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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-05 · 118 added, 181 removed, 217 unchanged (58% of the section changed)

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Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements.

We discuss such risks, uncertainties and other factors throughout this Annual Report and specifically under the caption “Forward-Looking Statements” and under “ Item 1A.

Risk Factors ” in this Annual Report.

We discuss such risks, uncertainties and other factors throughout this Annual Report and specifically under the caption “Forward-Looking Statements” in this Annual Report.

In addition, the following discussion of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 8 in this Annual Report.

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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 Capital Market as of December 31, 2019.

and the combined company’s stock, par value $0.0001, was listed on the Nasdaq Capital Market.

Effective February 3, 2020, the Company was listed on the Nasdaq Global Select Market under the ticker symbol “OPCH”.

See Note 3, Business Acquisitions , of the consolidated financial statements for further discussion of the Merger.

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 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 year ended December 31, 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 experienced cost inefficiencies during the year ended December 31, 2020 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 it cannot confidently forecast the duration nor the ultimate financial impact on its operations.

“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.

Merger Integration Execution

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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 forecasted synergy categories are as follows:

The synergy categories are as follows:

• Selling, General and Administrative Expenses Savings.

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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.

We believe the achievement of these synergies will enable the delivery of high-quality, cost-effective solutions to providers across the country and help facilitate the introduction of new therapies to the marketplace while improving the profitability profile of the Company.

Since the Merger, we have worked to align our field and sales teams.

We have also made strides at combining our procurement processes and contracts, all while continuing to focus on serving our patients.

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, processes 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 million in net cost synergies.

Changes to Medicare Reimbursement

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This temporary transition benefit defines professional services as only including nursing, and not pharmacy, care planning, care coordination, or monitoring, and only pays for an infusion day when the nurse is in the home.

The Company has made strategic acquisitions to expand both its national footprint as well as its service line offering.

These acquisitions are comprised of the following:

Option Care merged with BioScrip on August 6, 2019.

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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.

The fair value per share of BioScrip’s common stock was $2.67 per share on August 6, 2019.

For additional information on this transaction, see Note 3, Business Acquisitions, of the consolidated financial statements.

In September 2018, we completed the acquisition of 100% of the outstanding shares of Home I.V.

Specialists, Inc.

(“Home IV”), for a purchase price of $11.6 million, net of cash acquired.

The Home IV acquisition expands our presence in Arkansas as we acquired Home IV’s three pharmacy locations in that state.

On February 3, 2020, the Company completed a one share for four reverse stock split.

In connection with the reverse stock split, the Company changed its ticker symbol from “BIOS” to “OPCH” and transferred the Company’s common stock from the Nasdaq Capital Market to the Nasdaq Global Select Market.

The par value of the Company’s common stock remained unchanged as a result of the reverse stock split, resulting in a decrease to the aggregate par value of common stock and corresponding increase to paid-in capital in the Company’s consolidated financial statements, which was retrospectively applied to all periods presented in the consolidated financial statements.

For additional information on this Merger, see Note 3, Business Acquisitions, of the consolidated financial statements.

Composition of Results of Operations

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The BioScrip results have been included since the August 6, 2019 Merger Date.

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.

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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, as well as the amortization of discount and deferred financing fees.

Interest expense consists principally of interest payments on the Company’s outstanding borrowings under 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.

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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 income (expense) primarily includes third-party fees paid in conjunction with our 2019 debt issuance of the Loan Facilities and Second Lien Notes and loss on extinguishment of debt for the Company’s Previous Credit Facilities.

Other income (expense) primarily includes current year loss on extinguishment of debt incurred in connection with 2020 debt prepayments.

Prior year amounts relate to third-party fees paid in conjunction with our 2019 debt issuance of the Loan Facilities and Second Lien Notes and loss on extinguishment of debt for the Company’s Previous Credit Facilities.

Income Tax Expense (Benefit) .

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The following table presents Option Care Health’s consolidated results of operations for the years ended December 31, 2020 and 2019 (in thousands).

For discussion of Option Care Health’s consolidated results of operations for the year ended December 31, 2019 compared to 2018, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on 10-K filed with the Securities and Exchange Commission on March 5, 2020.

Year Ended December 31,

Amount % of Revenue Amount % of Revenue

NET REVENUE $ 3,032,610 100.0% $ 2,310,417 100.0%

COST OF REVENUE 2,350,346 77.5% 1,797,418 77.8%

GROSS PROFIT 682,264 22.5% 512,999 22.2%

OPERATING COSTS AND EXPENSES:

Selling, general and administrative expenses 500,199 16.5% 459,628 19.9%

Provision for doubtful accounts (2)

Depreciation and amortization expense 71,310 2.4% 53,690 2.3%

Total operating expenses 571,509 18.8% 513,318 22.2%

OPERATING (LOSS) INCOME

OPERATING INCOME (LOSS) 110,755 3.7% (319) —%

OTHER INCOME (EXPENSE):

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Equity in earnings of joint ventures 3,313 0.1% 2,840 0.1%

Other, net (11,541) (0.4)% (6,991) (0.3)%

Total other expense (115,998) (3.8)% (77,875) (3.4)%

LOSS BEFORE INCOME TAXES (5,243) (0.2)% (78,194) (3.4)%

INCOME TAX BENEFIT

NET (LOSS) INCOME

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:

Change in unrealized (losses) gains on cash flow hedges, net of income taxes of $259, $234 and $36, respectively

OTHER COMPREHENSIVE (LOSS) INCOME

NET COMPREHENSIVE (LOSS) INCOME

(1) 2019 includes the results of operations of BioScrip from August 6, 2019 onward and are, therefore, not comparable to prior periods.

(2) Provision for doubtful accounts for the years ended December 31, 2019 and 2018 reflect the adoption of ASU 2014-09, Revenue from Contracts with Customers , and are, therefore, not comparable to prior periods.

For a full discussion on the impacts of the adoption see Note 4, Revenue , included in Item 8 of this report.

INCOME TAX EXPENSE (BENEFIT) 2,833 0.1% (2,274) (0.1)%

NET LOSS $ (8,076) (0.3)% $ (75,920) (3.3)%

OTHER COMPREHENSIVE LOSS, NET OF TAX:

Change in unrealized losses on cash flow hedges, net of income taxes of $0 and $259, respectively (3,977) (0.1)% (8,039) (0.3)%

OTHER COMPREHENSIVE LOSS (3,977) (0.1)% (8,039) (0.3)%

NET COMPREHENSIVE LOSS $ (12,053) (0.4)% $ (83,959) (3.6)%

(1) 2020 includes the results of operations from BioScrip for the full year.

2019 includes the results of operations of BioScrip from the August 6, 2019 Merger Date onward and are, therefore, not comparable.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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Year Ended December 31,

(in thousands, except for percentages)

The 19.1% increase in net revenue was primarily driven by additional revenue following the Merger of $308.9 million.

Additional increases in net revenue were the result of growth in the Company’s portfolio of therapies, particularly those therapies to treat chronic conditions such as autoimmune inflammatory disorders.

Cost of Revenue

Year Ended December 31,

2020 2019 Variance

(in thousands, except for percentages)

Net revenue $ 3,032,610 $ 2,310,417 $ 722,193 31.3 %

Cost of revenue 2,350,346 1,797,418 552,928 30.8 %

Gross profit $ 682,264 $ 512,999 $ 169,265 33.0 %

Gross profit margin 22.5 % 22.2 %

The 18.4% increase in cost of revenue was primarily attributable to the increase in revenue.

The increase in gross margin was driven by the therapy mix shift along with favorable formulary management and procurement contracts as we were able to take advantage of more favorable pricing due to increased buying power after the Merger.

The 31.3% increase in net revenue was primarily driven by additional revenue following the Merger, as the prior year included the results of BioScrip from the August 6, 2019 Merger Date, along with organic growth in the Company’s portfolio of therapies.

For the year ended December 31, 2020, the revenue results reflect flat revenues for acute therapies relative to the prior year due to the impact of the COVID-19 pandemic, while revenue for chronic therapies grew in the mid-teens.

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 increase in gross profit margin 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 and mix shift toward lower profit chronic therapies.

Operating Expenses

Year Ended December 31,

2020 2019 Variance

(in thousands, except for percentages)

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Total operating expenses $ 571,509 $ 513,318 $ 58,191 11.3 %

The increase in selling, general and administrative expenses in dollars and as a percent of revenue (17.8% of revenue for the year ended December 31, 2018 to 19.9% for the year ended December 31, 2019 ) was driven by transaction and integration expenses related to the Merger during the year ended December 31, 2019.

The increase in depreciation and amortization was primarily related to the deprecation of fixed assets acquired and the amortization of intangibles acquired from the Merger of $6.2 million and $6.5 million, respectively.

Selling, general and administrative expenses increased for the year ended December 31, 2020 primarily due to the impact of the Merger, but has decreased as a percentage of revenue to 16.5% for the year ended December 31, 2020 as compared to 19.9% for the year ended December 31, 2019 primarily due to synergy realization from Merger integration activities as well as spending reductions to offset the negative impacts of the COVID-19 pandemic.

The increase in depreciation and amortization was primarily related to the deprecation of fixed assets acquired and the amortization of intangibles acquired from the Merger along with depreciation of additional investments in our pharmacies and infrastructure.

Other Income (Expense)

Year Ended December 31,

2020 2019 Variance

(in thousands, except for percentages)

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Equity in earnings of joint ventures 3,313 2,840 473 16.7 %

Other, net (11,541) (6,991) (4,550) 65.1 %

Total other expense $ (115,998) $ (77,875) $ (38,123) 49.0 %

The increase in interest expense of 60.9% was primarily attributable to the additional expense related to the new debt issued at the close of the Merger.

The increase in other, net of 213.1% was the result of the debt extinguishment costs incurred in 2019 of $5.5 million as a result of the extinguishment of debt in conjunction with the Merger.

The increase in interest expense was primarily attributable to the additional expense related to the new debt issued at the close of the Merger, partially offset by the savings from the combined $174.0 million prepayment of principal on the Second Lien Notes in the third and fourth quarters of 2020.

The prior year included interest expense on the new debt from the Merger Date.

See Note 11, Indebtedness , of the consolidated financial statements.

The increase in other, net of was the result of the loss on extinguishment of debt of $11.5 million incurred during the year ended December 31, 2020 in conjunction with the $174.0 million prepayment of principal on the Second Lien Notes, compared to the loss on extinguishment of debt of $5.5 million incurred during the year ended December 31, 2019 in conjunction with the extinguishment of debt related to the Merger.

Income Tax Expense (Benefit)

Year Ended December 31,

2020 2019 Variance

(in thousands, except for percentages)

Income tax expense (benefit) $ 2,833 $ (2,274) $ 5,107 (224.6) %

The Company’s tax expense for the year ended December 31, 2020 is comprised of a change in deferred tax assets and liabilities, partially offset by a change in valuation allowance, and state tax liabilities, resulting in a negative effective tax rate of 54.0%.

The Company’s tax benefit for the year ended December 31, 2019 is comprised of a deferred tax benefit partially offset by a change in valuation allowance and state tax liabilities.

This results in an effective tax rate of 2.9% for the year ended December 31, 2019.

During the year ended December 31, 2018, the effective tax rate was 30.3%.

These rates differ from the Company’s 21% federal statutory rate primarily due to a change in valuation allowance, certain state and local taxes, non-deductible costs, and resolution of certain tax matters.

Net (Loss) Income and Other Comprehensive (Loss) Income

Year Ended December 31,

(in thousands, except for percentages)

Net (loss) income

Other comprehensive income (loss), net of tax:

Changes in unrealized (losses) gains on cash flow hedges, net of income taxes

Other comprehensive (loss) income

Net comprehensive (loss) income

Net loss increased $69.8 million primarily driven by increased depreciation and amortization expense, transaction expenses and integration costs related to the Merger, increased interest expense, as well as the loss on the extinguishment of debt.

Changes in unrealized (losses) gains on cash flow hedges, net of income taxes, decreased as a result of the decrease in the variable interest rates during 2019.

The interest rate swaps in 2019 are hedging against the first $911.1 million of the First Lien Term Loan and the first $400.0 million of the Second Lien Term Loan, whereas the interest rate caps in 2018 through April 2019 were on the first $250.0 million of the Previous First Lien Term Loan, resulting in a larger impact on unrealized (losses) gains on cash flow hedges in 2019.

Net comprehensive loss increased $78.6 million for the year ended December 31, 2019 as a result of the changes in net loss, discussed above, further reduced by the impact of the fair value of the hedging instruments.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

The following tables present selected consolidated comparative results of operations for the years ended December 31, 2018 and 2017:

Year Ended December 31,

(in thousands, except for percentages)

The 6.1% increase in net revenue was primarily driven by growth in the Company’s portfolio of therapies to treat chronic conditions such as autoimmune inflammatory disorders, as well as a shift in commercial strategy to better leverage the capabilities of its care transition specialists to capture additional market share.

The 2017 launch of additional therapies for the treatment of amyotrophic lateral sclerosis and Duchenne muscular dystrophy resulted in a $138.9 million increase in the Company’s revenue in 2018.

The favorable impact of these items offset the disruption impact from the implementation of a new pharmacy system, which was deployed from November 2016 to November 2018.

Additionally, 2018 net revenue reflects a

decrease of $61.3 million related to the implementation of ASC Topic 606, Revenue from Contracts with Customers, (See “Revenue Recognition” within Note 2, Summary of Significant Accounting Policies ), which resulted in the previously reported provision for doubtful accounts being treated as an implicit price concession that reduces net revenue upon adoption in 2018.

Cost of Revenue

Year Ended December 31,

(in thousands, except for percentages)

Cost of revenue

Gross profit margin

The increase in cost of revenue was primarily attributable to the increase in revenue, combined with a number of higher cost pharmaceuticals being introduced into the Company’s therapy mix.

This impact of the therapy mix shift on gross profit margin was partially offset by favorable formulary management and procurement contracts, as well as the introduction of generic alternatives.

Over the course of the year, the Company focused on pharmacy efficiency through the utilization of regional compounding facilities and centers of excellence.

In addition, the adoption of ASC 606 in 2018 contributed to the decline in gross margin.

Operating Expenses

Year Ended December 31,

(in thousands, except for percentages)

Selling, general and administrative expenses

Provision for doubtful accounts

Depreciation and amortization expense

Total operating expenses

The $7.4 million increase in selling, general and administrative expenses was associated with the increase in sales volume, but as a percentage revenue declined to 17.8% in 2018 from 18.5% in 2017 as topline growth outpaced this incremental increase in operating costs and expenses.

Provision for doubtful accounts decreased as a result of the implementation of ASC Topic 606 (See “Revenue Recognition” within Note 2, Summary of Significant Accounting Policies ) which resulted in the previously reported provision for doubtful accounts in 2017 being treated as an implicit price concession that reduces net revenue upon adoption in 2018.

The increase in depreciation and amortization expense was primarily due to the investments made into the Company’s pharmacy and information technology infrastructure in 2018.

Other Income (Expense)

Year Ended December 31,

(in thousands, except for percentages)

Interest expense, net

Equity in earnings of joint ventures

Total other expense

The $1.5 million increase in interest expense was attributable to the increasing variable interest rates associated with the outstanding debt.

To minimize the impact of these increasing rates, the Company repriced its first lien debt in June 2018

resulting in a lower spread over the underlying interest rate.

Additionally, the interest rate cap contracts entered into in 2017 partially mitigated the increase in interest expense.

The increase in other, net was primarily due to costs incurred associated with the repricing of the Previous First Lien Term Loan.

Income Tax Expense (Benefit)

Year Ended December 31,

(in thousands, except for percentages)

Income tax benefit

Income tax benefit decreased $15.9 million, or 85.7%.

In December 2017, the United States Government enacted the Tax Cuts and Jobs Act of 2017 (“TCJA”), which significantly changed U.S.

tax law by, among other things, reducing the corporate tax rate from 35% to 21%, effective January 1, 2018.

Included in the tax benefit for 2017 is a benefit of $17.0 million related to the tax rate reduction, resulting in an effective income rate of 126.4%.

The Company’s 2018 income tax benefit returned to a normalized run-rate with an effective income tax rate of 30.3%.

Net (Loss) Income and Other Comprehensive (Loss) Income

These effective tax rates differ from the Company’s 21% federal statutory rate primarily due to a change in valuation allowance, certain state and local taxes and non-deductible costs.

Net Loss and Other Comprehensive Loss

Year Ended December 31,

2020 2019 Variance

(in thousands, except for percentages)

Net (loss) income

Other comprehensive income, net of tax:

Changes in unrealized gains on cash flow hedges, net of income taxes

Other comprehensive income

Net comprehensive (loss) income

Net income decreased $10.0 million.

The decrease was primarily driven by the run-rate normalization of the impact of the tax reform legislation, which had a favorable impact in 2017.

Changes in unrealized gains on cash flow hedges, net of income taxes, increased $0.7 million.

The increase in the variable interest rates during 2018 resulted in a corresponding increase in the fair value of the interest rate cap.

Net comprehensive loss was $5.3 million for the twelve months ended December 31, 2018, compared to net comprehensive income of $3.9 million for the twelve months ended December 31, 2017, primarily related to the impact of the tax reform legislation previously discussed.

Net loss $ (8,076) $ (75,920) $ 67,844 (89.4) %

Other comprehensive loss, net of tax:

Changes in unrealized losses on cash flow hedges, net of income taxes (3,977) (8,039) 4,062 (50.5) %

Other comprehensive loss (3,977) (8,039) 4,062 (50.5) %

Net comprehensive loss $ (12,053) $ (83,959) $ 71,906 (85.6) %

Net loss decreased primarily driven by the growth in gross profit, which more than offset the incremental operating expenses and interest expense incurred in conjunction with the Merger.

The decrease in net loss is also impacted by the full realization of $60 million of Merger synergies in 2020 following the Merger, which more than offset the negative impacts of the COVID-19 pandemic during 2020.

Changes in unrealized losses on cash flow hedges, net of income taxes, decreased as the interest rate swap nears maturity in August 2021.

Net comprehensive loss decreased for the year ended December 31, 2020 as a result of the changes in net loss, discussed above, further reduced by the impact of the hedging instruments.

Liquidity and Capital Resources

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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.

In addition to these ongoing investing and financing activities, during the year ended December 31, 2019, the Company entered into the Merger Agreement, and the Merger resulted in cash used in investing activities of $700.2 million and net cash provided by financing activities for net proceeds of indebtedness of $724.3 million.

Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt.

In addition to these ongoing investing and financing activities, during the year ended December 31, 2020, the Company prepaid $174.0 million of outstanding debt principal balance.

During the year ended December 31, 2019, the Company entered into the Merger Agreement, and the Merger resulted in cash used in investing activities of $700.2 million and net cash provided by financing activities for net proceeds of indebtedness of $724.3 million.

Our business strategy includes the selective acquisition of additional infusion pharmacies and other related healthcare businesses.

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Proceeds of $575.0 million from the two new credit arrangements and indenture, discussed below, were also used, in part, to repay the outstanding debt of BioScrip as of the Merger.

In conjunction with the Merger, the Company entered into an asset-based-lending revolving credit facility and a first lien term loan facility.

The Company also issued senior secured second lien PIK toggle floating rate notes due 2027 (the “Second Lien Notes”).

The two new credit agreements and the indenture were entered into on August 6, 2019 and provide for up to $1,475.0 million in senior secured credit facilities through a $150.0 million asset-based-lending revolving credit facility (the “ABL Facility”), a $925.0 million first lien term loan (the “First Lien Term Loan”, and together with the ABL Facility, the “Loan Facilities”), and a $400.0 million issuance of Second Lien Notes.

In conjunction with the Merger, the Company entered into two credit agreements and an indenture that initially provided for up to $1,475.0 million in senior secured credit facilities through a $150.0 million asset-based lending revolving credit facility (the “ABL Facility”), a $925.0 million first lien term loan facility (the “First Lien Term Loan”, and together with the ABL Facility, the “Loan Facilities”), and a $400.0 million senior secured second lien PIK toggle floating rate notes due 2027 (the “Second Lien Notes”).

Amounts borrowed under the credit agreements are secured by substantially all of the assets of the Company.

The ABL Facility credit agreement provides for borrowings up to $150.0 million , which matures on August 6, 2024 .

The ABL Facility credit agreement initially provided for borrowings up to $150.0 million, and matures on August 6, 2024.

During the year ended December 31, 2020, the Company increased the borrowing capacity to $175.0 million.

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.

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The revolving credit facility contains commitment fees payable on the unused portion of the ABL 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 2.50%.

The Company had no outstanding borrowings under the ABL Facility at December 31, 2019 .

The Company did not borrow against the ABL Facility at any time during 2020, and had no outstanding borrowings under the ABL Facility at December 31, 2020.

The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL of $165.4 million as of December 31, 2020.

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 will commence in March of 2020.

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.

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The Second Lien Notes mature on August 6, 2027.

Interest on the Second Lien Notes is payable quarterly and is at the greater of 1.00% or 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, increasing the outstanding principal balance to $412.3 million.

Interest on the Second Lien Notes is payable quarterly at LIBOR, plus 8.75%.

The Company elected to pay-in-kind the 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 used the proceeds from a stock offering to prepay $125.0 million of the outstanding principal balance.

In December 2020, the Company utilized available cash on hand to prepay an additional $49.0 million of the outstanding principal balance.

As a result of these actions, the outstanding principal balance of the Second Lien Notes is $245.8 million as of December 31, 2020.

The interest rate on the Second Lien Notes was 8.98% as of December 31, 2020.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2019 and 2018:

Year Ended December 31,

(in thousands)

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents - beginning of period

Cash and cash equivalents - end of period

Cash Flows from Operating Activities

For the year ended December 31, 2019 , Option Care Health generated $39.5 million in cash flow from operating activities, a $15.0 million increase over the year ended December 31, 2018 .

The cash provided by operating activities for the year ended December 31, 2019 was driven by working capital efficiencies, primarily in accounts receivable, as the Company’s efforts to increase cash velocity and improve the aging of the accounts receivable balance resulted in stronger cash collections.

The strong collections were partially offset by the change in accounts payable as the Company had a net pay down of acquired payables from the Merger.

Cash Flows from Investing Activities

For the year ended December 31, 2019 , Option Care Health used $727.8 million in cash for investing activities as compared to $37.0 million for the year ended December 31, 2018 .

For the year ended December 31, 2019 , the cash used was primarily attributable to the Merger of $700.2 million as well as investments in pharmacy and information technology infrastructure of $28.3 million .

Similarly, for the year ended December 31, 2018 , $26.3 million was invested in our pharmacies and information technology and $10.7 million was deployed for the Baptist Health and Home IV, Inc.

acquisitions.

Cash Flows from Financing Activities

Cash flows from financing increased $723.2 million from cash used in financing activities of $4.2 million for the year ended December 31, 2018 to cash provided by financing activities of $719.0 million for the year ended December 31, 2019 .

The change is primarily related to the 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 $30.0 million for the year ended December 31, 2019 .

Cash used in financing activities for the year ended December 31, 2018 primarily related to repayments of the Previous Credit Facilities.

In January 2021, the Company entered into an amendment on the First Lien Term Loan (the “First Lien Credit Agreement Amendment”).

The First Lien Credit Agreement Amendment resulted in an additional $250.0 million of incremental First Lien Term Loan indebtedness being issued and reduced the interest rate on all outstanding First Lien Term Loan indebtedness from LIBOR plus 4.25% to LIBOR plus 3.75%.

The proceeds of the $250.0 million incremental First Lien Term Loan indebtedness were used to prepay the remaining $245.8 million outstanding balance of the Second Lien Notes.

Following the First Lien Credit Agreement Amendment, the First Lien Term Loan is repayable in quarterly installments of $2.9 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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Year Ended December 31,

2020 2019 Variance

(in thousands)

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Net cash used in investing activities (26,334) (727,826) 701,492

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Net cash (used in) provided by financing activities (68,849) 719,024 (787,873)

Net increase in cash and cash equivalents 32,209 30,665 1,544

Cash and cash equivalents - beginning of period 67,056 36,391 30,665

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Cash Flows from Operating Activities

For the year ended December 31, 2018, Option Care Health generated $24.4 million in positive cash flow from operating activities.

This represented a $13.4 million decrease from the $37.9 million generated for the year ended December 31, 2017.

The primary drivers of the decline in cash provided by operating activities included:

(i) a reduction in accounts payable and accrued expenses and other current liabilities of $32.1 million related to timing of vendor payments in the ordinary course of business;

and (ii) an increase in prepaid expenses and other current assets of $17.2 million primarily driven by the timing of vendor rebate payments.

Partially offsetting these declines were the following improvements:

(i) an improvement in accounts receivable of $13.0 million as the Company was recovering from the prior year disruption impact of the new pharmacy dispensing system deployment and billing center consolidation;

(ii) an improvement in operating income of $11.0 million;

(iii) a $6.7 million increase in accrued compensation and employee benefits related to the timing of payroll cycles;

and (iv) a $6.4 million reduction in inventory.

The increase in cash provided by operating activities for the year ended December 31, 2020 was primarily driven by the improvement in net loss during 2020.

In addition, working capital efficiencies also contributed to this increase, as additional investment in accounts receivable and inventories in conjunction with the growth in business volumes were more than offset by increases in accounts payable due to the timing of vendor payments.

Cash Flows from Investing Activities

For the year ended December 31, 2018, Option Care Health used $37.0 million in cash for investing activities.

This was primarily attributable to capital investments in pharmacy and information technology infrastructure, as well as to fund the Baptist and Home IV acquisitions.

The increase of $12.5 million in net cash used in investing activities for the year ended December 31, 2018 compared to the year ended December 31, 2017 is due primarily to the Baptist and Home IV acquisitions.

The decrease in cash flows used in investing activities is primarily due to the Merger completed in the prior year.

Cash Flows from Financing Activities

For the year ended December 31, 2018, Option Care Health used $4.2 million in cash for financing activities.

This was related to repayments of long-term debt.

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, which was partially offset by the retirement of the Company’s previous debt of $226.7 million and the payment of deferred financing costs of $30.0 million related to the Merger.

In 2020, the cash used in financing activities consisted of the $174.0 million prepayment of the Second Lien Notes, which was partially offset by $118.9 million of proceeds from the issuance of common stock, as well as principal payments on the First Lien Term Loan.

Commitments and Contractual Obligations

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Payments Due by Period

Less than 1 year

More than 5 years

Total Less than 1 year 1 - 3 years 3-5 years More than 5 years

(in thousands)

Long-term debt obligations (1)

$ 1,161,531 $ 9,250 $ 18,500 $ 18,500 $ 1,115,281

Interest payments on long-term debt obligations (2)

391,301 63,039 124,840 123,191 80,231

Operating lease obligations 110,011 23,770 35,020 21,053 30,168

Total $ 1,662,843 $ 96,059 $ 178,360 $ 162,744 $ 1,225,680

(1) Includes aggregate principal payment on the indebtedness from the First Lien Term Loan and the Second Lien Notes incurred in 2019.

(2) Interest payments calculated based on LIBOR rate as of December 31, 2020.

Actual payments are based on changes in

Actual payments are based on changes in LIBOR.

Calculated interest payments exclude interest rate swap agreements the Company entered into in connection with the new indebtedness incurred in 2019.

Other noncurrent liabilities and deferred income taxes were excluded from this table, as the Company is unable to determine the timing of future payments.

There were no significant capital expenditure commitments as of December 31, 2019 .

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.

Off-Balance Sheet Arrangements

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Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.

The Company’s accounts receivable are reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions.

The Company’s accounts receivable is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions.

The majority of accounts receivable are due from private insurance carriers and governmental health care programs, such as Medicare and Medicaid.

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Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.

Prior to the adoption of ASC 606, estimates of uncollectible accounts receivable were recorded as either a pricing adjustment to revenue (“contractual adjustment”) or as an uncollectible account to provision for doubtful accounts.

The Company recorded an allowance for doubtful accounts based on historical experience and a detailed assessment of the collectability of its accounts receivable.

In estimating the allowance for doubtful accounts, the Company considered, among other factors, (i) the balance and aging composition of the accounts receivable, (ii) the Company’s historical write-offs and recoveries, (iii) the creditworthiness of its payers, and (iv) general economic conditions.

Accounts receivable were written-off as bad debts after all reasonable collection efforts have been exhausted.

Subsequent to the adoption of ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings.

The Company recorded an allowance for contractual adjustment based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value.

After applying the criteria from ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings.

The Company did not have an allowance for doubtful accounts as of December 31, 2020 or 2019.

The Company recorded an allowance for implicit price concessions based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value.

The detailed assessments included, among other factors, (i) current over/under payments which had not yet been applied to an account, (ii) historical contractual adjustments, and (iii) an estimate for contractual adjustments expected to be realized in the future.

Contractual allowance estimates were adjusted to actual amounts as cash was received and claims were settled.

Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled.

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed.

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and the results of testing for recoverability of a significant asset group within a reporting unit.

A qualitative impairment analysis was performed in the fourth quarter of 2019 to assess whether it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying value.

A qualitative impairment analysis was performed in the fourth quarter of 2020 and 2019 to assess whether it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying value.

The Company assessed relevant events and circumstances including macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and changes in the Company’s stock price.

The Company determined that there was no goodwill impairment in 2019.

A quantitative impairment analysis was performed in the fourth quarter of 2018 and 2017, and the Company estimated the fair value of its reporting unit using an income approach.

The income approach requires the Company to estimate a number of factors for its reporting unit, including projected future operating results, economic projections, anticipated future cash flows, and discount rates.

The fair value determined using he income approach was then compared to marketplace fair value data from within a comparable industry grouping for reasonableness.

The Company determined that there was no goodwill impairment in 2020 or 2019.

A quantitative impairment analysis was performed in the fourth quarter of 2018, and the Company estimated the fair value of its reporting unit using an income approach.

The fair value determined using the income approach was then compared to marketplace fair value data from within a comparable industry grouping for reasonableness.

The Company determined that there was no goodwill impairment in 2018.

The determination of fair value and the allocation of that value to individual assets and liabilities within the reporting unit requires the Company to make significant estimates and assumptions.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis