Option Care Health, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context requires otherwise, references in this report to "Option Care Health," the “Company,” “we,” “us” and “our” refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. (“Option Care Health”, or the “Company”) should be read in conjunction with the audited consolidated financial statements and related notes, as presented in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2020, as well as the Company’s unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act’), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Such forward-looking statements include, but are not limited to, the effect of the novel coronavirus (“COVID-19”) on our business, financial condition and results of operations. This Quarterly Report contains, among others, forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in Item 1A “Risk Factors”. Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. Do 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, the Company assumes 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 Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 146 locations around the United States. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other nonhospital settings. Our services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. We provide home infusion services consisting of anti-infectives, nutrition support, bleeding disorder therapies, immunoglobulin therapy, and other therapies for chronic and acute conditions. HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care, Inc. (“Option Care”). On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”) (the “Merger”), a national provider of infusion and home care management solutions, which was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc. and the combined company’s stock, par value $0.0001, was listed on the Nasdaq Global Select Market as of September 30, 2020. See Note 3, Business Acquisitions , of the unaudited condensed consolidated financial statements for further discussion of the Merger. 24 Table of Contents Update on the Impact of the COVID-19 Pandemic The primary operations of the Company focus on providing infusion therapy services and based on the recent impact of the pandemic across the healthcare ecosystem, the Company began experiencing a related impact across a number of facets beginning in March 2020. The third quarter of 2020 results reflect the Company’s continued efforts to accelerate growth and drive merger-related cost savings offset by the detrimental impact of the COVID-19 pandemic. The Company relies upon patient referrals from multiple sources, including but not limited to patients discharged from acute care settings (e.g., hospitals) and patients requiring treatment for chronic conditions from specialty physicians. As expected, the pandemic has negatively affected new patient referrals for both acute and chronic conditions; however, the Company did experience an increase in patient transfers from hospital and outpatient settings which positively affected revenues. For the third quarter of 2020, the revenue results reflect flat acute revenues relative to the prior year while chronic revenue grew in the mid teens. Option Care Health continues to collaborate with payers and health systems to transition patients into the home or one of our alternate treatment sites to receive vital infusion therapy. The Company’s operations involve the compounding of therapeutic drugs in sterile cleanroom facilities by pharmacists and pharmacy technicians, the transportation of such drugs to the patients’ home or alternate infusion treatment site and the administration of the drug by a licensed healthcare professional. Due to personal disruption experienced by employees of the Company, the ability to efficiently resource the compounding, delivery and administration of therapies has been negatively impacted given staffing challenges and availability. This has resulted in higher wage costs in the form of overtime expenditures, migration of clinical resources to additional markets and utilization of contract labor resources. In addition to direct labor investments, the Company has experienced similar impacts on the indirect support functions, as employees have generally migrated to a virtual, remote establishment. In delivering infusion therapy, the Company’s clinical personnel regularly utilize personal protection equipment (“PPE”) and ancillary medical supplies as dictated by the Company’s clinical protocols. Based on the increased demand for PPE, the Company has experienced challenges in procuring necessary PPE to ensure the safety of its personnel and the patients served in the form of higher costs for PPE as well as increased effort and resources dedicated to procurement activities. To date, the Company has maintained adequate levels of PPE to support its operations, albeit at higher procurement costs. The Company experienced cost inefficiencies in the third quarter with respect to clinical labor and other staffing challenges, as well as higher costs to procure personal protection equipment. Offsetting the negative impacts resulting from the COVID-19 pandemic, the Company managed spending and accelerated many integration-related initiatives as discussed below. Further, to date, the Company experienced no material deceleration in cash collections and collaboration with payers continues to be productive. The Company anticipates that the pandemic could affect its operations for an extended period; however, at this time cannot confidently forecast the duration nor the ultimate financial impact on its operations. See Item 1A. “Risk Factors” under the caption “The COVID-19 pandemic could adversely impact our business, results of operations, cash flows and financial position” for further discussion of risks. In April 2020, the Company received approximately $11.7 million from the Public Health and Social Services Emergency Fund as part of the Coronavirus Aid, Relief, and Economics Security Act (“CARES Act”). The $11.7 million was reflected in the second quarter 2020 as a cash inflow from financing activities. Given the Company’s ability to largely offset the cost inefficiencies experienced from the COVID-19 pandemic with spending reductions and accelerated integration net cost synergies, the Company returned these CARES Act funds to the federal government during the third quarter of 2020. This was reflected as a cash outflow from financing activities during the third quarter of 2020. 25 Table of Contents Merger Integration Execution The Merger of Option Care and BioScrip into Option Care Health has created an opportunity to realize cost synergies while continuing to drive organic growth in chronic and acute therapies through our expanded national platform. Option Care Health is well-positioned to leverage the investments in corporate infrastructure and drive economies of scale as a result of the Merger. The synergy categories are as follows: • Selling, General and Administrative Expenses Savings. Merged corporate infrastructure has created significant opportunity for streamlining corporate and administrative costs, including headcount and functional spend. • Network Optimization. The previous investments in technology and compounding pharmacies, along with the overlapping geographic footprint, allows for facility rationalization and the optimization of assets. • Procurement Savings. The enhanced scale of the Company generates supply chain efficiencies through increased purchasing leverage. The Company’s platform is also positioned to be the partner of choice for pharmaceutical manufacturers seeking innovative distribution channels and patient support models to access the market. Since the Merger, we have worked to align our field and sales teams. We have also made strides at combining our procurement process and contracts, all while continuing to focus on serving our patients. Patient health is personal to us, which is why, throughout the integration process, we strive to improve and set the standard for quality care that is matched by best-in-class service. After completion of the Merger, we have additional resources to invest in our people, process and systems, providing us improved strength and scale to drive better patient outcomes. The Company accelerated its integration activities during the second quarter of 2020 to offset the negative impacts resulting from COVID-19 pandemic, and as a result we fully achieved the articulated goal of at least $60.0 million in net cost synergies. We continue to pursue further integration efforts, and ultimately expect to exceed the net cost synergy goal. Acquisitions Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and home care management, who partnered with physicians, hospital systems, payers, pharmaceutical manufacturers and skilled nursing facilities to provide patients access to post-acute care services. The fair value of purchase consideration transferred, net of cash acquired, on the closing date of $1,087.2 million includes the value of the number of shares of the combined company to be owned by BioScrip shareholders at closing of the Merger, the value of common shares to be issued to certain warrant and preferred shareholders in conjunction with the Merger, the value of stock-based instruments that were vested or earned as of the Merger, and cash payments made in conjunction with the Merger. For additional information on this transaction, see Note 3, Business Acquisitions, of the unaudited condensed consolidated financial statements. 26 Table of Contents Composition of Results of Operations The following results of operations include the accounts of Option Care Health and our subsidiaries for the three and nine months ended September 30, 2020 and 2019. The BioScrip results have been included since the August 6, 2019 Merger Date. Gross Profit Gross profit represents our net revenue less cost of revenue. Net Revenue. Infusion and related health care services revenue is reported at the estimated net realizable amounts from third-party payers and patients for goods sold and services rendered. When pharmaceuticals are provided to a patient, revenue is recognized upon delivery of the goods. When nursing services are provided, revenue is recognized when the services are rendered. Due to the nature of the health care industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded. Cost of Revenue. Cost of revenue consists of the actual cost of pharmaceuticals and other medical supplies dispensed to patients. In addition to product costs, cost of revenue includes warehousing costs, purchasing costs, depreciation expense relating to revenue-generating assets, such as infusion pumps, shipping and handling costs, and wages and related costs for the pharmacists, nurses, and all other employees and contracted workers directly involved in providing service to the patient. The Company receives volume-based rebates and prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These payments are recorded as a reduction of inventory and are accounted for as a reduction of cost of revenue when the related inventory is sold. Operating Costs and Expenses Selling, General and Administrative Expenses . Selling, general and administrative expenses consist principally of salaries for administrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees. Depreciation and Amortization Expense. Depreciation within this caption includes infrastructure items such as computer hardware and software, office equipment and leasehold improvements. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue. Other Income (Expense) Interest Expense, Net . Interest expense consists principally of interest payments on the Company’s outstanding borrowings under the ABL Facility, the first lien term loan and second lien notes, amortization of discount and deferred financing fees, and changes in derivatives not designated as hedging instruments related to the interest rate swaps. Refer to the “Liquidity and Capital Resources” section below for further discussion of these outstanding borrowings. Equity in Earnings of Joint Ventures . Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion joint ventures with health systems. Other, Net . Other income (expense) primarily includes miscellaneous non-operating expenses and third-party fees paid in conjunction with debt issuances and debt extinguishments, as they occur. Income Tax Expense (Benefit) . The Company is subject to taxation in the United States and various states. The Company’s income tax expense (benefit) is reflective of the current federal and state tax rates. Change in unrealized gains (losses) on cash flow hedges, net of income taxe expense (benefit) . Change in unrealized gains (losses) on cash flow hedges, net of income taxes, consists of the gains and losses associated with the changes in the fair value of derivatives designated as hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes. 27 Table of Contents Results of Operations The following table presents Option Care Health’s consolidated results of operations for the three and nine months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 (unaudited) 2019 (unaudited) 2020 (unaudited) 2019 (unaudited) Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue NET REVENUE $ 781,609 100.0 % $ 615,880 100.0 % $ 2,227,897 100.0 % $ 1,589,638 100.0 % COST OF REVENUE 607,456 77.7 % 478,107 77.6 % 1,729,395 77.6 % 1,252,281 78.8 % GROSS PROFIT 174,153 22.3 % 137,773 22.4 % 498,502 22.4 % 337,357 21.2 % OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 123,000 15.7 % 133,475 21.7 % 377,198 16.9 % 315,815 19.9 % Depreciation and amortization expense 16,597 2.1 % 16,023 2.6 % 54,892 2.5 % 36,142 2.3 % Total operating expenses 139,597 17.9 % 149,498 24.3 % 432,090 19.4 % 351,957 22.1 % OPERATING INCOME (LOSS) 34,556 4.4 % (11,725) (1.9) % 66,412 3.0 % (14,600) (0.9) % OTHER INCOME (EXPENSE): Interest expense, net (24,583) (3.1) % (21,509) (3.5) % (84,102) (3.8) % (44,117) (2.8) % Equity in earnings of joint ventures 790 0.1 % 826 0.1 % 2,364 0.1 % 2,018 0.1 % Other, net (8,344) (1.1) % (6,810) (1.1) % (8,322) (0.4) % (6,679) (0.4) % Total other expense (32,137) (4.1) % (27,493) (4.5) % (90,060) (4.0) % (48,778) (3.1) % INCOME (LOSS) BEFORE INCOME TAXES 2,419 0.3 % (39,218) (6.4) % (23,648) (1.1) % (63,378) (4.0) % INCOME TAX EXPENSE (BENEFIT) 756 0.1 % 3,576 0.6 % 2,267 0.1 % (3,269) (0.2) % NET INCOME (LOSS) $ 1,663 0.2 % $ (42,794) (6.9) % $ (25,915) (1.2) % $ (60,109) (3.8) % OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Change in unrealized gains (losses) on cash flow hedges, net of income tax expense (benefit) of $0, $32, $0 and $259, respectively 4,022 0.5 % (8,249) (1.3) % (8,034) (0.4) % (8,727) (0.5) % OTHER COMPREHENSIVE INCOME (LOSS) 4,022 0.5 % (8,249) (1.3) % (8,034) (0.4) % (8,727) (0.5) % NET COMPREHENSIVE INCOME (LOSS) $ 5,685 0.7 % $ (51,043) (8.3) % $ (33,949) (1.5) % $ (68,836) (4.3) % 28 Table of Contents Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 The following tables present selected consolidated comparative results of operations from Option Care Health’s unaudited condensed consolidated financial statements for the three month periods ended September 30, 2020 and September 30, 2019. Gross Profit Three Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net revenue $ 781,609 $ 615,880 $ 165,729 26.9 % Cost of revenue 607,456 478,107 129,349 27.1 % Gross profit $ 174,153 $ 137,773 $ 36,380 26.4 % Gross profit margin 22.3 % 22.4 % The increase in net revenue was primarily driven by additional revenue following the Merger, as the prior year included the results of BioScrip from the Merger Date, along with organic growth in the Company’s portfolio of therapies. The increase in cost of revenue was driven by the impact of the Merger and revenue growth. The increase in gross profit was primarily related to contribution margin from additional revenue from the Merger. The slight decline in gross margin percentage was primarily driven by the positive impact from the merger integration net cost synergies, offset by the incremental wage costs and personal protective equipment costs related to the COVID-19 pandemic. Operating Expenses Three Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Selling, general and administrative expenses $ 123,000 $ 133,475 $ (10,475) (7.8) % Depreciation and amortization expense 16,597 16,023 574 3.6 % Total operating expenses $ 139,597 $ 149,498 $ (9,901) (6.6) % Selling, general and administrative expenses for the three months ended September 30, 2019 included $21.2 million of transaction and integration expenses related to the Merger. No similar expenses were incurred for the three months ended September 30, 2020. Selling, general and administrative expenses decreased as a percentage of revenue to 15.7% for the three months ended September 30, 2020 as compared to 21.7% for the three months ended September 30, 2019 due to the prior year transaction and integration expenses along with realization of net cost synergies achieved related to the Merger. The increase in depreciation and amortization was primarily related to the depreciation of additional investment s in our pharmacies and infrastructure. 29 Table of Contents Other Income (Expense) Three Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Interest expense, net $ (24,583) $ (21,509) $ (3,074) 14.3 % Equity in earnings of joint ventures 790 826 (36) (4.4) % Other, net (8,344) (6,810) (1,534) 22.5 % Total other expense $ (32,137) $ (27,493) $ (4,644) 16.9 % The increase in interest expense was primarily attributable to the interest expense on the new debt issued in conjunction with the Merger, as the prior year included interest expense on the new debt from the Merger Date, partially offset by the savings from the $125.0 million repayment of principal on the second lien notes in the third quarter of 2020. See Note 10, Indebtedness , of the unaudited condensed consolidated financial statements. The increase in other, net relates to the loss on extinguishment of debt of $8.3 million incurred in the third quarter of 2020 in conjunction with the $125.0 million repayment of principal on the second lien notes. Income Tax Expense (Benefit) Three Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Income tax expense (benefit) $ 756 $ 3,576 $ (2,820) (78.9) % The Company maintains a full valuation allowance, established at the time of Merger, against all of its net U.S. federal and state deferred tax assets with the exception of approximately $0.6 million of estimated state net operating losses (“NOL”). Because of the Company’s full valuation allowance, the Company’s tax expense for the three months ended September 30, 2020 only consists of quarterly tax liabilities attributable to separate company state tax returns as well as recognized deferred tax expense. These tax expense items resulted in an effective tax rate of 31.3% during the three months ended September 30, 2020. During the three months ended September 30, 2019, the effective tax rate was negative 9.1%. The variance in the year-over-year effective tax rates is primarily attributable to the valuation allowance established by the Company at the time of the Merger. The quarterly tax rates of both periods differ from the Company’s 21% federal statutory rate primarily due to changes in valuation allowance, certain state and local taxes, non-deductible costs and resolution of certain tax matters. 30 Table of Contents Net Income (Loss) and Other Comprehensive Income (Loss) Three Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net income (loss) $ 1,663 $ (42,794) $ 44,457 (103.9) % Other comprehensive income (loss), net of tax: Changes in unrealized gains (losses) on cash flow hedges, net of income taxes 4,022 (8,249) 12,271 (148.8) % Other comprehensive income (loss) 4,022 (8,249) 12,271 (148.8) % Net comprehensive income (loss) $ 5,685 $ (51,043) $ 56,728 (111.1) % The change in net income (loss) was primarily attributed to contribution margin from additional revenue related to the Merger and integration savings that resulted in total operating expenses decreasing as a percentage of revenue. The prior year net loss included transaction-related expenses incurred in conjunction with the Merger. The change in unrealized gains (losses) on cash flow hedges, net of income taxes, primarily related to the increase in fair value on the $925.0 million notional swap. The change in unrealized loss for the three months ended September 30, 2019 related to decreases in variable interest rates, resulting in a corresponding liability on the fair value of the interest rate swaps. Net comprehensive income was $5.7 million for the three months ended September 30, 2020, compared to net comprehensive loss of $51.0 million for the three months ended September 30, 2019, as a result of the changes in net income (loss), discussed above, along with the impact of the interest rate swaps. 31 Table of Contents Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following tables present selected consolidated comparative results of operations from the Company’s unaudited condensed consolidated financial statements for the nine month periods ended September 30, 2020 and September 30, 2019. Gross Profit Nine Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net revenue $ 2,227,897 $ 1,589,638 $ 638,259 40.2 % Cost of revenue 1,729,395 1,252,281 $ 477,114 38.1 % Gross profit 498,502 337,357 $ 161,145 47.8 % Gross profit margin 22.4 % 21.2 % The increase in net revenue was primarily driven by additional revenue following the Merger as well as growth in the Company’s portfolio of therapies. The increase in cost of revenue was driven by the impact of the Merger and organic growth. The increase in gross profit was primarily related to contribution margin from additional revenue from the Merger. The increase in gross margin percentage was primarily driven by the positive impact from the merger integration net cost synergies, partially offset by the incremental wage costs and personal protective equipment costs related to the COVID-19 pandemic. Operating Expenses Nine Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Selling, general and administrative expenses $ 377,198 $ 315,815 $ 61,383 19.4 % Depreciation and amortization expense 54,892 36,142 18,750 51.9 % Total operating expenses $ 432,090 $ 351,957 $ 80,133 22.8 % Selling, general and administrative expenses increased for the nine months ended September 30, 2020 primarily due to the impact of the Merger, but has decreased as a percentage of revenue to 16.9% for the nine months ended September 30, 2020 as compared to 19.9% for the nine months ended September 30, 2019 due to synergy realization. The increase in depreciation and amortization was primarily related to the depreciation of the fixed assets acquired and the amortization of the intangibles acquired from the Merger along with depreciation of additional investments in our pharmacies and infrastructure. 32 Table of Contents Other Income (Expense) Nine Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Interest expense, net $ (84,102) $ (44,117) $ (39,985) 90.6 % Equity in earnings of joint ventures 2,364 2,018 346 17.1 % Other, net (8,322) (6,679) (1,643) 24.6 % Total other expense $ (90,060) $ (48,778) $ (41,282) 84.6 % The increase in interest expense was primarily attributable to the interest expense on the new debt issued in conjunction with the Merger, as discussed above. The increase in other, net relates to the loss on extinguishment of debt of $8.3 million incurred in the third quarter of 2020 in conjunction with the $125.0 million repayment of principal on the second lien notes. Income Tax Expense (Benefit) Nine Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Income tax expense (benefit) $ 2,267 $ (3,269) $ 5,536 (169.3) % The Company maintains a full valuation allowance, established at the time of Merger, against all of its net U.S. federal and state deferred tax assets with the exception of approximately $0.6 million of estimated state net operating losses (“NOL”). Because of the Company’s full valuation allowance, the Company’s tax expense for the nine months ended September 30, 2020 only consists of quarterly tax liabilities attributable to separate company state taxing authorities as well as recognized deferred tax expense. These tax expense items created a negative effective tax rate of 9.6% during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, the effective tax rate was 5.2%. The variance in the year-over-year effective tax rates is primarily attributable to the valuation allowance established by the Company at the time of the Merger. The effective tax rates of both periods differ from the Company’s 21% federal statutory rate primarily due to changes in valuation allowance, certain state and local taxes, non-deductible costs and resolution of certain tax matters. 33 Table of Contents Net Income (Loss) and Other Comprehensive Income (Loss) Nine Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net loss $ (25,915) $ (60,109) $ 34,194 (56.9) % Other comprehensive income (loss), net of tax: Changes in unrealized losses on cash flow hedges, net of income taxes (8,034) (8,727) 693 (7.9) % Other comprehensive loss (8,034) (8,727) 693 (7.9) % Net comprehensive loss $ (33,949) $ (68,836) $ 34,887 (50.7) % The change in net loss was primarily attributed to increased depreciation, amortization and interest expense, which was partially offset by operating efficiencies, certain cost saving initiatives related to COVID-19 and Merger integration savings. The change in unrealized losses on cash flow hedges, net of income taxes, related to the decrease in the variable interest rates during 2020, partially offset by the $3.7 million reclassification from accumulated other comprehensive income to interest expense upon discontinuing hedge accounting on the $400.0 million notional interest rate swap. The change in unrealized losses for the nine months ended September 30, 2019 related to fluctuations on interest rate caps along with decreasing interest rates, which resulted in a corresponding liability on the change in fair value of the interest rate swaps. The change in net comprehensive loss was the result of the change in net loss, described above, further reduced by the impact of the fair value of the interest rate swaps. Liquidity and Capital Resources For the nine months ended September 30, 2020 and the twelve months ended December 31, 2019, the Company’s primary sources of liquidity were cash on hand of $140.0 million and $67.1 million, respectively, as well as the $140.4 million of borrowings available under its credit facilities. During the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company’s positive cash flows from operations enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as pursue acquisitions. The Company’s primary uses of cash include supporting our ongoing business activities and investing in various acquisitions and our infrastructure to support additional business volumes. Ongoing operating cash outflows are primarily associated with procuring and dispensing prescription drugs, personnel and other costs associated with servicing patients, as well as paying cash interest on the outstanding debt. Ongoing investing cash flows are primarily associated with capital projects related to business acquisitions, the improvement and maintenance of our pharmacy facilities and investment in our information technology systems. Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt. Our business strategy includes the selective acquisition of additional infusion pharmacies and other related healthcare businesses. We continue to evaluate acquisition opportunities and view acquisitions as a key part of our growth strategy. The Company historically has funded its acquisitions with cash with the exception of the Merger. The Company may require additional capital in excess of current availability in order to complete future acquisitions. It is impossible to predict the amount of capital that may be required for acquisitions, and there is no assurance that sufficient financing for these activities will be available on acceptable terms. Short-Term and Long-Term Liquidity Requirements The Company’s ability to make principal and interest payments on any borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations and planned capital expenditures, we believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans. 34 Table of Contents Credit Facilities The Company’s asset-based-lending (“ABL”) revolving credit facility provides for borrowings up to $150.0 million, which matures on August 6, 2024. The ABL facility bears interest at a per annum rate that is determined by the Company’s periodic selection of rate type, either the Base Rate or the Eurocurrency Rate. The Base Rate is charged between 1.25% and 1.75% and the Eurocurrency Rate is charged between 2.25% and 2.75% based on the historical excess availability as a percentage of the Line Cap, as defined in the ABL facility credit agreement. The revolving credit facility contains commitment fees payable on the unused portion of the ABL facility ranging from 0.25% to 0.375%, depending on various factors including the Company’s leverage ratio, type of loan and rate type, and letter of credit fees of 2.5%. The Company had no outstanding borrowings under the ABL facility at September 30, 2020. The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL facility of $140.4 million as of September 30, 2020. Subsequent to September 30, 2020, the Company increased the borrowing capacity of the ABL facility to $175.0 million, increasing net borrowings available to $165.4 million. See Note 17, Subsequent Events , for further discussion of the increased borrowing capacity. The principal balance of the first lien term loan is repayable in quarterly installments of $2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026. The quarterly principal payments commenced in March of 2020. Interest on the first lien term loan is payable monthly on Base Rate loans at Base Rate, as defined, plus 3.25% to 3.50%, depending on the Company’s leverage ratio. Interest is charged on Eurocurrency Rate loans at the Eurocurrency Rate, as defined, plus 4.25% to 4.50%, depending on the Company’s leverage ratio. The interest rate on the first lien term loan was 4.65% as of September 30, 2020. The second lien notes mature on August 6, 2027. Interest on the second lien notes is payable quarterly and is at the greater of 1% or London Interbank Offered Rate (“LIBOR”), plus 8.75%. The Company elected to pay-in-kind the first quarterly interest payment, due in November 2019, which resulted in the Company capitalizing the interest payment to the principal balance on the interest payment date. The Company paid the second and third quarterly interest payments, due in February 2020 and May 2020. The Company elected to pay-in-kind the quarterly interest payment due in August 2020, which resulted in the Company capitalizing the interest payment to the principal balance on the interest payment date. In August 2020, the Company prepaid $125.0 million of second lien note principal, bringing the outstanding principal balance to $294.8 million. The interest rate on the second lien notes was 9.00% as of September 30, 2020. 35 Table of Contents Cash Flows Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table presents selected data from Option Care Health’s unaudited condensed consolidated statements of cash flows: Nine Months Ended September 30, 2020 2019 (unaudited) (unaudited) Variance (in thousands) Net cash provided by operating activities $ 101,728 $ 16,570 $ 85,158 Net cash used in investing activities (12,330) (712,684) 700,354 Net cash (used in) provided by financing activities (16,407) 712,512 (728,919) Net increase in cash and cash equivalents 72,991 16,398 56,593 Cash and cash equivalents - beginning of period 67,056 36,391 30,665 Cash and cash equivalents - end of period $ 140,047 $ 52,789 $ 87,258 Cash Flows from Operating Activities The increase in cash flows provided by operating activities is primarily due to working capital efficiencies and timing of vendor payments during the nine months ended September 30, 2020. Cash Flows from Investing Activities The decrease in cash flows used in investing activities is primarily due to the BioScrip acquisition in the prior year. Cash Flows from Financing Activities The decrease in cash (used in) provided by financing activities is related to the prior year proceeds from the issuance of new debt of $981.1 million, partially offset by the retirement of the Company’s previous debt of $226.7 million and the payment of deferred financing costs of $36.5 million for the nine months ended September 30, 2019. The cash used in financing activities for the nine months ended September 30, 2020 primarily related to prepayment of the second lien notes of $125.0 million, partially offset by proceeds from the issuance of common stock of $119.0 million, as well as principal payments on the first lien term loan. 36 Table of Contents Commitments and Contractual Obligations The following table presents Option Care Health’s commitments and contractual obligations as of September 30, 2020, as well as its long-term obligations (in thousands): Payments Due by Period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years (in thousands) Long-term debt obligations (1) $ 1,212,844 $ 9,250 $ 18,500 $ 18,500 $ 1,166,594 Interest payments on long-term debt obligations (2) 455,844 69,981 138,655 136,910 110,298 Operating lease obligations 109,252 26,340 33,218 19,582 30,112 Total $ 1,777,940 $ 105,571 $ 190,373 $ 174,992 $ 1,307,004 (1) Includes aggregate principal payment from the first lien term loan and second lien notes. (2) Interest payments calculated based on LIBOR rate as of September 30, 2020. Actual payments are based on changes in LIBOR. Calculated interest payments exclude interest rate swap agreements the Company entered into in connection with the long-term debt obligations. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Off-Balance Sheet Arrangements As of September 30, 2020, Option Care Health did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K. Critical Accounting Policies and Estimates The Company prepares its unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. The Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. There have been no significant changes in the critical accounting estimates from those described in the Company’s audited consolidated financial statements and related notes, as presented in our Annual report on 10-K for the year ended December 31, 2019, hereby incorporated by reference. 37 Table of Contents Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to our exposure to market risk from those included in our Annual Report on Form 10-K for the year ended December 31, 2019, hereby incorporated by reference.