 |
| | (3,954 | ) | | (923 | ) | | (158.9 | )% | | 4,535 |
| | (114.7 | )% |
| Loss on extinguishment of debt | — |
| | 13,453 |
| | — |
| | (13,453 | ) | | (100.0 | )% | | 13,453 |
| | — | % |
| Total other expenses | $ | 61,927 |
| | $ | 69,693 |
| | $ | 23,168 |
| | $ | (7,766 | ) | | (11.1 | )% | | $ | 46,525 |
| | 200.8 | % |
| | | | | | | | | | | | | | |
| Income taxes: | | | | | | | | | | | | | |
| Income tax benefit (expense) | $ | (568 | ) | | $ | 4,130 |
| | $ | (2,015 | ) | | $ | (4,698 | ) | | (113.8 | )% | | $ | 6,145 |
| | (305.0 | )% |
Interest Expense, Net. Interest expense, net consists of interest expense and amortization of deferred financing costs offset by an immaterial amount of interest income. During the years ended December 31, 2018, 2017 and 2016, we recorded $1.3 million, $1.3 million and $3.6 million of amortization of deferred financing costs, respectively. The increase in interest expense in 2018 as compared to 2017 is primarily the result of increasing variable interest rates on the First and Second Lien Note Facilities and an increase to the principal balance of the Second Lien Note Facility of $17.8 million as a result of an additional $10.0 million borrowing during June 2018 and $7.8 million of paid-in-kind interest being capitalized as principal during the second half of 2018. The increase in interest expense in 2017 as compared to 2016 is the result of the changes in our debt structure (see Note 7 - Debt), which also resulted in a higher effective interest rate specific to the amortization of the discount associated with the 2017 Warrants.
Change in Fair Value of Equity Linked Liabilities. The increases in the change in fair value of equity linked liabilities during the years ended December 31, 2018 and 2017, represents the mark-to-market adjustment to the estimated fair value of the 2017 Warrants. The increases were primarily driven by an increase in the Company’s stock price. During the year ended December 31, 2016 there was a gain on the reversal of a liability recorded in connection with contingent equity securities, in the form of restricted shares of Company common stock, issuable in connection with the Home Solutions Transaction.
Loss on Extinguishment of Debt. The loss on extinguishment of debt during the year ended December 31, 2017 is attributable to the Company’s entry into the Notes Facilities and the associated extinguishment of the Senior Credit Facilities and the Prior Credit Agreements (see Note 7 - Debt).
Income Tax Benefit (Expense). Our income tax provision for the year ended December 31, 2018 reflects expense of $0.6 million, compared to a benefit of $4.1 million during the year ended December 31, 2017. The 2018 income tax expense of $0.6 million includes a federal tax benefit of $10.7 million and a state tax benefit of $1.5 million, a $10.2 million adjustment related to deferred tax asset valuation allowances and other adjustments of $2.6 million. Our income tax provision for the year ended December 31, 2017 reflects a $4.1 million benefit, compared to a provision of $2.0 million during the year ended December 31, 2016. The primary driver of the change was the reversal of the valuation allowance, which created an income tax benefit in 2017. The reversal of the valuation allowance was the result of new federal NOL carryforward rules enacted under TCJA, which prescribe an indefinite federal NOL carryforward period for NOLs generated in 2018 and beyond (subject to a 20% reduction). The 2017
income tax benefit includes a federal tax benefit of $23.7 million and a state tax benefit of $4.6 million, a $41.6 million adjustment related to deferred tax asset valuation allowances and other adjustments of $2.0 million, offset by a $67.7 million adjustment associated with the impact of the change in the corporate tax rate brought about by the enactment of the TCJA. The 2016 income tax expense includes a federal tax benefit of $11.9 million and a state tax benefit of $1.4 million at statutory tax rates, offset by a $14.7 million adjustment related to deferred tax asset valuation allowances and other adjustments of $0.7 million.
Non-GAAP Measures
The following table reconciles GAAP loss from continuing operations, net of income taxes to Consolidated Adjusted EBITDA. Consolidated Adjusted EBITDA is net loss from continuing operations, net of income taxes, adjusted for interest expense, net, loss on extinguishment of debt, gain (loss) on dispositions, income tax benefit (expense), depreciation and amortization expense, stock-based compensation expense, and change in fair value of equity linked liabilities. Consolidated Adjusted EBITDA also excludes restructuring, acquisition, integration, and other expenses, including associated non-recurring costs such as employee severance costs, certain legal and professional fees, training costs, redundant wage costs, impacts recorded from the change in contingent consideration obligations, and other costs related to contract terminations and closed branches/offices.
Consolidated Adjusted EBITDA is a measure of earnings that management monitors as an important indicator of financial performance, particularly future earnings potential and recurring cash flow. Consolidated Adjusted EBITDA is also a primary objective of the management bonus plan. Inclusion of Consolidated Adjusted EBITDA is intended to provide investors insight into the manner in which management views the performance of the Company.
Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Our calculation of Consolidated Adjusted EBITDA, as presented, may differ from similarly titled measures reported by other companies. We encourage investors to review these reconciliations and we qualify our use of non-GAAP financial measures with cautionary statements as to their limitations.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in thousands) |
| Loss from continuing operations | $ | (51,592 | ) | | $ | (63,303 | ) | | $ | (36,172 | ) |
| | | | | | |
| Interest expense, net | (57,433 | ) | | (52,072 | ) | | (37,572 | ) |
| Loss on extinguishment of debt | — |
| | (13,453 | ) | | — |
|
| Gain (loss) on dispositions | 342 |
| | (581 | ) | | 3,954 |
|
| Income tax benefit (expense) | (568 | ) | | 4,130 |
| | (2,015 | ) |
| Depreciation and amortization expense | (23,601 | ) | | (27,725 | ) | | (22,025 | ) |
| Stock-based compensation | (4,175 | ) | | (2,360 | ) | | (1,801 | ) |
| Change in fair value of equity linked liabilities | (4,836 | ) | | (3,587 | ) | | 10,450 |
|
| Restructuring, acquisition, integration, and other expenses | (6,457 | ) | | (12,662 | ) | | (15,859 | ) |
| | | | | | |
| Consolidated Adjusted EBITDA | $ | 45,136 |
| | $ | 45,007 |
| | $ | 28,696 |
|
Consolidated Adjusted EBITDA increased during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increased gross profit margins and lower operating expenses resulting from higher core mix and lower costs of prescription medications, and reduced payroll expenses. Consolidated Adjusted EBITDA increased during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to increased gross profit resulting from improved gross profit margins driven by increased core revenue mix and supply chain management, as well as restructuring and integration efforts which optimized operations.
Liquidity and Capital Resources
At December 31, 2018, we had net working capital of $67.4 million, including $14.5 million of cash on hand, compared to $81.5 million of net working capital at December 31, 2017. The working capital decrease of $14.1 million was the result of a decrease in cash and cash equivalents of $24.9 million due to lower operating cash flow driven by an increase in accounts receivable due to a temporal reduction of collection rates. At December 31, 2018, we had outstanding letters of credit totaling $4.3 million, collateralized by restricted cash of $4.3 million. In June 2018, we exercised our option to draw upon the Second Lien Note Facility in the amount of $10.0 million to supplement our working capital needs.
We regularly evaluate market conditions and financing options to improve our current liquidity profile and enhance our financial flexibility. These options may include opportunities to raise additional funds through the issuance of various forms of equity and/or debt securities or other instruments, or the sale of assets or refinancing all or a portion of our indebtedness. However, there is no assurance that, if necessary, we would be able to raise capital to provide required liquidity.
Additionally, we will review a range of strategic alternatives, which could include, among other things, transitioning chronic therapies to alliance partners, a potential sale or merger of our company, or continuing to pursue our operational and strategic plan. Additionally, we may pursue joint venture arrangements, additional business acquisitions and other transactions designed to expand our business.
If we cannot successfully execute our strategic plans, including accelerating cash collections, this could have an adverse effect on our liquidity and results of operations and we will likely require additional or alternative sources of liquidity, including additional borrowings.
As of the filing of this Annual Report, we expect that our cash on hand and cash from operations will be sufficient to fund our anticipated working capital, scheduled interest repayments and other cash needs for at least the next 12 months. Principal payments on the Notes Facilities commence on September 30, 2019.
Operating Activities
Net cash used in operating activities from continuing operations was $20.0 million for the year ended December 31, 2018, compared to net cash provided by operating activities from continuing operations of $5.6 million for the year ended December 31, 2017. The decrease primarily relates to lower cash collections of accounts receivable and a net decrease in accounts payable and accrued expenses. The decrease was partially offset by strategic inventory management initiatives and a reduction of prepaid expenses.
Net cash provided by operating activities from continuing operations was $5.6 million for the year ended December 31, 2017, a $41.1 million improvement, compared to net cash used in operating activities from continuing operations of $35.5 million for the year ended December 31, 2016. Cash interest payments increased $10.7 million to $45.4 million in 2017, compared to $34.7 million during 2016. These higher cash interest payments during 2017 were more than offset by the favorable impacts of increased Consolidated Adjusted EBITDA, lower restructuring, acquisition, integration, and other expenses and working capital management.
Investing Activities
Net cash used in investing activities from continuing operations during the year ended December 31, 2018 was $13.5 million compared to $8.7 million of cash used during the same period in 2017. The increase in cash used in investing was primarily due to increased renovation, expansion of certain company branch locations, and the opening of new locations during the year.
Net cash used in investing activities from continuing operations during the year ended December 31, 2017 was $8.7 million compared to $73.2 million of cash used during the same period in 2016. Fluctuations in investing cash flows during the year ended December 31, 2017, as compared to the same period in 2016, were primarily attributable to a year over year decrease in cash consideration paid for acquisitions of $67.5 million associated with the prior year acquisition of Home Solutions, Inc. and a year over year decrease in purchases of property and equipment of $1.2 million, offset by a year over year decrease of $4.2 million associated with proceeds received in divestitures related to the strategic divestiture of the Hepatitis C business during 2016.
Financing Activities
Net cash provided by financing activities was $8.1 million and $44.3 million during the years ended December 31, 2018 and 2017, respectively. The cash provided in 2018 includes the net proceeds of approximately $10.0 million from draws on the Second Lien Note Facility, offset by repayments of capital leases of $1.9 million.
Net cash provided by financing activities of $44.3 million during the year ended December 31, 2017 includes the net proceeds of approximately $20.8 million from the First Quarter 2017 Private Placement and Second Quarter 2017 Private Placement, $23.1 million from the Priming Credit Agreement, and $294.4 million from the Notes Facilities offset by repayments of $55.9 million on our Revolving Credit Facility and by $236.8 million of principal payments made on the Term Loan Facility and the Priming Credit Agreement.
Net cash provided by financing activities of $109.7 million during the year ended December 31, 2016 results from $83.3 million from the 2016 Equity Offering and by advances of $104.3 million offset by repayments of $64.0 million on our Revolving Credit Facility and $12.6 million of principal payments made on the Term Loan Facility.
Debt Facilities
For a discussion of our long-term debt, see Note 7 - Debt, of the accompanying Notes to Consolidated Financial Statements.
Contractual Obligations
The following table sets forth our contractual obligations affecting future cash flows as of December 31, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due in Year Ending December 31, |
| Contractual Obligations | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2022 | | 2023 and Beyond |
Long-term debt (1) | $ | 547,218 |
| | $ | 2,500 |
| | $ | 344,718 |
| | $ | 200,000 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest on long-term debt (2) | 74,975 |
| | 36,721 |
| | 29,379 |
| | 8,875 |
| | | | | | |
| Operating lease obligations | 37,916 |
| | 8,934 |
| | 7,143 |
| | 6,252 |
| | 4,797 |
| | 3,320 |
| | 7,470 |
|
| Capital lease obligations | 990 |
| | 679 |
| | 311 |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 661,099 |
| | $ | 48,834 |
| | $ | 381,551 |
| | $ | 215,127 |
| | $ | 4,797 |
| | $ | 3,320 |
| | $ | 7,470 |
|
| |
(1) | Long-term debt includes interest incurred on the Second Lien Note Facility assuming continued capitalization to principal at the variable interest rate as of December 31, 2018. Capitalized interest on the Second Lien Note Facility is due at maturity. |
| |
(2) | Interest on long-term debt includes estimated cash interest to be paid on the First Lien Note Facility and the 2021 Notes. Interest on the 2021 Notes was estimated using the stated interest rate on the borrowing. Interest on the variable rate First Lien Note Facility was estimated using the December 31, 2018 interest rate. |
| |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed toThe Company’s primary market risk from changes inexposure is changing LIBOR‑based interest rates relatedrates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our outstanding debt.control. Our First Lien Term Loan bears interest at the Eurocurrency Rate, as defined, plus 4.50%, based on our leverage ratio as of December 31, 2019. Our Second Lien Notes bear interest at the greater of 1.00% or LIBOR, plus 8.75%. Our ABL Facility bears interest at the Eurocurrency Rate, as defined, plus 2.25%. At December 31, 2018,2019, we had total outstanding debt with a face value of $517.8$925.0 million under our First Lien Term Loan. As of which $317.8December 31, 2019, we had $412.3 million is relatedSecond Lien Notes issued and outstanding. We had no outstanding borrowings under the ABL Facility as of December 31, 2019.
To minimize interest rate risk, the Company entered into two interest rate swap contracts to hedge against fluctuations in LIBOR rates on the First Lien NoteTerm Loan and Second Lien Note,Term Loan. 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 indexed to one-month LIBOR through August 2021. The second interest rate swap for $400.0 million notional was effective in November 2019 and is subject to floatingdesignated as a cash flow hedge against the underlying interest rates. The First Lien Note bears interest at a floating rate or rates equal to, at the option of the Company, (i) the base rate (defined as the highest of the Federal Funds Rate plus 0.5% per annum, the Prime Rate as published by The Wall Street Journal and the one-month London Interbank Offered Rate (“LIBOR”) (subject to a 1.0% floor) plus 1.0%), or (ii) the one-month LIBOR rate (subject to a 1.0% floor), plus a margin of 6.0% if the base rate is selected or 7.0% if the LIBOR Option is selected. The Second Lien Note bears interest at a floating rate or rates equal to, at the option of the Company, (i) one-month LIBOR (subject to a 1.25% floor) plus 9.25% per annum in cash, (ii) one-month LIBOR (subject to a 1.25% floor) plus 11.25% per annum, which amount will be capitalized on each interest payment date, or (iii) one-month LIBOR (subject to a 1.25% floor) plus 10.25% per annum, of which one-half LIBOR plus 4.625% per annum will be payable in cash and one-half LIBOR plus 5.625% per annum will be capitalized on each interest payment date, provided that, in each case, if any permitted refinancing indebtedness with which the 2021 Notes are refinanced requires or permits the payment of cash interest, all of the interest on the Second Lien Notes shall be paidinterest payment indexed to three-month LIBOR through November 2020.
Based on the amounts outstanding coupled with interest rate swaps, a 100-basis point increase or decrease in cash. As of December 31, 2018, the Eurodollar rate is approximately 2.5%. An increase in the current market rate of 1.00%interest rates over a twelve-month period would result in an increase in annuala change to interest expense of approximately $3.4$0.9 million. We do not anticipate a significant impact from a change in market interest rates through the period of the interest rate swaps, discussed further in Note 13, Derivative Instruments, of the consolidated financial statements and the notes related thereto included in Item 8 of this report.
Foreign Exchange Risk
On February 11, 2014, we issued $200.0 millionAll sales are in aggregate principalthe U.S. and are U.S.-dollar denominated. Option Care Health makes a limited amount of purchases from foreign sources, which subjects Option Care Health to foreign currency exchange risk. As a result of the 2021 Notes (as definedlimited amount of transactions in Note 7 - Debt). The interest rate on the 2021 Notes of 8.875% is fixed anda foreign currency, Option Care Health does not subjectexpect its future cash flows or operating results to marketbe affected to any significant degree by foreign currency exchange risk.
We regularly assess the significance of interest rate market risk as part of our treasury operations and as circumstances change and enter into instruments to hedge variable rate interest expense as appropriate in accordance with the termsInflation Rate Risk
Based on its analysis of the Debt Facilities. We doperiods presented, the Company believes that inflation has not usehad a material effect on its operating results. There can be no assurance that future inflation will not have an adverse impact on the Company’s operating results and financial instruments for trading or other speculative purposes and are not a party to any derivative financial instruments at this time.condition.
The fair value of our long-term debt under our Note Facilities subject to variable interest rates and the 2021 Notes is disclosed in Note 7 - Debt, of the accompanying Notes to Consolidated Financial Statements.
| |
Item 8. | Financial Statements and Supplementary Data |
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
BioScrip,Option Care Health, Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of BioScrip,Option Care Health, Inc. and subsidiaries (the Company) as of December 31, 20182019 and 2017,2018, the related consolidated statements of operations,comprehensive income (loss), stockholders’ deficit,equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2018,2019, and the related notes and financial statement schedule (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the years in the three‑three year period ended December 31, 2018,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 20195, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition inas of January 1, 2018 and leases as of January 1, 2019 due to the adoptionadoptions of Accounting Standards Codification Topic 606, RevenueASU No. 2014-09, “Revenue from Contracts with CustomersCustomers” and ASU No. 2016-02, “Leases”.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.2015.
Denver, ColoradoChicago, Illinois
March 15, 20195, 2020
BIOSCRIP,OPTION CARE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS) |
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 14,539 |
| | $ | 39,457 |
|
| Restricted cash | 4,321 |
| | 4,950 |
|
| Accounts receivable, net | 114,864 |
| | 85,522 |
|
| Inventory | 26,689 |
| | 38,044 |
|
| Prepaid expenses and other current assets | 14,292 |
| | 18,620 |
|
| Total current assets | 174,705 |
| | 186,593 |
|
| Property and equipment, net | 28,788 |
| | 26,973 |
|
| Goodwill | 367,198 |
| | 367,198 |
|
| Deferred taxes | 1,032 |
| | 1,098 |
|
| Intangible assets, net | 10,470 |
| | 19,114 |
|
| Other non-current assets | 1,745 |
| | 2,116 |
|
| Total assets | $ | 583,938 |
| | $ | 603,092 |
|
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | |
|
| Current liabilities | |
| | |
|
| Current portion of long-term debt | $ | 3,179 |
| | $ | 1,722 |
|
| Accounts payable | 67,025 |
| | 65,963 |
|
| Amounts due to plan sponsors | 956 |
| | 4,621 |
|
| Accrued interest | 6,706 |
| | 6,706 |
|
| Accrued expenses and other current liabilities | 29,450 |
| | 26,118 |
|
| Total current liabilities | 107,316 |
| | 105,130 |
|
| Long-term debt, net of current portion | 501,495 |
| | 478,866 |
|
| Other non-current liabilities | 25,842 |
| | 21,769 |
|
| Total liabilities | 634,653 |
| | 605,765 |
|
| Series A convertible preferred stock, $.0001 par value; 825,000 shares authorized; 21,630 and 21,645 shares issued and outstanding as of December 31, 2018 and 2017, respectively; and $3,264 and $2,916 liquidation preference as of December 31, 2018 and 2017, respectively | 3,231 |
| | 2,827 |
|
| Series C convertible preferred stock, $.0001 par value; 625,000 shares authorized; 614,177 shares issued and outstanding; and $94,706 and $84,555 liquidation preference as of December 31, 2018 and 2017, respectively | 90,058 |
| | 79,252 |
|
| Stockholders’ deficit | |
| | |
|
| Preferred stock, $.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of December 31, 2018 and 2017, respectively | — |
| | — |
|
| Common stock, $.0001 par value; 250,000,000 shares authorized; 128,391,456 shares issued and 128,077,651 shares outstanding at December 31, 2018, and 127,639,118 shares issued and 127,634,012 shares outstanding as of December 31, 2017, respectively | 13 |
| | 13 |
|
| Treasury stock, 313,805 and 5,106 shares outstanding, at cost, as of December 31, 2018 and 2017, respectively | (950 | ) | | (16 | ) |
| Additional paid-in capital | 618,137 |
| | 624,762 |
|
| Accumulated deficit | (761,204 | ) | | (709,511 | ) |
| Total stockholders’ deficit | (144,004 | ) | | (84,752 | ) |
| Total liabilities and stockholders’ deficit | $ | 583,938 |
| | $ | 603,092 |
|
See accompanying Notes to the Consolidated Financial Statements. |
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| ASSETS | | | |
| CURRENT ASSETS: | | | |
| Cash and cash equivalents | $ | 67,056 |
| | $ | 36,391 |
|
| Accounts receivable, net | 324,416 |
| | 310,169 |
|
| Inventories | 115,876 |
| | 83,340 |
|
| Prepaid expenses and other current assets | 51,306 |
| | 37,525 |
|
| Total current assets | 558,654 |
| | 467,425 |
|
| | | | |
| NONCURRENT ASSETS: | | | |
| Property and equipment, net | 133,198 |
| | 93,142 |
|
| Operating lease right-of-use asset | 63,502 |
| | — |
|
| Intangible assets, net | 385,910 |
| | 219,713 |
|
| Goodwill | 1,425,542 |
| | 632,469 |
|
| Other noncurrent assets | 22,741 |
| | 15,462 |
|
| Total noncurrent assets | 2,030,893 |
| | 960,786 |
|
| TOTAL ASSETS | $ | 2,589,547 |
| | $ | 1,428,211 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
| CURRENT LIABILITIES: | |
| | |
|
| Accounts payable | $ | 221,060 |
| | $ | 187,886 |
|
| Accrued compensation and employee benefits | 45,765 |
| | 24,895 |
|
| Accrued expenses and other current liabilities | 33,538 |
| | 23,066 |
|
| Current portion of operating lease liability | 20,391 |
| | — |
|
| Current portion of long-term debt | 9,250 |
| | 4,150 |
|
| Total current liabilities | 330,004 |
| | 239,997 |
|
| | | | |
| NONCURRENT LIABILITIES: | | | |
| Long-term debt, net of discount, deferred financing costs and current portion | 1,277,246 |
| | 535,225 |
|
| Operating lease liability, net of current portion | 58,242 |
| | — |
|
| Deferred income taxes | 2,143 |
| | 33,481 |
|
| Other noncurrent liabilities | 15,085 |
| | 16,683 |
|
| Total noncurrent liabilities | 1,352,716 |
| | 585,389 |
|
| Total liabilities | 1,682,720 |
| | 825,386 |
|
| | | | |
| STOCKHOLDERS’ EQUITY: | | | |
| Preferred stock; $0.0001 par value; 12,500,000 shares authorized, no shares outstanding as of December 31, 2019. No preferred stock authorized or outstanding as of December 31, 2018. | — |
| | — |
|
| Common stock; $0.0001 par value: 250,000,000 shares authorized, 176,975,628 shares issued and 176,591,907 shares outstanding as of December 31, 2019; 142,613,749 shares issued and outstanding as of December 31, 2018. | 18 |
| | 14 |
|
| Treasury stock; 383,722 shares outstanding, at cost, as of December 31, 2019; no shares outstanding as of December 31, 2018 | (2,403 | ) | | — |
|
| Paid-in capital | 1,008,362 |
| | 619,621 |
|
| Management notes receivable | — |
| | (1,619 | ) |
| Accumulated deficit | (91,955 | ) | | (16,035 | ) |
| Accumulated other comprehensive (loss) income | (7,195 | ) | | 844 |
|
| Total stockholders’ equity | 906,827 |
| | 602,825 |
|
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,589,547 |
| | $ | 1,428,211 |
|
BIOSCRIP,The notes to consolidated financial statements are an integral part of these statements.
OPTION CARE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net revenue | $ | 708,903 |
| | $ | 817,190 |
| | $ | 935,589 |
|
| Cost of revenue (excluding depreciation expense) | 465,865 |
| | 547,948 |
| | 673,507 |
|
| Gross profit | 243,038 |
| | 269,242 |
| | 262,082 |
|
| | | | | | |
| Operating expenses: | | | | | |
| Service location operating expenses | 154,813 |
| | 163,273 |
| | 169,781 |
|
| General and administrative expenses | 47,264 |
| | 39,625 |
| | 38,798 |
|
| Depreciation and amortization expense | 23,601 |
| | 27,725 |
| | 22,025 |
|
| Restructuring, acquisition, integration, and other expenses | 6,457 |
| | 12,662 |
| | 15,859 |
|
| Bad debt expense | — |
| | 23,697 |
| | 26,608 |
|
| Total operating expenses | 232,135 |
| | 266,982 |
| | 273,071 |
|
| Operating income (loss) | 10,903 |
| | 2,260 |
| | (10,989 | ) |
| Other expense: | | | | | |
| Interest expense, net | 57,433 |
| | 52,072 |
| | 37,572 |
|
| Change in fair value of equity linked liabilities | 4,836 |
| | 3,587 |
| | (10,450 | ) |
| Loss (gain) on dispositions | (342 | ) | | 581 |
| | (3,954 | ) |
| Loss on extinguishment of debt | — |
| | 13,453 |
| | — |
|
| Total other expense | 61,927 |
| | 69,693 |
| | 23,168 |
|
| Loss from continuing operations, before income taxes | (51,024 | ) | | (67,433 | ) | | (34,157 | ) |
| Income tax benefit (expense) | (568 | ) | | 4,130 |
| | (2,015 | ) |
| Loss from continuing operations | (51,592 | ) | | (63,303 | ) | | (36,172 | ) |
| Loss from discontinued operations, net of income taxes | (101 | ) | | (893 | ) | | (6,593 | ) |
| Net loss | (51,693 | ) | | (64,196 | ) | | (42,765 | ) |
| Accrued dividends on preferred stock | (11,210 | ) | | (10,077 | ) | | (9,084 | ) |
| Loss attributable to common stockholders | $ | (62,903 | ) | | $ | (74,273 | ) | | $ | (51,849 | ) |
| | | | | | |
| Loss per common share: | |
| | |
| | |
|
| Loss from continuing operations, basic and diluted | $ | (0.49 | ) | | $ | (0.59 | ) | | $ | (0.48 | ) |
| Loss from discontinued operations, basic and diluted | — |
| | (0.01 | ) | | (0.07 | ) |
| Loss per common share, basic and diluted | $ | (0.49 | ) | | $ | (0.60 | ) | | $ | (0.55 | ) |
| | | | | | |
| Weighted average number of common shares outstanding: | |
| | |
| | |
|
| Basic and diluted | 127,942 |
| | 123,791 |
| | 93,740 |
|
See accompanying Notes to the Consolidated Financial Statements.
BIOSCRIP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITCOMPREHENSIVE INCOME (LOSS)
(in thousands)IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders' Deficit |
| Balance at December 31, 2015 | $ | — |
| | $ | 8 |
| | $ | (10,737 | ) | | $ | 531,764 |
| | $ | (602,550 | ) | | $ | (81,515 | ) |
| Net proceeds from public stock offering | — |
| | 4 |
| | — |
| | 83,263 |
| | — |
| | 83,267 |
|
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — |
| | — |
| | (33 | ) | | — |
| | — |
| | (33 | ) |
| Surrender of stock - settlement | — |
| | — |
| | (255 | ) | | 255 |
| | — |
| | — |
|
| Shares issued in connection with the acquisition of Home Solutions, Inc. | — |
| | — |
| | 11,025 |
| | (1,088 | ) | | — |
| | 9,937 |
|
| Equity linked liabilities reclassified to equity upon approval of Charter Amendment | — |
| | — |
| | — |
| | 2,847 |
| | — |
| | 2,847 |
|
| Accrued dividends on preferred stock | — |
| | — |
| | — |
| | (9,084 | ) | | — |
| | (9,084 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 3,725 |
| | — |
| | 3,725 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (42,765 | ) | | (42,765 | ) |
| Balance at December 31, 2016 | — |
| | 12 |
| | — |
| | 611,682 |
| | (645,315 | ) | | (33,621 | ) |
| Net proceeds from private placements | — |
| | 1 |
| | — |
| | 20,776 |
| | — |
| | 20,777 |
|
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — |
| | — |
| | (16 | ) | | 21 |
| | — |
| | 5 |
|
| Accrued dividends on preferred stock | — |
| | — |
| | — |
| | (10,077 | ) | | — |
| | (10,077 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 2,360 |
| | — |
| | 2,360 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (64,196 | ) | | (64,196 | ) |
| Balance at December 31, 2017 | — |
| | 13 |
| | (16 | ) | | 624,762 |
| | (709,511 | ) | | (84,752 | ) |
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — |
| | — |
| | (934 | ) | | 908 |
| | — |
| | (26 | ) |
| Accrued dividends on preferred stock | — |
| | — |
| | — |
| | (11,210 | ) | | — |
| | (11,210 | ) |
| Stock-based compensation | — |
| | — |
| | — |
| | 3,677 |
| | — |
| | 3,677 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (51,693 | ) | | (51,693 | ) |
| Balance at December 31, 2018 | $ | — |
| | $ | 13 |
| | $ | (950 | ) | | $ | 618,137 |
| | $ | (761,204 | ) | | $ | (144,004 | ) |
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| NET REVENUE | | $ | 2,310,417 |
| | $ | 1,939,791 |
| | $ | 1,828,046 |
|
| COST OF REVENUE | | 1,797,418 |
| | 1,517,576 |
| | 1,382,047 |
|
| GROSS PROFIT | | 512,999 |
| | 422,215 |
| | 445,999 |
|
| | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | |
| Selling, general and administrative expenses | | 459,628 |
| | 345,884 |
| | 338,456 |
|
| Provision for doubtful accounts | | — |
| | — |
| | 45,602 |
|
| Depreciation and amortization expense | | 53,690 |
| | 38,062 |
| | 34,662 |
|
| Total operating expenses | | 513,318 |
| | 383,946 |
| | 418,720 |
|
| OPERATING (LOSS) INCOME | | (319 | ) | | 38,269 |
| | 27,279 |
|
| | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | |
| Interest expense, net | | (73,724 | ) | | (45,824 | ) | | (44,307 | ) |
| Equity in earnings of joint ventures | | 2,840 |
| | 1,020 |
| | 2,186 |
|
| Other, net | | (6,991 | ) | | (2,233 | ) | | 135 |
|
| Total other expense | | (77,875 | ) | | (47,037 | ) | | (41,986 | ) |
| | | | | | | |
| LOSS BEFORE INCOME TAXES | | (78,194 | ) | | (8,768 | ) | | (14,707 | ) |
| INCOME TAX BENEFIT | | (2,274 | ) | | (2,653 | ) | | (18,585 | ) |
| | | | | | | |
| NET (LOSS) INCOME | | $ | (75,920 | ) | | $ | (6,115 | ) | | $ | 3,878 |
|
| | | | | | | |
| OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: | | | | | | |
| Change in unrealized (losses) gains on cash flow hedges, net of income taxes of $259, $234 and $36, respectively | | (8,039 | ) | | 774 |
| | 58 |
|
| OTHER COMPREHENSIVE (LOSS) INCOME | | (8,039 | ) | | 774 |
| | 58 |
|
| NET COMPREHENSIVE (LOSS) INCOME | | $ | (83,959 | ) | | $ | (5,341 | ) | | $ | 3,936 |
|
| | | | | | | |
| (LOSS) EARNINGS PER COMMON SHARE | | | | | | |
| Net (loss) earnings per share, basic and diluted | | $ | (0.49 | ) | | $ | (0.04 | ) | | $ | 0.03 |
|
| | | | | | | |
| Weighted average common shares outstanding, basic and diluted | | 156,280 |
| | 142,614 |
| | 142,614 |
|
See accompanying NotesThe notes to the Consolidated Financial Statements.consolidated financial statements are an integral part of these statements.
BIOSCRIP,OPTION CARE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)IN THOUSANDS)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (51,693 | ) | | $ | (64,196 | ) | | $ | (42,765 | ) |
| Less: Loss from discontinued operations, net of income taxes | (101 | ) | | (893 | ) | | (6,593 | ) |
| Loss from continuing operations | (51,592 | ) | | (63,303 | ) | | (36,172 | ) |
| Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities: | | | |
| | |
|
| Depreciation and amortization | 23,601 |
| | 27,725 |
| | 22,025 |
|
| Amortization of deferred financing costs and debt discount | 8,172 |
| | 6,998 |
| | 4,042 |
|
| Change in fair value of contingent consideration | — |
| | — |
| | (4,597 | ) |
| Change in fair value of equity linked liabilities | 4,836 |
| | 3,587 |
| | (10,450 | ) |
| Change in deferred taxes | 66 |
| | (3,379 | ) | | 2,045 |
|
| Stock-based compensation | 4,175 |
| | 2,360 |
| | 1,801 |
|
| Paid-in-kind interest capitalized as principal on Second Lien Note Facility | 7,787 |
| | — |
| | — |
|
| Loss (gain) on dispositions | (342 | ) | | 581 |
| | (3,954 | ) |
| Loss on extinguishment of debt | — |
| | 13,453 |
| | — |
|
| Changes in assets and liabilities, net of acquired businesses: | | | |
| | |
|
| Accounts receivable | (29,342 | ) | | 23,564 |
| | (2,219 | ) |
| Inventory | 11,355 |
| | (2,544 | ) | | 10,016 |
|
| Prepaid expenses and other assets | 4,699 |
| | (239 | ) | | (893 | ) |
| Accounts payable | 1,062 |
| | 689 |
| | (15,977 | ) |
| Amounts due to plan sponsors | (3,665 | ) | | 942 |
| | 308 |
|
| Accrued interest | — |
| | 1 |
| | (192 | ) |
| Accrued expenses and other liabilities | (815 | ) | | (4,805 | ) | | (1,305 | ) |
| Net cash provided by (used in) operating activities from continuing operations | (20,003 | ) | | 5,630 |
| | (35,522 | ) |
| Net cash used in operating activities from discontinued operations | (101 | ) | | (6,393 | ) | | (7,019 | ) |
| Net cash used in operating activities | (20,104 | ) | | (763 | ) | | (42,541 | ) |
| Cash flows from investing activities: | | | |
| | |
|
| Cash consideration paid for acquisitions, net of cash acquired | — |
| | — |
| | (67,516 | ) |
| Purchases of property and equipment, net | (13,875 | ) | | (8,680 | ) | | (9,870 | ) |
| Proceeds from dispositions | 360 |
| | — |
| | 4,177 |
|
| Net cash used in investing activities | (13,515 | ) | | (8,680 | ) | | (73,209 | ) |
| Cash flows from financing activities: | | | |
| | |
|
| Proceeds from private issuances, net | — |
| | 20,777 |
| | 83,267 |
|
| Proceeds from priming credit agreement, net | — |
| | 23,060 |
| | — |
|
| Fees attributable to extinguishment of debt | — |
| | (980 | ) | | — |
|
| Borrowings on revolving credit facility | — |
| | 563 |
| | 104,300 |
|
| Repayments on revolving credit facility | — |
| | (55,863 | ) | | (64,000 | ) |
| Borrowing of long-term debt, net of expenses | 10,000 |
| | 294,446 |
| | — |
|
| Principal payments of long-term debt | — |
| | (236,770 | ) | | (12,550 | ) |
| Repayments of capital leases | (1,873 | ) | | (1,072 | ) | | (1,073 | ) |
| Net activity from exercise of employee stock awards | (55 | ) | | 120 |
| | (202 | ) |
| Net cash provided by financing activities | 8,072 |
| | 44,281 |
| | 109,742 |
|
| Net change in cash and cash equivalents and restricted cash | (25,547 | ) | | 34,838 |
| | (6,008 | ) |
| Cash and cash equivalents and restricted cash - beginning of year | 44,407 |
| | 9,569 |
| | 15,577 |
|
| Cash and cash equivalents and restricted cash - end of year | $ | 18,860 |
| | $ | 44,407 |
| | $ | 9,569 |
|
| DISCLOSURE OF CASH FLOW INFORMATION: | | | |
| | |
|
| Cash paid during the year for interest | $ | 41,488 |
| | $ | 45,376 |
| | $ | 34,696 |
|
| Cash paid during the year for income taxes, net of refunds | $ | (319 | ) | | $ | 649 |
| | $ | (372 | ) |
| DISCLOSURE OF NON-CASH TRANSACTIONS: | | | | | |
| Issuance of 3,750,000 shares in connection with the Home Solutions acquisition | $ | — |
| | $ | — |
| | $ | 9,938 |
|
| Capital lease obligations incurred to acquire property and equipment | $ | 34 |
| | $ | 1,825 |
| | $ | 2,314 |
|
| Paid-in-kind interest capitalized as principal on Second Lien Note Facility | $ | 7,787 |
| | $ | — |
| | $ | — |
|
| Tenant improvement allowances for leasehold improvements | $ | 2,914 |
| | $ | — |
| | $ | — |
|
See accompanying Notes to the Consolidated Financial Statements. |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net (loss) income | $ | (75,920 | ) | | $ | (6,115 | ) | | $ | 3,878 |
|
| Adjustments to reconcile net (loss) income to net cash provided by operations: | | | | | |
| Depreciation and amortization expense | 57,869 |
| | 41,055 |
| | 38,062 |
|
| Non-cash operating lease costs | 19,719 |
| | — |
| | — |
|
| Deferred income taxes - net | (4,607 | ) | | (3,595 | ) | | (19,804 | ) |
| Loss on sale of assets | 3,269 |
| | 1,123 |
| | 999 |
|
| Business casualty loss | (626 | ) | | 3,549 |
| | — |
|
| Loss on extinguishment of debt | 5,469 |
| | 72 |
| | — |
|
| Amortization of deferred financing costs | 4,544 |
| | 3,107 |
| | 2,996 |
|
| Paid-in-kind interest capitalized as principal | 12,256 |
| | — |
| | — |
|
| Equity in earnings of joint ventures | (2,840 | ) | | (1,020 | ) | | (2,186 | ) |
| Stock-based incentive compensation expense | 4,170 |
| | 2,139 |
| | 1,455 |
|
| Interest on management notes receivable | (62 | ) | | (78 | ) | | (56 | ) |
| Capital distribution from equity method investments | 500 |
| | 2,000 |
| | 1,250 |
|
| Change in contingent consideration liability | (300 | ) | | — |
| | — |
|
| Changes in operating assets and liabilities: | | | | |
|
|
| Accounts receivable, net | 82,285 |
| | (21,012 | ) | | (34,003 | ) |
| Inventories | (12,853 | ) | | 2,965 |
| | (3,481 | ) |
| Prepaid expenses and other current assets | (2,940 | ) | | (4,715 | ) | | 12,452 |
|
| Accounts payable | (30,856 | ) | | 10,965 |
| | 47,411 |
|
| Accrued compensation and employee benefits | 2,671 |
| | (5,586 | ) | | (12,246 | ) |
| Accrued expenses and other current liabilities | (317 | ) | | (1,740 | ) | | (4,095 | ) |
| Operating lease liabilities | (17,253 | ) | | — |
| | — |
|
| Other noncurrent assets and liabilities | (4,711 | ) | | 1,314 |
| | 5,239 |
|
| Net cash provided by operating activities | 39,467 |
| | 24,428 |
| | 37,871 |
|
| | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Acquisition of property and equipment | (28,292 | ) | | (26,276 | ) | | (24,956 | ) |
| Proceeds from sale of assets | 10 |
| | — |
| | 484 |
|
| Insurance proceeds from business casualty loss | 626 |
| | — |
| | — |
|
| Business acquisitions, net of cash acquired | (700,170 | ) | | (10,727 | ) | | — |
|
| Net cash used in investing activities | (727,826 | ) | | (37,003 | ) | | (24,472 | ) |
| | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Redemptions to related parties | (2,000 | ) | | — |
| | — |
|
| Sale of management notes receivable | 1,310 |
| | — |
| | — |
|
| Exercise of stock options, vesting of restricted stock, and related tax withholdings | (2,501 | ) | | — |
| | — |
|
| Payment of contingent consideration liability | — |
| | — |
| | (1,000 | ) |
| Proceeds from debt | 981,050 |
| | 1,000 |
| | — |
|
| Repayments of debt principal | (2,075 | ) | | (5,150 | ) | | (4,150 | ) |
| Retirement of debt obligations | (226,738 | ) | | — |
| | — |
|
| Deferred financing costs | (30,022 | ) | | — |
| | — |
|
| Net cash provided by (used in) financing activities | 719,024 |
| | (4,150 | ) | | (5,150 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 30,665 |
| | (16,725 | ) | | 8,249 |
|
| Cash and cash equivalents - beginning of the period | 36,391 |
| | 53,116 |
| | 44,867 |
|
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 67,056 |
| | $ | 36,391 |
| | $ | 53,116 |
|
| | | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 50,808 |
| | $ | 47,173 |
| | $ | 43,485 |
|
| Cash paid for income taxes | $ | 2,405 |
| | $ | 1,600 |
| | $ | 1,194 |
|
| Cash paid for operating leases | $ | 18,992 |
| |
|
| | |
BIOSCRIP,The notes to consolidated financial statements are an integral part of these statements.
OPTION CARE HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Treasury Stock | | Paid-in Capital | | Management Notes Receivable | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders’ Equity |
| Balance - December 31, 2016 | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | 615,713 |
| | $ | (1,171 | ) | | $ | (13,786 | ) | | $ | — |
| | $ | 600,770 |
|
| Interest on management notes receivable | — |
| | — |
| | — |
| | — |
| | (56 | ) | | — |
| | — |
| | (56 | ) |
| Stockholders' redemptions | — |
| | — |
| | — |
| | (111 | ) | | 111 |
| | — |
| | — |
| | — |
|
| Stock-based incentive compensation | — |
| | — |
| | — |
| | 1,455 |
| | — |
| | — |
| | — |
| | 1,455 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 3,878 |
| | — |
| | 3,878 |
|
| Reclassification of certain tax effects | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | 12 |
| | — |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 58 |
| | 58 |
|
| Balance - December 31, 2017 | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | 617,057 |
| | $ | (1,116 | ) | | $ | (9,920 | ) | | $ | 70 |
| | $ | 606,105 |
|
| Stockholders' contributions | — |
| | — |
| | — |
| | 425 |
| | (425 | ) | | — |
| | — |
| | — |
|
| Interest on management notes receivable | — |
| | — |
| | — |
| | — |
| | (78 | ) | | — |
| | — |
| | (78 | ) |
| Stock-based incentive compensation | — |
| | — |
| | — |
| | 2,139 |
| | — |
| | — |
| | — |
| | 2,139 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (6,115 | ) | | — |
| | (6,115 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 774 |
| | 774 |
|
| Balance - December 31, 2018 | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | 619,621 |
| | $ | (1,619 | ) | | $ | (16,035 | ) | | $ | 844 |
| | $ | 602,825 |
|
| Purchase of BioScrip, Inc. | — |
| | 4 |
| | — |
| | 387,040 |
| | — |
| | — |
| | — |
| | 387,044 |
|
| Interest on management notes receivable | — |
| | — |
| | — |
| | — |
| | (62 | ) | | — |
| | — |
| | (62 | ) |
| Repayment of management notes receivable | — |
| | — |
| | — |
| | — |
| | 1,310 |
| | — |
| | — |
| | 1,310 |
|
| Stockholders' redemptions | — |
| | — |
| | — |
| | (2,371 | ) | | 371 |
| | — |
| | — |
| | (2,000 | ) |
| Stock-based incentive compensation | — |
| | — |
| | — |
| | 4,170 |
| | — |
| | — |
| | — |
| | 4,170 |
|
| Exercise of stock options, vesting of restricted stock, and related tax withholdings | — |
| | — |
| | (2,403 | ) | | (98 | ) | | — |
| | — |
| | — |
| | (2,501 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (75,920 | ) | | — |
| | (75,920 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,039 | ) | | (8,039 | ) |
| Balance - December 31, 2019 | $ | — |
| | $ | 18 |
| | $ | (2,403 | ) | | $ | 1,008,362 |
| | $ | — |
| | $ | (91,955 | ) | | $ | (7,195 | ) | | $ | 906,827 |
|
| | | | | | | | | | | | | | | | |
The notes to consolidated financial statements are an integral part of these statements.
OPTION CARE HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 –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”), “we”, “us”, “our” or the “Company”) is a national provider of infusion and home care management solutions. We partnersolutions, 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 (135,565,392 equivalent shares after adjusting for the one share for four share reverse stock split - see Note 20, Subsequent Events) of BioScrip common stock, par value $0.0001 (the “BioScrip common stock”). BioScrip also issued an additional 28,193,428 shares (7,048,357 equivalent shares after adjusting for the reverse stock split) 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 17, 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 (864,603 equivalent shares after adjusting for the reverse stock split) 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 19.2% of the combined company, and HC I holds approximately 80.8% 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 December 31, 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 115 full service pharmacies. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, hospital systems, payors, pharmaceutical manufacturers and skilled nursing facilitiesother referral sources to provide pharmaceuticals and complex compounded solutions to patients access to post-acute care services. We operate with a commitment to bring customer-focused pharmacy and related healthcare infusion therapy services into the home or alternate-site setting. By collaborating with the full spectrum of healthcare professionals and the patient, we aim to provide cost-effective care that is driven by clinical excellence, customer service and values that promote positive outcomes and an enhanced quality of life for those whom we serve.
Our platform provides nationwide service capabilities and the ability to deliver clinical management services that offer patients a high-touch, community-based and home-based care environment. Our core services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. Whetherintravenous delivery in the home, physician office, ambulatory infusion center, skilled nursing facilitypatients’ homes or other alternate sites of care, we provide products, services and condition-specific clinical management programs tailored to improve the care of individuals with complex health conditions such as gastrointestinal abnormalities, infectious diseases, cancer, multiple sclerosis, organ and blood cell transplants, bleeding disorders, immune deficiencies and heart failure.nonhospital settings. The Company operates in one segment, infusion services.
Basis of Presentation
— The Company’s Consolidated Financial Statementsaccompanying consolidated financial statements have been prepared in accordanceconformity with U.S. generally accepted accounting principles (“GAAP”).
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain prior period financial statement amounts have been reclassified to conform to current period presentation. Additionally, certain amounts in the Consolidated Statements of Operations have been reclassified to include the presentation of operating expenses and operating income (loss).
Use of Estimates
The preparation of financial statements in conformity with GAAP requiresUnited States. These principals require management to make certain estimates and assumptions. These estimatesassumptions in determining assets, liabilities, revenue, expenses, and assumptions affectrelated disclosures. Actual amounts could differ materially from those estimates.
Principles of Consolidation — The Company’s consolidated financial statements include the reported amountsaccounts of assetsOption Care Health, Inc. and liabilitiesits subsidiaries. The BioScrip results have been included in the consolidated financial results since the Merger Date. All intercompany transactions and disclosurebalances are eliminated in consolidation.
The Company has investments in companies that are 50% owned and are accounted for as equity-method investments. The Company’s share of contingent assets and liabilities atearnings from equity-method investments is included in the dateline entitled “Equity in earnings of joint ventures” in the consolidated statements of comprehensive income (loss). See Note 11, Equity-Method Investments, for further discussion of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.Company’s equity-method investments.
NOTE 2 –2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents — The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Accounts Receivable — The Company’s accounts receivable are reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for
Revenue Recognitionprice concessions. The majority of accounts receivable are due from private insurance carriers and governmental health care programs, such as Medicare and Medicaid.
On January 1, 2018,Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons. Subsequent to the Company adopted ASCadoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, - Revenue from Contracts with Customers (“ASC 606”) using, an allowance for doubtful accounts is established only as a result of an adverse change in the modified retrospective method appliedCompany’s payers’ ability to those contractspay outstanding billings. The allowance for doubtful accounts balance is $0 as of December 31, 2019 and 2018, respectively.
Prior to the adoption of ASC 606, estimates of uncollectible accounts receivable were recorded as either a pricing adjustment to revenue (“contractual adjustment”) or as an uncollectible account to provision for doubtful accounts. The Company recorded an allowance for doubtful accounts based on historical experience and a detailed assessment of the collectability of its accounts receivable. In estimating the allowance for doubtful accounts, the Company considered, among other factors, (i) the balance and aging composition of the accounts receivable, (ii) the Company’s historical write-offs and recoveries, (iii) the creditworthiness of its payers, and (iv) general economic conditions. Accounts receivable were written-off as bad debts after all reasonable collection efforts have been exhausted.
Included in accounts receivable are earned but unbilled gross receivables of $68.7 million and $43.0 million as of December 31, 2019 and 2018, respectively. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.
See Revenue Recognition for a further discussion of the Company’s revenue recognition policy.
Inventory — Inventory, which consists primarily of pharmaceuticals, is stated at the lower of first‑in, first‑out cost or net realizable value basis, which the Company believes is reflective of the physical flow of inventories.
During the year ended December 31, 2018, one Company location was destroyed by a hurricane, resulting in a loss of $2.9 million of inventory. This business casualty loss was recorded as a component of operating costs and expenses within the consolidated statements of comprehensive income (loss). The Company received insurance proceeds of $0.8 million during the year ended December 31, 2018, and recorded a receivable of $1.0 million as a component of prepaid expenses and other current assets within the consolidated balance sheets at December 31, 2018. Both of these amounts were not completedrecorded as a partial offset to the business casualty loss in the consolidated statements of comprehensive income (loss). The $0.8 million of insurance proceeds were reflected as a component of cash flows from operating activities in the consolidated statements of cash flows. During the year ended December 31, 2019, $3.0 million in proceeds were received related to recovery of inventory and business interruption and was included as a component of cash flows from operating activities in the consolidated statements of cash flows. These proceeds resulted in a gain on business casualty loss of $2.0 million recorded as a component of selling, general and administrative expense in the consolidated statement of comprehensive income (loss).
Leases — The Company has lease agreements for facilities, warehouses, office space and property and equipment. Effective as of January 1, 2018. Results2019, 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 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 reporting periods beginning after January 1, 2018collateralized loans and its credit rating, along with the corporate bond yield curve in estimating its incremental borrowing rates. ROU assets are presentedrecorded 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 recognized 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 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. See Note 8, Leases, for further discussion on leases.
Goodwill, Intangible Assets, and Property and Equipment — Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under ASC 606, while prior period amountsTopic 350, Intangibles-Goodwill and Other. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter. See Note 10, Goodwill and Other Intangible Assets, for further discussion of the Company’s goodwill and other intangible assets.
Intangible assets arising from the Company’s acquisitions are amortized on a straight‑line basis over the estimated useful life of each asset. Referral sources have a useful life of 15-20 years. Trademarks/names have a useful life ranging from two to fifteen years. The useful lives for other amortizable intangible assets range from approximately two to nine years. The Company does not have any indefinite‑lived intangible assets.
Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation on owned property and equipment is provided for on a straight‑line basis over the estimated useful lives of owned assets. Leasehold improvements are amortized over the estimated useful life of the property or over the term of the lease, whichever is shorter. Estimated useful lives are seven years for infusion pumps and three years to thirteen years for equipment. Major repairs, which extend the useful life of an asset, are capitalized in the property and equipment accounts. Routine maintenance and repairs are expensed as incurred. Computer software is included in property and equipment and consists of purchased software and internally-developed software. The Company capitalizes application-stage development costs for significant internally-developed software projects. Once the software is ready for its intended use, these costs are amortized on a straight‑line basis over the software’s estimated useful life, generally five years. Costs recognized in the preliminary project phase and the post-implementation phase, as well as maintenance and training costs, are expensed as incurred.
The Company tests long‑lived assets for impairment whenever events or circumstances indicate that a certain asset or asset group may be impaired. Once identified, the amount of the impairment is computed by comparing the carrying value of the respective asset or asset group to its fair value, which is based on the discounted estimated future cash flows.
Equity Method Investments — The Company’s investments in certain unconsolidated entities are accounted for under the equity method. The balance of these investments is included in other noncurrent assets in the accompanying consolidated balance sheets. The investment is increased to reflect the Company’s capital contributions and equity in earnings of the investees. The investment is decreased to reflect the Company’s equity in losses of the investees and for distributions received that are not restatedin excess of the carrying amount of the investments. The Company’s proportionate share of earnings or losses of the investees are recorded in equity in earnings of joint ventures in the accompanying consolidated statements of comprehensive income (loss). See Note 11, Equity-Method Investments, for a further discussion of the Company’s equity method investments.
Hedging Instruments — The Company uses derivative financial instruments to limit its exposure to increases in the interest rate of its variable rate debt instruments. The derivative financial instruments are recognized on the consolidated balance sheets at fair value. See Note 13, Derivative Instruments, for additional information.
At inception of the hedge, the Company designated the derivative instruments as a hedge of the cash flows related to the interest on the variable rate debt. For all hedging relationships, the Company documents the hedging relationships and continueits risk management objective of the hedging relationship. For all hedging instruments, the terms of the hedge perfectly offset the hedged expected cash flows.
Revenue Recognition — 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 reported in accordance with accounting standards in effect for those periods.revised or updated as additional information becomes available.
Net revenuesThe 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 primarily generateddetermined based on the nature of the services provided by twothe Company. The majority of the Company’s performance obligations; deliveryobligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.
The Company provides a variety of prescription medicationsinfusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services related to infusion therapies. Aservices. After applying the criteria from ASC 606, the Company concluded that multiple performance obligation is a promiseobligations exist in a contract to transfer a distinct good or service to the customer and is defined as the unit of account for revenue recognition under ASC 606. Sources of net revenues include commercial insurance payors, Medicare, Medicaid, other government insurance payors, hospital and hospice facilities
and patients.its contracts with its customers. Revenue is allocated to each performance obligation based on its relative standalone price, determined usingbased on reimbursement rates established by third-party payor contracts. Revenue is recognized in the period in which the related performance obligation is satisfied. Prescription medicationthird-party payer contracts. Pharmaceutical drug revenue is recognized at the time the productpharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.
Transaction prices for performance obligations with contracted payors are based on contracted rates. Transaction prices for Medicare and Medicaid programs are based on predetermined net realizable rates that are established by statutes or regulation. Transaction prices for non-contracted payors are based on usual and customary rates for services provided. These transaction prices are reduced by estimates of variable consideration, consisting of (i) implicit price concessions resulting from differences between rates charged for services performed and expected reimbursements, and (ii) retroactive revenue adjustments due to audits or reviews by our third-party payors.
We determine our estimates of variable consideration based on historical collection experience with similar payor classes, aged accounts receivable by payor class, terms of payment agreements, correspondence from payors related to revenue audits or reviews, our historical settlement activity of audited and reviewed claims and current economic conditions using the portfolio approach. Revenue is recognized only to the extent that it is probable that a significant reversal of the cumulative amount recognized will not occur in future periods.
Net revenues are adjusted when changes in estimates of variable consideration occur. Changes in estimates typically arise as a result of new information obtained, such as actual payment receipt or denial, or retroactive pricing adjustments by payors for new medications or services. Subsequent changes to estimates of transaction prices are recorded as adjustments to net revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the payors ability to pay are recorded as an allowance for doubtful accounts.
The Company's outstanding performance obligations relate to contracts with a duration of less than one year; therefore,year. Therefore, the Company has elected to apply the optional exemptionpractical 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 as ofat the end of the reporting period. TheAny unsatisfied or partially unsatisfied performance obligations are completed when prescription medications are shipped, which generally occurs within a few days ofat the end of thea reporting period. The Company's cost of obtaining contracts is not material.
In accordance with ASC 606, contract assetsperiod are to be recognized when an entity has the right to receive consideration in exchange for goods or services that have been transferred to a customer when that right is conditional on something other than the passage of time. The Company does not recognize contract assets as the right to receive consideration is unconditional in accordance with the passage of time criteria. Also in accordance with ASC 606, contract liabilities are to be recognized when an entity is obligated to transfer goods or services for which consideration has already been received. The Company does not receive considerationgenerally completed prior to the transfer of goods or services and, therefore, does not recognize contract liabilities. The Company electedpatient being discharged. See Note 4, Revenue for a practical expedient to expense sales commissions when incurred as the amortization period associated therewith is generally one year or less. These costs are recorded in service location operating expenses.further discussion on revenue.
Prior to the adoption of ASC 606, the Company accounted for revenue under ASC Subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements (“ASC 605-25”). The Company concluded that its (i) delivery of prescription medications to patients and (ii) nursing services related to infusion therapies represented separate deliverables to its customers and allocated the total consideration to each deliverable based on its stand-alone selling price. Prescription medication revenue was recognized at the time the medication is shipped, and nursing revenue was recognized on the date of service.
Accounts Receivable and Allowance for Doubtful Accounts
Amounts billed that have not yet been collected that also meet the conditions for unconditional right to payment are presented as accounts receivable. We report accounts receivable related to delivery of prescription medications to patients and nursing services related to infusion therapies at their estimated transaction prices, inclusive of adjustments for variable consideration, based on the amounts expected to be collected from payors. Our accounts receivable are uncollateralized and consist of amounts due from commercial, government and patient payors. We write off accounts receivable once we have exhausted our collection efforts and deem an account to be uncollectible. Subsequent to the adoption of ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the Company’s payors’ ability to pay outstanding billings. There was no allowance for doubtful accounts as of December 31, 2018.
Prior to the adoption of ASC 606, estimates of uncollectible accounts receivable were recorded as bad debt expense and a related allowance for doubtful accounts was established. The risk of collection varied based upon the product and the payor. We estimated the allowance for doubtful accounts based on several factors including the age of the outstanding receivables, the
historical experience of collections, adjusting for current economic conditions, and evaluating specific customer accounts for the ability to pay. We evaluated trends in collections and the effects of systems and business process changes in determining our expected collection rates. Balances that were determined to be uncollectible were written off against the existing allowance for doubtful accounts.
Cost of Revenue
— Cost of revenue includesconsists of the costsactual cost of prescription medications, shippingpharmaceuticals and other directmedical supplies dispensed to patients, as well as all other costs directly related to the production of revenue. These costs include warehousing costs, purchasing costs, freight costs, cash discounts, wages and indirectrelated costs for pharmacists and nursing services, offset by volumenurses, along with depreciation expense relating to revenue-generating assets, such as infusion pumps.
The Company receives prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These prompt paypayment discounts received from pharmaceutical manufacturers and distributors and manufacturer rebates, which are generally volume-based incentives that are recorded as a reduction to theof inventory and are accounted for as a reduction of cost of inventory purchases.
Cash and Cash Equivalents and Restricted Cash
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents. Restricted cash consists of cash balances held by financial institutions as collateral for letters of credit. These balances are reclassified to cash and cash equivalentsgoods sold when the underlying obligationrelated inventory is satisfied. Restricted cash balances expected to become unrestricted during the next twelve monthssold.
The Company also receives rebates from pharmaceutical and medical supply manufacturers. Rebates are generally volume-based incentives and are recorded as current assets. Asa reduction of December 31, 2018, the Company had a restricted cash balance, in a money market account, of approximately $4.3 million.
Inventory
Inventory is recorded at the lower of cost or net realizable value. Cost for prescription medications is determined using specific item identificationinventory and supplies are accounted for usingas a reduction of cost of goods sold when the first-in, first-out method.
Acquisitions
related inventory is sold.
We accountSelling, General and Administrative Expenses — Selling, general and administrative expenses mainly consist of salaries for acquisitionsadministrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees.
Stock Based Incentive Compensation - The Company accounts for stock-based incentive compensation expense in accordance with ASC Topic 850, Business Combinations, if the acquired assets assumed and liabilities incurred constitute a business. We consider acquired companies to constitute a business if the acquired set of activities and assets are capable of being managed for the purpose of providing a return to the Company. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable assets as goodwill.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of assets as follows:
|
| | | | | | |
| | | Useful Life |
| Computer hardware and software | | 3 | years | - | 5 | years |
| Office equipment | |
| | | 5 | years |
| Vehicles | | 4 | years | - | 5 | years |
| Medical equipment | | 13 | months | - | 5 | years |
| Furniture and fixtures | |
| | | 5 | years |
Leasehold improvements and assets leased under capital leases are depreciated using a straight-line basis over the lesser of the related lease term or estimated useful life of the assets. Software implementation costs, primarily consisting of application development activities, are capitalized and included in property and equipment. Costs related to the preliminary project and post-implementation stages of a project are charged to expense as incurred.
Depreciation of the property and equipment commences on the date the asset is ready for its intended use. A gain or loss is recorded in the statement of operations in the period in which the asset was sold or retired. Maintenance and repair costs are expensed as incurred.
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of its property and equipment may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, are determined based on the fair value of the asset, which is generally calculated as the present
value of related cash flows using discount rates that reflect the inherent risk of the underlying business. No impairment charges related to property and equipment were recorded during the years ended December 31, 2018, 2017 or 2016.
Leases
Operating lease expense is recorded on a straight-line basis over the expected term of the lease beginning on the date the Company gains possession of leased property. The Company includes tenant improvement allowances and rent holidays received from landlords and the effect of any rent escalation clauses as adjustments to straight-line rent expense over the expected term of the lease.
Capital leases are reflected as a liability at the inception of the lease based on the present value of the minimum lease payments or, if lower, the fair value of the property. Assets recorded under capital leases are depreciated in the same manner as owned property.
Goodwill
In accordance with ASC Topic 350, Intangibles–Goodwill and Other (“ASC 350”), we evaluate goodwill for possible impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We concluded that the characteristics of all components of our business are similar and therefore the reporting unit for our goodwill analysis is the entity as a whole. We use a two-step process to assess the realizability of goodwill. The first step is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, we analyze changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there are indicators of a significant decline in the fair value of a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required.
If a qualitative assessment indicates it is more likely than not that the fair value of our reporting unit is less than its carrying amount, we will proceed to the second step where we estimate the fair value of the reporting unit. We concluded that our goodwill was not impaired as a result of our 2018 assessment and none of the goodwill associated with our single reporting unit was considered at risk of impairment as of October 31, 2018.
Intangible Assets
Intangible assets as of December 31, 2018 consisted of managed care contracts and non-compete agreements. We amortize managed care contracts over their estimated useful lives of four years, and non-compete agreements on a straight-line basis over their contractual lives, which is generally one to five years. During 2018, we evaluated our intangible assets for indicators of impairment and determined that there have been no material developments, events, changes in operating performance or other circumstances that would cause management to believe it is more likely than not that the fair value of our intangible assets would be less than its carrying amount.
Amounts due to Plan Sponsors
Amounts due to plan sponsors represent payments received from plan sponsors in excess of the contractually required reimbursement that are expected to be refunded.
2017 Warrants
The 2017 Warrants are recorded at fair value and are included in other non-current liabilities on the accompanying Consolidated Balance Sheets. Fair value is remeasured each reporting period and a mark-to-market adjustment is recorded under the caption “Change in fair value of equity linked liabilities” on the accompanying Consolidated Statements of Operations. The fair value of the 2017 Warrants was $25.3 million and $20.5 million as of December 31, 2018 and 2017, respectively. Fair value increases of $4.8 million and $3.6 million were recorded during the years ended December 31, 2018 and 2017.
The Company estimates the fair value of the 2017 Warrants using a valuation model that considers attributes of the Company’s common stock, including the number of outstanding shares, share price and volatility. The valuation also considers the exercise period of the warrants and the attributes of other convertible instruments in estimating the number of shares that will be issued upon the exercise of the warrants.
See Note 8 - Preferred Stock and Stockholders’ Deficit for further discussion of the 2017 Warrants.
Income Taxes
The Company accounts for income taxes under ASC Topic 740, Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using current enacted tax rates in effect in the years in which those temporary differences are expected to reverse. A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax asset will not be realized.
Uncertain tax positions are recognized if it is more likely than not that the Company will be able to sustain the tax position taken, and the measurement of the benefit is calculated as the largest amount that is more than 50% likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. There were no liabilities recorded for uncertain tax positions as of December 31, 2018 or 2017.
Stock-Based Compensation
The Company accounts for stock-based compensation expense under the provisions of ASC Topic 718, Compensation – StockCompensation-Stock Compensation (“ASC 718”). Stock-based incentive compensation expense is based on the grant date fair value. We estimateThe Company estimates the fair value of stock option awards using a Black-Scholes option pricing model. Themodel and the fair value of restricted stock unit awards is generally estimated using the closeclosing price of ourthe Company’s common stock on the grant date. We recognize expense for share-based paymentFor awards based on their vesting conditions as follows:
Awards with a service-based vesting conditions only – Expense is recognizedcondition, the Company recognizes expense on a straight-line basis over the requisite service period of the award.
Awards For awards with performance-based vesting conditions, – Expense is not recognized untilthe Company will recognize expense when it is determinedprobable that it is probable the performance-based conditions will be met. When achievement of athe Company determines that it is probable that the performance-based condition is probable,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 condition changes.
conditions. The Company records the impact of forfeited awards is recorded 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. See Note 16, Stock-Based Incentive Compensation, for a further discussion of equity incentive plans.
Business Acquisitions - The Company accounts for business acquisitions in accordance with ASC Topic 805, Business Combinations, with assets and liabilities being recorded at their acquisition date fair value and goodwill being calculated as the purchase price in excess of the net identifiable assets. See Note 3, Business Acquisitions, for further discussion of the Company’s business acquisitions.
Fair Value Measurements
Income Taxes — On December 22, 2017, the U.S. government enacted H.R. 1, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act significantly changed U.S. tax law by, among other things, reducing the corporate tax rate from 35% to 21%, effective January 1, 2018. In addition, there are many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, and usage of future net operating losses. Included in the tax benefit for 2017 is the impact of the corporate tax rate reduction which resulted in a $17.0 million non-cash adjustment of our net deferred tax liabilities and a corresponding credit to income tax benefit. While the corporate tax rate reduction was effective January 1, 2018, the Company accounted for this anticipated rate change in 2017, the period of enactment.
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are reported for book-tax basis differences and are measured based on currently enacted tax laws using rates expected to apply to taxable income in the years in which the differences are expected to reverse. The effect of a change in tax rate on deferred taxes is recognized in income tax expense in the period that includes the enactment date of the change.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.
The Company recognizes income tax positions that are more likely than not to be sustained on their technical merits. The Company measures recognized income tax positions at the maximum benefit that is more likely than not, based on cumulative probability, realizable upon final settlement of the position. Interest and penalties related to unrecognized tax benefits are reported in income tax expense.
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 16%, 17% and 17% for the years ended December 31, 2019, 2018 and 2017, respectively. In December 2019, the Company renewed and expanded its multi-year contract with this payer. The contract renewal is effective in February 2020 for a two-year term and auto-renews at the end of that term. There were no other managed care contracts that represent greater than 10% of revenue for the years presented.
For the years ended December 31, 2019, 2018 and 2017, approximately 12%, 12% and 14%, respectively, of the Company’s revenue was reimbursable through direct government healthcare programs such as Medicare and Medicaid. As of December 31, 2019 and 2018, approximately 12% and 13%, respectively, of the Company’s accounts receivable was related to these programs. Governmental programs reimburse 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.
The Company does not require its patients nor other payers to carry collateral for any amounts owed for goods or services provided. Other than as discussed above, concentrations of credit risk relating to trade accounts receivable is limited due to the Company’s diversity of patients and payers. Further, the Company generally does not provide charity care.
For the year ended December 31, 2019, approximately 70% of the Company’s pharmaceutical and medical supply purchases were from three vendors. For the years ended December 31, 2018 and 2017, approximately 66% and 73%, respectively, of the Company’s pharmaceutical and medical supply purchases were from two 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.
Fair Value Measurements — The fair value measurement accounting standard, ASC Topic 820, Fair Value Measurement (“ASC 820”), provides a framework for measuring fair value and defines fair value as the price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that isshould be determined using assumptions that market participants would use in pricing an asset or liability. The standard establishes a valuation hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on independent market data sources. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available.
The valuation hierarchy is composed of three categories. The categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. 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.
The Company’s cashWhile the Company believes its valuation methods are appropriate and cash equivalents, restricted cash, accounts receivable, prepaid expenses andconsistent with other current assets, accounts payable, amounts duemarket participants, the use ofdifferent methodologies or assumptions to plan sponsors, accrued interest, accrued expenses and other current liabilities approximate fair value due to their fully liquid or short-term nature.
See Note 12 - Fair Value Measurements for additional information ondetermine the fair value of certain financial instruments could result in a different fair value measurement at the Company’s debt facilities.
Accounting Pronouncements Recently Adoptedreporting date.
Recently-Adopted Accounting Pronouncements — In August 2018,February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued ASU 2018-15 —No. 2016-02, Internal Use SoftwareLeases., 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 2018-15 aligns the requirements2016-02 is effective for capitalization of implementation costs related to hosted software with the existing internal-use software guidance. The effective date for ASU 2018-15 is forinterim and annual and interim periods beginning after December 15, 2019.2018 for public entities and certain not-for-profits. The Company early 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 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 consolidated balance sheet as of January 1, 2019. See Note 8, Leases, for further discussion on Octoberleases.
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 on2018. ASU 2014-09 allows for a prospective basis.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 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 doubtful 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 consolidated financial statements. See Note 4, Revenue, for further discussion on revenue.
In July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company adopted the new standard on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09—2017-09, Compensation–StockCompensation-Stock Compensation (Topic 718): Scope of Modification Accounting.Accounting. ASU 2017-092019-09 modifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition, or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The effective date for ASU 2017-09 is for annual or any interim periods beginning after December 15, 2017. The Company adopted this ASU onthe standard as of January 1, 2018. The adoption of this standard did not materiallyhave a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18—Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The effective date for ASU 2016-18 is for annual or any interim periods beginning after December 15, 2017. The Company adopted this ASU on January 1, 2018. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance for eight specific cash flow issues with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The effective date for ASU 2016-15 is for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this ASU on January 1, 2018. The adoption of this standard did not materially impact the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and replaced most of the existing revenue recognition guidance in U.S. GAAP. On January 1, 2018, we adopted ASC 606 using the modified retrospective transition method which allowed for the application of the new guidance only to contracts that were not completed at the adoption date. Prior periods have not been restated and continue to be reported under accounting standards that were in place at the time. Prior to the adoption of ASC 606, estimates of implicit price concessions and retroactive price adjustments were recorded as bad debt expense and a related allowance for doubtful accounts was established. Subsequent to the adoption of ASC 606, accounts receivable are recorded net of estimated implicit price concessions and retroactive price adjustments and an allowance for doubtful accounts is established only as a result of an adverse change in the Company’s payors’ ability to pay outstanding billings. Upon adoption, the Company concluded that the allowance for doubtful accounts at December 31, 2017 consisted entirely of estimated implicit price concessions and retroactive price adjustments. As a result, the allowance for doubtful accounts was eliminated and accounts receivable were restated net of estimated implicit price concessions and retroactive price adjustments as of January 1, 2018. Adoption of ASC 606 did not result in an opening accumulated deficit adjustment.
Recently IssuedRecent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13— Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurements. ASU 2018-13 modifies fair value measurement disclosure requirements. The effective date for ASU 2018-13 is for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s disclosures to the consolidated financial statements.
— In June 2016, the FASB issued ASU 2016-13—2016-13, Financial Instruments—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 January 1, 2020,after December 15, 2019, and is to be applied using a modified retrospective transition method. EarlierEarly adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, FASB issued ASU 2016-02,Immaterial Error Correction Leases (“ASU 2016-02”)— During the year ended December 31, 2019, the Company identified prior period misstatements in the recording of other noncurrent liabilities that resulted in an overstatement of goodwill and issued additional clarificationsother noncurrent liabilities in the Company’s consolidated balance sheets. The Company assessed the materiality of these misstatements both quantitatively and improvements throughout 2018.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 financial statements. The pronouncement requires lesseesmisstatements had no impact on net (loss) income or net cash flows from operating, investing, or financing activities in any of the periods presented.
During the fourth quarter of the year ended December 31, 2019, the Company identified a misstatement in the recording of certain transaction fees related to recognizethe Merger, which resulted in a liability$6.5 million understatement of net loss for lease obligations, which represents the discounted obligation to make future minimum lease payments,three and nine months ended September 30, 2019 and a corresponding right-of-use asset$6.5 million understatement of long term debt, net, at September 30, 2019, as reported in the third quarter 2019 report on Form 10-Q. The Company assessed the materiality of these misstatements both quantitatively and qualitatively and determined the correction of these errors to be immaterial to the results as reported in the third quarter report on Form 10-Q. As a result, the Company has corrected the misstatements by (i) increasing selling, general and administrative expense on the statement of comprehensive income (loss), (ii) increasing long-term debt, net and reducing retained earnings on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financialsheet, and (iii) decreasing net cash provided by operating activities and increasing net cash provided by financing activities on the statement users the ability to assess the amount, timing, and potential uncertainty of cash flows relatedin the fourth quarter of 2019.
3. BUSINESS ACQUISITIONS
Merger with BioScrip, Inc. — 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. The Merger of Option Care and BioScrip into Option Care Health created an expanded national platform and the opportunity to leases. ASU 2016-02 is effective for interimdrive economies of scale through procurement savings, facility rationalization and annual reporting periods beginning January 1, 2019. We will electother operating cost savings.
The fair value of purchase consideration transferred on the optional transition methodclosing 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 applycertain warrant and preferred shareholders in conjunction with the standardMerger, the fair value of stock-based instruments that were vested or earned as of the effective dateMerger, and therefore, we willcash 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 (1) | | 129,181 |
|
| Common shares issued to warrant and preferred stockholders at time of the Merger (1) | | 3,458 |
|
| Total shares of BioScrip common stock outstanding at time of the Merger (1) | | 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 |
|
(1) These shares were not applyadjusted for the standardone share for four share reverse stock split, which occurred on February 3, 2020. See Note 20, Subsequent Events, for further discussion of this stock split.
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 12, Indebtedness.
The Company's allocation of consideration exchanged to the comparative periods presentednet tangible and intangible assets acquired and liabilities assumed in our financial statements. We will elect the transition packageMerger is based on estimated fair values as of three practical expedients permittedthe Merger Date. The fair values were determined based upon a valuation and the estimates and assumptions used in the valuation of certain contingent liabilities are pending completion and subject to change, which could be significant, within the standard, which eliminatesmeasurement period, up to one year from the requirementsAugust 6, 2019 acquisition date.
The following is a preliminary estimate of the allocation of the consideration transferred to reassess prior conclusions about lease identification, lease classificationacquired identifiable assets and initial direct costs. We will not electassumed liabilities, net of cash acquired, in the hindsight practical expedient, which permitsMerger as of August 6, 2019 (in thousands):
|
| | | | | | |
| | | Amount |
| Accounts receivable, net (1) | | $ | 96,532 |
|
| Inventories (2) | | 19,683 |
|
| Property and equipment, net (3) | | 48,732 |
|
| Intangible assets, net (4) | | 193,245 |
|
| 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) | | (64,030 | ) |
| Other assumed liabilities, net of other acquired assets (7) | | (20,233 | ) |
| Total acquired identifiable assets and liabilities | | 294,141 |
|
| Goodwill (8) | | 793,073 |
|
| Total consideration transferred | | $ | 1,087,214 |
|
| |
| (1) | Management has valued accounts receivables based on the estimated future collectability of the receivables portfolio. |
| |
| (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 allocation of consideration exchanged to intangible assets acquired is as follows (in thousands): |
|
| | | | | | |
| | | Fair Value | | Weighted Average Estimated Life (in years) |
| Trademarks/Names | | $ | 12,536 |
| | 2 |
| Patient referral sources | | 180,329 |
| | 20 |
| Licenses | | 380 |
| | 1.5 |
| Total intangible assets, net | | $ | 193,245 |
| | 18.8 |
The Company valued trademarks/names utilizing the userelief of hindsight when determining lease termroyalty method and impairmentpatient referral sources utilizing the multi-period excess earnings method, a form of right-of-use assets. Further, we will elect a short-term lease exception policy, permitting usthe 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 6, 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 $793.1 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. |
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 years ended December 31, 2019 and 2018 (in thousands). The estimated pro forma net income adjusts for the effect of fair value
adjustments related to not apply the recognition requirements of this standardMerger, transaction costs and other non-recurring costs directly attributable to short-term leases (i.e. leases with terms of 12 months or less)the Merger and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. We are finalizing the impact of the standardadditional debt to our accounting policies, processes, disclosures,finance the Merger.
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| Net revenue | | $ | 2,755,361 |
| | $ | 2,648,694 |
|
| Net loss | | (49,566 | ) | | (70,932 | ) |
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 years ended December 31, 2019, BioScrip had net revenue of $308.9 million and internal control over financial reportinga net loss of $30.1 million.
Acquisition-related costs were expensed as incurred, with the exception of BioScrip success-based fees that are included in consideration transferred. The Company recorded transaction costs that are expensed in selling, general and have implemented necessary upgradesadministrative expenses during the year ended December 31, 2019 of approximately $25.8 million. Transaction expenses consisted of professional fees for advisory, consulting and underwriting services as well as other incremental costs directly related to our existing lease system.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. (“Home I.V.”) for a purchase price of $11.6 million, net of cash acquired. The total consideration was comprised of cash paid of $9.8 million and a contingent payment of $1.8 million payable one year after the acquisition date. During the year ended December 31, 2019, the Company reduced the contingent liability by $0.3 million. Subsequent to December 31, 2019, it was determined that the contingent payment was not payable.
Healthy Connections Homecare Services, Inc. Acquisition — In October 2016, pursuant to the Share Purchase Agreement dated September 14, 2016, the Company completed the acquisition of 100% of the outstanding shares of Healthy Connections Homecare Services, Inc. (“HCHS”), for a purchase price of $5.2 million, net of cash acquired. The total consideration was comprised of cash paid of $4.2 million and a contingent payment of $1.0 million payable one year after the acquisition date. The contingent payment was determined based on the operations of HCHS. The contingent payment of $1.0 million was paid by the Company during the year ended December 31, 2017.
NOTE 3 - NET4. REVENUE AND ACCOUNTS RECEIVABLE
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 December 31, 2019 |
| Consolidated Balance Sheets | | |
| Accounts receivable, net | | $ | 324,416 |
| | $ | — |
| | $ | 324,416 |
|
| | | | | | | |
| | | Year Ended December 31, 2019 |
| Consolidated Statement of Comprehensive Income (Loss) | | |
| Net revenue | | $ | 2,382,058 |
| | $ | (71,641 | ) | | $ | 2,310,417 |
|
| Provision for doubtful accounts | | (71,641 | ) | | 71,641 |
| | — |
|
| Operating loss | | (319 | ) | | — |
| | (319 | ) |
| Consolidated Statements of Cash Flows | | | | | | |
| Changes in operating cash flows: | | | | | | |
| Accounts receivable, net | | 82,285 |
| | — |
| | 82,285 |
|
| | | | | | | |
| | | As of December 31, 2018 |
| Consolidated Balance Sheets | | |
| Accounts receivable, net | | $ | 310,169 |
| | $ | — |
| | $ | 310,169 |
|
| | | | | | | |
| | | Year Ended December 31, 2018 |
| Consolidated Statement of Comprehensive Income (Loss) | | | | | | |
| Net revenue | | $ | 2,001,132 |
| | $ | (61,341 | ) | | $ | 1,939,791 |
|
| Provision for doubtful accounts | | (61,341 | ) | | 61,341 |
| | — |
|
| Operating income | | 38,269 |
| | — |
| | 38,269 |
|
| Consolidated Statements of Cash Flows | | | | | | |
| Changes in operating cash flows: | | | | | | |
| Accounts receivable, net | | (21,012 | ) | | — |
| | (21,012 | ) |
The following table presents our disaggregated net revenuethe allowance for each associated payor classdoubtful accounts for the years ended December 31, 2019, 2018 and 2017 (in thousands). Sales and usage-based taxes are excluded from net revenue.:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Commercial | $ | 575,566 |
| | $ | 677,536 |
| | $ | 771,278 |
|
| Government | 127,301 |
| | 131,459 |
| | 158,450 |
|
| Patient | 6,036 |
| | 8,195 |
| | 5,861 |
|
| Net Revenue | $ | 708,903 |
| | $ | 817,190 |
| | $ | 935,589 |
|
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Write-Off of Receivables | | Charged to Costs and Expenses | | Balance at End of Period |
| Year ended December 31, 2017 | | | | | | | |
| Allowance for doubtful accounts | $ | 32,144 |
| | $ | (34,920 | ) | | $ | 45,602 |
| | $ | 42,826 |
|
| Year ended December 31, 2018 | | | | | | | |
Allowance for doubtful accounts (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Year ended December 31, 2019 | | | | | | | |
Allowance for doubtful accounts (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Absent implementation(1) Subsequent to the adoption of ASC 606, the Company would have reported revenue of $738.8 million, gross profit of $272.9 million, bad debt expense of $29.9 million for the year ended December 31, 2018, respectively, and an allowance for doubtful accounts is established only as a result of $41.2 million at December 31, 2018.
Net Revenue Concentration
Duringan adverse change in the year ended December 31, 2018, Aetna Health Management, LLC accounted for approximately 10% of net revenue. During the years ended December 31, 2017 and 2016, UnitedHealthcare Insurance Company accounted for approximately 18% and 24% of net revenue, respectively.
Collectability of Accounts ReceivableCompany’s payers’ ability to pay outstanding billings.
The following table sets forth the agingnet revenue earned by category of our accounts receivable, aged based on date of service and categorized based on the three primary payor groups (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| | | 0 - 180 days | | Over 180 days | | Total | | % of Total | | 0 - 180 days | | Over 180 days | | Total | | % of Total |
| Government | | $ | 17,849 |
| | $ | 6,098 |
| | $ | 23,947 |
| | | | $ | 20,602 |
| | $ | 10,082 |
| | $ | 30,684 |
| | |
| Commercial | | 67,288 |
| | 14,740 |
| | 82,028 |
| | | | 63,767 |
| | 18,779 |
| | 82,546 |
| | |
| Patient | | 2,092 |
| | 6,797 |
| | 8,889 |
| | | | 2,577 |
| | 7,627 |
| | 10,204 |
| | |
| Gross accounts receivable | | $ | 87,229 |
| | $ | 27,635 |
| | 114,864 |
| | | | $ | 86,946 |
| | $ | 36,488 |
| | 123,434 |
| | |
| Allowance for doubtful accounts | | | | | | — |
| | — | % | | | | | | (37,912 | ) | | 30.7 | % |
| Accounts receivable, net | | | | | | $ | 114,864 |
| | | | | | | | $ | 85,522 |
| | |
NOTE 4 – ACQUISITION
On September 9, 2016, the Company acquired substantially all of the assets and assumed certain liabilities of Home Solutions, Inc. for consideration totaling 93.2 million, comprised of: (i) $67.5 million in cash; (ii) 7.1 million restricted shares of the Company’s common stock valued at $15.4 million; (iii) 3,750,000 shares of the Company’s common stock valued at $9.9 million, and (iv) the assumption of $0.3 million of capital lease obligations. Home Solutions, a privately held company, provided home infusion and home nursing products and services to patients suffering from chronic and acute medical conditions.
The excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill in the amount of $58.5 million. Acquisition and integration expenses totaled $10.1 million for the year ended December 31, 2016 and are included in restructuring, acquisition, integration, and other expenses in the accompanying Consolidated Statements of Operations.
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill, and the changes in the carrying amount of goodwillpayer for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands):
|
| | | |
| Balance at December 31, 2016 | $ | 365,947 |
|
| Adjustments associated with the acquisition of Home Solutions | 1,251 |
|
| Balance at December 31, 2017 | $ | 367,198 |
|
| Adjustments | — |
|
| Balance at December 31, 2018 | $ | 367,198 |
|
Intangible assets consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Infusion customer relationships | $ | 25,650 |
| | $ | (25,650 | ) | | $ | — |
| | $ | 25,650 |
| | $ | (25,650 | ) | | $ | — |
|
| Managed care contracts | 25,000 |
| | (14,576 | ) | | 10,424 |
| | 25,000 |
| | (8,403 | ) | | 16,597 |
|
| Licenses | 5,400 |
| | (5,400 | ) | | — |
| | 5,400 |
| | (3,681 | ) | | 1,719 |
|
| Trade name | 1,800 |
| | (1,800 | ) | | — |
| | 1,800 |
| | (1,181 | ) | | 619 |
|
| Non-compete agreements | 1,700 |
| | (1,654 | ) | | 46 |
| | 1,700 |
| | (1,521 | ) | | 179 |
|
| | $ | 59,550 |
| | $ | (49,080 | ) | | $ | 10,470 |
| | $ | 59,550 |
| | $ | (40,436 | ) | | $ | 19,114 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Commercial payers | | $ | 2,001,105 |
| | $ | 1,699,450 |
| | $ | 1,598,703 |
|
| Government payers | | 285,128 |
| | 217,876 |
| | 203,651 |
|
| Patients | | 24,184 |
| | 22,465 |
| | 25,692 |
|
| Net revenue | | $ | 2,310,417 |
| | $ | 1,939,791 |
| | $ | 1,828,046 |
|
Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
|
| | | | | | | |
| | | Estimated Useful Life |
| Infusion customer relationships | | 5 | months | - | 4 | years |
| Managed care contracts | | | | | | 4 | years |
| Licenses | | | | | | 2 | years |
| Trade name | | | | | | 2 | years |
| Non-compete agreements | | | 1 | year | - | 5 | years |
Total amortizationThe Company maintains a 401(k) plan and matches 100% of employee contributions, up to 4% of employee compensation. The Company recorded expense for the defined contribution plan of intangible assets was $8.6$6.4 million, $11.8$6.3 million and $6.2$6.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. In the years ended December 31, 2019, 2018 and 2016, respectively. Amortization expense is expected to be the following (in thousands):2017, Company contributions of $6.6 million, $6.3 million and $14.4 million, respectively, were paid.
|
| | | | |
| Year ending December 31, | | Estimated Amortization |
| 2019 | | $ | 6,218 |
|
| 2020 | | 4,252 |
|
| Total estimated amortization expense | | $ | 10,470 |
|
NOTE 6 – PROPERTY AND EQUIPMENT6. INCOME TAXES
Property and equipment consistedThe income tax benefit consists of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Computer and office equipment | $ | 32,452 |
| | $ | 31,371 |
|
| Software capitalized for internal use | 17,625 |
| | 17,470 |
|
| Vehicles | 2,287 |
| | 2,379 |
|
| Medical equipment | 42,600 |
| | 36,230 |
|
| Work in progress | 1,733 |
| | 2,478 |
|
| Furniture and fixtures | 5,930 |
| | 5,534 |
|
| Leasehold improvements | 27,012 |
| | 19,809 |
|
| Property and equipment, gross | 129,639 |
| | 115,271 |
|
| Less: Accumulated depreciation | (100,851 | ) | | (88,298 | ) |
| Property and equipment, net | $ | 28,788 |
| | $ | 26,973 |
|
Depreciation expense, including expense related to assets under capital lease, for the years ended December 31, 2019, 2018 2017 and 2016 was $15.0 million, $15.9 million, and $15.8 million, respectively.
NOTE 7 – DEBT
Debt consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| First Lien Note Facility, net of unamortized discount | $ | 198,962 |
| | $ | 198,324 |
|
| Second Lien Note Facility, net of unamortized discount | 108,931 |
| | 85,694 |
|
| 2021 Notes, net of unamortized discount | 198,125 |
| | 197,363 |
|
| Capital leases | 990 |
| | 2,863 |
|
| Less: Deferred financing costs | (2,334 | ) | | (3,656 | ) |
| Total debt | 504,674 |
| | 480,588 |
|
| Less: Current portion of long-term debt | (3,179 | ) | | (1,722 | ) |
| Long-term debt, net of current portion | $ | 501,495 |
| | $ | 478,866 |
|
Prior Debt Facilities
The Company was previously obligated under (i) a senior secured first-lien revolving credit facility in an aggregate principal amount of $75.0 million (the “Revolving Credit Facility”), (ii) a senior secured first-lien term loan B in an aggregate principal amount of $250.0 million (the “Term Loan B Facility”) and (iii) a senior secured first-lien delayed draw term loan B in an aggregate principal amount of $150.0 million (the “Delayed Draw Term Loan Facility” and, together with the Revolving Credit Facility and the Term Loan B Facility, the “Senior Credit Facilities”) with SunTrust Bank, Jefferies Finance LLC and Morgan Stanley Senior Funding, Inc., originally entered on July 31, 2013 and amended from time to time. The borrowings under these facilities were fully repaid during 2017.
On January 6, 2017 the Company entered into a credit agreement (the “Priming Credit Agreement” and, together with the Senior Credit Facilities, the “Prior Credit Agreements”) with certain existing lenders under the Senior Credit Facilities and SunTrust Bank, as administrative agent for itself and the lenders. The Priming Credit Agreement provided an aggregate borrowing commitment of $25.0 million, which was fully drawn at closing. The borrowings under this facility were fully repaid during 2017.
First Lien and Second Lien Note Facilities
On June 29, 2017 (the “Closing Date”), the Company entered into (i) a first lien note purchase agreement (the “First Lien Note Facility”), among the Company, which is the issuer under the agreement, the financial institutions and note purchasers from time to time party to the agreement (the “First Lien Note Purchasers”), and Wells Fargo Bank, National Association, in its capacity as collateral agent for itself and the First Lien Note Purchasers (the “First Lien Collateral Agent”), pursuant to which the Company issued first lien senior secured notes in an aggregate principal amount of $200.0 million (the “First Lien Notes”); and (ii) a second lien note purchase agreement (the “Second Lien Note Facility” and, together with the First Lien Note Facility, the “Notes Facilities”) among the Company, which is the issuer under the agreement, the financial institutions and note purchasers from time to time party to the agreement (the “Second Lien Note Purchasers”), and Wells Fargo Bank, National Association, in its capacity as collateral agent for itself and the Second Lien Note Purchasers (the “Second Lien Collateral Agent” and, together with the First Lien Collateral Agent, the “Collateral Agent”), pursuant to which the Company (a) issued second lien senior secured notes in an aggregate initial principal amount of $100.0 million (the “Initial Second Lien Notes”) and (b) had the ability to draw upon the Second Lien Note Facility and issue second lien delayed draw senior secured notes, which was exercised on June 21, 2018, in an aggregate initial principal amount of $10.0 million, representing the maximum borrowings allowed on this facility (the “Second Lien Delayed Draw Notes” and, together with the Initial Second Lien Notes, the “Second Lien Notes”; the Second Lien notes, together with the First Lien Notes, the “Notes”). Funds managed by Ares Management L.P. are acting as lead purchasers for the Notes Facilities.
The Company used the proceeds of the sale of the First Lien Notes and the Initial Second Lien Notes pursuant to the Notes Facilities to repay in full all amounts outstanding under the Prior Credit Agreements and extinguished the liability. Each of the Prior Credit Agreements was terminated following such repayment. The Company used the remaining proceeds of $15.9 million of the Notes Facilities, net of $0.2 million in issuance costs, from the Notes Facilities and the Second Quarter 2017 Private Placement for working capital and general corporate purposes.
The First Lien Notes accrue interest, payable monthly in arrears, at a floating rate or rates equal to, at the option of the Company, (i) the base rate (defined as the highest of the Federal Funds Rate plus 0.5% per annum, the Prime Rate as published
by The Wall Street Journal and the one-month London Interbank Offered Rate (“LIBOR”) (subject to a 1.0% floor) plus 1.0%), or (ii) the one-month LIBOR rate (subject to a 1.0% floor), plus a margin of 6.0% if the base rate is selected or 7.0% if the LIBOR Option is selected. The First Lien Notes mature on August 15, 2020, provided that if the Company’s existing 8.875% Senior Notes due 2021 (the “2021 Notes”) are refinanced prior to August 15, 2020, then the scheduled maturity date of the First Lien Notes shall be June 30, 2022.
The First Lien Notes amortize in equal quarterly installments equal to 0.625% of the aggregate principal amount of the First Lien Note Facility, commencing on September 30, 2019, and on the last day of each third month thereafter, with the balance payable at maturity. The First Lien Notes are pre-payable at the Company’s option at specified premiums to the principal amount that will decline over the term of the First Lien Note Facility. If the First Lien Notes are prepaid prior to the second anniversary of the Closing Date, the Company will be required to pay a make-whole premium based on the present value (using a discount rate based on the specified treasury rate plus 50 basis points) of all remaining interest payments on the First Lien Notes being prepaid prior to the second anniversary of the Closing Date, plus 4.0% of the principal amount of First Lien Notes being prepaid. On or after the second anniversary of the Closing Date, the prepayment premium is 4.0%, which declines to 2.0% on or after the third anniversary of the Closing Date, and declines to 0.0% on or after the fourth anniversary of the Closing Date. At any time, the Company may pre-pay up to $50.0 million in aggregate principal amount of the First Lien Notes from internally generated cash without incurring any make-whole or prepayment premium. The occurrence of certain events of default may increase the applicable rate of interest by 2.0% and could result in the acceleration of the Company’s obligations under the First Lien Note Facility prior to stated maturity and an obligation of the Company to pay the full amount of its obligations under the First Lien Note Facility.
The First Lien Note Facility contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross-defaults to material indebtedness and events constituting a change of control. In addition, the obligations under the First Lien Note Facility are guaranteed by joint and several guarantees from the Company’s subsidiaries.
In connection with the First Lien Note Facility, the Company, its subsidiaries and the First Lien Collateral Agent entered into a First Lien Guaranty and Security Agreement, dated as of June 29, 2017 (the “First Lien Guaranty and Security Agreement”). Pursuant to the First Lien Guaranty and Security Agreement, the obligations under the First Lien Notes are secured by first priority liens on, and security interests in, substantially all of the assets of the Company and its subsidiaries.
The Second Lien Notes accrue interest, payable monthly in arrears, at a floating rate or rates equal to, at the option of the Company, (i) one-month LIBOR (subject to a 1.25% floor) plus 9.25% per annum in cash, (ii) one-month LIBOR (subject to a 1.25% floor) plus 11.25% per annum, which amount will be capitalized on each interest payment date, or (iii) one-month LIBOR (subject to a 1.25% floor) plus 10.25% per annum, of which one-half LIBOR plus 4.625% per annum will be payable in cash and one-half LIBOR plus 5.625% per annum will be capitalized on each interest payment date, provided that, in each case, if any permitted refinancing indebtedness with which the 2021 Notes are refinanced requires or permits the payment of cash interest, all of the interest on the Second Lien Notes shall be paid in cash. The Company elected to capitalize $7.8 million of interest during the year ended December 31, 2018. No interest was capitalized during the year ended December 31, 2017. The Second Lien Notes mature on August 15, 2020, provided that if the 2021 Notes are refinanced prior to August 15, 2020, then the scheduled maturity date of the Second Lien Notes shall be June 30, 2022.
The Second Lien Notes are not subject to scheduled amortization installments. The Second Lien Notes are pre-payable at the Company’s option at specified premiums to the principal amount that will decline over the term of the Second Lien Note Facility. If the Second Lien Notes are prepaid prior to the third anniversary of the Closing Date, the Company will need to pay a make-whole premium based on the present value (using a discount rate based on the specified treasury rate plus 50 basis points) of all remaining interest payments on the Second Lien Notes being prepaid prior to the third anniversary of the Closing Date, plus 4.0% of the principal amount of Second Lien Notes being prepaid. On or after the third anniversary of the Closing Date, the prepayment premium is 4.0%, which declines to 2.0% on or after the fourth anniversary of the Closing Date, and declines to 0.0% on or after the fifth anniversary of the Closing Date. The occurrence of certain events of default may increase the applicable rate of interest by 2.0% and could result in the acceleration of the Company’s obligations under the Second Lien Note Facility prior to stated maturity and an obligation of the Company to pay the full amount of its obligations under the Second Lien Note Facility.
The Second Lien Note Facility contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross-defaults to material indebtedness and events constituting a change of control. In addition, the obligations under the Second Lien Note Facility are guaranteed by joint and several guarantees from the Company’s subsidiaries.
In connection with the Second Lien Note Facility, the Company, its subsidiaries and the Second Lien Collateral Agent entered into a Second Lien Guaranty and Security Agreement, dated as of June 29, 2017 (the “Second Lien Guaranty and Security
Agreement”). Pursuant to the Second Lien Guaranty and Security Agreement, the obligations under the Second Lien Notes are secured by second priority liens on, and security interests in, substantially all of the assets of the Company and its subsidies.
In connection with the First Lien Note Facility and the Second Lien Note Facility, the Company, the First Lien Collateral Agent and the Second Lien Collateral Agent, entered into an intercreditor agreement containing customary provisions to, among other things, subordinate the lien priority of the liens granted under the Second Lien Note Facility to the liens granted under the First Lien Note Facility.
2021 Notes
On February 11, 2014, the Company issued $200.0 million aggregate principal amount of the 2021 Notes. The 2021 Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed by all existing and future subsidiaries of the Company. The 2021 Notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons in reliance on Regulation S under the Securities Act pursuant to an Indenture (the “2021 Notes Indenture”), dated February 11, 2014, by and among the Company, the guarantors named therein and U.S. Bank National Association, as trustee.
Interest on the 2021 Notes accrues at a fixed rate of 8.875% per annum and is payable in cash semi-annually, in arrears, on February 15 and August 15 of each year, commencing on August 15, 2014. The debt discount of $5.0 million at issuance is being amortized as interest expense through maturity which will result in the accretion over time of the outstanding debt balance to the principal amount. The 2021 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness.
The 2021 Notes are guaranteed on a full, joint and several basis by each of the Company’s existing and future domestic restricted subsidiaries that is a borrower under any of the Company’s credit facilities or that guarantees any of the Company’s debt or that of any of its restricted subsidiaries, in each case incurred under the Company’s credit facilities. As of December 31, 2018, the Company does not have any independent assets or operations, and as a result, its direct and indirect subsidiaries (other than minor subsidiaries), each being 100% owned by the Company, are fully and unconditionally, jointly and severally, providing guarantees on a senior unsecured basis to the 2021 Notes.
The 2021 Notes Indenture contains covenants that, among other things, limit the Company’s ability and the ability of certain of the Company’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. In addition, the 2021 Notes Indenture requires, among other things, the Company to provide financial and current reports to holders of the 2021 Notes or file such reports electronically with the U.S. Securities and Exchange Commission (the “SEC”). These covenants are subject to a number of exceptions, limitations and qualifications set forth in the 2021 Notes Indenture.
Pursuant to the terms of the Second Amendment to the Senior Credit Facilities, the Company used the net proceeds of the 2021 Notes of approximately $194.5 million to repay existing debt.
Fair Value of Debt Facilities
See Note 12 - Fair Value Measurements, for information related to the estimated fair value of the Company’s debt facilities.
Deferred Financing Costs
In connection with the Note Facilities and the 2021 Notes, the Company incurred underwriting fees, agent fees, legal fees and other expenses of approximately $4.1 million and $0.5 million, respectively. The deferred financing costs are reflected as additional issuance costs and amortized as a component of interest expense over the remaining term of the Note Facilities using the effective interest method.
Future Maturities
The estimated future maturities of the Company’s long-term debt, exclusive of deferred financing costs and unamortized discounts, as of December 31, 2018, are as follows (in thousands):
|
| | | | |
| Year Ending December 31, | | Amount |
| 2019 | | $ | 3,179 |
|
| 2020 | | 315,598 |
|
| 2021 | | 200,000 |
|
| Total future maturities | | $ | 518,777 |
|
| Less: Deferred financing costs | | (2,334 | ) |
| Less: Unamortized discounts | | (11,769 | ) |
| Total debt | | $ | 504,674 |
|
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| US federal income tax (benefit) expense: | | | | | |
| Current | $ | — |
| | $ | — |
| | $ | — |
|
| Deferred | (3,072 | ) | | (2,688 | ) | | (21,944 | ) |
| | (3,072 | ) | | (2,688 | ) | | (21,944 | ) |
| State income tax (benefit) expense: | | | | | |
| Current | 2,074 |
| | 1,176 |
| | 1,244 |
|
| Deferred | (1,276 | ) | | (1,141 | ) | | 2,115 |
|
| | 798 |
| | 35 |
| | 3,359 |
|
| Total income tax benefit | $ | (2,274 | ) | | $ | (2,653 | ) | | $ | (18,585 | ) |
NOTE 8 – PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Series A Preferred Stock
As of December 31, 2018,The difference between the carrying value of Series A Preferred Stock included accrued dividends at 11.5%statutory federal income tax rate and discount accretion from the date of issuance. Dividends and discount accretion totaled $0.3 million and $0.1 million, respectively,effective tax rate is as follows for each of the years ended December 31, 2019, 2018 and 2017 and were recorded as a reduction to additional paid-in capital. The following table sets forth the activity recorded during the years ended December 31, 2018 and 2017 related to the Series A Preferred Stock (in thousands):
|
| | | |
| Series A Preferred Stock carrying value at December 31, 2016 | $ | 2,462 |
|
Dividends and discount accretion through December 31, 2017 1 | 365 |
|
| Series A Preferred Stock carrying value at December 31, 2017 | $ | 2,827 |
|
Dividends and discount accretion through December 31, 2018 1 | 404 |
|
| Series A Preferred Stock carrying value at December 31, 2018 | $ | 3,231 |
|
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| US federal statutory tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
| US federal statutory tax rate change | — |
| | — |
| | 115.9 |
|
| State income taxes - net of federal benefit | (0.5 | ) | | 2.4 |
| | (10.1 | ) |
| Valuation allowance | (13.4 | ) | | — |
| | — |
|
| Changes in uncertain tax positions | — |
| | 14.7 |
| | (8.8 | ) |
| Non-deductible expenses | (3.5 | ) | | (7.5 | ) | | (5.6 | ) |
| Other, net | (0.7 | ) | | (0.3 | ) | | — |
|
| Effective income tax rate | 2.9 | % | | 30.3 | % | | 126.4 | % |
1 The components of deferred income tax assets and liabilities using the 21% U.S. Federal statutory tax rate were as follows as of DividendsDecember 31, 2019 and 2018 (in thousands): |
| | | | | | | |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Price concessions | $ | 12,302 |
| | $ | 14,879 |
|
| Compensation and benefits | 3,672 |
| | 1,925 |
|
| Interest limitation carryforward | 38,623 |
| | 3,486 |
|
| Operating lease liability | 19,462 |
| | 1,640 |
|
| Net operating losses | 147,749 |
| | 10,155 |
|
| Other | 5,506 |
| | 3,644 |
|
| Deferred tax assets before valuation allowance | 227,314 |
| | 35,729 |
|
| Valuation allowance | (109,531 | ) | | (1,373 | ) |
| Deferred tax assets net of valuation allowance | 117,783 |
| | 34,356 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Accelerated depreciation | (10,376 | ) | | (9,483 | ) |
| Operating lease right-of-use asset | (15,442 | ) | | — |
|
| Intangible assets | (71,204 | ) | | (39,977 | ) |
| Goodwill | (20,250 | ) | | (14,700 | ) |
| Other | (2,654 | ) | | (3,677 | ) |
| Deferred tax liabilities | (119,926 | ) | | (67,837 | ) |
| Net deferred tax liabilities | $ | (2,143 | ) | | $ | (33,481 | ) |
As a result of the Merger, the Company recorded reflecta full valuation allowance against all of its net U.S. federal and state deferred tax assets with the increaseexception of $0.8 million of estimated state net operating losses (“NOL”). The initial recognition of this valuation allowance by the Company was reflected in the Liquidation Preference associated with unpaid dividends.
Series C Preferred Stock
Asopening balance sheet of December 31, 2018,BioScrip and, to that extent, did not impact the carrying value of Series C Preferred Stock included accrued dividends at 11.5% and discount accretion from the date of issuance. Dividends and discount accretion totaled $10.1 million and $0.7 million, respectively,Company’s tax expense (benefit) for the year ended December 31, 2018 and $9.1 million and $0.6 million, respectively,2019. The valuation allowance for the year endeddeferred tax assets as of December 31, 2017 and were recorded as a reduction to additional paid-in capital.2019 was $109.5 million.
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 following table sets forthultimate realization of deferred tax assets depends on the activity recordedgeneration of future taxable income during the years endedperiods 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 the positive and negative evidence in determining if the valuation allowance is fairly stated.
The Company is subject to taxation in the United States and various states. As a result of the Merger, BioScrip carried over $461.5 million of federal net operating losses, $491.9 million of state net operating losses, and $85.0 million of interest limitation carryforwards. At December 31, 2019, the Company had $541.0 million of gross federal NOL carryforwards of which $401.2 million are available to offset future taxable income in the United States. These NOL’s will begin to expire in 2026 if not utilized. The remaining gross federal NOL’s of $139.8 million at December 31, 2019 are expected to expire unutilized due to limitations under Internal Revenue Code Section 382. At December 31, 2018, the Company had $38.1 million of gross federal NOL’s. At December 31, 2019 and 2017 related2018, the Company had $156.6 million and $13.6 million of interest limitation carryforwards. At December 31, 2019 and 2018, the Company also had $601.9 million and $43.5 million of cumulative gross state NOL carryforwards available to the Series C Preferred Stock (in thousands):
|
| | | |
| Series C Preferred Stock carrying value at December 31, 2016 | $ | 69,540 |
|
Dividends and discount accretion through December 31, 2017 1 | 9,712 |
|
| Series C Preferred Stock carrying value at December 31, 2017 | $ | 79,252 |
|
Dividends and discount accretion through December 31, 2018 1 | 10,806 |
|
| Series C Preferred Stock carrying value at December 31, 2018 | $ | 90,058 |
|
1 Dividends recorded reflect the increase in the Liquidation Preference associated with unpaid dividends.
First Quarter 2017 Private Placement
On March 1, 2017, the Company entered into a Stock Purchase Agreement (the “First Quarter Stock Purchase Agreement”) with Venor Capital Master Fund Ltd., Map 139 Segregated Portfolio of LMA SPC, Venor Special Situations Fund II LP and Trevithick LP (the “First Quarter Stockholders”). Pursuant to the First Quarter Stock Purchase Agreement, the Company sold an aggregate of 3.3 million shares of its common stock (the “First Quarter Shares”) for aggregate gross proceeds of approximately $5.1 million in a private placement transaction (the “First Quarter 2017 Private Placement”). The purchase price for each Share
was $1.5366, which was negotiated between the Company and the First Quarter Stockholders based on the volume-weighted average price of the Company's common stock on the Nasdaq Global Market on March 1, 2017.
Second Quarter 2017 Private Placement
On June 29, 2017, the Company entered into a Stock Purchase Agreement (the “Second Quarter Stock Purchase Agreement”) with a fund managed by Ares Management L.P. (“Ares” or the “Second Quarter Stock Purchaser”). Pursuant to the terms of the Second Quarter Stock Purchase Agreement, the Company issued and sold to the Second Quarter Stock Purchaser in a private placement (the “Second Quarter 2017 Private Placement”) 6,359,350 shares of Common Stock (the “Second Quarter Shares”) at a price of $2.50 per share, for proceeds of approximately $15.9 million, net of $0.2 million in associated costs.
Second Quarter Registration Rights Agreement
In connection with the 2017 Warrants and the Second Quarter 2017 Private Placement, the Company entered into a Registration Rights Agreement (the “Second Quarter 2017 Registration Rights Agreement”) with the holders of the 2017 Warrants and the Second Quarter Stock Purchaser. Pursuant to the Second Quarter 2017 Registration Rights Agreement, subject to certain exceptions, the Company is required, upon the request of the Second Quarter Stock Purchaser and holders of the 2017 Warrants, to register the resale of the Second Quarter Shares and the shares of Common Stock issuable upon exercise of the 2017 Warrants. Pursuant to the terms of the Second Quarter 2017 Registration Rights Agreement, these registration rights will not become effective until twelve months after the Closing Date, and the costs incurred in connection with such registrations will be borne by the Company.
2017 Warrants
In connection with the Second Lien Note Facility (as defined above), the Company issued warrants (the “2017 Warrants”) to the purchasers of the Second Lien Notes (as defined below) pursuant to a Warrant Purchase Agreement dated as of June 29, 2017 (the “Warrant Purchase Agreement”). The 2017 Warrants entitle the purchasers of the Warrants to purchase shares of Common Stock, representing at the time of any exercise of the 2017 Warrants an equivalent number of shares equal to 4.99% of the Common Stock of the Company on a fully diluted basis, subject to the terms of the Warrant Agreement governing the 2017 Warrants, dated as of June 29, 2017 (the “Warrant Agreement”); provided, however, the 2017 Warrants may not be converted to the extent that, after giving effect to such conversion, the holders of the 2017 Warrants would beneficially own, in the aggregate, in excess of (i) 19.99% of the shares of Common Stock outstanding as of June 29, 2017 (the “Closing Date”) minus (ii) the shares of Common Stock that were sold pursuant to the Second Quarter 2017 Private Placement (as defined below) (the “Conversion Cap”). The Conversion Cap will not apply to the 2017 Warrants if the Company obtains the approval of its stockholders for the removal of the Conversion Cap, which the Company is required to take certain steps to attempt to obtain, subject to the terms of the Warrant Agreement.
The 2017 Warrants have a 10-year term and an initial exercise price of $2.00 per share, and may be exercised by payment of the exercise price in cash or surrender of shares of Common Stock into which the 2017 Warrants are being converted in an aggregate amount sufficient to pay the exercise price. The exercise price and the number of shares that may be acquired upon exercise of the 2017 Warrants are subject to adjustment in certain situations, including price based anti-dilution protection whereby, subject to certain exceptions, if the Company later issues Common Stock or certain Common Stock Equivalents (as defined in the Warrant Agreement) at a price less than either the then-current market price per share or exercise price of the 2017 Warrants, then the exercise price will be decreased and the percentage of shares of Common Stock issuable upon exercise of the 2017 Warrants will remain the same, giving effect to such issuance. Additionally, the 2017 Warrants have standard anti-dilution protections if the Company effects a stock split, subdivision, reclassification or combination of its Common Stock or fixes a record date for the making of a dividend or distribution to stockholders of cash or certain assets. Upon the occurrence of certain business combinations, the 2017 Warrants will be converted into the right to acquire shares of stock or other securities or property (including cash) of the successor entity.
See 2017 Warrants within Note 2 - Summary of Significant Accounting Policies for additional information related to the estimated fair value of the 2017 Warrants.
Treasury Stock
During the years endedAt December 31, 2019 and 2018, and 2017, 51,394 and 5,106 shares, respectively, were surrendered to satisfythe unrecognized tax withholding obligations on the exercise of stock options and the vesting of restricted stock awards. During the year ended December 31, 2018, an additional 257,305 shares were surrendered in net settlement of option exercises. The Company did not hold any shares of treasury stock at December 31, 2016 as the balancebenefits for uncertain tax positions was utilized to issue shares, reflected as consideration, in the Home Solutions acquisition.
NOTE 9 – STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
BioScrip Equity Incentive Plans
Under the Company’s Amended and Restated 2008 Equity Incentive Plan (the “2008 Plan”), the Company may issue, among other things, incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock grants, restricted stock units, performance shares and performance units to key employees and directors. While stock appreciation rights are authorized under the 2008 Plan, they may also be issued outside of the plan. The 2008 Plan is administered by the Company’s Management Development and Compensation Committee (the “Compensation Committee”), a standing committee of the Board of Directors.
On November 30, 2016, at a special meeting, the stockholders approved an amendment to the 2008 Plan to (a) increase the number of shares of Common Stock in the aggregate that may be subject to awards by 5,250,000 shares, from 9,355,000 to 14,605,000 shares and (b) increase the annual grant caps under the Company’s 2008 Plan from 500,000 Options, 500,000 Stock Appreciation Rights and 350,000 Stock Grants and Restricted Stock Units to a cap of no more than a total of 3,000,000 Options, Stock Appreciation Rights, Stock Grants and Restricted Stock Units combined that are intended to comply with the requirements of Section 162(m) of the Code.
On May 3, 2018, at the annual meeting of stockholders, the Board of Directors and stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”) to replace the expiring 2008 Plan. The 2018 Plan contains terms and conditions substantially similar to the 2008 Plan. A total of 16,406,939 shares of Common Stock were initially authorized for issuance under the 2018 Plan, which included the shares that remained available under the 2008 Plan. The 2018 Plan will terminate ten years after its adoption, unless terminated earlier by the Board of directors. As of December 31, 2018, there were 12,987,351 shares of Common Stock available for future grant under the 2018 Plan.
Stock Options
Options granted under the 2008 Plan or the 2018 Plan: (a) typically vest over a three-year period and, in certain instances, fully vest upon a change in control of the Company, (b) have an exercise price that may not be less than 100% of its fair market value on the date of grant and (c) are exercisable for seven to ten years after the date of grant, subject to earlier termination in certain circumstances.
Option expense is amortized on a straight-line basis over the requisite service period. The Company recognized compensation expense related to stock options of $1.0 million, $1.0 million, and $3.4 million, in the years ended December 31, 2018, 2017 and 2016, respectively.
The weighted-average, grant-date fair value of options granted during the years ending December 31, 2018, 2017 and 2016 was $1.69, $1.22, and $0.72, respectively. The fair value of stock options granted was estimated on the date of grant using a Black-Scholes option-pricing model. The assumptions used to compute the fair value of options for the years ending December 31, 2018, 2017 and 2016 were:
|
| | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Expected volatility | 71.0 | % | | 73.2 | % | | 68.1 | % |
| Risk-free interest rate | 2.71 | % | | 2.04 | % | | 1.98 | % |
| Expected life of options | 6.0 years |
| | 5.7 years |
| | 4.8 years |
|
| Dividend rate | — |
| | — |
| | — |
|
A summary of stock option activityThe following table presents the valuation allowance for the 2008 Plan and the 2018 Plan through December 31, 2018 was as follows:
|
| | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (thousands) | | Weighted Average Remaining Contractual Life |
| Balance at December 31, 2017 | 4,398,200 |
| | $ | 3.98 |
| | $ | 2,639 |
| | 5.5 years |
| Granted | 1,047,642 |
| | $ | 2.61 |
| | $ | 990 |
| | |
| Exercised | (427,977 | ) | | $ | 2.14 |
| | $ | 382 |
| | |
| Forfeited and expired | (1,320,140 | ) | | $ | 4.78 |
| | $ | 904 |
| | |
| Balance at December 31, 2018 | 3,697,725 |
| | $ | 3.52 |
| | $ | 3,974 |
| | 5.9 years |
| Exercisable at December 31, 2018 | 2,132,090 |
| | $ | 4.46 |
| | $ | 1,875 |
| | 4.1 years |
Cash received from option exercises under share-based payment arrangements was $0.1 million, 0.4 million and nominaldeferred tax assets for the years ended December 31, 2019, 2018 and 2017 and 2016, respectively.
The maximum term of stock options under these plans is ten years. Options outstanding as of December 31, 2018 expire on various dates ranging from February 2019 through November 2028. The following table outlines our outstanding and exercisable stock options as of December 31, 2018:(in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Range of Option Exercise Price | | Outstanding Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Options Exercisable | | Weighted Average Exercise Price |
| $0.00 - $2.06 | | 921,094 |
| | $ | 1.35 |
| | 6.4 years | | 471,139 |
| | $ | 0.76 |
|
| $2.06 - $4.13 | | 1,812,798 |
| | $ | 2.50 |
| | 7.2 years | | 697,118 |
| | $ | 1.90 |
|
| $4.13 - $6.19 | | 179,000 |
| | $ | 5.13 |
| | 3.0 years | | 179,000 |
| | $ | 2.74 |
|
| $6.19 - $8.25 | | 633,333 |
| | $ | 7.16 |
| | 2.8 years | | 633,333 |
| | $ | 4.15 |
|
| $10.31 - $12.38 | | 125,000 |
| | $ | 11.04 |
| | 2.6 years | | 125,000 |
| | $ | 5.97 |
|
| $12.38 - $14.44 | | 21,500 |
| | $ | 14.06 |
| | 4.3 years | | 21,500 |
| | $ | 7.30 |
|
| $16.50 - $18.57 | | 5,000 |
| | $ | 16.63 |
| | 4.6 years | | 5,000 |
| | $ | 8.96 |
|
| All options | | 3,697,725 |
| |
|
| |
| | 2,132,090 |
| |
|
|
|
| | | | | | | | | | | | | | | |
| | | | Additions | | |
| Description | Balance at Beginning of Period | | Charged (Benefit) to Costs and Expenses | | Charged to Other Accounts | | Balance at End Period |
| | | | | | | | |
| 2017: Valuation allowance for deferred tax assets | $ | 765 |
| | $ | 498 |
| | $ | — |
| | $ | 1,263 |
|
| | | | | | | | |
| 2018: Valuation allowance for deferred tax assets | $ | 1,263 |
| | $ | 110 |
| | $ | — |
| | $ | 1,373 |
|
| | | | | | | | |
| 2019: Valuation allowance for deferred tax assets | $ | 1,373 |
| | $ | 15,395 |
| | $ | 92,763 |
| | $ | 109,531 |
|
As of December 31, 2018 there was $1.7 million of unrecognized compensation expense related to unvested option grants that is expected to be recognized over a weighted-average period of 2.1 years.
Restricted Stock
Restricted stock grants subject solely to an employee’s or director’s continued service withCurrently, the Company generally will become fully vested within (a) one to three years from the date of grant to employees and, in certain instances, may fully vest upon a change in control of the Company, and (b) one year from the date of grant for directors. Stock grantsis not subject to any U.S. Federal income tax audits. The Company is subject to various state tax audits, and believes that the achievementoutcome of performance conditionsthese audits will not vest less than one year from the date of grant.
The Company recognized compensation expense related to restricted stock awards of $2.6 million, $1.1 million, and $0.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
A summary of restricted stock award activity through December 31, 2018 was as follows:
|
| | | | | | |
| | Restricted Stock | | Weighted Average Grant Date Fair Value |
| Balance at December 31, 2017 | 1,882,363 |
| | $ | 1.82 |
|
| Granted | 3,284,197 |
| | $ | 2.55 |
|
| Awards Vested | (372,116 | ) | | $ | 2.09 |
|
| Canceled | (392,256 | ) | | $ | 2.29 |
|
| Balance at December 31, 2018 | 4,402,188 |
| | $ | 1.87 |
|
As of December 31, 2018, there was $3.5 million in unrecognized compensation expense related to unvested restricted stock awards that is expected to be recognized overhave a weighted-average period of 1.8 years. The total fair value of restricted stock awards vested during the years December 31, 2018, 2017 and 2016 was $0.4 million, $0.4 million, and $0.2 million, respectively.
Employee Stock Purchase Plan
The Company’s Employee Stock Purchase Plan (the “ESPP”) is administered by the Compensation Committee. The ESPP provides all eligible employees, as defined under the ESPP, the opportunity to purchase up to a maximum number of shares of Common Stock of the Company as determined by the Compensation Committee. Participants in the ESPP may acquire the Common Stock at a cost of 85% of the lower of the fair market valuematerial impact on the first or last day of the quarterly offering period.
On May 8, 2018, the Board of Directors and stockholders approved an amendment to the ESPP to increase the number of shares available for issuance from 750,000 shares to 2,250,000 shares. As of December 31, 2018, there were 1,379,943 remaining shares available for issuance. During the years ended December 31, 2018, 2017 and 2016, 173,519, 265,608 and 245,371 shares were purchased under this plan, respectively. The Company recognized $0.1 million of expense related to the ESPP during the years ended December 31, 2018, 2017 and 2016.
401(k) Plan
The Company maintains a deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the Plan, employees may elect to defer up to 100% of their salary, subject to Internal Revenue Service limits, and the Company may make a discretionary matching contribution. During the year ended December 31, 2018, management approved discretionary matching contributions totaling approximately $0.3 million effective July 1, 2018. The Company elected to forgo a matching contribution during the years ended December 31, 2017 and 2016.Company.
NOTE 10 – LOSS7. (LOSS) EARNINGS PER SHARE
The Company presents basic and diluted loss(loss) earnings per share for its common stock, par value $.0001 per share (“Common Stock”).stock. Basic loss(loss) earnings per share is calculated by dividing the net loss attributable to common stockholders(loss) income of the Company by the weighted average number of shares of Common Stockcommon stock outstanding during the period. Diluted loss(loss) earnings per share is determined by adjusting the profit or loss attributable to stockholders and the weighted average number of shares of Common Stockcommon stock outstanding adjusted for the effects of all dilutive potential common shares comprisedshares.
As a result of options granted, unvested restricted stock, stock appreciation rights, the 2017 Warrants and Series A and Series C Convertible Preferred Stock. Potential Common Stock equivalents that have been issued by the Company related to outstanding stock options, unvested restricted stock and warrants are determined using the treasury stock method, while potential common shares related to Series A and Series C Convertible Preferred Stock are determined using the “if converted” method.
The Company's Series A and Series C Convertible Preferred Stock, par value $.0001Merger, all historical per share (together, the “Preferred Stock”), is considered a participating security, which means the security may participate in undistributeddata and number of shares and equity awards were retroactively adjusted. The (loss) earnings with Common Stock. The holders of the Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of Common Stock were to receive dividends. The Company is required to use the two-class method when computing loss per share when it has a security that qualifies as a participating security. The two-class method is an earnings allocation formula that determines loss per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding during the period. Diluted loss per share for the Company’s Common Stock is computed using the more dilutive of the two-class method or the if-converted method.
The following table sets forth the computation of basic and diluted loss per common share (in thousands, except per share amounts):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Numerator: | | | | | |
| Loss from continuing operations | $ | (51,592 | ) | | $ | (63,303 | ) | | $ | (36,172 | ) |
| Loss from discontinued operations, net of income taxes | (101 | ) | | (893 | ) | | (6,593 | ) |
| Net loss | (51,693 | ) | | (64,196 | ) | | (42,765 | ) |
| Accrued dividends on preferred stock | (11,210 | ) | | (10,077 | ) | | (9,084 | ) |
| Loss attributable to common stockholders | $ | (62,903 | ) | | $ | (74,273 | ) | | $ | (51,849 | ) |
| | | | | | |
| Denominator - Basic and Diluted: | | | | | |
| Weighted average number of common shares outstanding | 127,942 |
| | 123,791 |
| | 93,740 |
|
| Loss Per Common Share: | | | | | |
| Loss from continuing operations, basic and diluted | $ | (0.49 | ) | | $ | (0.59 | ) | | $ | (0.48 | ) |
| Loss from discontinued operations, basic and diluted | — |
| | (0.01 | ) | | (0.07 | ) |
| Loss per common share, basic and diluted | $ | (0.49 | ) | | $ | (0.60 | ) | | $ | (0.55 | ) |
The loss attributable to common stockholders is used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. Accordingly, the computation of diluted shares for the yearsyear ended December 31, 2018, 2017 and 20162019 excludes the effect of shares that would be issued in connection with the PIPE Transaction, the Rights Offering, 2017 Warrants,warrants, stock options and restricted stock awards, as their inclusion would be anti-dilutive to the loss attributable toper share. As of December 31, 2019 there were 2,328,120 warrants, 644,975 stock options and 231,562 restricted stock awards outstanding that were excluded from the calculation as they would be anti-dilutive. There are no dilutive potential common stockholders.shares for the years ended December 31, 2018 or 2017.
In conjunction with the one share for four share reverse stock split discussed in Note 20, Subsequent Events, all historical per share data and number of shares and equity awards were retroactively adjusted.
The following table presents the Company’s basic and diluted (loss) earnings per share and shares outstanding (in thousands, except per share data):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net (loss) income | $ | (75,920 | ) | | $ | (6,115 | ) | | $ | 3,878 |
|
| Denominator: | |
| | |
| | |
| Weighted average number of common shares outstanding | 156,280 |
| | 142,614 |
| | 142,614 |
|
| (Loss) Earnings per Common Share: | | | | | |
| (Loss) earnings per common share, basic and diluted | $ | (0.49 | ) | | $ | (0.04 | ) | | $ | 0.03 |
|
NOTE 11 – INCOME TAXES8. LEASES
The federalDuring the year ended December 31, 2019, the Company incurred operating lease expenses of $25.8 million including short-term lease expenses, which were included as a component of selling, general and stateadministrative expenses in the consolidated statements of comprehensive income tax benefit (expense) from continuing operations consisted(loss). As of December 31, 2019, the followingweighted-average remaining lease term was 5.3 years and the weighted-average discount rate was 5.40%.
Operating leases mature as follows (in thousands):
|
| | | | |
| Year Ending December 31 | | Minimum Payments |
| 2020 | | $ | 24,983 |
|
| 2021 | | 19,178 |
|
| 2022 | | 13,982 |
|
| 2023 | | 10,605 |
|
| 2024 | | 7,847 |
|
| 2025 and beyond | | 17,662 |
|
| Total lease payments | | 94,257 |
|
| Less: Interest | | (15,624 | ) |
| Present value of lease liabilities | | $ | 78,633 |
|
In addition, the Company had $0.7 million of financing leases outstanding at December 31, 2019 which mature over the next year.
During the year ended December 31, 2019, the Company did not enter into any significant new operating or financing leases. As of December 31, 2019, the Company did not have any significant operating or financing leases that had not yet commenced.
During the years ended December 31, 2018 and 2017, the Company incurred rent expense of $17.3 million, respectively, under ASC Topic 840, Leases, which was included as a component of selling, general and administrative expenses in the consolidated statements of comprehensive income (loss).
9. PROPERTY AND EQUIPMENT
Property and equipment was as follows as of December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Current | | | | | |
| Federal | $ | — |
| | $ | 925 |
| | $ | — |
|
| State | (502 | ) | | (174 | ) | | 30 |
|
| Total current | (502 | ) | | 751 |
| | 30 |
|
| Deferred | |
| | |
| | |
|
| Federal | — |
| | 1,951 |
| | (1,744 | ) |
| State | (66 | ) | | 1,428 |
| | (301 | ) |
| Total deferred | (66 | ) | | 3,379 |
| | (2,045 | ) |
| Total tax benefit (expense) | $ | (568 | ) | | $ | 4,130 |
| | $ | (2,015 | ) |
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Infusion pumps | $ | 30,416 |
| | $ | 20,339 |
|
| Equipment, furniture, and other | 51,454 |
| | 34,433 |
|
| Leasehold improvements | 80,916 |
| | 61,302 |
|
| Computer software, purchased and internally developed | 34,884 |
| | 29,668 |
|
| Assets under development | 14,150 |
| | 5,447 |
|
| | 211,820 |
| | 151,189 |
|
| Less accumulated depreciation | 78,622 |
| | 58,047 |
|
| Property and equipment, net | $ | 133,198 |
| | $ | 93,142 |
|
Depreciation expense is recorded within cost of revenue and operating expenses within the 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 years ended December 31, 2019, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Depreciation expense in cost of revenue | $ | 4,179 |
| | $ | 2,993 |
| | $ | 3,400 |
|
| Depreciation expense in operating expenses | 27,629 |
| | 18,490 |
| | 14,868 |
|
| Total depreciation expense | $ | 31,808 |
| | $ | 21,483 |
| | $ | 18,268 |
|
During the year ended December 31, 2018, one company location was destroyed by a hurricane, resulting in a loss of $0.6 million of property and equipment. A business casualty loss was recorded as a component of operating costs and expenses within the consolidated statements of comprehensive income (loss). During the year ended December 31, 2019, $0.6 million in
proceeds were received related to recovery of property and equipment. These proceeds resulted in a gain on business casualty loss of $0.6 million recorded as a component of selling, general, and administrative expenses in the consolidated statements of comprehensive income (loss) during the year ended December 31, 2019. These proceeds were reflected as a component of cash flows from investing activities in the consolidated statement of cash flows.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is not amortized, but is evaluated for impairment annually in the fourth quarter of the fiscal year, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Circumstances that could trigger an interim impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reporting units; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; and the results of testing for recoverability of a significant asset group within a reporting unit.
A qualitative impairment analysis was performed in the fourth quarter of 2019 to assess whether it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying value. The Company assessed relevant events and circumstances including macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and changes in the Company’s stock price. The Company determined that there was no goodwill impairment in 2019.
A quantitative impairment analysis was performed in the fourth quarter of 2018 and 2017, and the Company estimated the fair value of its reporting unit using an income approach. The income approach requires management to estimate a number of factors for its reporting unit, including projected future operating results, economic projections, anticipated future cash flows, and discount rates. The fair value determined using the income approach was then compared to marketplace fair value data from within a comparable industry grouping for reasonableness. The Company determined that there was no goodwill impairment in 2018 or 2017.
The effectdetermination of temporary differencesfair value and the allocation of that give risevalue to individual assets and liabilities within the reporting unit requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures. Actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant portionimpact on either the fair value of deferred taxesthe reporting unit, the amount of the goodwill impairment charge, or both.
Changes in the carrying amount of goodwill consist of the following activity for the years ended December 31, 2019 and 2018 (in thousands):
|
| | | | |
| Balance at December 31, 2017 | | $ | 627,392 |
|
| Acquisitions | | 5,077 |
|
| Balance at December 31, 2018 | | $ | 632,469 |
|
| Acquisitions | | 793,073 |
|
| Balance at December 31, 2019 | | $ | 1,425,542 |
|
There was no change in the carrying amount of goodwill for the year ended December 31, 2017.
The carrying amount and accumulated amortization of intangible assets consists of the following as of December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| Gross intangible assets: | | | | |
| Referral sources | | $ | 438,121 |
| | $ | 257,792 |
|
| Trademarks/names | | 44,536 |
| | 32,000 |
|
| Other amortizable intangible assets | | 402 |
| | 4,151 |
|
| Total gross intangible assets | | 483,059 |
| | 293,943 |
|
| | | | | |
| Accumulated amortization: | | | | |
| Referral sources | | (84,295 | ) | | (63,353 | ) |
| Trademarks/names | | (12,748 | ) | | (8,000 | ) |
| Other amortizable intangible assets | | (106 | ) | | (2,877 | ) |
| Total accumulated amortization | | (97,149 | ) | | (74,230 | ) |
| Total intangible assets, net | | $ | 385,910 |
| | $ | 219,713 |
|
Amortization expense for intangible assets was $26.1 million, $19.6 million and $19.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Expected future amortization expense for intangible assets recorded at December 31, 2019, is as follows (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Reserves not currently deductible | $ | 6,634 |
| | $ | 10,707 |
|
| Net operating loss carryforwards | 128,819 |
| | 110,773 |
|
| Goodwill and intangibles (tax deductible) | 7,853 |
| | 12,757 |
|
| Accrued expenses | 641 |
| | 95 |
|
| Property basis differences | 3,679 |
| | 2,813 |
|
| Stock based compensation | 2,180 |
| | 2,371 |
|
| Total deferred tax assets | 149,806 |
| | 139,516 |
|
| Deferred tax liabilities: | |
| | |
|
| Other | (309 | ) | | (180 | ) |
| Less: valuation allowance | (148,465 | ) | | (138,238 | ) |
| Net deferred tax asset | $ | 1,032 |
| | $ | 1,098 |
|
|
| | | | |
| 2020 | | $ | 34,859 |
|
| 2021 | | 32,015 |
|
| 2022 | | 28,338 |
|
| 2023 | | 28,338 |
|
| 2024 | | 28,338 |
|
| 2025 and beyond | | 234,022 |
|
| Total | | $ | 385,910 |
|
The weighted average amortization period of intangible assets by class and in total as of December 31, 2019 are as follows: 17.1 years for referral sources, 4.2 years for trademarks/names, 1.5 years for other amortizable intangible assets, and 15.9 years for total intangible assets.
11. EQUITY-METHOD INVESTMENTS
The Company’s two equity-method investments totaled $17.0 million and $14.6 million as of December 31, 2019 and 2018, respectively, and are included in other noncurrent assets in the accompanying consolidated balance sheets. The Company’s related proportionate share of earnings is recorded in equity in earnings of joint ventures in the accompanying consolidated statements of comprehensive income (loss). For the years ended December 31, 2019, 2018 and 2017, the Company’s proportionate share of earnings in its equity-method investees was $2.8 million, $1.0 million and $2.2 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, $2.0 million and $1.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. The following presents condensed financial information as of December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | |
| Consolidated statements of comprehensive income (loss) data: | | |
| | | | Year Ended December 31, |
| | | | 2019 | | 2018 | | 2017 |
| Net revenue | | | $ | 21,037 |
| | $ | 21,309 |
| | $ | 23,295 |
|
| Cost of revenue | | | 14,792 |
| | 15,042 |
| | 17,069 |
|
| Gross profit | | | 6,245 |
| | 6,267 |
| | 6,226 |
|
| Net income | | | 1,986 |
| | 1,772 |
| | 3,278 |
|
| Equity in net income | | | 993 |
| | 886 |
| | 1,639 |
|
| | | | | | | | |
|
| | | | | | | |
| Consolidated balance sheet data: |
| | As of December 31, |
| | 2019 | | 2018 |
| Current assets | $ | 7,643 |
| | $ | 5,666 |
|
| Noncurrent assets | 3,846 |
| | 3,403 |
|
| Current liabilities | 903 |
| | 119 |
|
| Noncurrent liabilities | 659 |
| | 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 December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, (in thousands):
|
| | | | | | | | | | | | | |
| Consolidated statements of comprehensive income (loss) data: | | |
| | | | Year Ended December 31, |
| | | | 2019 | | 2018 | | 2017 |
| Net revenue | | | $ | 38,744 |
| | $ | 31,517 |
| | $ | 27,805 |
|
| Cost of revenue | | | 29,952 |
| | 24,433 |
| | 20,665 |
|
| Gross profit | | | 8,792 |
| | 7,084 |
| | 7,140 |
|
| Net income | | | 3,694 |
| | 268 |
| | 1,094 |
|
| Equity in net income | | | 1,847 |
| | 134 |
| | 547 |
|
| | | | | | | | |
|
| | | | | | | | | |
| Consolidated balance sheet data: |
| | | As of December 31, |
| | | 2019 | | 2018 |
| Current assets | | $ | 11,111 |
| | $ | 6,517 |
|
| Noncurrent assets | | 2,033 |
| | 1,008 |
|
| Current liabilities | | 1,228 |
| | 192 |
|
| Noncurrent liabilities | | 956 |
| | 68 |
|
12. INDEBTEDNESS
Long-term debt consisted of the following as of December 31, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Principal Amount | | Discount | | Debt Issuance Costs | | Net Balance |
| ABL Facility | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| First Lien Term Loan | | 925,000 |
| | (8,399 | ) | | (22,825 | ) | | 893,776 |
|
| Second Lien Notes | | 412,256 |
| | (11,672 | ) | | (7,864 | ) | | 392,720 |
|
| | | $ | 1,337,256 |
| | $ | (20,071 | ) | | $ | (30,689 | ) | | 1,286,496 |
|
| Less: current portion | | | | | | | | (9,250 | ) |
| Total long-term debt | | | | | | | | $ | 1,277,246 |
|
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 continually assessesincurred an original issue discount in conjunction with entering into the necessityPrevious 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 valuation allowance. Based on this assessment,reduction to the carrying amount in the 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 concluded thatrepaid the outstanding balance of Previous Term Loans and retired the outstanding Previous Credit Facilities by entering into two new credit arrangements and a valuation allowance, innotes indenture, described below under “New Debt Obligations”. At the amounttime of $148.5repayment, 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 $138.2deferred 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 principal balance on the Previous First Lien Term Loan was repayable in quarterly installments of $1.0 million. There were no quarterly principal payments required for the Previous Second Lien Term Loan. Interest was payable monthly for the Previous First Lien Term Loan and quarterly for the Previous Second Lien Term Loan. The interest rate on the Previous First Lien Term Loan was 6.10% as of December 31, 2018 and 2017, respectively. Ifthe 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 6.20% and 6.30% for the years ended December 31, 2019 and 2018, respectively, prior to the retirement of the debt obligations. The weighted average interest paid on the Previous Second Lien Term Loan was 11.36% and 10.80% for the years ended December 31, 2019 and 2018, respectively, prior to the retirement of the debt obligations.
New Debt Obligations — In conjunction with the Merger, the Company determinesentered into an asset-based-lending revolving credit facility administered by Bank of America, N.A. 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. 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 future$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 2.50%. 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 December 31, 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 December 31, 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 6.20% as of December 31, 2019. The weighted average interest rate incurred was 6.47% for the period that it is more likely than not that part orAugust 6, 2019 through December 31, 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 deferred taxCompany’s property and assets will be realized,(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 (“PIK”) the first quarterly interest payment, due in November 2019, which resulted in the Company will reverse part or allcapitalizing $12.3 million in interest to the principal balance on the interest payment date. In connection with the PIK election, the Company was charged an additional 1.00% in interest expense on the first quarterly interest payment. The interest rate on the Second Lien Notes was 10.66% as of December 31, 2019. The weighted average interest incurred was 11.45% for the period August 6, 2019 through December 31, 2019.
The Company assessed whether the repayment of the valuation allowance.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 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 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 $52.6 million in debt issuance costs and third-party fees, of which $48.1 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 $52.6 million was netted against the $981.1 million of proceeds from debt as a component of the cash flows from financing activities, $30.0 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.
At December 31, 2018, theThe Company had federal net operatingrecognized a loss carryforwardson extinguishment of approximately $429.8debt of $5.5 million, of which $11.9 million is subject to an annual limitation, which will begin expiring in 2026 and later. The Company also has a carryforward of approximately $49.2$3.2 million related to debt issue costs incurred with the interest expense limitation, which is not subject to an expiration period. The Company has post-apportioned state net operating loss carryforwards of approximately $479.7 million, the majority of which will begin expiring in 2019 and later.
A reconciliationissuance of the federal statutory rateLoan 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 effective income tax rate from continuing operations isPrevious 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):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Tax benefit at statutory rate | $ | 10,715 |
| | $ | 23,654 |
| | $ | 11,907 |
|
| State tax benefit, net of federal taxes | 1,510 |
| | 4,587 |
| | 1,398 |
|
| Change in valuation allowance | (10,227 | ) | | 41,550 |
| | (14,725 | ) |
| Change in tax contingencies | — |
| | 10 |
| | 66 |
|
| Alternative minimum tax receivable | — |
| | 925 |
| | — |
|
| Corporate tax rate changes | — |
| | (67,707 | ) | | — |
|
| Other | (2,566 | ) | | 1,111 |
| | (661 | ) |
| Tax benefit (expense) | $ | (568 | ) | | $ | 4,130 |
| | $ | (2,015 | ) |
|
| | | | |
| Year Ending December 31, | | Minimum Payments |
| 2020 | | $ | 9,250 |
|
| 2021 | | 9,250 |
|
| 2022 | | 9,250 |
|
| 2023 | | 9,250 |
|
| 2024 | | 9,250 |
|
| 2025 and beyond | | 1,291,006 |
|
| Total | | $ | 1,337,256 |
|
As ofDuring the year ended December 31, 2018,2019, the Company had $1.0 million of gross unrecognized tax benefits. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Unrecognized tax benefits balance at January 1, | $ | 1,014 |
| | $ | 1,021 |
| | $ | 1,067 |
|
| Lapse of statute of limitations | — |
| | (7 | ) | | (46 | ) |
| Unrecognized tax benefits balance at December 31, | $ | 1,014 |
| | $ | 1,014 |
| | $ | 1,021 |
|
engaged in hedging activities to limit its exposure to changes in interest rates. See Note 13, Derivative Instruments, for further discussion.
The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of income tax expense infollowing table presents the Consolidated Statements of Operations. As of December 31, 2018 and December 31, 2017, the Company had a nominal amount of accrued interest related to uncertain tax positions.
The Company files income tax returns, including returns for its subsidiaries, with federal, state and local jurisdictions. The Company’s uncertain tax positions are related to tax years that remain subject to examination. As of December 31, 2018, U.S. tax returns for the years 2015 through 2018 remain subject to examination by federal tax authorities. Tax returns for the years 2014 through 2018 remain subject to examination by state and local tax authorities for a majority of the Company's state and local filings.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (“TCJA”). The enactment included broad tax changes that are applicable to BioScrip, Inc. Most notably, the TCJA has established the U.S. corporate tax rate decrease from a high of 35% to a flat 21% income tax rate effective January 1, 2018.
These changes require BioScrip, Inc. to re-measure deferred tax assets and liabilities. The Company uses the asset and liability approach for accounting for income taxes. Under that method, assets and liabilities are recorded for future tax consequences attributable to the difference between financial statement balances of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates at which the temporary differences are expected to reverse. As a result of the decreased U.S. corporate income tax rate from 35% to 21%, the Company has revalued its ending net deferred tax assets as of December 31, 2017. Due to the full valuation allowance against substantially all net deferred tax assets, the change in deferred tax rate to 21% does not have an impact on the Company’s financial statements.
NOTE 12 – FAIR VALUE MEASURMENTS
The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basisdebt obligations as of December 31, 20182019 (in thousands):
|
| | | | | | | | | | | | | | | | |
| Financial Instrument | | Carrying Value as of December 31, 2019 | | Markets for Identical Item (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| First Lien Note Facility | | $ | 893,776 |
| | $ | — |
| | $ | 922,688 |
| | $ | — |
|
| Second Lien Note Facility | | 392,720 |
| | — |
| | — |
| | 411,119 |
|
| Total debt instruments | | $ | 1,286,496 |
| | $ | — |
| | $ | 922,688 |
| | $ | 411,119 |
|
The following table sets forth the changes in Level 3 measurements for the year ended December 31, 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 |
|
| Interest rate PIK | | 12,256 |
|
| Change in fair value | | 10,863 |
|
| Second Lien Notes fair value as of December 31, 2019 | | $ | 411,119 |
|
See Note 14, Fair Value Measurements, for further discussion.
13. DERIVATIVE INSTRUMENTS
The Company utilizes derivative financial instruments for hedging and non-trading purposes to limit the Company’s exposure to its variable interest rate risk. Use of derivative financial instruments in hedging strategies 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. 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 rising interest rates. 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. The second interest rate swap for $400.0 million notional was effective in November 2019 and is designated as a cash flow hedge against the underlying interest rate on the Second Lien Notes interest payment indexed to three-month LIBOR through November 2020. 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 first interest rate swap is not designated as followsa hedging instrument.
The following table summarizes the amount and location of the Company’s derivative instruments in the consolidated balance sheets (in thousands):
|
| | | | | | | | | | |
| | Fair value - Derivatives in asset position |
| Derivative | | Balance Sheet Caption | | December 31, 2019 | | December 31, 2018 |
| Interest rate caps designated as cash flow hedges | | Prepaid expenses and other current assets | | $ | — |
| | $ | 2,627 |
|
| Total derivatives | | | | $ | — |
| | $ | 2,627 |
|
|
| | | | | | | | | | |
| | | Fair value - Derivatives in liability position |
| Derivative | | Balance Sheet Caption | | December 31, 2019 | | December 31, 2018 |
| Interest rate swaps designated as cash flow hedges | | Accrued expenses and other current liabilities | | $ | 1,275 |
| | $ | — |
|
| Interest rate swaps designated as cash flow hedges | | Other noncurrent liabilities | | 5,920 |
| | — |
|
| Interest rate swaps not designated as hedges | | Other noncurrent liabilities | | 90 |
| | — |
|
| Total derivatives | | | | $ | 7,285 |
| | $ | — |
|
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 consolidated statements of comprehensive income (loss) (in thousands):
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| Derivative | 2019 | | 2018 | | 2017 |
| Interest rate caps designated as cash flow hedges | $ | (1,103 | ) | | $ | 1,008 |
| | $ | 94 |
|
| Interest rate swaps designated as cash flow hedges | (7,195 | ) | | — |
| | — |
|
| Total | $ | (8,298 | ) | | $ | 1,008 |
| | $ | 94 |
|
The following table presents the amount and location of pre-tax income (loss) recognized in the Company’s consolidated statement of comprehensive income (loss) related to the Company’s derivative instruments (in thousands):
|
| | | | | | | | | | | | | | | | |
| Financial Instrument | | Carrying Value as of December 31, 2018 | | Markets for Identical Item (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
First Lien Note Facility(1) | | $ | 198,962 |
| | $ | — |
| | $ | — |
| | $ | 203,462 |
|
Second Lien Note Facility (1) | | 108,931 |
| | — |
| | — |
| | 121,622 |
|
2021 Notes (2) | | 198,125 |
| | — |
| | 186,500 |
| | — |
|
| Total debt instruments | | $ | 506,018 |
| | $ | — |
| | $ | 186,500 |
| | $ | 325,084 |
|
| | | | | | | | | |
2017 Warrants (3) | | $ | 25,331 |
| | $ | — |
| | $ | 25,331 |
| | $ | — |
|
|
| | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| Derivative | Income Statement Caption | | 2019 | | 2018 | | 2017 |
| Interest rate caps designated as cash flow hedges | Interest expense | | $ | (125 | ) | | $ | 300 |
| | $ | 5 |
|
| Interest rate swaps designated as cash flow hedges | Interest expense | | (115 | ) | | — |
| | — |
|
| Interest rate swaps not designated as hedges | Interest expense | | (92 | ) | | — |
| | — |
|
| Total | | | $ | (332 | ) | | $ | 300 |
| | $ | 5 |
|
The Company expects to reclassify $5.1 million of total interest rate costs from accumulated other comprehensive loss against interest expense during the next 12 months.
| |
(1) | The estimated fair values of the First and Second Lien Notes were based on cash flow models discounted at market interest rates that considered the underlying risks of the note. |
| |
(2) | The estimated fair value of the 2021 Notes incorporated recent trading activity in public markets. |
| |
(3) | See 2017 Warrants within Note 2 - Summary of Significant Accounting Policies.14. FAIR VALUE MEASUREMENTS |
NOTE 13Fair 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 three levels of inputs within the fair value hierarchy are defined in Note 2, –Summary of Significant Accounting Policies. RESTRUCTURING, ACQUISITION, INTEGRATION, AND OTHER EXPENSESWhile the Company believes its valuation methods are appropriate and consistent with other market participants, the use ofdifferent methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Restructuring, acquisition, integration,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 12, Indebtedness, for further discussion on the carrying amount and other expenses include non-recurring costs associated with restructuring, acquisitionfair 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 12, Indebtedness, for further discussion on the carrying amount and integration initiatives such as employee severance costs, certain legal and professional fees, training costs, redundant wage costs, impacts recordedfair value of the Second Lien Notes.
Interest rate swaps: The fair values of interest rate swaps are derived from the change in contingent consideration obligations, and other costs related to contract terminations and closed branches/offices.
Restructuring, acquisition, integration, and other expensesinterest rates prevalent in the Consolidated Statementsmarket and future expectations of Operations consistedthose interest rates (Level 2 inputs). The Company determines the fair value of the following (in thousands):investments based on quoted prices from third-party brokers. See Note 13, Derivative Instruments, for further discussion on the fair value of the 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. See Note 13, Derivative Instruments, for further discussion on the fair value of the interest rate caps.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Restructuring and other expense | $ | 4,934 |
| | $ | 12,134 |
| | $ | 10,334 |
|
| Acquisition and integration expenses | 1,523 |
| | 528 |
| | 10,122 |
|
| Change in fair value of contingent consideration | — |
| | — |
| | (4,597 | ) |
| Total restructuring, acquisition, integration, and other expenses | $ | 6,457 |
| | $ | 12,662 |
| | $ | 15,859 |
|
NOTE 14 –15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
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 partyplaintiff 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 variouspredict, and the costs incurred in litigation can be substantial, regardless of the outcome. The Company believes that its defenses and assertions in pending legal regulatoryproceedings have merit and governmental proceedings incidental to its business. Based on current knowledge, management does not believe that loss contingencies arising fromany of these pending legal, regulatorymatters, after consideration of applicable reserves and governmental matters, including the matters described herein,rights to indemnification, will have a material adverse effect on the Company’s consolidated financial position or liquidity of the Company.balance sheets. However, in light of the inherent uncertainties involved in pending legal, regulatorysubstantial unanticipated verdicts, fines, and governmental matters, some of which are beyond the Company’s control, and the indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.
With respect to all legal, regulatory and governmental proceedings,rulings may occur. As a result, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated loss for the expected outcome of the matter. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the possible loss or range of loss. However, the Company is unable to estimate a possible loss or range of loss in some instances based on the significant uncertainties involved in, and/or the preliminary nature of, certain legal, regulatory and governmental matters.
On December 18, 2017, a commercial payor of the Company sent a letter that claimed an alleged breach of the Company’s obligation under its provider contracts. No legal proceeding has been filed. The Company is not able to estimate the amount of any possible loss. The Company believes this claim is without merit and intends to vigorously defend against this claim if any such legal proceeding is commenced.
Government Regulation
Various federal and state laws and regulations affecting the healthcare industry do or may impact the Company’s current and planned operations, including, without limitation, federal and state laws prohibiting kickbacks in government health programs, federal and state antitrust and drug distribution laws, and a wide variety of consumer protection, insurance and other state laws and regulations. While management believes the Company is in substantial compliance with all existing laws and regulations material to the operation of its business, such laws and regulations are often uncertain in their application to our business practices as they evolve and are subject to rapid change. As controversies continue to arise in the healthcare industry, federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which cannot be predicted.
Fromfrom time to time the Company responds to investigatory subpoenas and requests for information from governmental agencies and private parties. The Company cannot predict with certainty whatincur judgments, enter into settlements, or revise expectations regarding the outcome of any of the foregoing might be. While the Company believes it is in substantial compliance with all laws, rulescertain matters, and regulations that affects its business and operations, there can be no assurance that the Company will not be subject to scrutiny or challenge under one or more existing laws or that any
such challenge would not be successful. Any such challenge, whether or not successful,developments could have a material adverse effect uponon 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.
16. STOCK-BASED INCENTIVE COMPENSATION
Equity Incentive Plans — Under the Company’s Consolidated Financial Statements. A violation2018 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 federal Anti-Kickback Statute,Board of Directors. A total of 16,406,939 shares (4,101,735 equivalent shares after adjusting for example,the one share for four share reverse stock split) of common stock were initially authorized for issuance under the 2018 Plan.
Stock Options — Options granted under the 2018 Plan typically vest over a three-year period and, in certain instances, may resultfully vest upon a change in substantial criminal penalties, as well as suspension or exclusioncontrol of the Company. The options also typically have an exercise price that may not be less than 100% of its fair market value on the date of grant and are exercisable seven to ten years after the date of grant, subject to earlier termination in certain circumstances.
Compensation expense from stock options is recognized on a straight-line basis over the Medicare and Medicaid programs. Moreover,requisite service period. During the costs and expenses associated with defending these actions, even where successful, can be significant.Further, there can be no assuranceyear ended December 31, 2019, the Company will be ablerecognized compensation expense related to obtain or maintainstock options of $0.4 million. The Company did not recognize any ofcompensation expense related to stock options prior to the regulatory approvals that may be required to operate its business, and the failure to do so could have a material effect on the Company’s Consolidated Financial Statements.
LeasesMerger.
The Company leases its facilities and certain equipment under various operating leases with third parties. The majority of these leases contain escalation clauses that increase base rent payments based upon eitherdid not grant any options during the Consumer Price Index or an agreed upon schedule.year ended December 31, 2019.
In addition,A summary of stock option activity from the Company utilizes capital leases agreementsMerger Date through December 31, 2019 was as follows (all amounts adjusted for the one share for four share reverse stock split):
|
| | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (thousands) | | Weighted Average Remaining Contractual Life |
| Balance at December 31, 2018 | — |
| | $ | — |
| | $ | — |
| |
|
| Acquired in Merger | 812,565 |
| | $ | 13.88 |
| | $ | 3,935 |
| | |
| Granted | — |
| | $ | — |
| | $ | — |
| | |
| Exercised | (158,270 | ) | | $ | 7.64 |
| | $ | 995 |
| | |
| Forfeited and expired | (9,320 | ) | | $ | 17.72 |
| | $ | 29 |
| | |
| Balance at December 31, 2019 | 644,975 |
| | $ | 15.36 |
| | $ | 2,754 |
| | 2.4 years |
| Exercisable at December 31, 2019 | 597,856 |
| | $ | 15.76 |
| | $ | 2,524 |
| | 1.9 years |
During the year ended December 31, 2019, shares were surrendered to satisfy tax withholding obligations on the exercise of stock options with third parties to obtain certain propertya cost basis of $0.4 million, which are all held as treasury stock as of December 31, 2019. No cash was received from stock option exercises under share-based payment arrangements for the years ended December 31, 2019, 2018 or 2017.
The maximum term of stock options under these plans is ten years. Options outstanding as of December 31, 2019 expire on various dates ranging from February 2020 through November 2028. The following table outlines the outstanding and equipment. Interest rates on capital leases are both fixed and variable and range from 3% to 7%.exercisable stock options as of December 31, 2019 (all amounts adjusted for the one share for four share reverse stock split):
|
| | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Range of Option Exercise Price | | Outstanding Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Options Exercisable | | Weighted Average Exercise Price |
| $0.00 - $8.24 | | 139,168 |
| | $ | 4.87 |
| | 1.0 year |
| | 135,867 |
| | $ | 4.83 |
|
| $8.24 - $16.52 | | 295,224 |
| | $ | 10.33 |
| | 3.7 years |
| | 251,406 |
| | $ | 10.34 |
|
| $16.52 - $24.76 | | 38,250 |
| | $ | 20.97 |
| | 2.5 years |
| | 38,250 |
| | $ | 20.97 |
|
| $24.76 - $33.00 | | 148,333 |
| | $ | 28.57 |
| | 0.8 years |
| | 148,333 |
| | $ | 28.57 |
|
| $33.00 - $41.28 | | — |
| | $ | — |
| | — |
| | — |
| | $ | — |
|
| $41.28 - $49.52 | | 18,750 |
| | $ | 44.16 |
| | 3.2 years |
| | 18,750 |
| | $ | 44.16 |
|
| $49.52 - $57.76 | | 4,000 |
| | $ | 56.24 |
| | 3.0 years |
| | 4,000 |
| | $ | 56.24 |
|
| $57.76 - $66.00 | | — |
| | $ | — |
| | — |
| | — |
| | $ | — |
|
| $66.00 - $74.28 | | 1,250 |
| | $ | 66.52 |
| | 3.6 years |
| | 1,250 |
| | $ | 66.52 |
|
| All options | | 644,975 |
| | | | | | 597,856 |
| | |
As of December 31, 2018, future minimum lease payments under operating2019, there was $0.2 million of unrecognized compensation expense related to unvested option grants that is expected to be recognized over a weighted-average period of 1.5 years.
Restricted Stock — Restricted stock grants subject solely to an employee’s continued service with the Company generally will become fully vested within one to three years from the grant date and, capital leases werein certain instances, may fully vest upon a change in control of the Company. Restricted stock grants subject solely to a Director’s continued service with the Company generally will become fully vested within one year from the date of grant.
Compensation expense from restricted stock is recognized on a straight-line basis over the requisite service period. During the year ended December 31, 2019, the Company recognized compensation expense related to restricted stock awards of $1.9 million. The Company did not recognize any compensation expense related to restricted stock awards prior to the Merger.
A summary of restricted stock award activity from the Merger Date through December 31, 2019 was as follows (in thousands):follows:
|
| | | | | | | | | | | |
| | Operating Leases | | Capital Leases | | Total |
| 2019 | $ | 8,934 |
| | $ | 679 |
| | $ | 9,613 |
|
| 2020 | 7,143 |
| | 311 |
| | 7,454 |
|
| 2021 | 6,252 |
| | — |
| | 6,252 |
|
| 2022 | 4,797 |
| | — |
| | 4,797 |
|
| 2023 | 3,320 |
| | — |
| | 3,320 |
|
| 2024 and Thereafter | 7,470 |
| | — |
| | 7,470 |
|
| Total Future Minimum Lease Payments | $ | 37,916 |
| | $ | 990 |
| | $ | 38,906 |
|
|
| | | | | | |
| | Restricted Stock | | Weighted Average Grant Date Fair Value |
| Balance at December 31, 2018 | — |
| | $ | — |
|
| Acquired in Merger (1) | 280,120 |
| | $ | 10.68 |
|
| Granted | 169,123 |
| | $ | 10.72 |
|
| Vested and issued (1) | (214,926 | ) | | $ | 10.68 |
|
| Forfeited and expired (1) | (2,755 | ) | | $ | 10.68 |
|
| Balance at December 31, 2019 | 231,562 |
| | $ | 10.68 |
|
(1) Weighted average grant date fair value was calculated as $2.67 stock price on the August 6, 2019 Merger Date, multiplied by four to adjust for the one share for four share reverse stock split.
During the year ended December 31, 2019, shares were surrendered to satisfy tax withholding obligations on the vesting of restricted stock awards with a cost basis of $2.1 million, of which $2.0 million is held as treasury stock as of December 31, 2019.
As of December 31, 2019, there was $2.4 million in unrecognized compensation expense related to unvested restricted stock awards that is expected to be recognized over a weighted average period of 2.7 years. The total fair value of restricted stock awards vested during the years ended December 31, 2019, 2018 and 2017 was $1.9 million, $0 and $0, respectively.
HC I Incentive Units — Beginning in October 2015, HC I implemented an equity incentive plan for certain officers and employees of the Company. Incentive units are equity-based awards subject to time and performance vesting restrictions. The compensation expense related to this plan has been reflected in the Company’s financial statements.
RentIn accordance with ASC Topic 718, Compensation-Stock Compensation, compensation expense for leased facilitiesis recognized on a straight-line basis over the vesting period of the award or the employee’s retirement eligible date, if earlier. During the years ended December 31, 2019, 2018 and equipment was approximately $8.12017, the Company recognized compensation expense related to the HC I incentive units of $1.9 million, $7.7$2.1 million and $7.3$1.4 million, respectively.
The fair value of each award was determined using a Monte-Carlo simulation with the following weighted average assumptions used for the years ended December 31, 2019 and 2018:
|
| | | |
| Risk-free interest rate (1) | | 2.25 | % |
| Average time to liquidity (years) (2) | | 2.13 |
|
| Volatility (3) | | 47.00 | % |
| Discount for lack of marketability (4) | | 30.00 | % |
| Weighted-average grant-date fair value per share | | $1.13 |
| | |
| (1) Represents the US Treasury security rate for the expected time to liquidity event. |
| (2) Represents the period of time expected prior to liquidity event. |
| (3) Based on historical volatility of comparable public companies. |
| (4) Represents a discount taken to reflect the private nature of the investment. |
17. STOCKHOLDERS’ EQUITY
As further discussed in Note 20, Subsequent Events, on February 3, 2020, the Company completed a one share for four share reverse stock split. All common shares, warrants and stock awards have been retrospectively adjusted for the reverse stock split for all periods presented in these consolidated financial statements.
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 (2.1 million equivalent shares after adjusting for the reverse stock split) of common stock. The 2017 Warrants have a 10-year term and an exercise price of $2.00 per share ($8.00 per share after adjusting for the reverse stock split), 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 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. Subsequent to the Merger Date through December 31, 2019, warrant holders exercised warrants to purchase 2.6 million shares (0.7 million equivalent shares after adjusting for the reverse stock split) of common stock. No proceeds were received from these exercises as the warrant holders elected to surrender shares to pay the exercise price. At December 31, 2019, the remaining warrant holders are entitled to purchase 5.7 million shares (1.4 million equivalent shares after adjusting for the reverse stock split) of common stock.
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 (0.9 million equivalent shares after adjusting for the reverse stock split) 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 ($20.68 per share to $25.80 per share after adjusting for the reverse stock split). 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 (1.8 million equivalent shares after adjusting for the reverse stock split) restricted shares of common stock were issued, of which 3.1 million (0.8 million equivalent shares after adjusting for the reverse stock split) of these units vest upon the closing price of the Company’s common stock averaging at or above $4.00 per share ($16.00 per share after adjusting for the reverse stock split) over 20 consecutive trading days prior to December 31, 2019 and 4.0 million (1.0 million equivalent shares after adjusting for the reverse stock split) of these units vest upon the closing price of the Company’s common stock averaging at or above $5.00 per share ($20.00 per share after adjusting for the reverse stock split) over 20 consecutive trading days prior to December 31, 2019. The restricted stock expired on December 31, 2019. As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, 28,193,428 common shares (7,048,357 equivalent shares after adjusting for the reverse stock split) 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 (7,048,357 equivalent shares after adjusting for the reverse stock split) held in escrow will be returned to the Company and canceled. As of December 31, 2019, the Home Solutions restricted stock remained in escrow pending final resolution of this matter.
Treasury Stock — During the year ended December 31, 2019, 1,160,469 shares (290,117 equivalent shares after adjusting for the reverse stock split) 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 $2.5 million, of which $2.4 million remains held in treasury as of December 31, 2019. At December 31, 2019, the Company held 1,534,886 shares (383,722 equivalent shares after adjusting for the reverse stock split) 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 December 31, 2019. There was no preferred stock existing as of December 31, 2018.
18. RELATED-PARTY TRANSACTIONS
Management Services — In conjunction with the Option Care Acquisition, the Company entered into two separate Management Services Agreements with Madison Dearborn Partners VI-B, L.P. and Walgreen Co. Each Management Services Agreement required the Company to pay $0.3 million to each party quarterly beginning July 1, 2015 for on-going management, consulting and financial services provided to the Company. Following the close of the Merger, both Management Services Agreements were terminated. In 2019, prior to the Merger, the Company incurred $1.5 million of management services expense, which has been reflected as a component of selling, general and administrative expense in the consolidated statements of comprehensive income (loss) for the year ended December 31, 2019. During the years ended December 31, 2018 and 2017, management services expense of $2.0 million was recorded as a component of selling, general, and administrative expense in the consolidated statements of comprehensive income (loss).
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 year ended December 31, 2019, 2018 and 2017, $0, $0.4 million, and $0, respectively, were credited to paid-in capital related to HC I membership units purchased with a loan from Option Care. During the year ended December 31, 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. There were no shareholder redemptions during the year ended December 31, 2018. During the year ended December 31, 2017, shareholder redemptions totaled $0.1 million for notes redeemed by the officers, which was treated as a shareholder redemption that reduced paid-in-capital.
During the year ended December 31, 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 December 31, 2019 and 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 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 $2.5 million, $2.2 million and $1.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. Management fees are recorded in net revenues in the accompanying consolidated statements of comprehensive income (loss).
The Company had amounts due to its joint ventures of $4.3 million as of December 31, 2019. The Company also had amounts due to its joint ventures of $0.9 million and 2016, respectively.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 balance sheets and these receivables were included in prepaid expenses and other current assets in the accompanying 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.
NOTE 15 –19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly financial information for the years ended December 31, 20182019 and 20172018 is as follows (in thousands except per share amounts).
| | | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Year ended December 31, 2019 | | | | | | | | |
| Net revenue | | $ | 476,492 |
| | $ | 497,266 |
| | $ | 615,880 |
| | $ | 720,779 |
|
| Gross profit | | 98,194 |
| | 101,390 |
| | 137,773 |
| | 175,642 |
|
| Operating income (loss) | | 5,438 |
| | (8,005 | ) | | (11,725 | ) | | 13,973 |
|
| Net loss | | $ | (3,712 | ) | | $ | (13,603 | ) | | $ | (42,794 | ) | | $ | (15,811 | ) |
| | | | | | | | | |
| Loss per share, basic and diluted | | $ | (0.03 | ) | | $ | (0.10 | ) | | $ | (0.26 | ) | | $ | (0.09 | ) |
| | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Year ended December 31, 2018 | | | | | | | | | | | | | | |
| Net revenue | $ | 168,584 |
| | $ | 175,789 |
| | $ | 180,962 |
| | $ | 183,568 |
| $ | 460,643 |
| | $ | 479,490 |
| | $ | 493,928 |
| | $ | 505,730 |
|
| Gross profit | 55,048 |
| | 59,957 |
| | 65,911 |
| | 62,122 |
| 101,696 |
| | 101,274 |
| | 108,245 |
| | 111,000 |
|
| Loss from continuing operations, before income taxes | (12,939 | ) | | (15,081 | ) | | (8,001 | ) | | (15,003 | ) | |
| Income (loss) from discontinued operations, net of income taxes | (30 | ) | | (15 | ) | | (71 | ) | | 15 |
| |
| Net loss | $ | (13,017 | ) | | $ | (15,139 | ) | | $ | (8,174 | ) | | $ | (15,363 | ) | |
| Operating income | | 3,065 |
| | 8,897 |
| | 12,759 |
| | 13,548 |
|
| Net (loss) income | | $ | (6,851 | ) | | $ | (4,309 | ) | | $ | 1,791 |
| | $ | 3,254 |
|
| | | | | | | | | | | | | | | |
| Loss per share from continuing operations, basic and diluted | $ | (0.12 | ) | | $ | (0.14 | ) | | $ | (0.09 | ) | | $ | (0.14 | ) | |
| Income (loss) per share from discontinued operations, basic and diluted | — |
| | — |
| | — |
| | — |
| |
| Loss per share, basic and diluted | $ | (0.12 | ) | | $ | (0.14 | ) | | $ | (0.09 | ) | | $ | (0.14 | ) | |
| | | | | | | | | |
| Year ended December 31, 2017 | |
| | |
| | |
| | |
| |
| Net revenue | $ | 217,810 |
| | $ | 218,106 |
| | $ | 198,692 |
| | $ | 182,582 |
| |
| Gross profit | 64,874 |
| | 67,611 |
| | 66,563 |
| | 70,194 |
| |
| Loss from continuing operations, before income taxes | (18,801 | ) | | (28,432 | ) | | (12,998 | ) | | (7,202 | ) | |
| Income (loss) from discontinued operations, net of income taxes | (299 | ) | | (373 | ) | | 66 |
| | (287 | ) | |
| Net loss | $ | (19,719 | ) | | $ | (29,523 | ) | | $ | (12,992 | ) | | $ | (1,962 | ) | |
| | | | | | | | | |
| Loss per share from continuing operations, basic and diluted | $ | (0.18 | ) | | $ | (0.26 | ) | | $ | (0.12 | ) | | $ | (0.03 | ) | |
| Income (loss) per share from discontinued operations, basic and diluted | — |
| | — |
| | — |
| | (0.01 | ) | |
| Loss per share, basic and diluted | $ | (0.18 | ) | | $ | (0.26 | ) | | $ | (0.12 | ) | | $ | (0.04 | ) | |
| (Loss) income per share, basic and diluted | | $ | (0.05 | ) | | $ | (0.03 | ) | | $ | 0.01 |
| | $ | 0.02 |
|
The net loss in the third quarter of 2019 included transaction expenses, integration costs and loss on extinguishment of debt incurred in conjunction with the Merger.
NOTE 16 –20. SUBSEQUENT EVENTS
The Company has evaluated whether any subsequent events occurred since December 31, 2019 and noted the following subsequent events:
On March 14, 2019 we entered intoJanuary 3, 2020, the Company’s board of directors and HC I, the stockholder of a definitive merger agreementmajority of the Company’s common stock, approved a reverse stock split of the Company’s issued and outstanding common stock on a one share for four share basis and appropriately amended the Company’s Third Amended and Restated Certificate of Incorporation to reflect the change. On February 3, 2020, the reverse stock split became effective. In connection with the shareholder of Option Care Enterprises, Inc. (“Option Care”),reverse stock split, the nation’s largest independent provider of homeCompany changed its ticker symbols from “BIOS” to “OPCH” and alternate treatment site infusion therapy services. Undertransferred the termsCompany’s common stock from the Nasdaq Capital Market to the Nasdaq Global Select Market. The par value of the merger agreement, the Company will issue new shares of itsCompany’s common stock to Option Care’s shareholderremained unchanged as a result of the reverse stock split, resulting in a non-taxable exchange, which will resultdecrease to the aggregate par value of common stock and corresponding increase to paid-in capital in BioScrip shareholders holding approximately 20% of the combined company. The shareholder of Option Care has secured committed financing, the proceeds of which will be used to retire the Company’s First Lien Note Facility, Second Lien Note Facility and 2021 Notes atconsolidated financial statements, which was retrospectively applied to all periods presented in the close of the transaction. Following the close of the transaction, the combined company common stock will continue to be listed on the Nasdaq National Market. The transaction is currently expected to close by the end of 2019.consolidated financial statements.
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
| |
Item 9A. | Controls and Procedures |
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of ourThe Company maintains disclosure controls and procedures was performed(as such term is defined under Rule 13a-15(e) promulgated under the supervision, and with the participation, of our management, including the principal executive officer and the principal financial officerExchange Act) that are designed to ensure that information required to be disclosed by the Company in ourthe reports that we file or submit under the SecuritiesExchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, management evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2019. Based on that evaluation, our management, including the principal executive officerCompany’s Chief Executive Officer and principal financial officer,its Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.December 31, 2019.
Management Report on Internal Control over Financial Reporting
ManagementOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Underreporting for the supervisionCompany, as defined in Rules 13a-15(f) and with15d-15(f) under the participationExchange Act. Our internal control system is designed to provide reasonable assurance regarding the reliability of our management, including the principal executive officerfinancial reporting and the principalpreparation of the Company’s financial officer, we conducted an evaluationstatements for external purposes in accordance with U.S. GAAP.
On August 6, 2019, BioScrip and Option Care completed the Merger, and, after giving effect to the Merger, the stockholders of Option Care as of immediately prior to the Merger Date owned approximately 80% of BioScrip common stock on a fully diluted basis following the closing, and the stockholders of BioScrip as of immediately prior to the Merger Date owned approximately 20% of BioScrip common stock on a fully diluted basis following the closing. BioScrip was the legal acquirer in the Merger. Option Care was the accounting acquirer in the Merger under U.S. GAAP. Prior to the Merger, Option Care was a privately-held company and was not subject to Section 404 of the Sarbanes-Oxley Act (“SOX”), while BioScrip was a publicly-traded company subject to Section 404 of SOX. For all filings under the Exchange Act after the Merger, the historical financial statements for the period prior to the Merger are and will be those of Option Care. BioScrip’s businesses are and will be included in consolidated financial statements for all periods subsequent to the Merger.
As noted above, BioScrip was the legal acquirer in the Merger and subject to Section 404 of SOX. As of the date of its report, management was able to evaluate the effectiveness of the design and operation of our ongoing internal controls related to BioScrip. As the Merger occurred during the third quarter of 2019, and Option Care was the accounting acquirer and not previously subject to Section 404 of SOX, management concluded there was insufficient time to complete its assessment of the internal controls over financial reporting related to Option Care, and, therefore, Option Care internal control over financial reporting basedwas excluded from our report on internal control over financial reporting.
Our management, with the participation of the CEO and CFO, assessed the effectiveness of the Company’s internal control over financial reporting, by focusing on those controls that relate exclusively to ongoing BioScrip operations (covering approximately 13% of the revenue on the frameworkConsolidated Statements of Income for the year ended December 31, 2019 and 7% of the total assets on the Consolidated Balance Sheet as of December 31, 2019). Based on the criteria for effective internal control over financial reporting established in the Internal Control-IntegratedControl - Integrated Framework (2013 framework) (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this frameworkCommission (“COSO”), management concluded that ourthe internal control over financial reporting was effective at December 31, 2018.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this annual report on Form 10-K, has issued an attestation report on our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
During 2018, we developed and implemented remediation plans to address the material weakness we identified during 2017. Specifically, our remediation plans included (i) enhancing risk assessment processes and monitoring activities to ensure the Company designs, implements, and operates effective controls that are responsive to identified risks; (ii) implementing controls to validate key inputs and calculations used in spreadsheets used to determine financial statement amounts and disclosures; (iii) implementing controls to identify and clear unmatched transactions in suspense accounts; (iv) implementing monitoring controls to be operated by a centralized resource to ensure periodic counts of inventory and fixed assets are completed and differences are timely processed by our accounting systems, and; (v) enhancing controls surrounding the timely and accurate recognition of fixed asset disposals and abandonments. To effectively execute on our plan, we hired additional resources with significant experience with internal controls over financial reporting to our accounting team, and invested in a more robust internal audit function. As a result of implementing our remediation plans, as of December 31, 2018, we believe we have remediated the material weakness.2019.
Except as discussed above, there were no changes during the fourth quarter of 2018 in ourAll internal control over financial reportingsystems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that have materially affectedcontrols may become inadequate because of changes in conditions or are reasonably likely to materially affect our internal control over financial reporting.that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
The Merger, which was completed on August 6, 2019, has had a material impact on the financial position, results of operations, and cash flows of the combined company from the date of acquisition through December 31 2019. The business combination also resulted in material changes in the combined company's internal controls over financial reporting. The Company is in the process of designing and integrating policies, processes, operations, technology, and other components of internal controls over financial reporting of the combined company. Management will monitor the implementation of new controls and test the operating effectiveness when instances are available in future periods.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
BioScrip,Option Care Health, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited BioScrip,Option Care Health, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018,2019, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2019, based on criteria“criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20182019 and 2017,2018, the related consolidated statements of operations,comprehensive income (loss), stockholders’ deficit,equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2018,2019, and the related notes and financial statement schedule (collectively, the consolidated financial statements), and our report dated March 15, 20195, 2020 expressed an unqualified opinion on those consolidated financial statements.
As described in the Management Report on Internal Control Over Financial Reporting, HC Group Holdings I, Inc. and HC Group Holdings II, Inc. (collectively, Option Care) merged with and into a wholly owned subsidiary of BioScrip, Inc. (BioScrip) on August 6, 2019, forming the Company, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, Option Care’s internal control over financial reporting associated with 93% of total assets and 87% of total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Option Care.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Denver, Colorado
Chicago, Illinois March 15, 20195, 2020
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Item 9B. | Other Information |
Item 9B. Other Information
None.
PART III
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Item 10. | Directors, Executive Officers and Corporate Governance |
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a Code of Ethics that applies to all of our directors, officers and employees, including our principal executive, principal financial and principal accounting officers, or persons performing similar functions. Our Code of Ethics is posted on our website located at http://www.bioscrip.com/corporate-governance.investors.optioncarehealth.com/corporate-governance/highlights. We intend to disclose future amendments to certain provisions of the Code of Ethics, and waivers of the Code of Ethics granted to executive officers and directors.
The other information required by this item iss incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC no later than 120 days after December 31, 2019 Proxy Statement.in connection with our 2020 Annual Meeting of Stockholders.
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Item 11. | Executive Compensation |
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC no later than 120 days after December 31, 2019 Proxy Statement.in connection with our 2020 Annual Meeting of Stockholders.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC no later than 120 days after December 31, 2019 Proxy Statement.in connection with our 2020 Annual Meeting of Stockholders.
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC no later than 120 days after December 31, 2019 Proxy Statement.in connection with our 2020 Annual Meeting of Stockholders.
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Item 14. | Principal Accountant Fees and Services |
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC no later than 120 days after December 31, 2019 Proxy Statement.in connection with our 2020 Annual Meeting of Stockholders.
PART IV
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| Item 15. | Exhibits, Financial Statement Schedules |
|
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| | Page |
| (a)(1) Financial Statements. | |
| The following financial statements appear in Part II, Item 8: | |
| Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 20182019 and 20172018 | |
Consolidated Statements of OperationsComprehensive Income (Loss) for the years ended December 31, 2019, 2018 2017 and 20162017 | |
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2018, 2017 and 2016 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 2017 and 20162017 | |
| Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017 | |
| Notes to Consolidated Financial Statements | |
(a)(2) Financial Statement Schedule: | |
Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016 | |
| All other schedules not listed above have been omitted since they are not applicable or are not required. | |
(a)(3) Exhibits.
Index to Exhibits
|
| |
| Exhibit Number | Description |
2.1**2.1+ | |
2.2**2.2+ | Stock Purchase Agreement, dated as of December 12, 2012, by and among HomeChoice Partners, Inc., DaVita HealthCare Partners Inc., Mary Ann Cope, R.Ph., Kathy F. Puglise, RN, CRNI, Joseph W. Boyd, R.Ph., Barbara J. Exum, PharmD and the Company. Company (Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 4, 2013)2013, SEC File Number 0-28740). |
2.3** | |
2.4** | Stock Purchase Agreement, dated as of February 1, 2014, by and among Elk Valley Professional Affiliates, Inc., South Mississippi Home Health, Inc., Deaconess Homecare, LLC, and the Buyers identified on the signature pages thereto, the Company and LHC Group, Inc. (the “Stock Purchase Agreement”). (Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on February 3, 2014) |
2.5** | |
2.6 | |
2.72.3 | Asset Purchase Agreement, dated June 11, 2016, by and among HS Infusion Holdings, Inc., the direct and indirect subsidiaries of HS Infusion Holdings, Inc. set forth on the signature pages, the Company and HomeChoice Partners, Inc. (the “Home Solutions Agreement”). (Incorporated(Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 13, 2016)2016, SEC File Number 000-28740). |
2.82.4 | |
|
| |
2.92.5 | |
2.102.6 | |
| 2.7+ | Agreement and Plan of Merger, dated as of March 14, 2019, by and among BioScrip, Inc., Beta Sub, Inc., Beta Sub, LLC, HC Group Holdings I, LLC, HC Group Holdings II, Inc. and HC Group Holdings III, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 15, 2019, SEC File Number 001-11993). |
| 3.1 | |
3.2 | |
3.33.2 | |
3.4 | |
3.53.3 | Amended and Restated By-Laws. (IncorporatedBylaws of Option Care Health, Inc., formerly known as BioScrip, Inc. (incorporated by reference to Exhibit 3.23.4 to the Company’s Form 8-K filedCurrent Report on April 28, 2011) |
3.6 | |
3.7 | |
3.8 | |
| 4.1 | |
4.2 | |
4.3 | |
4.4 | |
4.5 | Registration Rights Agreement, dated as of March 9, 2015, by and among the Company, Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., and Blackwell Partners, LLC, Series A. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 10, 2015)2015, SEC File Number 000-28740). |
4.64.2 | |
4.74.3 | |
4.84.4 | |
|
| |
4.134.6 | |
4.144.7 | |
4.154.8 | |
| 4.9 | |
10.1†4.10 | MIM Corporation AmendedSecond Lien Notes Indenture, dated as of August 6, 2019, among HC Group Holdings II, LLC, as the Initial Issuer, BioScrip, Inc., as the Parent Issuer, subsidiary issuers and Restated 2001 Incentive Stock Plan. (Incorporated by referenceguarantors party thereto from time to time, and Ankura Trust Company, LLC, as the definitive proxy statement filed on April 30, 2003) |
10.2† | |
10.3†4.11 | AmendedSupplemental Indenture, dated November 18, 2019, by and Restated BioScrip,between Option Care Health, Inc. 2008 Equity Incentive Plan. (Incorporated, as parent issuer, and Ankura Trust Company, LLC, as trustee and collateral agent (incorporated by reference to Exhibit 10.14.1 to the Company’s Current Report on Form 8-K filed on May 14, 2014)November 19, 2019, SEC File Number 001-11993). |
10.4†4.12 | |
10.5† | |
10.6† | |
10.7† | |
10.8† | |
10.9†10.2† | |
10.10†10.3† | Form of Restricted Stock Grant Certificate.BioScrip, Inc. 2018 Equity Incentive Plan (Incorporated by reference to Exhibit 99.3Appendix A to the Company's Registration Statement on Form S-8definitive proxy statement filed on filed on May 16, 2008)April 4, 2018). |
10.11†10.4† | |
10.12†10.5 | |
10.13† | |
10.14† | |
10.15† | |
10.16† | |
10.17† | |
10.18† | |
10.19† | |
|
| |
10.20† | |
10.21† | |
10.22† | |
10.23† | |
10.24† | |
10.25 | |
10.2610.6 | |
10.27 | First Amendment to Credit Agreement, dated as of December 23, 2013,March 14, 2019, by and among the Company,BioScrip, Inc. and each of the Subsidiaries of the Company identified on the signature pages thereto, the Lenders party thereto, and the Administrative Agent. (Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K filed on February 3, 2014) |
10.28 | |
10.29 | |
10.30 | |
10.31 | |
10.32 | |
10.33 | |
10.34 | |
10.35# | |
10.36 | |
|
| |
10.37# | |
10.38#10.7 | |
10.39# | |
10.40# | |
10.41 | Stockholders’ Agreement, dated as of January 24, 2010, by and among the Company, the Kohlberg Entities, Robert Cucuel, Mary Jane Graves, Nitin Patel, Joey Ryan, Colleen Lederer, the Blackstone Entities and S.A.C. (the “Stockholders’ Agreement”). (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 27, 2010) |
10.42 | |
10.43 | |
10.44 | |
10.45 | |
10.46 | Indemnification Agreement, dated as of April 3, 2013,6, 2019, by and among the CompanyBioScrip, Inc. and the Kohlberg Entities, Robert Cucuel, Mary Jane Graves, Nitin Patel, Joey Ryan, Colleen Lederer, the Blackstone Entities and S.A.C. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 5, 2013) |
10.47 | |
10.48 | |
10.49 | |
10.50 | |
10.51 | |
10.52 | |
10.53 | |
10.54 | |
|
| |
10.55 | |
10.56 | |
10.57 | First Lien Note Purchase Agreement, dated as of June 29, 2017, by and among the Company, the financial institutions and note purchasers from time to time party thereto, and Wells Fargo Bank, National Association, as Collateral Agent (Incorporated(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 29, 2017)August 7, 2019, SEC File Number 001-11993). |
10.5810.8 | First Lien Guaranty and SecurityDirector Nomination Agreement, dated as of June 29, 2017,August 6, 2019, by and among the Company, the subsidiaries of the Company signatory theretoBioScrip, Inc. and Wells Fargo Bank, National Association as Collateral Agent (IncorporatedHC Group Holdings I, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 29, 2017)August 7, 2019, SEC File Number 001-11993). |
10.5910.9 | SecondFirst Lien Note PurchaseCredit Agreement, dated as of June 29, 2017, by andAugust 6, 2019, among HC Group Holdings II, LLC, as the Company,Initial Borrower, BioScrip, Inc., as the financial institutions and note purchasersParent Borrower, the guarantors party thereto from time to time, Bank of America, N.A., as the Administrative Agent, the lenders party thereto from time to time, BofA Securities, Inc., as Lead Arranger and Wells Fargo Bank, National AssociationBookrunner and as CollateralSyndication Agent (Incorporated and Documentation Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 29, 2017)August 7, 2019, SEC File Number 001-11993). |
10.6010.10 | Second Lien Guaranty and SecurityABL Credit Agreement, dated as of June 29, 2017, byAugust 6, 2019, among HC Group Holdings II, LLC, as the Initial Borrower, BioScrip, Inc., as the Parent Borrower, and Bank of America N.A., as the Company,Administrative Agent, Issuing Bank and Swing Line Lender, the subsidiariesother lenders party thereto from time to time and Bank of the Company signatory theretoAmerica, N.A. and Wells Fargo Bank, National AssociationACF Finco I LP as Collateral Agent (IncorporatedJoint Lead Arrangers and Joint Lead Bookrunners (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 29, 2017)August 7, 2019, SEC File Number 001-11993). |
10.6110.11 | WarrantNote Purchase Agreement, dated as of June 29, 2017, byAugust 6, 2019, among HC Group Holdings II, LLC, as the Initial Issuer, BioScrip, Inc., as the Parent Issuer, subsidiary issuers and among the Companyguarantors party thereto from time to time, and the subscribers signatoryseveral initial purchasers party thereto (Incorporated (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on June 29, 2017)August 7, 2019, SEC File Number 001-11993). |
10.6210.12† | |
10.63† | |
10.64† | |
10.65† | |
10.13† | |
10.14† | |
21.1 * | |
|
| |
23.1 * | |
31.1 * | |
31.2 * | |
32.1 * | |
32.2 *31.2 | |
| 32.1 | |
| 32.2 | |
| 101 | The following financial information from the Company’s Form 10-K for the fiscal year ended December 31, 2018,2019, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of OperationsComprehensive Income (Loss) for the fiscal years ended December 31, 2019, 2018 2017 and 2016,2017, (ii) Consolidated Balance Sheets as of December 31, 20182019 and 2017,2018, (iii) Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 31, 2019, 2018 2017 and 2016,2017, (iv) Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2019, 2018 2017 and 2016,2017, and (v) Notes to Consolidated Financial Statements. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
|
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* | Filed herewith. |
** | Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and exhibits are omitted from some exhibits. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
| † | Designates the Company’s management contracts or compensatory plan or arrangement. |
#+ | Certain schedules attached to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The SEC has granted confidential treatmentCompany will furnish copies of certain provisions of these exhibits. Omitted material for which confidential treatment has been granted has been filed separately with the SEC.omitted schedules to the Securities and Exchange Commission upon request by the Commission. |
Item 16.Form 10-K Summary
None
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2019.
5, 2020.
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BIOSCRIP,OPTION CARE HEALTH, INC. |
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/s/ John McMahonMichael Shapiro |
John McMahonMichael Shapiro |
Chief Financial Officer and Senior Vice President Controller(Principal Financial Officer and Chief Accounting Officer (Principal AccountingDuly Authorized Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | |
| Signature | Title(s) | Date |
/s/ Daniel E. GreenleafJohn C. Rademacher Daniel E. GreenleafJohn C. Rademacher
| Chief Executive Officer, President and Director (Principal Executive Officer) | March 15, 20195, 2020 |
| | | |
/s/ Stephen Deitsch
Michael ShapiroStephen Deitsch Michael Shapiro | Chief Financial Officer and TreasurerSenior Vice President (Principal (Principal Financial Officer)
| March 15, 20195, 2020 |
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/s/ Robert R. Kampstra Robert R. Kampstra | Senior Vice President, Finance and Chief Accounting Officer (Principal Accounting Officer) | March 5, 2020 |
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/s/ Harry M. Jansen Kraemer, Jr. Harry M. Jansen Kraemer, Jr. | Non-Executive Chairman of the Board | March 5, 2020 |
| | | |
/s/ John McMahonJ. Arlotta John McMahonJ. Arlotta | Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
Director | March 15, 20195, 2020 |
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/s/ Elizabeth Q. Betten Elizabeth Q. Betten | Director | March 5, 2020 |
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/s/ David W. Golding David W. Golding | Director | March 5, 2020 |
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/s/ Alan Nielsen Alan Nielsen | Director | March 5, 2020 |
| | | |
/s/ R. Carter Pate R. Carter Pate | Non-Executive Chairman of the BoardDirector | March 15, 20195, 2020 |
| | | |
/s/ David GoldingNitin Sahney David GoldingNitin Sahney
| Director | March 15, 20195, 2020 |
| | | |
/s/ Michael GoldsteinTimothy P. Sullivan Michael GoldsteinTimothy P. Sullivan
| Director | March 15, 20195, 2020 |
| | | |
/s/ Christopher ShackeltonMark Vainisi Christopher ShackeltonMark Vainisi
| Director | March 15, 2019 |
| | |
/s/ Michael G. Bronfein
Michael G. Bronfein
| Director | March 15, 2019 |
| | |
/s/ Steven Neumann
Steven Neumann
| Director | March 15, 20195, 2020 |
BioScrip, Inc. and Subsidiaries
Schedule II-- Valuation and Qualifying Accounts
(in thousands)
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Write-Off of Receivables | | Charged to Costs and Expenses | | Balance at End of Period |
| Year ended December 31, 2016 | | | | | | | |
| Allowance for doubtful accounts | $ | 59,689 |
| | $ | (41,567 | ) | | $ | 26,608 |
| | $ | 44,730 |
|
| Year ended December 31, 2017 | |
| | |
| | |
| | |
|
| Allowance for doubtful accounts | $ | 44,730 |
| | $ | (30,515 | ) | | $ | 23,697 |
| | $ | 37,912 |
|
| Year ended December 31, 2018 | |
| | |
| | |
| | |
|
Allowance for doubtful accounts (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
(1) Subsequent to adoption of ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the Company’s payors’ ability to pay outstanding billings.
