Option Care Health, Inc. quarterly report, Q1 FY2018

Business context and reporting period

The supplied filing text identifies the registrant as BioScrip, Inc., a national infusion-services provider—not Option Care Health, Inc. Although parts of the extracted text contain conflicting September 2017 references, the financial statements and MD&A cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The report was signed May 10, 2018. Verify the filing identity and period before relying on this summary.

BioScrip operated 65 service locations in 27 states and reported one operating segment, Infusion Services.

Financial results and liquidity

Interest expense was $13.4 million, up from $12.7 million. Cash interest paid was $15.9 million. At March 31, cash and cash equivalents were $30.4 million, restricted cash was $5.0 million, working capital was $72.3 million, and total debt was $481.4 million. Long-term debt, net of current portion, was $480.4 million. The company also reported $10.0 million of delayed-draw capacity under its second-lien facility, available until December 2018.

Material changes versus the prior comparable period

• Revenue fell $49.2 million, or 22.6%, primarily reflecting the UnitedHealthcare contract transition effective September 30, 2017, the strategic focus on core revenue, lower volumes in some product lines, and temporary branch closures during severe winter weather.
• Gross profit declined $9.8 million, but gross margin increased 2.9 percentage points. Management attributed the improvement to a higher-margin therapy mix and lower drug costs from supply-chain improvements; temporary product shortages also increased costs.
• Q1 2018 revenue was reduced by $5.5 million under adoption of ASC Topic 606, which records expected uncollectible amounts as a reduction of revenue rather than bad-debt expense. Prior-period amounts were not restated, limiting direct comparability. The filing states that, absent Topic 606, Q1 2018 revenue would have been $174.0 million and bad-debt expense $5.5 million.
• Operating cash use improved by $5.5 million year over year; management said operational cash flow excluding interest payments improved by $8.9 million, reflecting operating performance and working-capital management.
• Adjusted EBITDA increased $0.8 million, which management attributed to the strategic mix shift and restructuring and integration efforts.

Outlook, risks, contingencies, and unusual items

• Management expected cash on hand and operating cash flows to fund anticipated working capital, scheduled interest, and other needs for at least the next 12 months. It cautioned that failure to execute its plans could require additional liquidity, and that future financing may not be available. The statements are prepared on a going-concern basis.
• Debt is substantial and carries significant interest costs. First- and second-lien notes mature August 15, 2020, subject to extension provisions if the 2021 notes are refinanced; scheduled first-lien amortization begins September 30, 2019. The company disclosed covenant, refinancing, default, and liquidity risks.
• Healthcare reimbursement changes, government and private-payor audits, payment delays, contract losses, competition, supplier disruptions, and regulatory scrutiny could affect revenue, margins, or cash flow. Medicare and state Medicaid programs and other government payors directly represented approximately 15.7% of Q1 2018 revenue.
• Management reported that disclosure controls and procedures were not effective at March 31, 2018 because remediation of a previously identified material weakness in internal control over financial reporting was incomplete. Remediation efforts included controls over spreadsheets, suspense-account transactions, inventory and fixed-asset counts, and fixed-asset disposals.
• The company reported a commercial payor contract-breach claim for which it could not estimate a loss; it considered the claim without merit. It also described general litigation and regulatory risks. The Walgreens dispute had been settled and paid in 2017.
• The $3.4 million favorable change in fair value of equity-linked liabilities was a noncash warrant remeasurement; the warrants had a reported fair value of $17.1 million at quarter-end. The company also recorded a $0.3 million gain on property and equipment dispositions.
• Series A and Series C preferred stock accrued dividends at 11.5%; Q1 accrued and deemed preferred dividends reduced earnings attributable to common stockholders.

Most important facts to verify

• Confirm that the intended filing is BioScrip’s Form 10-Q for the quarter ended March 31, 2018; the supplied text conflicts with the stated company and includes stray September 2017 references.
• Assess the drivers and durability of the revenue decline, including the UnitedHealthcare transition, core-mix strategy, and effects of ASC 606.
• Review debt terms, interest burden, covenant compliance, refinancing needs, and the availability and conditions of the $10.0 million delayed draw.
• Track cash consumption, working-capital trends, and management’s stated 12-month liquidity expectation.
• Monitor remediation of the material weakness and any updates to the commercial-payor claim or other legal and regulatory matters.