Option Care Health, Inc. (then BioScrip, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 3, 2019. The filing is by BioScrip, which had agreed to merge with Option Care Enterprises. BioScrip provided infusion and home-care services through nearly 67 U.S. locations.
Financial performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $179.0 million | $168.6 million; up 6.2% |
| Gross profit / margin | $57.7 million / 32.2% | $55.0 million / 32.7% |
| Operating loss | $5.1 million | $3.3 million |
| Net loss | $10.3 million | $13.0 million |
| Loss attributable to common stockholders | $13.2 million; basic loss per share $0.10 and diluted $0.18 | $15.7 million; basic and diluted loss per share $0.12 and $0.15, respectively |
| Adjusted EBITDA (non-GAAP) | $7.1 million | $5.6 million |
| Operating cash flow | $(6.6) million | $(5.2) million from continuing operations |
| Cash and restricted cash | $10.0 million total; $5.7 million unrestricted | Cash and restricted cash totaled $18.9 million at December 31, 2018 |
| Total debt | $511.3 million carrying value | $504.7 million at December 31, 2018 |
Capital expenditures were $1.9 million. Net working capital was $55.5 million, down $11.9 million from year-end. Debt included first- and second-lien note facilities and 8.875% notes due 2021; $4.1 million of second-lien interest was paid-in-kind and added to principal during the quarter. The filing reports substantial preferred-stock liquidation preferences, including $97.4 million for Series C.
Changes, outlook and risks
- Revenue growth reflected more patients served and higher reimbursement for certain therapies. Gross margin declined 0.5 percentage points; management attributed much of the decline to lower estimated realization on billed revenue, reducing margin by 2.3 percentage points, or $4.5 million, versus the prior-year quarter.
- Operating expenses rose 7.6%, mainly from $4.3 million of merger expenses. Operating loss widened despite higher revenue. Net loss improved in part because the noncash fair-value decrease in warrant liabilities was larger: $10.0 million versus $3.4 million in Q1 2018. Interest expense increased 13.7% to $15.2 million, primarily due to higher variable rates and higher second-lien principal.
- Management said Adjusted EBITDA improved with a shift toward core revenue and restructuring efforts. This is a non-GAAP measure and is not a substitute for GAAP results.
- On March 14, 2019, BioScrip agreed to merge with Option Care. The anticipated transaction would leave existing BioScrip shareholders with approximately 20% of the combined company; financing secured by Option Care’s shareholder was expected to repay BioScrip’s note facilities and 2021 notes at closing. Closing was expected by year-end 2019, subject to conditions and approvals. The merger agreement included a potential $15 million termination fee in specified circumstances.
- In May 2019, the first-lien facility was amended to permit up to $8 million of additional borrowing. Management expected cash, operating cash flow and available borrowing capacity to cover anticipated needs for at least 12 months, but warned that failure or delay of the merger and underperformance in cash collections or execution could worsen liquidity and require additional financing. Scheduled note amortization was to begin September 30, 2019.
- Management reported that the Medicare payment changes under the Cures Act had materially negatively affected revenue and profitability. It cited reimbursement cuts, payment delays, audits, regulatory scrutiny, competition and high indebtedness among ongoing risks. It did not provide numerical full-year guidance.
- Management did not expect pending legal and regulatory matters to materially affect consolidated financial position or liquidity, but said an adverse outcome could materially affect results or cash flow in a particular period. A commercial payor claim remained unresolved and the company could not estimate a possible loss.
Most important facts to verify
- Whether the Option Care merger closed as expected, on what terms, and whether debt repayment and the projected ownership split matched the filing’s assumptions.
- Cash collections, receivables aging, operating cash burn and access to the additional first-lien borrowing capacity.
- Debt balances, interest costs, covenant compliance and the effect of scheduled principal payments.
- Whether gross-margin pressure, Medicare reimbursement changes and merger-related costs persisted in later periods.
- Developments in the payor claim and other legal, regulatory or reimbursement matters.