UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| (Mark One) | |
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | |
| OR | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to | |
Commission file number: 001-11993
(Exact name of registrant as specified in its charter)
| Delaware | 05-0489664 |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each Class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.0001 par value per share | OPCH | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
On July 29, 2019,May 5, 2020, there were 129,180,707176,712,333 shares of the registrant’s Common Stock outstanding.
TABLE OF CONTENTS
Page Number | ||
| PART I | ||
PART II | ||
PART I
FINANCIAL INFORMATION
| Item 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
| June 30, 2019 | December 31, 2018 | ||||||
| (unaudited) | |||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 14,390 | $ | 14,539 | |||
| Restricted cash | 4,322 | 4,321 | |||||
| Accounts receivable, net | 118,081 | 114,864 | |||||
| Inventory | 27,801 | 26,689 | |||||
| Prepaid expenses and other current assets | 13,046 | 14,292 | |||||
| Total current assets | 177,640 | 174,705 | |||||
| Property and equipment, net of accumulated depreciation of $76,282 and $100,851 as of June 30, 2019 and December 31, 2018, respectively | 27,103 | 28,788 | |||||
| Goodwill | 367,198 | 367,198 | |||||
| Deferred taxes | 995 | 1,032 | |||||
| Intangible assets, net of accumulated amortization of $51,800 and $49,080 as of June 30, 2019 and December 31, 2018, respectively | 7,351 | 10,470 | |||||
| Operating lease right-of-use assets | 18,611 | — | |||||
| Other non-current assets | 1,679 | 1,745 | |||||
| Total assets | $ | 600,577 | $ | 583,938 | |||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
| Current liabilities | |||||||
| Current portion of long-term debt | $ | 5,879 | $ | 3,179 | |||
| Current portion of operating lease liabilities | 5,335 | — | |||||
| Accounts payable | 73,367 | 67,025 | |||||
| Amounts due to plan sponsors | 573 | 956 | |||||
| Accrued interest | 6,659 | 6,706 | |||||
| Accrued expenses and other current liabilities | 24,352 | 29,450 | |||||
| Total current liabilities | 116,165 | 107,316 | |||||
| Long-term debt, net of current portion | 519,384 | 501,495 | |||||
| Operating lease liabilities, net of current portion | 19,231 | — | |||||
| Other non-current liabilities | 21,009 | 25,842 | |||||
| Total liabilities | 675,789 | 634,653 | |||||
| Series A convertible preferred stock, $.0001 par value; 825,000 shares authorized; 21,630 shares issued and outstanding; and $3,452 and $3,264 liquidation preference as of June 30, 2019 and December 31, 2018, respectively | 3,442 | 3,231 | |||||
| Series C convertible preferred stock, $.0001 par value; 625,000 shares authorized; 614,177 shares issued and outstanding; and $100,184 and $94,706 liquidation preference as of June 30, 2019 and December 31, 2018, respectively | 95,872 | 90,058 | |||||
| Stockholders’ deficit | |||||||
| Preferred stock, $.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | — | — | |||||
| Common stock, $.0001 par value; 250,000,000 shares authorized; 129,620,672 shares issued and 128,956,878 shares outstanding at June 30, 2019, and 128,391,456 shares issued and 128,077,651 shares outstanding as of December 31, 2018, respectively | 13 | 13 | |||||
| Treasury stock, 663,794 and 313,805 shares outstanding, at cost, as of June 30, 2019 and December 31, 2018, respectively | (1,722 | ) | (950 | ) | |||
| Additional paid-in capital | 614,335 | 618,137 | |||||
| Accumulated deficit | (787,152 | ) | (761,204 | ) | |||
| Total stockholders’ deficit | (174,526 | ) | (144,004 | ) | |||
| Total liabilities and stockholders’ deficit | $ | 600,577 | $ | 583,938 | |||
| (unaudited) | |||||||
| March 31, 2020 | December 31, 2019 | ||||||
| ASSETS | |||||||
| CURRENT ASSETS: | |||||||
| Cash and cash equivalents | $ | 77,244 | $ | 67,056 | |||
| Accounts receivable, net | 337,197 | 324,416 | |||||
| Inventories | 139,128 | 115,876 | |||||
| Prepaid expenses and other current assets | 47,703 | 51,306 | |||||
| Total current assets | 601,272 | 558,654 | |||||
| NONCURRENT ASSETS: | |||||||
| Property and equipment, net | 125,786 | 133,198 | |||||
| Operating lease right-of-use asset | 58,669 | 63,502 | |||||
| Intangible assets, net | 377,196 | 385,910 | |||||
| Goodwill | 1,427,883 | 1,425,542 | |||||
| Other noncurrent assets | 21,725 | 22,741 | |||||
| Total noncurrent assets | 2,011,259 | 2,030,893 | |||||
| TOTAL ASSETS | $ | 2,612,531 | $ | 2,589,547 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| CURRENT LIABILITIES: | |||||||
| Accounts payable | $ | 265,703 | $ | 221,060 | |||
| Accrued compensation and employee benefits | 52,416 | 45,765 | |||||
| Accrued expenses and other current liabilities | 32,302 | 33,538 | |||||
| Current portion of operating lease liability | 19,352 | 20,391 | |||||
| Current portion of long-term debt | 9,250 | 9,250 | |||||
| Total current liabilities | 379,023 | 330,004 | |||||
| NONCURRENT LIABILITIES: | |||||||
| Long-term debt, net of discount, deferred financing costs and current portion | 1,276,329 | 1,277,246 | |||||
| Operating lease liability, net of current portion | 54,541 | 58,242 | |||||
| Deferred income taxes | 2,443 | 2,143 | |||||
| Other noncurrent liabilities | 29,702 | 15,085 | |||||
| Total noncurrent liabilities | 1,363,015 | 1,352,716 | |||||
| Total liabilities | 1,742,038 | 1,682,720 | |||||
| STOCKHOLDERS’ EQUITY: | |||||||
| Preferred stock; $0.0001 par value; 12,500,000 shares authorized, no shares outstanding as of March 31, 2020 and December 31, 2019, respectively | — | — | |||||
| Common stock; $0.0001 par value: 250,000,000 shares authorized, 177,088,028 shares issued and 176,704,306 shares outstanding as of March 31, 2020; 176,975,628 shares issued and 176,591,907 shares outstanding as of December 31, 2019 | 18 | 18 | |||||
| Treasury stock; 383,722 shares outstanding, at cost, as of March 31, 2020 and December 31, 2019, respectively | (2,403 | ) | (2,403 | ) | |||
| Paid-in capital | 1,008,570 | 1,008,362 | |||||
| Accumulated deficit | (111,865 | ) | (91,955 | ) | |||
| Accumulated other comprehensive loss | (23,827 | ) | (7,195 | ) | |||
| Total stockholders’ equity | 870,493 | 906,827 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,612,531 | $ | 2,589,547 | |||
OPTION CARE HEALTH, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net revenue | $ | 191,517 | $ | 175,789 | $ | 370,473 | $ | 344,373 | |||||||
| Cost of revenue (excluding depreciation expense) | 126,864 | 115,832 | 248,156 | 229,368 | |||||||||||
| Gross profit | 64,653 | 59,957 | 122,317 | 115,005 | |||||||||||
| Operating expenses: | |||||||||||||||
| Service location operating expenses | 38,428 | 38,861 | 78,615 | 78,160 | |||||||||||
| General and administrative expenses | 11,796 | 10,931 | 23,290 | 21,600 | |||||||||||
| Depreciation and amortization expense | 4,665 | 6,366 | 9,738 | 12,852 | |||||||||||
| Restructuring, acquisition, integration, and other expenses | 2,871 | 2,024 | 8,892 | 3,906 | |||||||||||
| Total operating expenses | 57,760 | 58,182 | 120,535 | 116,518 | |||||||||||
| Operating income (loss) | 6,893 | 1,775 | 1,782 | (1,513 | ) | ||||||||||
| Other expense: | |||||||||||||||
| Interest expense, net | 15,638 | 13,805 | 30,869 | 27,200 | |||||||||||
| Change in fair value of equity linked liabilities | 5,216 | 3,064 | (4,784 | ) | (375 | ) | |||||||||
| Loss (gain) on dispositions | 51 | (13 | ) | (25 | ) | (318 | ) | ||||||||
| Total other expense | 20,905 | 16,856 | 26,060 | 26,507 | |||||||||||
| Loss from continuing operations before income taxes | (14,012 | ) | (15,081 | ) | (24,278 | ) | (28,020 | ) | |||||||
| Income tax expense | (154 | ) | (43 | ) | (170 | ) | (91 | ) | |||||||
| Loss from continuing operations | (14,166 | ) | (15,124 | ) | (24,448 | ) | (28,111 | ) | |||||||
| Loss from discontinued operations, net of income taxes | (1,500 | ) | (15 | ) | (1,500 | ) | (45 | ) | |||||||
| Net loss | (15,666 | ) | (15,139 | ) | (25,948 | ) | (28,156 | ) | |||||||
| Accrued dividends on preferred stock | (3,068 | ) | (2,756 | ) | (6,025 | ) | (5,413 | ) | |||||||
| Loss attributable to common stockholders | $ | (18,734 | ) | $ | (17,895 | ) | $ | (31,973 | ) | $ | (33,569 | ) | |||
| Basic loss per share: | |||||||||||||||
| Loss from continuing operations | $ | (0.13 | ) | $ | (0.14 | ) | $ | (0.24 | ) | $ | (0.26 | ) | |||
| Loss from discontinued operations | (0.01 | ) | — | (0.01 | ) | — | |||||||||
| Basis loss per share | $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (0.26 | ) | |||
| Diluted loss per share: | |||||||||||||||
| Loss from continuing operations | $ | (0.13 | ) | $ | (0.14 | ) | $ | (0.27 | ) | $ | (0.26 | ) | |||
| Loss from discontinued operations | (0.01 | ) | — | (0.01 | ) | — | |||||||||
| Diluted loss per share | $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.28 | ) | $ | (0.26 | ) | |||
| Weighted average number of common shares outstanding: | |||||||||||||||
| Basic | 128,779 | 128,038 | 128,446 | 127,906 | |||||||||||
| Diluted | 128,779 | 128,038 | 130,499 | 130,158 | |||||||||||
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| NET REVENUE | $ | 705,440 | $ | 476,492 | |||
| COST OF REVENUE | 547,411 | 378,298 | |||||
| GROSS PROFIT | 158,029 | 98,194 | |||||
| OPERATING COSTS AND EXPENSES: | |||||||
| Selling, general and administrative expenses | 129,280 | 82,787 | |||||
| Depreciation and amortization expense | 20,101 | 9,969 | |||||
| Total operating expenses | 149,381 | 92,756 | |||||
| OPERATING INCOME | 8,648 | 5,438 | |||||
| OTHER INCOME (EXPENSE): | |||||||
| Interest expense, net | (28,087 | ) | (11,045 | ) | |||
| Equity in earnings of joint ventures | 562 | 549 | |||||
| Other, net | 8 | (76 | ) | ||||
| Total other expense | (27,517 | ) | (10,572 | ) | |||
| LOSS BEFORE INCOME TAXES | (18,869 | ) | (5,134 | ) | |||
| INCOME TAX EXPENSE (BENEFIT) | 1,041 | (1,422 | ) | ||||
| NET LOSS | $ | (19,910 | ) | $ | (3,712 | ) | |
| OTHER COMPREHENSIVE LOSS, NET OF TAX: | |||||||
| Change in unrealized losses on cash flow hedges, net of income tax benefit of $0, and $242, respectively | (16,632 | ) | (505 | ) | |||
| OTHER COMPREHENSIVE LOSS | (16,632 | ) | (505 | ) | |||
| NET COMPREHENSIVE LOSS | $ | (36,542 | ) | $ | (4,217 | ) | |
| LOSS PER COMMON SHARE | |||||||
| Net loss per share, basic and diluted | $ | (0.11 | ) | $ | (0.03 | ) | |
| Weighted average common shares outstanding, basic and diluted | 176,661 | 142,614 | |||||
| Preferred Stock | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||
| Balance at December 31, 2018 | $ | — | $ | 13 | $ | (950 | ) | $ | 618,137 | $ | (761,204 | ) | $ | (144,004 | ) | ||||||||
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — | — | (386 | ) | 253 | — | (133 | ) | |||||||||||||||
| Accrued dividends on preferred stock | — | — | — | (2,957 | ) | — | (2,957 | ) | |||||||||||||||
| Stock-based compensation | — | — | — | 1,034 | — | 1,034 | |||||||||||||||||
| Net loss | — | — | — | — | �� | (10,282 | ) | (10,282 | ) | ||||||||||||||
| Balance at March 31, 2019 | $ | — | $ | 13 | $ | (1,336 | ) | $ | 616,467 | $ | (771,486 | ) | $ | (156,342 | ) | ||||||||
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — | — | (386 | ) | — | (386 | ) | ||||||||||||||||
| Accrued dividends on preferred stock | — | — | — | (3,068 | ) | (3,068 | ) | ||||||||||||||||
| Stock-based compensation | — | — | — | 936 | 936 | ||||||||||||||||||
| Net loss | — | — | — | (15,666 | ) | (15,666 | ) | ||||||||||||||||
| Balance at June 30, 2019 | $ | — | $ | 13 | $ | (1,722 | ) | $ | 614,335 | $ | (787,152 | ) | $ | (174,526 | ) | ||||||||
| Preferred Stock | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||
| Balance at December 31, 2017 | $ | — | $ | 13 | $ | (16 | ) | $ | 624,762 | $ | (709,511 | ) | $ | (84,752 | ) | ||||||||
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — | — | (338 | ) | 41 | (297 | ) | ||||||||||||||||
| Accrued dividends on preferred stock | — | — | (2,657 | ) | (2,657 | ) | |||||||||||||||||
| Stock-based compensation | — | — | 511 | 511 | |||||||||||||||||||
| Net loss | — | — | (13,017 | ) | (13,017 | ) | |||||||||||||||||
| Balance at March 31, 2018 | $ | — | $ | 13 | $ | (354 | ) | $ | 622,657 | $ | (722,528 | ) | $ | (100,212 | ) | ||||||||
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — | — | 27 | 94 | 121 | ||||||||||||||||||
| Accrued dividends on preferred stock | — | — | (2,756 | ) | (2,756 | ) | |||||||||||||||||
| Stock-based compensation | — | — | 1,020 | 1,020 | |||||||||||||||||||
| Net loss | — | — | (15,139 | ) | (15,139 | ) | |||||||||||||||||
| Balance at June 30, 2018 | $ | 13 | $ | (327 | ) | $ | 621,015 | $ | (737,667 | ) | $ | (116,966 | ) | ||||||||||
unaudited condensed consolidated financial statements are an integral part of these statements.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)IN THOUSANDS)
| Six Months Ended June 30, | |||||||
| 2019 | 2018 | ||||||
| Cash flows from operating activities: | |||||||
| Net loss | $ | (25,948 | ) | $ | (28,156 | ) | |
| Less: Loss from discontinued operations, net of income taxes | (1,500 | ) | (45 | ) | |||
| Loss from continuing operations | (24,448 | ) | (28,111 | ) | |||
| Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: | |||||||
| Depreciation and amortization | 9,738 | 12,852 | |||||
| Amortization of operating lease right-of-use assets | 2,456 | — | |||||
| Amortization of deferred financing costs and debt discount | 4,064 | 4,071 | |||||
| Change in fair value of equity linked liabilities | 4,784 | (375 | ) | ||||
| Change in deferred income taxes | 36 | 56 | |||||
| Stock-based compensation | 2,160 | 1,809 | |||||
| Paid-in-kind interest capitalized as principal on Second Lien Note Facility | 8,383 | — | |||||
| Gain on dispositions | (25 | ) | (318 | ) | |||
| Changes in assets and liabilities | |||||||
| Accounts receivable | (3,217 | ) | (11,397 | ) | |||
| Inventory | (1,112 | ) | 12,759 | ||||
| Prepaid expenses and other assets | 1,401 | 10,054 | |||||
| Operating lease liabilities | (2,817 | ) | — | ||||
| Accounts payable | 6,342 | (16,702 | ) | ||||
| Amounts due to plan sponsors | (384 | ) | (2,437 | ) | |||
| Accrued interest | (46 | ) | 23 | ||||
| Accrued expenses and other liabilities | (11,238 | ) | (2,566 | ) | |||
| Net cash used in operating activities from continuing operations | (3,923 | ) | (20,282 | ) | |||
| Net cash used in operating activities from discontinued operations | — | (45 | ) | ||||
| Net cash used in operating activities | (3,923 | ) | (20,327 | ) | |||
| Cash flows from investing activities: | |||||||
| Purchases of property and equipment, net | (3,246 | ) | (6,946 | ) | |||
| Net cash used in investing activities | (3,246 | ) | (6,946 | ) | |||
| Cash flows from financing activities: | |||||||
| Borrowings on long-term debt, net of expenses | 8,000 | 10,000 | |||||
| Repayments of finance leases | (460 | ) | (1,185 | ) | |||
| Net activity from exercises of employee stock awards | (519 | ) | (179 | ) | |||
| Net cash provided by financing activities | 7,021 | 8,636 | |||||
| Net change in cash, cash equivalents and restricted cash | (148 | ) | (18,637 | ) | |||
| Cash, cash equivalents and restricted cash - beginning of period | 18,860 | 44,407 | |||||
| Cash, cash equivalents and restricted cash - end of period | $ | 18,712 | $ | 25,770 | |||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||
| Cash paid during the period for interest | $ | 18,544 | $ | 23,146 | |||
| Cash paid during the period for income taxes, net of refunds | $ | — | $ | 51 | |||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||
| Paid-in-kind interest capitalized as principal on Second Lien Note Facility | $ | 8,383 | $ | — | |||
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net loss | $ | (19,910 | ) | $ | (3,712 | ) | |
| Adjustments to reconcile net loss to net cash provided by operations: | |||||||
| Depreciation and amortization expense | 21,844 | 10,749 | |||||
| Non-cash operating lease costs | 4,764 | 4,231 | |||||
| Deferred income taxes - net | 300 | (2,082 | ) | ||||
| Amortization of deferred financing costs | 1,396 | 799 | |||||
| Equity in earnings of joint ventures | (562 | ) | (549 | ) | |||
| Stock-based incentive compensation expense | 757 | 584 | |||||
| Other adjustments | (882 | ) | (535 | ) | |||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable, net | (12,781 | ) | 266 | ||||
| Inventories | (23,252 | ) | (6,690 | ) | |||
| Prepaid expenses and other current assets | 3,603 | 7,263 | |||||
| Accounts payable | 42,302 | (3,395 | ) | ||||
| Accrued compensation and employee benefits | 6,651 | (1,139 | ) | ||||
| Accrued expenses and other current liabilities | (1,650 | ) | 7,217 | ||||
| Operating lease liabilities | (4,740 | ) | (3,765 | ) | |||
| Other noncurrent assets and liabilities | 563 | (162 | ) | ||||
| Net cash provided by operating activities | 18,403 | 9,080 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Acquisition of property and equipment | (5,353 | ) | (5,367 | ) | |||
| Other investing cash flows | — | 636 | |||||
| Net cash used in investing activities | (5,353 | ) | (4,731 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Redemptions to related parties | — | (2,000 | ) | ||||
| Exercise of stock options, vesting of restricted stock, and related tax withholdings | (549 | ) | — | ||||
| Repayments of debt principal | (2,313 | ) | (1,038 | ) | |||
| Net cash used in financing activities | (2,862 | ) | (3,038 | ) | |||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 10,188 | 1,311 | |||||
| Cash and cash equivalents - beginning of the period | 67,056 | 36,391 | |||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 77,244 | $ | 37,702 | |||
| Supplemental disclosure of cash flow information: | |||||||
| Cash paid for interest | $ | 25,936 | $ | 6,321 | |||
| Cash paid for income taxes | $ | 307 | $ | 180 | |||
| Cash paid for operating leases | $ | 6,798 | $ | 4,671 | |||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
| Preferred Stock | Common Stock | Treasury Stock | Paid-in Capital | Management Notes Receivable | Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Balance - December 31, 2018 | $ | — | $ | 14 | $ | — | $ | 619,621 | $ | (1,619 | ) | $ | (16,035 | ) | $ | 844 | $ | 602,825 | |||||||||||||
| Interest on management notes receivable | — | — | — | — | (21 | ) | — | — | (21 | ) | |||||||||||||||||||||
| Stockholders' redemption | — | — | — | (2,000 | ) | — | — | — | (2,000 | ) | |||||||||||||||||||||
| Stock-based incentive compensation | — | — | — | 584 | — | — | — | 584 | |||||||||||||||||||||||
| Net loss | — | — | — | — | — | (3,712 | ) | — | (3,712 | ) | |||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (505 | ) | (505 | ) | |||||||||||||||||||||
| Balance - March 31, 2019 | $ | — | $ | 14 | $ | — | $ | 618,205 | $ | (1,640 | ) | $ | (19,747 | ) | $ | 339 | $ | 597,171 | |||||||||||||
| Balance - December 31, 2019 | $ | — | $ | 18 | $ | (2,403 | ) | $ | 1,008,362 | $ | — | $ | (91,955 | ) | $ | (7,195 | ) | $ | 906,827 | ||||||||||||
| Exercise of stock options, vesting of restricted stock and related tax withholdings | — | — | — | (549 | ) | — | — | — | (549 | ) | |||||||||||||||||||||
| Stock-based incentive compensation | — | — | — | 757 | — | — | — | 757 | |||||||||||||||||||||||
| Net loss | — | — | — | — | — | (19,910 | ) | — | (19,910 | ) | |||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (16,632 | ) | (16,632 | ) | |||||||||||||||||||||
| Balance - March 31, 2020 | $ | — | $ | 18 | $ | (2,403 | ) | $ | 1,008,570 | $ | — | $ | (111,865 | ) | $ | (23,827 | ) | $ | 870,493 | ||||||||||||
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
OPTION CARE HEALTH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Corporate Organization and Business— HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care (“Option Care”).
Option Care Enterprises, Inc. Merger Agreementbeing considered the accounting acquirer and BioScrip being considered the legal acquirer.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordanceconformity with U.S. generally accepted accounting principles (“GAAP”) in the United States and contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for interim financial information, andreporting. The results of operations for the instructions to Form 10-Q and Article 10interim periods presented are not necessarily indicative of Regulation S-X promulgated under the Securities Exchange Actresults of 1934, as amended (the “Exchange Act”). Accordingly, theyoperations for the entire year. These unaudited condensed consolidated financial statements do not include all of the information and footnotesnotes to the financial statements required by GAAP for complete financial statements.statements and should be read in conjunction with the 2019 audited consolidated financial statements, including the notes thereto, as presented in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2020.
Principles of Consolidation — The Company’s unaudited condensed consolidated balance sheet data as of December 31, 2018 was derived from audited financial statements but does not include all disclosures required by GAAP.
For three months ended March 31, 2020 and 2019, approximately 12% and 13%, respectively, of the new standard resultedCompany’s revenue was reimbursable through direct government healthcare programs, such as Medicare and Medicaid. As of March 31, 2020 and December 31, 2019, respectively, approximately 12% and 12%, respectively, of the Company’s accounts receivable was related to these programs. Governmental programs pay for services based on fee schedules and rates that are determined by the related governmental agency. Laws and regulations pertaining to government programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change in the recordingnear term.
The Company does not require its patients nor other payers to carry collateral for any amounts owed for goods or services provided. Other than as discussed above, concentration of credit risk relating to trade accounts receivable is limited due to the Company’s diversity of patients and payers. Further, the Company generally does not provide charity care.
For the three months ended March 31, 2020 and 2019, approximately 70% and 75%, respectively, of the Company’s pharmaceutical and medical supply purchases were from three vendors. Although there are a limited number of suppliers, the Company believes that other vendors could provide similar products on comparable terms. However, a change in suppliers could cause delays in service delivery and possible losses in revenue, which could adversely affect the Company’s financial condition or operating lease liabilities and corresponding ROU assets of $25.9 millionresults. Although there is uncertainty regarding the COVID-19 pandemic, as of January 1, 2019. Additionally, existing net liabilities for prepayments or accrued lease payments, initial direct costsMarch 31, 2020 the Company has been able to maintain adequate levels of supplies and lease incentives of $5.0 million were reclassified as an offsetpharmaceuticals to the ROU assets on January 1, 2019, resulting in net initial ROU assets of $20.9 million. The standard did not materially impact our consolidated statements of operations or cash flows.
support its operations.
— In June 2016, the FASB issued ASU 2016-13, ASU 2016-13—Financial Instruments—Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The amendmentsAmendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and
reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning January 1, 2020,after December 15, 2019, and is to be applied using a modified retrospective transition method. Earlier adoption is permitted.The Company adopted the standard as of January 1, 2020. The adoption of this standard isdid not expected to have a material impact on the Company’s consolidated financial statements.
3. BUSINESS ACQUISITIONS
Merger with BioScrip, Inc. — As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and home care management solutions. The Merger of Option Care and BioScrip into Option Care Health creates an expanded national platform and the opportunity to drive economies of scale through procurement savings, facility rationalization and other operating cost savings.
The fair value of purchase consideration transferred on the closing date includes the value of the number of shares of the combined company owned by BioScrip shareholders at closing of the Merger, the value of common shares issued to certain warrant and preferred shareholders in conjunction with the Merger, the fair value of stock-based instruments that were vested or earned as of the Merger, and cash payments made in conjunction with the Merger. The fair value per share of BioScrip’s common stock was $2.67 per share. This is the closing price of the BioScrip common stock on August 6, 2019.
Under the acquisition method of accounting, the calculation of total consideration exchanged is as follows (in thousands):
| Amount | ||||
| Number of BioScrip common shares outstanding at time of the Merger (1) | 129,181 | |||
| Common shares issued to warrant and preferred stockholders at time of the Merger (1) | 3,458 | |||
| Total shares of BioScrip common stock outstanding at time of the Merger (1) | 132,639 | |||
| BioScrip share price as of August 6, 2019 | $ | 2.67 | ||
| Fair value of common shares | $ | 354,146 | ||
| Fair value of share-based instruments | $ | 32,898 | ||
| Cash paid in conjunction with the Merger included in purchase consideration | $ | 714,957 | ||
| Fair value of total consideration transferred | $ | 1,102,001 | ||
| Less: cash acquired | $ | 14,787 | ||
| Fair value of total consideration acquired, net of cash acquired | $ | 1,087,214 | ||
(1) These shares were not adjusted for the one share for four share reverse stock split effective on February 3, 2020. See Note 16, Stockholders’ Equity, for further discussion on the one share for four share reverse stock split.
Cash paid in conjunction with the Merger includes payments made for settlement of $575.0 million in legacy BioScrip debt, $125.8 million in existing BioScrip preferred shares, and $14.1 million in legacy BioScrip success-based fees owed to third-party advisors. HC II financed these payments primarily through cash on hand and debt financing.
The Company's allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Merger is based on estimated fair values as of the Merger Date. The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in the valuation of certain contingent liabilities are pending completion and subject to change, which could be significant, within the measurement period, up to one year from the August 6, 2019 acquisition date.
The following is a preliminary estimate of the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, in the Merger as of August 6, 2019 (in thousands):
| Amount | ||||||
| Accounts receivable, net (1) | $ | 96,532 | ||||
| Inventories (2) | 19,683 | |||||
| Property and equipment, net (3) | 48,732 | |||||
| Intangible assets, net (4) | 193,245 | |||||
| Deferred tax assets, net of deferred tax liabilities (5) | 26,731 | |||||
| Operating lease right-of-use asset (6) | 22,378 | |||||
| Operating lease liability (6) | (28,897 | ) | ||||
| Accounts payable (7) | (66,371 | ) | ||||
| Other assumed liabilities, net of other acquired assets (7) | (20,233 | ) | ||||
| Total acquired identifiable assets and liabilities | 291,800 | |||||
| Goodwill (8) | 795,414 | |||||
| Total consideration transferred | $ | 1,087,214 | ||||
| (1) | Management has valued accounts receivables based on the estimated future collectability of the receivables portfolio. |
| (2) | Inventories are stated at fair value as of the Merger Date. |
| (3) | The fair value of the property and equipment was determined based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised. |
| (4) | The preliminary allocation of consideration exchanged to intangible assets acquired is as follows (in thousands): |
| Fair Value | Weighted Average Estimated Life (in years) | |||||
| Trademarks/Names | $ | 12,536 | 2 | |||
| Patient referral sources | 180,329 | 20 | ||||
| Licenses | 380 | 1.5 | ||||
| Total intangible assets, net | $ | 193,245 | 18.8 | |||
The Company preliminarily valued trademarks/names utilizing the relief of royalty method and patient referral sources utilizing the multi-period excess earnings method, a form of the income approach.
| (5) | Net deferred tax assets represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. See Note 5, Income Taxes, for additional discussion of the Company’s combined income tax position subsequent to the Merger. |
| (6) | The fair value of the operating lease liability and corresponding right-of-use asset (current and long-term) was based on current market rates available to the Company. |
| (7) | Accounts payable as well as certain other current and non-current assets and liabilities are stated at fair value as of the Merger Date. |
| (8) | The Merger preliminarily resulted in $795.4 million of goodwill, which is attributable to cost synergies resulting from procurement and operational efficiencies and elimination of duplicative administrative costs. The goodwill created in the Merger is not expected to be deductible for tax purposes. |
Assuming BioScrip had been acquired as of January 1, 2018, and the results of BioScrip had been included in operations beginning on January 1, 2018, the estimated unaudited pro forma results of operations for the three months ended March 31, 2019 were net revenue of $655.4 million and a net loss of $22.0 million. The estimated pro forma net loss 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. Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the Merger been completed on the date indicated or the future operating results.
4. REVENUE
The following table sets forth the net revenue earned by category of payer for the three months ended March 31, 2020 and 2019 (in thousands):
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| Commercial payers | $ | 605,994 | $ | 401,663 | |||
| Government payers | 86,271 | 63,548 | |||||
| Patients | 13,175 | 11,281 | |||||
| Net revenue | $ | 705,440 | $ | 476,492 | |||
During the three months ended March 31, 2020, the Company recorded tax expense of $1.0 million, which represents an effective tax rate of (5.5)%. During the three months ended March 31, 2019, the Company recorded a tax benefit of $1.4 million, which represents an effective tax rate of 27.7%.
The Company continues to maintain a full valuation allowance against all of its net U.S. federal and state deferred tax assets with the exception of $0.7 million of estimated state net operating losses (“NOL”). In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considers the scheduled reversal of deferred tax liabilities, including the effect in available carryback and carryforward periods, projected taxable income and tax-planning strategies, in making this assessment. On a quarterly basis, the Company evaluates all positive and negative evidence in determining if the valuation allowance is fairly stated.
Based on the Company’s full valuation allowance, as noted above, the Company’s tax expense for the three months ended March 31, 2020 of $1.0 million consists of quarterly tax liabilities attributable to specific state tax returns as well as recognized deferred tax expense.
The Company recorded no income tax expense or benefit for the three months ended March 31, 2020 associated with the tax provisions of the Coronavirus Aid, Relief and Economic Security Act (“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 months ended March 31, 2020 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 March 31, 2020 there were 2,328,120
warrants, 531,747 stock options and 484,326 restricted stock awards outstanding that were excluded from the calculation as they would be anti-dilutive. There are no dilutive potential common shares for the three months ended March 31, 2019.
The following table presents our disaggregated net revenue for each associated payor classthe Company’s basic and diluted (loss) earnings per share and shares outstanding (in thousands). Sales and usage-based taxes are excluded from net revenue.thousands, except per share data):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Commercial | $ | 174,461 | $ | 152,251 | $ | 324,156 | $ | 292,792 | ||||||||
| Government | 15,872 | 22,397 | 43,832 | 48,939 | ||||||||||||
| Patient | 1,184 | 1,141 | 2,485 | 2,642 | ||||||||||||
| Total Net Revenue | $ | 191,517 | $ | 175,789 | $ | 370,473 | $ | 344,373 | ||||||||
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Numerator: | ||||||||
| Net loss | $ | (19,910 | ) | $ | (3,712 | ) | ||
| Denominator: | ||||||||
| Weighted average number of common shares outstanding | 176,661 | 142,614 | ||||||
| Loss per Common Share: | ||||||||
| Loss per common share, basic and diluted | $ | (0.11 | ) | $ | (0.03 | ) | ||
7. LEASES
During the three months ended March 31, 2020 and 2019, the Company incurred operating lease expenses of $7.7 million and $5.2 million, respectively, 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 March 31, 2020, the weighted-average remaining lease term was 5.3 years and the weighted-average discount rate was 5.47%.
Operating leases mature as follows (in thousands):
| Fiscal Year Ending December 31, | Minimum Payments | |||
| 2020 | $ | 18,202 | ||
| 2021 | 19,201 | |||
| 2022 | 14,103 | |||
| 2023 | 10,767 | |||
| 2024 | 8,008 | |||
| Thereafter | 18,327 | |||
| Total lease payments | $ | 88,608 | ||
| Less: Interest | 14,715 | |||
| Present value of lease liabilities | $ | 73,893 | ||
8. PROPERTY AND EQUIPMENT
Property and equipment was as follows as of March 31, 2020 and December 31, 2019 (in thousands):
| March 31, 2020 | December 31, 2019 | ||||||
| Infusion pumps | $ | 33,386 | $ | 30,416 | |||
| Equipment, furniture and other | 50,988 | 51,454 | |||||
| Leasehold improvements | 82,140 | 80,916 | |||||
| Computer software, purchased and internally developed | 35,079 | 34,884 | |||||
| Assets under development | 5,438 | 14,150 | |||||
| 207,031 | 211,820 | ||||||
| Less: accumulated depreciation | 81,245 | 78,622 | |||||
| Property and equipment, net | $ | 125,786 | $ | 133,198 | |||
Depreciation expense is recorded within cost of revenue duringand 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 or six months ended June 30,March 31, 2020 and 2019 or 2018.(in thousands):
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Depreciation expense in cost of revenue | $ | 1,742 | $ | 780 | ||||
| Depreciation expense in operating expenses | 11,319 | 5,073 | ||||||
| Total depreciation expense | $ | 13,061 | $ | 5,853 | ||||
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of Accounts Receivablegoodwill consists of the following activity for the three months ended March 31, 2020 (in thousands):
| Balance at December 31, 2019 | $ | 1,425,542 | ||
| Purchase accounting adjustments | 2,341 | |||
| Balance at March 31, 2020 | $ | 1,427,883 | ||
There was no change in the carrying amount of goodwill for the three months ended March 31, 2019.
The carrying amount and accumulated amortization of intangible assets consists of the following as of March 31, 2020 and December 31, 2019 (in thousands):
| March 31, 2020 | December 31, 2019 | |||||||
| Gross intangible assets: | ||||||||
| Referral sources | $ | 438,121 | $ | 438,121 | ||||
| Trademarks/names | 44,536 | 44,536 | ||||||
| Other amortizable intangible assets | 402 | 402 | ||||||
| Total gross intangible assets | 483,059 | 483,059 | ||||||
| Accumulated amortization: | ||||||||
| Referral sources | (90,846 | ) | (84,295 | ) | ||||
| Trademarks/names | (14,845 | ) | (12,748 | ) | ||||
| Other amortizable intangible assets | (172 | ) | (106 | ) | ||||
| Total accumulated amortization | (105,863 | ) | (97,149 | ) | ||||
| Total intangible assets, net | $ | 377,196 | $ | 385,910 | ||||
Amortization expense for intangible assets was $8.8 million and $4.9 million for the three months ended March 31, 2020 and 2019, respectively.
10. EQUITY-METHOD INVESTMENTS
The Company’s two equity-method investments totaled $17.0 million and $17.0 million as of March 31, 2020 and December 31, 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 months ended March 31, 2020 and 2019, the Company’s proportionate share of earnings in its investments was $0.6 million and $0.5 million, respectively.
Legacy Health Systems — The Company’s 50% ownership interest in this limited liability company, which provides infusion pharmacy services, expands the Company’s presence in the Portland, Oregon market. In 2005, Option Care’s initial cash investment in this joint venture was $1.3 million. The Company received a capital distribution from this investment of $0.5 million for the three months ended March 31, 2020. The Company did not receive a capital distribution from this
investment for the three months ended March 31, 2019. The following presents condensed financial information as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 (in thousands).
| Consolidated statements of comprehensive income (loss) data: | |||||||
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| Net revenue | $ | 5,491 | $ | 4,775 | |||
| Cost of revenue | 3,940 | 3,367 | |||||
| Gross profit | 1,551 | 1,408 | |||||
| Net income | 517 | 250 | |||||
| Equity in net income | 258 | 125 | |||||
| Consolidated balance sheet data: | |||||||
| As of | |||||||
| March 31, 2020 | December 31, 2019 | ||||||
| Current assets | $ | 7,482 | $ | 7,643 | |||
| Noncurrent assets | 3,615 | 3,846 | |||||
| Current liabilities | 1,074 | 903 | |||||
| Noncurrent liabilities | 579 | 659 | |||||
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 March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 (in thousands).
| Consolidated statements of comprehensive income (loss) data: | |||||||
| Three Months Ended March 31, | |||||||
| 2020 | 2019 | ||||||
| Net revenue | $ | 10,508 | $ | 9,238 | |||
| Cost of revenue | 8,640 | 7,049 | |||||
| Gross profit | 1,868 | 2,189 | |||||
| Net income | 608 | 847 | |||||
| Equity in net income | 304 | 424 | |||||
| Consolidated balance sheet data: | |||||||
| As of | |||||||
| March 31, 2020 | December 31, 2019 | ||||||
| Current assets | 12,086 | 11,111 | |||||
| Noncurrent assets | 1,862 | 2,033 | |||||
| Current liabilities | 1,528 | 1,228 | |||||
| Noncurrent liabilities | 852 | 956 | |||||
11. INDEBTEDNESS
Long-term debt consisted of the following as of March 31, 2020 (in thousands):
| Principal Amount | Discount | Debt Issuance Costs | Net Balance | |||||||||||||
| ABL facility | $ | — | $ | — | $ | — | $ | — | ||||||||
| First lien term loan | 922,688 | (8,120 | ) | (22,069 | ) | 892,499 | ||||||||||
| Second lien notes | 412,256 | (11,455 | ) | (7,721 | ) | 393,080 | ||||||||||
| $ | 1,334,944 | $ | (19,575 | ) | $ | (29,790 | ) | 1,285,579 | ||||||||
| Less: current portion | (9,250 | ) | ||||||||||||||
| Total long-term debt | $ | 1,276,329 | ||||||||||||||
Long-term debt consisted of the following as of December 31, 2019 (in thousands):
| Principal Amount | Discount | Debt Issuance Costs | Net Balance | |||||||||||||
| ABL facility | $ | — | $ | — | $ | — | $ | — | ||||||||
| First lien term loan | 925,000 | (8,399 | ) | (22,825 | ) | 893,776 | ||||||||||
| Second lien notes | 412,256 | (11,672 | ) | (7,864 | ) | 392,720 | ||||||||||
| $ | 1,337,256 | $ | (20,071 | ) | $ | (30,689 | ) | 1,286,496 | ||||||||
| Less: current portion | (9,250 | ) | ||||||||||||||
| Total long-term debt | $ | 1,277,246 | ||||||||||||||
The interest rate on the first lien term loan was 5.49% and 6.20% as of March 31, 2020 and December 31, 2019, respectively. The weighted average interest rate incurred on the first lien term loan was 6.18% for the three months ended March 31, 2020. The weighted average interest rate incurred on the previous first lien term loan was 6.25% for the three months ended March 31, 2019. The interest rate on the second lien notes was 10.49% and 10.66% as of March 31, 2020 and December 31, 2019, respectively. The weighted average interest incurred on the second lien notes was 10.54% for the three months ended March 31, 2020. The weighted average interest incurred on the previous second lien term loan was 11.55% for the three months ended March 31, 2019.
Long-term debt matures as follows (in thousands):
| Year Ending December 31, | Minimum Payments | |||
| 2020 | $ | 6,938 | ||
| 2021 | 9,250 | |||
| 2022 | 9,250 | |||
| 2023 | 9,250 | |||
| 2024 | 9,250 | |||
| Thereafter | 1,291,006 | |||
| Total | 1,334,944 | |||
During the three months ended March 31, 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 March 31, 2020 (in thousands):
| Financial Instrument | Carrying Value as of March 31, 2020 | Markets for Identical Item (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| First lien term loan | $ | 892,499 | $ | — | $ | 775,058 | $ | — | ||||||||
| Second lien notes | 393,080 | — | — | 339,371 | ||||||||||||
| Total debt instruments | $ | 1,285,579 | $ | — | $ | 775,058 | $ | 339,371 | ||||||||
The following table sets forth the aging of our net accounts receivable, aged based on date of service and categorized based onchanges in Level 3 measurements for the three primary payor groupsmonths ended March 31, 2020 (in thousands):
| June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
| 0 - 180 days | Over 180 days | Total | 0 - 180 days | Over 180 days | Total | |||||||||||||||||||
| Government | $ | 15,121 | $ | 4,891 | $ | 20,012 | $ | 17,849 | $ | 6,098 | $ | 23,947 | ||||||||||||
| Commercial | 74,369 | 13,862 | 88,231 | 67,288 | 14,740 | 82,028 | ||||||||||||||||||
| Patient | 4,313 | 5,525 | 9,838 | 2,092 | 6,797 | 8,889 | ||||||||||||||||||
| Accounts receivable, net | $ | 93,803 | $ | 24,278 | $ | 118,081 | $ | 87,229 | $ | 27,635 | $ | 114,864 | ||||||||||||
| 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 | ||
See Note 13, Fair Value Measurements, for further discussion.
| Supplemental cash flow information | Six Months Ended June 30, 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities | ||||
| Operating cash flows from operating leases | $ | 2,022 | ||
| Financing cash flows from finance leases | $ | 460 | ||
| Maturities of lease liabilities | ||||||||||||
| (in thousands) | Operating leases | Finance leases | Total | |||||||||
| 2019 | $ | 3,932 | $ | 538 | $ | 4,470 | ||||||
| 2020 | 6,963 | 638 | 7,601 | |||||||||
| 2021 | 6,100 | — | 6,100 | |||||||||
| 2022 | 4,872 | — | 4,872 | |||||||||
| 2023 | 3,592 | — | 3,592 | |||||||||
| After 2023 | 7,088 | — | 7,088 | |||||||||
| Total future minimum lease payments | 32,547 | 1,176 | $ | 33,723 | ||||||||
| Less: interest | 7,981 | 44 | ||||||||||
| Present value of lease liabilities | $ | 24,566 | $ | 1,132 | ||||||||
| Maturities of lease liabilities | ||||||||||||
| (in thousands) | Operating leases | Finance leases | Total | |||||||||
| 2019 | $ | 8,934 | $ | 679 | $ | 9,613 | ||||||
| 2020 | 7,143 | 311 | 7,454 | |||||||||
| 2021 | 6,252 | — | 6,252 | |||||||||
| 2022 | 4,797 | — | 4,797 | |||||||||
| 2023 | 3,320 | — | 3,320 | |||||||||
| After 2023 | 7,470 | — | 7,470 | |||||||||
| Total future minimum lease payments | $ | 37,916 | $ | 990 | $ | 38,906 | ||||||
During 2017, Option Care entered into interest rate caps that reduce the risk of increased interest payments due to interest rates rising. The hedges offset the risk of rising interest rates through 2020 on the first $250.0 million of the previous first lien term loan. The interest rate caps perfectly offset the terms of the interest rates associated with the variable interest rate previous first lien term loan. Option Care entered into the interest rate caps as a cash flow hedge for a notional amount of $1.9 million. In April 2019, Option Care terminated its interest rate caps.
| June 30, 2019 | December 31, 2018 | ||||||
| First Lien Note Facility, net of unamortized discount | 207,209 | 198,962 | |||||
| Second Lien Note Facility, net of unamortized discount | 120,017 | 108,931 | |||||
| 2021 Notes, net of unamortized discount | 198,534 | 198,125 | |||||
| Finance leases | 1,132 | 990 | |||||
| Less: Deferred financing costs | (1,629 | ) | (2,334 | ) | |||
| Total debt | 525,263 | 504,674 | |||||
| Less: Current portion of long-term debt | (5,879 | ) | (3,179 | ) | |||
| Long-term debt, net of current portion | $ | 519,384 | $ | 501,495 | |||
The following table summarizes the amount and on the last day of each third month thereafter, with the balance payable at maturity. The First Lien Notes are pre-payable at the Company’s option at specified premiums to the principal amount that will decline over the term of the First Lien Note Facility. If the First Lien Notes are prepaid prior to the second anniversary of the Closing Date, the Company will be required to pay a make-whole premium based on the present value (using a discount rate based on the specified treasury rate plus 50 basis points) of all remaining interest payments on the First Lien Notes being prepaid prior to the second anniversary of the Closing Date, plus 4.0% of the principal amount of First Lien Notes being prepaid. On or after the second anniversary of the Closing Date, the prepayment premium is 4.0%, which declines to 2.0% on or after the third anniversary of the Closing Date, and declines to 0.0% on or after the fourth anniversary of the Closing Date. At any time, the Company may pre-pay up to $50.0 million in aggregate principal amount of the First Lien Notes from internally generated cash without incurring any make-whole or prepayment premium. The occurrence of certain events of default may increase the applicable rate of interest by 2.0% and could result in the accelerationlocation of the Company’s obligations under the First Lien Note Facility prior to stated maturity and an obligation of the Company to pay the full amount of its obligations under the First Lien Note Facility.
| Series A Preferred Stock carrying value at December 31, 2018 | $ | 3,231 | |
Dividends and discount accretion through June 30, 2019 1 | 211 | ||
| Series A Preferred Stock carrying value at June 30, 2019 | $ | 3,442 | |
| Fair value - Derivatives in liability position | ||||||||||
| Derivative | Balance Sheet Caption | March 31, 2020 | December 31, 2019 | |||||||
| Interest rate swaps designated as cash flow hedges | Accrued expenses and other current liabilities | $ | 3,122 | $ | 1,275 | |||||
| Interest rate swaps designated as cash flow hedges | Other non-current liabilities | 20,705 | 5,920 | |||||||
| Interest rate swaps not designated as hedges | Other non-current liabilities | 315 | 90 | |||||||
| Total derivatives | $ | 24,142 | $ | 7,285 | ||||||
| Three Months Ended March 31, | |||||||
| Derivative | 2020 | 2019 | |||||
| Interest rate caps designated as cash flow hedges | $ | — | $ | (747 | ) | ||
| Interest rate swaps designated as cash flow hedges | (16,632 | ) | — | ||||
| $ | (16,632 | ) | $ | (747 | ) | ||
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 Series C Preferred StockCompany’s derivative instruments (in thousands):
| Series C Preferred Stock carrying value at December 31, 2018 | $ | 90,058 | |
Dividends and discount accretion through June 30, 2019 1 | 5,814 | ||
| Series C Preferred Stock carrying value at June 30, 2019 | $ | 95,872 | |
| Three months ended March 31, | ||||||||||
| Derivative | Income Statement Caption | 2020 | 2019 | |||||||
| Interest rate caps designated as cash flow hedges | Interest expense | $ | — | $ | (183 | ) | ||||
| Interest rate swaps designated as cash flow hedges | Interest expense | (799 | ) | — | ||||||
| Interest rate swaps not designated as hedges | Interest expense | (234 | ) | — | ||||||
| $ | (1,033 | ) | $ | (183 | ) | |||||
The Company expects to reclassify $18.0 million of total interest rate costs from accumulated other comprehensive loss against interest expense during the next 12 months.
13. FAIR VALUE MEASUREMENTS
Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and gives the lowest priority to unobservable inputs (Level 3 measurements). The categories within the valuation hierarchy are described as follows:
Level 1 — Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3 — Inputs to the fair value measurement are unobservable inputs or valuation techniques.
Second lien notes: The fair value of equity linked liabilitiesthe second lien notes is derived from a cash flow model that discounted the cash flows based on market interest rates (Level 3 inputs). See Note 11, Indebtedness, for further discussion on the accompanying Unaudited Condensed Consolidated Statementscarrying amount and fair value of Operations.the second lien notes.
Interest rate swaps: The fair values of interest rate swaps are derived from the interest rates prevalent in the market and future expectations of those interest rates (Level 2 inputs). The Company determines the fair value of the investments based on quoted prices from third-party brokers. See Note 12, Derivative Instruments, for further discussion on the fair value of interest rate swaps.
There were no other assets or liabilities measured at fair value at March 31, 2020 and December 31, 2019.
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 AND EMPLOYEE BENEFIT PLANS
— Under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), approved at the annual meeting by the BioScrip stockholders on May 3, 2018, the Company may issue, among other things, incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, stock grants, and performance units to key employees and directors. The 2018 Planplan is administered by the Company’s Management Development and Compensation Committee, (the “Compensation Committee”), a standing committee of the Board of Directors.
A total of 16,406,9394,101,735 shares of Common Stockcommon stock were initially authorized for issuance under the 2018 Plan. The Company had stock options and restricted stock outstanding related to the 2018 Plan as of March 31, 2020. As of March 31, 2020, the Company also had incentive units outstanding related to the HC I equity incentive plan, which included the shares that remained available under the 2008 Plan. No key employeewas implemented in any calendar year will be granted more than 3,000,000 shares of Common Stock with respect to any combination of (i) Options to purchase shares of Common Stock, (ii) Stock Appreciation Rights (based on the appreciation with respect to shares of Common Stock);October 2015, for certain officers and (iii) Stock Grants and Restricted Stock Units that are intended to comply with the requirements of Section 162(m)employees of the Code.
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 options, unvested restrictedon 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 warrants are determined usingtransferred the treasuryCompany’s common stock method, while potential common shares relatedfrom the Nasdaq Capital Market to Series A and Series C Convertible Preferred Stock are determined using the “if converted” method.
Nasdaq Global Select Market. The Company's Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), and Series C Convertible Preferred Stock,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 $0.0001 per share (the “Series C Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”), is considered a participating security, which means the security may participate in undistributed earnings with Common Stock. The holders of the Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of Common Stock were to receive dividends. The Company is required to use the two-class method when computing loss per share when it has a security that qualifies as a participating security. The two-class method is an earnings allocation formula that determines loss per share for each class of common stock and participating security accordingcorresponding increase to dividends declared (or accumulated) and participation rightspaid-in capital in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding during the period. Diluted loss per share for the Company’s Common Stock is computed using the more dilutive of the two-class method or the if-converted method.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Numerator: | |||||||||||||||
| Loss from continuing operations | $ | (14,166 | ) | $ | (15,124 | ) | $ | (24,448 | ) | $ | (28,111 | ) | |||
| Loss from discontinued operations, net of income taxes | (1,500 | ) | (15 | ) | (1,500 | ) | (45 | ) | |||||||
| Net loss | $ | (15,666 | ) | $ | (15,139 | ) | $ | (25,948 | ) | $ | (28,156 | ) | |||
| Accrued dividends on preferred stock | (3,068 | ) | (2,756 | ) | (6,025 | ) | (5,413 | ) | |||||||
| Loss attributable to common stockholders, basic | $ | (18,734 | ) | $ | (17,895 | ) | $ | (31,973 | ) | $ | (33,569 | ) | |||
| Income effect of 2017 Warrants | — | — | (4,784 | ) | (375 | ) | |||||||||
| Loss attributable to common stockholders, diluted | $ | (18,734 | ) | $ | (17,895 | ) | $ | (36,757 | ) | $ | (33,944 | ) | |||
| Denominator: | |||||||||||||||
| Weighted average number of common shares outstanding, basic | 128,779 | 128,038 | 128,446 | 127,906 | |||||||||||
| Dilutive effect of 2017 Warrants | — | — | 2,053 | 2,252 | |||||||||||
| Weighted average number of common shares outstanding, diluted | 128,779 | 128,038 | 130,499 | 130,158 | |||||||||||
| Basic loss per share: | |||||||||||||||
| Loss from continuing operations | $ | (0.13 | ) | $ | (0.14 | ) | $ | (0.24 | ) | $ | (0.26 | ) | |||
| Loss from discontinued operations | (0.01 | ) | — | (0.01 | ) | — | |||||||||
| Basis loss per share | $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (0.26 | ) | |||
| Diluted loss per share: | |||||||||||||||
| Loss from continuing operations | $ | (0.13 | ) | $ | (0.14 | ) | $ | (0.27 | ) | $ | (0.26 | ) | |||
| Loss from discontinued operations | (0.01 | ) | — | (0.01 | ) | — | |||||||||
| Diluted loss per share | $ | (0.14 | ) | $ | (0.14 | ) | $ | (0.28 | ) | $ | (0.26 | ) | |||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Current | |||||||||||||||
| Federal | $ | — | $ | — | $ | — | $ | — | |||||||
| State | 123 | 18 | 134 | 35 | |||||||||||
| Total current | 123 | 18 | 134 | 35 | |||||||||||
| Deferred | |||||||||||||||
| Federal | — | — | — | — | |||||||||||
| State | 31 | 25 | 36 | 56 | |||||||||||
| Total deferred | 31 | 25 | 36 | 56 | |||||||||||
| Total income tax expense | $ | 154 | $ | 43 | $ | 170 | $ | 91 | |||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Tax benefit at statutory rate | $ | (2,942 | ) | $ | (3,155 | ) | $ | (5,098 | ) | $ | (5,884 | ) | |||
| State tax expense, net of federal taxes | 154 | 43 | 170 | 91 | |||||||||||
| Change in valuation allowance | 1,941 | 2,484 | 4,890 | 5,903 | |||||||||||
| Other | 1,001 | 671 | 208 | (19 | ) | ||||||||||
| Income tax expense | $ | 154 | $ | 43 | $ | 170 | $ | 91 | |||||||
| Financial Instrument | Carrying Value as of June 30, 2019 | Markets for Identical Item (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
First Lien Note Facility(1) | $ | 207,209 | $ | — | $ | — | $ | 215,536 | ||||||||
Second Lien Note Facility (1) | 120,017 | — | — | 132,092 | ||||||||||||
2021 Notes (2) | 198,534 | — | 200,083 | — | ||||||||||||
| Total debt instruments | $ | 525,760 | $ | — | $ | 200,083 | $ | 347,628 | ||||||||
2017 Warrants (3) | $ | 20,547 | $ | — | $ | 20,547 | $ | — | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Restructuring expense | $ | 1,713 | $ | 1,956 | $ | 3,399 | $ | 3,835 | |||||||
| Acquisition and integration expense | — | 68 | — | 71 | |||||||||||
| Merger expenses | 1,158 | — | 5,493 | — | |||||||||||
| Total restructuring, acquisition, integration, and other expenses | $ | 2,871 | $ | 2,024 | $ | 8,892 | $ | 3,906 | |||||||
2017 Warrants — During the three months ended March 31, 2020, warrant holders did not elect to exercise any warrants to purchase shares of operations undercommon stock. No warrants existed in 2019 prior to the Merger. As of March 31, 2020 and December 31, 2019, the remaining warrant holders are entitled to purchase 1.4 million shares of common stock, respectively.
2015 Warrants “Loss from discontinued operations, net— During the three months ended March 31, 2020, warrant holders did not elect to exercise any warrants to purchase shares of income taxes,”common stock. No warrants existed in 2019 prior to the Merger. As of March 31, 2020 and December 31, 2019, warrant holders are entitled to purchase 0.9 million shares of common stock, respectively.
Home Solutions Restricted Stock as— In conjunction with BioScrip’s 2016 acquisition of Home Solutions, Inc., 1.8 million restricted shares of common stock were issued, of which 0.8 million of these units vest upon the alleged breach wasclosing price of the Company’s common stock averaging at or above $16.00 per share over 20 consecutive trading days prior to December 31, 2019 and 1.0 million of these units vest upon the closing price of the Company’s common stock averaging at or above $20.00 per share over 20 consecutive trading days prior to December 31, 2019. The restricted stock expired on December 31, 2019. As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, 7,048,357 common shares issued to HC I in conjunction with the Merger are held in escrow to prevent dilution related to a business line that no longer exists.
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 $0.7 million and $0.6 million for July 26, 2019. BioScrip caused certain supplemental disclosures regarding the proposed mergers to be filedthree months ended March 31, 2020 and 2019, respectively. Management fees are recorded in a Current Report on Form 8-K on July 24, 2019. Later that same day, the plaintiff withdrew his motion for a preliminary injunction.
The Company had amounts due to its joint ventures of $2.9 million as of March 31, 2020. The Company also had amounts due to its joint ventures of $4.3 million as of December 31, 2019. These payables were included in accrued expenses and other current liabilities in the District of Delaware. The complaint names BioScrip andaccompanying condensed consolidated balance sheets. These balances primarily relate to cash collections received by the membersCompany on behalf of the BioScrip Board, as defendants. The complaint alleges generally thatjoint ventures, offset by certain pharmaceutical inventories purchased by the defendants caused BioScrip to file a preliminary proxy statement relating to the Option Care mergers that omits material information required to have been disclosed, in violation of Sections 14(a) and 20(a)Company on behalf of the Exchange Act. The complaint seeks, among other things, a preliminary injunction prohibiting defendants from proceeding with, consummating, or closing the Option Care merger or, in the event that the Option Care merger is consummated, rescission or rescissory damages as well as costs incurred in bringing the action (including plaintiff’s attorneys’ and experts’ fees).joint ventures.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Unless the context requires otherwise, references in this report to "Option Care Health," the “Company,” “we,” “us” and “our” refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. (“Option Care Health”, or the “Company”) should be read in conjunction with the audited Consolidated Financial Statements, includingconsolidated financial statements and related notes, as presented in the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”),on March 5, 2020, as well as our Unaudited Condensed Consolidated Financial Statementsthe 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”Act’), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Specifically, thisSuch 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 about:
Item 1A “Risk Factors”.
Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. Important factors that could cause such differences include, among other things:
Business Overview
other nonhospital settings. Our platform provides nationwide service capabilities and the ability to deliver clinical management services that offer patients a high-touch, community-based and home-based care environment. Our core services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. WhetherWe provide home infusion services consisting of anti-infectives, nutrition support, bleeding disorder therapies, immunoglobulin therapy, and other therapies for chronic and acute conditions.
HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care, Inc. (“Option Care”).
On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”) (the “Merger”), a national provider of infusion and home care management solutions, which was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc. and the combined company’s stock, par value $0.0001, was listed on the Nasdaq Global Select Market as of March 31, 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
During the first quarter of 2020, the Company did not experience a material financial impact from the COVID-19 pandemic (the “pandemic”) on the financial results as reported. However, as 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 has experienced a related impact across a number of facets beginning in March 2020.
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. With the onset of the pandemic, the Company has experienced variability in the referral trends of patients from acute care settings as hospitals have reduced their non-pandemic related census. Similarly, the Company has also experienced variability in the referral trends of patients with chronic conditions, as patient visits to specialty physician practices has been reduced under general guidelines for non-essential social interactions.
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 physician office, ambulatoryor alternate infusion center, skilled nursingtreatment 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 continues to evaluate the impact of the pandemic on the merger-related integration activities currently under way and remains confident in the ability to eventually generate at least $60.0 million in net cost synergies. Further, to date, the Company experienced no material deceleration in cash collections and collaboration with payers continues to be productive. However, given the dynamic situation, the Company is not in a position to assess the potential impact of the pandemic on the timing associated with realizing the cost synergies. The Company anticipates that the pandemic will 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.
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 or other alternate sitesrationalization and the optimization of care, we provide products, servicesassets.
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 condition-specific clinical management programs tailoredpatient support models to improveaccess the care of individuals with complex health conditions such as gastrointestinal abnormalities, infectious diseases, cancer, multiple sclerosis, organ and blood cell transplants, bleeding disorders, immune deficiencies and heart failure.market.
We operatecontinue to make progress on the achievement synergies, which will enable the delivery of high-quality, cost-effective solutions to providers across the country and help facilitate the introduction of new therapies to the marketplace while improving the profitability profile of the Company.
Since the Merger, we have worked to align our field and sales teams. We have also made strides at combining our procurement process and contracts, all while continuing to focus on serving our patients. Patient health is personal to us, which is why, throughout the integration process, we strive to improve and set the standard for quality care that is matched by best-in-class service. After completion of the Merger, we have additional resources to invest in one segment, infusion services. On an ongoing basis we will not report operating segment information unless a change in the business necessitates the needour people, process and systems, providing us improved strength and scale to do so.drive better patient outcomes.
Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and 19.3%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 revenuepurchase 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. For additional information on this transaction, see Note 3, Business Acquisitions, of the unaudited condensed consolidated financial statements.
Composition of Results of Operations
The following results of operations include the accounts of Option Care Health and our subsidiaries for the three months ended June 30,March 31, 2020 and 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.Infusion and 2018, respectively, was derived directlyrelated 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 Medicare program, state Medicaid programsgoods. When nursing services are provided, revenue is recognized when the services are rendered.
Due to the nature of the health care industry and other government payors. We also providethe 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 beneficiariesbe revised or updated as additional information becomes available. Specifically, the complexity of Medicare, Medicaidmany third-party billing arrangements and other government-sponsored healthcare programs through managed care entities. Medicare Part D, for example, is administered through managed care entities. In the normal course of business, we and our customers are subject to legislative and regulatory changes impacting the leveluncertainty of reimbursement receivedamounts for certain services from the Medicare and state Medicaid programs.
Cost of Revenue.Cost of revenue consists of the actual cost of pharmaceuticals and we would likely exit some or all services where rate reductions result in unacceptable returnsother medical supplies dispensed to our stockholders.
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 also providesprofessional fees.
Depreciation and Amortization Expense. Depreciation within this caption includes infrastructure items such as computer hardware and software, office equipment and leasehold improvements. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue.
Other Income (Expense)
Interest Expense, Net. Interest expense consists principally of interest payments on the Company’s outstanding borrowings under the ABL Facility, the first lien term loan and second lien notes, as well as the amortization of discount and deferred financing fees. Refer to the “Liquidity and Capital Resources” section below for the implementationfurther discussion of a clinical services payment. Under the Cures Act, the services payment does not take effect until 2021. However, the Bipartisan Budget Actthese outstanding borrowings.
Equity in Earnings of 2018 provides for a temporary transitional payment, starting January 1, 2019, for Medicare Part B homeJoint Ventures. Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion services. CMS issued a final rule in October 2018 implementing this temporary benefit, which will continue until January 1, 2021,joint ventures with health systems.
Income Tax Expense (Benefit). The Company is subject to taxation in the Cures Act takes effect. We have taken steps to mitigate the impactUnited States and various states. The Company’s income tax (benefit) expense is reflective of the Cures Actcurrent federal and state tax rates.
Change in unrealized losses on our business, butcash flow hedges, net of income taxes. Change in unrealized (losses) gains on cash flow hedges, net of income taxes, consists of the Act has had material negative impact on our revenuesgains and profitability.losses associated with the changes in the fair value of hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes.
The following table presents Option Care Health’s consolidated results of operations for the three months ended June 30,March 31, 2020 and 2019 (in thousands):
| Three Months Ended March 31, | |||||||||||||
| 2020 (unaudited) | 2019 (unaudited) | ||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | ||||||||||
| NET REVENUE | $ | 705,440 | 100.0 | % | $ | 476,492 | 100.0 | % | |||||
| COST OF REVENUE | 547,411 | 77.6 | % | 378,298 | 79.4 | % | |||||||
| GROSS PROFIT | 158,029 | 22.4 | % | 98,194 | 20.6 | % | |||||||
| OPERATING COSTS AND EXPENSES: | |||||||||||||
| Selling, general and administrative expenses | 129,280 | 18.3 | % | 82,787 | 17.4 | % | |||||||
| Depreciation and amortization expense | 20,101 | 2.8 | % | 9,969 | 2.1 | % | |||||||
| Total operating expenses | 149,381 | 21.2 | % | 92,756 | 19.5 | % | |||||||
| OPERATING INCOME | 8,648 | 1.2 | % | 5,438 | 1.1 | % | |||||||
| OTHER INCOME (EXPENSE): | |||||||||||||
| Interest expense, net | (28,087 | ) | (4.0 | )% | (11,045 | ) | (2.3 | )% | |||||
| Equity in earnings of joint ventures | 562 | 0.1 | % | 549 | 0.1 | % | |||||||
| Other, net | 8 | — | % | (76 | ) | — | % | ||||||
| Total other expense | (27,517 | ) | (3.9 | )% | (10,572 | ) | (2.2 | )% | |||||
| LOSS BEFORE INCOME TAXES | (18,869 | ) | (2.7 | )% | (5,134 | ) | (1.1 | )% | |||||
| INCOME TAX EXPENSE (BENEFIT) | 1,041 | 0.1 | % | (1,422 | ) | (0.3 | )% | ||||||
| NET LOSS | $ | (19,910 | ) | (2.8 | )% | $ | (3,712 | ) | (0.8 | )% | |||
| OTHER COMPREHENSIVE LOSS, NET OF TAX: | |||||||||||||
| Change in unrealized losses on cash flow hedges, net of income tax benefit of $0, and $242, respectively | (16,632 | ) | (2.4 | )% | (505 | ) | (0.1 | )% | |||||
| OTHER COMPREHENSIVE LOSS | (16,632 | ) | (2.4 | )% | (505 | ) | (0.1 | )% | |||||
| NET COMPREHENSIVE LOSS | $ | (36,542 | ) | (5.2 | )% | $ | (4,217 | ) | (0.9 | )% | |||
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 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 March 31, 2020 and 2018,March 31, 2019.
Gross Profit
| Three Months Ended March 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | Variance | ||||||||||||
| (in thousands, except for percentages) | ||||||||||||||
| Net revenue | $ | 705,440 | $ | 476,492 | $ | 228,948 | 48.0 | % | ||||||
| Cost of revenue | 547,411 | 378,298 | 169,113 | 44.7 | % | |||||||||
| Gross profit | $ | 158,029 | $ | 98,194 | $ | 59,835 | 60.9 | % | ||||||
| Gross profit margin | 22.4 | % | 20.6 | % | ||||||||||
The increase in net revenue was primarily driven by additional revenue following the Merger of $193.7 million as well as growth in the Company’s portfolio of therapies. The increase in cost of revenue was driven by 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.
Operating Expenses
| Three Months Ended March 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | Variance | ||||||||||||
| (in thousands, except for percentages) | ||||||||||||||
| Selling, general and administrative expenses | $ | 129,280 | $ | 82,787 | $ | 46,493 | 56.2 | % | ||||||
| Depreciation and amortization expense | 20,101 | 9,969 | 10,132 | 101.6 | % | |||||||||
| Total operating expenses | $ | 149,381 | $ | 92,756 | $ | 56,625 | 61.0 | % | ||||||
Operating expenses increased for the three months ended March 31, 2020 due to the impact of the Merger.
The increase in depreciation and amortization was primarily related to the depreciation of the fixed assets acquired and the amortization of the intangibles acquired from the Merger of $3.9 million and $3.9 million, respectively.
Other Income (Expense)
| Three Months Ended March 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | Variance | ||||||||||||
| (in thousands, except for percentages) | ||||||||||||||
| Interest expense, net | $ | (28,087 | ) | $ | (11,045 | ) | $ | (17,042 | ) | 154.3 | % | |||
| Equity in earnings of joint ventures | 562 | 549 | 13 | 2.4 | % | |||||||||
| Other, net | 8 | (76 | ) | 84 | (110.5 | )% | ||||||||
| Total other expense | $ | (27,517 | ) | $ | (10,572 | ) | $ | (16,945 | ) | 160.3 | % | |||
The increase in interest expense was primarily attributable to the interest expense on the new debt issued in conjunction with the Merger. The balance of debt increased from $539.1 million at March 31, 2019 to $1,285.6 million at March 31, 2020. See Note 11, Indebtedness, of the unaudited condensed consolidated financial statements.
Income Tax Expense (Benefit)
| Three Months Ended March 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | Variance | ||||||||||||
| (in thousands, except for percentages) | ||||||||||||||
| Income tax expense (benefit) | $ | 1,041 | $ | (1,422 | ) | $ | 2,463 | (173.2 | )% | |||||
The Company 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 assets with the exception 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 three months ended March 31, 2020 only consists of quarterly tax liabilities attributable to separate company state tax returns as well as recognized deferred tax expense. These tax expense items created a negative quarterly effective tax rate of 5.5% during the three months ended March 31, 2020. During the three months ended March 31, 2019, the effective tax rate was 27.7%. The 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 March 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | Variance | ||||||||||||
| (in thousands, except for percentages) | ||||||||||||||
| Net loss | $ | (19,910 | ) | $ | (3,712 | ) | $ | (16,198 | ) | 436.4 | % | |||
| Other comprehensive loss, net of tax: | ||||||||||||||
| Changes in unrealized losses on cash flow hedges, net of income taxes | (16,632 | ) | (505 | ) | (16,127 | ) | 3,193.5 | % | ||||||
| Other comprehensive loss | (16,632 | ) | (505 | ) | (16,127 | ) | 3,193.5 | % | ||||||
| Net comprehensive loss | $ | (36,542 | ) | $ | (4,217 | ) | $ | (32,325 | ) | 766.5 | % | |||
The change in net loss was primarily related to the increased interest expense on the increased indebtedness.
The changes in unrealized losses on cash flow hedges, net of income taxes, related to the decrease in the variable interest rates during the first quarter of 2020 and projected as of March 31, 2020 resulted in a corresponding liability on the fair value of the interest rate swaps on $1,311.1 million of debt principal. The change in unrealized loss for the three months ended March 31, 2019 related to fluctuations on interest rate caps on $250.0 million of the previous first lien term loan.
Net comprehensive loss was $36.5 million for the three months ended March 31, 2020, compared to net comprehensive loss of $4.2 million for the three months ended March 31, 2019, as a result of the changes in net loss, discussed above, further reduced by the impact of the fair value of the interest rate swaps.
Liquidity and Capital Resources
For the three months ended March 31, 2020 and the twelve months ended December 31, 2019, the Company’s primary sources of liquidity were cash on hand of $77.2 million and $67.1 million, respectively, as well as the $140.4 million of borrowings available under its credit facilities. During the three months ended March 31, 2020 and the year ended December 31, 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 investment in various acquisitions and our infrastructure to support additional business volumes. Ongoing operating cash outflows are associated with procuring and dispensing prescription drugs, personnel and other costs associated with servicing patients, as well as paying cash interest on the outstanding debt. Ongoing investing cash flows are primarily associated with capital projects related to business acquisitions, the improvement and maintenance of our pharmacy facilities and investment in our information technology systems. Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt.
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
The Company’s asset-based-lending (“ABL”) revolving credit 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. The Base Rate is charged between 1.25% and 1.75% and the Eurocurrency Rate is charged between 2.25% and 2.75% based on the historical excess availability as a percentage of the Line Cap, as defined in the ABL facility credit agreement. The revolving credit facility contains commitment fees payable on the unused portion of the ABL 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 facility at March 31, 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 March 31, 2020.
The principal balance of the first lien term loan is repayable in quarterly installments of $2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026. The quarterly principal payments commenced in March of 2020. Interest on the first lien term loan is payable monthly on Base Rate loans at Base Rate, as defined, plus 3.25% to 3.50%, depending on the Company’s leverage ratio. Interest is charged on Eurocurrency Rate loans at the Eurocurrency Rate, as defined, plus 4.25% to 4.50%, depending on the Company’s leverage ratio. The interest rate on the first lien term loan was derived5.49% as of March 31, 2020.
The second lien notes mature on August 6, 2027. Interest on the second lien notes is payable quarterly and is at the greater of 1% or 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 resulted in the Company capitalizing the interest payment to the principal balance on the interest payment date, increasing the outstanding principal balance to $412.3 million. The Company paid the second quarterly interest payment, due in February 2020; the interest rate on the second lien notes was 10.49% as of March 31, 2020.
Cash Flows
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
The following table presents selected data from Medicare.Option Care Health’s unaudited condensed consolidated statements of cash flows:
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| (unaudited) | (unaudited) | Variance | |||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 18,403 | $ | 9,080 | $ | 9,323 | |||||
| Net cash used in investing activities | (5,353 | ) | (4,731 | ) | (622 | ) | |||||
| Net cash used in financing activities | (2,862 | ) | (3,038 | ) | 176 | ||||||
| Net increase in cash and cash equivalents | 10,188 | 1,311 | 8,877 | ||||||||
| Cash and cash equivalents - beginning of period | 67,056 | 36,391 | 30,665 | ||||||||
| Cash and cash equivalents - end of period | $ | 77,244 | $ | 37,702 | $ | 39,542 | |||||
Cash Flows from Operating Activities
The increase in cash flows provided by operating activities is due to working capital efficiencies and timing of vendor payments during the three months ended March 31, 2020.
Cash Flows from Investing Activities
The increase in cash flows used in investing activities is due to increased fixed asset additions during the three months ended March 31, 2020 as we invested more into our pharmacies and infrastructure.
Cash Flows from Financing Activities
The decrease in cash flows used in financing activities is due to a $2.0 million redemption to related party during the three months ended March 31, 2019. This was offset by an increased principal repayment on the new debt and net payments for taxes on cashless exercises of options and vesting of restricted stock awards during the three months ended March 31, 2020.
Commitments and Contractual Obligations
There were no material changes to our commitments under contractual obligations, as disclosed in our latest Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of March 31, 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
There have been no significant changes in ourthe critical accounting estimates from those described in the Company’s audited consolidated financial statements and related notes, as presented in our Annual Report.
hereby incorporated by reference.
| Three Months Ended June 30, | Change | |||||||||||||
| 2019 | 2018 | 2019 v. 2018 | ||||||||||||
| Net revenue | $ | 191,517 | $ | 175,789 | $ | 15,728 | 8.9 | % | ||||||
| Gross profit, excluding depreciation expense | $ | 64,653 | $ | 59,957 | $ | 4,696 | 7.8 | % | ||||||
| Gross margin | 33.8 | % | 34.1 | % | ||||||||||
| Three Months Ended June 30, | As a Percentage of Net Revenue | ||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||
| Service location operating expenses | $ | 38,428 | $ | 38,861 | 20.1 | % | 22.1 | % | |||||
| General and administrative expenses | 11,796 | 10,931 | 6.2 | % | 6.2 | % | |||||||
| Depreciation and amortization expense | 4,665 | 6,366 | 2.4 | % | 3.6 | % | |||||||
| Restructuring, acquisition, integration, and other expenses | 2,871 | 2,024 | 1.5 | % | 1.2 | % | |||||||
| Total operating expenses | $ | 57,760 | $ | 58,182 | 30.2 | % | 33.1 | % | |||||
| Three Months Ended June 30, | Change | |||||||||||||
| 2019 | 2018 | 2019 v. 2018 | ||||||||||||
| Service location operating expenses | $ | 38,428 | $ | 38,861 | $ | (433 | ) | (1.1 | )% | |||||
| General and administrative expenses | 11,796 | 10,931 | 865 | 7.9 | % | |||||||||
| Depreciation and amortization expense | 4,665 | 6,366 | (1,701 | ) | (26.7 | )% | ||||||||
| Restructuring, acquisition, integration, and other expenses | 2,871 | 2,024 | 847 | 41.8 | % | |||||||||
| Total operating expenses | $ | 57,760 | $ | 58,182 | $ | (422 | ) | (0.7 | )% | |||||
| Three Months Ended June 30, | Change | |||||||||||||
| 2019 | 2018 | 2019 v. 2018 | ||||||||||||
| Interest expense, net | $ | 15,638 | $ | 13,805 | $ | 1,833 | 13.3 | % | ||||||
| Change in fair value of equity linked liabilities | 5,216 | 3,064 | 2,152 | 70.2 | % | |||||||||
| Loss (gain) on dispositions | 51 | (13 | ) | 64 | (492.3 | )% | ||||||||
| Total other expense | $ | 20,905 | $ | 16,856 | $ | 4,049 | 24.0 | % | ||||||
| Income taxes: | ||||||||||||||
| Income tax expense | $ | (154 | ) | $ | (43 | ) | $ | (111 | ) | 258.1 | % | |||
| Loss from discontinued operations: | ||||||||||||||
| Loss from discontinued operations, net of income taxes | $ | (1,500 | ) | $ | (15 | ) | $ | (1,485 | ) | 9,900.0 | % | |||
| Six Months Ended June 30, | Change | |||||||||||||
| 2019 | 2018 | 2019 v. 2018 | ||||||||||||
| Net revenue | $ | 370,473 | $ | 344,373 | $ | 26,100 | 7.6 | % | ||||||
| Gross profit, excluding depreciation expense | $ | 122,317 | $ | 115,005 | $ | 7,312 | 6.4 | % | ||||||
| Gross margin | 33.0 | % | 33.4 | % | ||||||||||
| Six Months Ended June 30, | As a Percentage of Net Revenue | ||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||
| Service location operating expenses | $ | 78,615 | $ | 78,160 | 21.2 | % | 22.7 | % | |||||
| General and administrative expenses | 23,290 | 21,600 | 6.3 | % | 6.3 | % | |||||||
| Depreciation and amortization expense | 9,738 | 12,852 | 2.6 | % | 3.7 | % | |||||||
| Restructuring, acquisition, integration, and other expenses | 8,892 | 3,906 | 2.4 | % | 1.1 | % | |||||||
| Total operating expenses | $ | 120,535 | $ | 116,518 | 32.5 | % | 33.8 | % | |||||
| Six Months Ended June 30, | Change | |||||||||||||
| 2019 | 2018 | 2019 v. 2018 | ||||||||||||
| Service location operating expenses | $ | 78,615 | $ | 78,160 | $ | 455 | 0.6 | % | ||||||
| General and administrative expenses | 23,290 | 21,600 | 1,690 | 7.8 | % | |||||||||
| Depreciation and amortization expense | 9,738 | 12,852 | (3,114 | ) | (24.2 | )% | ||||||||
| Restructuring, acquisition, integration, and other expenses | 8,892 | 3,906 | 4,986 | 127.6 | % | |||||||||
| Total operating expenses | $ | 120,535 | $ | 116,518 | $ | 4,017 | 3.4 | % | ||||||
| Six Months Ended June 30, | Change | |||||||||||||
| 2019 | 2018 | 2019 v. 2018 | ||||||||||||
| Interest expense, net | $ | 30,869 | $ | 27,200 | $ | 3,669 | 13.5 | % | ||||||
| Change in fair value of equity linked liabilities | (4,784 | ) | (375 | ) | (4,409 | ) | 1,175.7 | % | ||||||
| Loss (gain) on dispositions | (25 | ) | (318 | ) | 293 | (92.1 | )% | |||||||
| Total other expense | $ | 26,060 | $ | 26,507 | $ | (447 | ) | (1.7 | )% | |||||
| Income taxes: | ||||||||||||||
| Income tax expense | $ | (170 | ) | $ | (91 | ) | $ | (79 | ) | 86.8 | % | |||
| Loss from discontinued operations: | ||||||||||||||
| Loss from discontinued operations, net of income taxes | $ | (1,500 | ) | $ | (45 | ) | $ | (1,455 | ) | 3,233.3 | % | |||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| (in thousands) | |||||||||||||||
| Loss from continuing operations | $ | (14,166 | ) | $ | (15,124 | ) | $ | (24,448 | ) | $ | (28,111 | ) | |||
| Interest expense, net | (15,638 | ) | (13,805 | ) | (30,869 | ) | (27,200 | ) | |||||||
| Loss (gain) on dispositions | (51 | ) | 13 | 25 | 318 | ||||||||||
| Income tax expense | (154 | ) | (43 | ) | (170 | ) | (91 | ) | |||||||
| Depreciation and amortization expense | (4,665 | ) | (6,366 | ) | (9,738 | ) | (12,852 | ) | |||||||
| Stock-based compensation | (1,065 | ) | (1,253 | ) | (2,160 | ) | (1,808 | ) | |||||||
| Change in fair value of equity linked liabilities | (5,216 | ) | (3,064 | ) | 4,784 | 375 | |||||||||
| Restructuring, acquisition, integration, and other expenses | (2,871 | ) | (2,024 | ) | (8,892 | ) | (3,906 | ) | |||||||
| Adjusted EBITDA | $ | 15,494 | $ | 11,418 | $ | 22,572 | $ | 17,053 | |||||||
| Item 3. | Quantitative and Qualitative Disclosures |
There have been no material changes to our exposure to market risk from those reportedincluded in our Annual Report.Report on Form 10-K for the year ended December 31, 2019, hereby incorporated by reference.
| 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 June 30, 2019.March 31, 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 June 30, 2019.March 31, 2020.
Changes in Internal Control OverControls over Financial Reporting
PART II
OTHER INFORMATION
| Item 1. | Legal Proceedings |
For a summary of legal proceedings, please refer to Note 12 within14, Commitments and Contingencies, of the unaudited condensed consolidated financial statements sectionincluded in Item 1 of this document.report.
| Item 1A. | Risk Factors |
The recent COVID-19 pandemic could adversely impact our business operations, results of operations, cash flows and financial position
In 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 public health emergency of international concern. In March 2020, the President of the United States declared a State of National Emergency due to the Merger with Option Care
We are closely monitoring the impact of the BoardCOVID-19 pandemic on all aspects of Directorsour business, including how it will impact our patients, teammates, suppliers, vendors, referral sources, and third party payers. The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which may adversely affect our business operations and may materially and adversely affect our results of BioScripoperations, cash flows and financial position.
While we cannot predict the impact that COVID-19 will have on our patients, suppliers, vendors, and third party payers and each of their financial conditions, we believe the following factors could lead to a material adverse impact on the approval or rejectionCompany’s business:
Variability in acute therapy patient referrals from hospitals based on changes in hospital-based procedures and treatment patterns;
Variability in chronic therapy patient referrals based on disruptions in the diagnosis of chronic conditions requiring infusion therapy;
Inefficiencies in clinical labor expenses and higher labor costs from staffing disruptions and availability, potential overtime due to inefficient clinical staffing and utilization 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 from an extended period of remote work arrangements, which could strain our business continuity plans, including but not limited to cybersecurity 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 currently. The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future proposals submitteddevelopments that we are not able to a stockholder vote. In addition, directors of BioScrip, as of immediately prior topredict, including: the effective timeseverity and duration of the merger, will represent twooutbreak; 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 10 memberspandemic on economic activity; the health of the Board of Directors of BioScrip as of the effective time of the merger. Accordingly, each BioScrip stockholder will have less influence on the management and policies of BioScrip after the closing than such stockholder now has on the management and policies of BioScrip.
In addition, we cannot predict the impact that COVID-19 will be made by BioScrip at the timehave on our patients, suppliers, vendors, and third party payers, and each of such waiver basedtheir financial conditions; however, any material effect on the facts and circumstances as they exist at that time.
currently.
| Item 6. | Exhibits |
(a) Exhibits.
| Exhibit Number | Description |
| 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 |
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 July 31, 2019.authorized.
| | |
| Date: May 7, 2020 | /s/ |
| Chief Financial Officer | |