10-Q
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
OR
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o |
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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)
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Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
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05-0489664
(I.R.S. Employer Identification No.) |
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100 Clearbrook Road, Elmsford, NY
(Address of Principal Executive Offices)
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10523
(Zip Code) |
(914) 460-1600
(Registrants telephone number, including area code)
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 R No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (check one):
o Large accelerated filer þ Accelerated filer o Non-accelerated filer
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 April 28, 2006, there were outstanding 37,356,838 shares of the registrants common stock,
$.0001 par value per share.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
BIOSCRIP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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March 31, 2006 |
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December 31, 2005 |
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ASSETS |
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(unaudited) |
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Current assets |
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Cash and cash equivalents |
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$ |
5,034 |
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$ |
1,521 |
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Receivables, less allowance for doubtful accounts of $13,082 and
$14,406 at March 31, 2006 and December 31, 2005, respectively |
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123,816 |
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118,762 |
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Inventory |
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29,404 |
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25,873 |
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Prepaid expenses and other current assets |
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1,635 |
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2,054 |
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Deferred taxes |
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12,295 |
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11,225 |
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Total current assets |
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172,184 |
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159,435 |
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Property and equipment, net |
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9,689 |
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9,232 |
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Other assets and investments |
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942 |
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939 |
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Goodwill |
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114,937 |
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104,268 |
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Intangible assets, net |
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13,591 |
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14,713 |
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Total assets |
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$ |
311,343 |
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$ |
288,587 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Line of credit |
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$ |
30,218 |
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$ |
7,427 |
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Accounts payable |
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50,307 |
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39,969 |
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Claims payable |
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20,342 |
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31,402 |
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Payables to plan sponsors |
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1,686 |
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1,695 |
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Accrued expenses and other current liabilities |
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10,351 |
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11,454 |
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Total current liabilities |
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112,904 |
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91,947 |
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Deferred taxes |
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2,383 |
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875 |
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Total liabilities |
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115,287 |
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92,822 |
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Stockholders equity |
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Preferred stock, $.0001 par value; 5,000,000 shares authorized,
no shares issued or outstanding |
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Common stock, $.0001 par value; 75,000,000 shares authorized,
37,220,838 shares issued and outstanding at March 31, 2006;
37,094,252 shares issued and outstanding at December 31, 2005; |
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4 |
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4 |
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Treasury stock, 2,198,076 shares at cost |
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(8,002 |
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(8,002 |
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Additional paid-in capital |
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236,405 |
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234,958 |
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Accumulated deficit |
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(32,351 |
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(31,195 |
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Total stockholders equity |
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196,056 |
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195,765 |
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Total liabilities and stockholders equity |
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$ |
311,343 |
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$ |
288,587 |
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See accompanying Notes to Consolidated Financial Statements.
1
BIOSCRIP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Revenue |
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$ |
299,718 |
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$ |
188,398 |
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Cost of revenue |
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269,388 |
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167,951 |
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Gross profit |
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30,330 |
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20,447 |
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Selling, general and administrative expenses |
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27,886 |
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15,551 |
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Bad debt expense |
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2,299 |
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733 |
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Amortization of intangibles |
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1,622 |
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891 |
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Merger and integration expenses |
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131 |
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387 |
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Total operating expenses |
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31,938 |
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17,562 |
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(Loss) income from operations |
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(1,608 |
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2,885 |
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Interest expense, net |
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450 |
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153 |
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(Loss) income before income taxes |
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(2,058 |
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2,732 |
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(Benefit from) provision for income taxes |
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(902 |
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1,065 |
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Net (loss) income |
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$ |
(1,156 |
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$ |
1,667 |
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Basic net (loss) income per share |
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$ |
(0.03 |
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$ |
0.07 |
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Diluted net (loss) income per share |
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$ |
(0.03 |
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$ |
0.06 |
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Basic weighted-average shares |
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37,202 |
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25,586 |
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Diluted weighted-average shares |
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37,202 |
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25,980 |
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See accompanying Notes to Consolidated Financial Statements.
2
BIOSCRIP, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
(in thousands)
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Common |
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Treasury |
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Additional Paid- |
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Accumulated |
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Total Stockholders |
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Stock |
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Stock |
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In Capital |
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Deficit |
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Equity |
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Balance December 31, 2005 |
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$ |
4 |
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$ |
(8,002 |
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$ |
234,958 |
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$ |
(31,195 |
) |
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$ |
195,765 |
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Exercise of stock options and other related activities |
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711 |
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711 |
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Compensation under employee compensation plans |
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645 |
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645 |
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Tax benefit relating to employee stock compensation |
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91 |
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91 |
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Net (loss) income |
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(1,156 |
) |
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(1,156 |
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Balance March 31, 2006 |
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$ |
4 |
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$ |
(8,002 |
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$ |
236,405 |
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$ |
(32,351 |
) |
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$ |
196,056 |
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See accompanying Notes to Consolidated Financial Statements.
3
BIOSCRIP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Three Months Ended March 31, |
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2006 |
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2005 |
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Operating activities |
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Net (loss) income |
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$ |
(1,156 |
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$ |
1,667 |
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Adjustments to reconcile net (loss) income to net cash
used in operating activities: |
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Depreciation |
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1,042 |
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641 |
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Amortization |
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1,622 |
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891 |
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Change in deferred income tax |
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438 |
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(5,417 |
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Excess tax benefits relating to employee stock compensation |
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(19 |
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Tax benefit relating to employee stock compensation |
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91 |
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Compensation under employee compensation plans |
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645 |
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34 |
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Provision for losses on receivables |
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2,299 |
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733 |
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Changes in assets and liabilities, net of acquired assets: |
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Receivables, net |
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(3,544 |
) |
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3,473 |
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Inventory |
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(3,042 |
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(1,337 |
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Prepaid expenses and other current assets |
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490 |
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(98 |
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Accounts payable |
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7,639 |
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4,941 |
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Claims payable |
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(11,060 |
) |
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(1,129 |
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Accrued expenses |
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(1,348 |
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(6,686 |
) |
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Net cash used in operating activities |
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(5,903 |
) |
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(2,287 |
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Investing activities |
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Purchases of property and equipment, net of disposals |
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(1,206 |
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(376 |
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Cost of acquisitions, net of cash acquired |
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(12,914 |
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17,441 |
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Decrease in other assets |
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17 |
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1,755 |
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Net cash (used in) provided by investing activities |
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(14,103 |
) |
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18,820 |
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Financing activities |
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Net borrowings (repayments) on line of credit |
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22,790 |
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(5,756 |
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Principal payments on capital lease obligations |
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(35 |
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Excess tax benefits relating to employee stock compensation |
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19 |
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Proceeds from exercise of stock options |
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710 |
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626 |
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Net cash provided by (used in) financing activities |
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23,519 |
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(5,165 |
) |
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Increase in cash and cash equivalents |
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3,513 |
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11,368 |
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Cash and cash equivalents at beginning of year |
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1,521 |
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2,957 |
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Cash and cash equivalents at end of period |
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$ |
5,034 |
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$ |
14,325 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Cash paid during the period for interest |
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$ |
521 |
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$ |
181 |
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Cash paid during the period for income taxes |
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$ |
2,054 |
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$ |
1,082 |
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See accompanying Notes to Consolidated Financial Statements.
4
BIOSCRIP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1
BASIS OF PRESENTATION
These unaudited consolidated interim 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. (the Company) for the year ended
December 31, 2005 (the Form 10-K) filed with the U.S Securities and Exchange Commission (the
SEC) on March 31, 2006. The unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial
statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the consolidated balance sheets and statements of
operations and cash flows for the periods presented have been included. Operating results for the
three month period ended March 31, 2006 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2006. The accounting policies followed for interim
financial reporting are similar to those disclosed in Note 2 of Notes to Consolidated Financial
Statements included in Form 10-K.
Certain prior period amounts have been reclassified to conform to the current year
presentation. Such reclassifications had no material effect on the Companys previously reported
consolidated financial position, results of operations or cash flows.
NOTE 2
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss) income per common
share (in thousands, except per share amounts):
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Numerator: |
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Net (loss) income |
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$ |
(1,156 |
) |
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$ |
1,667 |
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Denominator
Basic: |
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Weighted
average number of common shares outstanding |
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37,202 |
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25,586 |
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Basic (loss) income per common share |
|
$ |
(0.03 |
) |
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$ |
0.07 |
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Denominator
Diluted: |
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Weighted average number of common
shares outstanding |
|
|
37,202 |
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|
25,586 |
|
Common share equivalents of outstanding
stock options |
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0 |
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|
394 |
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Total diluted shares outstanding |
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37,202 |
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|
25,980 |
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Diluted (loss) income per common share |
|
$ |
(0.03 |
) |
|
$ |
0.06 |
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|
The net loss per diluted share for the period ended March 31, 2006 excludes the effect of common
stock equivalents, as their inclusion would be anti-dilutive.
5
NOTE 3
STOCK-BASED COMPENSATION PLANS
At March 31, 2006, the Company has several stock-based employee compensation plans pursuant to
which incentive stock options (ISOs) and non-qualified stock options (NQSOs) awards are granted
to employees and non-employee directors. Prior to January 1, 2006, those plans were accounted for
under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations, as permitted by
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation (SFAS 123), issued by the Financial Accounting Standards Board (FASB). Under APB
25, only the intrinsic value of stock options was recognized in the Statement of Operations for
periods prior to January 1, 2006. Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), using the
modified-prospective-transition method. Under that transition method, compensation cost recognized
during the first quarter of 2006 includes: (i) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, and (ii) compensation cost for
all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not
been restated. Under these plans there were a total of 15,087,596 shares authorized for issuance.
As of March 31, 2006, there remain 3,197,622 shares available for grant under the Plans.
Options granted under the Plans vest over a three-year period and, in certain limited
instances, fully vest upon a change in control of the Company. In addition, such options are
generally exercisable for 10 years after the date of grant, subject to earlier termination in
certain circumstances. The exercise price of such options is equal to the fair market value on the
date of grant. The exercise price of ISOs granted under the Plans will not be less than 100% of the
fair market value on the date of grant (110% for ISOs granted to more than a 10% stockholder).
The fair value of each option award is estimated on the date of grant using a Black-Scholes
option-pricing model that uses the assumptions noted in the following table. Expected volatility is
based on the historical volatility of the Companys stock. The risk-free interest rate for periods
within the contractual life of the option is based on the U.S. Treasury yield curve in effect at
the time of the grant. The expected life of options granted is derived from previous history of
stock exercises from the grant date and represents the period of time that options granted are
expected to be outstanding. The Company uses historical data to estimate option exercise and
employee termination within the valuation model. The Company has never paid dividends on its
Common Stock and does not anticipate doing so in the foreseeable future.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2006 |
|
2005 |
Expected volatility |
|
|
52.1 |
% |
|
|
73.7 |
% |
Risk-free interest rate |
|
|
5.00 |
% |
|
|
5.25 |
% |
Expected life of options |
|
3.2 years |
|
5.0 years |
Dividend rate |
|
|
-0- |
|
|
|
-0- |
|
Fair value of options |
|
$ |
3.09 |
|
|
$ |
4.10 |
|
As a result of adopting SFAS 123(R) on January 1, 2006, the Companys loss before income taxes
increased $0.6 million, or $0.01 per share, compared to continuing to account for share-based
compensation under APB 25.
The following table illustrates the effect on net income and earnings per share had the
Company applied the fair value recognition provisions of SFAS 123 to options granted under the
Companys stock option plans in all periods presented prior to adopting SFAS 123(R). For purposes
of this pro forma disclosure, the value of the options is estimated using a Black-Scholes
option-pricing formula and amortized to expense on a straight line basis over the options vesting
periods (in thousands, except per share amounts).
6
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2005 |
|
Net income, as reported |
|
$ |
1,667 |
|
Plus: Stock award-based employee compensation included in reported net
income, net of related tax effect |
|
|
5 |
|
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effect |
|
|
(799 |
) |
|
|
|
|
Pro forma net income |
|
$ |
873 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic as reported |
|
$ |
0.07 |
|
Basic pro forma |
|
$ |
0.03 |
|
Diluted as reported |
|
$ |
0.06 |
|
Diluted pro forma |
|
$ |
0.03 |
|
Prior to the adoption of SFAS 123(R), the Company presented the tax benefit resulting from the
exercise of stock options as a cash inflow from operating activities in the Statement of Cash
Flows. SFAS 123(R) requires the cash flows from tax benefits in excess of the tax deductions of
the compensation cost to be classified as financing cash inflows. The excess tax benefit
classified as financing cash inflow would have been classified as an operating cash inflow if the
Company had not adopted SFAS 123(R). Prior periods are not restated to reflect adoption of SFAS
123(R).
Stock option activity under the Plans for the first three months of 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
Weighted |
|
Intrinsic |
|
Weighted Average |
|
|
|
|
|
|
Average |
|
Value |
|
Remaining |
|
|
Options |
|
Exercise Price |
|
(millions) |
|
Contractual Life |
|
|
|
Balance, December 31, 2005 |
|
|
5,892,806 |
|
|
$ |
7.62 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
200,000 |
|
|
$ |
7.54 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(126,586 |
) |
|
$ |
5.81 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(50,770 |
) |
|
$ |
9.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2006 |
|
|
5,915,450 |
|
|
$ |
7.64 |
|
|
$ |
6.9 |
|
|
6.2 Years |
|
|
|
Outstanding options less expected forfeitures at March 31, 2006 |
|
|
5,809,157 |
|
|
$ |
7.66 |
|
|
$ |
6.8 |
|
|
5.9 Years |
|
|
|
Exercisable at March 31, 2006 |
|
|
4,922,050 |
|
|
$ |
7.94 |
|
|
$ |
5.6 |
|
|
5.8 Years |
|
|
|
Options outstanding as of March 31, 2006 expire on various dates ranging from May 2006 through
January 2016. The following table outlines the Companys outstanding and exercisable stock options
as of March 31, 2006:
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
Weighted Average |
|
|
|
|
|
Weighted |
Range of Option |
|
Options |
|
Average |
|
Remaining |
|
Options |
|
Average |
Exercise Price |
|
Outstanding |
|
Exercise Price |
|
Contractual Life |
|
Exercisable |
|
Exercise Price |
|
|
|
|
|
$ 0.00
- $ 5.20 |
|
|
1,586,100 |
|
|
$ |
3.66 |
|
|
5.1 Years |
|
|
1,450,100 |
|
|
$ |
4.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 5.29
- $ 7.03 |
|
|
1,520,061 |
|
|
$ |
6.35 |
|
|
6.8 Years |
|
|
1,104,323 |
|
|
$ |
6.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 7.26
- $ 9.56 |
|
|
1,734,513 |
|
|
$ |
8.44 |
|
|
7.5 Years |
|
|
1,292,851 |
|
|
$ |
8.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 9.60 - $13.06 |
|
|
697,109 |
|
|
$ |
12.01 |
|
|
3.9 Years |
|
|
697,109 |
|
|
$ |
12.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$15.13 - $20.25 |
|
|
377,667 |
|
|
$ |
17.75 |
|
|
5.9 Years |
|
|
377,667 |
|
|
$ |
17.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,915,450 |
|
|
$ |
7.64 |
|
|
6.2 Years |
|
|
4,922,050 |
|
|
$ |
7.94 |
|
|
|
|
|
|
Stock option activity for non-vested shares under the Plans for the first three months of 2006
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
|
|
Options |
|
Fair Value |
|
|
|
Balance, December 31, 2005 |
|
|
1,223,599 |
|
|
$ |
4.36 |
|
Granted |
|
|
200,000 |
|
|
|
3.09 |
|
Vested |
|
|
(408,333 |
) |
|
|
4.56 |
|
Forfeited |
|
|
(21,866 |
) |
|
|
3.78 |
|
|
|
|
Balance, March 31, 2006 |
|
|
993,400 |
|
|
$ |
4.03 |
|
|
|
|
As of March 31, 2006, there was $2.4 million of unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the Plans. That cost is expected to
be recognized over a weighted-average period of 1.2 years. The total intrinsic value of options
exercised during the quarter was $0.2 million.
As compensation expense for options granted is recorded over the vesting period of options,
future stock-based compensation expense may be greater as additional options are granted.
NOTE 4
OPERATING SEGMENTS
The Company operates in two reportable segments: (1) Specialty Services, which is comprised
of specialty pharmacy distribution and clinical management services; and (2) PBM Services,
which is comprised of fully integrated pharmacy benefit management and traditional mail services.
Corporate overhead is allocated between the two segments based on adjusted revenue for each
segment.
8
Segment Reporting Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
Specialty Services |
|
$ |
203,638 |
|
|
$ |
95,761 |
|
PBM Services |
|
|
96,080 |
|
|
|
92,637 |
|
|
|
|
|
|
|
|
|
|
$ |
299,718 |
|
|
$ |
188,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations: |
|
|
|
|
|
|
|
|
Specialty Services |
|
$ |
(2,667 |
) |
|
$ |
946 |
|
PBM Services |
|
|
1,190 |
|
|
|
2,326 |
|
|
|
|
|
|
|
|
|
|
|
(1,477 |
) |
|
|
3,272 |
|
Merger and integration |
|
|
131 |
|
|
|
387 |
|
|
|
|
|
|
|
|
(Loss) income from operations: |
|
|
(1,608 |
) |
|
|
2,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
450 |
|
|
|
153 |
|
Income tax (benefit) expense |
|
|
(902 |
) |
|
|
1,065 |
|
|
|
|
|
|
|
|
Net (loss) income: |
|
$ |
(1,156 |
) |
|
$ |
1,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation: |
|
|
|
|
|
|
|
|
Specialty Services |
|
$ |
826 |
|
|
$ |
370 |
|
PBM Services |
|
|
216 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
$ |
1,042 |
|
|
$ |
641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Specialty Services |
|
$ |
211,844 |
|
|
$ |
191,236 |
|
PBM Services |
|
|
99,499 |
|
|
|
110,573 |
|
|
|
|
|
|
|
|
|
|
$ |
311,343 |
|
|
$ |
301,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
Specialty Services |
|
$ |
1,190 |
|
|
$ |
242 |
|
PBM Services |
|
|
16 |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
$ |
1,206 |
|
|
$ |
376 |
|
|
|
|
|
|
|
|
9
The
following table sets forth revenue information regarding significant customer(s) by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
March 31, |
|
|
2006 |
|
2005 |
Significant customer A |
|
|
|
|
|
|
|
|
PBM Services: |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
36,192 |
|
|
$ |
28,468 |
|
% of Total Revenue |
|
|
12 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
Significant customer B |
|
|
|
|
|
|
|
|
PBM Services: |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
38,917 |
|
|
$ |
28,335 |
|
% of Total Revenue |
|
|
13 |
% |
|
|
15 |
% |
Specialty Services: |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
7,569 |
|
|
$ |
4,664 |
|
% of Total Revenue |
|
|
3 |
% |
|
|
2 |
% |
NOTE 5
ACQUISITIONS
Chronimed Inc. Acquisition
On March 12, 2005 the Company acquired all of the issued and outstanding stock of Chronimed
Inc. (Chronimed) in a stock-for-stock transaction pursuant to which each share of Chronimed
common stock was exchanged for 1.12 shares of the Companys common stock. The results of
operations of Chronimed are included in the Consolidated Statements of Operations beginning March
12, 2005. The acquisition of Chronimed added 28 specialty pharmacies throughout the U.S. to the
Companys existing pharmacies.
The aggregate purchase price paid for Chronimed was $105.3 million, including direct expenses
of $3.7 million associated with the acquisition. The 14,380,551 shares of common stock exchanged
and 2,612,146 stock options assumed in the acquisition were valued using the average market price
of the Companys common stock during the period beginning two days before and ending two days after
the revised merger agreement was announced. The purchase price has been allocated to the acquired
assets and liabilities based on managements estimates of their fair value and an independent
outside valuation.
The following unaudited consolidated pro forma financial information for the three months
ended March 31, 2005 has been prepared assuming Chronimed was
acquired as of January 1, 2005. The number of basic and
diluted shares has been adjusted assuming the exchange ratio of 1.12 shares of common stock of the
Company exchanged for each outstanding share of Chronimed common stock. The pro forma financial
information is presented for informational purposes only and is not necessarily indicative of the
results that would have been realized had the acquisition occurred on January 1, 2005 (in
thousands, except per share amounts):
10
Unaudited Pro forma Income Statement
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, 2005 |
Revenue |
|
$ |
302,477 |
|
Net income |
|
$ |
858 |
|
Basic income per common share |
|
$ |
0.02 |
|
Diluted income per common share |
|
$ |
0.02 |
|
Northland Medical Pharmacy Acquisition
On October 7, 2005 the Company acquired all of the issued and outstanding stock of JPD, Inc.
d/b/a Northland Medical Pharmacy (Northland), a community-based specialty pharmacy located in
Columbus, Ohio, for approximately $12.0 million in cash plus a potential earn-out payment
contingent on Northland achieving certain future performance benchmarks in 2006. Had this acquisition taken place on
January 1, 2005, the Companys consolidated sales and income would not have been significantly
different from the reported amounts at March 31, 2005.
Intravenous Therapy Services, Inc. Acquisition
On March 1, 2006 the Company acquired all of the issued and outstanding stock of Intravenous
Therapy Services, Inc. (ITS), a specialty home infusion company located in Burbank, California,
for approximately $13.1 million in cash plus a potential earn-out payment contingent on ITS
achieving certain future performance benchmarks. Had this acquisition taken place on
January 1, 2006, the Companys consolidated sales and income would not have been significantly
different from the reported amounts at March 31, 2006.
NOTE 6
RESTRUCTURING
The acquisition of Chronimed resulted in the consolidation of certain finance and information
technology functions. The Companys Rhode Island offices, which included finance and information
technology functions, were closed as a result of these consolidations and these functions were
transitioned to the Companys Minnesota office. Accordingly, there have been restructuring costs
associated with these consolidations.
In association with the consolidation of the finance and information technology departments,
on March 4, 2005 the Company notified 67 employees that their employment with the Company would be
involuntarily terminated. All of these employees were terminated by December 31, 2005. Severance
costs were recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS 146), with the expense being allocated over the estimated retention
period of employees, ending December 31, 2005. Current year provisions have been recorded in
selling, general and administrative expense in the Specialty Services segment. The following table
provides a reconciliation of the restructuring liability at March 31, 2006 (in thousands):
Restructuring
|
|
|
|
|
Liability at December 31, 2005 |
|
$ |
1,297 |
|
Provisions |
|
|
67 |
|
Payments |
|
|
(770 |
) |
|
|
|
|
Liability at March 31, 2006 |
|
$ |
594 |
|
|
|
|
|
NOTE 7
CONCENTRATION OF CREDIT RISK
The
following table outlines information concerning contracts with Plan Sponsors having revenues and/or accounts
receivable that individually exceeded 10% of the Companys total revenues and/or accounts
receivable during the time periods indicated:
11
|
|
|
|
|
|
|
|
|
|
|
Plan Sponsor |
|
|
A |
|
B |
Year-to-date period ended March 31, 2005 |
|
|
|
|
|
|
|
|
% of total revenue |
|
|
15 |
% |
|
|
18 |
% |
% of total accounts receivable at period end |
|
|
* |
|
|
|
12 |
% |
Year-to-date period ended March 31, 2006 |
|
|
|
|
|
|
|
|
% of total revenue |
|
|
12 |
% |
|
|
16 |
% |
% of total accounts receivable at period end |
|
|
* |
|
|
|
18 |
% |
Plan Sponsor (A) is in the PBM Services segment
Plan Sponsor (B) revenue and accounts receivable is primarily in the PBM Services
segment with a lesser amount in the Specialty Services segment
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, and Managements Discussion and Analysis of Financial
Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005 (the Form 10-K) filed with the U.S. Securities and Exchange Commission
(the SEC), as well as our unaudited consolidated interim financial statements and the related
notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2006 (this Report).
This Report contains statements not purely historical and which may be considered
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended
(the Exchange Act), including statements regarding our expectations, hopes, beliefs, intentions
or strategies regarding the future. These forward looking statements may include statements
relating to our business development activities, sales and marketing efforts, the status of
material contractual arrangements, including the negotiation or re-negotiation of such
arrangements, future capital expenditures, the effects of regulation and competition on our
business, future operating performance and the results, benefits and risks associated with the
integration of acquired companies. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and uncertainties, that
actual results may differ materially from those possible results discussed in the forward-looking
statements as a result of various factors. These factors include, among other things, risks
associated with risk-based or capitated contracts, increased government regulation related to the
health care and insurance industries in general and more specifically, pharmacy benefit management
and specialty pharmaceutical distribution organizations, the existence of complex laws and
regulations relating to our business, changes in reimbursement rates from government and private
payors, and increased competition from our competitors, including competitors with greater
financial, technical, marketing and other resources. This Report contains information regarding
important factors that could cause such differences.
You should not place undue reliance on such forward-looking statements as they speak only as
of the date they are made. Except as required by law, we assume no obligation to publicly update or
revise any forward-looking statement even if experience or future changes make it clear that any
projected results expressed or implied therein will not be realized.
Business Overview
We are a comprehensive pharmacy services provider that distributes specialty and traditional
prescription medications, coordinates customer benefits and provides specialized therapy management
services for people with certain health conditions, particularly those treated with biotech
injectable medications, as well as those afflicted with potentially life threatening or
debilitating diseases or genetic disorders requiring specialty medications. We work with patients,
physicians and pharmaceutical manufacturers. We also work directly with a variety of health
insurers, including HMOs, indemnity plans and PPOs, managed care organizations, other insurance
companies, and, to a lesser extent, labor unions, self-funded employer groups, government agencies
(including Medicaid and Medicare) and other self-funded plan sponsors (collectively, Plan
Sponsors), as well as through third-party administrators. We work with all of these constituents
in a concerted effort to improve clinical and economic outcomes while enhancing the quality of life
for the individuals living with chronic conditions.
Our services are organized under two operating segments: (i) specialty pharmacy distribution
and clinical management services (collectively, Specialty
Services); and (ii)
pharmacy benefit management and traditional mail services (collectively, PBM Services).
Our Specialty Services are provided primarily to patients who either have chronic health
conditions or are afflicted with potentially life threatening or debilitating diseases or genetic
disorders requiring specialty medications. These specialty services include the distribution of
biotech and other high cost injectable, oral and infusable prescription medications and the
provision of pharmacy-related clinical management services, product administration and disease
state programs. Specialty Services are also offered to physicians, in a variety of practice and/or
hospital settings, on behalf of their patients. Many of these physicians have network affiliations
with Plan Sponsors, who in turn have a relationship with us.
Historically, our PBM Services were offered to Plan Sponsors and were designed to promote a
broad range of cost-effective, clinically appropriate pharmacy benefit management services through
our network of retail pharmacies and our dedicated traditional mail service distribution facility.
Over the past several years we have focused on building our Specialty Services for strategic
growth, and have lost a significant amount of PBM Services business,
particularly the recent loss of the Centene Corporation contract,
which will negatively impact 2006 revenue. Consequently, the PBM Services managed care business has decreased as a percentage of
total revenue.
13
As part of our business we develop and maintain existing relationships with pharmaceutical
manufacturers through a dedicated Pharmaceutical Relations department. These efforts have been
concentrated on the creation and execution of new drug distribution and service contracts in our
core specialty therapeutic areas, including providing those medications used for the treatment of
Cancer, Multiple Sclerosis, HIV, Immune Deficiency and other chronic illnesses and life threatening
diseases. The specialty management services that we provide through our national mail pharmacy,
community pharmacies and infusion businesses are attractive to the pharmaceutical manufacturer
community, demonstrated by recent successes in being selected for participation in national
specialty distribution networks for newly approved, high-cost medications. These new contracts
provide new sales and revenue opportunities which we began to realize in 2005 and expect to
continue in 2006 and beyond.
We also distribute and administer high cost specialty infusion therapies to patients
principally requiring immunological blood products, parenteral nutrition products, and infused
antibiotic therapies. We strive to maximize therapy outcomes through strict adherence to the
clinical guidelines or protocols for a particular prescription therapy while at the same time
managing the costs of such therapies on behalf of a Plan Sponsor or patient. Unlike the other
specialty programs, infusion patients have their therapies administered intravenously by IV
certified nurses.
On March 1, 2006 we acquired all of the issued and outstanding stock of Intravenous Therapy
Services, Inc. (ITS), a specialty home infusion company located in Burbank, California. The
addition of ITS enhances our ability to service infusion patients on both the East and West coasts
and complements our strategic objective of expanding our infusion operations nationally.
Consistent with our branding efforts, ITS name has been changed to BioScrip Infusion
Services, Inc.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with U. S. generally
accepted accounting principles (GAAP). In preparing our financial statements, we are required to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. We evaluate our estimates
and assumptions on an ongoing basis. We base our estimates and assumptions on historical
experience and on various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Our actual results may differ from
these estimates, and different assumptions or conditions may yield different estimates. The
following discussion highlights what we believe to be the critical accounting estimates and
assumptions made in the preparation of these consolidated financial statements.
The following discussion is not intended to be a comprehensive list of all the accounting
estimates or judgments made in the preparation of our financial statements, and in many cases the
accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for
managements judgment in its application.
Revenue Recognition
We generate revenue principally through the sale of prescription medications, which are
dispensed either through a pharmacy participating in our pharmacy network or a pharmacy owned by
us. Revenue is generally derived under fee-for-service agreements; however, an immaterial amount of
revenue is derived from capitated agreements. Prescription medication revenue is offset by the
rebates shared with Plan Sponsors.
Fee-For-Service Agreements. Fee-for-service agreements include: (i) specialty and mail service
agreements, where we dispense prescription medications through our pharmacy facilities and (ii) PBM
agreements, where prescription medications are dispensed through pharmacies participating in our
retail pharmacy network as well as through our traditional mail service facility. Under
fee-for-service agreements, revenue is recognized either: (a) when the pharmacy services are
reported to us through the point of sale (POS) claims processing system and the medication is
dispensed to the Member, in the case of a prescription filled through a pharmacy participating in
our retail pharmacy network, or (b) at the time the medication is dispensed, in the case of a
prescription filled through a pharmacy owned by us.
Revenue generated under our PBM agreements is classified as either gross or net by us based on
whether we are acting as a principal or an agent in the fulfillment of prescriptions through our
retail pharmacy network. When we independently have a contractual obligation to pay a network
pharmacy provider for benefits provided to its Plan Sponsors Members, and have other indicia of
risk and reward, we include payments (which include the medication ingredient cost) from these Plan
14
Sponsors as revenue and payments to the network pharmacy providers as cost of revenue, as
these transactions require us to assume credit risk and act as a principal. If we merely act as an
agent, and consequently administer Plan Sponsors network pharmacy contracts, we do not assume
credit risk and record only the administrative fees (and not the medication ingredient cost) as
revenue.
Co-Payments; Co-Insurance. When prescriptions are filled by our own pharmacies (that is,
where we are acting as a participating pharmacy in another PBMs or payors pharmacy network), we
collect and retain co-payments or co-insurance from Plan Sponsors members and record these
receipts as revenue when the amounts are collected or deemed collectible and reasonably estimable.
Conversely, when prescriptions are filled through pharmacies participating in our retail pharmacy
networks, we are not entitled to retain co-payments or co-insurance and accordingly do not
recognize revenue with respect to or account for retail pharmacy co-payments or co-insurance in our
financial statements. In our capacity as a PBM, pharmacy network co-payments and co-insurance are
never billed or collected by us and we have no legal right or obligation to receive them as they
are collected by our network pharmacies.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are based on estimates of losses related to customer
receivable balances. The procedure for estimating the allowance for doubtful accounts requires
significant judgment and assumptions. The risk of collection varies based upon the product, the
payor, the patients ability to pay the amounts not reimbursed by the payor and point of
distribution. We estimate the allowance for doubtful accounts based upon a variety of factors
including the age of the outstanding receivables and our historical experience of collections,
adjusting for current economic conditions and, in some cases, evaluating specific customer accounts
for risk of loss. We periodically review the estimation process and make changes to the estimates
as necessary. As of March 31, 2006 and December 31, 2005, we have an allowance for doubtful
accounts of $13.1 million and $14.4 million, respectively, which includes (i) reserves based on our
estimation process described above, and (ii) the acquisition of Chronimed in March, 2005.
Allowance for Contractual Discounts
We are reimbursed for the medications and services we sell by Plan Sponsors. Revenues and
related accounts receivable are recorded net of payor contractual discounts to reflect the
estimated net billable amounts for the products and services delivered. We estimate the allowance
for contractual discounts based on historical experience and in certain cases on a
customer-specific basis given our interpretation of the contract terms or applicable regulations.
However, the reimbursement rates are often subject to interpretation that could result in payments
that differ from our estimates. Additionally, updated regulations and contract negotiations occur
frequently, necessitating our continual review and assessment of the estimation process.
Rebates
Manufacturers rebates are primarily part of our PBM Services segment and are recorded as
estimates until such time as the rebate monies are received. These estimates are based on
historical results and trends and are revised on a regular basis depending on our latest forecasts,
as well as information received from rebate sources. Should actual results differ, adjustments
will be recorded in future earnings. In some instances, rebate payments are shared with our
managed care organizations. Shared rebates are recorded as a reduction of revenue. Total rebates
are recorded as a reduction of cost of goods sold.
Payables to Plan Sponsors
Payables to Plan Sponsors represent the sharing of pharmaceutical rebates with the Plan
Sponsors as part of our PBM Services segment. We estimate the portion of those pharmacy rebates
that are shared with Plan Sponsors and adjust pharmacy rebates payable to Plan Sponsors when the
amounts are paid, typically on a quarterly basis in arrears, or as significant events occur. These
estimates are recorded based on actual and estimated claims data and agreed upon contractual rebate
sharing rates. We adjust these estimates on a periodic basis based on changing circumstances such
as contract modifications, product mix subject to rebates, and changes in the applicable formulary.
Purchase Price Allocation
We account for acquisitions under the purchase method of accounting. Accordingly, any assets
acquired and liabilities assumed are initially recorded at their estimated fair values. The
recorded values of assets and liabilities are based on third
15
party estimates and independent valuations. Accordingly, our financial position or results of
operations may be affected by changes in estimates and judgments used to value these assets and
liabilities.
Impairment of Long Lived Assets
We evaluate whether events and circumstances have occurred that indicate the remaining
estimated useful life of long lived assets, including intangible assets, may warrant revision or
that the remaining balance of an asset may not be recoverable. The measurement of possible
impairment is based on the ability to recover the balance of assets from expected future operating
cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the
present value of the cash flows using discount rates that reflect the inherent risk of the
underlying business. It is managements belief that no such impairment existed as of March 31,
2006.
Goodwill
We evaluate goodwill for impairment based on a two-step process. The first step compares the
fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of
a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and
the second step of the impairment test is unnecessary. If the carrying amount of the reporting
unit exceeds its fair value, the second step of the goodwill impairment test is necessary to
measure the amount of impairment loss, if any. The second step compares the implied fair value of
reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would
be recognized in an amount equal to that excess. It is managements belief that no such impairment
existed as of March 31, 2006.
Indefinite-Lived Intangible Assets
The determination of fair value of intangible assets requires management to use estimates and
assumptions of future cash flows and discount rates. Changes to these estimates and assumptions
could affect the estimated fair value. The impairment test compares the fair value of an
intangible asset to the carrying value of that asset, and is performed at least annually. If the
estimated fair value of an intangible asset is determined to be lower than its carrying value, an
impairment charge is recorded for the difference.
At March 31, 2006, the reported value of our intangible assets was $13.6 million. We cannot
predict the occurrence of certain future events that might adversely affect the carrying value of
these assets. Such events include, but are not limited to, strategic decisions made in response to
economic and competitive conditions, the impact of the economic environment on our customer base,
or a material negative change in our relationships with significant customers.
Lease Accounting
We account for leasing transactions by recording rent expense on a straight-line basis,
starting on the date we gain possession of leased property, over the expected life of the lease.
Lease terms are generally five years, with many containing one or more options to extend for
periods ranging from one to five years. We include tenant improvement allowances received from
landlords as adjustments reducing straight-line rent expense. In April 2006 we received
approximately $1.2 million in tenant improvement allowances, which will be recorded as an
adjustment to straight-line rent expense in future periods.
Income Taxes
As part of the process of preparing our consolidated financial statements, we estimate income
taxes in each of the jurisdictions in which we operate. We account for income taxes under Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109
requires the use of the asset and liability method of accounting for income taxes. Under this
method, deferred taxes are determined by calculating the future tax consequences attributable to
differences between the financial accounting and tax bases of existing assets and liabilities. A
valuation allowance is recorded against deferred tax assets when, in the opinion of management, it
is more likely than not that we will not be able to realize the benefit from the deferred tax
assets. Deferred tax assets that will be utilized within twelve months are classified as current
assets.
In addition, we have established, and periodically review and reevaluate, an estimated income
tax reserve. This income tax reserve is for anticipated federal and state income tax liability and
exposures related to various Federal and state tax matters. An accrual is established at the time
an exposure is identified when it is both probable that a liability has been
16
incurred and the amount of the liability can be reasonably estimated. While we believe that we
have identified all reasonably identifiable liabilities and exposures and that the reserve we have
established for identifiable exposures is appropriate under the circumstance, it is possible that
additional exposures exist and that the exposures will be settled at amounts different than the
amounts reserved. It is possible that changes in estimates in the future could cause us to either
materially increase or reduce the carrying amount of our income tax reserve. Our effective tax
rate is 43.8% in 2006.
Accounting for Stock-Based Compensation
We adopted the fair-value-based method of accounting for share-based payments effective
January 1, 2006 under provisions of SFAS 123(R) using the modified-prospective-transition method.
Under that transition method, compensation cost recognized during the first quarter of 2006
includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested
as of January 1, 2006, based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123 and (ii) compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions
of SFAS 123(R). Results for prior periods have not been restated.
Prior to the adoption of SFAS 123(R) we accounted for employee stock and stock-based
compensation plans through the intrinsic value method in accordance with APB 25
as permitted by SFAS No. 123, and as such, generally recognized no compensation expense
for employee stock options. As a result of adopting SFAS 123(R) as of January 1, 2006, our loss
before income taxes increased $0.6 million, or $0.01 per share, compared to continuing to account
for share-based compensation under APB 25.
As of March 31, 2006, there was $2.4 million of unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the Plans. That cost is expected to
be recognized over a weighted-average period of 1.2 years.
Results of Operations
The table below presents the reconciliation between our GAAP (reported) and non-GAAP (pro
forma) consolidated results, assuming the acquisition of Chronimed had occurred on January 1, 2005.
Related estimated amortization expense is added, and the adjusted shares reflect the conversion
of Chronimed shares at the 1.12 exchange ratio for comparative purposes. We believe this
information to be more helpful in gaining an understanding of future results and trends. In the
following Managements Discussion and Analysis we provide discussion of both reported results as
set forth in the Financial Statements and the pro forma results as presented in the table below.
17
Unaudited Proforma Consolidated Results
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioScrip, Inc. |
|
|
|
|
|
|
|
MIM Corporation |
|
|
Chronimed Inc. |
|
|
Pro Forma |
|
|
Pro Forma |
|
|
|
BioScrip, Inc. |
|
|
As Reported (1) |
|
|
Pre-Merger |
|
|
Adjustments (2) |
|
|
Combined |
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Services |
|
$ |
203,638 |
|
|
$ |
95,761 |
|
|
$ |
114,079 |
|
|
$ |
|
|
|
$ |
209,840 |
|
PBM Services |
|
|
96,080 |
|
|
|
92,637 |
|
|
|
|
|
|
|
|
|
|
|
92,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,718 |
|
|
|
188,398 |
|
|
|
114,079 |
|
|
|
|
|
|
|
302,477 |
|
Cost of revenue |
|
|
269,388 |
|
|
|
167,951 |
|
|
|
101,155 |
|
|
|
|
|
|
|
269,106 |
|
|
|
|
|
|
|
Gross profit |
|
|
30,330 |
|
|
|
20,447 |
|
|
|
12,924 |
|
|
|
|
|
|
|
33,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
27,886 |
|
|
|
15,551 |
|
|
|
10,498 |
|
|
|
|
|
|
|
26,049 |
|
Bad debt expense |
|
|
2,299 |
|
|
|
733 |
|
|
|
840 |
|
|
|
|
|
|
|
1,573 |
|
Amortization of intangibles |
|
|
1,622 |
|
|
|
891 |
|
|
|
|
|
|
|
958 |
|
|
|
1,849 |
|
Merger and integration expenses |
|
|
131 |
|
|
|
387 |
|
|
|
2,037 |
|
|
|
|
|
|
|
2,424 |
|
|
|
|
|
|
|
Total operating expenses |
|
|
31,938 |
|
|
|
17,562 |
|
|
|
13,375 |
|
|
|
958 |
|
|
|
31,895 |
|
|
|
|
|
|
|
(Loss) income from operations |
|
|
(1,608 |
) |
|
|
2,885 |
|
|
|
(451 |
) |
|
|
(958 |
) |
|
|
1,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
450 |
|
|
|
153 |
|
|
|
(84 |
) |
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(2,058 |
) |
|
|
2,732 |
|
|
|
(367 |
) |
|
|
(958 |
) |
|
|
1,407 |
|
Income tax (benefit) expense |
|
|
(902 |
) |
|
|
1,065 |
|
|
|
(143 |
) |
|
|
(373 |
) |
|
|
549 |
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,156 |
) |
|
$ |
1,667 |
|
|
$ |
(224 |
) |
|
$ |
(585 |
) |
|
$ |
858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares |
|
|
37,202 |
|
|
|
25,586 |
|
|
|
|
|
|
|
|
|
|
|
36,802 |
|
Diluted weighted average shares |
|
|
37,202 |
|
|
|
25,980 |
|
|
|
|
|
|
|
|
|
|
|
37,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share |
|
$ |
(0.03 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
$ |
0.02 |
|
Diluted net (loss) income per share (3) |
|
$ |
(0.03 |
) |
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
$ |
0.02 |
|
|
|
|
(1) |
|
Includes the results of operations of MIM Corporation for the full quarter and of Chronimed Inc. from March
12, 2005 through March 31, 2005. |
|
(2) |
|
Reflects estimated amortization expense from Chronimed Inc. for the quarter. |
|
(3) |
|
The March 2006 net loss per diluted share excludes the effect of common stock equivalents, as
their inclusion would be anti-dilutive. |
Revenue. Reported revenues for the first quarter of 2006 were $299.7 million compared to
$188.4 million in the first quarter of 2005. This increase was primarily attributable to the
acquisition of Chronimed Inc. in March, 2005 as well as increased revenue from the PBM Services segment.
These increases were partially offset by decreases in Specialty Services segment revenue.
Revenue for the first quarter of 2006 was $299.7 million compared to $302.5 million on a pro
forma basis for the same period in 2005. First quarter 2006 PBM Services revenue was $96.1
million, an increase of $3.4 million, or 3.7%, from the same period a year ago on a pro forma basis
primarily due to increased traditional mail volume which was partially offset by a decline in
pharmacy benefit management revenue as a result of the loss of our customer Centene Corporation
that was previously communicated to take place throughout the year. First quarter 2006 Specialty
Services revenue was $203.6 million, a decrease of $6.2 million or 3.0% from the pro forma basis
for the same period a year ago, primarily due to the loss of Chronimeds Aetna contract which
terminated on February 28, 2005. This decline was partially offset by strong growth in infusion
and the acquisitions of Northland Pharmacy in October 2005 and ITS in March 2006.
18
Cost of Revenue and Gross Profit. Reported cost of revenue for the first quarter of 2006 was
$269.4 million compared to $168.0 million for the same period in 2005. Gross margin as a
percentage of revenue declined from 10.9% in first quarter 2005 to 10.1% in first quarter 2006.
The lower gross margins are due primarily to payor reimbursement pressure and cost increases on
certain medications.
Cost of revenue increased $0.3 million, or 0.1%, to $269.4 for the period ended March 31, 2006
from $269.1 on a pro forma basis for the same period in 2005. Gross profit decreased $3.0 million,
or 9.1%, from $33.4 million on a pro forma basis for the first quarter of 2005 to $30.3 million for
the same period of 2006. We experienced a decline in gross margin as a percentage of revenue in
the first quarter of 2006 to 10.1% compared to the pro forma first quarter of 2005 rate of 11.0%,
primarily due to lower reimbursement rates and higher product costs in the quarter across all
business segments.
Selling, General and Administrative Expenses. For the three months ended March 31, 2006,
selling, general and administrative expenses (SG&A) increased to $27.9 million, or 9.3% of total
revenue, from $15.6 million, or 8.3% of total revenue, for the same period a year ago. This
increase in SG&A is the result of the addition of Chronimeds expenses for the full first quarter
of 2006 compared to only 19 days of expenses during first quarter 2005, as well as increased
expense to
support growth of the business. We incurred $0.6 million of stock option expense due to the
adoption of SFAS 123(R) at January 1, 2006. No stock option expense was recorded in the first
quarter of 2005. We also incurred $0.3 million in severance expense in the first quarter of 2006
related to the previously announced retirement of our Chief Executive Officer (CEO), Henry
Blissenbach. This severance accrual will continue at $0.3 million per month through June 2006.
SG&A expenses for the first quarter of 2006 were $27.9 million, or 9.3% of total revenue,
compared to $26.0 million, or 8.6% of total revenue, on a pro forma basis for the first quarter of
2005. SG&A expenses increased primarily due to increased spending in our Specialty Services
segment along with stock option expense and CEO severance expense discussed above.
Bad Debt Expense. For the three months ended March 31, 2006, bad debt expense increased to
$2.3 million from $0.7 million for the same period a year ago. The increase reflects an increased
bad debt accrual rate due to lower than expected collections during the Chronimed merger
integration period. We are enhancing our collection processes to improve our financial performance
and return to historical bad debt accrual rates.
Bad debt expense for the first quarter of 2006 was $2.3 million, an increase of $0.7 million
compared to $1.6 million on a pro forma basis for the first quarter of 2005. We are enhancing our
collection processes to improve our financial performance and return to historical bad debt accrual
rates.
Amortization of Intangibles. For the first three months of 2006 we recorded amortization of
intangibles of $1.6 million compared to $0.9 million for the same period in 2005. The increase in
2006 was primarily the result of the additional amortization resulting from the acquisition of
Chronimed on March 12, 2005.
The amortization of intangibles for the quarter ended March 31, 2006 was $1.6 million compared
to a pro forma basis of $1.8 million for the same period a year ago. The decrease was primarily
the result of the write-off of intangible assets in 2005.
Merger and Integration Expenses. For the three months ended March 31, 2006, merger and
integration expenses decreased $0.3 million to $0.1 million from $0.4 million for the same period a
year ago. Merger and integration expenses include expenses incurred to consolidate the acquisition
of Chronimed, including severance and re-branding costs.
Merger and integration expense decreased to $0.1 million for the first quarter of 2006 from
$2.4 million on a pro forma basis in the first quarter of 2005. The integration expense for 2005
includes pre-merger expenses recorded by Chronimed.
Net Interest Expense. Net interest expense was $0.5 million for the three months ended March
31, 2006 compared to $0.2 million for the three months ended March 31, 2005. This interest expense
is associated with the line of credit which was used to fund the acquisition of ITS and general
working capital requirements.
Net interest expense was $0.5 million for the three months ended March 31, 2006 compared to
$0.1 million on a pro forma basis for the three months ended March 31, 2005. Interest expense for
the line of credit was partially offset by interest income received on short term investments and
money market accounts in the first quarter of 2005.
19
Provision for Income Taxes. The reported benefit from income tax for the first quarter of
2006 was $0.9 million compared to income tax expense of $1.1 million for the first quarter of 2005.
The effective tax rate for these periods was 43.8% and 39.0%, respectively. The increased rate
for 2006 is due primarily to an increase in potential state tax
liabilities.
The pro forma basis tax rate was 39.0%. This resulted in a pro forma income tax provision of
$0.5 million for the first quarter of 2005, based on the pro forma income before taxes compared to
an income tax benefit of $0.9 million for the first quarter of 2006.
Net Income and Earnings Per Share. Net loss for the first quarter of 2006 was $1.2 million,
or $0.03 per diluted share, compared to net income of $1.7 million, or $0.06 per diluted share, for
the same period last year. The decline in net income is due to gross margin decline, increased
SG&A expense to support growth in the business and increased amortization.
Net loss for the first quarter of 2006 was $1.2 million, or $0.03 per diluted share. This
compares to net income of $0.9 million, or $0.02 per diluted share, on a pro forma basis for the
first quarter of 2005.
Liquidity and Capital Resources
For the three months ended March 31, 2006 net cash used in operating activities totaled $5.9
million compared to $2.3 million for the same period last year. Increases in net receivables and
inventory of $3.5 million and $3.0 million, respectively, as well as payment against claims payable
of $11.0 million were partially offset by increases in accounts payable of $7.6 million.
Net cash used in investing activities during the three months ended March 31, 2006 was $14.1
million, primarily due to the acquisition of ITS on March 1, 2006 for
$13.1 million in cash. This compares to $18.8 million provided by
investing activities in the same period in 2005, primarily from the acquisition of Chronimed.
For the three months ended March 31, 2006 net cash provided by financing activities was $23.5
million compared to net cash used in financing activities of $5.2 million for the same period in
2005. At March 31, 2006 there was $30.2 million of outstanding bank borrowings under our $65
million revolving credit facility (the Facility) with an affiliate of Healthcare Finance Group,
Inc. (HFG), a $22.8 million increase in first quarter 2006 compared to a decrease of $5.8 million
the same period in 2005. Outstanding borrowings increased in the first quarter of 2006 primarily
as a result of the acquisition of ITS and increased working capital requirements. We are currently
negotiating an extension and potential expansion of the Facility and improved terms and conditions thereunder.
At March 31, 2006 we had working capital of $59.3 million compared to $67.5 million at
December 31, 2005.
The Facility was increased in March 2006 to provide for borrowings up to $65 million at the
London Inter-Bank Offered Rate (LIBOR) plus 2.4%. The current term of the Facility expires on
November 1, 2006 and will automatically renew for additional one-year terms unless either party
gives notice not less than 90 days prior to the expiration of the then current term of its
intention not to renew the Facility. The Facility contains various covenants that, among other
things, require us to maintain certain financial ratios, as defined in the agreements governing the
Facility. The Facility permits us to request an increase in the amount available for borrowing to
up to $100 million, as well as converting a portion of any outstanding borrowings from a Revolving
Loan into a Term Loan. The borrowing base utilizes receivables balances, among other things, as
collateral.
As we continue to grow, we anticipate that our working capital needs will also continue to
increase. We believe that our cash on hand, together with funds
available under the current and potentially expanded Facility and
cash expected to be generated from operating activities will be sufficient to fund our anticipated
working capital, IT systems investments and other cash needs for the
next twelve months. However, we have recently been selected by the
Centers for Medicare and Medicaid Services as the national vendor for
the initial phase of the new Competitive
Acquisition Program for certain Part B drugs and biologicals
commencing July 1, 2006. Implementing this program will likely
require an increase in our line of credit.
Though we believe that we will be successful in expanding our line of
credit, there are no assurances that it will occur. We may then need
to seek higher-cost alternatives or restrict our revenue growth.
We also may pursue joint venture arrangements, business acquisitions and other transactions
designed to expand our business, which we would expect to fund from cash on hand, borrowings under
the Facility, other future indebtedness or, if appropriate, the private and/or public sale or
exchange of our debt or equity securities.
At December 31, 2005 we had Federal net operating loss carry forwards (NOLs) of
approximately $14.0 million, which will begin expiring in 2017. Certain of the NOLs are subject to
limitation and may be utilized in a future year upon release of
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the limitation. If the NOLs are not utilized in the year they are available they may be utilized
in a future year to the extent they have not expired.
Other Matters
We make available through our website, www.bioscrip.com, access to our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, any amendments to those reports
(when applicable), and other reports filed with the SEC. Such access is free of charge and is
available as soon as reasonably practicable after such information is filed with the SEC. This
information may also be accessed through the SEC website at www.sec.gov.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Exposure to market risk for changes in interest rates relates to our outstanding debt. At
March 31, 2006 we did not have any long-term debt. We are exposed to interest rate risk primarily
through our borrowing activities under our line of credit discussed in Item 2 of this report. A
10% increase in interest rates would not have a significant effect on our interest expense.
Interest rate risk on our investments is immaterial due to our level of investment dollars.
Foreign currency
exchange rate risk, commodity price risk, or other market risks (e.g. equity price) are not
present. We do not use financial instruments for trading or other speculative purposes and are not
a party to any derivative financial instruments.
At March 31, 2006, the carrying values of cash and cash equivalents, accounts receivable,
accounts payable, claims payable, payables to plan sponsors and others and line of credit
approximate fair value due to their short-term nature.
Because management does not believe that our exposure to interest rate market risk is material
at this time, we have not developed or implemented a strategy to manage this market risk through
the use of derivative financial instruments or otherwise. We will assess the significance of
interest rate market risk from time to time and will develop and implement strategies to manage
that market risk as appropriate.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to reasonably assure that
information required to be disclosed by us in reports we file or submit under the Exchange Act,
such as the Quarterly Report on Form 10-Q (Form 10-Q), is recorded, processed, summarized and
reported on a timely basis and that such information is accumulated and communicated to management,
including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) as
appropriate, to allow for timely decisions regarding required disclosures.
In connection with the preparation of our 2005 Annual Report on Form 10-K as of December 31,
2005 (Form 10-K), an evaluation was performed under the supervision and with the participation of
management, including our CEO and CFO, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13d-15(e) and 15d-15(e)).
Based on that evaluation, management concluded that our disclosure controls as of December 31, 2005
were not effective as a result of material weaknesses in internal control over financial reporting.
The material weaknesses identified by management were in the areas of information technology,
revenue recognition and accounts receivable. The material weaknesses were disclosed in Item 9A of
our Form 10-K which was filed with the SEC on March 31, 2006.
As part of its evaluation of the effectiveness of the design and operation of our internal
control over financial reporting as of the end of the period covered by this Form 10-Q, management
has identified no material weaknesses other than those described in the Form 10-K. Although we
believe that progress has been made to address these material weaknesses, management has concluded
that the material weaknesses disclosed in our Form 10-K filed on March 31, 2006 continue to exist
as of the quarter ended March 31, 2006, and therefore, has also concluded that our disclosure
controls and procedures were not effective as of March 31, 2006 for the same reasons disclosed in
the Form 10-K.
Internal Control Over Financial Reporting
In light of the material weaknesses in internal control over financial reporting which
continue to exist as of March 31, 2006, management performed additional analysis and procedures to
ensure the consolidated financial statements were prepared in accordance with GAAP. Accordingly,
management believes that the consolidated financial statements and
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schedules included in this Form 10-Q fairly present in all material respects our
financial position, results of operations and cash flows for the periods presented.
Management, with oversight from the Audit Committee, is working to remediate the material
weaknesses in internal control over financial reporting disclosed in the Form 10-K. Because the
filing of the Form 10-K occurred on March 31, 2006 and as such coincided with the quarter ended
March 31, 2006, no additional changes in our internal controls over financial reporting occurred
during the quarter ended March 31, 2006 that materially affected, or is reasonably likely to
materially affect, such internal control over financial reporting other than those remedial actions
previously disclosed in Form 10-K.
CEO and CFO Certifications
Attached as exhibits to this quarterly report are Certifications of the CEO and CFO as
required by Rule 13a-14(a) of the Securities Exchange Act of 1934. The disclosures in this Item 4
contain information concerning the Controls Evaluation referred to in the Rule 13a-14(a)
Certifications and should be read in conjunction with the certifications as well as Item 9A of Form
10-K for a more complete understanding of the matters covered by the certifications.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments in any of the proceedings disclosed previously in the
Form 10-K filed on March 31, 2006, nor have there been any material new proceedings filed in any
courts subsequent to the Form 10-K filed on March 31, 2006.
Item 1A. Risk Factors
There have been no material changes to risk factors as previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2005 and filed with the SEC on March 31, 2006.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits
(a) Exhibits.
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Exhibit 3.1
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Second Amended and Restated Certificate of Incorporation of BioScrip, Inc.
(Incorporated by reference to Exhibit 3.2 to the Companys Registration Statement on
Form S-4 (File No. 333-119098), as amended, which became effective on January 26, 2005) |
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Exhibit 3.2
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Amended and Restated By-Laws of BioScrip, Inc. (Incorporated by reference to
Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q filed with the Commission on
May 15, 2003) |
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Exhibit 31.1
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Certification of Henry F. Blissenbach pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2
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Certification of Gregory H. Keane pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1
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Certification of Henry F. Blissenbach pursuant to 18 U.S. C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.2
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Certification of Gregory H. Keane pursuant to 18 U.S. C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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BIOSCRIP, INC.
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Date: May 10, 2006 |
/s/ Gregory H. Keane
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Gregory H. Keane, Chief Financial Officer |
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