Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year-to-year and the primary factors that accounted for those changes as well as how certain accounting principles affect our consolidated financial statements.
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” 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.
Business Overview
Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 145 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 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.
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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. 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.
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, allow 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, 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.
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Changes to Medicare Reimbursement
In recent years, legislative changes have resulted in reductions in reimbursement under government healthcare programs. In December 2016, the Cures Act legislation was signed into law, which decreased reimbursement for Medicare Part B Durable Medical Equipment infusion drugs administered in an alternate site setting effective January 1, 2017. The original legislation did not provide for reimbursement for the service component until 2021. Center for Medicare and Medicaid Services issued a final rule in October 2018 implementing a temporary transition benefit for Medicare Part B home infusion services, which will continue from January 1, 2019 until January 1, 2021. 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.
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. 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.
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Composition of Results of Operations
The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 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 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 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) . The Company is subject to taxation in the United States and various states. The Company’s income tax (benefit) expense is reflective of the current federal tax rates.
Change in unrealized (losses) gains on cash flow hedges, net of income taxes . Change in unrealized (losses) gains on cash flow hedges, net of income taxes, consists of the gains and losses associated with the changes in the fair value of hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes.
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Results of Operations
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,
2020 (1)
2019 (1)
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%
Depreciation and amortization expense 71,310 2.4% 53,690 2.3%
Total operating expenses 571,509 18.8% 513,318 22.2%
OPERATING INCOME (LOSS) 110,755 3.7% (319) —%
OTHER INCOME (EXPENSE):
Interest expense, net (107,770) (3.6)% (73,724) (3.2)%
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 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.
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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following tables present selected consolidated comparative results of operations for the years ended December 31, 2020 and 2019:
Gross Profit
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 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)
Selling, general and administrative expenses $ 500,199 $ 459,628 $ 40,571 8.8 %
Depreciation and amortization expense 71,310 53,690 17,620 32.8 %
Total operating expenses $ 571,509 $ 513,318 $ 58,191 11.3 %
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.
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Other Income (Expense)
Year Ended December 31,
2020 2019 Variance
(in thousands, except for percentages)
Interest expense, net $ (107,770) $ (73,724) $ (34,046) 46.2 %
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 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. 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.
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Net Loss and Other Comprehensive Loss
Year Ended December 31,
2020 2019 Variance
(in thousands, except for percentages)
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
For the years ended December 31, 2020 and 2019, the Company’s primary sources of liquidity were cash on hand of $99.3 million and $67.1 million, respectively, as well as borrowings under its credit facilities, described further below. During the years ended December 31, 2020 and 2019, the Company’s positive cash flows from operations have 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, integration efforts, and investment in various acquisitions and our infrastructure to support additional business volumes. Ongoing operating cash outflows are 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. 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. 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.
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Credit Facilities
During 2015, Option Care entered into two credit arrangements administered by Bank of America, N.A. and U.S. Bank. The agreements provided for up to $645.0 million in senior secured credit facilities through an $80.0 million revolving credit facility (the “Previous Revolving Credit Facility”), a $415.0 million first lien term loan (the “Previous First Lien Term Loan”), and a $150.0 million second lien term loan (the “Previous Second Lien Term Loan”, and together with the Previous First Lien Term Loan, the “Previous Term Loans”, and the Previous Term Loans, together with the Previous Revolving Credit Facility, the “Previous Credit Facilities”). Amounts borrowed under the credit agreements were secured by substantially all of the assets of the Company.
On August 6, 2019, the Company repaid the outstanding balance of the Previous Term Loans and retired the outstanding credit arrangements for $551.7 million. 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 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 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. 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 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 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 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 4.40% as of December 31, 2020.
The Second Lien Notes mature on August 6, 2027. 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.
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.
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Cash Flows
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2020 and 2019:
Year Ended December 31,
2020 2019 Variance
(in thousands)
Net cash provided by operating activities $ 127,392 $ 39,467 $ 87,925
Net cash used in investing activities (26,334) (727,826) 701,492
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
Cash and cash equivalents - end of period $ 99,265 $ 67,056 $ 32,209
Cash Flows from Operating Activities
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
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
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.
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Commitments and Contractual Obligations
The following table presents Option Care Health’s commitments and contractual obligations as of December 31, 2020, as well as its long-term obligations:
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)
$ 1,161,531 $ 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 LIBOR. Calculated interest payments exclude interest rate swap agreements the Company entered into in connection with the new indebtedness incurred in 2019.
Off-Balance Sheet Arrangements
As of December 31, 2020, Option Care Health did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
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Critical Accounting Policies and Estimates
The Company prepares its 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.
The following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies , within the notes to the consolidated financial statements included in Item 8 of this Annual Report.
Revenue Recognition and Accounts Receivable
Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.
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.
The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.
The Company provides a variety of infusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from ASC 606, the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. 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 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.
Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.
Included in accounts receivable are earned but unbilled gross receivables. 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.
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 are adjusted to actual amounts as cash is received and claims are settled.
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Goodwill
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter.
Circumstances that could trigger an interim impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reporting units; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; 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 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 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 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 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. These estimates and assumptions primarily include, but are not limited to, the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures. Actual financial results could differ from those estimates due to inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit, the amount of the goodwill impairment charge, or both.
Business Acquisitions
The Company accounts for business acquisitions in accordance with ASC Topic 805 (“ASC 805”), Business Combinations , with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of the net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not limited to, the future cash flows an asset is expected to generate and the weighted-average cost of capital.
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