Washington, D.C. 20549
OPTION CARE HEALTH, INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
OPTION CARE HEALTH, INC.
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
OPTION CARE HEALTH, INC.
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
OPTION CARE HEALTH, INC.
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
OPTION CARE HEALTH, INC.
1. NATURE OF OPERATIONS AND PRESENTATION OF FINANCIAL STATEMENTS
On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”), a national provider of infusion and home care management solutions, along with certain other subsidiaries of BioScrip and HC II. The merger contemplated by the Merger Agreement (the “Merger”) was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer.
Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 132 locations.104 full service pharmacies. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other nonhospital settings. The Company operates in one segment, infusion services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Although there is uncertainty regarding the COVID-19 pandemic, as of June 30, 2020 the Company has been able to maintain adequate levels of supplies and pharmaceuticals to support its operations.
Assuming BioScrip had been acquired as of January 1, 2018, and the results of BioScrip had been included in operations beginning on January 1, 2018, the following tables provide estimated unaudited pro forma results of operations for the three and ninesix months ended SeptemberJune 30, 2019 were net revenue of $688.8 million and 2018 (in thousands).$1,344.2 million, respectively, and net loss of $13.5 million and $35.5 million, respectively. The estimated pro forma net incomeloss adjusts for the effect of fair value adjustments related to the Merger, transaction costs and other non-recurring costs directly attributable to the Merger and the impact of the additional debt to finance the Merger.
Transaction Expenses — Acquisition-related costs were expensed as incurred, with the exception of success-based fees that are included in consideration transferred. The Company recorded transaction costs that are expensed in selling, general and administrative expenses during the three and nine months ended September 30, 2019 of approximately $6.5 million and $19.3 million, respectively. Transaction expenses consisted of professional fees for advisory, consulting and underwriting services as well as other incremental costs directly related to the acquisition.
Baptist Health Asset Acquisition — In August 2018, pursuant to the Purchase and Sale Agreement dated August 8, 2018, Option Care completed the acquisition of certain assets of Baptist Health in Little Rock, Arkansas for a purchase price of $1.0 million.
Home I.V. Specialists, Inc. Acquisition — In September 2018, pursuant to the Stock Purchase Agreement dated September 18, 2018, Option Care completed the acquisition of 100% of the outstanding shares of Home I.V. Specialists, Inc. for a purchase price of $11.6 million, net of cash acquired.
4. REVENUE
On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective approach applied to those contracts that were not completed as of that date. The Company did not record a cumulative catch-up adjustment, as the timing and measurement of revenue for the Company’s customers is similar to its prior revenue recognition model.
ASC 606 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. ASC 606 requires application of a five-step model to determine when to recognize revenue and at what amount. The revenue standard applies to all contracts with customers and revenues are to be recognized when control of the promised goods or services is transferred to the Company’s patients in an amount that reflects consideration expected to be received in exchange for those goods or services.
Adoption of the standard impacted the Company’s results as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Prior to ASC 606 Adoption | | Adjustments for ASC 606 | | Subsequent to ASC 606 Adoption |
| | | As of September 30, 2019 |
| Condensed Consolidated Balance Sheets | | |
| Accounts receivable, net | | $ | 336,303 |
| | $ | — |
| | $ | 336,303 |
|
| | | | | | | |
| | | Nine Months Ended September 30, 2019 |
| Condensed Consolidated Statement of Comprehensive Income (Loss) | | |
| Net revenue | | $ | 1,644,903 |
| | $ | (55,265 | ) | | $ | 1,589,638 |
|
| Provision for doubtful accounts | | (55,265 | ) | | 55,265 |
| | — |
|
| Operating loss | | (14,600 | ) | | — |
| | (14,600 | ) |
| Condensed Consolidated Statements of Cash Flows | | | | | | |
| Changes in operating cash flows: | | | | | | |
| Accounts receivable, net | | 71,029 |
| | — |
| | 71,029 |
|
| | | | | | | |
| | | As of December 31, 2018 |
| Condensed Consolidated Balance Sheets | | |
| Accounts receivable, net | | $ | 310,169 |
| | $ | — |
| | $ | 310,169 |
|
| | | | | | | |
| | | Nine Months Ended September 30, 2018 |
| Condensed Consolidated Statement of Comprehensive Income (Loss) | | | | | | |
| Net revenue | | $ | 1,479,058 |
| | $ | (44,997 | ) | | $ | 1,434,061 |
|
| Provision for doubtful accounts | | (44,997 | ) | | 44,997 |
| | — |
|
| Operating Income | | 24,721 |
| | — |
| | 24,721 |
|
| Condensed Consolidated Statements of Cash Flows | | | | | | |
| Changes in operating cash flows: | | | | | | |
| Accounts receivable, net | | (32,483 | ) | | — |
| | (32,483 | ) |
Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from government payers, commercial payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.
Due to the nature of the health care industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available.
The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.
The Company provides a variety of therapies to patients. For infusion-related therapies, the Company frequently provides multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from ASC 606, the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.
The Company's outstanding performance obligations relate to contracts with a duration of less than one year. Therefore, the Company has elected to apply the practical expedient provided by ASC 606 and is not required to disclose the aggregate
amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. Any unsatisfied or partially unsatisfied performance obligations at the end of a reporting period are generally completed prior to the patient being discharged.
The following table sets forth the net revenue earned by category of payer for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Commercial payers | $ | 642,726 | | | $ | 439,747 | | | $ | 1,248,720 | | | $ | 847,554 | |
| Government payers | 95,124 | | | 52,062 | | | 181,395 | | | 114,595 | |
| Patients | 2,998 | | | 5,457 | | | 16,173 | | | 11,609 | |
| Net revenue | $ | 740,848 | | | $ | 497,266 | | | $ | 1,446,288 | | | $ | 973,758 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Commercial payers | | $ | 525,927 |
| | $ | 428,873 |
| | $ | 1,373,481 |
| | $ | 1,256,109 |
|
| Government payers | | 80,280 |
| | 56,511 |
| | 194,875 |
| | 160,939 |
|
| Patients | | 9,673 |
| | 8,544 |
| | 21,282 |
| | 17,013 |
|
| Net revenue | | $ | 615,880 |
| | $ | 493,928 |
| | $ | 1,589,638 |
| | $ | 1,434,061 |
|
5. INCOME TAXES
During the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company recorded tax expense (benefit) of $3.6$0.5 million and $(3.3)$1.5 million, respectively, which represents an effective tax rate of (9.1)(6.5)% and 5.2%(5.8)%, respectively. During the three and ninesix months ended SeptemberJune 30, 2018,2019 the Company recorded a tax expense (benefit)benefit of $0.4$5.4 million and $(1.7)$6.8 million, respectively, which represents an effective tax rate of 17.6%28.5% and 15.6%28.3%, respectively.
As a result of the Merger, theThe Company recordedcontinues to maintain a full valuation allowance against all of its net U.S. federal and state deferred tax assets with the exception of $1.0$0.7 million of estimated state net operating losses (“NOL”). The initial recognition of this valuation allowance by the Company was reflected in the acquired identifiable assets and liabilities of BioScrip as of the Merger Date and did not impact the Company’s tax expense (benefit) for the nine months ended September 30, 2019. Due to the Company’s valuation allowance position as of the Merger Date, the Company recognized no tax benefit for post-Merger activity for the third quarter ended September 30, 2019.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considers the scheduled reversal of deferred tax liabilities, (includingincluding the effect in available carryback and carryforward periods),periods, projected taxable income and tax-planning strategies, in making this assessment. On a quarterly basis, the Company evaluates all positive and negative evidence in determining if the valuation allowance is fairly stated.
Based on the Company’s full valuation allowance, as noted above, the Company’s tax expense for the three and six months ended SeptemberJune 30, 20192020 of $3.6$0.5 million and $1.5 million consists of quarterly tax liabilities attributable to specific state tax returns as well as the Company’srecognized deferred tax expense.
The Company recorded no income tax expense recognized during the third quarter of 2019 prior to the Merger. The Company’s taxor benefit for the ninethree or six months ended SeptemberJune 30, 2020 and 2019 consists of a deferredassociated with the tax benefit recognized by the Company prior to the establishment of its valuation allowance at the timeprovisions of the Merger partially offset by estimated state tax liabilities.CARES Act.
6. (LOSS) EARNINGS PER SHARE
The Company presents basic and diluted (loss) earnings per share for its common stock. Basic (loss) earnings per share is calculated by dividing the net (loss) income of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share is determined by adjusting the profit or loss and the weighted average number of shares of common stock outstanding for the effects of all dilutive potential common shares.
As a result of the Merger, which has been accounted for as a reverse merger, all historical per share data and number of shares and equity awards were retroactively adjusted. The (loss) earnings is used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. Accordingly, the computation of diluted shares for the three and ninesix months ended SeptemberJune 30, 20192020 excludes the effect of shares that would be issued in connection with stock options and restricted stock awards, as their inclusion would be anti-dilutive to the loss per share. As of June 30, 2020 there were 2,328,120 warrants, 497,517 stock options and 562,575 restricted stock awards outstanding that were excluded from the calculation as they would be anti-dilutive. There are no0 dilutive potential common shares for the three and ninesix months ended SeptemberJune 30, 2018.
2019.
The following table presents the Company’s basic and diluted (loss) earnings per share and shares outstanding (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Numerator: | | | | | | | | |
| Net loss | | $ | (7,668) | | | $ | (13,603) | | | $ | (27,578) | | | $ | (17,315) | |
| Denominator: | | | | | | | | |
| Weighted average number of common shares outstanding | | 176,711 | | | 142,614 | | | 176,686 | | | 142,614 | |
| Loss per Common Share: | | | | | | | | |
| Loss per common share, basic and diluted | | $ | (0.04) | | | $ | (0.10) | | | $ | (0.16) | | | $ | (0.12) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Numerator: | | | | | | | |
| Net (loss) income | $ | (42,794 | ) | | $ | 1,791 |
| | $ | (60,109 | ) | | $ | (9,369 | ) |
| Denominator: | |
| | |
| | |
| | |
|
| Weighted average number of common shares outstanding | 651,576 |
| | 570,455 |
| | 597,792 |
| | 570,455 |
|
| (Loss) Earnings per Common Share: | | | | | | | |
| (Loss) earnings per common share, basic and diluted | $ | (0.07 | ) | | $ | 0.00 |
| | $ | (0.10 | ) | | $ | (0.02 | ) |
7. LEASES
During the three and ninesix months ended SeptemberJune 30, 2019,2020, the Company incurred operating lease expenses of $7.4$7.6 million and $21.5$15.3 million, respectively, including short-term lease expenses,expense, which were included as a component of selling, general and administrative expensesexpense in the unaudited condensed consolidated statements of comprehensive income (loss). As of September 30, 2019, the weighted-average remaining lease term was 5.3 years and the weighted-average discount rate was 5.41%.
Operating leases mature as follows (in thousands):
|
| | | | |
| Fiscal Year Ending | | |
| December 31 | | Minimum Payments |
| 2019 | | $ | 6,793 |
|
| 2020 | | 24,733 |
|
| 2021 | | 19,026 |
|
| 2022 | | 14,021 |
|
| 2023 | | 10,614 |
|
| After 2024 | | 24,582 |
|
| Total lease payments | | $ | 99,769 |
|
| Less: Interest | | 15,805 |
|
| Present value of lease liabilities | | $ | 83,964 |
|
In addition, the Company had $0.8 million of financing leases outstanding at September 30, 2019 which mature over the next year.
During the three and six months ended SeptemberJune 30, 2019, the Company did not enter into any significant newincurred operating or financing leases. As of September 30, 2019, the Company did not have any significant operating or financing leases that had not yet commenced.
During the three and nine months ended September 30, 2018, the Company incurred rentlease expense of $4.5$5.6 million and $13.0$10.8 million, respectively, under ASC 840, Leases,including short-term lease expenses, which were included as a component of selling, general and administrative expenses in the unaudited condensed consolidated statements of comprehensive income (loss). As of June 30, 2020, the weighted-average remaining lease term was 5.2 years and the weighted-average discount rate was 5.48%.
Operating leases mature as follows (in thousands):
| | | | | | | | |
| Fiscal Year Ending December 31, | | Minimum Payments |
| 2020 | | $ | 11,895 | |
| 2021 | | 19,591 | |
| 2022 | | 14,192 | |
| 2023 | | 10,774 | |
| 2024 | | 8,009 | |
| Thereafter | | 18,328 | |
| Total lease payments | | $ | 82,789 | |
| Less: Interest | | 13,538 | |
| Present value of lease liabilities | | $ | 69,251 | |
During the three and six months ended June 30, 2020, the Company did not enter into any significant new operating or financing leases. As of June 30, 2020, the Company has entered into 1 build-to-suit lease agreement for a term of 15 years that has not yet commenced. The lease will require minimum lease payments over its life of approximately $22.9 million.
8. PROPERTY AND EQUIPMENT
Property and equipment was as follows as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):
| | | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| Infusion pumps | $ | 24,786 |
| | $ | 20,339 |
| Infusion pumps | $ | 33,546 | | | $ | 30,416 | |
| Equipment, furniture, and other | 60,569 |
| | 34,433 |
| |
| Equipment, furniture and other | | Equipment, furniture and other | 48,177 | | | 51,454 | |
| Leasehold improvements | 84,675 |
| | 61,302 |
| Leasehold improvements | 79,589 | | | 80,916 | |
| Computer software, purchased and internally developed | 34,500 |
| | 29,668 |
| Computer software, purchased and internally developed | 35,079 | | | 34,884 | |
| Assets under development | 4,585 |
| | 5,447 |
| Assets under development | 6,521 | | | 14,150 | |
| | 209,115 |
| | 151,189 |
| | 202,912 | | | 211,820 | |
| Less accumulated depreciation | 77,133 |
| | 58,047 |
| |
| Less: accumulated depreciation | | Less: accumulated depreciation | 85,283 | | | 78,622 | |
| Property and equipment, net | $ | 131,982 |
| | $ | 93,142 |
| Property and equipment, net | $ | 117,629 | | | $ | 133,198 | |
Depreciation expense is recorded within cost of revenue and operating expenses within the unaudited condensed consolidated statements of comprehensive income (loss), depending on the nature of the underlying fixed assets. The depreciation expense included in cost of revenue relates to revenue-generating assets, such as infusion pumps. The depreciation expense included in operating expenses is related to infrastructure items, such as furniture, computer and office equipment, and leasehold improvements. The following table presents the amount of depreciation expense recorded in cost of revenue and operating expenses for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Depreciation expense in cost of revenue | | $ | 1,747 | | | $ | 691 | | | $ | 3,489 | | | $ | 1,471 | |
| Depreciation expense in operating expenses | | 9,412 | | | 5,255 | | | 20,731 | | | 10,328 | |
| Total depreciation expense | | $ | 11,159 | | | $ | 5,946 | | | $ | 24,220 | | | $ | 11,799 | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Depreciation expense in cost of revenue | $ | 1,384 |
| | $ | 747 |
| | $ | 2,855 |
| | $ | 2,265 |
|
| Depreciation expense in operating expenses | 8,522 |
| | 4,680 |
| | 18,849 |
| | 13,522 |
|
| Total depreciation expense | $ | 9,906 |
| | $ | 5,427 |
| | $ | 21,704 |
| | $ | 15,787 |
|
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill consists of the following activity for the three and ninesix months ended SeptemberJune 30, 20192020 (in thousands):
| | | | | | | | |
| Balance at December 31, 2019 | | $ | 1,425,542 | |
| Purchase accounting adjustments | | 2,341 | |
| Balance at March 31, 2020 | | $ | 1,427,883 | |
| Purchase accounting adjustments | | 727 |
| Balance at June 30, 2020 | | $ | 1,428,610 | |
|
| | | | |
| Three Months Ended September 30, 2019 |
| June 30, 2019 - net book value | | $ | 632,469 |
|
| Acquisitions | | 786,904 |
|
| September 30, 2019 - net book value | | $ | 1,419,373 |
|
| | | |
| Nine Months Ended September 30, 2019 |
| December 31, 2018 - net book value | | $ | 632,469 |
|
| Acquisitions | | 786,904 |
|
| September 30, 2019 - net book value | | $ | 1,419,373 |
|
ChangesThere was no change in the carrying amount of goodwill consists of the following activity for the three and nineor six months ended SeptemberJune 30, 2018 (in thousands):2019.
|
| | | | |
| Three Months Ended September 30, 2018 |
| June 30, 2018 - net book value | | $ | 627,392 |
|
| Acquisitions | | 4,492 |
|
| September 30, 2018 - net book value | | $ | 631,884 |
|
| | | |
| Nine Months Ended September 30, 2018 |
| December 31, 2017 - net book value | | $ | 627,392 |
|
| Acquisitions | | 4,492 |
|
| September 30, 2018 - net book value | | $ | 631,884 |
|
The carrying amount and accumulated amortization of intangible assets consists of the following as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):
| | | | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| Gross intangible assets: | | | | | Gross intangible assets: | | | | |
| Referral sources | | $ | 438,445 |
| | $ | 257,792 |
| Referral sources | | $ | 438,121 | | | $ | 438,121 | |
| Trademarks/names | | 44,702 |
| | 32,000 |
| Trademarks/names | | 44,536 | | | 44,536 | |
| Other amortizable intangible assets | | 379 |
| | 4,151 |
| Other amortizable intangible assets | | 402 | | | 402 | |
| Total gross intangible assets | | 483,526 |
| | 293,943 |
| Total gross intangible assets | | 483,059 | | | 483,059 | |
| | | | | | | | | |
| Accumulated amortization: | | | | | Accumulated amortization: | |
| Referral sources | | (77,749 | ) | | (63,353 | ) | Referral sources | | (97,396) | | | (84,295) | |
| Trademarks/names | | (10,657 | ) | | (8,000 | ) | Trademarks/names | | (16,946) | | | (12,748) | |
| Other amortizable intangible assets | | (42 | ) | | (2,877 | ) | Other amortizable intangible assets | | (236) | | | (106) | |
| Total accumulated amortization | | (88,448 | ) | | (74,230 | ) | Total accumulated amortization | | (114,578) | | | (97,149) | |
| Total intangible assets, net | | $ | 395,078 |
| | $ | 219,713 |
| Total intangible assets, net | | $ | 368,481 | | | $ | 385,910 | |
Amortization expense for intangible assets was $7.5$8.8 million and $17.3$17.6 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively. Amortization expense for intangible assets was $4.9 million and $14.7$9.8 million for the three and ninesix months ended September 30, 2018, respectively.
The weighted average amortization period of intangible assets by class and in total as of SeptemberJune 30, 2019, are as follows: 17.1 years for referral sources, 4.1 years for trademarks/names, 1.5 years for other amortizable intangible assets, and 15.9 years for total intangible assets.respectively.
10. EQUITY-METHOD INVESTMENTS
The Company’s two2 equity-method investments totaled $16.1$18.0 million and $14.6$17.0 million as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively, and are included in other noncurrent assets in the accompanying condensed consolidated balance sheets. The Company’s related proportionate share of earnings is recorded in equity in earnings of joint ventures in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). For the three and ninesix months ended SeptemberJune 30, 2020, the Company’s proportionate share of earnings in its investments was $1.0 million and $1.6 million, respectively. For the three and six months ended June 30, 2019, the Company’s proportionate share of earnings in its investmentsinvestment was $0.8$0.6 million and $2.0 million, respectively. For the three and nine months ended September 30, 2018, the Company’s proportionate share of earnings was $0.3 million and $0.7$1.2 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 and $0.5 million for the three and ninesix months ended SeptemberJune 30, 2019.2020. The Company did not0t receive a capital distribution from this investment for the three or ninesix months ended SeptemberJune 30, 2018.2019. The following presents condensed financial information as of SeptemberJune 30, 20192020 and December 31, 20182019 and for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated statements of comprehensive income (loss) data: | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net revenue | $ | 6,520 | | | $ | 4,789 | | | $ | 12,011 | | | $ | 9,396 | |
| Cost of revenue | 4,772 | | | 3,432 | | | 8,712 | | | 6,799 | |
| Gross profit | 1,748 | | | 1,357 | | | 3,299 | | | 2,597 | |
| Net income | 633 | | | 257 | | | 1,150 | | | 507 | |
| Equity in net income | 316 | | | 129 | | | 574 | | | 254 | |
| | | | | | | |
| Consolidated balance sheet data: | | | | | | | |
| | | | | As of | | |
| | | | | June 30, 2020 | | December 31, 2019 |
| Current assets | | | | | $ | 8,401 | | | $ | 7,643 | |
| Noncurrent assets | | | | | 3,387 | | | 3,846 | |
| Current liabilities | | | | | 1,213 | | | 903 | |
| Noncurrent liabilities | | | | | 498 | | | 659 | |
|
| | | | | | | | | | | | | | | | |
| Consolidated statements of comprehensive income (loss) data: |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenue | | $ | 5,814 |
| | $ | 5,572 |
| | $ | 15,210 |
| | $ | 15,728 |
|
| Cost of revenue | | 4,083 |
| | 3,853 |
| | 10,882 |
| | 11,132 |
|
| Gross profit | | 1,731 |
| | 1,719 |
| | 4,328 |
| | 4,596 |
|
| Net income | | 670 |
| | 402 |
| | 1,177 |
| | 1,225 |
|
| Equity in net income | | 335 |
| | 201 |
| | 588 |
| | 612 |
|
| |
| Consolidated balance sheet data: |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| Current assets | | $ | 6,358 |
| | $ | 5,666 |
|
| Noncurrent assets | | 4,072 |
| | 3,403 |
|
| Current liabilities | | 572 |
| | 119 |
|
| Noncurrent liabilities | | 740 |
| | 8 |
|
Vanderbilt Health Services — The Company’s 50% ownership interest in this limited liability company, which provides infusion pharmacy services, expands the Company’s presence in the Nashville, Tennessee market. In 2009, Option Care contributed both cash and certain operating assets into the joint venture for a total initial investment of $1.1 million. The following presents condensed financial information as of SeptemberJune 30, 20192020 and December 31, 20182019 and for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated statements of comprehensive income (loss) data: | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| Net revenue | $ | 11,972 | | | $ | 9,925 | | | $ | 22,480 | | | $ | 19,163 | |
| Cost of revenue | 9,341 | | | 7,468 | | | 17,981 | | | 14,517 | |
| Gross profit | 2,631 | | | 2,457 | | | 4,499 | | | 4,646 | |
| Net income | 1,391 | | | 1,028 | | | 1,999 | | | 1,876 | |
| Equity in net income | 696 | | | 514 | | | 1,000 | | | 938 | |
| | | | | | | |
| Consolidated balance sheet data: | | | | | | | |
| | | | | As of | | |
| | | | | June 30, 2020 | | December 31, 2019 |
| Current assets | | | | | $ | 14,684 | | | $ | 11,111 | |
| Noncurrent assets | | | | | 1,699 | | | 2,033 | |
| Current liabilities | | | | | 2,680 | | | 1,228 | |
| Noncurrent liabilities | | | | | 745 | | | 956 | |
|
| | | | | | | | | | | | | | | | |
| Consolidated statements of comprehensive income (loss) data: |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Net revenue | | $ | 9,638 |
| | $ | 7,659 |
| | $ | 28,701 |
| | $ | 22,055 |
|
| Cost of revenue | | 7,473 |
| | 5,718 |
| | 21,989 |
| | 16,943 |
|
| Gross profit | | 2,165 |
| | 1,941 |
| | 6,712 |
| | 5,112 |
|
| Net income | | 982 |
| | 199 |
| | 2,859 |
| | 88 |
|
| Equity in net income | | 491 |
| | 100 |
| | 1,430 |
| | 44 |
|
| |
| Consolidated balance sheet data: |
| | | As of |
| | | September 30, 2019 | | December 31, 2018 |
| Current assets | | $ | 10,095 |
| | $ | 6,517 |
|
| Noncurrent assets | | 2,206 |
| | 1,008 |
|
| Current liabilities | | 1,116 |
| | 192 |
|
| Noncurrent liabilities | | 1,061 |
| | 68 |
|
11. INDEBTEDNESS
Long-term debt consisted of the following as of SeptemberJune 30, 20192020 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Principal Amount | | Discount | | Debt Issuance Costs | | Net Balance |
| ABL Facility | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| First Lien Term Loan | | 925,000 |
| | (8,681 | ) | | (23,590 | ) | | 892,729 |
|
| Second Lien Notes | | 400,000 |
| | (11,876 | ) | | (14,455 | ) | | 373,669 |
|
| | | $ | 1,325,000 |
| | $ | (20,557 | ) | | $ | (38,045 | ) | | 1,266,398 |
|
| Less: current portion | | | | | | | | (6,938 | ) |
| Total long-term debt | | | | | | | | $ | 1,259,460 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Amount | | Discount | | Debt Issuance Costs | | Net Balance |
| ABL facility | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| First lien term loan | | 920,375 | | | (7,836) | | | (21,295) | | | 891,244 | |
| Second lien notes | | 412,256 | | | (11,269) | | | (7,596) | | | 393,391 | |
| | $ | 1,332,631 | | | $ | (19,105) | | | $ | (28,891) | | | 1,284,635 | |
| Less: current portion | | | | | | | | (9,250) | |
| Total long-term debt | | | | | | | | $ | 1,275,385 | |
Long-term debt consisted of the following as of December 31, 20182019 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Principal Amount | | Discount | | Debt Issuance Costs | | Net Balance |
| Previous Revolving Credit Facility | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Previous First Lien Term Loan | | 401,513 |
| | (1,062 | ) | | (5,678 | ) | | 394,773 |
|
| Previous Second Lien Term Loan | | 150,000 |
| | — |
| | (5,398 | ) | | 144,602 |
|
| | | $ | 551,513 |
| | $ | (1,062 | ) | | $ | (11,076 | ) | | 539,375 |
|
| Less: current portion | | | | | | | | (4,150 | ) |
| Total long-term debt | | | | | | | | $ | 535,225 |
|
Retired Debt Obligations — During 2015, Option Care entered into two credit arrangements administered by Bank of America, N.A. and U.S. Bank. The agreements provided for up to $645.0 million in senior secured credit facilities through an $80.0 million revolving credit facility (the “Previous Revolving Credit Facility”), a $415.0 million first lien term loan (the “Previous First Lien Term Loan”), and a $150.0 million second lien term loan (the “Previous Second Lien Term Loan”, and together with the Previous First Lien Term Loan, the “Previous Term Loans”, and the Previous Term Loans, together with the Previous Revolving Credit Facility, the “Previous Credit Facilities”). Amounts borrowed under the credit agreements were secured by substantially all of the assets of the Company.
The Company incurred an original issue discount in conjunction with entering into the Previous First Lien Term Loan of $2.1 million, and also incurred an aggregate of $21.1 million in debt issuance costs to obtain the two credit agreements. These costs were recorded as a reduction to the carrying amount in the condensed consolidated balance sheets and were being amortized over the term of the related debt using the effective interest method for the Previous Term Loans and the straight-line method for the Previous Revolving Credit Facility.
On August 6, 2019, the Company repaid the outstanding balance of Previous Term Loans and retired the outstanding Previous Credit Facilities by entering into two new credit arrangements and a notes indenture, described below under “New Debt Obligations”. At the time of repayment, the outstanding balance of the Previous First Lien Term Loan was $393.8 million, which was comprised of principal of $399.4 million, net of debt issuance costs of $0.9 million and deferred financing costs of $4.7 million. The balance of the Previous Second Lien Term Loan was $145.8 million, which was comprised of principal of $150.0 million, net of deferred financing costs of $4.2 million. Proceeds from the two new credit arrangements and notes indenture were also used, in part, to repay the outstanding debt of BioScrip as of the Merger Date of $575.0 million. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
The interest rate on the Previous First Lien Term Loan was 6.10% as of December 31, 2018 and the interest rate on the Previous Second Lien Term Loan was 11.15% as of December 31, 2018. The weighted average interest rate paid on the Previous First Lien Term Loan was 6.06% and 6.20% for the three and nine months ended September 30, 2019, respectively, prior to the retirement of the debt obligations. The weighted average interest paid on the Previous Second Lien Term Loan was 11.02% and 11.36% for the three and nine months ended September 30, 2019, respectively, prior to the retirement of the debt obligations. The weighted average interest rate paid on the Previous First Lien Term Loan was 5.83% and 6.38% for the three and nine months ended September 30, 2018. The weighted average interest paid on the Previous Second Lien Term Loan was 11.09% and 10.68% for the three and nine months ended September 30, 2018.
New Debt Obligations — In conjunction with the Merger, the Company entered into an asset-based-lending revolving credit facility administered by Bank of America, N.A., as the administrative agent and a first lien term loan facility administered by Bank of America, N.A.was 4.68% and ACF Finco I LP, as joint lead arrangers and bookrunners. The Company also issued senior secured second lien PIK toggle floating rate notes due 2027 (the “Second Lien Notes”) under an indenture with Ankura Trust Company, LLC, as trustee and collateral agent for the Second Lien Notes. The two new credit agreements and the indenture were entered into on August 6, 2019 and provide for up to $1,475.0 million in senior secured credit facilities through a $150.0 million asset-based-lending revolving credit facility (the “ABL Facility”), a $925.0 million first lien term loan (the “First Lien Term Loan”, and together with the ABL Facility, the “Loan Facilities”), and a $400.0 million issuance of Second Lien notes.
The ABL Facility provides for borrowings up to $150.0 million, which matures on August 6, 2024. The ABL Facility bears interest at a per annum rate that is determined by the Company’s periodic selection of rate type, either the Base Rate or the Eurocurrency Rate. Interest on the ABL Facility is charged on Base Rate loans at Base Rate, as defined, plus 1.25% to 1.75%, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. Interest on the ABL Facility is charged on Eurocurrency Rate Loans at the Eurocurrency Rate, as defined, plus 2.25% to 2.75%, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. The ABL Facility contains commitment fees payable on the unused portion ranging from 0.25% to 0.375%, depending on various factors including the Company’s leverage ratio, type of loan and rate type, and letter of credit fees of 2.5%. Borrowings under the ABL Facility are secured by a first priority security interest in the Company’s and each of its subsidiaries’ inventory, accounts receivable, cash, deposit accounts and certain assets and property related thereto (the “ABL Priority Collateral”), in each case subject to certain exceptions, and a third priority security interest in the Term Loan Priority Collateral, as defined below. The Company had no outstanding borrowings under the ABL Facility at September 30, 2019. The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL of $140.4 million6.20% as of SeptemberJune 30, 2019.
The principal balance of the First Lien Term Loan is repayable in quarterly installments commencing in March 2020 of $2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026. Interest on the First Lien Term Loan is payable monthly on Base Rate loans at Base Rate, as defined, plus 3.25% to 3.50%, depending on the Company’s leverage ratio. Interest is charged on Eurocurrency Rate loans at the Eurocurrency Rate, as defined, plus 4.25% to 4.50%, depending on the Company’s leverage ratio. The interest rate on the First Lien Term Loan was 6.61% as of September 30, 2019.and December 31, 2019, respectively. The weighted average interest rate incurred on the first lien term loan was 6.67%5.02% and 5.60% for the period August 6, 2019 through Septemberthree and six months ended June 30, 2020. The weighted average interest rate incurred on the previous first lien term loan was 6.22% and 6.24% for the three and six months ended June 30, 2019. Amounts borrowed under the First Lien Term Loan are secured by a first priority securityThe interest in each of the Company’s subsidiaries’ capital stock (subject to certain exceptions) and substantially all of the Company’s property and assets (other than the ABL Priority Collateral), (the “Term Loan Priority Collateral”), in each case subject to certain exceptions, and a second priority security interest in the ABL Priority Collateral.
The Second Lien Notes mature on August 6, 2027. Interestrate on the Second Lien Notes is payable quarterlysecond lien notes was 10.25% and is at10.66% as of June 30, 2020 and December 31, 2019, respectively. The weighted average interest incurred on the greatersecond lien notes was 10.33% and 10.44% for the three and six months ended June 30, 2020. The weighted average interest incurred on the previous second lien term loan was 11.34% and 11.45% for the three and six months ended June 30, 2019.
The Company elected to pay-in-kind (“PIK”) the first quarterly interest payment due in November 2019,August 2020, which will result in the Company capitalizing the$10.8 million in interest paymentexpense to the principal balance of the second lien term loan on the interest payment date. The interest rate on the Second Lien Notes was 10.89% as of September 30, 2019. The weighted average interest incurred was 10.89% for the period August 6, 2019 through September 30, 2019.
The Company assessed whether the repayment of the Previous Term Loans and subsequent issuance of the First Lien Term Loan and the Second Lien Notes resulted in an insubstantial modification or an extinguishment of the existing debt for each loan in the syndication by grouping lenders as follows: (i) Lenders participating in both the Previous Credit Facilities and the new Loan Facilities and Second Lien Notes; (ii) previous lenders that exited; and (iii) new lenders. The Company determined that $226.7 million of the Previous First Lien Term Loan was extinguished and none of the Previous Second Lien Term Loan was extinguished, which is disclosed as an outflow from financing activities in the condensed consolidated statements of cash flows. The Company determined that $752.4 million of new debt was issued related to the First Lien Term Loan and $250.0 million of new debt was issued related to the Second Lien Notes, which is disclosed as an inflow from financing activities in the condensed consolidated statements of cash flows. In connection with the issuance of the First Lien Term Loan, the Second Lien Notes, and the ABL Facility,PIK election, the Company incurred $59.1 millionwas charged an additional 1.00% in debt issuance costsinterest expense during the quarterly interest period.
Subsequent to June 30, 2020, the Company completed a public offering of stock for net proceeds of approximately $118 million. Those proceeds and third-party fees, of which $54.6 million was capitalized, $1.3 million was expensed as a component of other expense and $3.2 million was expensed as a loss on extinguishment as a component of other expense. Further, $21.3available cash will be used to prepay $125.0 million of the total fees incurred of $59.1 million was netted against the $981.1 million of proceeds from debt as a component of the cash flows from financing activities, $36.5 million was presented as deferred financing costs as a component of cash flows from financing activities, and the remaining $1.3 million was included in cash flows from operating activities.
The Company recognized a loss on extinguishment of debt of $5.5 million, of which $3.2 million related to debt issue costs incurred with the issuance of the Loan Facilities and Second Lien Notes, as discussed above, and $2.3 million related to
deferred financing fees on the Previous Credit Facilities, which were written off upon extinguishment. All remaining deferred financing fees related to the Previous Credit Facilities of $7.6 million were attributed to modified loans, which are capitalized and will be amortized over the remaining term of the Loan Facilities and Second Lien Notes.second lien notes. See Note 18, Subsequent Events, for further discussion.
Long-term debt matures as follows (in thousands):
| | | | | | | | |
| Year Ending December 31, | | Minimum Payments |
| 2020 | | $ | 4,625 | |
| 2021 | | 9,250 | |
| 2022 | | 9,250 | |
| 2023 | | 9,250 | |
| 2024 | | 9,250 | |
| Thereafter | | 1,291,006 | |
| Total | | 1,332,631 | |
|
| | | | |
| Fiscal Year Ending December 31, | | Minimum Payments |
| 2019 | | $ | — |
|
| 2020 | | 9,250 |
|
| 2021 | | 9,250 |
|
| 2022 | | 9,250 |
|
| 2023 | | 9,250 |
|
| 2024 and beyond | | 1,288,000 |
|
| Total | | $ | 1,325,000 |
|
During the three and ninesix months ended SeptemberJune 30, 2020 and 2019, the Company engaged in hedging activities to limit its exposure to changes in interest rates. See Note 12, Derivative Instruments, for further discussion.
The following table presents the estimated fair values of the Company’s debt obligations as of SeptemberJune 30, 20192020 (in thousands):
| | | Financial Instrument | | Carrying Value as of September 30, 2019 | | Markets for Identical Item (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Financial Instrument | | Carrying Value as of June 30, 2020 | | Markets for Identical Item (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| First Lien Term Loan | | $ | 892,729 |
| | $ | — |
| | $ | 922,688 |
| | $ | — |
| |
| Second Lien Notes | | 373,669 |
| | — |
| | — |
| | 394,653 |
| |
| First lien term loan | | First lien term loan | | $ | 891,244 | | | $ | — | | | $ | 892,764 | | | $ | — | |
| Second lien notes | | Second lien notes | | 393,391 | | | — | | | — | | | 417,910 | |
| Total debt instruments | | $ | 1,266,398 |
| | $ | — |
| | $ | 922,688 |
| | $ | 394,653 |
| Total debt instruments | | $ | 1,284,635 | | | $ | — | | | $ | 892,764 | | | $ | 417,910 | |
The following table sets forth the changes in Level 3 measurements for the ninethree and six months ended SeptemberJune 30, 20192020 (in thousands):
| | | | | | | | |
| | Level 3 Measurements |
| Second lien notes fair value as of January 1, 2020 | | $ | 411,119 | |
| Change in fair value | | (71,748) | |
| Second lien notes fair value as of March 31, 2020 | | $ | 339,371 | |
| Change in fair value | | 78,539 | |
| Second lien notes fair value as of June 30, 2020 | | $417,910 |
|
| | | | |
| | | Level 3 Measurements |
| Previous Term Loans fair value as of January 1, 2019 | | $ | 551,882 |
|
| Change in fair value | | (369 | ) |
| Repayments of debt principal | | (2,075 | ) |
| Retirements of Previous Term Loans | | (549,438 | ) |
| Issuance of Second Lien Notes as of August 6, 2019 | | 388,000 |
|
| Change in fair value | | 6,653 |
|
| Second Lien Notes fair value as of September 30, 2019 | | $ | 394,653 |
|
See Note 13, Fair Value Measurements, for further discussion.
12. DERIVATIVE INSTRUMENTS
The Company uses derivative financial instruments for hedging and non-trading purposes to limit the Company’s exposure to increases in interest rates related to its variable interest rate debt. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative financial instrument will change. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including reviewing credit ratings when appropriate.
During 2017, Option Care entered into interest rate caps that reduce the risk of increased interest payments due to interest rates rising. The hedges offset the risk of rising interest rates through 2020 on the first $250.0 million of the Previous First Lien Term Loan.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.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 Loanfirst lien term loan interest payments indexed to one-month LIBORLondon Interbank Offered Rate (“LIBOR”) through August 2021. In accordance with ASU 2017-12, Targeted Improvements to Accounting for Hedges, the Company has determined that the hedges are perfectly effective. The remaining $13.9 million notional amount of the interest rate swap is not designated as a hedging instrument.
The second interest rate swap of $400.0 million notional will becomewas effective in November 2019 and will beis designated as a cash flow hedge against the underlying interest rate on the Second Lien Notessecond lien notes interest payments indexed to three-month LIBOR through November 2020. The
In May 2020, the Company elected to PIK the second lien note’s quarterly interest payment due in August 2020. Upon making the PIK election, the Company determined that the hedged interest payment would no longer occur, resulting in an ineffective hedge, so the Company discontinued hedge accounting on its $400.0 million notional interest rate swap. As a result, the Company reclassified accumulated comprehensive loss of $3.7 million to interest expense, net in the unaudited condensed consolidated statements of comprehensive income (loss). The gains and losses associated with the $400.0 million notional swap will be recognized in net income (loss) through interest expense until the swap expires in November 2020. See Note 11, Indebtedness, for further discussion of the PIK. In accordance with ASU 2017-12, Targeted Improvements to Accounting for Hedges, the Company has determined that the $911.1 million designated as a cash flow hedge is expected to be perfectly effective at offsetting the terms of the interest rates associated with the Company’s variable interest rate Second Lien Notes. effective.
The following table summarizes the amount and location of the Company’s derivative instruments in the condensed consolidated balance sheets (in thousands):
|
| | | | | | | | | | |
| | | Fair value - Derivatives in asset position |
| Derivative | | Balance Sheet Caption | | September 30, 2019 | | December 31, 2018 |
| Interest rate caps designated as cash flow hedges | | Prepaids and other current assets | | $ | — |
| | $ | 2,627 |
|
| Total derivatives | | | | $ | — |
| | $ | 2,627 |
|
| | | | | Fair value - Derivatives in liability position | | Fair value - Derivatives in liability position | |
| Derivative | | Balance Sheet Caption | | September 30, 2019 | | December 31, 2018 | Derivative | | Balance Sheet Caption | | June 30, 2020 | | December 31, 2019 |
| Interest rate swaps designated as cash flow hedges | | Other non-current liabilities | | $ | 7,883 |
| | $ | — |
| Interest rate swaps designated as cash flow hedges | | Accrued expenses and other current liabilities | | $ | — | | | $ | 1,275 | |
| Interest rate swaps not designated as hedges | | Other non-current liabilities | | 120 |
| | — |
| |
| Interest rate swaps not designated as cash flow hedges | | Interest rate swaps not designated as cash flow hedges | | Accrued expenses and other current liabilities | | 3,474 | | | — | |
| Interest rate swaps designated as cash flow hedges | | Interest rate swaps designated as cash flow hedges | | Other non-current liabilities | | 19,251 | | | 5,920 | |
| Interest rate swaps not designated as cash flow hedges | | Interest rate swaps not designated as cash flow hedges | | Other non-current liabilities | | 293 | | | 90 | |
| Total derivatives | | $ | 8,003 |
| | $ | — |
| Total derivatives | | $ | 23,018 | | | $ | 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 $400.0 million notional swap and the $13.9 million notional amount not designated as a hedging instrument are recognized in net income (loss) 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 unaudited condensed consolidated statements of comprehensive income (loss) (in thousands):
The following table presents the amount and location of pre-tax income (loss) recognized in the Company’s unaudited condensed consolidated statement of comprehensive income (loss) related to the Company’s derivative instruments (in thousands):
13. FAIR VALUE MEASUREMENTS
Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and gives the lowest priority to unobservable inputs (Level 3 measurements). The categories within the valuation hierarchy are described as follows:
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings and is subject to investigations, inspections, audits, inquiries, and similar actions by governmental authorities, arising in the normal course of the Company’s business. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive
or exemplary damages, and may remain unresolved for several years. From time to time, the Company may also be involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property, and other matters. Gain contingencies, if any, are recognized when they are realized. The results of legal proceedings are often uncertain and difficult to predict, and the costs incurred in litigation can be substantial, regardless of the outcome. The Company believes that its defenses and assertions in pending legal proceedings have merit and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s condensed consolidated balance sheets. However, substantial unanticipated verdicts, fines, and rulings may occur. As a result, the Company may from time to time incur judgments, enter into settlements, or revise expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid.
15. STOCK-BASED INCENTIVE COMPENSATION
16. STOCKHOLDERS’ EQUITY
On January 3, 2020, the Company’s board of directors and HC I, the stockholder of a majority 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 reverse stock split, the Company changed its ticker symbol from “BIOS” to “OPCH” and transferred the Company’s common stock from the Nasdaq Capital Market to the Nasdaq Global Select Market. The par value of the Company’s common stock remained unchanged as a result of the reverse stock split, resulting in a decrease to the aggregate par value of common stock and corresponding increase to paid-in capital in the Company’s unaudited condensed consolidated financial statements, which was retrospectively applied to all periods presented in the unaudited condensed consolidated financial statements. All common shares, warrants and stock awards presented in the unaudited condensed consolidated financial statements have been retrospectively adjusted for the reverse stock split. Subsequent to June 30, 2020, the Company completed a public offering of 10,000,000 shares of common stock for net proceeds of approximately $118 million. Those proceeds will be used to prepay a portion of the second lien notes. See Note 18, Subsequent Events, for further discussion.
2017 Warrants — PriorDuring the three and six months ended June 30, 2020, warrant holders did not elect 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 theexercise any warrants to purchase 8.3shares of common stock. NaN warrants existed in 2019 prior to the Merger. As of June 30, 2020 and December 31, 2019, the remaining warrant holders are entitled to purchase 1.4 million shares of common stock, respectively.
2015 Warrants — During the three and six months ended June 30, 2020, warrant holders did not elect to exercise any warrants to purchase shares of common stock. The 2017 Warrants have a 10-year termNaN warrants existed in 2019 prior to the Merger. As of June 30, 2020 and an exercise price of $2.00 per share, and may be exercised by payment of the exercise price in cash or surrender ofDecember 31, 2019, warrant holders are entitled to purchase 0.9 million shares of common stock, into which the 2017 Warrants are being converted in an aggregate amount sufficient to pay the exercise price. The 2017 Warrants were assumed by the Company in conjunction with the Merger. The 2017 Warrants are classified as equity instruments, and the fair value of these warrants of $14.1 million was recorded in paid-in capital as of the Merger Date.respectively.
2015 Warrants — Prior to the Merger, BioScrip issued warrants pursuant to a Common Stock Warrant Agreement dated as of March 9, 2015 which entitle the holders to purchase 3.7 million shares of common stock. The 2015 Warrants have a 10-year term and have exercise prices in a range of $5.17 per share to $6.45 per share. The 2015 Warrants were assumed by the Company in conjunction with the Merger and are classified as equity instruments, and the fair value of these warrants of $4.6 million was recorded in paid in capital as of the Merger Date.
Home Solutions Restricted Stock — In conjunction with BioScrip’s 2016 acquisition of Home Solutions, Inc., 7.11.8 million restricted shares of common stock were issued, of which 3.10.8 million of these units vest upon the closing price of the Company’s common stock averaging at or above $4.00$16.00 per share over 20 consecutive trading days prior to December 31, 2019 and 4.01.0 million of these units vest upon the closing price of the Company’s common stock averaging at or above $5.00$20.00 per share over 20 consecutive trading days prior to December 31, 2019. The restricted stock expiresexpired on December 31, 2019. As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, 28,193,4287,048,357 common shares issued to HC I in conjunction with the Merger are held in escrow to prevent dilution related to the vesting of the Home Solutions restricted stock. In the event the Home Solutions restricted stock expires unvested, the 28,193,4287,048,357 common shares held in escrow will be returned to the Company and canceled.
Treasury Stock — During As of June 30, 2020, the three and nine months ended September 30, 2019, 1,146,065 shares were surrendered to satisfy tax withholding obligations on the exercise of stock options and the vesting ofHome Solutions restricted stock awards with a cost basisremained in escrow pending final resolution of $2.4 million. At September 30, 2019, the Company held 1,736,220 shares of treasury stock. No treasury stock existed prior to the Merger.this matter.
Preferred Stock — In conjunction with the Merger, all legacy BioScrip preferred stock was settled, and no preferred stock is outstanding as of September 30, 2019. There was no preferred stock existing as of December 31, 2018.
17. RELATED-PARTY TRANSACTIONS
Management Equity Ownership Plan — In October 2015, HC I implemented an equity ownership and incentive plan for certain officers and employees of Option Care. The officers were able to purchase membership units in HC I and could fund a portion of the purchase with a loan from Option Care. These loans were treated as a shareholder contribution in Option Care. For the nine months ended September 30, 2019 and 2018, $0 and $0.4 million, respectively, were credited to paid-in capital related to HC I membership units purchased with a loan from Option Care. There were no shareholder redemptions during the three months ended September 30, 2019. During the nine months ended September 30, 2019, shareholder redemptions totaled $2.4 million, comprised of a cash distribution to HC I of $2.0 million and notes redeemed of $0.4 million.
During the three months ended September 30, 2019, prior to the Merger, Option Care sold its notes receivable from management, along with all accrued interest expense, to a third-party bank. Option Care received cash proceeds of $1.3 million, which represented payment of $1.1 million in outstanding notes receivable from management and payment of $0.2 million in accrued interest expense. Notes receivable from management of $0 and $1.6 million remained outstanding as of September 30, 2019 and December 31, 2018, respectively. The notes receivable from management and associated interest receivable are recorded in management notes receivable as a reduction to equity on the Company’s condensed consolidated balance sheets as of December 31, 2018.
Transactions with Equity-Method Investees — The Company provides management services to its joint ventures such as accounting, invoicing and collections in addition to day-to-day managerial support of the operations of the businesses. The Company recorded management fee income of $0.6$0.7 million and $1.8$1.4 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively. The Company recorded management fee income of $0.6 million and $1.6$1.2 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. Management fees are recorded in net revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).
The Company had amounts due to its joint ventures of $3.1$3.3 million as of SeptemberJune 30, 2019.2020. The Company also had amounts due to its joint ventures of $0.9 million and amounts due from its joint ventures of $0.1$4.3 million as of December 31, 2018.2019. These payables were included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets and these receivables were included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. These balances primarily relate to cash collections received by the Company on behalf of the joint ventures, offset by certain pharmaceutical inventories purchasedand other expenses paid for by the Company on behalf of the joint ventures.
18. SUBSEQUENT EVENTS
The Company has evaluated whether any subsequent events occurred since June 30, 2020, and noted the following subsequent events:
On July 24, 2020, the Company completed a public offering of 18,000,000 shares of the Company’s common stock at a price of $12.50 per share, consisting of 10,000,000 shares of common stock issued and sold by the Company and 8,000,000 shares of common stock sold by HC I. The Company received net proceeds from the offering of approximately $118 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the proceeds from the offering and available cash to repay $125.0 million on the principal balance of its second lien notes outstanding. Following the offering, HC I holds approximately 72.1% of the Company’s common stock.
Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations
Unless the context requires otherwise, references in this report to "Option Care Health," the “Company,” “we,” “us” and “our” refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. (“Option Care Health”, or the “Company”) should be read in conjunction with the audited consolidated financial statements and related notes, as presented in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2020, as well as the Company’s unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act’), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Such forward-looking statements include, but are not limited to, the effect of the novel coronavirus (“COVID-19”) on our business, financial condition and results of operations. This Quarterly Report contains, among others, forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in Item 1A “Risk Factors”.
Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors.
Do not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, the Company assumes no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
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Item 2. | Management’s Discussion and Analysis of Financial Condition andResults of Operations
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Unless the context requires otherwise, references in this report to "Option Care Health," the “Company,” “we,” “us” and “our” refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. (“Option Care Health”, or the “Company”) should be read in conjunction with the audited consolidated financial statements and related notes, as presented in the definitive merger proxy filed with the Securities and Exchange Commission on June 26, 2019, as well as the Company’s unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report.
Business Overview
Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 132148 locations around the United States. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other nonhospital settings. Our services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. We provide home infusion services consisting of anti-infectives, nutrition support, bleeding disorder therapies, immunoglobulin therapy, and other therapies for chronic and acute conditions.
HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care, Inc. (“Option Care”).
On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”) (the “Merger”), a national provider of infusion and home care management solutions, which was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc. and the combined company’s stock, par value $0.0001, was listed on the Nasdaq CapitalGlobal Select Market as of SeptemberJune 30, 2019.2020. See Note 3, Business Acquisitions, of the unaudited condensed consolidated financial statements for further discussion on the Merger.
Update on the Impact of the COVID-19 Pandemic
The primary operations of the Company focus on providing infusion therapy services and based on the recent impact of the pandemic across the healthcare ecosystem, the Company began experiencing a related impact across a number of facets beginning in March 2020.
The second quarter of 2020 results reflect the Company’s continued efforts to accelerate growth and drive merger-related cost savings offset by the detrimental impact of the COVID-19 pandemic. The Company relies upon patient referrals from multiple sources, including but not limited to patients discharged from acute care settings (e.g., hospitals) and patients requiring treatment for chronic conditions from specialty physicians. As expected, the pandemic has negatively affected new patient referrals for both acute and chronic conditions; however, the Company did experience an increase in patient transfers from hospital and outpatient settings which positively affected revenues. For the second quarter of 2020, the revenue results reflect a single digit decline in acute revenues relative to the prior year while chronic revenue grew in the low double digits. Option Care Health continues to collaborate with payers and health systems to transition patients into the home or one of our alternate treatment sites to receive vital infusion therapy.
The Company’s operations involve the compounding of therapeutic drugs in sterile cleanroom facilities by pharmacists and pharmacy technicians, the transportation of such drugs to the patients’ home or alternate infusion treatment site and the administration of the drug by a licensed healthcare professional. Due to personal disruption experienced by employees of the Company, the ability to efficiently resource the compounding, delivery and administration of therapies has been negatively impacted given staffing challenges and availability. This has resulted in higher wage costs in the form of overtime expenditures, migration of clinical resources to additional markets and utilization of contract labor resources. In addition to direct labor investments, the Company has experienced similar impacts on the indirect support functions, as employees have generally migrated to a virtual, remote establishment.
In delivering infusion therapy, the Company’s clinical personnel regularly utilize personal protection equipment (“PPE”) and ancillary medical supplies as dictated by the Company’s clinical protocols. Based on the increased demand for PPE over the past several weeks, the Company has experienced challenges in procuring necessary PPE to ensure the safety of its personnel and the patients served in the form of higher costs for PPE as well as increased effort and resources dedicated to procurement activities. To date, the Company has maintained adequate levels of PPE to support its operations, albeit at higher procurement costs.
The Company experienced cost inefficiencies in the second quarter with respect to clinical labor and other staffing challenges, as well as higher costs to procure personal protection equipment. Offsetting the negative impacts resulting from the COVID-19 pandemic, the Company managed spending and accelerated many integration-related initiatives as discussed below. Further, to date, the Company experienced no material deceleration in cash collections and collaboration with payers continues to be productive. The Company anticipates that the pandemic could affect its operations for an extended period; however, at this time cannot confidently forecast the duration nor the ultimate financial impact on its operations. See Item 1A. “Risk Factors” under the caption “The COVID-19 pandemic could adversely impact our business, results of operations, cash flows and financial position” for further discussion on risks.
In April 2020, the Company received approximately $11.7 million from the Public Health and Social Services Emergency Fund as part of the Coronavirus Aid, Relief, and Economics Security Act (“CARES Act”). The $11.7 million is reflected in the second quarter 2020 as a cash inflow from financing activities and, as a result, is reflected in the June 30, 2020 cash balance and as a component of accrued expenses and other current liabilities. Given the Company’s ability to largely offset the cost inefficiencies experienced from the COVID-19 pandemic with spending reductions and accelerated integration net cost synergies, the Company has determined that it will return these CARES Act funds to the federal government.
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, allows 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.
Since the Merger, we have worked to align our field and sales teams. We believehave also made strides at combining our procurement process and contracts, all while continuing to focus on serving our patients. Patient health is personal to us, which is why, throughout the achievement of these synergies will enableintegration process, we strive to improve and set 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 profilestandard for quality care that is matched by best-in-class service. After completion of the Company.
ChangesMerger, we have additional resources to Medicare Reimbursement
In recent years, legislative changes have resultedinvest in reductionsour people, process and systems, providing us improved strength and scale to drive better patient outcomes. The Company accelerated its integration activities during the second quarter to offset the negative impacts resulting from COVID-19 pandemic, and as a result we exited the second quarter having fully achieved the articulated goal of at least $60.0 million in reimbursement under government healthcare programs. In December 2016,net cost synergies. We continue to pursue further integration efforts, and ultimately expect to exceed the Cures Act legislation was signed into law, which included a decrease to drug pricing for Medicare Part B Durable Medical Equipment infusion drugs administered in an alternate site setting effective January 1, 2017. The original legislation did not provide for reimbursement for the service component until 2021. Center for Medicare and Medicaid Services issued a final rule in October 2018 implementing a temporary transition benefit for Medicare Part B home infusion services, which will continue from January 1, 2019 until January 1, 2021. This temporary transition benefit defines professional services as only including nursing, and not pharmacy, care planning, care coordination, or monitoring, and only pays for an infusion day when the nurse is in the home, which continues to have a negative financial impact on our business.net cost synergy goal.
Acquisitions
The Company has made strategic acquisitions to expand both its national footprint as well as its service line offering. These acquisitions are comprised of the following:
Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and home care management, who partnered with physicians, hospital systems, payers, pharmaceutical manufacturers and skilled nursing facilities to provide patients access to post-acute care services. The fair value of purchase consideration transferred, net of cash acquired, on the closing date of $1,087.2 million includes the value of the number of shares of the combined company to be owned by BioScrip shareholders at closing of the Merger, the value of common shares to be issued to certain warrant and preferred shareholders in conjunction with the Merger, the value of stock-based instruments that were vested or earned as of the Merger, and cash payments made in conjunction with the Merger. The fair value per share of BioScrip’s common stock was $2.67 per share on August 6, 2019. For additional information on this transaction, see Note 3, Business Acquisitions, of the unaudited condensed consolidated financial statements.
In September 2018, we completed the acquisition
In August 2018, we completed the acquisition of certain assets of Baptist Health in Little Rock, Arkansas, for a purchase price of $1.0 million.
Composition of Results of Operations
The following results of operations include the accounts of Option Care Health and our subsidiaries for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. The BioScrip results have been included since the August 6, 2019 Merger Date.
Gross Profit
Gross profit represents our net revenue less cost of revenue.
Net Revenue
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
Revenue.Cost of revenue consists of the actual cost of pharmaceuticals and other medical supplies dispensed to patients. In addition to product costs, cost of revenue includes warehousing costs, purchasing costs, depreciation expense relating to revenue-generating assets, such as infusion pumps, shipping and handling costs, and wages and related costs for the pharmacists, nurses, and all other employees and contracted workers directly involved in providing service to the patient.
The Company receives volume-based rebates and prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These payments are recorded as a reduction of inventory and are accounted for as a reduction of cost of revenue when the related inventory is sold.
Operating Costs and Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist principally of salaries for administrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees.
Depreciation and Amortization Expense. Depreciation within this caption includes infrastructure items such as computer hardware and software, office equipment and leasehold improvements. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue.
Other Income (Expense)
Interest Expense, Net. Interest expense consists principally of interest payments on the Company’s outstanding borrowings under the ABL Facility, the First Lien Term Loanfirst lien term loan and Second Lien Notes, as well as thesecond lien notes, amortization of discount and deferred financing fees.fees, and changes in derivatives not designated as hedging instruments related to the interest rate swaps. Refer to the “Liquidity and Capital Resources” section below for further discussion of these outstanding borrowings.
Equity in Earnings of Joint Ventures. Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion joint ventures with health systems.
Other, Net. Other income (expense) primarily includes miscellaneous non-operating expenses and third-party fees paid in conjunction with our 2019 debt issuance of the Loan Facilitiesissuances and Second Lien Notes and loss on extinguishment of debt for the Company’s Previous Credit Facilities.extinguishments, as they occur.
Income Tax Expense (Benefit) Expense. The Company is subject to taxation in the United States and various states. The Company’s income tax (benefit) expense is reflective of the current federal and state tax rates.
Change in unrealized (losses) gainslosses 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 derivatives designated as hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes.
Results of Operations
The following table presents Option Care Health’s consolidated results of operations for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | | | | | Six Months Ended June 30, | | | | | | |
| | 2020 (unaudited) | | | | 2019 (unaudited) | | | | 2020 (unaudited) | | | | 2019 (unaudited) | | |
| Amount | | % of Revenue | | Amount | | % of Revenue | | Amount | | % of Revenue | | Amount | | % of Revenue |
| NET REVENUE | $ | 740,848 | | | 100.0 | % | | $ | 497,266 | | | 100.0 | % | | $ | 1,446,288 | | | 100.0 | % | | $ | 973,758 | | | 100.0 | % |
| COST OF REVENUE | 574,528 | | | 77.6 | % | | 395,876 | | | 79.6 | % | | 1,121,939 | | | 77.6 | % | | 774,174 | | | 79.5 | % |
| GROSS PROFIT | 166,320 | | | 22.4 | % | | 101,390 | | | 20.4 | % | | 324,349 | | | 22.4 | % | | 199,584 | | | 20.5 | % |
| | | | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | 124,918 | | | 16.9 | % | | 99,245 | | | 20.0 | % | | 254,198 | | | 17.6 | % | | 182,032 | | | 18.7 | % |
| Depreciation and amortization expense | 18,194 | | | 2.5 | % | | 10,150 | | | 2.0 | % | | 38,295 | | | 2.6 | % | | 20,119 | | | 2.1 | % |
| Total operating expenses | 143,112 | | | 19.3 | % | | 109,395 | | | 22.0 | % | | 292,493 | | | 20.2 | % | | 202,151 | | | 20.8 | % |
| OPERATING INCOME (LOSS) | 23,208 | | | 3.1 | % | | (8,005) | | | (1.6) | % | | 31,856 | | | 2.2 | % | | (2,567) | | | (0.3) | % |
| | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | |
| Interest expense, net | (31,432) | | | (4.2) | % | | (11,563) | | | (2.3) | % | | (59,519) | | | (4.1) | % | | (22,608) | | | (2.3) | % |
| Equity in earnings of joint ventures | 1,012 | | | 0.1 | % | | 643 | | | 0.1 | % | | 1,574 | | | 0.1 | % | | 1,192 | | | 0.1 | % |
| Other, net | 14 | | | — | % | | (101) | | | — | % | | 22 | | | — | % | | (177) | | | — | % |
| Total other expense | (30,406) | | | (4.1) | % | | (11,021) | | | (2.2) | % | | (57,923) | | | (4.0) | % | | (21,593) | | | (2.2) | % |
| | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | (7,198) | | | (1.0) | % | | (19,026) | | | (3.8) | % | | (26,067) | | | (1.8) | % | | (24,160) | | | (2.5) | % |
| INCOME TAX EXPENSE (BENEFIT) | 470 | | | 0.1 | % | | (5,423) | | | (1.1) | % | | 1,511 | | | 0.1 | % | | (6,845) | | | (0.7) | % |
| NET LOSS | $ | (7,668) | | | (1.0) | % | | $ | (13,603) | | | (2.7) | % | | $ | (27,578) | | | (1.9) | % | | $ | (17,315) | | | (1.8) | % |
| | | | | | | | | | | | | | | |
| OTHER COMPREHENSIVE GAIN ( LOSS), NET OF TAX: | | | | | | | | | | | | | | | |
| Change in unrealized gains (losses) on cash flow hedges, net of income tax expense (benefit) of $0, $(15), $0 and $227, respectively | 4,576 | | | 0.6 | % | | 27 | | | — | % | | (12,056) | | | (0.8) | % | | (478) | | | — | % |
| OTHER COMPREHENSIVE GAIN (LOSS) | 4,576 | | | 0.6 | % | | 27 | | | — | % | | (12,056) | | | (0.8) | % | | (478) | | | — | % |
| NET COMPREHENSIVE LOSS | $ | (3,092) | | | (0.4) | % | | $ | (13,576) | | | (2.7) | % | | $ | (39,634) | | | (2.7) | % | | $ | (17,793) | | | (1.8) | % |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2019 (unaudited) | | 2018 (unaudited) | | 2019 (unaudited) | | 2018 (unaudited) |
| | Amount |
| | % of Revenue |
| | Amount |
| | % of Revenue |
| | Amount |
| | % of Revenue |
| | Amount |
| | % of Revenue |
|
| NET REVENUE | $ | 615,880 |
| | 100.0 | % | | $ | 493,928 |
| | 100.0 | % | | $ | 1,589,638 |
| | 100.0 | % | | $ | 1,434,061 |
| | 100.0 | % |
| COST OF REVENUE | 478,107 |
| | 77.6 | % | | 385,683 |
| | 78.1 | % | | 1,252,281 |
| | 78.8 | % | | 1,122,846 |
| | 78.3 | % |
| GROSS PROFIT | 137,773 |
| | 22.4 | % | | 108,245 |
| | 21.9 | % | | 337,357 |
| | 21.2 | % | | 311,215 |
| | 21.7 | % |
| | | | | | | | | | | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | 133,475 |
| | 21.7 | % | | 85,929 |
| | 17.4 | % | | 315,815 |
| | 19.9 | % | | 258,314 |
| | 18.0 | % |
| Depreciation and amortization expense | 16,023 |
| | 2.6 | % | | 9,557 |
| | 1.9 | % | | 36,142 |
| | 2.3 | % | | 28,180 |
| | 2.0 | % |
| Total operating expenses | 149,498 |
| | 24.3 | % | | 95,486 |
| | 19.3 | % | | 351,957 |
| | 22.1 | % | | 286,494 |
| | 20.0 | % |
| OPERATING (LOSS) INCOME | (11,725 | ) | | (1.9 | )% | | 12,759 |
| | 2.6 | % | | (14,600 | ) | | (0.9 | )% | | 24,721 |
| | 1.7 | % |
| | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | |
| Interest expense, net | (21,509 | ) | | (3.5 | )% | | (11,025 | ) | | (2.2 | )% | | (44,117 | ) | | (2.8 | )% | | (34,313 | ) | | (2.4 | )% |
| Equity in earnings of joint ventures | 826 |
| | 0.1 | % | | 301 |
| | 0.1 | % | | 2,018 |
| | 0.1 | % | | 656 |
| | — | % |
| Other, net | (6,810 | ) | | (1.1 | )% | | 139 |
| | — | % | | (6,679 | ) | | (0.4 | )% | | (2,170 | ) | | (0.2 | )% |
| Total other expense | (27,493 | ) | | (4.5 | )% | | (10,585 | ) | | (2.1 | )% | | (48,778 | ) | | (3.1 | )% | | (35,827 | ) | | (2.5 | )% |
| | | | | | | | | | | | | | | | |
| (LOSS) INCOME BEFORE INCOME TAXES | (39,218 | ) | | (6.4 | )% | | 2,174 |
| | 0.4 | % | | (63,378 | ) | | (4.0 | )% | | (11,106 | ) | | (0.8 | )% |
| INCOME TAX EXPENSE (BENEFIT) | 3,576 |
| | 0.6 | % | | 383 |
| | 0.1 | % | | (3,269 | ) | | (0.2 | )% | | (1,737 | ) | | (0.1 | )% |
| NET (LOSS) INCOME | $ | (42,794 | ) | | (6.9 | )% | | $ | 1,791 |
| | 0.4 | % | | $ | (60,109 | ) | | (3.8 | )% | | $ | (9,369 | ) | | (0.7 | )% |
| | | | | | | | | | | | | | | | |
| OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: | | | | | | | | | | | | | | | |
| Change in unrealized (losses) gains on cash flow hedges, net of income taxes of $32, ($34), $259 and ($530), respectively | (8,249 | ) | | (1.3 | )% | | 187 |
| | — | % | | (8,727 | ) | | (0.5 | )% | | 1,635 |
| | 0.1 | % |
| OTHER COMPREHENSIVE (LOSS) INCOME | (8,249 | ) | | (1.3 | )% | | 187 |
| | — | % | | (8,727 | ) | | (0.5 | )% | | 1,635 |
| | 0.1 | % |
| NET COMPREHENSIVE (LOSS) INCOME | $ | (51,043 | ) | | (8.3 | )% | | $ | 1,978 |
| | 0.4 | % | | $ | (68,836 | ) | | (4.3 | )% | | $ | (7,734 | ) | | (0.5 | )% |
Three Months Ended SeptemberJune 30, 20192020 Compared to Three Months Ended SeptemberJune 30, 2018
2019
The following tables present selected consolidated comparative results of operations from Option Care Health’s unaudited condensed consolidated financial statements for the three month periods ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018.2019.
Gross Profit
Net Revenue
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Net revenue | $ | 615,880 |
| | $ | 121,952 |
| | 24.7 | % | | $ | 493,928 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Net revenue | $ | 740,848 | | | $ | 497,266 | | | $ | 243,582 | | | 49.0 | % |
| Cost of revenue | 574,528 | | | 395,876 | | | 178,652 | | | 45.1 | % |
| Gross profit | $ | 166,320 | | | $ | 101,390 | | | $ | 64,930 | | | 64.0 | % |
| Gross profit margin | 22.4 | % | | 20.4 | % | | | | |
The 24.7% increase in net revenue was primarily driven by additional revenue following the Merger of $119.1 million.
Cost$208.4 million as well as growth in the Company’s portfolio of Revenue
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Cost of revenue | $ | 478,107 |
| | $ | 92,424 |
| | 24.0 | % | | $ | 385,683 |
|
| Gross profit margin | 22.4 | % | | | | | | 21.9 | % |
therapies. The increase in cost of revenue was driven by organic growth and the impact of the Merger and organic growth. The increase in gross profit was primarily related to contribution margin from additional revenue from the Merger. The increase in gross margin percentage was primarily driven by therapy mix shift.shift and the positive impact from the merger integration net cost synergies, partially offset by the incremental wage costs and personal protective equipment costs related to the COVID-19 pandemic.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Selling, general and administrative expenses | $ | 124,918 | | | $ | 99,245 | | | $ | 25,673 | | | 25.9 | % |
| Depreciation and amortization expense | 18,194 | | | 10,150 | | | 8,044 | | | 79.3 | % |
| Total operating expenses | $ | 143,112 | | | $ | 109,395 | | | $ | 33,717 | | | 30.8 | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Selling, general and administrative expenses | $ | 133,475 |
| | $ | 47,546 |
| | 55.3 | % | | $ | 85,929 |
|
| Depreciation and amortization expense | 16,023 |
| | 6,466 |
| | 67.7 | % | | 9,557 |
|
| Total operating expenses | $ | 149,498 |
| | $ | 54,012 |
| | 56.6 | % | | $ | 95,486 |
|
OperatingSelling, general and administrative expenses increased for the three months ended SeptemberJune 30, 2020 primarily due to the impact of the Merger but decreased as a percentage of revenue to 16.9% for the three months ended June 30, 2020 as compared to 20.0% for the three months ended June 30 2019 due to transaction and integration expenses of $21.2 million during the quarter as well as the impact of the Merger.synergy realization.
The increase in depreciation and amortization was primarily related to the depreciation of the fixed assets acquired and the amortization of the intangibles acquired from the Merger of $3.0$3.6 million and $2.6$3.9 million, respectively.
Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Interest expense, net | $ | (31,432) | | | $ | (11,563) | | | $ | (19,869) | | | 171.8 | % |
| Equity in earnings of joint ventures | 1,012 | | | 643 | | | 369 | | | 57.4 | % |
| Other, net | 14 | | | (101) | | | 115 | | | (113.9) | % |
| Total other expense | $ | (30,406) | | | $ | (11,021) | | | $ | (19,385) | | | 175.9 | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Interest expense, net | $ | (21,509 | ) | | $ | (10,484 | ) | | 95.1 | % | | $ | (11,025 | ) |
| Equity in earnings of joint ventures | 826 |
| | 525 |
| | 174.4 | % | | 301 |
|
| Other, net | (6,810 | ) | | (6,949 | ) | | (4,999.3 | )% | | 139 |
|
| Total other expense | $ | (27,493 | ) | | $ | (16,908 | ) | | 159.7 | % | | $ | (10,585 | ) |
The $10.5 million increase in interest expense was primarily attributable to the interest expense on the new debt issued to us in conjunction with the Merger. The balance of long-term debt increased from $551.5$538.9 million at December 31, 2018June 30, 2019 to $1,325.0$1,284.6 million at SeptemberJune 30, 2019.2020. See Note 11, Indebtedness, of the unaudited condensed consolidated financial statements.
Income Tax Expense (Benefit)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Income tax expense (benefit) | $ | 470 | | | $ | (5,423) | | | $ | 5,893 | | | (108.7) | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Income tax expense (benefit) | $ | 3,576 |
| | $ | 3,193 |
| | 833.7 | % | | $ | 383 |
|
As a result of the Merger, theThe Company recordedcontinues to maintain a full valuation allowance, established at the time of Merger, against all of its net U.S. federal and state deferred tax assets with the exception of $1.0approximately $0.7 million of estimated state net operating losses (“NOL”). Because of the Company’s full valuation allowance, the Company’s tax expense for the three months ended SeptemberJune 30, 2019 is2020 only composedconsists of quarterly tax liabilities attributable to separate company state tax returns as well as the Company’srecognized deferred tax expense recognized during the third quarter of 2019 prior to the Merger.expense. These tax expense items created a negative quarterly effective tax rate of 9.1%6.5% during the three months ended SeptemberJune 30, 2019.2020. During the three months ended SeptemberJune 30, 2018,2019, the effective tax rate was 17.6%28.5%. TheseThe variance in the year-over-year effective tax rates is primarily attributable to the valuation allowance established by the Company at the time of the Merger. The quarterly tax rates of both periods differ from the Company’s 21% federal statutory rate primarily due to changes in valuation allowance, certain state and local taxes, non-deductible costs and resolution of certain tax matters.
Net (Loss) Income and Other Comprehensive (Loss) Income
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Net (loss) income | $ | (42,794 | ) | | $ | (44,585 | ) | | (2,489.4 | )% | | $ | 1,791 |
|
| Other comprehensive income (loss), net of tax: | | |
|
| |
|
| | |
| Changes in unrealized (losses) gains on cash flow hedges, net of income taxes | (8,249 | ) | | (8,436 | ) | | (4,511.2 | )% | | 187 |
|
| Other comprehensive (loss) income | (8,249 | ) | | (8,436 | ) | | (4,511.2 | )% | | 187 |
|
| Net comprehensive (loss) income | $ | (51,043 | ) | | $ | (53,021 | ) | | (2,680.5 | )% | | $ | 1,978 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Net loss | $ | (7,668) | | | $ | (13,603) | | | $ | 5,935 | | | (43.6) | % |
| Other comprehensive loss, net of tax: | | | | | | | |
| Changes in unrealized gains (losses) on cash flow hedges, net of income taxes | 4,576 | | | 27 | | | 4,549 | | | 16,848.1 | % |
| Other comprehensive gain (loss) | 4,576 | | | 27 | | | 4,549 | | | 16,848.1 | % |
| Net comprehensive loss | $ | (3,092) | | | $ | (13,576) | | | $ | 10,484 | | | (77.2) | % |
The change in net (loss) income of $44.6 millionloss was primarily attributed to operating efficiencies and certain cost saving initiatives related to COVID-19 and the transaction-related expenses incurred in conjunction withimpact of the Merger and related integration savings that resulted in total operating expenses decreasing as well as the increased interest expense on the increased indebtedness.a percentage of net revenue.
ChangesThe change in unrealized gains (losses) gains on cash flow hedges, net of income taxes, decreased $8.4 million. The decrease inprimarily related to the variable$3.7 million reclassification from accumulated other comprehensive loss to interest rates during the third quarter of 2019 and projected as of September 30, 2019 resulted in a corresponding liabilityexpense, net upon discontinuing hedge accounting on the fair value of the interest rateCompany’s $400.0 million notional swap. The remaining change was related to increases in fair values on the $925.0 million notional swap. The change in unrealized loss for the three months ended SeptemberJune 30, 20182019 related to fluctuations on interest rate caps on $250.0 million of the Previous First Lien Term Loan.previous first lien term loan.
Net comprehensive loss was $51.0$3.1 million for the three months ended SeptemberJune 30, 2019,2020, compared to net comprehensive incomeloss of $2.0$13.6 million for the three months ended SeptemberJune 30, 2018,2019, as a result of the changes in net (loss) income,loss, discussed above, further reduced byalong with the impact of the fair value of the interest rate swaps on the first $911.1 million of First Lien Term Loan.swaps.
NineSix Months Ended SeptemberJune 30, 20192020 Compared to NineSix Months Ended SeptemberJune 30, 2018
2019
The following tables present selected consolidated comparative results of operations from the Company’s unaudited condensed consolidated financial statements for the ninesix month periods ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018.2019.
Gross Profit
Net Revenue
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Net revenue | $ | 1,589,638 |
| | $ | 155,577 |
| | 10.8 | % | | $ | 1,434,061 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Net revenue | $ | 1,446,288 | | | $ | 973,758 | | | $ | 472,530 | | | 48.5 | % |
| Cost of revenue | 1,121,939 | | | 774,174 | | | $ | 347,765 | | | 44.9 | % |
| Gross profit | 324,349 | | | 199,584 | | | $ | 124,765 | | | 62.5 | % |
| Gross profit margin | 22.4 | % | | 20.5 | % | | | | |
The 10.8% increase in net revenue was primarily driven by additional revenue following the Merger for $119.1of $402.1 million as well as growth in the Company’s portfolio of therapies.
Cost of Revenue
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Cost of revenue | $ | 1,252,281 |
| | $ | 129,435 |
| | 11.5 | % | | $ | 1,122,846 |
|
| Gross profit margin | 21.2 | % | | | | | | 21.7 | % |
The 11.5% increase in cost of revenue was primarily attributable to the increase in revenue. The decrease in gross margin was driven by the therapy mix shift.
Operating Expenses
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Selling, general and administrative expenses | $ | 315,815 |
| | $ | 57,501 |
| | 22.3 | % | | $ | 258,314 |
|
| Depreciation and amortization expense | 36,142 |
| | 7,962 |
| | 28.3 | % | | 28,180 |
|
| Total operating expenses | $ | 351,957 |
| | $ | 65,463 |
| | 22.8 | % | | $ | 286,494 |
|
Spending leverage declined by 1.9% from 18.0% of revenue for the nine months ended September 30, 2018 to 19.9% for the nine months ended September 30, 2019 driven by transaction and integration expenses of $38.8 million during the nine months as well as the impact of the Merger and organic growth. The increase in gross profit was primarily related to contribution margin from additional revenue from the Merger. The increase in gross margin percentage was primarily driven by therapy mix shift and the positive impact from the merger integration net cost synergies, partially offset by the incremental wage costs and personal protective equipment costs related to the COVID-19 pandemic.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Selling, general and administrative expenses | $ | 254,198 | | | $ | 182,032 | | | $ | 72,166 | | | 39.6 | % |
| Depreciation and amortization expense | 38,295 | | | 20,119 | | | 18,176 | | | 90.3 | % |
| Total operating expenses | $ | 292,493 | | | $ | 202,151 | | | $ | 90,342 | | | 44.7 | % |
Selling, general and administrative expenses increased for the six months ended June 30, 2020 primarily due to the impact of the Merger, but has decreased as a percentage of revenue to 17.6% for the six months ended June 30, 2020 as compared to 18.7% for the six months ended June 30, 2019 due to synergy realization.
The increase in depreciation and amortization was primarily related to the additional expense resultingdepreciation of the fixed assets acquired and the amortization of the intangibles acquired from the Merger as well as the investment in capital expenditures in 2018.of $7.5 million and $7.8 million, respectively.
Other Income (Expense)
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, | |
| | 2019 | | | | 2018 | | 2020 | | 2019 | |
| | (unaudited) | | Variance | | (unaudited) | | (unaudited) | | (unaudited) | | Variance | |
| | | | | | | | | | |
| | (in thousands, except for percentages) | | (in thousands, except for percentages) | |
| Interest expense, net | $ | (44,117 | ) | | $ | (9,804 | ) | | 28.6 | % | | $ | (34,313 | ) | Interest expense, net | $ | (59,519) | | | $ | (22,608) | | | $ | (36,911) | | | 163.3 | % |
| Equity in earnings of joint ventures | 2,018 |
| | 1,362 |
| | 207.6 | % | | 656 |
| Equity in earnings of joint ventures | 1,574 | | | 1,192 | | | 382 | | | 32.0 | % |
| Other, net | (6,679 | ) | | (4,509 | ) | | 207.8 | % | | (2,170 | ) | Other, net | 22 | | | (177) | | | 199 | | | (112.4) | % |
| Total other expense | $ | (48,778 | ) | | $ | (12,951 | ) | | 36.1 | % | | $ | (35,827 | ) | Total other expense | $ | (57,923) | | | $ | (21,593) | | | $ | (36,330) | | | 168.2 | % |
The increase in interest expense of 28.6% was primarily attributable to the additionalinterest expense related toon the new debt issued at the close ofin conjunction with the Merger, as discussed above.
Income Tax Expense (Benefit)
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Income tax expense (benefit) | $ | (3,269 | ) | | $ | (1,532 | ) | | 88.2 | % | | $ | (1,737 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Income tax expense (benefit) | $ | 1,511 | | | $ | (6,845) | | | $ | 8,356 | | | (122.1) | % |
The Company’sCompany continues to maintain a full valuation allowance, established at the time of Merger, against all of its net U.S. federal and state deferred tax benefit forassets with the nine months ended September 30, 2019 is primarily comprisedexception of approximately $0.7 million of estimated state net operating losses (“NOL”). Because of the Company’s full valuation allowance, the Company’s tax expense for the six months ended June 30, 2020 only consists of quarterly tax liabilities attributable to separate company state tax returns as no netwell as recognized deferred benefit ortax expense. These tax expense items created a negative effective tax rate of 5.8% during the six months ended June 30, 2020. During the six months ended June 30, 2019, the effective tax rate was realized during 2019 due28.3%. The variance in the year-over-year effective tax rates is primarily attributable to the establishment of the valuation allowance established by the Company at the time of the Merger. This results in an effectiveThe quarterly tax raterates of 5.2% for the nine months ended September 30, 2019. During the nine months ended September 30, 2018, the effective tax rate was 15.6%. These ratesboth periods differ from the Company’s 21% federal statutory rate primarily due to changes in valuation allowance, certain state and local taxes, non-deductible costs and resolution of certain tax matters.
Net (Loss) Income and Other Comprehensive (Loss) Income
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | |
| | 2020 | | 2019 | | | | |
| (unaudited) | | (unaudited) | | Variance | | |
| | | | | | | |
| (in thousands, except for percentages) | | | | | | |
| Net (loss) income | $ | (27,578) | | | $ | (17,315) | | | $ | (10,263) | | | 59.3 | % |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Changes in unrealized (losses) gains on cash flow hedges, net of income taxes | (12,056) | | | (478) | | | (11,578) | | | 2,422.2 | % |
| Other comprehensive (loss) income | (12,056) | | | (478) | | | (11,578) | | | 2,422.2 | % |
| Net comprehensive loss | $ | (39,634) | | | $ | (17,793) | | | $ | (21,841) | | | 122.8 | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | | | 2018 |
| | (unaudited) | | Variance | | (unaudited) |
| | | | | |
| | (in thousands, except for percentages) |
| Net (loss) income | $ | (60,109 | ) | | $ | (50,740 | ) | | 541.6 | % | | $ | (9,369 | ) |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Changes in unrealized (losses) gains on cash flow hedges, net of income taxes | (8,727 | ) | | (10,362 | ) | | (633.8 | )% | | 1,635 |
|
| Other comprehensive (loss) income | (8,727 | ) | | (10,362 | ) | | (633.8 | )% | | 1,635 |
|
| Net comprehensive (loss) income | $ | (68,836 | ) | | $ | (61,102 | ) | | 790.0 | % | | $ | (7,734 | ) |
NetThe change in net loss increased $50.7 millionwas primarily driven byattributed to increased depreciation, and amortization expense, transaction expenses and integration costs for the Merger, increased interest expense, as well as the loss on the extinguishment of debtwhich was partially offset by operating efficiencies, certain cost saving initiatives related to COVID-19 and third-party fees on the debt.Merger integration savings.
ChangesThe change in unrealized (losses) gains on cash flow hedges, net of income taxes, decreased as a result ofrelated to the decrease in the variable interest rates during 2019. The2020, partially offset by the $3.7 million reclassification from accumulated other comprehensive income to interest expense upon discontinuing hedge accounting on the $400.0 million notional interest rate swapsswap. The change in unrealized (loss) income for the six months ended June 30, 2019 are hedging against the first $911.1 million of the First Lien Term Loan, whereas therelated to fluctuations on interest rate capscaps.
The change in 2018 through April 2019 were onnet comprehensive (loss) income was the first $250.0 million of the Previous First Lien Term Loan resulting in a larger impact on unrealized (losses) gains on cash flow hedges in 2019.
Net comprehensive loss increased $61.1 million for the nine months ended September 30, 2019 as a result of the changeschange in net loss, discusseddescribed above, further reduced by the impact of the fair value of the hedging instruments.interest rate swaps.
Liquidity and Capital Resources
For the ninesix months ended SeptemberJune 30, 20192020 and the twelve months ended December 31, 2018,2019, the Company’s primary sources of liquidity were cash on hand of $52.8$118.1 million and $36.4$67.1 million, respectively, as well as the $140.4 million of borrowings available under its credit facilities, described further below.facilities. During the ninesix months ended SeptemberJune 30, 20192020 and the year ended December 31, 2018,2019, the Company’s positive cash flows from operations have enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as pursue acquisitions.
The Company’s primary uses of cash include supporting our ongoing business activities and investmentinvesting in various acquisitions and our infrastructure to support additional business volumes. Ongoing operating cash outflows are primarily associated with procuring and dispensing prescription drugs, personnel and other costs associated with servicing patients, as well as paying cash interest on the outstanding debt. Ongoing investing cash flows are primarily associated with capital projects related to business acquisitions, the improvement and maintenance of our pharmacy facilities and investment in our information technology systems. Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt. In addition to these ongoing investing and financing activities, during the three months ended September 30, 2019, the Company entered into the Merger Agreement, and the Merger resulted in one-time cash used in investing activities
Our business strategy includes the selective acquisition of additional infusion pharmacies and other related healthcare businesses. We continue to evaluate acquisition opportunities and view acquisitions as a key part of our growth strategy. The Company historically has funded its acquisitions with cash with the exception of the Merger. The Company may require additional capital in excess of current availability in order to complete future acquisitions. It is impossible to predict the amount of capital that may be required for acquisitions, and there is no assurance that sufficient financing for these activities will be available on acceptable terms.
Short-Term and Long-Term Liquidity Requirements
The Company’s ability to make principal and interest payments on any borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations and planned capital expenditures, we believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans.
Credit Facilities
On August 6, 2019, the Company repaid the outstanding balance of the Previous Term Loans and retired the outstanding credit arrangements for $551.7 million. Proceeds of $575.0 million from the two new credit arrangements and indenture, discussed below, were also used, in part, to repay the outstanding debt of BioScrip as of the Merger.
In conjunction with the Merger, the Company entered into anThe Company’s asset-based-lending (“ABL”) 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 Facilityfacility 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 Facilityfacility credit agreement. The revolving credit facility contains commitment fees payable on the unused portion of the ABL facility ranging from 0.25% to 0.375%, depending on various factors including the Company’s leverage ratio, type of loan and rate type, and letter of credit fees of 2.5%. The Company had no outstanding borrowings under the ABL Facilityfacility at SeptemberJune 30, 2019.2020. The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL facility of $140.4 million as of SeptemberJune 30, 2019.
2020.
The principal balance of the First Lien Term Loanfirst 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 commencecommenced in March of 2020. Interest on the First Lien Term Loanfirst 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 Loanfirst lien term loan was 6.61%4.68% as of SeptemberJune 30, 2019.2020.
The Second Lien Notessecond lien notes mature on August 6, 2027. Interest on the Second Lien Notessecond lien notes is payable quarterly and is at the greater of 1% or LIBOR,London Interbank Offered Rate (“LIBOR”), plus 8.75%. The Company elected to pay-in-kind the first quarterly interest payment, due in November 2019, which will resultresulted in the Company capitalizing the interest payment to the principal balance on the interest payment date;date, increasing the outstanding principal balance to $412.3 million. The Company paid the second and third quarterly interest payments, due in February 2020 and May 2020. The interest rate on the Second Lien Notessecond lien notes was 10.89%10.25% as of SeptemberJune 30, 2019.2020.
Cash Flows
NineSix Months Ended SeptemberJune 30, 20192020 Compared to NineSix Months Ended SeptemberJune 30, 20182019
The following table presents selected data from Option Care Health’s unaudited condensed consolidated statements of cash flows:
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, | |
| | 2019 | | | | 2018 | | 2020 | | 2019 | |
| | (unaudited) | | Variance | | (unaudited) | | (unaudited) | | (unaudited) | | Variance |
| | | | | | | | | | | | |
| | (in thousands) | | (in thousands) | |
| Net cash provided by operating activities | $ | 16,570 |
| | $ | 4,372 |
| | $ | 12,198 |
| Net cash provided by operating activities | $ | 53,390 | | | $ | 22,406 | | | $ | 30,984 | |
| Net cash used in investing activities | (712,684 | ) | | (682,051 | ) | | (30,633 | ) | Net cash used in investing activities | (8,728) | | | (7,866) | | | (862) | |
| Net cash provided by (used in) financing activities | 712,512 |
| | 715,624 |
| | (3,112 | ) | Net cash provided by (used in) financing activities | 6,381 | | | (4,076) | | | 10,457 | |
| Net increase (decrease) in cash and cash equivalents | 16,398 |
| | 37,945 |
| | (21,547 | ) | |
| Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | 51,043 | | | 10,464 | | | 40,579 | |
| Cash and cash equivalents - beginning of period | 36,391 |
| | (16,725 | ) | | 53,116 |
| Cash and cash equivalents - beginning of period | 67,056 | | | 36,391 | | | 30,665 | |
| Cash and cash equivalents - end of period | $ | 52,789 |
| | $ | 21,220 |
| | $ | 31,569 |
| Cash and cash equivalents - end of period | $ | 118,099 | | | $ | 46,855 | | | $ | 71,244 | |
Cash Flows from Operating Activities
For the nine months ended September 30, 2019, Option Care Health generated $16.6 millionThe increase in cash flow from operating activities, a $4.4 million increase over the nine months ended September 30, 2018. The primary drivers of the cashflows provided by operating activities for the nine months ended September 30, 2019 are discussed below:
(i)The positive change in accounts receivable for the nine months ended September 30, 2019 of $71.0 millionis primarily relateddue to the Company’s efforts to increase cash velocityworking capital efficiencies and improve the aging of the receivables balance. The negative change in accounts receivable for the nine months ended September 30, 2018 of $32.5 million was primarily related to the disruption from the deployment of the new pharmacy dispensing system over the course of the year causing a more aged accounts receivable profile.
(ii)The negative change in accounts payable of $36.2 million in 2019 related to timing of vendor payments induring the ordinary course of business as well as a net pay down of $9.2 million of acquired payables from the Merger. The positive change in accounts payable of $8.7 million in 2018 related to timing of vendor payments in the ordinary course of business.six months ended June 30, 2020.
Cash Flows from Investing Activities
ForThe increase in cash flows used in investing activities is primarily due to increased fixed asset additions during the ninesix months ended SeptemberJune 30, 2019, Option Care Health used $712.7 million in cash for investing activities2020 as compared to $30.6 million for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, the cash used was primarily attributable to the Merger of $700.2 million as well as investments in pharmacy and information technology infrastructure of $13.2 million. Similarly, for the nine months ended September 30, 2018, $20.7 million waswe invested inmore into our pharmacies and information technology and $9.9 million was deployed for the Baptist Health and Home IV, Inc. acquisitions.
infrastructure.
Cash Flows from Financing Activities
Cash flows from financing increased $715.6 million from cash usedThe increase in financing activities of $3.1 million for the nine months ended September 30, 2018 to cash provided by (used in) financing activities of $712.5 million for the nine months ended September 30, 2019. The change is primarily related to the proceeds from the issuancereceipt of new debt$11.7 million of $981.1 million,CARES Act funds, partially offset by the retirement of the Company’s previous debt of $226.7 million and the payment of deferred financing costs of $36.5 million for the nine months ended September 30, 2019. Cash used in financing activities for the nine months ended September 30, 2018 primarily related to repayments of the Previous Credit Facilities.increased principal payments.
Commitments and Contractual Obligations
The following table presents Option Care Health’sThere were no material changes to our commitments andunder contractual obligations, as of September 30, 2019, as well as its long-term obligations (in thousands):disclosed in our latest Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| | | Total | | Less than 1 year | | 1 - 3 years | | 3-5 years | | More than 5 years |
| | | | | | | | | | | |
| | | (in thousands) |
Long-term debt obligations (1) | | $ | 1,325,000 |
| | $ | 6,938 |
| | $ | 18,500 |
| | $ | 18,500 |
| | $ | 1,281,062 |
|
Interest payments on long-term debt obligations (2) | | 809,460 |
| | 106,010 |
| | 219,212 |
| | 207,732 |
| | 276,506 |
|
| Operating lease obligations | | 99,769 |
| | 25,891 |
| | 35,384 |
| | 19,804 |
| | 18,690 |
|
| Total | | $ | 2,234,229 |
| | $ | 138,839 |
| | $ | 273,096 |
| | $ | 246,036 |
| | $ | 1,576,258 |
|
| |
(1) | Includes aggregate principal payment on the new indebtedness from the First Lien Term Loan and the Second Lien Notes incurred in 2019. |
| |
(2) | Interest payments calculated based on LIBOR rate as of September 30, 2019. Actual payments are based on changes in LIBOR. Calculated interest payments exclude interest rate swap agreements the Company entered into in connection with the new indebtedness incurred in 2019. |
Other long-term liabilities were excluded from this table, as the Company is unable to determine the timing of future payments. There were no significant capital expenditure commitments as of September 30, 2019. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2019,2020, Option Care Health did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
The Company prepares its unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. The Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates.
There have been no significant changes in the critical accounting estimates from those described in the Company’s audited consolidated financial statements and related notes, as presented in our Annual report on 10-K for the definitive merger proxy filed on June 26,year ended December 31, 2019, and those financial statementshereby incorporated by reference therein.reference.
| |
Item 3. | Quantitative and Qualitative Disclosures about Market Risks |
Interest RateItem 3.Quantitative and Qualitative Disclosures about Market Risk
The Company’s primaryThere have been no material changes to our exposure to market risk exposure is changing LIBOR‑based interest rates. 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 beyondfrom those included in our control. Our First Lien Term Loan bears interest at a floating rate equal to our option of a rate per annum equal to (i)Annual Report on Base Rate loans, at a Base Rate, plus 3.25% to 3.50%, depending on our leverage ratio and (ii) Eurocurrency Rate loans atForm 10-K for the Eurocurrency Rate, as defined, plus 4.25% to 4.50%, depending on our leverage ratio. Our Second Lien Notes bear interest at the greater of 1.00% or LIBOR, plus 8.75%. Our ABL Facility bears interest on Base Rate loans at the Base Rate plus 1.25% to 1.75% and on Eurocurrency Rate loans at the Eurocurrency Rate plus 2.25% to 2.75%. At September 30,year ended December 31, 2019, we had total outstanding debt of $925.0 million under our First Lien Term Loan. As of September 30, 2019, we had $400.0 million Second Lien Notes issued and outstanding. We had no outstanding borrowings under the ABL Facility as of September 30, 2019.hereby incorporated by reference.
Based on the amounts outstanding coupled with interest rate swaps, a 100-basis point increase or decrease in market interest rates over a twelve-month period would result in a change to interest expense of $0.1 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 12, Derivative Instruments, of the unaudited condensed consolidated financial statements and the notes related thereto included elsewhere in this report.
Foreign Exchange Risk
All sales are in the 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 limited amount of transactions in a foreign currency, Option Care Health does not expect its future cash flows or operating results to be affected to any significant degree by foreign currency exchange risk.
| |
Item 4. | Controls and Procedures |
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Under the 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 SeptemberJune 30, 2019.2020. Based on that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2019.
2020.
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 SeptemberJune 30, 2019.2020. 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.
PART II
OTHER INFORMATION
Item 1.Legal Proceedings
For a summary of legal proceedings, refer to Note 14, Commitments and Contingencies, of the unaudited condensed consolidated financial statements included elsewhere in Item 1 of this report.
InvestorsItem 1A.Risk Factors
The risk factors disclosed in “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2019 are hereby incorporated by reference.
In addition to these risk factors, you should carefully consider the following risk factors.factor below:
The recent COVID-19 pandemic could adversely impact our business operations, results of operations, cash flows and financial position
Our revenueIn December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization has declared COVID-19 a pandemic and profitability will decline ifpublic health emergency of international concern. In March 2020, the pharmaceutical industry undergoes certain changes, including limiting or discontinuing research, development, production and marketingPresident of the pharmaceuticals that are compatible withUnited States declared a State of National Emergency due to the services we provide.
Our business is highly dependentCOVID-19 outbreak. Other countries affected by the outbreak took similar measures. Consequently, the COVID-19 pandemic has had a material impact on the ability of pharmaceutical manufacturers to develop, supplyU.S. and market pharmaceuticals that are compatible with the services we provide. Our revenue and profitability will decline if those companies were to sell pharmaceuticals directly to the public, 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 pharmaceutical industry experiences any supply shortages, pharmaceutical recalls, changes in the Food and Drug Administration (“FDA”) approval processes, or changes to how pharmaceutical manufacturers finance, promote or sell pharmaceutical products. A reduction in the supply of and market for pharmaceuticals that are compatible with the services we provide may have a material adverse effect on our financial condition and results of operations.
If we lose relationships with managed care organizations (“MCOs”) and other non-governmental third party payers, we could lose access to a significant number of patients and our revenue and profitability could decline.
global economies.
We are highly dependentclosely monitoring the impact of the COVID-19 pandemic on reimbursement from MCOs, government programs such as Medicare and Medicaid and commercial insurers (collectively, “Third Party Payers”). For the three and nine months ended September 30, 2019, respectively, 85% and 86%all aspects of our revenue came from managed care organizationsbusiness, including how it will impact our patients, teammates, suppliers, vendors, referral sources, and other nongovernmental payers, including Medicare Advantage plans, Managed Medicaid plans, pharmacy benefit managers (“PBM’s”),third party payers. The COVID-19 pandemic has created significant volatility, uncertainty 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 relationships require that we bid against our competitors to keep their business. As a result of this bidding process, we may not be retained, and even if we are retained, the prices ateconomic disruption, which we are able to retain the business may be reduced. The loss of a payer relationship could significantly reduce the number of patients we serve and have a material adverse effect on our revenue and net income, and a reduction in pricing could reduce our gross margins and net income.
The healthcare industry is highly competitive.
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, PBMs 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. Consequently, we may be less price competitive than some of these competitors with respect to certain pharmaceutical products.
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,business operations and may materially and adversely affect our results of operations, cash flows and operating results.financial position.
The reimbursement process forWhile we cannot predict the services we provide is complex, resulting in delays between the time we bill for a serviceimpact that COVID-19 will have on our patients, suppliers, vendors, 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-partythird party payers and each of their financial conditions, we believe the inabilityfollowing factors could lead to collect outstanding accounts receivable could have a material adverse effectimpact on our liquidity, cash flowsthe Company’s business:
•Variability in acute therapy patient referrals from hospitals based on changes in hospital-based procedures and operating results.treatment patterns;
•Variability in chronic therapy patient referrals based on disruptions in the diagnosis of chronic conditions requiring infusion therapy;
We are subject•Inefficiencies in clinical labor expenses and higher labor costs from staffing disruptions and availability, potential overtime due to pricing pressuresinefficient clinical staffing and otherutilization of contract labor;
•Higher costs to procure, and potential unavailability of, critical personal protection equipment, pharmaceuticals and medical supplies given a constrained supply environment; and
•Heightened operational 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 influencefrom an extended period 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,remote work arrangements, which 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,strain 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.
Changes in industry pricing benchmarks could adversely affect our financial performance.
Our contracts generally use certain published benchmarks to establish pricing for the reimbursement of prescription medications we dispense. These benchmarks include average wholesale price (“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.
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 Proceedings 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 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 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 drugs 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,continuity plans, including but not limited to losscybersecurity risks, and could impair our ability to manage our business.
The situation is changing rapidly and additional consequences may arise that we are not aware of a manufacturer relationship, drug shortages or changes in pricing, could have an adversecurrently. The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that we are not able to predict, including: the severity and duration of the outbreak; governmental, business and other actions; the promotion of social distancing and the adoption of shelter-in-place orders affecting our referral sources; the impacts on our supply chain; the impact of the pandemic on economic activity; the health of and the effect on our business and financial results.
Some pharmaceutical manufacturers attempt to limit the numberworkforce; any impairment in value of preferred distributors that may market certain of their pharmaceutical products. We cannot provide assurance that we willour tangible or intangible assets which could be selected and retainedrecorded as a preferred distributor or can remainresult of a preferred distributor to market these products. Although we believe we can effectively meetweaker economic conditions; and the potential effects on our suppliers’ requirements, we cannot provide assurance that we will be able to compete effectively with other providers to retain our
positioninternal controls including those over financial reporting as a distributorresult of each ofchanges in working environments such as shelter-in-place and similar orders that are applicable to our core products. Adverse developments with respectteammates. In addition, if the pandemic continues to this trend could have a material adverse effect on our financial condition and results of operations.
A disruption in supply could adversely impact our business.
For the three and nine months ended September 30, 2019, approximately 69% and 72%, respectively, of our pharmaceutical and medical supply purchases are from 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 resultcreate disruptions or turmoil in the inability to obtain especially high margin drugs and compound components necessary for patient care,credit or financial markets, or impacts our consolidated financial statements could be negatively impacted.
A shortage of qualified registered nursing staff, pharmacists and other professionalscredit ratings or stock price, it could adversely affect our ability to attract, trainaccess capital on favorable terms and retrain qualified personnel and could increase operating costs.
Our business relies on our ability to attract and retain nursing staff, pharmacists and other professionals who possess the skills, experience and licenses necessarycontinue to meet the requirementsour liquidity needs, all of their job responsibilities. From time to timewhich are highly uncertain 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 notcannot be successful in any of these areas.predicted.
In addition, where labor shortages arisewe cannot predict the impact that COVID-19 will have on our patients, suppliers, vendors, and third party payers, and each of their financial conditions; however, any material effect on these parties could adversely impact us. The impact of COVID-19 may also exacerbate other risks discussed 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 do 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 occursItem 1A. Risk Factors in our existing geographic areas, negotiating collective bargaining agreements may have a negative effectAnnual Report 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 qualityForm 10-K, any of our services may decline and we could lose patients and referral sources, which could have a material adverse effect on our businessus. This situation is changing rapidly 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 Payers.
The pharmaceutical industry pipeline of new drugs includes many drugsadditional impacts may arise that over the long term may replace older, more expensive therapies. As a result of such older drugs losing 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 negatively 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.not aware of currently.
Technology, including the ability to capture and report outcomes, is also an important component
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 the Health Insurance Portability and Accountability Act of 1996 (“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 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.
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 complex, highly regulated environments and could be materially and adversely affected by changes to applicable legal requirements including the related interpretations and enforcement practices, new legal requirements and/or any failure to comply with applicable regulations. Our home infusion and alternate site infusion businesses are subject to numerous 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 subject 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 U.S. Food and Drug Administration (“FDA”) and Drug Enforcement Administration (“DEA”); applicable governmental payer regulations, including those applicable to Medicare and Medicaid; data privacy and security laws, including the Health Insurance Portability and Accountability Act of 1996 (“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 connection with the services provided by certain of our contractors; and the consumer protection and safety laws, including those of the Consumer Product Safety Commission.
We are required to hold valid DEA and 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 seize or recall products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations.
We use, disclose and otherwise process personally identifiable information, including health information, making us subject to HIPAA and other federal and state privacy and security regulations and failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm and, in turn, have a material adverse effect on our patient base and revenue.
We are also governed by federal and state laws of general applicability, including laws regulating matters of working conditions, health and safety and equal employment opportunity and other labor and employment matters as well as employee benefit, competition and antitrust matters. In addition, we could have significant exposure 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 applicable 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 continued operation of our businesses, 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 to legislative 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 three and nine months ended September 30, 2019, 13% and 12%, respectively, 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 new legislation, all of which may materially affect the amount and timing of reimbursement payments to us. Changes to the way Medicare pays for our 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, results of operations and 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;
state or federal agencies imposing fines, penalties and other sanctions on us;
suspension or exclusion from the Medicare program, state programs, or one or more Third Party Payer 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 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 Drug Quality and Security Act (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 September 30, 2019, we had $1,325.0 million of outstanding borrowings, including (i) $925.0 million under our First Lien Term Loan and (ii) $400.0 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 the covenants contained in our credit agreement and indenture have important consequences, including but not limited to:
limiting funds otherwise available for financing our capital expenditures by requiring us to dedicate a portion of our cash flows from operations to 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 are not as highly leveraged. Fluctuations in interest rates can increase borrowing costs. Increases in interest rates may directly impact the amount of interest we are required to pay and reduce earnings accordingly. In addition, developments in tax policy, such as the 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 prepayment of a certain percentage of our excess cash flow. This excess cash flow payment, and future required prepayments, will reduce our cash available for investment in our business.
We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital 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 factors beyond our 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 financing documents governing our 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 the 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.
Combining 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 be realized.
The success of the Merger, including anticipated benefits and cost savings, will 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 integration process, the anticipated benefits of the Merger may not 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 September 30, 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 September 30, 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 September 30, 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 (based on our share price of $3.20 at September 30, 2019). 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 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.
None.
Item 6.Exhibits
(a) Exhibits.
| | | | | |
Item 6.Exhibit Number | Exhibits |
(a) Exhibits.
| Description |
| |
Exhibit Number | Description |
3.131.1 | |
3.2 | |
3.3 | |
4.1 | Second 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 guarantors party thereto from time to time, and Ankura Trust Company, LLC, as the Trustee and Collateral Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 7, 2019, SEC File Number 001-11993). |
4.2 | |
10.1 | |
10.2 | |
10.3 | First Lien Credit Agreement, dated as of August 6, 2019, among HC Group Holdings II, LLC, as the Initial Borrower, BioScrip, Inc., as the Parent 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 Bookrunner and as Syndication Agent and Documentation Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 7, 2019, SEC File Number 001-11993). |
10.4 | ABL Credit Agreement, dated as of August 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 Administrative Agent, Issuing Bank and Swing Line Lender, the other lenders party thereto from time to time and Bank of America, N.A. and ACF Finco I LP as Joint 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 August 7, 2019, SEC File Number 001-11993). |
10.5 | Note Purchase Agreement, 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 guarantors party thereto from time to time, and the several initial purchasers party thereto (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on August 7, 2019, SEC File Number 001-11993).
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31.1 | |
| 31.2 | |
| 32.1 | |
| 32.2 | |
| 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 |
| 104 | XBRL Formatted Cover Page |
|
| | |
+ | Certain schedules attached to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of the omitted schedules to the Securities and Exchange Commission upon request by the Commission. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 6, 2019.authorized.
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| | | | |
| OPTION CARE HEALTH, INC. | |
| |
| Date: August 4, 2020 | /s/ Michael Shapiro |
| Michael Shapiro | |
| Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) | |
