BASIS OF PRESENTATION

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

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

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

Reclassifications

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

Change in Estimate of the Collectability of Accounts Receivable

During the nine months ended September 30, 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 has experienced more difficulty collecting the aged balances than it originally estimated. While the Company has provided incremental allowances in the prior quarters of 2014 to address the developing deterioration, during the three months ended September 30, 2014, the Company materially changed its estimates based on actual collection experience during and after the acquisition disruption period. As a result, the Company recorded adjustments to reserves in the quarter ended September 30, 2014 of approximately $23.1 million consisting of $19.9 million to its allowance for bad debts and $3.2 million to its contractual adjustment reserves due to the deterioration of the Infusion Services segment accounts receivable aging. The increase in reserves in the three months ended September 30, 2014 was predominantly on aged balances over 365 days old. For the nine months ended September 30, 2014, the incremental adjustments are approximately $28.7 million consisting of $23.1 million to the allowance for doubtful accounts and $5.6 million of contractual adjustment reserves.

Collections of billed revenues have returned to historical Infusion Services segment levels during the three months ended September 30, 2014 while the Company’s accounts receivable over 180 days have increased by $23.0 million since December 31, 2013. As a result, the Company increased the allowance for doubtful accounts by $21.4 million from December 31, 2013 and the allowance for doubtful accounts as a percentage of total accounts receivable is 18.7% at September 30, 2014 compared to 9.4% at December 31, 2013. 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):



	September 30, 2014							December 31, 2013
	0 - 180 days		Over 180 days		Total			0 - 180 days		Over 180 days		Total
Government	$	28,158	$	13,632	$	41,790		$	27,622	$	7,864	$	35,486
Commercial	116,846		35,070		151,916			122,660		26,975		149,635
Patient	4,904		11,263		16,167			2,792		2,110		4,902
Gross accounts receivable	$	149,908	$	59,965	209,873			$	153,074	$	36,949	190,023
Allowance for doubtful accounts					(39,240		)					(17,836		)
Net accounts receivable					$	170,633						$	172,187

The result of this change in estimate was to increase the loss from continuing operations by $23.1 million and $28.7 million for the three months and nine months ended September 30, 2014, respectively. Net loss per share (basic and diluted) increased by $0.34 and $0.42 per share for the three months and nine months ended September 30, 2014, respectively. The tax effect of these adjustments is not significant because the tax benefit would be offset by the change in the valuation allowance.

Variable Interest Entity

The Company previously had an affiliate equity investment in a variable interest entity that developed a platform to facilitate the flow, management and sharing of vital health and medical information with stakeholders across the healthcare ecosystem. On April 19, 2013, the Company, along with all other minority investors, completed the sale of its affiliate equity investment in this variable interest entity. At closing, the Company received a cash payment of $8.5 million, with an additional $1.1 million held in escrow. As of September 30, 2014, the unpaid escrow balance attributable to the Company was $0.5 million. The Company also expects to receive additional services or cash from an existing guarantee during the two years following close. The terms of the services to be provided or the cash guarantee to be paid will be determined by the Company and the parties involved in the sale. As of September 30, 2014, a receivable of $2.4 million is included in prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets.

Recent Accounting Pronouncements

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

In April 2014, the FASB issued ASU 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”) which amends the existing GAAP discontinued operations classification criteria to require a significant strategic shift in an entity’s operations. The new guidance also simplifies the classification analysis by eliminating the continuing involvement criteria. ASU 2014-08 also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. ASU 2014-08 becomes effective for the Company on January 1, 2015. The Company is currently evaluating the impact of adopting ASU 2014-08 on its Unaudited Consolidated Financial Statements and anticipates that the adoption will have no material impact on the Unaudited Consolidated Financial Statements.

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

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