Option Care Health, Inc. (then BioScrip, Inc.) — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2019. The filing was made under BioScrip, Inc., a provider of infusion and home-care services operating nearly 67 locations. The company had agreed to merge with Option Care Enterprises; the transaction was expected to close in the third quarter of 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $191.5 million | $175.8 million | $370.5 million | $344.4 million |
| Gross profit | $64.7 million | $60.0 million | $122.3 million | $115.0 million |
| Gross margin | 33.8% | 34.1% | 33.0% | 33.4% |
| Operating income (loss) | $6.9 million | $1.8 million | $1.8 million | $(1.5) million |
| Net loss | $(15.7) million | $(15.1) million | $(25.9) million | $(28.2) million |
| Adjusted EBITDA | $15.5 million | $11.4 million | $22.6 million | $17.1 million |
Revenue increased 8.9% in Q2 and 7.6% for the first half, primarily from more patients served and higher reimbursement for certain therapies. Gross profit grew, supported by supply-chain improvements, but gross margin narrowed due to lower estimated realization on billings and, in Q2, a higher mix of lower-margin chronic therapies. Adjusted EBITDA is a non-GAAP measure; management cited core revenue mix and restructuring and integration efforts as drivers of its increase.
- Cash flow: First-half operating cash use was $3.9 million, versus $20.3 million in 2018; investing cash use was $3.2 million versus $6.9 million. Financing provided $7.0 million. Cash, cash equivalents and restricted cash totaled $18.7 million at June 30, including $14.4 million of unrestricted cash.
- Liquidity: Net working capital was $61.5 million, down from $67.4 million at year-end 2018. Restricted cash of $4.3 million collateralized $4.3 million of letters of credit.
- Debt and obligations: Total debt, net of deferred financing costs, was $525.3 million, including $519.4 million long-term debt and $5.9 million current debt. The company also reported $24.6 million of operating lease liabilities. First- and second-lien notes had floating-rate interest; $8.4 million of second-lien interest was capitalized in the first half.
- Other balance-sheet items: Total liabilities were $675.8 million, exceeding total assets of $600.6 million; stockholders’ deficit was $174.5 million. Preferred-stock liquidation preferences totaled approximately $103.6 million.
Material changes and unusual items
- Q2 operating income improved to $6.9 million from $1.8 million; first-half operating results shifted to income from a loss. Depreciation and amortization declined as certain assets became fully depreciated or amortized.
- Interest expense rose 13.3% in Q2 and 13.5% for the first half, reflecting higher variable rates and increased debt principal, including capitalized interest. First-half restructuring, acquisition, integration and other expenses rose to $8.9 million from $3.9 million, largely due to $5.5 million of merger expenses.
- Q2 included a $5.2 million expense from the increase in fair value of equity-linked liabilities; for the first half, the corresponding fair-value change was a $4.8 million gain. These warrant-related noncash remeasurements affected reported results.
- A $1.5 million provision for a nonbinding commercial-payor settlement was recorded as discontinued-operations loss; payment is contingent on the Option Care merger closing.
- The company adopted lease accounting in January 2019, recording $25.9 million of lease liabilities and right-of-use assets before reclassifying existing lease-related balances; management said adoption did not materially affect earnings or cash flows.
Outlook, risks and contingencies
- Merger: Under the agreement, BioScrip shareholders were expected to own approximately 20% of the combined company. Financing secured by Option Care’s shareholder was intended to repay the first-lien and second-lien facilities and 2021 Notes at closing. Closing remained subject to conditions and approvals; the agreement could be terminated, including if not completed by December 13, 2019.
- Liquidity outlook: Management expected cash, operating cash flow and remaining borrowing capacity to cover anticipated working capital, scheduled interest and other needs for at least 12 months. The company had drawn the full additional $8.0 million permitted under its first-lien facility in May. If the merger failed or cash-collection and operating plans fell short, management warned additional or alternative liquidity could be needed, with no assurance it could be obtained.
- Medicare reimbursement: The company said the Cures Act had materially negatively affected revenue and profitability. A temporary transitional payment was in effect from January 2019 until the planned clinical-services payment begins in 2021. Government payors represented 17.5% of Q2 revenue, including 9.9% from Medicare.
- Other risks: Risks include high indebtedness and debt-covenant compliance, reimbursement and regulatory changes, payer contract or network changes, collection delays, supplier and operating-system disruptions, and merger completion and integration. Merger-related litigation alleged inadequate disclosures; supplemental disclosures were filed, and a preliminary-injunction motion in one case was withdrawn. Management said pending matters were not expected to materially affect financial position or liquidity, but an adverse outcome could affect results or cash flows.
- No formal financial guidance was provided. Management’s stated near-term priorities included growing revenue, improving EBITDA margins and accelerating cash collections. Disclosure controls were assessed as effective at June 30, 2019.
Important facts for investors to verify
- Whether the merger closed, its final terms and financing, and whether debt was repaid as planned.
- Cash collections, operating cash flow, remaining borrowing capacity and compliance with debt covenants.
- Progress in gross-margin recovery and whether Adjusted EBITDA improvement translates into sustainable cash generation.
- The realized effects of Medicare and state Medicaid reimbursement changes, particularly the transition to the 2021 Medicare payment system.
- Final outcomes and potential costs of merger-related lawsuits and the contingent $1.5 million payor settlement.