Attached files

file filename
EX-32.2 - EXHIBIT - BioScrip, Inc.bios-ex322x20140630.htm
EX-31.1 - EXHIBIT - BioScrip, Inc.bios-ex311x20140630.htm
EX-31.2 - EXHIBIT - BioScrip, Inc.bios-ex312x20140630.htm
EX-32.1 - EXHIBIT - BioScrip, Inc.bios-ex321x20140630.htm
EXCEL - IDEA: XBRL DOCUMENT - BioScrip, Inc.Financial_Report.xls

 
 
 
 
 
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 June 30, 2014
 
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: 0-28740

BioScrip, Inc.
(Exact name of registrant as specified in its charter)
Delaware
05-0489664
(State of incorporation)
(I.R.S. Employer Identification No.)
100 Clearbrook Road, Elmsford NY
10523
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:
914-460-1600

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 and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes þ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o      Smaller reporting company 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 August 6, 2014, there were 68,614,132 shares of the registrant’s Common Stock outstanding.




TABLE OF CONTENTS


2


PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
BIOSCRIP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
June 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,547

 
$
1,001

Receivables, less allowance for doubtful accounts of $26,340 and $17,836
as of June 30, 2014 and December 31, 2013, respectively
190,479

 
172,187

Inventory
34,478

 
34,341

Prepaid expenses and other current assets
12,289

 
14,110

Current assets of discontinued operations

 
15,316

Total current assets
238,793

 
236,955

Property and equipment, net
39,861

 
41,182

Goodwill
572,931

 
571,337

Intangible assets, net
13,501

 
16,824

Deferred financing costs
17,418

 
17,184

Other non-current assets
1,318

 
3,733

Non-current assets of discontinued operations

 
49,643

Total assets
$
883,822

 
$
936,858

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Current portion of long-term debt
$
431

 
$
60,257

Accounts payable
69,747

 
63,575

Claims payable
4,022

 
2,547

Amounts due to plan sponsors
5,642

 
4,826

Accrued interest
6,937

 
2,173

Accrued expenses and other current liabilities
38,801

 
34,352

Current liabilities of discontinued operations

 
6,576

Total current liabilities
125,580

 
174,306

Long-term debt, net of current portion
418,313

 
375,322

Deferred taxes
16,328

 
8,954

Other non-current liabilities
8,579

 
17,540

Other non-current liabilities of discontinued operations

 
6,153

Total liabilities
568,800

 
582,275

Stockholders’ equity
 

 
 

Preferred stock, $.0001 par value; 5,000,000 shares authorized; no shares issued or outstanding

 

Common stock, $.0001 par value; 125,000,000 shares authorized; 71,177,319 and 70,711,439 shares issued and 68,594,799 and 68,128,919 shares outstanding as of June 30, 2014 and
December 31, 2013, respectively
8

 
7

Treasury stock, 2,582,520 shares at cost
(10,311
)
 
(10,311
)
Additional paid-in capital
525,195

 
519,625

Accumulated deficit
(199,870
)
 
(154,738
)
Total stockholders’ equity
315,022

 
354,583

Total liabilities and stockholders’ equity
$
883,822

 
$
936,858

See accompanying Notes to Unaudited Consolidated Financial Statements.

3


BIOSCRIP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
                                                
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Product revenue
$
225,277

 
$
150,559

 
$
441,180

 
$
300,583

Service revenue
21,848

 
21,764

 
45,238

 
52,760

Total revenue
247,125

 
172,323

 
486,418

 
353,343

 
 
 
 
 
 
 
 
Cost of product revenue
161,658

 
102,725

 
313,398

 
208,258

Cost of service revenue
20,111

 
11,823

 
42,564

 
31,323

Total cost of revenue
181,769

 
114,548

 
355,962

 
239,581

 
 
 
 
 
 
 
 
Gross profit
65,356

 
57,775

 
130,456

 
113,762

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
57,244

 
50,295

 
116,424

 
97,217

Change in fair value of contingent consideration
(4,646
)
 

 
(6,855
)
 

Bad debt expense
8,360

 
3,461

 
14,961

 
6,641

Acquisition and integration expenses
5,333

 
3,512

 
11,832

 
8,135

Restructuring and other expenses
3,858

 
1,439

 
8,450

 
2,679

Amortization of intangibles
1,620

 
1,710

 
3,323

 
3,792

Loss from continuing operations
(6,413
)
 
(2,642
)
 
(17,679
)
 
(4,702
)
Interest expense, net
9,135

 
6,508

 
19,634

 
12,986

Loss from continuing operations before income taxes
(15,548
)
 
(9,150
)
 
(37,313
)
 
(17,688
)
Income tax expense (benefit)
3,063

 
146

 
6,554

 
(29
)
Loss from continuing operations, net of income taxes
(18,611
)
 
(9,296
)
 
(43,867
)
 
(17,659
)
Income (loss) from discontinued operations, net of income taxes
(1,207
)
 
416

 
(1,265
)
 
651

Net loss
$
(19,818
)
 
$
(8,880
)
 
$
(45,132
)
 
$
(17,008
)
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
Loss from continuing operations, basic and diluted
$
(0.27
)
 
$
(0.14
)
 
$
(0.64
)
 
$
(0.29
)
Income (loss) from discontinued operations, basic and diluted
(0.02
)
 

 
(0.02
)
 
0.01

Net loss, basic and diluted
$
(0.29
)
 
$
(0.14
)
 
$
(0.66
)
 
$
(0.28
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
68,468

 
65,025

 
68,354

 
61,058


See accompanying Notes to Unaudited Consolidated Financial Statements.

4


BIOSCRIP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 
Six Months Ended 
 June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net (loss)
$
(45,132
)
 
$
(17,008
)
Less: income (loss) from discontinued operations, net of income taxes
(1,265
)
 
651

(Loss) from continuing operations, net of income taxes
(43,867
)
 
(17,659
)
Adjustments to reconcile (loss) from continuing operations, net of income taxes to net cash provided by (used in) operating activities:
 
 
 
Depreciation
7,794

 
4,945

Amortization of intangibles
3,323

 
3,792

Amortization of deferred financing costs and debt discount
2,745

 
722

Change in fair value of contingent consideration
(6,855
)
 

Change in deferred income taxes
6,358

 
1,018

Compensation under stock-based compensation plans
4,884

 
5,833

Loss on disposal of fixed assets

 
(16
)
   Equity in net loss of unconsolidated affiliate

 
661

Changes in assets and liabilities, net of amounts acquired in acquisitions:
 
 
 
Receivables, net of bad debt expense
(19,019
)
 
(15,890
)
Inventory
(58
)
 
10,097

Prepaid expenses and other assets
3,745

 
1,281

Accounts payable
6,105

 
6,320

Claims payable
1,475

 
(3,564
)
Amounts due to plan sponsors
816

 
(7,836
)
Accrued interest
4,764

 
(38
)
Accrued expenses and other liabilities
1,116

 
(12,468
)
Net cash (used in) operating activities from continuing operations
(26,674
)
 
(22,802
)
Net cash provided by (used in) by operating activities from discontinued operations
(4,304
)
 
745

Net cash (used in) operating activities
(30,978
)
 
(22,057
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, net
(6,925
)
 
(10,977
)
Proceeds from sales of property and equipment

 
234

Cash consideration paid for acquisitions, net of cash acquired
(454
)
 
(72,921
)
Net cash proceeds from sale of unconsolidated affiliate

 
8,509

Cash advances to unconsolidated affiliate

 
(2,348
)
Net cash (used in) investing activities from continuing operations
(7,379
)
 
(77,503
)
Net cash provided by (used in) investing activities from discontinued operations
57,688

 
(37
)
Net cash provided by (used in) investing activities
50,309

 
(77,540
)
Cash flows from financing activities:
 
 
 
Proceeds from public stock offering

 
118,570

Proceeds from new senior notes due 2021, net of lender fees and other expenses
193,868

 

Deferred and other financing costs
(1,161
)
 

Borrowings on line of credit
85,400

 
351,859

Repayments on line of credit
(125,403
)
 
(351,859
)
Principal payments on long-term debt
(172,243
)
 

Repayments of capital leases
(151
)
 
(884
)
Net proceeds from exercise of common stock purchase warrants

 
399

Net proceeds from exercise of employee stock compensation plans
905

 
1,052

Net cash provided by (used in) financing activities
(18,785
)
 
119,137

Net change in cash and cash equivalents
546

 
19,540

Cash and cash equivalents - beginning of period
1,001

 
62,101

Cash and cash equivalents - end of period
$
1,547

 
$
81,641

DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for interest
$
12,232

 
$
12,327

Cash paid during the period for income taxes
$
349

 
$
235

See accompanying Notes to Unaudited Consolidated Financial Statements.

5


BIOSCRIP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--
BASIS OF PRESENTATION

These Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements, including the notes thereto, and other information included in the Annual Report on Form 10-K of BioScrip, Inc. and its wholly-owned subsidiaries (the “Company”) for the year ended December 31, 2013 (the “Annual Report”) filed with the U.S. Securities and Exchange Commission. These Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The information furnished in these Unaudited Consolidated Financial Statements reflects all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the three months and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 2 of the Audited Consolidated Financial Statements included in the Annual Report.

The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

On March 31, 2014 the Company completed the sale of substantially all of its Home Health Services segment to LHC Group, Inc. (see Note 5 - Discontinued Operations). As a result of the sale of the Home Health Services segment, the Company operates in two operating and reportable segments, “Infusion Services” and “PBM Services”. All prior period financial statements have been reclassified to include the Home Health Services segment as discontinued operations. In addition, other classification changes have been made which have no material effect on the Company’s previously reported consolidated financial position, results of operations or cash flows.

The Company previously had an affiliate equity investment in a variable interest entity that developed a platform to facilitate the flow, management and sharing of vital health and medical information with stakeholders across the healthcare ecosystem. The Company’s investment in this variable interest entity was recorded in the investments in and advances to unconsolidated affiliate line on the accompanying Consolidated Balance Sheets using the equity method of accounting.

On April 19, 2013, the Company, along with all other minority investors, completed the sale of its affiliate equity investment in this variable interest entity.  At closing, the Company received a cash payment of $8.5 million, with an additional $1.1 million held in escrow.  As of June 30, 2014, the unpaid escrow balance was $0.7 million. The Company also expects to receive additional services or cash from an existing guarantee during the two years following close. The terms of the services to be provided or the cash guarantee to be paid will be determined by the Company and the parties involved in the sale. As of June 30, 2014, a receivable of $2.1 million is included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets.

In July 2013, the FASB issued ASU 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides that a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. The Company adopted ASU 2013-11 effective January 1, 2014 with no material impact on its Unaudited Consolidated Financial Statements.

In April 2014, the FASB issued ASU 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”) which amends the existing GAAP discontinued operations classification criteria to require a significant strategic shift in an entity’s operations. The new guidance also simplifies the classification analysis by eliminating the continuing involvement criteria. ASU 2014-08 also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. ASU 2014-08 becomes

6


effective for the Company on January 1, 2015. The Company is currently evaluating the impact of adopting ASU 2014-08 on its Unaudited Consolidated Financial Statements and anticipates that the adoption will have no material impact on the Unaudited Consolidated Financial Statements.

In May 2014, the FASB issued guidance codified in Accounting Standards Codification (“ASC”) 606, Revenue Recognition - Revenue from Contracts with Customers, which supersedes the guidance in former ASC 605, Revenue Recognition. ASC 606 becomes effective for the Company on January 1, 2017. The Company is currently evaluating the impact of the provisions of ASC 606.

The Company has evaluated events that occurred during the period subsequent to the balance sheet date through the filing date of this Form 10-Q. There have been no subsequent events that require recognition or disclosure in the Unaudited Consolidated Financial Statements.

7


NOTE 2--
EARNINGS PER SHARE

Income (Loss) Per Share

The following table sets forth the computation of basic and diluted income (loss) per common share (in thousands, except for per share amounts):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Loss from continuing operations, net of income taxes
$
(18,611
)
 
$
(9,296
)
 
$
(43,867
)
 
$
(17,659
)
Income (loss) from discontinued operations, net of income taxes
(1,207
)
 
416

 
(1,265
)
 
651

Net loss
$
(19,818
)
 
$
(8,880
)
 
$
(45,132
)
 
$
(17,008
)
 
 
 
 
 
 
 
 
Denominator - Basic and Diluted:
 

 
 

 
 

 
 

Weighted average number of common shares outstanding
68,468

 
65,025

 
68,354

 
61,058

 
 
 
 
 
 
 
 
Loss from continuing operations, basic and diluted
$
(0.27
)
 
$
(0.14
)
 
$
(0.64
)
 
$
(0.29
)
Income (loss) from discontinued operations, basic and diluted
(0.02
)
 

 
(0.02
)
 
0.01

Loss per common share, basic and diluted
$
(0.29
)
 
$
(0.14
)
 
$
(0.66
)
 
$
(0.28
)

ASC Topic 260, Earnings Per Share, requires that income from continuing operations be 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 and six months ended June 30, 2014 and 2013 excludes the effect of the Company’s 3.1 million common stock purchase warrants with an exercise price of $10 issued in connection with the acquisition of Critical Homecare Solutions Holdings, Inc. (“CHS”) in 2010 as their inclusion would be anti-dilutive to earnings per common share from continuing operations. In addition to the warrants, the computation of diluted shares for the three months ended June 30, 2014 and 2013 excludes the effect of 4.1 million and 6.5 million shares, respectively, of other common stock equivalents as their inclusion would be anti-dilutive to earnings per common share from continuing operations. For the six months ended June 30, 2014 and 2013, the computation of diluted shares excludes the effect of 3.9 million and 6.5 million shares, respectively, of other common stock equivalents as their inclusion would be anti-dilutive to earnings per common share from continuing operations.

NOTE 3-- STOCKHOLDERS’ EQUITY

The Company filed a shelf registration statement on Form S-3 on March 18, 2013 and related amendment on April 2, 2013, which was declared effective on April 4, 2013. On April 24, 2013, the Company completed an underwritten primary public offering of 10,406,250 shares of its common stock at an offering price to the public of $12.00 per share. In addition, 3,968,750 shares of common stock were offered and sold by certain existing stockholders in an underwritten secondary offering completed on the same date and at the same offering price to the public.

Net proceeds to the Company were approximately $118.6 million after underwriting discounts, commissions and other offering expenses. The Company did not receive any proceeds from the sale of shares of common stock by the selling stockholders. The Company used $21.0 million and approximately $61.1 million of the net proceeds to (i) repay outstanding borrowings under the Company's prior credit facility with Healthcare Finance Group (the “Prior Credit Facility”) and (ii) fund a portion of the CarePoint acquisition (see Note 4 - Acquisitions), respectively. The Company used the remaining net proceeds from the offering for general corporate purposes, which included, among other things, capital expenditures, repurchases of outstanding debt or equity securities, debt servicing requirements or redemption of our short-term or long-term borrowings, or for other working capital requirements.

This offering is the subject of a putative securities class action lawsuit (see Note 10 - Commitments and Contingencies).


8


NOTE 4--ACQUISITIONS

CarePoint Partners Holdings LLC

On August 23, 2013, the Company closed on the acquisition of substantially all of the assets and assumption of certain liabilities that constituted the home infusion business (the “CarePoint Business”) of CarePoint Partners Holdings LLC, a Delaware limited liability company, and its subsidiaries (collectively “CarePoint”). CarePoint was a provider of home and alternate-site infusion therapy for patients with complex, acute and chronic illnesses. CarePoint serviced approximately 20,500 patients annually through 28 sites of service in nine states in the East Coast and Gulf Coast regions.

The cash purchase price paid at closing was $211.1 million. In addition, the purchase agreement provides that the purchase price could be increased by contingent consideration of $10.0 million if the CarePoint Business achieves a specified level of product gross profit during the one-year period following the closing date. If the specified level of product gross profit is not achieved, no contingent consideration will be due to the sellers. The Company will report actual product gross profit for the measurement period of September 1, 2013 to August 31, 2014 to the sellers by October 15, 2014. Should the sellers disagree with the Company’s report, the purchase agreement provides for the dispute to be settled through arbitration.

The purchase agreement contemplated a targeted level of net working capital. Subsequent to the closing, the Company and the sellers agreed that additional net working capital adjustments of approximately $1.8 million were due to the Company primarily related to the value of accounts receivable and prepaid expenses as of the date of acquisition. The Company received payment for these amounts in June 2014.

At the date of acquisition, the fair value of the $10.0 million contingent consideration was estimated at $9.8 million. The fair value of the contingent consideration was determined using Level 3 inputs based on the present value of various payout scenarios, weighted on the basis of probability. The most important factor in determining the probability of payout was the remaining 2013 forecast and the 2014 budget for the CarePoint Business standalone and merged market sites. Certain disynergies were expected due to adoption of national contract pricing and conformance to the Company’s revenue accounting policies. These disynergies were expected to be offset by volume based purchasing synergies and access to higher patient volumes through our national managed care contract platform. During the first three months of 2014, the acquired sites delivered less than targeted product gross profit and the forecast indicated that the probability of payout was still highly likely but had declined. As such, the fair value of contingent consideration was reduced to $8.9 million as of March 31, 2014.

During the three months ended June 30, 2014, the CarePoint Business sites once again delivered less than targeted product gross profit. At June 30, 2014, the fair value of the contingent consideration was remeasured using the actual operating results during 2013 and 2014 and forecasted operating results for the remainder of the measurement period in 2014. As a result of this remeasurement, the fair value of the contingent consideration was reduced to $5.0 million. The liability for the contingent consideration is included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.

The Company believes the likelihood of contingent consideration payout is as likely as non-payment as of June 30, 2014. The required product gross profit target will be difficult for these branches to attain in the remaining measurement period due to revenue cycle disynergies and volume reduction in certain markets. The Company expects to achieve volume recovery in these markets over time. Should the sellers of the CarePoint Business earn the contingent consideration during the twelve month measurement period ending August 31, 2014, an additional expense of $5.0 million will be recorded over and above the accrual of $5.0 million estimated at June 30, 2014. The $4.0 million and $4.8 million of income resulting from the reduction of the fair value of the contingent consideration for the three months and six months ended June 30, 2014, respectively, is included in the change in fair value of contingent consideration in the accompanying Unaudited Consolidated Statements of Operations

The Company funded the cash payment at closing with a combination of cash on hand and $150.0 million in borrowings under the Senior Credit Facilities (see Note 9 - Debt).

The table below summarizes the Company’s current assessment of the estimated fair values of the assets acquired and liabilities assumed as of the date of closing of the acquisition of the CarePoint Business. The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the date of the closing may result in retrospective adjustments to the provisional amounts recognized. These changes could be significant. The Company will finalize these amounts in the third quarter of 2014.


9


 
Estimated Fair Value
(in thousands)
Cash
$
14

Accounts receivable
15,918

Inventories
3,342

Other current assets
272

Property and equipment
3,266

Identifiable intangible assets(1)
16,700

Current liabilities
(8,521
)
Non-current liabilities
(721
)
Total identifiable net assets
30,270

Goodwill
188,822

Total cash and fair value of contingent consideration
$
219,092


(1)
The following table summarizes the amounts and useful lives assigned to identifiable intangible assets:
 
Weighted-
 Average
 Useful Lives
 
 
Amounts
Recognized as of the Closing Date
(in thousands)
Customer relationships
2 - 4 years
 
$
13,600

Trademarks
2 years
 
2,600

Non-compete agreements
5 years
 
500

Total identifiable intangible assets acquired
 
 
$
16,700


The excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of goodwill represents the value the Company expects to be created by combining the various operations of the CarePoint Business with the Company’s operations, including the expansion into new infusion markets, the opportunity to consolidate and upgrade certain existing facilities, access to new patients and potential cost savings and synergies. The CarePoint transaction was structured such that the amount allocated to goodwill will be deductible for income tax purposes.

The accompanying Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2014 include revenues of $39.9 million and $79.9 million and income (loss) from continuing operations of $(0.2) million and $1.1 million for the CarePoint Business, respectively.

HomeChoice Partners, Inc.

On February 1, 2013, the Company acquired 100% of the ownership interest in HomeChoice Partners, Inc., a Delaware corporation (“HomeChoice”). Prior to the Company’s acquisition, HomeChoice was a provider of alternate-site infusion pharmacy services that serviced approximately 15,000 patients annually and had 14 infusion pharmacy locations in Pennsylvania; Washington, DC; Maryland; Virginia; North Carolina; South Carolina; Georgia; Missouri; and Alabama.

The cash purchase price of the HomeChoice acquisition was $72.9 million paid at the closing date. In addition, the purchase agreement provides that the purchase price could be increased by contingent consideration of up to $10.0 million if HomeChoice were to attain certain performance milestones in the first year following the closing and an additional $10.0 million if HomeChoice were to attain certain performance milestones in the second year following the closing, for total possible contingent consideration of up to $20.0 million.

At the date of acquisition, the fair value of the potential contingent consideration, using Level 3 inputs, was estimated at $8.0 million. The $20.0 million maximum contingent consideration was established using aggressive growth targets meant to achieve operating results in excess of transaction valuation model assumptions. Given the aggressiveness of the earnout target threshold, the Company assigned less than 50% probability of payout among the various payout scenarios considered.


10


While the acquisition has generated revenues as expected in the transaction valuation model, revenues through June 30, 2014 have not exceeded the aggressive earnout performance pace required. Specifically, revenue generating opportunities through various potential business relationships have not come to fruition and thus the probability of attaining the high level of growth required to achieve the earnout has been diminishing over the past year resulting in a lower probability of a future payout of contingent consideration. At June 30, 2014, the fair value of the contingent consideration was again remeasured at fair value using actual operating results through June 30, 2014 and forecasted operating results for the remainder of 2014. As a result of this remeasurement, the fair value of the contingent consideration was reduced to $0.1 million, and is included in other non-current liabilities in the accompanying Consolidated Balance Sheets. The $0.7 million and $2.0 million of income resulting from the reduction in the fair value of the contingent liability is included in change in fair value of contingent consideration in the accompanying Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2014.

The accompanying Unaudited Consolidated Statements of Operations include revenues of $21.4 million and $17.6 million and income from continuing operations of $2.3 million, and $0.3 million related to HomeChoice for the three months ended June 30, 2014 and 2013, respectively. The accompanying Unaudited Consolidated Statements of Operations include revenues of $42.5 million and $28.7 million and income (loss) from continuing operations of $6.0 million and $(0.3) million for the six months ended June 30, 2014 and for the period from the date of acquisition to June 30, 2013, respectively.

InfuScience, Inc.

On July 31, 2012, the Company acquired 100% of InfuScience, Inc. (“InfuScience”) for a cash payment of $38.3 million. The terms of the agreement provided that the purchase price could increase up to an additional $3.0 million based on the results of operations during the 24 month period through July 31, 2014. InfuScience historically acquired, developed and operated businesses providing alternate site infusion pharmacy services through five infusion centers located in Eagan, Minnesota; Omaha, Nebraska; Chantilly, Virginia; Charleston, South Carolina; and Savannah, Georgia.

As of December 31, 2013, the total fair value of the potential contingent consideration, determined using Level 3 inputs based on the present value of various payout scenarios and weighted on the basis of probability, was estimated at $3.0 million. As of June 30, 2014, the Company has made contingent payments of $3.0 million based on the achievement of expected operating results and as a result, the contingent consideration has been fully paid.

Acquisition and Integration Costs

Acquisition and integration expenses in the accompanying Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2014 and 2013 include the following costs related to the CarePoint Business, HomeChoice Partners, and InfuScience acquisitions (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Legal, financial advisory and professional fees
$
1,571

 
$
1,946

 
$
2,546

 
$
2,956

Employee costs including redundant salaries and benefits and severance
430

 
342

 
1,580

 
1,477

Facilities consolidation and discontinuation
353

 
864

 
658

 
1,023

Change in revenue reserves related to acquired accounts receivable
2,118

 

 
5,420

 

Legal settlement
8

 

 
333

 
2,300

Other
853

 
360

 
1,295

 
379

Total
$
5,333

 
$
3,512

 
$
11,832

 
$
8,135


The change in revenue reserves includes adjustments to the allowance for doubtful accounts and allowance for contractual discounts related to accounts receivable acquired in connection with the CarePoint Business and HomeChoice acquisitions that are no longer deemed collectible. These acquired accounts receivable and contractual discounts were reserved at historical collection rates as of December 31, 2013. Based on lower than expected collections in 2014, the Company no longer expects to achieve historical collection rates on the acquired accounts receivable.


11


Pro Forma Impact of Acquisitions

The following shows summarized unaudited pro forma consolidated results of operations for the three months and six months ended June 30, 2014 and 2013 as if the CarePoint and HomeChoice acquisitions had occurred as of January 1, 2013 (in thousands except per share data):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
247,125

 
$
211,576

 
$
486,418

 
$
437,027

Loss from continuing operations, net of income taxes
$
(18,611
)
 
$
(8,342
)
 
$
(43,867
)
 
$
(16,788
)
Basic loss per share from continuing operations
$
(0.27
)
 
$
(0.13
)
 
$
(0.64
)
 
$
(0.28
)
Diluted loss per share from continuing operations
$
(0.27
)
 
$
(0.13
)
 
$
(0.64
)
 
$
(0.28
)

The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company, CarePoint and HomeChoice. Except to the extent realized in the three months and six months ended June 30, 2013, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the expenses to be incurred to achieve these savings, operating synergies and other benefits. In addition, except to the extent recognized in the three months and six months ended June 30, 2013, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with CarePoint or HomeChoice.

The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the CarePoint and HomeChoice acquisitions been completed on January 1, 2013. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information primarily reflects the following adjustments to the historical results of the acquired entities prior to acquisition (in thousands):    
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Interest expense
$

 
$
827

 
$

 
$
1,331

Amortization expense
$

 
$
238

 
$

 
$
(362
)
Income tax benefit (expense)
$

 
$
(878
)
 
$

 
$
(2,163
)

Expenses incurred to integrate acquisitions are recorded in acquisition and integration expenses of the Unaudited Consolidated Statements of Operations.  These costs include legal and financial advisory fees associated with acquisitions and integration costs to convert to common policies, procedures, and information systems.

NOTE 5--DISCONTINUED OPERATIONS

Sale of Home Health Business

On March 31, 2014, the Company completed the sale of substantially all of the Company’s Home Health Services segment (the “Home Health Business”) pursuant to the Stock Purchase Agreement dated as of February 1, 2014 (the “Stock Purchase Agreement”), as amended, by and among LHC Group, Inc., a Delaware corporation, and certain of its subsidiaries (collectively, the “Buyer”) and the Company and Elk Valley Professional Affiliates, Inc. (“EVPA”), South Mississippi Home Health, Inc. (“SMHH”), and Deaconess Homecare, LLC (collectively the “Seller”). The Buyer agreed to acquire the Home Health Business, consisting of (1) all of the issued and outstanding shares of capital stock of EVPA owned by the Seller, (2) all of the issued and outstanding shares of capital stock of SMHH owned by the Seller, and (3) all of the issued and outstanding membership interests in two limited liability companies (collectively, the “Holding Newcos” and, together with EVPA and SMHH, the “Subject Companies”) that were wholly-owned subsidiaries of the Seller, formed for the purpose of the sale to hold indirectly the Seller’s other assets and operating liabilities related to the operation of the Home Health Business. On the closing date, the Company also entered into an Amendment No. 1 (the “Amendment”) to the Stock Purchase Agreement in connection with the closing. The Amendment modified the Stock Purchase Agreement to (i) exclude from the home health business conducted by the Company at one of its locations, and (ii) reduce by $0.5 million the total consideration to be received by the Company, to approximately $59.5 million.

12



Pursuant to the terms of the Stock Purchase Agreement, as amended, the Company received total consideration of approximately $59.5 million paid in cash (the “Purchase Price”) at closing. The Company used a portion of the net proceeds from the sale to pay down a portion of the Company’s outstanding debt. During the three months ended June 30, 2014, the Purchase Price was adjusted for net working capital of the Subject Companies as of the closing date that resulted in an additional payment to the Company of approximately $1.1 million. As a result of this adjustment, the final Purchase Price received by the Company was approximately $60.6 million.

The sale of the Home Health Business is consistent with the Company’s continuing strategic evaluation of its non-core businesses and its decision to continue to focus growth initiatives and capital in the Infusion Services segment. As a result, the Company has decided to cease operations at the one Home Health location excluded from the Stock Purchase Agreement, as amended, and has reclassified its operations to discontinued operations for all prior periods in the accompanying Unaudited Consolidated Financial Statements. In addition, the Unaudited Consolidated Statements of Operations previously reported by the Company as of March 31, 2014 have been reclassified to include this Home Health location in income from discontinued operations, net of income taxes. The effect of this reclassification reduced total revenue by $0.3 million to $239.3 million and reduced loss from continuing operations, net of income taxes by $0.2 million to $25.3 million for the three months ended March 31, 2014. The reclassification had no effect on previously reported net loss or net loss per common share for the three months ended March 31, 2014.

As of the March 31, 2014 closing date of the sale of the Home Health Business, the carrying value of the net assets of the Subject Companies was as follows (in thousands):
 
 
Carrying Value
Net accounts receivable
 
$
12,597

Prepaid expenses and other current assets
 
242

Total current assets
 
12,839

Property and equipment, net
 
402

Goodwill
 
33,784

Intangible assets
 
15,400

Other non-current assets
 
28

Total assets
 
62,453

Accounts payable
 
673

Amounts due to plan sponsors
 
229

Accrued expenses and other current liabilities
 
3,008

Total liabilities
 
3,910

Net assets
 
$
58,543


The estimated pre-tax gain on sale of the Home Health Business is approximately $2.1 million based on the March 31, 2014 net asset balances above and before financial advisory fees, legal expenses and other one-time transactions costs and including the net working capital adjustment. The net assets of the Subject Companies have been reclassified to discontinued operations for all prior periods in the accompanying Unaudited Consolidated Financial Statements.


13


The operating results included in discontinued operations of the Home Health Business for the three months and six months ended June 30, 2014 and 2013 are summarized as follows (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
502

 
$
18,410

 
$
18,392

 
$
36,461

Gross profit
$
173

 
$
7,237

 
$
6,954

 
$
14,487

Selling, general and administrative expenses
583

 
5,683

 
7,375

 
11,590

Bad debt expense
237

 
223

 
900

 
440

Income (loss) from operations
(647
)
 
1,331

 
(1,321
)
 
2,457

Gain on sale before income taxes
1,072

 

 
2,067

 

Financial advisor fee and legal expenses

 

 
(2,875
)
 

Impairment of assets

 

 
(452
)
 

Other costs and expenses

 

 
(47
)
 

Income (loss) before income taxes
425

 
1,331

 
(2,628
)
 
2,457

Income tax expense (benefit)
(355
)
 
352

 
(4,186
)
 
585

Income (loss) from discontinued operations, net of income taxes
$
780

 
$
979

 
$
1,558

 
$
1,872


Pharmacy Services Asset Sale

On February 1, 2012, the Company entered into a Community Pharmacy and Mail Business Purchase Agreement (the “2012 Asset Purchase Agreement”) by and among Walgreen Co. and certain subsidiaries (collectively, the “Buyers”) and the Company and certain subsidiaries (collectively, the “Sellers”) with respect to the sale of certain assets, rights and properties (the “Pharmacy Services Asset Sale”) relating to the Sellers’ traditional and specialty pharmacy mail operations and community retail pharmacy stores.

Pursuant to the terms of the 2012 Asset Purchase Agreement, the Company received a total purchase price of approximately $173.8 million. As a result of the Pharmacy Services Asset Sale, the Company has recognized a total pretax gain of $108.1 million, net of transaction costs and other one-time charges as a result of the transaction. The Company used a portion of the net proceeds from the sale to pay down the Company’s outstanding debt and a portion was used to invest in the Infusion Services segment.

The purchase price excluded all accounts receivable and working capital liabilities related to the operations subject to the Pharmacy Services Asset Sale, which were retained by the Company. No amounts related to the net accounts receivable retained by the Company remained at December 31, 2013.

The transaction included the sale of 27 community pharmacy locations, and certain assets of three community pharmacy locations, and three traditional and specialty mail service operations, which constituted all of the Company’s operations in the community pharmacy and mail order lines of business. As a result of the divestiture process, the Company assessed its continuing operations in order to align its corporate structure with its remaining operations. As part of these efforts, the Company has incurred and expects to continue to incur additional expenses that may impact the Company’s future consolidated financial statements. These additional costs, including employee severance and other benefit-related costs, facility-related costs, and other one-time charges are included in income (loss) from discontinued operations, net of income taxes in the Unaudited Consolidated Statements of Operations.


14


The operating results of the divested traditional and specialty pharmacy mail operations and community pharmacies included in discontinued operations for the three months and six months ended June 30, 2014 and 2013, are summarized below (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$

 
$
(35
)
 
$

 
$
(55
)
Gross profit
$

 
$
(9
)
 
$
(27
)
 
$
(77
)
Operating expenses
1,987

 
554

 
2,796

 
1,144

Income (loss) from discontinued operations, net of income taxes
$
(1,987
)
 
$
(563
)
 
$
(2,823
)
 
$
(1,221
)

Operating expenses during the three months and six months ended June 30, 2014 primarily consist of legal fees related to the legal proceedings discussed in Note 10 - Commitments and Contingencies.

Effective January 8, 2014, the Company entered into a Stipulation and Order of Settlement and Dismissal (the “Federal Settlement Agreement”) with the U.S. Department of Justice (the “DOJ”) and a qui tam relator (the “Relator”). The Federal Settlement Agreement represented the federal and private component of an agreement in principle to settle all civil claims under the False Claims Act and related statutes and all common law claims that could have been brought by the DOJ and Relator that arose out of the distribution of the Novartis Pharmaceutical Corporation’s product Exjade® (the “Medication”) by the Company’s traditional and specialty pharmacy mail operations and community retail pharmacy stores prior to its divestiture in May 2012. Further, effective February 11, 2014, the Company entered into State Settlement Agreements with the offices of the Attorneys General of thirty-five states (the “Settling States”). The State Settlement Agreements represented the state component of the Company’s agreement in principle to settle the claims that could have been brought by the Settling States that arose out of the distribution of the Medication. During the year ended December 31, 2013, the Company accrued $15.0 million related to the Settlement Agreements and included the amount and related legal fees and expenses in income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations (see Note 10 - Commitments and Contingencies).

As of June 30, 2014 and December 31, 2013, there were accruals of $12.9 million and $16.3 million, respectively, related to these costs in accrued expenses and other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The accrual activity consisted of the following (in thousands):
 
 
Legal Settlement
 
Employee Severance
and Other Benefits
 
Other Costs
 
Total
Balance at December 31, 2013
 
$
15,000

 
$
92

 
$
1,195

 
$
16,287

Expenses
 
14

 

 
2,904

 
2,918

Cash payments
 
(3,014
)
 
(92
)
 
(3,058
)
 
(6,164
)
Non-cash charges and adjustments
 

 

 
(95
)
 
(95
)
Balance at June 30, 2014
 
$
12,000

 
$

 
$
946

 
$
12,946



NOTE 6--GOODWILL AND INTANGIBLE ASSETS

Goodwill consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):

 
Infusion Services
 
PBM Services
 
Total
Balance at December 31, 2013
$
558,593

 
$
12,744

 
$
571,337

Other adjustments
1,594

 

 
1,594

Balance at June 30, 2014
$
560,187

 
$
12,744

 
$
572,931


At December 31, 2013, goodwill of $33.8 million related to the Home Health Business sold on March 31, 2014 is included in non-current assets of discontinued operations in the accompanying Consolidated Balance Sheets (see Note 5 - Discontinued

15


Operations). The increase in the Infusion Services segment goodwill primarily results from purchase price adjustments related to the CarePoint Business acquisition net working capital adjustments related to the value of accounts receivable and prepaid expenses (see Note 4 - Acquisitions).

In accordance with ASC 350, Intangibles--Goodwill and Other, the Company evaluates goodwill for impairment on an annual basis and whenever events or circumstances exist that indicate that the carrying value of goodwill may no longer be recoverable.  The impairment evaluation is based on a two-step process.  The first step compares the fair value of a reporting unit with its carrying amount, including goodwill.  If the first step indicates that the fair value of the reporting unit is less than its carrying amount, the second step must be performed which determines the implied fair value of reporting unit goodwill. The measurement of possible impairment is based upon the comparison of the implied fair value of reporting unit to its carrying value.

The Company will evaluate goodwill for possible impairment during the quarter ending December 31, 2014 unless an interim goodwill impairment test is required.

Intangible assets consisted of the following as of June 30, 2014 and December 31, 2013 (in thousands):
 
June 30, 2014
 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Infusion customer relationships
$
25,650

 
$
(14,341
)
 
$
11,309

 
$
25,650

 
$
(12,062
)
 
$
13,588

Infusion trademarks
6,200

 
(4,425
)
 
1,775

 
6,200

 
(3,514
)
 
2,686

Non-compete agreements
1,500

 
(1,083
)
 
417

 
1,500

 
(950
)
 
550

 
$
33,350

 
$
(19,849
)
 
$
13,501

 
$
33,350

 
$
(16,526
)
 
$
16,824


Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
 
Estimated Useful Life
Infusion customer relationships
5 months - 4 years
Infusion trademarks
23 months - 3 years
Non-compete agreements
1 to 5 years

At December 31, 2013, intangible assets of $15.4 million related to the Home Health Business sold on March 31, 2014 are included in non-current assets of discontinued operations in the accompanying Consolidated Balance Sheets at December 31, 2013 (see Note 5 - Discontinued Operations).

The estimated fair value of intangible assets was calculated using level 3 inputs based on the present value of anticipated future benefits. Total amortization of intangible assets was $1.6 million and $1.7 million for the three months ended June 30, 2014 and 2013, respectively, and $3.3 million and $3.8 million for the six months ended June 30, 2014 and 2013, respectively. Future amortization expense is anticipated to be as follows (in thousands):

2014 (six months)
$
3,240

2015
5,318

2016
3,078

2017
1,799

2018 and beyond
66

Total
$
13,501



16


NOTE 7--RESTRUCTURING AND OTHER EXPENSES

Restructuring and other expenses include expenses resulting from the execution of our strategic assessment and related restructuring plans, consisting primarily of employee severance and other benefit-related costs, third-party consulting costs, facility-related costs, and certain other costs. It also includes other transitional costs such as training, redundant salaries, and retention bonuses for certain critical personnel.

In the fourth quarter of 2010, the Company commenced a strategic assessment of its business and operations (“Restructuring Phase I”). This assessment focused on expanding revenue opportunities and lowering corporate overhead, including workforce and benefit reductions and facility rationalization. In addition to addressing corporate overhead, the strategic assessment examined the Company’s market strengths and opportunities and compared the Company’s position to that of its competitors. As a result of the assessment, the Company focused its growth on investments in the Infusion and Home Health Services segments and elected to pursue offers for its traditional and specialty pharmacy mail operations and community pharmacy stores. Accordingly, the Company consummated the Pharmacy Services Asset Sale relating to its traditional and specialty pharmacy mail operations and community retail pharmacy stores. During the three months ended June 30, 2012, as a result of the divestiture process, the Company’s management team commenced an assessment of the Company’s continuing operations in order to align its corporate structure with its remaining operations (“Restructuring Phase II”). Restructuring Phase II is continuing as the Company divests other businesses and adjusts the Company’s overhead expenses to support the Infusion Services segment.

The Company anticipates that additional restructuring will occur and thus significant additional charges such as the write down of certain long−lived assets, employee severance, other restructuring type charges, temporary redundant expenses, potential cash bonus payments and potential accelerated payments or termination costs for certain of its contractual obligations, could impact the Company’s future consolidated financial statements.

Restructuring Phase I

As a result of Restructuring Phase I, the Company incurred restructuring expenses of approximately $0.1 million related to facility-related costs during the six months ended June 30, 2014. The Company did not incur any significant restructuring expenses related to Phase I during the six months ended June 30, 2013, although some amounts previously accrued were adjusted.

Since inception of Restructuring Phase I, the Company has incurred approximately $10.2 million in total Phase I expenses, consisting of $4.3 million of third-party consulting costs, $4.1 million of employee severance and other benefit-related costs related to workforce reductions, and $1.8 million of facility-related costs.

The restructuring costs are included in restructuring and other expenses in the Unaudited Consolidated Statements of Operations and as part of the calculation of Segment Adjusted EBITDA, as defined in Note 11. As of June 30, 2014, there are restructuring accruals of $0.5 million related to Phase I included in accrued expenses and other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The restructuring accrual activity consisted of the following (in thousands):
 
 
Facility-Related Costs
 
Total
Balance at December 31, 2013
 
$
521

 
$
521

Expenses
 
124

 
124

Cash payments
 
(161
)
 
(161
)
Balance at June 30, 2014
 
$
484

 
$
484


Restructuring Phase II

As a result of Restructuring Phase II, the Company incurred restructuring expenses of approximately $3.0 million and $6.8 million during three months and six months ended June 30, 2014, respectively, consisting of employee severance and other benefit-related costs as the result of workforce reductions and third-party consulting costs. Restructuring expenses for the three months and six months ended June 30, 2013 were $0.2 million and $0.7 million, respectively.

Since inception of Phase II of restructuring, the Company has incurred approximately $12.2 million in total expenses, consisting of $3.9 million of employee severance and other benefit-related costs related to workforce reductions, $7.1 million in third party consulting costs and $1.2 million of other costs.

17



The restructuring costs are included in restructuring and other expenses on the Unaudited Consolidated Statements of Operations and as part of the calculation of Segment Adjusted EBITDA, as defined in Note 11. As of June 30, 2014, there are restructuring accruals of approximately $3.1 million related to Phase II included in accrued expenses and other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The restructuring accrual activity consisted of the following (in thousands):
 
Employee Severance
and Other Benefits
 
Consulting
Costs
 
Other Costs
 
Total
Balance at December 31, 2013
$
896

 
$
1,551

 
$
34

 
$
2,481

Expenses
1,269

 
5,321

 
237

 
6,827

Cash payments
(1,369
)
 
(4,613
)
 
(237
)
 
(6,219
)
Balance at June 30, 2014
$
796

 
$
2,259

 
$
34

 
$
3,089


Other Expenses

Other expenses include training and transitional costs, redundant salaries, certain fees associated with the Pharmacy Services Asset Sale and the sale of its Home Health Business and the Company’s equity in the net loss of its unconsolidated affiliate. Other expenses totaled $0.9 million and $1.2 million for the three months ended June 30, 2014 and 2013, respectively, and $1.6 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively.

18


NOTE 8--PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
Computer and office equipment
$
23,024

 
$
19,961

Software capitalized for internal use
16,088

 
13,746

Vehicles, including equipment acquired under capital leases
2,170

 
2,056

Medical equipment, including equipment acquired under capital leases
26,472

 
22,247

Work in progress
3,173

 
8,815

Furniture and fixtures
4,455

 
4,291

Leasehold improvements
13,164

 
12,082

 
88,546

 
83,198

Less: Accumulated depreciation
(48,685
)
 
(42,016
)
Property and equipment, net
$
39,861

 
$
41,182


The Company had an insignificant amount of vehicles and medical equipment under capital lease as of June 30, 2014 and December 31, 2013.

Depreciation Expense

Depreciation expense, including expense related to assets under capital lease, was $4.0 million and $2.5 million for the three months ended June 30, 2014 and 2013, respectively, and $7.8 million and $4.9 million for the six months ended June 30, 2014 and 2013, respectively. Depreciation expense includes costs related to software capitalized for internal use of $0.7 million and $0.4 million for the three months ended June 30, 2014 and 2013, respectively, and $1.1 million and $0.7 million for the six months ended June 30, 2014 and 2013, respectively.

NOTE 9--DEBT

As of June 30, 2014 and December 31, 2013, the Company’s debt consisted of the following obligations (in thousands):
 
June 30,
2014
 
December 31,
2013
Revolving Credit Facility
$

 
$
40,003

Term Loan Facilities
222,757

 
395,000

2021 Notes, net of discount
195,195

 

Capital leases
792

 
576

Total Debt
418,744

 
435,579

Less: Current portion
431

 
60,257

Long-term debt, net of current portion
$
418,313

 
$
375,322


Senior Credit Facilities

On July 31, 2013, the Company entered into (i) a senior secured first-lien revolving credit facility in an aggregate principal amount of $75.0 million (the “Revolving Credit Facility”), (ii) a senior secured first-lien term loan B in an aggregate principal amount of $250.0 million (the “Term Loan B Facility”) and (iii) a senior secured first-lien delayed draw term loan B in an aggregate principal amount of $150.0 million (the “Delayed Draw Term Loan Facility” and, together with the Revolving Credit Facility and the Term Loan B Facility, the “Senior Credit Facilities”) with SunTrust Bank, Jefferies Finance LLC and Morgan Stanley Senior Funding, Inc.
On December 23, 2013, the Company entered into the First Amendment to the Senior Credit Facilities pursuant to which the Company obtained the required consent of the lenders to enter into the Settlement Agreements (see Note 10 - Commitments and Contingencies) and to begin making payments, in accordance with the payment terms, on the settlement amount of $15.0 million.

19



On January 31, 2014, the Company entered into the Second Amendment to the Senior Credit Facilities, which, among other things (i) provides additional flexibility with respect to compliance with the maximum net leverage ratio for the fiscal quarters ending December 31, 2013 through and including December 31, 2014, (ii) provides additional flexibility under the indebtedness covenants to permit the Company to obtain up to $150.0 million of second-lien debt and issue up to $250.0 million of unsecured bonds, provided that 100% of the net proceeds are applied first to the Revolving Credit Facility, with no corresponding permanent commitment reduction, and then on a pro rata basis to the Term Loan B Facility and the Delayed Draw Term Loan Facility (collectively, the “Term Loan Facilities”), (iii) provides the requisite flexibility to sell non-core assets, subject to the satisfaction of certain conditions, and (iv) increased the applicable interest rates for each of the Term Loan Facilities to the Eurodollar rate plus 6.00% or the base rate plus 5.00%, until the occurrence of certain pricing decrease triggering events, as defined in the amendment. Upon the occurrence of a pricing decrease triggering event, the interest rates for the Senior Credit Facilities may revert to the Eurodollar rate plus 5.25% or the base rate plus 4.25%.

As discussed below, the net proceeds of approximately $194.5 million from the issuance on February 11, 2014 of 8.875% senior notes due 2021 (the “2021 Notes”) were used to repay $59.3 million of the Revolving Credit Facility and $135.2 million of the Term Loan Facilities. In addition, approximately $54.2 million of the net proceeds from the sale of the Home Health Business (see Note 5 - Discontinued Operations) were used to repay $17.2 million of the Revolving Credit Facility and $37.0 million of the Term Loan Facilities. Once repaid, amounts under Term Loan Facilities may not be reborrowed. The Senior Credit Facilities are secured by substantially all of the Company’s and its subsidiaries’ assets.

The partial repayments of the Senior Credit Facilities as a result of the issuance of the 2021 Notes and from the sale of the Home Health Business were pricing decrease triggering events that resulted in the interest rates reverting to the Eurodollar rate plus 5.25% or the base rate plus 4.25%. As of June 30, 2014, the interest rate related to the Revolving Credit Facility is approximately 7.50% and 6.50% for the Term Loan Facilities. The interest rates may vary in the future depending on the Company’s consolidated net leverage ratio.

The Revolving Credit Facility matures on July 31, 2018 at which time all principal amounts outstanding are due and payable. The Term Loan Facilities each mature on July 31, 2020 at which time the remaining principal amount of approximately $222.8 million is due and payable.

Issuance of 2021 Notes

On February 11, 2014, the Company issued $200.0 million aggregate principal amount of the 2021 Notes. The 2021 Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed by all existing and future subsidiaries of the Company. The 2021 Notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons in reliance on Regulation S under the Securities Act pursuant to an Indenture (the “2021 Notes Indenture”), dated February 11, 2014, by and among the Company, the guarantors named therein and U.S. Bank National Association, as trustee.

Interest on the 2021 Notes accrues at a fixed rate of 8.875% per annum and is payable in cash semi-annually, in arrears, on February 15 and August 15 of each year, commencing on August 15, 2014. The debt discount of $5.0 million at issuance is being amortized as interest expense through maturity which will result in the accretion over time of the outstanding debt balance to the principal amount. As of June 30, 2014, there are no quoted prices or active markets for the 2021 Notes. The 2021 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness.

The 2021 Notes are guaranteed on a full, joint and several basis by each of the Company’s existing and future domestic restricted subsidiaries that is a borrower under any of the Company’s credit facilities or that guarantees any of the Company’s debt or that of any of its restricted subsidiaries, in each case incurred under the Company’s credit facilities.

The Company may redeem some or all of the 2021 Notes prior to February 15, 2017 by paying a “make-whole” premium. The Company may redeem some or all of the 2021 Notes on or after February 15, 2017 at specified redemption prices. In addition, prior to February 15, 2017, the Company may redeem up to 35% of the 2021 Notes with the net proceeds of certain equity offerings at a price of 108.875% plus accrued and unpaid interest, if any. The Company is obligated to offer to repurchase the 2021 Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.

The 2021 Notes Indenture contains covenants that, among other things, limit the Company’s ability and the ability of certain of the Company’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted

20


payments, (iii) incur restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. In addition, the 2021 Notes Indenture requires, among other things, the Company to provide financial and current reports to holders of the 2021 Notes or file such reports electronically with the U.S. Securities and Exchange Commission (the “SEC”). These covenants are subject to a number of exceptions, limitations and qualifications set forth in the 2021 Notes Indenture.

Pursuant to the terms of the Second Amendment to the Senior Credit Facilities, the Company used the net proceeds of the 2021 Notes of approximately $194.5 million to repay $59.3 million of the Revolving Credit Facility and $135.2 million of the Term Loan Facilities.

In connection with the issuance of the 2021 Notes, the Company entered into a registration rights agreement on February 11, 2014 with certain guarantors of the 2021 Notes named therein and Jefferies LLC, on behalf of itself and the other initial purchasers named therein (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company has agreed to file an exchange offer registration statement to exchange the 2021 Notes for substantially identical notes registered under the Securities Act unless the exchange offer is not permitted by applicable law or the policy of the SEC. The Company has also agreed to file a shelf registration statement to cover resales of notes under certain circumstances. The Company has agreed to file the exchange offer registration statement with the SEC within 360 days of the issue date of the 2021 Notes and use commercially reasonable efforts to have the exchange offer registration statement declared effective within 450 days of the issue date and to complete the exchange offer with respect to the 2021 Notes within 30 days of effectiveness. In addition, the Company agreed to use commercially reasonable efforts to file the shelf registration statement as promptly as practicable and to use commercially reasonable efforts to cause such shelf registration statement to be declared effective by the SEC within 90 days of the event giving rise to such obligation. If the Company fails to satisfy its registration obligations under the Registration Rights Agreement, it will be required to pay additional interest to the holders of the 2021 Notes under certain circumstances.

Deferred Financing Costs

In connection with the issuance of the 2021 Notes, the Company incurred underwriting fees, agent fees, legal fees and other expenses of $1.1 million that are being amortized over the term of the 2021 Notes.

Interest Expense, net

Interest expense consisted of the following for the three months and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Revolving Credit Facility
$
184

 
$

 
$
768

 
$

Term Loan Facilities
3,669

 

 
9,419

 

Prior Credit Facility

 
418

 

 
820

2015 Notes

 
5,766

 

 
11,531

2021 Notes
4,437

 

 
6,744

 

Amortization of deferred financing costs
727

 
367

 
2,550

 
722

Amortization of debt discount
129

 

 
195

 

Other, net
(11
)
 
(43
)
 
(42
)
 
(87
)
Interest expense, net
$
9,135

 
$
6,508

 
$
19,634

 
$
12,986


The increase in interest expense during the three months and six months ended June 30, 2014 as compared to the same periods in 2013 results from higher debt levels partially offset by lower interest rates. The increase in debt primarily relates to the acquisition of the CarePoint Business.

21


NOTE 10--COMMITMENTS AND CONTINGENCIES

Legal Proceedings

United States Attorney’s Office for the Southern District of New York and New York State Attorney General Investigation

Effective January 8, 2014, the Company entered into the Federal Settlement Agreement with the DOJ and David M. Kester (the “Relator”). The Federal Settlement Agreement represented the federal and private component of the Company’s agreement to settle all civil claims under the False Claims Act and related statutes and all common law claims (collectively, the “Claims”) that could have been brought by the DOJ and Relator in the qui tam lawsuit filed in the Southern District of New York (the “SDNY”) by the Relator relating to the distribution of the Medication by the Company’s legacy specialty pharmacy division (the “Legacy Division”) that was divested in May 2012 (the “Civil Action”). Until January 8, 2014, the Company was prohibited from publicly disclosing any information related to the existence of the Civil Action. On January 8, 2014, the Civil Action was unsealed and made public on order of the court. Effective February 11, 2014, the Company entered into the State Settlement Agreements with the Settling States. The State Settlement Agreements represented the state component of the Company’s agreement to settle the Claims that could have been brought by the Settling States that arose out of the Legacy Division’s distribution of the Medication.

With the execution of the Federal Settlement Agreement and the State Settlement Agreements (collectively the “Settlement Agreements”), the Company expects the Civil Action to be fully resolved, and also expects to be fully resolved the federal and state claims that were or could have been raised in the Civil Action. All federal claims and all state claims by the Settling States that have been or could be brought against it in the Civil Action have been dismissed with prejudice. The State Settlement Agreements expressly recognize and affirmatively provide that, by entering into the State Settlement Agreements, the Company has not made any admission of liability and the Company expressly denies the allegations in the Civil Action.

As a part of the State Settlement Agreements, the Company has also resolved any and all claims that the Settling States or their representatives, including the National Association of Medicaid Fraud Control Units (the “NAMFCU”) (which represented the offices of the Attorneys General of the Settling States), could bring for attorney’s fees, investigative fees and/or administrative costs related to the Civil Action. The Company has also separately resolved any and all claims for certain investigative/administrative costs and attorney’s fees related to the Civil Action incurred by the DOJ, Relator and the NAMFCU for approximately $1.1 million in the aggregate. The Company does not anticipate any further claims relating to the matters involved in the Settlement Agreements. The Settlement Agreements do not, however, preclude the U.S. Department of Health and Human Services, the Office of the Inspector General or any state from taking any administrative actions.

Under the Settlement Agreements, the Company will pay an aggregate of $15.0 million, plus interest (at an annual rate of 3.25%) in three approximately annual payments from January 2014 through January 2016. The Settlement Agreements represented a compromise to avoid the costs, distraction and uncertainty of protracted litigation. The Settlement Agreements do not include any admission of wrongdoing, illegal activity, or liability by the Company or its employees, directors, officers or agents.

During the year ended December 31, 2013, the Company included in its results of discontinued operations an accrual of $15.0 million in connection with the government’s investigation regarding certain operations of the Legacy Division. As of June 30, 2014, the Company has paid $3.0 million, including interest, related to the Settlement Agreements and $450,000 of fees to the Relator.

Securities Class Action Litigation in the Southern District of New York

On September 30, 2013, a putative securities class action lawsuit was filed against the Company and certain of its officers on behalf of the putative class of purchasers of our securities between August 8, 2011 and September 20, 2013, inclusive.

On November 15, 2013, a putative securities class action lawsuit was filed against the Company and certain of its directors and officers and certain underwriters in the Company’s April 2013 underwritten public offering of its common stock, on behalf of the putative class of purchasers of our securities between August 8, 2011 and September 23, 2013, inclusive.

On December 19, 2013, the United States District Court for the SDNY entered an order consolidating the two class action lawsuits and appointing a lead plaintiff. The Company denies any allegations of wrongdoing in the consolidated class action lawsuit. The lead plaintiff filed a consolidated complaint on February 19, 2014 against the Company, certain of its directors and officers, certain underwriters in the Company’s April 2013 underwritten public offering of its common stock, and a certain stockholder of the Company. The consolidated complaint is brought on behalf of a putative class of purchasers of the Company’s securities between November 9, 2012 and November 6, 2013, inclusive, and persons and entities who purchased the Company’s securities pursuant or traceable to two underwritten public offerings of the Company’s common stock conducted in April 2013,

22


and August 2013. The consolidated complaint alleges generally that the defendants made material misstatements and/or failed to disclose matters related the Legacy Division’s distribution of the Medication as well as the Company’s PBM Services segment. The consolidated complaint asserts claims under Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. All defendants in the case moved to dismiss the consolidated complaint on April 28, 2014. Briefing on the motion to dismiss was complete on July 28, 2014. The Company believes all of the claims in these class action lawsuits are without merit and intends to vigorously defend against these claims. However, there is no assurance that the Company will be successful in its defense or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of these actions. Additional similar lawsuits may be filed. Moreover, the Company is not able to predict the outcome or reasonably estimate a range of possible loss at this time.

Professional Home Care Services Litigation

On March 31, 2009, Professional Home Care Services, Inc. (“PHCS”), a subsidiary of the Company, was sued by Alexander Infusion, LLC, a New York-based home infusion company (“Alexander Infusion”), in the Supreme Court of the State of New York (the “Lawsuit”). The complaint alleged principally breach of contract arising in connection with PHCS’s failure to consummate an acquisition of Alexander Infusion after failing to satisfy the conditions to PHCS’s obligation to close. On April 4, 2014, PHCS and the Company entered into a settlement agreement with Alexander Infusion and its affiliate Avantiscripts, LLC (collectively the “Alexander Parties”) to resolve all outstanding claims arising out of the Lawsuit in exchange for payment by PHCS to the Alexander Parties in the amount of $325,000, and the Lawsuit was dismissed on April 8, 2014. The Company did not pay any cash under the settlement agreement. Rather, the settlement amount of $325,000 was offset against an amount of $325,000 on accounts receivable due to the Company from the Alexander Parties.

PBM Services Payment Delay

The Company has historically engaged a third party processor to process PBM Services cash card claims. The third party processor has ceased paying amounts due to the Company. As of June 30, 2014, the total amount owed to the Company is approximately $6.8 million. In addition, the third party processor owes the Company approximately $2.1 million related to the unconsolidated affiliate that was sold on April 19, 2013. As of June 30, 2014, no reserve has been provided for the amounts due to the Company.

Government Regulation

Various federal and state laws and regulations affecting the healthcare industry do or may impact the Company’s current and planned operations, including, without limitation, federal and state laws prohibiting kickbacks in government health programs, federal and state antitrust and drug distribution laws, laws governing the practice of pharmacy and nursing, and a wide variety of consumer protection, insurance and other state laws and regulations. While management believes the Company is in substantial compliance with all existing laws and regulations material to the operation of its business, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the healthcare industry, federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which cannot be predicted.

From time to time, the Company responds to subpoenas and requests for information from governmental agencies. The Company cannot predict with certainty what the outcome of any of the foregoing might be. While the Company believes it is in substantial compliance with all laws, rules and regulations that affects its business and operations, there can be no assurance that the Company will not be subject to scrutiny or challenge under one or more existing laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material effect upon the Company’s Consolidated Financial Statements.  A violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as suspension or exclusion from the Medicare and Medicaid programs.  Moreover, the costs and expenses associated with defending these actions, even where successful, can be significant.  Further, there can be no assurance the Company will be able to obtain or maintain any of the regulatory approvals that may be required to operate its business, and the costs associated with obtaining or maintaining such approvals, or the failure to obtain or maintain such approvals could have a material effect on the Company’s Consolidated Financial Statements.

Leases

The Company leases its facilities and certain equipment under various operating leases with third parties. The majority of these leases contain escalation clauses that increase base rent payments based upon either the Consumer Price Index or an agreed upon schedule.


23


In addition, the Company utilizes capital leases agreements with third parties to obtain certain assets such as vehicles. Interest rates on capital leases are both fixed and variable and range from 3% to 7%.

As of June 30, 2014, future minimum lease payments, including interest, under operating and capital leases are as follows (in thousands):
 
 Operating Leases
 
 Capital Leases
 
 Total
2014 (six months)
$
4,487

 
$
246

 
$
4,733

2015
7,853

 
418

 
8,271

2016
6,255

 
122

 
6,377

2017
5,225

 
62

 
5,287

2018
3,592

 
11

 
3,603

2019 and thereafter
3,484

 

 
3,484

 Total
$
30,896

 
$
859

 
$
31,755


Rent expense for leased facilities and equipment was approximately $2.0 million and $1.8 million for the three months ended June 30, 2014 and 2013, respectively, and $3.9 million and $3.6 million for the six months ended June 30, 2014 and 2013, respectively.

Purchase Commitments

As of June 30, 2014, the Company had commitments to purchase prescription drugs from drug manufacturers of approximately $15.8 million during the remainder of 2014.  These purchase commitments are made at levels expected to be used in the normal course of business.
NOTE 11--OPERATING AND REPORTABLE SEGMENTS

Following the sale of substantially all of the Company’s Home Health Services segment, the Company’s operating and reportable segments, “Infusion Services,” and “PBM Services,” reflect how the Company’s chief operating decision maker reviews the Company’s results in terms of allocating resources and assessing performance.

The Infusion Services operating and reportable segment provides services consisting of home infusion therapy, respiratory therapy and the provision of durable medical equipment, products and services. Infusion services include the dispensing and administering of infusion-based drugs, which typically require additional nursing and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes. Home infusion services also include the dispensing of certain self-injectable therapies.

The PBM Services operating and reportable segment consists of integrated pharmacy benefit management (“PBM”) services, which primarily consists of discount card programs. The discount card programs provide a cost effective alternative for individuals who may be uninsured, underinsured or may have restrictive coverage that disallows reimbursement for certain medications. Under these discount programs, individuals who present a discount card at any of the Company’s participating network pharmacies receive prescription medications at a discounted price compared to the retail price.

The Company’s chief operating decision maker evaluates segment performance and allocates resources based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as income (loss) from continuing operations, net of income taxes adjusted for net interest expense, income tax expense (benefit), depreciation, amortization of intangibles and stock-based compensation expense and prior to the allocation of certain corporate expenses. Segment Adjusted EBITDA excludes acquisition, integration, and transitional expenses; restructuring expense; and other expenses related to the Company’s strategic assessment. Segment Adjusted EBITDA also excludes the operating losses of start-up branch locations that the Company has invested in organically rather than through acquisition. Segment Adjusted EBITDA is a measure of earnings that management monitors as an important indicator of operating and financial performance. The accounting policies of the operating and reportable segments are consistent with those described in the Company’s summary of significant accounting policies.

As a result of the sale of substantially all of the Company’s Home Health Services segment, prior period operating results and supplementary data have been reclassified to exclude the Home Health Services segment.



Segment Reporting Information
(in thousands)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Results of Operations:
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Infusion Services - product revenue
$
225,277

 
$
150,559

 
$
441,180

 
$
300,583

Infusion Services - service revenue
5,271

 
5,424

 
10,437

 
9,668

Total Infusion Services revenue
230,548

 
155,983

 
451,617

 
310,251

PBM Services - service revenue
16,577

 
16,340

 
34,801

 
43,092

Total revenue
$
247,125

 
$
172,323

 
$
486,418

 
$
353,343

 
 
 
 
 
 
 
 
Adjusted EBITDA by Segment before corporate overhead:
 
 
 

 
 
 
 

Infusion Services
$
16,194

 
$
13,995

 
$
31,155

 
$
25,992

PBM Services
1,837

 
4,916

 
3,512

 
11,111

Total Segment Adjusted EBITDA
18,031

 
18,911

 
34,667

 
37,103

 
 
 
 
 
 
 
 
Corporate overhead
(7,016
)
 
(8,132
)
 
(14,492
)
 
(16,048
)
 
 
 
 
 
 
 
 
Interest expense, net
(9,135
)
 
(6,508
)
 
(19,634
)
 
(12,986
)
Income tax (expense) benefit
(3,063
)
 
(146
)
 
(6,554
)
 
29

Depreciation
(3,958
)
 
(2,527
)
 
(7,794
)
 
(4,945
)
Amortization of intangibles
(1,620
)
 
(1,710
)
 
(3,323
)
 
(3,792
)
Stock-based compensation expense
(1,998
)
 
(3,860
)
 
(4,884
)
 
(5,833
)
Acquisition and integration expenses
(5,333
)
 
(3,512
)
 
(11,832
)
 
(8,135
)
Restructuring and other expenses and investments
(4,519
)
 
(1,812
)
 
(10,021
)
 
(3,052
)
Loss from continuing operations, net of income taxes
$
(18,611
)
 
$
(9,296
)
 
$
(43,867
)
 
$
(17,659
)
 
 
 
 
 
 
 
 
Supplemental Operating Data
 

 
 

 
 
 
 
 
 
June 30,
2014
 
December 31,
2013
Total Assets:
 
 
 
 
Infusion Services
 
$
806,127

 
$
793,475

PBM Services
 
27,203

 
25,239

Corporate unallocated, including cash and cash equivalents
 
50,485

 
53,169

Assets from discontinued operations
 

 
64,959

Assets associated with discontinued operations, not sold
 
7

 
16

Total Assets
 
$
883,822

 
$
936,858



24


NOTE 12--CONCENTRATION OF RISK

Customer and Credit Risk

The Company provides trade credit to its customers in the normal course of business.  

One payor, UnitedHealthcare, accounted for approximately 22% and 23% of revenue during the three months ended June 30, 2014 and 2013, respectively, and 22% and 23% for the six months ended June 30, 2014 and 2013, respectively. The revenue is related to the Infusion Services segment.

Therapy Revenue Risk

The Company sells products related to the Immune Globulin therapy, which represented 17% and 20% of revenue during the three months ended June 30, 2014 and 2013, respectively, and 18% and 19% for the six months ended June 30, 2014 and 2013, respectively. The revenue is related to the Infusion Services segment.

NOTE 13--INCOME TAXES

The Company’s Federal and state income tax expense (benefit) from continuing operations for the three months and six months ended June 30, 2014 and 2013 is summarized in the following table (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Current
 
 
 
 
 
 
 
Federal
$

 
$
(240
)
 
$

 
$
(900
)
State
(587
)
 
(176
)
 
196

 
(144
)
Total current
(587
)
 
(416
)
 
196

 
(1,044
)
Deferred
 

 
 

 
 

 
 

Federal
3,248

 
489

 
5,644

 
885

State
402

 
73

 
714

 
130

Total deferred
3,650

 
562

 
6,358

 
1,015

Total income tax expense (benefit)
$
3,063

 
$
146

 
$
6,554

 
$
(29
)

The Company’s reconciliation of the statutory rate from continuing operations to the effective income tax rate for the three months and six months ended June 30, 2014 and 2013 is summarized as follows (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Tax benefit at statutory rate
$
(5,374
)
 
$
(3,203
)
 
$
(13,044
)
 
$
(6,191
)
State tax expense (benefit), net of Federal taxes
(384
)
 
(220
)
 
125

 
(348
)
Change in tax contingencies
3

 
6

 
3

 
(506
)
Valuation allowance changes affecting income tax expense
8,755

 
3,225

 
19,356

 
6,293

Non-deductible transaction costs and other
63

 
338

 
114

 
723

Income tax expense (benefit)
$
3,063

 
$
146

 
$
6,554

 
$
(29
)


25


NOTE 14--STOCK-BASED COMPENSATION

BioScrip Equity Incentive Plan

Under the Company’s Amended and Restated 2008 Equity Incentive Plan (as amended and restated, the “2008 Plan”), the Company may issue, among other things, incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock, performance shares and performance units to employees and directors. While SARS are authorized under the 2008 Plan, they may also be issued outside of the plan. On May 8, 2014, the Company’s stockholders (i) approved an amendment to the 2008 Plan to increase the number of authorized shares of common stock available for issuance by 2,500,000 shares to 9,355,000 shares and to clarify that cash dividends or dividend equivalents may not be paid to holders of unvested restricted stock units, restricted stock grants and performance units until such awards are vested and non-forfeitable; and (ii) re-approved the material terms of the performance goals that are a part of the 2008 Plan.

As of June 30, 2014, there were 2,082,456 shares that remained available for grant under the 2008 Plan.

BioScrip/CHS Equity Plan

Effective upon closing of the acquisition of CHS, the CHS 2006 Equity Incentive Plan was adopted by the Company and renamed the “BioScrip/CHS 2006 Equity Incentive Plan” (as amended and restated, the “BioScrip/CHS Plan”). The Board of Directors further amended the BioScrip/CHS Plan to provide for it to have substantially the same terms and provisions as the 2008 Plan. As of May 8, 2014, the Company will no longer grant awards under the BioScrip/CHS Plan.

Stock Options

The Company recognized compensation expense related to stock options of $1.5 million and $1.8 million during the three months ended June 30, 2014 and 2013, respectively, and $3.3 million and $3.2 million during the six months ended June 30, 2014 and 2013, respectively.

Restricted Stock

The Company recognized compensation expense related to restricted stock awards of $0.2 million and $1.1 million during the three months ended June 30, 2014, respectively, and 2013 and $1.3 million and $1.3 million during the six months ended June 30, 2014 and 2013, respectively.

Stock Appreciation Rights

The Company recognized compensation expense related to stock appreciation rights awards of $0.3 million and $0.9 million during the three months ended June 30, 2014 and 2013, respectively, and $0.2 million and $1.4 million during six months ended June 30, 2014 and 2013, respectively.

Employee Stock Purchase Plan

On May 7, 2013, the Company’s stockholders approved the BioScrip, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP provides all eligible employees, as defined under the ESPP, the opportunity to purchase up to a maximum number of shares of Common Stock of the Company as determined by the Compensation Committee. Participants in the ESPP may acquire the Common Stock at a cost of 85% of the lower of the fair market value on the first or last day of the Plan Year from January 1st through December 31st. The Company has filed a Registration Statement on Form S-8 to register 750,000 shares of Common Stock, par value $0.0001 per share, for issuance under the ESPP. As of June 30, 2014, no shares have been issued and no expense has been incurred under the ESPP. The Company is currently in the roll-out and implementation phase of the ESPP.


26


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Audited Consolidated Financial Statements, including 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, 2013 (the “Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”), as well as our Unaudited Consolidated Financial Statements and the related notes thereto included elsewhere in this report.
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Specifically, this Quarterly Report contains, among others, forward-looking statements about:
 
our ability to successfully integrate the operations of the CarePoint Partners Holdings LLC (“CarePoint”) home infusion business (the “CarePoint Business”);
our ability to make principal and interest payments on our debt and unsecured notes and satisfy the other covenants contained in our senior secured credit facility and other debt agreements;
our high level of indebtedness;
our expectations regarding financial condition or results of operations in future periods;
our future sources of, and needs for, liquidity and capital resources;
our expectations regarding economic and business conditions;
our expectations regarding potential legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs;
our expectations regarding the size and growth of the market for our products and services;
our business strategies and our ability to grow our business;
the implementation or interpretation of current or future regulations and legislation, particularly governmental oversight of our business;
our ability to maintain contracts and relationships with our customers;
sales and marketing efforts;
status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements;
our ability to maintain supplies and services, which could be impacted by force majeure events such as war, strike, riot, crime, or “acts of God” such as hurricanes, flooding, blizzards or earthquakes;
future capital expenditures;
our ability to hire and retain key employees;
our  ability to successfully execute our succession plans;
our ability to execute our acquisition and growth strategy;
our ability to successfully integrate businesses we may acquire; and
other risks and uncertainties described from time to time in our filings with the SEC.

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:

risks associated with increased government regulation related to the health care and insurance industries in general, and more specifically, home infusion and pharmacy benefit management providers;
our expectation regarding the interim and ultimate outcome of commercial disputes, including litigation;
unfavorable economic and market conditions;
disruptions in supplies and services resulting from force majeure events such as war, strike, riot, crime, or “acts of God” such as hurricanes, flooding, blizzards or earthquakes;
reductions in federal and state reimbursement for our products and services;
delays or suspensions of Federal and state payments for services provided;
efforts to reduce healthcare costs and alter health care financing;
effects of the Patient Protection and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, which amended PPACA, and the related accountable care organizations;
existence of complex laws and regulations relating to our business;
achieving financial covenants under our senior secured credit facility and unsecured notes indenture;
availability of financing sources;

27


declines and other changes in revenue due to the expiration of short-term contracts;
network lockouts and decisions to in-source by health insurers including lockouts with respect to acquired entities;
unforeseen contract terminations;
difficulties with the integration of the CarePoint Business;
our ability to comply with debt covenants in our senior secured credit facility and unsecured notes indenture and the increased leverage we incurred upon completion of the acquisition of the CarePoint Business;
difficulties in the implementation and ongoing evolution of our operating systems;
difficulties with the implementation of our growth strategy and integrating businesses we have acquired or will acquire;
increases or other changes in our acquisition cost for our products;
increased competition from competitors having greater financial, technical, reimbursement, marketing and other resources could have the effect of reducing prices and margins;
disruptions in our relationship with our primary supplier of prescription products;
the level of our indebtedness and its effect on our ability to execute our business strategy and increased risk of default under our debt obligations;
introduction of new drugs, which can cause prescribers to adopt therapies for existing patients that are less profitable to us; and
changes in industry pricing benchmarks, which could have the effect of reducing prices and margins.

You should not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

Business Overview

We are a national provider of infusion and home care management solutions. We partner with physicians, hospital systems, facilities-based providers, healthcare payors and pharmaceutical manufacturers to provide patients access to post-acute care services. We operate with a commitment to bring customer-focused pharmacy and related healthcare infusion therapy services into the home or alternate-site setting. By collaborating with the full spectrum of healthcare professionals and the patient, we aim to provide cost-effective care that is driven by clinical excellence, customer service and values that promote positive outcomes and an enhanced quality of life for those whom we serve. As of the filing of this report, we have 78 service locations in 29 states, executive offices in New York and corporate offices in Minnesota.

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, respiratory therapists and physical therapists, work with the physician to develop a plan of care suited to our patients’ specific needs. Whether in the home, physician office, ambulatory infusion center or other alternate sites of care, we provide products, services and condition-specific clinical management programs tailored to improve the care of individuals with complex health conditions such as gastrointestinal abnormalities, infectious diseases, cancer, multiple sclerosis, organ transplants, bleeding disorders, immune deficiencies and heart failure.

Segments

Following the sale of our Home Health Business on March 31, 2014, our operating and reportable segments are “Infusion Services” and “PBM Services.” These segments reflect how our chief operating decision maker reviews our results in terms of allocating resources and assessing performance.
 
The Infusion Services operating and reportable segment provides services consisting of home infusion therapy, respiratory therapy and the provision of durable medical equipment, products and services. Infusion services include the dispensing and administering of infusion-based drugs, which typically require additional nursing and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes. Home infusion services also include the dispensing of certain self-injectable therapies.

The integrated pharmacy benefit management (“PBM”) Services operating and reportable segment consists of integrated PBM services, which primarily consists of discount card programs. The discount card programs provide a cost effective alternative for individuals who may be uninsured, underinsured or may have restrictive coverage that disallows reimbursement for certain medications. Under these discount programs, individuals who present a discount card at one of our participating network pharmacies receive prescription medications at a discounted price compared to the retail price.


28


Strategic Assessment

In 2010, we commenced a strategic assessment of our business and operations. The assessment examined our market strengths and opportunities and compared our position to that of our competitors. As a result of this assessment and ensuing assessments, we have focused our growth on investments in the Infusion Services segment, which remains the primary driver of our growth strategy.

On February 1, 2012, we entered into a Community Pharmacy and Mail Business Purchase Agreement (the “2012 Asset Purchase Agreement”) by and among Walgreen Co. and certain subsidiaries (collectively, the “Buyers”) with respect to the sale of certain assets, rights and properties (the “Pharmacy Services Asset Sale”) relating to our traditional and specialty pharmacy mail operations and community retail pharmacy stores. We received a total purchase price of $173.8 million resulting in a pretax gain of $108.2 million net of transaction costs and other one-time charges.

Following the completion of the Pharmacy Services Assets Sale, we continued to execute our strategic plan by deploying the proceeds toward strategic business acquisitions to maximize future stockholder value.

On July 31, 2012, we acquired 100% of InfuScience, Inc. (“InfuScience”) for a cash payment of $38.3 million at closing and an additional $3.0 million of contingent consideration that was paid based on the results of operations during the 24 month period following the acquisition. InfuScience historically acquired, developed and operated businesses providing alternate site infusion pharmacy services through five infusion centers located in Eagan, Minnesota; Omaha, Nebraska; Chantilly, Virginia; Charleston, South Carolina; and Savannah, Georgia.

On February 1, 2013, we acquired 100% of the ownership interest in HomeChoice Partners, Inc. (“HomeChoice”) for a cash purchase price of $72.9 million at closing. The purchase agreement provides that the purchase price may also be increased by contingent consideration of to $10.0 million if HomeChoice reaches certain performance milestones in the first year following the closing and an additional $10.0 million if HomeChoice reaches certain performance milestones in the second year following the closing, for total possible contingent consideration of up to $20.0 million. We funded the acquisition with a combination of cash on hand and drawing on our revolving credit facility. HomeChoice is a provider of alternate-site infusion pharmacy services. Prior to our acquisition, HomeChoice serviced approximately 15,000 patients annually and had 14 infusion pharmacy locations in Pennsylvania, Washington, D.C., Maryland, Virginia, North Carolina, South Carolina, Georgia, Missouri, and Alabama.

On August 23, 2013, we completed the acquisition of substantially all of the assets and assumption of certain liabilities that constituted the home infusion business (the “CarePoint Business”) of CarePoint Partners Holdings LLC for a cash purchase price of $211.1 million at closing. The purchase agreement provides that the purchase price may also be increased by contingent consideration of $10.0 million if the CarePoint Business achieves a specified level of product gross profit during the one year measurement period following the closing date. If the specified level of product gross profit is not achieved, no contingent consideration will be due to the sellers. CarePoint was a provider of home and alternate-site infusion therapy for patients with complex, acute and chronic illnesses. CarePoint serviced approximately 20,500 patients annually and had 28 sites of service in nine states in the East Coast and Gulf Coast regions prior to our acquisition.

Consistent with our continuing strategic evaluation of our non-core businesses and our decision to continue to focus growth initiatives and capital in the Infusion Services segment, we completed the sale of substantially all of our Home Health Services segment to LHC Group, Inc. and certain of its subsidiaries on March 31, 2014. We received total consideration of approximately $60.6 million in cash including adjustments to net working capital. A portion of the net proceeds from the sale was used to pay down a portion of our outstanding debt.

Regulatory Matters Update

Approximately 23% of revenue for the three months and six months ended June 30, 2014 was derived directly from Medicare, state Medicaid programs or other government payors. We also provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs through managed care entities. Medicare Part D, for example, is administered through managed care entities and PBMs.   In the normal course of business, the Company and our customers are subject to legislative and regulatory changes impacting the level of reimbursement received from the Medicare and state Medicaid programs.

State Medicaid Programs

Over the last several years, increased Medicaid spending, combined with slow state revenue growth, led many states to institute measures aimed at controlling spending growth. Spending cuts have taken many forms including reducing eligibility and benefits,

29


eliminating certain types of services, and provider reimbursement reductions. In addition, some states have been moving beneficiaries to managed care programs in an effort to reduce costs.

No single state Medicaid program represents greater than 4.4% of our consolidated revenue for the three months and six months ended June 30, 2014, and no individual state Medicaid reimbursement reduction is expected to have a material effect on our Unaudited Consolidated Financial Statements.  We are continually assessing the impact of the state Medicaid reimbursement cuts as states propose, finalize and implement various cost-saving measures.

Given the reimbursement pressures, we continue to improve operational efficiencies and reduce costs to mitigate the impact on results of operations where possible. In some cases, reimbursement rate reductions may result in negative operating results, and we would likely exit some or all services where rate reductions result in unacceptable returns to our stockholders. 

States are also in the process of determining whether to expand their Medicaid programs as permitted by the PPACA. We cannot predict the impact of these decisions.

Medicare

Federal efforts to reduce Medicare spending have continued in 2014. Congress first passed the PPACA, followed by the Health Care and Education Reconciliation Act of 2010, which amended PPACA. In August 2011, Congress passed a deficit reduction agreement that created a committee tasked with proposing legislation to reduce the federal deficit by November 23, 2011. Because the committee did not act, automatic Medicare cuts were scheduled to go into effect January 1, 2013. However, Congress passed legislation extending the time for such cuts by two months. Thus, Medicare reimbursement to providers was reduced overall by 2% (as part of sequestration) beginning April 1, 2013.  The reductions in Medicare reimbursement during the three months and six months ended June 30, 2014 have not been significant but the impact on future results of operations cannot yet be predicted.


Critical Accounting Estimates

Our Unaudited Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). In preparing our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from these estimates.

We evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Our actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. There have been no changes to critical accounting estimates in the three months ended June 30, 2014. For a full description of our accounting policies please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.

Results of Operations

The following discussion is based on our Unaudited Consolidated Financial Statements. It compares our results of operations for the three months and six months ended June 30, 2014 with the prior year results of operations. As a result of the sale of substantially all of our Home Health Services segment on March 31, 2014, all prior period financial information has been reclassified to include the Home Health Services segment as discontinued operations.


30


Three months ended June 30, 2014 compared to three months ended June 30, 2013
 
Three Months Ended June 30,
 
(in thousands)
 
2014
 
2013
 
Change
Revenue
$
247,125

 
 
$
172,323

 
 
$
74,802

Gross profit
$
65,356

26.4
 %
 
$
57,775

33.5
 %
 
$
7,581

Loss from continuing operations
$
(6,413
)
(2.6
)%
 
$
(2,642
)
(1.5
)%
 
$
(3,771
)
Interest expense, net
$
9,135

3.7
 %
 
$
6,508

3.8
 %
 
$
2,627

Loss from continuing operations, before income taxes
$
(15,548
)
(6.3
)%
 
$
(9,150
)
(5.3
)%
 
$
(6,398
)
Loss from continuing operations, net of income taxes
$
(18,611
)
(7.5
)%
 
$
(9,296
)
(5.4
)%
 
$
(9,315
)
Income (loss) from discontinued operations, net of income taxes
$
(1,207
)
(0.5
)%
 
$
416

0.2
 %
 
$
(1,623
)
Net loss
$
(19,818
)
(8.0
)%
 
$
(8,880
)
(5.2
)%
 
$
(10,938
)

Revenue. Revenue for the three months ended June 30, 2014 was $247.1 million compared to revenue of $172.3 million for the three months ended June 30, 2013.

Infusion segment revenue for the three months ended June 30, 2014 was $230.5 million, compared to revenue of $156.0 million for the same period in 2013, an increase of $74.6 million, or 47.8%. Product revenue increased $74.7 million, or 49.6%, as a result of organic revenue growth of approximately 24.0% and additional revenue from acquisitions. The organic growth includes revenues related to the new hepatitis C drug Sovaldi.

PBM Services segment revenue for the three months ended June 30, 2014 was $16.6 million, compared to revenue of $16.3 million for the same period in 2013, an increase of $0.2 million, or 1.5%. This increase in service revenue for the quarter was primarily due to increases in new funded business volume of $7.7 million offset by decreases in discount cash card revenue.

Gross Profit. Gross profit for the three months ended June 30, 2014 was $65.4 million compared to $57.8 million for the same period in 2013, an increase of $7.6 million, or 13.1%. The increase in gross profit dollars for the three month period was due to growth in the Infusion Services segment partially offset by lower PBM Services gross profit. The decrease in gross profit as a percentage of revenue from 33.5% to 26.4% was mainly due to the decline in the mix of PBM Services business which operates at a comparatively high gross profit rate. The increase in Infusion Services gross profit was driven by organic growth and acquisitions that was partially offset by a $2.8 million increase in contractual reserve provisions due to disruption that occurred related to acquisition integration, particularly in merged markets where facilities, work teams and information systems were consolidated.

Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2014 were $57.2 million, or 23.2% of total revenue, compared to $50.3 million, or 29.2% of total revenue, for the same period in 2013. The increase in SG&A expense is due mainly to acquisitions and also due to higher expenses required to drive and manage organic growth. The decrease in SG&A as a percentage of revenue was due to operating leverage attained on Infusion segment growth and due to a reduction of the PBM Services segment cash card business which incurs high selling costs as a percentage of revenue.

Change in Fair Value of Contingent Consideration. The change in fair value of contingent consideration for the three months ended June 30, 2014 was $4.6 million. There was no change in the fair value of contingent consideration during the three months ended June 30, 2013. The adjustments recorded in 2014 were partly due to remeasurement at fair value of the probability of the sellers of the CarePoint Business earning contingent consideration based on product gross profit performance versus target. Remeasurement was based on actual product gross profit since the date of acquisition and the most current forecast for the remaining measurement period. As a result, we reduced the fair value of contingent consideration by $4.0 million. In addition, the fair value of contingent consideration related to the HomeChoice acquisition was remeasured in 2014 based on gross profit performance versus targets. While the HomeChoice acquisition has generated expected revenues, the contingent consideration was an incentive for the sellers to partner with the Company which would result in performance significantly over and above the transaction valuation model. Based on performance in 2013 and 2014 and the 2014 business plans for these branches, we reduced our estimate of the probability of payout and the fair value of this liability by $0.7 million.

Bad Debt Expense.  For the three months ended June 30, 2014, bad debt expense was $8.4 million, or 3.4% of revenue, compared to $3.5 million or