Vermont Business Magazine Faced with the imminent demise of an important resource in the fight against opiate addiction, the Green Mountain Care Board approved today Burlington Labs' Emergency Certificate of Need. The health care regulator agreed that it was urgent to approve the CON because of its tenuous financial situation and the important role Burlington Labs plays in opiate treatment statewide. It will also save 140 Vermont jobs. The GMCB approved the applicant's (Burlington Labs Acquisition, LLC) request for the CON, which will be issued upon the execution of a settlement agreement with the Vermont Attorney General concerning allegations of inaccurate or improper Medicaid claims reporting. The lead investor is former IDX Systems CEO James Crook and includes the UVM Health Network. UVMHN initially will own 15 percent of the lab and lend the new entity $3 million-$5 million.
UVMHN is the umbrella organization for the UVM Medical Center, Central Vermont Medical Center and three hospitals in upstate New York.
Crook said in a statement: "We are thankful to the Green Mountain Care Board for addressing our application in a timely manner. The critical role Burlington Lab plays in the state-wide fight against opiate addiction obviously resonated with the Board. While we have more work to do before we finalize our investment, Burlington Labs Acquisition, LLC is one step closer to our collective goal."
As stated in the GMCB Order: Burlington Labs Acquisition, LLC, the group led by Crook, seeks to purchase the assets and continue the operations of Burlington Labs, a diagnostic testing facility headquartered in Burlington that serves patients suffering from opiate and other substance addictions and supports patients in treatment for chronic pain.
Burlington Labs employs 183 people in six states, including 137 employees in Vermont, and operates walk-in patient services in Barre, Bennington, Burlington, Middlebury, Morrisville, Rutland, St. Albans, and Springfield. A location in White River Junction was planned to open in late 2016.
Burlington Labs serves a critical need in Vermont’s efforts to combat substance abuse. Between January and August 2016, Burlington Labs served 2,347 patients and performed 40,941 drug tests.
The Vermont health care centers served by Burlington Labs include Howard Center, Gifford Health Care, Twin River and Barre, and Lund Family Center. In addition, Burlington Labs offers onsite collection services to treatment centers, sober houses, and medical offices.
Under its current ownership, Burlington Labs is struggling financially and lacks sufficient cash to meet its ongoing payroll and trade debt obligations. It is in default with numerous contracts and has trade debt of approximately $3.7 million, much of which is overdue. Its current monthly expenses exceed monthly revenue by approximately $400,000.
Burlington Labs is in default of its bank loan with KeyBank NA, and is indebted to the bank under a $2 million demand note and a $2,894,600 SBA-guaranteed term note, resulting in an outstanding debt to KeyBank NA of $4,894,600, plus accrued interest.
The Medicaid Fraud & Residential Abuse Unit (MFRAU) of the Vermont Attorney General’s Office has been in negotiations with Burlington Labs since May 2016 as a result of its investigation related to the overstatement of Medicaid claims filed by Burlington Labs during 2015.
Since March 25, 2016, Vermont Medicaid has been withholding approximately 50% of the payments that would otherwise have been paid to Burlington Labs. See Letter from Jason Turner, Office of the Attorney General (Aug. 24, 2016). The Applicant estimates that under a settlement agreement, Burlington Labs will pay to the State approximately $6.5 million in damages.
Since May 2016, Burlington Labs contracted with Dorman & Fawcett, a consulting and financial advisory and turnaround firm located in Quechee, Vermont, to provide assistance on cash flow management. Dorman & Fawcett has assessed Burlington Labs’ financial outlook and is serving as its chief recovery officer.
Beginning in June 2016, an investor group (Investor Group) led by James H. Crook has provided financial assistance to Burlington Labs. Mr. Crook was employed by IDX Systems Corporation (IDX) for 25 years in executive operating roles, including as its President and CEO. Mr. Crook is a private equity investor in several health care IT companies and serves on multiple related boards.
On June 30, 2016, Mr. Crook provided a secured loan to Burlington Labs of $800,000 to enable it to meet its payroll obligations and pay its most critical suppliers and vendors. Since that date, Mr. Crook advanced an additional $585,000 to assist Burlington Labs in meeting its financial obligations, most all of which has been spent.
Mr. Crook requested that University of Vermont Health Network (UVHN) become a minority participant in the Investor Group. UVHN views this project as an important component of its population health management initiatives in Vermont.
On August 18, 2016, the Applicant formed as a limited liability company under the laws of Delaware for the purpose of purchasing Burlington Labs. The Applicant will be capitalized with equity investments totaling $4.5 million. Its owners will consist of the Investor Group, the current owners of Burlington Labs, and UVHN.
Initially, the breakdown of ownership units will result in the Investor Group holding the majority of ownership (approximately 62%) with Burlington Labs and UVHN owning 23% and15%, respectively. The breakdown will be subject to dilution based on (1) the issuance of discount units to Mr. Crook in consideration of the pre-closing loans extended by him to Burlington Labs, (2) issuance of equity incentive units to officers and employees as approved by the Board, and (3) future issuance of membership units.
UVHN is expected to provide loans to the Applicant in the amount of $3 million to $5 million. A portion of the loan amount is planned to be convertible into preferred units in the second calendar quarter of 2018, estimated at an additional 10%.
Mr. Crook credibly testified that the transfer of Burlington Labs must happen quickly, and that even “30 days is too long.” TR at 14. The media attention, in large part focused on the State’s Medicaid investigation, has created anxiety among employees, creditors, the Attorney General’s Office, patients, and the treatment centers. Id. The persons asked to serve as Burlington Labs’ Board members expected the transfer would close on August 29, 2016, and are now “waiting in the wings” for the transaction to occur. Mr. Crook testified that he cannot continue to allocate resources to Burlington Labs if the transaction does not quickly move forward.
By purchasing Burlington Labs, the Applicant will provide it with new leadership and governance. The Applicant will put in place a Board of Directors that includes Mr. Crook who will serve as Chair, Christopher Powell who will serve as Chief Executive Officer, John A. Kane who will serve as Chair of the Audit and Finance Committee, and Todd Keating, an executive with UVHN.
Christopher Powell has extensive experience in health care IT and worked alongside Mr. Crook in executive positions at IDX. John A. Kane has extensive business leadership and management experience, including serving as Senior Vice President, Chief Financial Officer and Treasurer for IDX. Initially, the Board was to include Michael Casarico, founder of Burlington Labs; the Applicant has confirmed that Mr. Casarico will not be a member of the Board. Letter from Attorney Wohl (Aug. 31, 2016).
The Applicant expects to continue to engage Dorman & Fawcett for a period of two or three months following the closing to assist with operational and financial management matters. Stephen Barraclough, a principal with Dorman & Fawcett, will serve in a senior advisory role during this period.
The Applicant will refinance the loan held by KeyBank NA, concurrent to the transfer of Burlington Labs, on terms no less favorable than those on the current loan. Id. The Applicant will assume Burlington Labs’ trade obligations of approximately $3.7 million.
The Applicant is pursuing a settlement with the Vermont Office of Attorney General regarding the allegations that Burlington Labs overbilled Medicaid in 2015. The Applicant has included in its budget projections approximately $6.5 million for an expected settlement.
The Applicant plans to continue the services currently conducted by Burlington Labs, using the same or equivalent lab testing procedures, specimen collection procedures, and proprietary methods. The Applicant will evaluate its business over time to determine the appropriate location and relocation of collection centers, and intends to move the Barre center to Montpelier, likely close one center in New York and one in Massachusetts that are underutilized, reopen a recently closed center in Enosburg, and evaluate plans to open a center in White River Junction.
The Applicant intends to initially retain substantially all of the employees of Burlington Labs, but states that there may be workforce reductions in the future “in order to put the business on more solid financial footing going forward.”
The Applicant has provided financial projections which include payments for a settlement with the State over inaccurate Medicaid billing and debt servicing to KeyBank NA, Burlington Labs’ senior lender. Although using historical revenue and expense information does not produce financial projections that show a positive margin by the close of 2017, the Applicant is working on and has drafted a revised expense model so that it will break-even by the end of 2017.
Mr. Crook spoke to the Board at its public meeting on August 24, 2016. He explained that he does not make short-term loans to businesses as a “banker,” but became involved in this transaction because he wants to do “something that matters” to curb the epidemic of opiate abuse, has an opportunity to prevent the loss of approximately 140 Vermont jobs, and believes his team can provide the “right resources” to save a “very important asset” in Vermont, notwithstanding the difficulty of the challenge.
The Board has received letters of support from Spectrum Youth and Family Services, Howard Center, Turning Point Center of Addison County, the Commissioner of the Vermont Department of Health Dr. Harry Chen, United Way of Northwest Vermont, and Burlington Mayor Miro Weinberger, each referencing the need for maintaining the services provided by Burlington Labs. In addition, the Board received a letter of support from David Epstein, Managing Principal of truexcullins, one of Burlington Labs’ creditors.