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EX-31.2 - EXHIBIT 31.2 - Option Care Health, Inc.bios-ex312x2015063010xq.htm
EX-32.2 - EXHIBIT 32.2 - Option Care Health, Inc.bios-ex322x2015063010xq.htm
EX-32.1 - EXHIBIT 32.1 - Option Care Health, Inc.bios-ex321x2015063010xq.htm
EX-31.1 - EXHIBIT 31.1 - Option Care Health, Inc.bios-ex311x2015063010xq.htm
EX-10.5 - EXHIBIT 10.5 - Option Care Health, Inc.esppamendmenteffectiveapri.htm
EX-10.4 - EXHIBIT 10.4 - Option Care Health, Inc.formofmarket-basedcashawar.htm



 
 
 
 
 
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, 2015
 
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 5, 2015, there were 68,730,871 shares of the registrant’s Common Stock outstanding.




TABLE OF CONTENTS
 
 
Page
Number
PART I
 
 
 
 
 
Unaudited Consolidated Statements of Operations for the three months and the six months ended June 30, 2015 and 2014
 
 
 
 
 
 
PART II 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
BIOSCRIP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,172

 
$
740

Receivables, less allowance for doubtful accounts of $72,332 and $66,500
as of June 30, 2015 and December 31, 2014, respectively
131,471

 
140,810

Inventory
42,364

 
37,215

Prepaid expenses and other current assets
10,396

 
9,450

Total current assets
185,403

 
188,215

Property and equipment, net
34,906

 
38,171

Goodwill
335,323

 
573,323

Intangible assets, net
7,290

 
10,269

Deferred financing costs
13,035

 
13,463

Other non-current assets
1,192

 
1,272

Total assets
$
577,149

 
$
824,713

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Current portion of long-term debt
$
238

 
$
5,395

Accounts payable
77,085

 
90,032

Claims payable
4,816

 
8,162

Amounts due to plan sponsors
4,254

 
5,779

Accrued interest
6,705

 
6,853

Accrued expenses and other current liabilities
40,923

 
46,092

Total current liabilities
134,021

 
162,313

Long-term debt, net of current portion
418,619

 
418,408

Deferred taxes
2,924

 
19,058

Other non-current liabilities
6,891

 
8,129

Total liabilities
562,455

 
607,908

Series A convertible preferred stock, $.0001 par value; 825,000 shares authorized; 625,000 shares issued and outstanding; and, $64,758 liquidation preference as of June 30, 2015. No convertible preferred stock was authorized or outstanding as of December 31, 2014.
57,988

 

Stockholders’ equity
 

 
 

Preferred stock, $.0001 par value; 4,175,000 and 5,000,000 shares authorized as of June 30, 2015 and December 31, 2014, respectively; no shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively

 

Common stock, $.0001 par value; 125,000,000 shares authorized; 71,376,164 and 71,274,064 shares issued and 68,730,871 and 68,636,965 shares outstanding as of June 30, 2015 and December 31, 2014, respectively
8

 
8

Treasury stock, 2,645,293 and 2,637,099 shares at cost as of June 30, 2015 and December 31, 2014, respectively
(10,715
)
 
(10,679
)
Additional paid-in capital
534,100

 
529,682

Accumulated deficit
(566,687
)
 
(302,206
)
Total stockholders’ equity (deficit)
(43,294
)
 
216,805

Total liabilities and stockholders’ equity
$
577,149

 
$
824,713


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,
 
2015
 
2014
 
2015
 
2014
Product revenue
$
241,020

 
$
225,277

 
$
480,067

 
$
441,180

Service revenue
21,343

 
21,848

 
43,977

 
45,238

Total revenue
262,363

 
247,125

 
524,044

 
486,418

 
 
 
 
 
 
 
 
Cost of product revenue
176,763

 
161,658

 
350,710

 
313,398

Cost of service revenue
19,634

 
20,111

 
40,895

 
42,564

Total cost of revenue
196,397

 
181,769

 
391,605

 
355,962

 
 
 
 
 
 
 
 
Gross profit
65,966

 
65,356

 
132,439

 
130,456

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
60,367

 
57,244

 
118,140

 
116,424

Change in fair value of contingent consideration
(93
)
 
(4,646
)
 
(72
)
 
(6,855
)
Bad debt expense
15,146

 
8,360

 
23,466

 
14,961

Impairment of goodwill
238,000

 

 
238,000

 

Acquisition and integration expenses
259

 
5,333

 
479

 
11,832

Restructuring and other expenses
4,803

 
3,858

 
8,266

 
8,450

Amortization of intangibles
1,489

 
1,620

 
2,979

 
3,323

Loss from continuing operations
(254,005
)
 
(6,413
)
 
(258,819
)
 
(17,679
)
Interest expense, net
9,080

 
9,135

 
18,243

 
19,634

Loss from continuing operations before income taxes
(263,085
)
 
(15,548
)
 
(277,062
)
 
(37,313
)
Income tax expense (benefit)
(19,921
)
 
3,063

 
(17,993
)
 
6,554

Loss from continuing operations, net of income taxes
(243,164
)
 
(18,611
)
 
(259,069
)
 
(43,867
)
Loss from discontinued operations, net of income taxes
(1,644
)
 
(1,207
)
 
(5,412
)
 
(1,265
)
Net loss
$
(244,808
)
 
$
(19,818
)
 
$
(264,481
)
 
$
(45,132
)
Accrued dividends on preferred stock
(1,805
)
 

 
(2,258
)
 

Deemed dividends on preferred stock
(2,186
)
 

 
(3,350
)
 

Loss attributable to common stockholders
$
(248,799
)
 
$
(19,818
)
 
$
(270,089
)
 
$
(45,132
)
 
 
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
 
 
Loss from continuing operations, basic and diluted
$
(3.60
)
 
$
(0.27
)
 
$
(3.85
)
 
$
(0.64
)
Loss from discontinued operations, basic and diluted
(0.02
)
 
(0.02
)
 
(0.08
)
 
(0.02
)
Net loss, basic and diluted
$
(3.62
)
 
$
(0.29
)
 
$
(3.93
)
 
$
(0.66
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
68,698

 
68,468

 
68,668

 
68,354


See accompanying Notes to Unaudited Consolidated Financial Statements.

4




BIOSCRIP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 (in thousands)

 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity (Deficit)
Balances at December 31, 2014
$

 
$
8

 
$
(10,679
)
 
$
529,682

 
$
(302,206
)
 
$
216,805

Issuance of Series A convertible preferred stock and warrants

 

 

 
6,570

 

 
6,570

Accrued dividends on preferred stock

 

 

 
(2,258
)
 

 
(2,258
)
Deemed dividends on preferred stock

 

 

 
(3,350
)
 

 
(3,350
)
Compensation under employee stock compensation plan

 

 

 
3,454

 

 
3,454

Surrender of stock to satisfy minimum tax withholding

 

 
(36
)
 
2

 

 
(34
)
Net loss

 

 

 

 
(264,481
)
 
(264,481
)
Balances at June 30, 2015
$

 
$
8

 
$
(10,715
)
 
$
534,100

 
$
(566,687
)
 
$
(43,294
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity
Balances at December 31, 2013
$

 
$
7

 
$
(10,311
)
 
$
519,625

 
$
(154,738
)
 
$
354,583

Exercise of stock options
$

 
1

 
 
 
905

 
$

 
906

Compensation under employee stock compensation plan
$

 
$

 

 
4,665

 

 
4,665

Net loss
$

 
$

 
$

 
$

 
(45,132
)
 
(45,132
)
Balances at June 30, 2014
$

 
$
8

 
$
(10,311
)
 
$
525,195

 
$
(199,870
)
 
$
315,022


See accompanying Notes to Unaudited Consolidated Financial Statements.


5


BIOSCRIP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(264,481
)
 
$
(45,132
)
Less: loss from discontinued operations, net of income taxes
(5,412
)
 
(1,265
)
Loss from continuing operations, net of income taxes
(259,069
)
 
(43,867
)
Adjustments to reconcile loss from continuing operations, net of income taxes to net cash provided by (used in) operating activities:
 
 
 
Depreciation
8,434

 
7,794

Amortization of intangibles
2,979

 
3,323

Impairment of goodwill
238,000

 

Amortization of deferred financing costs and debt discount
1,792

 
2,745

Change in fair value of contingent consideration
(72
)
 
(6,855
)
Change in deferred income taxes
(15,834
)
 
6,358

Compensation under stock-based compensation plans
2,819

 
4,884

Loss on disposal of fixed assets
628

 

Changes in assets and liabilities, net of acquired business:
 
 
 
Receivables, net of bad debt expense
10,299

 
(19,019
)
Inventory
(5,149
)
 
(58
)
Prepaid expenses and other assets
(613
)
 
3,745

Accounts payable
(12,912
)
 
6,105

Claims payable
(3,346
)
 
1,475

Amounts due to plan sponsors
(1,524
)
 
816

Accrued interest
(148
)
 
4,764

Accrued expenses and other liabilities
(8,335
)
 
1,116

Net cash used in operating activities from continuing operations
(42,051
)
 
(26,674
)
Net cash used in operating activities from discontinued operations
(4,110
)
 
(4,304
)
Net cash used in operating activities
(46,161
)
 
(30,978
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, net
(5,797
)
 
(6,925
)
Cash consideration paid for acquisitions, net of cash acquired

 
(454
)
Net cash used in investing activities from continuing operations
(5,797
)
 
(7,379
)
Net cash provided by investing activities from discontinued operations

 
57,688

Net cash provided by (used in) investing activities
(5,797
)
 
50,309

Cash flows from financing activities:
 
 
 
Proceeds from issuance of convertible preferred stock and warrants, net of issuance costs
58,951

 

Proceeds from senior notes due 2021, net of fees paid to lenders

 
193,868

Deferred and other financing costs
(1,218
)
 
(1,161
)
Borrowings on line of credit
129,163

 
85,400

Repayments on line of credit
(134,163
)
 
(125,403
)
Principal payments on long-term debt

 
(172,243
)
Repayments of capital leases
(345
)
 
(151
)
Net proceeds from exercise of employee stock compensation plans
2

 
905

Net cash provided by (used in) financing activities from continuing operations
52,390

 
(18,785
)
Net change in cash and cash equivalents
432

 
546

Cash and cash equivalents - beginning of period
740

 
1,001

Cash and cash equivalents - end of period
$
1,172

 
$
1,547

DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for interest
$
18,391

 
$
12,232

Cash paid during the period for income taxes
$
515

 
$
349


See accompanying Notes to Unaudited Consolidated Financial Statements.

6


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, 2014 (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, 2015 require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes and are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015. 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.

Adjustment Relating to Deferred Financing Costs

During 2014 the Company discovered an error was made relating to deferred financing costs. The error was immaterial for the three months and six months ending June 30, 2014. As previously disclosed in the Annual Report, a cumulative adjustment was recorded in the fourth quarter of 2014.

Change in Estimate of the Collectability of Accounts Receivable

During 2014, the Company experienced deterioration in the aging of certain accounts receivable primarily due to delays and disruptions related to the integration of its acquisitions in 2013. The disruption to billing and collection processes was attributable in part to the following:

Re-licensure and new managed care credentialing was required in connection with the CarePoint Business;
Medicare claims were not filed until retraining and review of eligibility was performed;
Merged facilities and work teams in seven large markets and related employee turnover;
Conversion to a single version of our dispensing and billing system while still managing accounts receivable run-off on five other legacy versions; and
Cash posting challenges that delayed secondary and patient billings and patient statement issuance.

The Company outsourced collections to third party agency partners and hired and trained billing and collection personnel to mitigate the effects of the disruption, however, the Company experienced more difficulty collecting the aged balances than it originally estimated. The Company provided incremental allowances in each quarter during 2014 to address the developing deterioration, and as such the Company materially changed its estimates based on actual collection experience during and after the acquisition disruption period.

Collections of billed revenues during the first 180 days have returned to historical Infusion Services segment levels during the six months ended June 30, 2015. The Company’s accounts receivable over 180 days have increased by $0.7 million since December 31, 2014 as several older balances are still the subject of collection projects with major payors.  We believe we are adequately reserved on these balances over 180 days, however there is a higher risk of collection on these projects than the overall accounts receivable. The Company increased the allowance for doubtful accounts by $5.8 million from December 31, 2014 and the allowance for doubtful accounts as a percentage of total accounts receivable is 35.5% at June 30, 2015 compared to 32.1% at December 31, 2014. The increase in reserves was predominantly on aged balances over 365 days old.

7


The following table summarizes the aging of the Company’s net accounts receivable (net of allowance for contractual adjustments and prior to allowance for doubtful accounts), aged based on date of service and categorized based on the three primary overall types of accounts receivable characteristics (in thousands):
 
 
June 30, 2015
 
December 31, 2014
 
 
0 - 180 days
 
Over 180 days
 
Total
 
0 - 180 days
 
Over 180 days
 
Total
Government
 
$
24,706

 
$
13,114

 
$
37,820

 
$
25,812

 
$
13,036

 
$
38,848

Commercial
 
112,593

 
34,954

 
147,547

 
117,699

 
35,302

 
153,001

Patient
 
6,920

 
11,516

 
18,436

 
4,899

 
10,562

 
15,461

Gross accounts receivable
 
$
144,219

 
$
59,584

 
203,803

 
$
148,410

 
$
58,900

 
207,310

Allowance for doubtful accounts
 
 
 
 
 
(72,332
)
 
 
 
 
 
(66,500
)
Net accounts receivable
 
 
 
 
 
$
131,471

 
 
 
 
 
$
140,810


Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03 “Interest - Imputation of Interest (subtopic 835-20): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted and will be applied on a retrospective basis. As of June 30, 2015 we have $2.9 million and $13.0 million of deferred financing costs that would be reclassified from a current and a long-term asset, respectively, to a reduction in the carrying amount of our debt.

In November 2014, the FASB issued ASU 2014-16 “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity” (“ASU 2014-16”). ASU 2014-16 requires an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument issued in the form of a share, including the embedded derivative feature that is being evaluated for separate accounting from the host contract when evaluating whether the host contract is more akin to debt or equity. ASU 2014-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016 and is not expected to have a material impact on the Company’s Consolidated Financial Statements.


NOTE 2--
EARNINGS PER SHARE

Loss Per Share

The Company presents basic and diluted earnings per share (“EPS”) for its common stock (“Common Stock”). Basic EPS is calculated by dividing the net loss attributable to common stockholders of the Company by the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to stockholders and the weighted average number of shares of Common Stock outstanding adjusted for the effects of all dilutive potential common shares comprised of options granted, unvested restricted stocks, warrants and convertible preferred stock. Potential Common Stock equivalents that have been issued by the Company related to outstanding stock options, unvested restricted stock and warrants are determined using the treasury stock method, while potential common shares related to Series A Preferred Stock are determined using the “if converted” method.

The Company's Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) is considered a participating security, which means the security may participate in undistributed earnings with Common Stock. The holders of the Series A Preferred Stock would be entitled to share in dividends, on an as-converted basis, if the holders of Common Stock were to receive dividends. The Company is required to use the two-class method when computing EPS when it has a security that qualifies as a participating security. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to Common Stock holders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding during the period. Diluted EPS for the Company’s Common Stock is computed using the more dilutive of the two-class method or the if-converted method.


8


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,
 
2015
2014
2015
2014
Numerator:
 
 
 
 
Loss from continuing operations, net of income taxes
$
(243,164
)
$
(18,611
)
$
(259,069
)
$
(43,867
)
Loss from discontinued operations, net of income taxes
(1,644
)
(1,207
)
(5,412
)
(1,265
)
Net loss
$
(244,808
)
$
(19,818
)
$
(264,481
)
$
(45,132
)
Accrued dividends on Series A Preferred Stock
(1,805
)

(2,258
)

Deemed dividend on Series A Preferred Stock
(2,186
)

(3,350
)

Loss attributable to common stockholders
$
(248,799
)
$
(19,818
)
$
(270,089
)
$
(45,132
)
 
 
 
 
 
Denominator - Basic and Diluted:
 

 

 

 

Weighted average number of common shares outstanding
68,698

68,468

68,668

68,354

 
 
 
 
 
Loss per Common Share:
 
 
 
 
Loss from continuing operations, basic and diluted
$
(3.60
)
$
(0.27
)
$
(3.85
)
$
(0.64
)
Loss from discontinuing operations, basic and diluted
(0.02
)
(0.02
)
(0.08
)
(0.02
)
Net loss, basic and diluted
$
(3.62
)
$
(0.29
)
$
(3.93
)
$
(0.66
)

The loss attributable to common stockholders is used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. Accordingly, the computation of diluted shares for the three months and six months ended June 30, 2015 excludes the effect of securities issued in connection with the Purchase Agreement and Warrant Addendum (each as defined below) the Company entered into on March 9, 2015 and March 23, 2015, respectively (see Note 4 - PIPE Transaction) as their inclusion would be anti-dilutive to loss attributable to common stockholders, including the (i) 625,000 shares of Series A Preferred Stock with an initial conversion price of $5.17, (ii) 1,800,000 PIPE Class A Warrants (as defined below) with an exercise price of $5.17 and the (iii) 1,800,000 PIPE Class B Warrants (as defined below) with an exercise price of $6.45. The computation of diluted shares for the three months and six months ended June 30, 2014 excludes the effect of 3.1 million warrants with an exercise price of $10.00 issued in connection with the acquisition of Critical Homecare Solutions Holdings, Inc. (“CHS”) as their inclusion would be anti-dilutive to loss attributable to common stockholders. These warrants expired unexercised in March 2015 and are not impactful to the diluted shares calculation for the three months and six months ended June 30, 2015. In addition to the warrants, the computation of diluted shares for the three months ended June 30, 2015 and 2014, excludes the effect of 6.1 million and 4.1 million shares, respectively, of stock options and restricted stock awards as their inclusion would be anti-dilutive to loss attributable to common stockholders. The computation of diluted shares for the six months ended June 30, 2015 and 2014, excludes the effect of 5.6 million and 3.9 million shares, respectively, of stock options and restricted stock awards as their inclusion would be anti-dilutive to loss attributable to common stockholders.

NOTE 3 -- STOCKHOLDERS’ EQUITY

PIPE Warrants

In connection with the PIPE Transaction (see Note 4 - PIPE Transaction), the Company issued 1,800,000 Class A warrants (the “PIPE Class A Warrants”) and 1,800,000 Class B warrants (the “PIPE Class B Warrants” and, together with the PIPE Class A Warrants, the “PIPE Warrants”) which may be exercised to acquire shares of Common Stock. The rights and terms of the PIPE Class A Warrants and the PIPE Class B Warrants are identical except for the exercise price. Pursuant to an addendum (the “Warrant Addendum”), dated as of March 23, 2015, to the Warrant Agreement, dated as of March 9, 2015, with the PIPE Investors (as further described below), the PIPE Investors paid the Company $483,559 in the aggregate, and the per share exercise price of the

9


PIPE Class A Warrants and PIPE Class B Warrants was set at $5.17 and $6.45, respectively, reduced from $5.295 to $5.17 and from $6.595 to $6.45, respectively.

The PIPE Warrants are exercisable for a ten year term and may only be exercised for cash. The number of Common Stock that may be acquired upon exercise of the PIPE Warrants is subject to anti-dilution adjustments for stock splits, subdivisions, reclassifications or combinations, or the issuance of Common Stock for a consideration per share less than 85% of the market price per share immediately prior to such issuance. Upon the occurrence of certain business combinations the PIPE Warrants will be converted into the right to acquire shares of stock or other securities or property (including cash) of the successor entity.

The PIPE Warrants became exercisable on May 11, 2015, the date Stockholder Approval (as defined below) was obtained at the Company’s 2015 annual meeting of stockholders (the “2015 Annual Meeting”). Until Stockholder Approval was obtained, the PIPE Warrants contained certain restrictions preventing the holder together with its affiliates to beneficially own in the aggregate greater than 19.99% of the Company’s Common Stock after giving effect to the exercise of the PIPE Warrants (a “Conversion Cap”). As a result of the Company obtaining Stockholder Approval, the Conversion Cap ceased to apply.

The carrying value assigned to the PIPE Warrants was $2.9 million (see Note 4 - PIPE Transaction) which is classified as additional paid in capital in stockholders’ equity on the Consolidated Balance Sheet.

2010 Common Stock Purchase Warrants

In connection with the acquisition of CHS in March 2010, the Company issued 3.4 million warrants (the “2010 Warrants”) exercisable for Common Stock. The 2010 Warrants had a five year term with an exercise price of $10.00 per share. They were exercisable at any time prior to the expiration date.  

During the year ended December 31, 2013, the Company issued 78,567 shares of Common Stock pursuant to the cashless exercise of 256,175 of the 2010 Warrants. No 2010 Warrants were exercised during 2014 or during the three months ended March 31, 2015. The 2010 Warrants expired in March 2015.

NOTE 4 -- PIPE TRANSACTION

Securities Purchase Agreement
On March 9, 2015, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Coliseum Capital Partners, L.P., a Delaware limited partnership, Coliseum Capital Partners II, L.P., a Delaware limited partnership, and Blackwell Partners, LLC, Series A, a Georgia limited liability company (collectively, the “PIPE Investors”), affiliates of Coliseum Capital Management, LLC, a Delaware limited liability company (“Coliseum”). Pursuant to the terms of the Purchase Agreement, the Company issued and sold to the PIPE Investors in a private placement (the “PIPE Transaction”) an aggregate of (a) 625,000 shares of Series A Preferred Stock at a purchase price per share of $100.00, (b) 1,800,000 PIPE Class A Warrants, and (c) 1,800,000 PIPE Class B Warrants, for gross proceeds of $62.5 million. The initial conversion price for the Series A Preferred Stock is $5.17. Pursuant to the Warrant Addendum with the PIPE Investors, the PIPE Investors paid the Company $483,559 in the aggregate, and the per share exercise price of the PIPE Class A Warrants and PIPE Class B Warrants was set at $5.17 and $6.45, respectively, reduced from $5.295 to $5.17 and from $6.595 to $6.45, respectively.

As disclosed in the Company’s definitive proxy materials relating to the 2015 Annual Meeting, the Company sought stockholder approval to remove certain conversion and voting restrictions affecting the Series A Preferred Stock and exercise restrictions affecting the PIPE Warrants (the “Stockholder Approval”). Until Stockholder Approval was obtained, the terms of the Series A Preferred Stock and the PIPE Warrants contained caps on the conversion of the Series A Preferred Stock into Common Stock and on the exercise of the PIPE Warrants to purchase Common Stock (the “Conversion Caps”) and a cap on the voting power (the “Voting Cap” and, together with the Conversion Caps, the “Caps”) that prevented the issuance of Common Stock if a single holder would own or vote more than 19.99% of the Common Stock or have more than 19.99% of the voting power. If the Company did not receive Stockholder Approval before September 30, 2015, then the Caps would have remained in effect and the dividend rates on the Series A Preferred Stock would have increased. As a result of obtaining Stockholder Approval on May 11, 2015, the Caps and other restrictions and conditions relating to the holders and their respective affiliates’ ability to vote and convert their shares of Series A Preferred Stock and exercise the PIPE Warrants ceased to apply.

The Purchase Agreement contains customary representations, warranties and covenants, including covenants relating to, among other things, information rights, the Company’s financial reporting, tax matters, listing compliance under the NASDAQ Global Market, Stockholder Approval, use of proceeds, and potential requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended to make a notice filing with respect to the exercise of the PIPE Warrants.


10


As of June 30, 2015, the Company had repaid approximately $45.3 million of the Revolving Credit Facility indebtedness and accrued interest, representing 77% of the PIPE Transaction’s net proceeds.

The PIPE Transaction is the subject of a putative securities class action lawsuit (see Note 11 - Commitments and Contingencies).

The proceeds from the Purchase Agreement were allocated among the instruments based on their relative fair values as follows (in thousands):
 
Relative Fair Value Allocation
Financial instruments:
March 9, 2015
Series A Preferred Stock 1
$
59,355

PIPE Warrants 2
3,145

Total Investment
$
62,500


1 The fair value of the Series A Preferred Stock was determined using a binomial lattice model using the following assumptions: volatility of 55%, risk-free rate of 0.92%, and a dividend rate of 11.5%. The model also utilized various assumptions about the time to maturity and conditions under which conversion features would be exercised.

2 The fair value of the PIPE Warrants was determined using the Black Scholes model using the following assumptions: volatility of 55%, risk-free rate of 0.92%, and stated exercise prices. The model also utilized various assumptions about the time to maturity and conditions under which exercise would occur.

Series A Convertible Preferred Stock
In connection with the PIPE Transaction, the Company authorized 825,000 shares and issued 625,000 shares of Series A Preferred Stock at $100.00 per share.

The Series A Preferred Stock may, at the option of the holder, be converted into Common Stock. Until Stockholder Approval was obtained, the Series A Preferred Stock beneficially owned by a holder and its affiliates could not be converted to the extent that, after giving effect to the conversion, the holder would beneficially own, in the aggregate, in excess of 19.99% of the shares of Common Stock outstanding immediately after the conversion (a “Conversion Cap”). As a result of the Company obtaining Stockholder Approval on May 11, 2015, the Conversion Cap ceased to apply to the Series A Preferred Stock. The conversion rate in effect at any applicable time for conversion of each share of Series A Preferred Stock into Common Stock will be the quotient obtained by dividing the Liquidation Preference then in effect by the conversion price then in effect, plus cash in lieu of fractional shares. The initial conversion price for the Series A Preferred Stock is $5.17, but is subject to adjustment from time to time upon the occurrence of certain events, including in the event of a stock split, a reverse stock split, or a dividend of Junior Securities (defined below) to the Company’s common stockholders.

Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company (each, a Liquidation Event), after satisfaction of all liabilities and obligations to creditors of the Company and distribution of any assets of the Company to the holders of any stock or debt that is senior to the Series A Preferred Stock, and before any distribution or payment shall be made to holders of any Junior Securities, each holder of Series A Preferred Stock will be entitled to (i) convert their shares of Series A Preferred Stock into Common Stock and receive their pro rata share of consideration distributed to the holders of Common Stock, or (ii) receive, out of the assets of the Company or proceeds thereof (whether capital or surplus) legally available therefor, an amount per share of Series A Preferred Stock equal to the Liquidation Preference. The initial Liquidation Preference was equal to $100.00 per share which may be adjusted from time to time by the accrual of non-cash dividends. As of June 30, 2015, the Liquidation Preference was $64.8 million. However, if, at any applicable date of determination of the liquidation preference, (i) any cash dividend has been declared but is unpaid or (ii) the Company has given notice (or failed to give such notice) of its intention to pay a cash dividend but such cash dividend has not yet been declared by the Company’s board of directors (the “Board”), then such cash dividends shall be deemed, for purposes of calculating the applicable liquidation preference, to be Accrued Dividends. Accrued Dividends are paid upon the occurrence of a Liquidation Event and upon conversion or redemption of the Series A Preferred Stock.
The Company may pay a noncumulative cash dividend on each share of the Series A Preferred Stock when, as and if declared by the Board at a rate of 8.5% per annum on the liquidation preference then in effect. Cash dividends, if declared, are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing on the first calendar day of the first July or October following the date of original issuance of the Series A Preferred Stock. If declared, cash dividends will begin to accrue

11


on the first day of the applicable quarterly dividend period. In the event the Company does not declare and pay a cash dividend, the liquidation preference of the Series A Preferred Stock will be increased to an amount equal to the liquidation preference in effect at the start of the applicable quarterly dividend period, plus an amount equal to such then applicable liquidation preference multiplied by 11.5% per annum. If the Company pays a dividend or makes a distribution on the outstanding Common Stock (other than in Junior Securities, as defined below), the Company must, at the same time, pay each holder of the Series A Preferred Stock a dividend equal to the dividend the holder would have received if all of the holder’s shares of Series A Preferred Stock were converted into Common Stock immediately prior to the record date for the dividend payment (“Participating Dividend”). The Company would not be required to pay the Participating Dividend if the Company dividend or distribution was in Common Stock, a security ranking equal to or junior to Common Stock, or a security convertible into Common Stock or a security ranking equal to or junior to Common Stock (“Junior Securities”). Instead, where the Company makes a dividend or distribution of a Junior Security, the holder of Series A Preferred Stock is entitled to anti-dilution protection in the form of an adjustment to the conversion price of the Series A Preferred Stock. Unless and until the Company obtains the required consent and/or amendment from the Company’s lenders under the Company’s Senior Credit Facilities (as defined below), the Company will not be permitted to pay cash dividends.

From and after the tenth anniversary of the original issuance of the Series A Preferred Stock, each holder of shares of Series A Preferred Stock will have the right to request that the Company redeem, in full, out of funds legally available, by irrevocable written notice to the Company, all of such holder’s shares of Series A Preferred Stock at a redemption price per share equal to the Liquidation Preference then in effect per share of Series A Preferred Stock. From and after the tenth anniversary of the original issuance of the Series A Preferred Stock, the Company may redeem the outstanding Series A Preferred Stock, in whole or in part, at a price per share equal to the Liquidation Preference then in effect.

The Series A Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank senior to the Company’s Common Stock and each other class or series of shares that the Company may issue in the future that do not expressly provide that such class or series ranks equally with, or senior to, the Series A Preferred Stock, with respect to dividend rights and/or rights upon liquidation, winding up or dissolution. The Series A Preferred Stock will also rank junior to the Company’s existing and future indebtedness. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of Common Stock (and any other class or series similarly entitled to vote with the holders of Common Stock) and not as a separate class, at any annual or special meeting of stockholders of the Company, and may act by written consent in the same manner as the holders of Common Stock, on an as-converted basis. Until Stockholder Approval was obtained, the Series A Preferred Stock beneficially owned by a holder, or any of its affiliates could only be voted to an extent as not to exceed 19.99% of the aggregate voting power of all of the Company’s voting stock outstanding who may vote with respect to any proposal (the “Voting Cap”). As a result of the Company obtaining Stockholder Approval on May 11, 2015, the Voting Cap ceased to apply. So long as shares of the Series A Preferred Stock represent at least five percent (5%) of the outstanding voting stock of the Company, a majority of the voting power of the Series A Preferred Stock shall have the right to designate one (1) member to the Company’s Board who shall be appointed to a minimum of two (2) committees of the Board.

The following sets forth the initial carrying value of the Series A Preferred Stock which is classified as temporary equity (mezzanine equity) on the Consolidated Balance Sheet (in thousands):

 
Carrying Value
Series A Preferred Stock:
March 9, 2015
Issuance date liquidation preference
$
62,500

Discount related to warrant value 1
(3,145
)
Discount related to beneficial conversion feature 2
(3,145
)
Discount related to issuance costs 3
(3,830
)
Initial carrying value of Series A Preferred Stock
$
52,380


1 The discount related to the PIPE Warrants represents the difference between the redemption value of the Series A Preferred Stock and its allocated proceeds. The discount is accreted over the period from issuance to first available redemption and are presented as a deemed dividend on the Statement of Operations.

2 The value assigned to the Beneficial Conversion Feature (BCF) reflects the difference between the initial fair value assigned to the Series A Preferred Stock and the conversion value. The BCF value is accreted over the period from issuance date to first date conversion to common shares may take place and is presented as a deemed dividend on the Statement of Operations.


12


3 The Company incurred issuance costs of $4.0 million associated with the PIPE Transaction. The issuance costs were allocated to the Series A Preferred Stock and PIPE Warrants based on the relative fair value of each instrument or $3.8 million and $0.2 million, respectively. The issuance costs are accreted over the period from issuance to first available redemption and are presented as a deemed dividend on the Statement of Operations.

As of June 30, 2015, the following values were accreted as described above and recorded as a reduction of additional paid in capital in Stockholders’ Equity and a deemed dividend on the Statement of Operations. In addition, dividends were accrued at 11.5% from the date of issuance to June 30, 2015. The following table sets forth the activity recorded in the quarter ended June 30, 2015 related to the Series A Preferred Stock (in thousands).

Series A Preferred Stock carrying value at issuance
$
52,380

Accretion of discount related to issuance costs
109

Accretion of discount related to warrant value
96

Accretion of discount related to beneficial conversion feature
3,145

Dividends recorded through June 2015 1
2,258

Series A Preferred Stock carrying value June 30, 2015
$
57,988


1 Dividends recorded reflect the increase in the Liquidation Preference associated with unpaid dividends.
PIPE Warrants
In connection with the PIPE Transaction, the Company issued 1,800,000 PIPE Class A Warrants and 1,800,000 PIPE Class B Warrants which may be exercised to acquire shares of Common Stock. The rights and terms of the PIPE Class A Warrants and the PIPE Class B Warrants are identical except for the exercise price. Pursuant to the Warrant Addendum, the PIPE Investors paid the Company $483,559 in the aggregate, and the per share exercise price of the PIPE Class A Warrants and PIPE Class B Warrants was set at $5.17 and $6.45, respectively, reduced from $5.295 to $5.17 and from $6.595 to $6.45, respectively. As noted above, the PIPE Class A Warrants and the PIPE Class B Warrants are collectively referred to as the “PIPE Warrants”.

The PIPE Warrants are exercisable for a ten year term and may only be exercised for cash. The number of shares of Common Stock that may be acquired upon exercise of the PIPE Warrants is subject to anti-dilution adjustments for stock splits, subdivisions, reclassifications or combinations, or the issuance of Common Stock for a consideration per share less than 85% of the market price per share immediately prior to such issuance. Upon the occurrence of certain business combinations the PIPE Warrants will be converted into the right to acquire shares of stock or other securities or property (including cash) of the successor entity.

The following sets forth the carrying value of the PIPE Warrants which is classified as equity on the Consolidated Balance Sheet (in thousands):
 
Carrying Value
PIPE Warrants
March 9, 2015
Fair value allocated to PIPE Warrants
$
3,145

Discount related to issuance costs 1
(203
)
Carrying value of PIPE Warrants
$
2,942


1 The Company incurred issuance costs of $4.0 million associated with the PIPE Transaction. The issuance costs were allocated to the Series A Preferred Stock and PIPE Warrants based on the relative fair value of each instrument or $3.8 million and $0.2 million, respectively.
Registration Rights Agreement
The Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the PIPE Investors that will, among other things and subject to certain exceptions, require the Company, upon the request of the holders of the Series A Preferred Stock to register the Common Stock of the Company issuable upon conversion of the Series A Preferred Stock or exercise of the PIPE Warrants. Pursuant to the terms of the Registration Rights Agreement, these registration rights will not become effective until one year after the closing date of the PIPE Transaction and the costs incurred in connection with such registrations will be borne by the Company.


13


NOTE 5--ACQUISITION AND INTEGRATION EXPENSES

Expenses incurred to integrate acquisitions are recorded in acquisition and integration expenses on the accompanying Unaudited Consolidated Statements of Operations. These costs include legal and financial advisory fees associated with acquisitions; employee severance related to staff rationalization; temporary redundant costs and integration costs to convert to common policies, procedures, and information systems. The following table summarizes the acquisition and integration expenses for the three months and six months ended June 30, 2015 and 2014 related to the CarePoint Business, HomeChoice Partners, and InfuScience acquisitions (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Legal and professional fees
$
223

 
$
1,571

 
$
571

 
$
2,546

Employee costs including redundant salaries and benefits and severance
10

 
430

 
(332
)
 
1,580

Facilities consolidation and discontinuation
143

 
353

 
336

 
658

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

 
(463
)
 
5,420

Legal settlement

 
8

 

 
333

Other
1

 
853

 
367

 
1,295

Total
$
259

 
$
5,333

 
$
479

 
$
11,832


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. The allowance for doubtful accounts and contractual discounts on acquired accounts receivable were initially reserved at historical collection rates as of December 31, 2013. Based on lower than expected collections in 2014, the Company no longer expected to achieve historical collection rates on the acquired accounts receivable.

NOTE 6--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.

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. Subsequently, 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 Company has classified the net proceeds received from this sale in cash provided by investing activities from discontinued operations in the accompanying Consolidated Statements of Cash Flows.

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 decided in the second quarter of 2014 to cease the material portion of its Home Health operations at the one location excluded from the Stock Purchase Agreement, as amended, and has reclassified its operations to discontinued operations for all

14


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 $0.4 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 operating results included in discontinued operations of the Home Health Business for the three months and six months ended June 30, 2015 and 2014 are summarized as follows (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$

 
$
502

 
$

 
$
18,932

Gross profit
$

 
$
173

 
$

 
$
6,954

Selling, general and administrative expenses

 
583

 

 
7,375

Bad debt expense

 
237

 

 
900

Income (loss) from operations

 
(647
)
 

 
(1,321
)
Gain on sale before income taxes

 
(1,072
)
 

 
(2,067
)
Financial advisory fee and legal expenses

 

 

 
2,875

Impairment of assets

 

 

 
452

Other costs and expenses
292

 

 
341

 
47

Income (loss) before income taxes
(292
)
 
425

 
(341
)
 
(2,628
)
Income tax expense (benefit)

 
(355
)
 

 
(4,186
)
Income (loss) from discontinued operations, net of income taxes
$
(292
)
 
$
780

 
$
(341
)
 
$
1,558



15


Pharmacy Services Asset Sale

On February 1, 2012, the Company entered into a Community Pharmacy and Mail Business Purchase Agreement by and among Walgreen Co. and certain subsidiaries 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.

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, 2015 and 2014, are summarized below (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$

 
$

 
$

 
$

Gross profit
$

 
$

 
$

 
$
(27
)
Operating expenses

 
1,987

 

 
2,796

Legal fees and settlement expense
1,116

 

 
3,129

 

Other (income) expense
236

 

 
266

 

Facilities costs

 

 
1,676

 

Income (loss) from discontinued operations, net of income taxes
$
(1,352
)
 
$
(1,987
)
 
$
(5,071
)
 
$
(2,823
)

Operating expenses during the three months and six months ended June 30, 2015 primarily consist of legal fees related to the legal proceedings discussed in Note 11 - Commitments and Contingencies and facilities costs.

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-four 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 11 - Commitments and Contingencies). Cash payments of $6.1 million and $3.0 million related to the Settlement Agreements were made to the DOJ and Settling States in the three months and six months ended June 30, 2015 and 2014, respectively. In addition, cash payments of $0.3 million and $0.4 million were paid to the Relator in the three months and six months ended June 30, 2015 and 2014, respectively.

As of June 30, 2015 and December 31, 2014, there were accruals of $8.6 million and $13.0 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
 
Other Costs
 
Total
Balance at December 31, 2014
 
$
12,389

 
$
609

 
$
12,998

Expenses
 
1,076

 
1,795

 
2,871

Cash payments
 
(6,376
)
 
(856
)
 
(7,232
)
Balance at June 30, 2015
 
$
7,089

 
$
1,548

 
$
8,637



16


NOTE 7--GOODWILL AND INTANGIBLE ASSETS

Goodwill consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):

 
Infusion Services
PBM Services
Total
Balance at December 31, 2014
$
560,579

12,744

573,323

Additions



Impairment of goodwill
$
238,000

$

$
238,000

Balance at June 30, 2015
$
322,579

$
12,744

$
335,323


The Company evaluates goodwill for impairment on an annual basis and whenever events or circumstances exist that indicates that the carrying value of goodwill may no longer be recoverable. The impairment evaluation is based on a two-step process. The first step (“Step 1”) 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 (“Step 2”) 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.

In the first quarter of 2015, we performed our annual goodwill impairment test and estimated the fair value of each of our reporting units as of the end of our most recent fiscal year. We concluded that the estimated fair value determined under our testing approach for each of our reporting units, as of December 31, 2014, was reasonable. In each case, the estimated fair value exceeded the respective carrying value. We concluded that the goodwill assigned to each reporting unit, as of December 31, 2014, was not impaired and that neither reporting unit was at risk of failing step one of the goodwill impairment test as prescribed under the ASC.
Business conditions have not significantly improved in recent months and our stock price has declined. As a result, we concluded that it was appropriate for us to perform a quantitative Step 1 interim goodwill impairment test as of June 30, 2015. Taking into consideration our updated business outlook for the remainder of fiscal 2015, we updated our future cash flow assumptions for our Infusion Services reporting unit and calculated updated estimates of fair value using the standard three step valuation approach. After updating our assumptions and projections, we then calculated an estimate of fair value for the reporting unit, consistent with our annual impairment test on December 31, 2014. As of June 30, 2015, we determined that our Infusion Services reporting unit had an indication of impairment and we proceeded to a Step 2 analysis to determine the amount of the goodwill impairment. The Step 1 analysis for our PBM Services reporting unit did not indicate a potential goodwill impairment. Therefore, no Step 2 was necessary.
Our fair value for each reporting unit is determined based on a guideline public company analysis or market approach which utilizes current earnings multiples of comparable publicly-traded companies, a guideline transaction analysis which utilizes select actual comparable industry transactions and a discounted cash flow analysis which uses significant unobservable inputs, or level 3 inputs, as defined by the fair value hierarchy. We have equally weighted the valuation of our reporting units based on the three methods.  We believe that this weighting is appropriate.

The Step 2 analysis included determining the fair value of inventory and other current assets and liabilities, as well as fair values of equipment and fixtures. Key assumptions used in the impairment test included: growth rates ranging from 3.0% to 5.0%, EBITDA margins of 6% to 8%, and discount rates applied ranging from 9.0% to 11.0%.  Although this analysis has not been completed due to its complexity, based on the work performed to date the Company has recorded a preliminary estimated impairment charge of $238.0 million in the second quarter of fiscal 2015, all of which related to our Infusion Services segment.  The impairment charge is subject to finalization of fair value which the Company will complete in the third quarter of fiscal 2015. The Company believes that the preliminary estimate of impairment charge is reasonable and represents the Company’s best estimate of the impairment charge to be incurred; however, it is possible that a material adjustment to the preliminary estimate may be required as the analysis is finalized. Any adjustment to the preliminary estimated impairment charge will be recorded in the Unaudited Consolidated Financial Statements in the third quarter of 2015.

The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of a company's stock (and thus its computed market capitalization) may not be representative of the fair value of the company as a whole.  Additional value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity.  Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity's individual common stock.  In most industries, including ours, an

17


acquiring entity typically is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest.  We have taken into consideration the current trends in our market capitalization and the current book value of our equity in relation to fair values arrived at in our interim fiscal 2015 goodwill impairment analysis, including the implied control premium, and have deemed the result to be reasonable.

Our goodwill impairment analysis is sensitive to changes in key assumptions used in our analysis, such as expected future cash flows, the degree of volatility in equity and debt markets, and our stock price. If the assumptions used in our analysis are not realized, it is possible that an impairment charge may need to be recorded in the future. We cannot accurately predict the amount and timing of any impairment of goodwill or other intangible assets. Further, as we work towards a turnaround of our business, we will need to continue to evaluate the carrying value of our goodwill. Any additional impairment charges that we may take in the future could be material to our results of operations and financial condition.

The Company will evaluate goodwill for possible impairment during the quarter ending December 31, 2015 unless an additional interim goodwill impairment test is required.

Intangible assets consisted of the following as of June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Infusion customer relationships
$
25,650

 
$
(18,894
)
 
$
6,756

 
$
25,650

 
$
(16,615
)
 
$
9,035

Infusion trademarks
6,200

 
(5,983
)
 
217

 
6,200

 
(5,333
)
 
867

Non-compete agreements
1,500

 
(1,183
)
 
317

 
1,500

 
(1,133
)
 
367

 
$
33,350

 
$
(26,060
)
 
$
7,290

 
$
33,350

 
$
(23,081
)
 
$
10,269


Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
 
Estimated Useful Life
Infusion customer relationships
2 - 4 years
Infusion trademarks
2 years
Non-compete agreements
5 years

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 $3.0 million and $3.3 million for the six months ended June 30, 2015 and 2014, respectively. Future amortization expense is anticipated to be as follows (in thousands):

2015 (six months)
$
2,162

2016
3,078

2017
1,983

2018
67

2019 and beyond

Total
$
7,290


NOTE 8--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, retention bonuses for certain critical personnel, certain excess facility costs for locations not yet abandoned and professional fees and other costs related to contract terminations and closed branches which are not classified as restructuring.


18


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 12.

Restructuring Phases

Restructuring Phase I commenced in 2010 with a strategic assessment of the Company’s business and operations. As a result of the assessment, the Company elected to focus investments in the Infusion Services segment and to pursue offers for its traditional and specialty pharmacy mail operations and community pharmacy stores.  Accordingly, the Company consummated the Pharmacy Services Asset Sale in May 2012 and Restructuring Phase I was completed.  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 II

As a result of Restructuring Phase II, which is ongoing, the Company incurred restructuring expenses of approximately $0.9 million and $1.9 million during three months and six months ended June 30, 2015, respectively, consisting of employee severance and other benefit-related costs as the result of workforce reductions, third-party consulting and other costs. Restructuring expenses for the three months and six months ended June 30, 2014 were $3.0 million and $6.8 million, respectively, including approximately $1.3 million of employee severance and other benefit-related costs related to workforce reductions and $5.3 million in third party consulting costs.

Since inception of Restructuring Phase II, the Company has incurred approximately $18.2 million in total expenses, consisting of $6.3 million of employee severance and other benefit-related costs related to workforce reductions, $8.2 million in third party consulting costs and $3.7 million of other costs.

As of June 30, 2015, there are restructuring accruals of approximately $1.3 million related to Restructuring 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, 2014
$
1,385

 
$
481

 
$
1,476

 
$
3,342

Expenses
732

 
111

 
1,098

 
1,941

Cash payments
(984
)
 
(589
)
 
(2,389
)
 
(3,962
)
Balance at June 30, 2015
$
1,133

 
$
3

 
$
185

 
$
1,321


Other Expenses

Other expenses include transitional costs such as training, redundant salaries, retention bonuses for certain critical personnel, certain excess facility costs for locations not yet abandoned and professional fees and other costs related to contract terminations and closed branches which are not classified as restructuring. Other expenses totaled $4.2 million and $0.9 million for the three months ended June 30, 2015 and 2014, respectively, and $6.7 million and $1.6 million for the six months ended June 30, 2015 and 2014, respectively.



19


NOTE 9--PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Computer and office equipment
$
22,869

 
$
22,662

Software capitalized for internal use
16,043

 
14,914

Vehicles, including equipment acquired under capital leases
2,062

 
2,106

Medical equipment, including equipment acquired under capital leases
27,954

 
27,668

Construction in progress
4,379

 
3,287

Furniture and fixtures
4,548

 
4,487

Leasehold improvements
13,998

 
13,690

 
91,853

 
88,814

Less: Accumulated depreciation
(56,947
)
 
(50,643
)
Property and equipment, net
$
34,906

 
$
38,171


The Company had an insignificant amount of vehicles and medical equipment under capital lease as of June 30, 2015 and December 31, 2014.

Depreciation Expense

Depreciation expense, including expense related to assets under capital lease, was $4.1 million and $4.0 million for the three months ended June 30, 2015 and 2014, respectively, and $8.4 million and $7.8 million for the six months ended June 30, 2015 and 2014, respectively. Depreciation expense includes costs related to software capitalized for internal use of $0.6 million and $0.7 million for the three months ended June 30, 2015 and 2014, respectively, and $1.3 million and $1.1 million for the six months ended June 30, 2015 and 2014, respectively.

NOTE 10--DEBT

As of June 30, 2015 and December 31, 2014, the Company’s debt consisted of the following obligations (in thousands):
 
June 30,
2015
 
December 31,
2014
Revolving Credit Facility
$

 
$
5,000

Term Loan Facilities
222,757

 
222,757

2021 Notes, net of unamortized discount
195,745

 
195,462

Capital leases
355

 
584

Total Debt
418,857

 
423,803

Less: Current portion
238

 
5,395

Long-term debt, net of current portion
$
418,619

 
$
418,408


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 11- Commitments and Contingencies) and to begin making payments, in accordance with the payment terms, on the settlement amount of $15.0 million.


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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%.

On March 1, 2015, the Company entered into the Third Amendment to the Senior Credit Facilities, which establishes an alternate leverage test for the fiscal quarters ending March 31, 2015 through and including March 31, 2016. The maximum net leverage ratio for these quarters is consistent with that in effect for the prior four fiscal quarters. The Third Amendment eliminated the need to meet progressively lower leverage ratio requirements at each quarter end date for the next four quarters. The Third Amendment also reduces the Revolver Covenant Triggering Event from 25% of the Aggregate Revolving Commitment Amount to 5% of the Aggregate Revolving Commitment Amount beginning with the quarter ended June 30, 2015 and provides for certain additional financial reporting.

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 6 - 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, 2015, 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.

In connection with the PIPE Transaction (see Note 4 - PIPE Transaction), the Company was required to use at least 75% of the net proceeds for the repayment of outstanding indebtedness. As of June 30, 2015, the Company has repaid approximately $45.3 million of the Revolving Credit Facility indebtedness and accrued interest from those proceeds.

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.

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, 2015, 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

21


or that of any of its restricted subsidiaries, in each case incurred under the Company’s credit facilities. As of June 30, 2015, the Company does not have any independent assets or operations, and as a result, its direct and indirect subsidiaries (other than minor subsidiaries), each being 100% owned by the Company, are fully and unconditionally, jointly and severally, providing guarantees on a senior unsecured basis to the 2021 Notes.

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 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 filed an exchange offer registration statement on Form S-4 on February 6, 2015 and a related amendment on May 1, 2015, which was declared effective on May 6, 2015, to exchange the 2021 Notes for substantially identical notes registered under the Securities Act. The Company filed a shelf registration statement to cover resales of the 2021 Notes under certain circumstances. The Company completed the exchange offer with respect to the 2021 Notes on June 16, 2015.

Deferred Financing Costs

In connection with the Third Amendment to the Senior Credit Facilities during the first quarter of 2015, the Company incurred $1.2 million in deferred financing costs. The deferred financing costs will be reflected as additional debt discount and amortized as an adjustment of interest expense over the remaining term of the Senior Credit Facilities using the effective interest method.

In connection with the issuance of the 2021 Notes, the Company incurred underwriting fees, agent fees, legal fees and other expenses of $0.5 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, 2015 and 2014 (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revolving Credit Facility
$
223

 
$
184

 
$
870

 
$
768

Term Loan Facilities
3,660

 
3,669

 
7,279

 
9,419

2021 Notes
4,438

 
4,437

 
8,727

 
6,744

Amortization of deferred financing costs
693

 
727

 
1,334

 
2,550

Amortization of debt discount
142

 
129

 
282

 
195

Other, net
(76
)
 
(11
)
 
(249
)
 
(42
)
Interest expense, net
$
9,080

 
$
9,135

 
$
18,243

 
$
19,634


22



NOTE 11--COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Shareholder Class Action Litigation in the Delaware Court of Chancery
On April 9, 2015, two separate putative class action lawsuits were filed in the Delaware Court of Chancery (the “Delaware Court”) by purported stockholders Lawrence Cline and Roger Rubin (“Plaintiffs”), respectively, in connection with the Purchase Agreement with the PIPE Investors, against the Company, Directors of the Company and the PIPE Investors. Pursuant to the Purchase Agreement, the Company issued and sold to the PIPE Investors in a private placement (as defined above, the “PIPE Transaction”) an aggregate of (a) 625,000 shares of Series A Preferred Stock, (b) 1,800,000 PIPE Class A Warrants, and (c) 1,800,000 PIPE Class B Warrants, as further described below.
As disclosed in the Company’s definitive proxy materials relating to the 2015 Annual Meeting, the Company sought Stockholder Approval to remove certain conversion and voting restrictions affecting the Series A Preferred Stock and exercise restrictions affecting the PIPE Warrants (as defined above, the “Stockholder Approval”). Until Stockholder Approval was obtained, the terms of the Series A Preferred Stock and the PIPE Warrants contained caps on the conversion of the Series A Preferred Stock into Common Stock and on the exercise of the PIPE Warrants to purchase Common Stock (the “Conversion Caps”) and a cap on voting power (the “Voting Cap” and, together with the Conversion Caps, the “Caps”) that prevented the issuance of Common Stock if a single holder would own or vote more than 19.99% of the Common Stock or have more than 19.99% of the voting power. If the Company did not receive Stockholder Approval before September 30, 2015, then the Caps would have remained in effect and the dividend rates on the Series A Preferred Stock would have increased (the “Dividend Rate Adjustment”).
The Plaintiffs asserted, among other things, that the Dividend Rate Adjustment was invalid, that the Board had breached their fiduciary duties and that the stockholder vote on the Stockholder Approval scheduled for the 2015 Annual Meeting was coercive and based on inadequate disclosure. The Plaintiffs’ complaint sought a preliminary and permanent injunction, enjoining the vote on Stockholder Approval at the 2015 Annual Meeting, additional disclosures, certain declaratory relief, and costs and disbursements, including attorneys’ fees, costs and expenses. On April 17, 2015, the two separate class action lawsuits were consolidated by order of the Delaware Court as In re BioScrip, Inc. Stockholder Litigation, Consol. C.A. 10893-VCG (the “Delaware Action”).

On April 30, 2015, the Company entered into a memorandum of understanding (the “Memorandum of Understanding”) to settle the Delaware Action. The parties entered into a stipulation of settlement on May 11, 2015 (the “Stipulation of Settlement”). In consideration for the full settlement and release of the Delaware Action (the “Settlement”), the Stipulation of Settlement provided for, among other things, agreement that if Stockholder Approval was obtained, causing the Caps to be removed and the Dividend Rate Adjustment to never go into effect, the Delaware Action will be dismissed with prejudice, subject to court approval. The Stipulation of Settlement also provided for an award of no more than $750,000 in attorneys’ fees and expenses to Plaintiffs’ counsel, subject to court approval.

Stockholder Approval was obtained at the 2015 Annual Meeting on May 11, 2015, and, therefore, subject to court approval of the Settlement, the Delaware Action will be dismissed with prejudice by the Delaware Court in accordance with the terms of the Stipulation of Settlement. The Delaware Court held a hearing on July 29, 2015, to consider the fairness of the Settlement and award of Plaintiffs’ attorneys’ fees. The order approving the Settlement and award of $750,000 in attorneys’ fees and expenses to Plaintiff’s counsel was issued on July 29, 2015.

The Company carries insurance coverage in such amounts as we believe to be reasonable under the circumstances, which will cover a certain percentage of the attorneys’ fees award. We believe the action may implicate one or more indemnification agreements between the Company and certain defendants, for which there may be no insurance coverage. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action is not likely to have a material adverse effect on our results of operations, financial position, liquidity or capital resources.
Derivative Lawsuit in Delaware Court of Chancery
On May 7, 2015, a derivative complaint was filed in the Delaware Court of Chancery by the Park Employees’ & Retirement Board Employees’ Annuity & Benefit Fund of Chicago (the “Delaware Complaint”). The Delaware Complaint names as defendants certain current and former directors of the Company, consisting of Richard M. Smith, Myron Holubiak, Charlotte Collins, Samuel Frieder, David Huber, Richard Robbins, Stuart Samuels and Gordon Woodward (collectively, the “Director Defendants”), certain current and former officers of the Company, consisting of Kimberlee Seah, Hai Tran and Patricia Bogusz (collectively the “Officer Defendants”), Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C., Kohlberg Investors V, L.P., Kohlberg Partners V, L.P.,

23


Kohlberg TE Investors V, L.P., KOCO Investors V, L.P. and Jefferies LLC. The Company is also named as a nominal defendant in the Delaware Complaint. The Delaware Complaint was filed in the Delaware Court of Chancery as Park Employees and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Richard M. Smith, Myron Z. Holubiak, Charlotte W. Collins, Samuel P. Frieder, David R. Huber, Richard L. Robbins, Stuart A. Samuels, Gordon H. Woodward, Kimberlee C. Seah, Hai V. Tran, Patricia Bogusz, Kohlberg & Co., L.L.C., Kohlberg Management V, L.L.C., Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V, L.P., KOCO Investors V, L.P., Jefferies LLC and BioScrip, Inc., C.A. No. 11000-VCG (Del. Ch. Ct., May 7, 2015).
The Delaware Complaint alleges generally that certain defendants breached their fiduciary duties with respect to the Company’s public disclosures, oversight of Company operations, secondary stock offerings and stock sales. The Delaware Complaint also contends that certain defendants aided and abetted those alleged breaches. The damages sought are not quantified but include, among other things, claims for money damages, restitution, disgorgement, equitable relief, reasonable attorneys’ fees, costs and expenses, and interest. The Delaware Complaint incorporates the same factual allegations from In re BioScrip, Inc., Securities Litigation (described below). On June 16, 2015, all defendants moved to dismiss the case. Briefing for the motion to dismiss is currently scheduled to be completed by November 30, 2015.
The Company, Director Defendants and the Officer Defendants deny any allegations of wrongdoing in this lawsuit. The Company and such persons believe all of the claims in this lawsuit are without merit and intend to vigorously defend against these claims. However, there is no assurance that the defense will be successful or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of this action. Certain of the defendants have sought indemnification from the Company pursuant to certain indemnification agreements, for which there may be no insurance coverage. Additional similar lawsuits may be filed. Moreover, we are unable to predict the outcome or reasonably estimate a range of possible loss at this time. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action is not likely to have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

Discontinued Operations Contingency - Prior State Regulatory Matter

The Company has accrued an estimate of a potential loss as of June 30, 2015 in connection with a pending regulatory matter related to certain discontinued operations of the Company (see Note 6 - Discontinued Operations). The accrual recorded represents the Company’s best estimate of the exposure.

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.

24



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, 2015, the Company has paid $9.1 million, including interest, related to the Settlement Agreements and $0.7 million 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 as In re BioScrip, Inc., Securities Litigation, No. 13-cv-6922 (AJN) 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, and August 2013. The consolidated complaint alleges generally that the defendants made material misstatements and/or failed to disclose matters related to 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. On March 31, 2015, the Court granted in part and denied in part the defendants’ motions to dismiss. On April 14, 2015, a motion to reconsider a portion of the Court’s denial of the motions to dismiss was filed on behalf of all remaining defendants. Plaintiffs filed their opposition to that motion on April 28, 2015. On June 5, 2015, the Court denied the defendants’ motion to reconsider. The parties have agreed to a mediation of all pending claims, which is currently scheduled to take place in September 2015.

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. Certain of the defendants have sought indemnification from the Company, pursuant to certain indemnification agreements, for which there may be no insurance coverage. While no assurance can be given as to the ultimate outcome of this matter, we believe that the final resolution of this action is not likely to have a material adverse effect on our results of operations, financial position, liquidity or capital resources.

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. In addition, under the merger agreement dated as of January 24, 2010, by and among the Company, CHS and the former CHS stockholders, the former CHS stockholders agreed to indemnify the

25


Company, subject to certain limits, in connection with any losses arising from claims made in respect of the acquisition agreement entered into between PHCS and Alexander Infusion.


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, 2015, the total amount owed to the Company is approximately $6.8 million. The Company has initiated arbitration to collect approximately $6.8 million due from the third party processor. The arbitration process is expected to take several more months. As of June 30, 2015, no reserve has been provided for the amounts due to the Company as we believe the amounts owed will be paid in full, however, there are uncertainties around any arbitration process.

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, 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 often uncertain in their application to our business practices as they evolve and are subject to rapid change. 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 investigatory subpoenas and requests for information from governmental agencies and private parties. 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 failure to do so 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.

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, 2015, future minimum lease payments under operating and capital leases are as follows (in thousands):
 
 Operating Leases
 
 Capital Leases
 
 Total
2015 (six months)
$
4,560

 
$
181

 
$
4,741

2016
7,921

 
122

 
8,043

2017
6,773

 
62

 
6,835

2018
4,713

 
11

 
4,724

2019
2,731

 

 
2,731

2020 and thereafter
2,357

 

 
2,357

 Total
$
29,055

 
$
376

 
$
29,431


Rent expense for leased facilities and equipment was approximately $1.8 million and $2.0 million three months ended June 30, 2015 and 2014, respectively, and $3.7 million and $3.9 million for the six months ended June 30, 2015 and 2014, respectively.


26


Purchase Commitments

As of June 30, 2015, the Company had commitments to purchase prescription drugs from drug manufacturers of approximately $23.3 million during the remainder of 2015. These purchase commitments are made at levels expected to be used in the normal course of business.

NOTE 12--OPERATING AND REPORTABLE SEGMENTS

Following the sale of substantially all of the Company’s Home Health Services segment on March 31, 2014, 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 nursing support and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes.

The PBM Services operating and reportable segment consists of 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 the Company’s participating network pharmacies receive prescription medications at a discounted price compared to the retail price. In addition, in the Company’s capacity as a pharmacy benefit manager, it has fully funded prescription benefit programs where the Company reimburses its network pharmacies and third party payors in turn reimburse the Company based on Medi-Span reported pricing for those claims fulfilled for their plan participants.

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, impairments and stock-based compensation expense and prior to the allocation of certain corporate expenses. Segment Adjusted EBITDA excludes acquisition, integration and transitional expenses; restructuring and other 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.


Segment Reporting Information
(in thousands)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Results of Operations:
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Infusion Services - product revenue
$
241,020

 
$
225,277

 
$
480,067

 
$
441,180

Infusion Services - service revenue
5,957

 
5,271

 
11,187

 
10,437

Total Infusion Services revenue
246,977

 
230,548

 
491,254

 
451,617

PBM Services - service revenue
15,386

 
16,577

 
32,790

 
34,801

Total revenue
$
262,363

 
$
247,125

 
$
524,044

 
$
486,418

 
 
 
 
 
 
 
 
Adjusted EBITDA by Segment before corporate overhead:
 
 
 

 
 
 
 

Infusion Services
$
4,140

 
$
16,194

 
$
16,839

 
$
31,155

PBM Services
1,737

 
1,837

 
3,126

 
3,512

Total Segment Adjusted EBITDA
5,877

 
18,031

 
19,965

 
34,667

Corporate overhead
(8,411
)
 
(7,016
)
 
(16,179
)
 
(14,492
)
Consolidated Adjusted EBITDA
(2,534
)
 
11,015

 
3,786

 
20,175

Interest expense, net
(9,080
)
 
(9,135
)
 
(18,243
)
 
(19,634
)
Loss on sale of assets
(628
)
 


 
(628
)
 

Income tax (expense) benefit
19,921

 
(3,063
)
 
17,993

 
(6,554
)
Depreciation
(4,130
)
 
(3,958
)
 
(8,434
)
 
(7,794
)
Amortization of intangibles
(1,489
)
 
(1,620
)
 
(2,979
)
 
(3,323
)
Impairment of goodwill
(238,000
)
 

 
(238,000
)
 

Stock-based compensation expense
(1,162
)
 
(1,998
)
 
(2,819
)
 
(4,884
)
Acquisition and integration expenses
(259
)
 
(5,333
)
 
(479
)
 
(11,832
)
Restructuring and other expenses
(5,803
)
 
(4,519
)
 
(9,266
)
 
(10,021
)
Loss from continuing operations, net of income taxes
$
(243,164
)
 
$
(18,611
)
 
$
(259,069
)
 
$
(43,867
)

Supplemental Operating Data
 
 
 
 
June 30,
2015
 
December 31,
2014
Total Assets:
 
 
 
Infusion Services
$
510,566

 
$
755,955

PBM Services
26,702

 
29,147

Corporate unallocated, including cash and cash equivalents
39,881

 
39,611

Total Assets
$
577,149

 
$
824,713


NOTE 13--CONCENTRATION OF RISK

Customer and Credit Risk

The Company provides trade credit to its customers in the normal course of business. One commercial payor, United Healthcare, accounted for approximately 24% of revenue during the three months and six months ended June 30, 2015 and 2014. In addition, Medicare accounted for approximately 10% and 12% of revenue during the three months and six months ended June 30, 2015 and June 30, 2014, respectively. The majority of the revenue is related to the Infusion Services segment.


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Therapy Revenue Risk

The Company sells products related to the Immune Globulin therapy, which represented 16% and 17% for the three months ended June 30, 2015 and 2014, respectively, and 16% and 18% for the six months ended June 30, 2015 and 2014, respectively. The revenue is related to the Infusion Services segment.

NOTE 14--INCOME TAXES

The Company’s Federal and state income tax expense from continuing operations for the three months and six months ended June 30, 2015 and 2014 is summarized in the following table (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Current
 
 
 
 
 
 
 
Federal
$

 
$

 
$

 
$

State
29

 
(587
)
 
30

 
196

Total current
29

 
(587
)
 
30

 
196

Deferred
 

 
 

 
 

 
 

Federal
(16,816
)
 
3,248

 
(15,188
)
 
5,644

State
(3,134
)
 
402

 
(2,835
)
 
714

Total deferred
(19,950
)
 
3,650

 
(18,023
)
 
6,358

Total income tax expense (benefit)
$
(19,921
)
 
$
3,063

 
$
(17,993
)
 
$
6,554


The tax benefit recognized for the three months and six months ended June 30, 2015 is a result of the decrease in deferred tax liability related to goodwill which decreased due to the goodwill impairment charge.

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, 2015 and 2014 is summarized as follows (in thousands):

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Tax benefit at statutory rate
$
(92,080
)
 
$
(5,374
)
 
$
(96,972
)
 
$
(13,044
)
State tax expense (benefit), net of Federal taxes
11

 
(384
)
 
11

 
125

Change in tax contingencies
2

 

 
2

 

Valuation allowance changes affecting income tax expense
31,098

 
8,755

 
37,879

 
19,356

Impairment of goodwill
40,977

 

 
40,977

 

Non-deductible transaction costs and other
71

 
66

 
110

 
117

Income tax expense (benefit)
$
(19,921
)
 
$
3,063

 
$
(17,993
)
 
$
6,554



28


NOTE 15--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, non-qualified stock options, stock appreciation rights ("SARs"), restricted stock grants, restricted stock units and performance units to key 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 (the “2014 Additional 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.

On September 19, 2014, the Company filed a Registration Statement on Form S-8 to register the issuance of the 2014 Additional Shares that were approved by the Company’s stockholders on May 8, 2014.

As of June 30, 2015, 1,858,427 shares remain available for grant under the 2008 Plan.

Stock Options

The Company recognized compensation expense related to stock options of $1.2 million and $1.5 million during the three months ended June 30, 2015 and 2014, respectively, and $3.1 million and $3.3 million during the six months ended June 30, 2015 and 2014, respectively.

Restricted Stock

The Company recognized compensation expense related to restricted stock awards of $0.1 million and $0.2 million during the three months ended June 30, 2015 and 2014, respectively and $0.3 million and $1.3 million during the six months ended June 30, 2015 and 2014, respectively.

Stock Appreciation Rights