Option Care Health, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Option Care Health, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Option Care Health, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 11, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 8 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of the Financial Acccounting Standards Board’s Accounting Standards Codification Topic 842 Leases . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 47 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. Evaluation of transaction price adjustments As discussed in Notes 2 and 4 to the consolidated financial statements, 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 government payers, commercial payers, and patients for infusion therapy and other ancillary health care services. The Company estimates the transaction price adjustments based on the verification of the patient’s insurance coverage and historical price concessions, historical payments, and management’s manual price concession adjustments. We identified the evaluation of the transaction price adjustments related to recognizing revenue as a critical audit matter. Subjective and complex auditor judgment was required to evaluate the transaction price adjustments. Specifically, auditor judgment was required to evaluate the relevance and reliability of historical price concessions, historical payments, and management’s manual price concession adjustments. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s transaction price adjustment process, including controls related to the historical price concessions, historical payments, and management’s manual price concession adjustments. We tested the relevance and reliability of the underlying data that served as the basis for the transaction price adjustments which included the historical price concessions and historical payments within the classes of payors by selecting certain historical price concessions and historical payments and agreeing to underlying support. We evaluated management’s manual price concession adjustments by comparing management’s prior-year recorded balance to actual write-offs during the current year. /s/ KPMG LLP We have served as the Company’s auditor since 2015. Chicago, Illinois March 11, 2021 48 Table of Contents OPTION CARE HEALTH, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS) December 31, 2020 2019 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 99,265 $ 67,056 Accounts receivable, net 328,340 324,416 Inventories 158,601 115,876 Prepaid expenses and other current assets 70,806 51,306 Total current assets 657,012 558,654 NONCURRENT ASSETS: Property and equipment, net 121,149 133,198 Operating lease right-of-use asset 68,795 63,502 Intangible assets, net 351,052 385,910 Goodwill 1,428,610 1,425,542 Other noncurrent assets 20,821 22,741 Total noncurrent assets 1,990,427 2,030,893 TOTAL ASSETS $ 2,647,439 $ 2,589,547 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 282,913 $ 221,060 Accrued compensation and employee benefits 58,899 45,765 Accrued expenses and other current liabilities 64,075 33,538 Current portion of operating lease liability 18,886 20,391 Current portion of long-term debt 9,250 9,250 Total current liabilities 434,023 330,004 NONCURRENT LIABILITIES: Long-term debt, net of discount, deferred financing costs and current portion 1,115,103 1,277,246 Operating lease liability, net of current portion 70,776 58,242 Deferred income taxes 3,339 2,143 Other noncurrent liabilities 8,474 15,085 Total noncurrent liabilities 1,197,692 1,352,716 Total liabilities 1,631,715 1,682,720 STOCKHOLDERS’ EQUITY: Preferred stock; $ 0.0001 par value; 12,500,000 shares authorized, no shares outstanding as of December 31, 2020 and 2019, respectively. — — Common stock; $ 0.0001 par value: 250,000,000 shares authorized, 180,178,308 shares issued and 179,794,586 shares outstanding as of December 31, 2020; 176,975,628 shares issued and 176,591,907 shares outstanding as of December 31, 2019. 18 18 Treasury stock; 383,722 shares outstanding, at cost, as of December 31, 2020 and 2019, respectively. ( 2,403 ) ( 2,403 ) Paid-in capital 1,129,312 1,008,362 Accumulated deficit ( 100,031 ) ( 91,955 ) Accumulated other comprehensive loss ( 11,172 ) ( 7,195 ) Total stockholders’ equity 1,015,724 906,827 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,647,439 $ 2,589,547 The notes to consolidated financial statements are an integral part of these statements. 49 Table of Contents OPTION CARE HEALTH, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, 2020 2019 2018 NET REVENUE $ 3,032,610 $ 2,310,417 $ 1,939,791 COST OF REVENUE 2,350,346 1,797,418 1,517,576 GROSS PROFIT 682,264 512,999 422,215 OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 500,199 459,628 345,884 Depreciation and amortization expense 71,310 53,690 38,062 Total operating expenses 571,509 513,318 383,946 OPERATING INCOME (LOSS) 110,755 ( 319 ) 38,269 OTHER INCOME (EXPENSE): Interest expense, net ( 107,770 ) ( 73,724 ) ( 45,824 ) Equity in earnings of joint ventures 3,313 2,840 1,020 Other, net ( 11,541 ) ( 6,991 ) ( 2,233 ) Total other expense ( 115,998 ) ( 77,875 ) ( 47,037 ) LOSS BEFORE INCOME TAXES ( 5,243 ) ( 78,194 ) ( 8,768 ) INCOME TAX EXPENSE (BENEFIT) 2,833 ( 2,274 ) ( 2,653 ) NET LOSS $ ( 8,076 ) $ ( 75,920 ) $ ( 6,115 ) OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX: Change in unrealized (losses) gains on cash flow hedges, net of income taxes of $ 0 , $ 259 and $ 234 , respectively ( 3,977 ) ( 8,039 ) 774 OTHER COMPREHENSIVE (LOSS) INCOME ( 3,977 ) ( 8,039 ) 774 NET COMPREHENSIVE LOSS $ ( 12,053 ) $ ( 83,959 ) $ ( 5,341 ) LOSS PER COMMON SHARE Net loss per share, basic and diluted $ ( 0.04 ) $ ( 0.49 ) $ ( 0.04 ) Weighted average common shares outstanding, basic and diluted 180,971 156,280 142,614 The notes to consolidated financial statements are an integral part of these statements. 50 Table of Contents OPTION CARE HEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended December 31, 2020 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 8,076 ) $ ( 75,920 ) $ ( 6,115 ) Adjustments to reconcile net loss to net cash provided by operations: Depreciation and amortization expense 77,896 57,869 41,055 Non-cash operating lease costs 18,814 19,719 — Deferred income taxes - net 1,196 ( 4,607 ) ( 3,595 ) Loss on sale of assets 742 3,269 1,123 Business casualty loss — ( 626 ) 3,549 Loss on extinguishment of debt 11,545 5,469 72 Amortization of deferred financing costs 5,517 4,544 3,107 Loss on interest rate swaps upon discontinuing hedge accounting 3,746 — — Paid-in-kind interest capitalized as principal 7,525 12,256 — Equity in earnings of joint ventures ( 3,313 ) ( 2,840 ) ( 1,020 ) Stock-based incentive compensation expense 2,920 4,170 2,139 Interest on management notes receivable — ( 62 ) ( 78 ) Capital distribution from equity method investments 3,250 500 2,000 Change in contingent consideration liability ( 1,500 ) ( 300 ) — Changes in operating assets and liabilities: Accounts receivable, net ( 3,924 ) 82,285 ( 21,012 ) Inventories ( 42,725 ) ( 12,853 ) 2,965 Prepaid expenses and other current assets ( 19,500 ) ( 2,940 ) ( 4,715 ) Accounts payable 59,215 ( 30,856 ) 10,965 Accrued compensation and employee benefits 13,134 2,671 ( 5,586 ) Accrued expenses and other current liabilities 22,809 ( 317 ) ( 1,740 ) Operating lease liabilities ( 18,089 ) ( 17,253 ) — Other noncurrent assets and liabilities ( 3,790 ) ( 4,711 ) 1,314 Net cash provided by operating activities 127,392 39,467 24,428 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment ( 26,875 ) ( 28,292 ) ( 26,276 ) Proceeds from sale of assets — 10 — Insurance proceeds from business casualty loss — 626 — Business acquisitions, net of cash acquired — ( 700,170 ) ( 10,727 ) Other investing cash flows 541 — — Net cash used in investing activities ( 26,334 ) ( 727,826 ) ( 37,003 ) CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions to related parties — ( 2,000 ) — Sale of management notes receivable — 1,310 — Exercise of stock options, vesting of restricted stock, and related tax withholdings ( 904 ) ( 2,501 ) — Net proceeds from issuance of common stock 118,934 — — Proceeds from debt — 981,050 1,000 Repayments of debt principal ( 9,250 ) ( 2,075 ) ( 5,150 ) Retirement of debt obligations ( 174,000 ) ( 226,738 ) — Deferred financing costs ( 149 ) ( 30,022 ) — Debt prepayment fees ( 3,480 ) — — Net cash (used in) provided by financing activities ( 68,849 ) 719,024 ( 4,150 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,209 30,665 ( 16,725 ) Cash and cash equivalents - beginning of the period 67,056 36,391 53,116 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 99,265 $ 67,056 $ 36,391 Supplemental disclosure of cash flow information: Cash paid for interest $ 97,640 $ 50,808 $ 47,173 Cash paid for income taxes $ 2,884 $ 2,405 $ 1,600 Cash paid for operating leases $ 26,809 $ 18,992 The notes to consolidated financial statements are an integral part of these statements. 51 Table of Contents OPTION CARE HEALTH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (IN THOUSANDS) Preferred Stock Common Stock Treasury Stock Paid-in Capital Management Notes Receivable Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Balance - December 31, 2017 $ — $ 14 $ — $ 617,057 $ ( 1,116 ) $ ( 9,920 ) $ 70 $ 606,105 Stockholders' contributions — — — 425 ( 425 ) — — — Interest on management notes receivable — — — — ( 78 ) — — ( 78 ) Stock-based incentive compensation — — — 2,139 — — — 2,139 Net loss — — — — — ( 6,115 ) — ( 6,115 ) Other comprehensive income — — — — — — 774 774 Balance - December 31, 2018 $ — $ 14 $ — $ 619,621 $ ( 1,619 ) $ ( 16,035 ) $ 844 $ 602,825 Purchase of BioScrip, Inc. — 4 — 387,040 — — — 387,044 Interest on management notes receivable — — — — ( 62 ) — — ( 62 ) Repayment of management notes receivable — — — — 1,310 — — 1,310 Stockholders' redemptions — — — ( 2,371 ) 371 — — ( 2,000 ) Stock-based incentive compensation — — — 4,170 — — — 4,170 Exercise of stock options, vesting of restricted stock, and related tax withholdings — — ( 2,403 ) ( 98 ) — — — ( 2,501 ) Net loss — — — — — ( 75,920 ) — ( 75,920 ) Other comprehensive loss — — — — — — ( 8,039 ) ( 8,039 ) Balance - December 31, 2019 $ — $ 18 $ ( 2,403 ) $ 1,008,362 $ — $ ( 91,955 ) $ ( 7,195 ) $ 906,827 Stock-based incentive compensation — — — 2,920 — — — 2,920 Exercise of stock options, vesting of restricted stock, and related tax withholdings — — — ( 904 ) — — — ( 904 ) Net proceeds from the issuance of common stock — 1 — 118,933 — — — 118,934 Cancellation of common stock - see Note 16 — ( 1 ) — 1 — — — — Net loss — — — — — ( 8,076 ) — ( 8,076 ) Other comprehensive loss — — — — — — ( 3,977 ) ( 3,977 ) Balance - December 31, 2020 $ — $ 18 $ ( 2,403 ) $ 1,129,312 $ — $ ( 100,031 ) $ ( 11,172 ) $ 1,015,724 The notes to consolidated financial statements are an integral part of these statements. 52 Table of Contents OPTION CARE HEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND PRESENTATION OF FINANCIAL STATEMENTS Corporate Organization and Business — 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 (“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”), a national provider of infusion and home care management solutions, along with certain other subsidiaries of BioScrip and HC II. The merger contemplated by the Merger Agreement (the “Merger”) 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. Under the terms of the Merger Agreement, shares of HC II common stock issued and outstanding immediately prior to the Merger Date were converted into 135,565,392 shares of BioScrip common stock, par value $ 0.0001 (the “BioScrip common stock”). BioScrip also issued an additional 7,048,357 shares to HC I in respect of certain outstanding unvested contingent restricted stock units of BioScrip, which were set aside to prevent dilution related to potential additional vesting on certain share-based instruments. See Note 16, Stockholders’ Equity , for additional discussion of these shares set aside. In conjunction with the Merger, holders of BioScrip preferred shares and certain warrants received 864,603 additional shares of BioScrip common stock and preferred shares were repurchased for $ 125.8 million of cash. In addition, all legacy BioScrip debt was settled for $ 575.0 million. As a result of the Merger, BioScrip’s stockholders held approximately 19.2 % of the combined company, and HC I held approximately 80.8 % of the combined company. Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc. (“Option Care Health”, or the “Company”). The combined company’s stock was listed on the Nasdaq Global Select Market as of December 31, 2020. See Note 3, Business Acquisitions , for further discussion of the Merger. Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 99 full service pharmacies and 46 stand-alone ambulatory infusion sites. 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. The Company operates in one segment, infusion services. Basis of Presentation — The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States. These principals require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses, and related disclosures. Actual amounts could differ materially from those estimates. Principles of Consolidation — The Company’s consolidated financial statements include the accounts of Option Care Health, Inc. and its subsidiaries. The BioScrip results have been included in the consolidated financial results since the Merger Date. All intercompany transactions and balances are eliminated in consolidation. The Company has investments in companies that are 50 % owned and are accounted for as equity-method investments. The Company’s share of earnings from equity-method investments is included in the line entitled “Equity in earnings of joint ventures” in the consolidated statements of comprehensive income (loss). See “Equity-Method Investments” within Note 2, Summary of Significant Accounting Policies , for further discussion of the Company’s equity-method investments. 53 Table of Contents 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents — The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable — 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. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), an allowance for doubtful accounts is established only as a result of an adverse change in the Company’s payers’ ability to pay outstanding billings. The allowance for doubtful accounts balance is $ 0 as of December 31, 2020 and 2019, respectively. Included in accounts receivable are earned but unbilled gross receivables of $ 79.0 million and $ 68.7 million as of December 31, 2020 and 2019, respectively. 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. See Revenue Recognition for a further discussion of the Company’s revenue recognition policy. Inventory — Inventory, which consists primarily of pharmaceuticals, is stated at the lower of first‑in, first‑out cost or net realizable value basis, which the Company believes is reflective of the physical flow of inventories. During the year ended December 31, 2018, one Company location was destroyed by a hurricane, resulting in a loss of $ 2.9 million of inventory. This business casualty loss was recorded as a component of operating costs and expenses within the consolidated statements of comprehensive income (loss). The Company received insurance proceeds of $ 0.8 million during the year ended December 31, 2018, and recorded a receivable of $ 1.0 million. Both of these amounts were recorded as a partial offset to the business casualty loss in the consolidated statements of comprehensive income (loss). The $ 0.8 million of insurance proceeds were reflected as a component of cash flows from operating activities in the consolidated statements of cash flows. During the year ended December 31, 2019, $ 3.0 million in proceeds were received related to recovery of inventory and business interruption and was included as a component of cash flows from operating activities in the consolidated statements of cash flows. These proceeds resulted in a gain on business casualty loss of $ 2.0 million recorded as a component of selling, general and administrative expense in the consolidated statement of comprehensive income (loss). Prepaid expenses and other current assets — Included in prepaid expenses and other current assets are rebates receivable from pharmaceutical and medical supply manufacturers of $ 35.2 million and $ 13.9 million for the years ended December 31, 2020 and 2019, respectively. There were no other items included in prepaid expenses and other current assets that comprised 5% or more of the balance. 54 Table of Contents Leases — The Company has lease agreements for facilities, warehouses, office space and property and equipment. Effective as of January 1, 2019, at the inception of a contract, the Company determines if the contract is a lease or contains an embedded lease arrangement. Operating leases are included in the operating lease right-of-use asset (“ROU asset”) and operating lease liabilities in the consolidated financial statements. ROU assets, which represent the Company’s right to use the leased assets, and operating lease liabilities, which represent the present value of unpaid lease payments, are both recognized by the Company at the lease commencement date. The Company utilizes its estimated incremental borrowing rate at the lease commencement date to determine the present value of unpaid lease obligations. The rates are estimated primarily using a methodology dependent on the Company’s financial condition, creditworthiness, and availability of certain observable data. In particular, the Company considers its actual cost of borrowing for collateralized loans and its credit rating, along with the corporate bond yield curve in estimating its incremental borrowing rates. ROU assets are recorded as the amount of operating lease liability, adjusted for prepayments, accrued lease payments, initial direct costs, lease incentives, and impairment of the ROU asset. Tenant improvement allowances used to fund leasehold improvements are recognized when earned and reduce the related ROU asset. Tenant improvement allowances are recognized through the ROU asset as a reduction of expense over the term of the lease. Leases may contain rent escalations, however the Company recognizes the lease expense on a straight-line basis over the expected lease term. The Company reviews the terms of any lease renewal options to determine if it is reasonably certain that the renewal options will be exercised. The Company has determined that the expected lease term is typically the minimum non-cancelable period of the lease. The Company has lease agreements that contain both lease and non-lease components which the Company has elected to account for as a single lease component for all asset classes. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the term of the lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. See Note 8, Leases , for further discussion of leases. Goodwill, Intangible Assets, and Property and Equipment — Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under ASC Topic 350, Intangibles - Goodwill and Other. 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. See Note 10, Goodwill and Other Intangible Assets , for further discussion of the Company’s goodwill and other intangible assets. Intangible assets arising from the Company’s acquisitions are amortized on a straight‑line basis over the estimated useful life of each asset. Referral sources have a useful life of 15 - 20 years. Trademarks/names have a useful life ranging from two to fifteen years . The useful lives for other amortizable intangible assets range from approximately two to nine years . The Company does not have any indefinite‑lived intangible assets. Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation on owned property and equipment is provided for on a straight‑line basis over the estimated useful lives of owned assets. Leasehold improvements are amortized over the estimated useful life of the property or over the term of the lease, whichever is shorter. Estimated useful lives are seven years for infusion pumps and three years to thirteen years for equipment. Major repairs, which extend the useful life of an asset, are capitalized in the property and equipment accounts. Routine maintenance and repairs are expensed as incurred. Computer software is included in property and equipment and consists of purchased software and internally-developed software. The Company capitalizes application-stage development costs for significant internally-developed software projects. Once the software is ready for its intended use, these costs are amortized on a straight‑line basis over the software’s estimated useful life, generally five years . Costs recognized in the preliminary project phase and the post-implementation phase, as well as maintenance and training costs, are expensed as incurred. The Company tests long‑lived assets for impairment whenever events or circumstances indicate that a certain asset or asset group may be impaired. Once identified, the amount of the impairment is computed by comparing the carrying value of the respective asset or asset group to its fair value, which is based on the discounted estimated future cash flows. 55 Table of Contents Equity-Method Investments — The Company’s investments in certain unconsolidated entities are accounted for under the equity method. The balance of these investments is included in other noncurrent assets in the accompanying consolidated balance sheets. As of December 31, 2020 and 2019, the balance of the investments was $ 17.0 million and $ 17.0 million, respectively. The investments are increased to reflect the Company’s capital contributions and equity in earnings of the investees. The investments are decreased to reflect the Company’s equity in losses of the investees and for distributions received that are not in excess of the carrying amount of the investments. The Company’s proportionate share of earnings or losses of the investees is recorded in equity in earnings of joint ventures in the accompanying consolidated statements of comprehensive income (loss). The Company’s proportionate share of earnings was $ 3.3 million, $ 2.8 million and $ 1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Distributions from the investees are treated as cash inflows from operating activities in the consolidated statements of cash flows. During the years ended December 31, 2020, 2019 and 2018, the Company received distributions from the investees of $ 3.3 million, $ 0.5 million and $ 2.0 million, respectively. See Footnote 17, Related-Party Transactions , for discussion of related-party transactions with these investees. Hedging Instruments — The Company uses derivative financial instruments to limit its exposure to increases in the interest rate of its variable rate debt instruments. The derivative financial instruments are recognized on the consolidated balance sheets at fair value. See Note 12, Derivative Instruments, for additional information. At inception of the hedge, the Company designated the derivative instruments as a hedge of the cash flows related to the interest on the variable rate debt. For all instruments designated as hedges, the Company documents the hedging relationships and its risk management objective of the hedging relationship. For all hedging instruments, the terms of the hedge perfectly offset the hedged expected cash flows. Revenue Recognition — 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 government payers, commercial 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 outstanding performance obligations relate to contracts with a duration of less than one year. Therefore, the Company has elected to apply the practical expedient provided by ASC 606 and is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. Any unsatisfied or partially unsatisfied performance obligations at the end of a reporting period are generally completed prior to the patient being discharged. See Note 4, Revenue for a further discussion of revenue. 56 Table of Contents Cost of Revenue — Cost of revenue consists of the actual cost of pharmaceuticals and other medical supplies dispensed to patients, as well as all other costs directly related to the production of revenue. These costs include warehousing costs, purchasing costs, freight costs, cash discounts, wages and related costs for pharmacists and nurses, along with depreciation expense relating to revenue-generating assets, such as infusion pumps. The Company receives prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These prompt payment discounts are recorded as a reduction of inventory and are accounted for as a reduction of cost of goods sold when the related inventory is sold. The Company also receives rebates from pharmaceutical and medical supply manufacturers. Rebates are generally volume-based incentives and are recorded as a reduction of inventory and are accounted for as a reduction of cost of goods sold when the related inventory is sold. Selling, General and Administrative Expenses — Selling, general and administrative expenses mainly consist of salaries for administrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees. Stock Based Incentive Compensation - The Company accounts for stock-based incentive compensation expense in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). Stock-based incentive compensation expense is based on the grant date fair value. The Company estimates the fair value of stock option awards using a Black-Scholes option pricing model and the fair value of restricted stock unit awards using the closing price of the Company’s common stock on the grant date. For awards with a service-based vesting condition, the Company recognizes expense on a straight-line basis over the service period of the award. For awards with performance-based vesting conditions, the Company will recognize expense when it is probable that the performance-based conditions will be met. When the Company determines that it is probable that the performance-based conditions will be met, a cumulative catch-up of expense will be recorded as if the award had been vesting on a straight-line basis from the award date. The award will continue to be expensed on a straight-line basis through the remainder of the vesting period and will be updated if the Company determines that there has been a change in the probability of achieving the performance-based conditions. The Company records the impact of forfeited awards in the period in which the forfeiture occurs. Prior to the Merger, HCI issued incentive units to certain employees of Option Care, who remained employees of the Company following the Merger. In accordance with ASC 718, the Company recognizes compensation expense on a straight-line basis over the shorter of the vesting period of the award or the employee’s expected eligibility date. HC I also issued equity incentive units to certain members of the Option Care Board of Directors, who remained members of the Board of Directors following the Merger. See Note 15, Stock-Based Incentive Compensation , for a further discussion of equity incentive plans. Business Acquisitions - The Company accounts for business acquisitions in accordance with ASC Topic 805, Business Combinations , with assets and liabilities being recorded at their acquisition date fair value and goodwill being calculated as the purchase price in excess of the net identifiable assets . See Note 3, Business Acquisitions , for further discussion of the Company’s business acquisitions. Income Taxes — The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are reported for book-tax basis differences and are measured based on currently enacted tax laws using rates expected to apply to taxable income in the years in which the differences are expected to reverse. The effect of a change in tax rate on deferred taxes is recognized in income tax expense in the period that includes the enactment date of the change. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. The Company recognizes income tax positions that are more likely than not to be sustained on their technical merits. The Company measures recognized income tax positions at the maximum benefit that is more likely than not, based on cumulative probability, realizable upon final settlement of the position. Interest and penalties related to unrecognized tax benefits are reported in income tax expense. 57 Table of Contents Concentrations of Business Risk — The Company generates revenue from managed care contracts and other agreements with commercial third-party payers. Revenue related to the Company’s largest payer was approximately 15 %, 16 % and 17 % for the years ended December 31, 2020, 2019 and 2018, respectively. In December 2019, the Company renewed and expanded its multi-year contract with this payer. The contract renewal was effective in February 2020 for a two-year term and auto-renews at the end of that term. There were no other managed care contracts that represent greater than 10% of revenue for the years presented. For the years ended December 31, 2020, 2019 and 2018, approximately 15 %, 12 % and 12 %, respectively, of the Company’s revenue was reimbursable through direct government healthcare programs such as Medicare and Medicaid. As of December 31, 2020 and 2019, approximately 15 % and 12 %, respectively, of the Company’s accounts receivable was related to these programs. Governmental programs pay for services based on fee schedules and rates that are determined by the related governmental agency. Laws and regulations pertaining to government programs are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change in the near term. The Company does not require its patients nor other payers to carry collateral for any amounts owed for goods or services provided. Other than as discussed above, concentrations of credit risk relating to trade accounts receivable is limited due to the Company’s diversity of patients and payers. Further, the Company generally does not provide charity care. For the years ended December 31, 2020 and 2019, approximately 70 % and 70 %, respectively, of the Company’s pharmaceutical and medical supply purchases were from three vendors. For the year ended December 31, 2018, approximately 66 % of the Company’s pharmaceutical and medical supply purchases were from two vendors. Although there are a limited number of suppliers, the Company believes that other vendors could provide similar products on comparable terms. However, a change in suppliers could cause delays in service delivery and possible losses in revenue, which could adversely affect the Company’s financial condition or operating results. Although there is uncertainty regarding the COVID-19 pandemic, as of December 31, 2020 the Company has been able to maintain adequate levels of supplies and pharmaceuticals to support its operations. Fair Value Measurements — The fair value measurement accounting standard, ASC Topic 820, Fair Value Measurement (“ASC 820”), provides a framework for measuring fair value and defines fair value as the price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The standard establishes a valuation hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on independent market data sources. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available. The valuation hierarchy is composed of three categories. The categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The categories within the valuation hierarchy are described as follows: • Level 1 - Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities. • Level 2 - Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. • Level 3 - Inputs to the fair value measurement are unobservable inputs or valuation techniques. While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Recently-Adopted Accounting Pronouncements — In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019 and is to be applied using a modified retrospective transition method. The Company adopted the standard as of January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. 58 Table of Contents 3. BUSINESS ACQUISITIONS Merger with BioScrip, Inc. — As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and home care management solutions. The Merger of Option Care and BioScrip into Option Care Health created an expanded national platform and the opportunity to drive economies of scale through procurement savings, facility rationalization and other operating cost savings. The fair value of purchase consideration transferred on the closing date includes the value of the number of shares of the combined company owned by BioScrip shareholders at closing of the Merger, the value of common shares issued to certain warrant and preferred shareholders in conjunction with the Merger, the fair 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. This is the closing price of the BioScrip common stock on August 6, 2019. Under the acquisition method of accounting, the calculation of total consideration exchanged is as follows (in thousands): Amount Number of BioScrip common shares outstanding at time of the Merger (1) 129,181 Common shares issued to warrant and preferred stockholders at time of the Merger (1) 3,458 Total shares of BioScrip common stock outstanding at time of the Merger (1) 132,639 BioScrip share price as of August 6, 2019 $ 2.67 Fair value of common shares $ 354,146 Fair value of share-based instruments $ 32,898 Cash paid in conjunction with the Merger included in purchase consideration $ 714,957 Fair value of total consideration transferred $ 1,102,001 Less: cash acquired $ 14,787 Fair value of total consideration acquired, net of cash acquired $ 1,087,214 (1) These shares were not adjusted for the one share for four share reverse stock split, which occurred on February 3, 2020. Cash paid in conjunction with the Merger includes payments made for settlement of $ 575.0 million in legacy BioScrip debt, $ 125.8 million in existing BioScrip preferred shares, and $ 14.1 million in legacy BioScrip success-based fees owed to third-party advisors. HC II financed these payments primarily through cash on hand and debt financing, which is discussed in Note 11, Indebtedness . 59 Table of Contents The Company’s allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed, net of cash acquired, in the Merger is as follows (in thousands): Amount Accounts receivable, net (1) $ 96,532 Inventories (2) 19,683 Property and equipment, net (3) 48,732 Intangible assets, net (4) 193,245 Deferred tax assets, net of deferred tax liabilities (5) 26,731 Operating lease right-of-use asset (6) 22,378 Operating lease liability (6) ( 28,897 ) Accounts payable (7) ( 66,668 ) Other assumed liabilities, net of other acquired assets (7) ( 20,663 ) Total acquired identifiable assets and liabilities 291,073 Goodwill (8) 796,141 Total consideration transferred $ 1,087,214 (1) Management has valued accounts receivables based on the estimated future collectability of the receivables portfolio. (2) Inventories are stated at fair value as of the Merger Date. (3) The fair value of the property and equipment was determined based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised. (4) The allocation of consideration exchanged to intangible assets acquired is as follows (in thousands): Fair Value Weighted Average Estimated Life (in years) Trademarks/Names $ 12,536 2 Patient referral sources 180,329 20 Licenses 380 1.5 Total intangible assets, net $ 193,245 18.8 The Company valued trademarks/names utilizing the relief of royalty method and patient referral sources utilizing the multi-period excess earnings method, a form of the income approach. (5) Net deferred tax assets represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. See Note 6, Income Taxes , for additional discussion of the Company’s combined income tax position subsequent to the Merger. (6) The fair value of the operating lease liability and corresponding right-of-use asset (current and long-term) was based on current market rates available to the Company. (7) Accounts payable as well as certain other current and non-current assets and liabilities are stated at fair value as of the Merger Date. (8) The Merger resulted in $ 796.1 million of goodwill, which is attributable to cost synergies resulting from procurement and operational efficiencies and elimination of duplicative administrative costs. The goodwill created in the Merger is not expected to be deductible for tax purposes. 60 Table of Contents Assuming BioScrip had been acquired as of January 1, 2018, and the results of BioScrip had been included in operations beginning on January 1, 2018, the following tables provide estimated unaudited pro forma results of operations for the years ended December 31, 2019 and 2018 (in thousands). The estimated pro forma net income adjusts for the effect of fair value adjustments related to the Merger, transaction costs and other non-recurring costs directly attributable to the Merger and the impact of the additional debt to finance the Merger. Year Ended December 31, 2019 2018 Net revenue $ 2,755,361 $ 2,648,694 Net loss ( 49,566 ) ( 70,932 ) Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the Merger been completed on the date indicated or the future operating results. For the periods subsequent to the Merger Date that are included in the results of operations for the year ended December 31, 2019, BioScrip had net revenue of $ 308.9 million and a net loss of $ 30.1 million. Acquisition-related costs were expensed as incurred, with the exception of BioScrip success-based fees that are included in consideration transferred. The Company recorded transaction costs that are expensed in selling, general and administrative expenses during the year ended December 31, 2019 of approximately $ 25.8 million. Transaction expenses consisted of professional fees for advisory, consulting and underwriting services as well as other incremental costs directly related to the acquisition. Baptist Health Asset Acquisition — In August 2018, pursuant to the Purchase and Sale Agreement dated August 8, 2018, Option Care completed the acquisition of certain assets of Baptist Health in Little Rock, Arkansas for a purchase price of $ 1.0 million. Home I.V. Specialists, Inc. Acquisition — In September 2018, pursuant to the Stock Purchase Agreement dated September 18, 2018, Option Care completed the acquisition of 100 % of the outstanding shares of Home I.V. Specialists, Inc. (“Home I.V.”) for a purchase price of $ 11.6 million, net of cash acquired. The total consideration was comprised of cash paid of $ 9.8 million and a contingent payment of $ 1.8 million payable one year after the acquisition date. During the year ended December 31, 2019, the Company reduced the contingent liability by $ 0.3 million. During the year ended December 31, 2020, the Company determined that the contingent payment was not payable and reduced the remaining contingent liability by $ 1.5 million. 4. REVENUE The following table sets forth the net revenue earned by category of payer for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Commercial payers $ 2,542,985 $ 2,001,105 $ 1,699,450 Government payers 450,067 285,128 217,876 Patients 39,558 24,184 22,465 Net revenue $ 3,032,610 $ 2,310,417 $ 1,939,791 5. EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) plan and matches 100 % of employee contributions, up to 4 % of employee compensation. The Company recorded expense for the defined contribution plan of $ 9.7 million, $ 6.4 million and $ 6.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. In the years ended December 31, 2020, 2019 and 2018, Company contributions of $ 8.9 million, $ 6.6 million and $ 6.3 million, respectively, were paid. 61 Table of Contents 6. INCOME TAXES The income tax expense (benefit) consists of the following for the years ended December 31, 2020, 2019 and 2018 (in thousands): 2020 2019 2018 US federal income tax expense (benefit): Current $ ( 69 ) $ — $ — Deferred 996 ( 3,072 ) ( 2,688 ) 927 ( 3,072 ) ( 2,688 ) State income tax expense (benefit): Current 1,707 2,074 1,176 Deferred 199 ( 1,276 ) ( 1,141 ) 1,906 798 35 Total income tax expense (benefit) $ 2,833 $ ( 2,274 ) $ ( 2,653 ) The difference between the statutory federal income tax rate and the effective tax rate is as follows for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 US federal statutory tax rate 21.0 % 21.0 % 21.0 % State and local income taxes net of federal tax benefit ( 29.5 ) ( 0.5 ) 2.4 Valuation allowance ( 29.9 ) ( 13.4 ) 0.0 Stock-based compensation 6.7 0.0 0.0 Non-deductible compensation ( 16.3 ) ( 0.7 ) 0.0 Changes in uncertain tax positions 0.0 0.0 14.7 Non-deductible expenses ( 8.2 ) ( 2.8 ) ( 7.5 ) Other, net 2.2 ( 0.7 ) ( 0.3 ) Effective income tax rate ( 54.0 ) % 2.9 % 30.3 % 62 Table of Contents The components of deferred income tax assets and liabilities using the 21% U.S. Federal statutory tax rate were as follows as of December 31, 2020 and 2019 (in thousands): 2020 2019 Deferred tax assets: Price concessions $ 6,907 $ 12,302 Compensation and benefits 4,058 3,672 Interest limitation carryforward 39,094 38,623 Operating lease liability 22,644 19,462 Net operating losses 155,922 147,749 Other 8,682 5,506 Deferred tax assets before valuation allowance 237,307 227,314 Valuation allowance ( 112,085 ) ( 109,531 ) Deferred tax assets net of valuation allowance 125,222 117,783 Deferred tax liabilities: Accelerated depreciation ( 12,593 ) ( 10,376 ) Operating lease right-of-use asset ( 17,186 ) ( 15,442 ) Intangible assets ( 67,127 ) ( 71,204 ) Goodwill ( 28,976 ) ( 20,250 ) Other ( 2,679 ) ( 2,654 ) Deferred tax liabilities ( 128,561 ) ( 119,926 ) Net deferred tax liabilities $ ( 3,339 ) $ ( 2,143 ) As a result of the Merger, the Company recorded a full valuation allowance against all of its net U.S. federal and state deferred tax assets except for certain state net operating losses (“NOL”) which were estimated to be $ 0.4 million as of December 31, 2020. The initial recognition of this valuation allowance by the Company was reflected in the opening balance sheet of BioScrip and, to that extent, did not impact the Company’s tax expense (benefit) for the years ended December 31, 2020 and 2019. The valuation allowance for deferred tax assets as of December 31, 2020 was $ 112.1 million. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considers the scheduled reversal of deferred tax liabilities (including the effect in available carryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment. On a quarterly basis, the Company evaluates the positive and negative evidence in determining if the valuation allowance is fairly stated. The Company is subject to taxation in the United States and various states. As a result of the Merger, BioScrip carried over $ 458.9 million of federal net operating losses, $ 479.6 million of state net operating losses, and $ 85.0 million of interest limitation carryforwards. At December 31, 2020, the Company had $ 577.9 million of gross federal NOL carryforwards of which $ 438.1 million are available to offset future taxable income in the United States. These NOL’s will begin to expire in 2026 if not utilized. The remaining gross federal NOL’s of $ 139.8 million at December 31, 2020 are expected to expire unutilized due to limitations under Internal Revenue Code Section 382. At December 31, 2019, the Company had $ 548.0 million of gross federal NOL’s. At December 31, 2020 and 2019, the Company had $ 154.8 million and $ 145.6 million of interest limitation carryforwards. At December 31, 2020 and 2019, the Company also had $ 600.1 million and $ 578.5 million of cumulative gross state NOL carryforwards available to offset future taxable income in various states. These state NOL’s will begin to expire starting in 2021 if not utilized. At December 31, 2020 and 2019, the unrecognized tax benefits for uncertain tax positions was $ 0 . 63 Table of Contents The following table presents the valuation allowance for deferred tax assets for the years ended December 31, 2020, 2019 and 2018 (in thousands): Additions Description Balance at Beginning of Period Charged (Benefit) to Costs and Expenses Charged to Other Accounts Balance at End Period 2018: Valuation allowance for deferred tax assets $ 1,263 $ 110 $ — $ 1,373 2019: Valuation allowance for deferred tax assets $ 1,373 $ 15,395 $ 92,763 $ 109,531 2020: Valuation allowance for deferred tax assets $ 109,531 $ 1,549 $ 1,005 $ 112,085 Currently, the Company is not subject to any U.S. Federal income tax audits. The Company is subject to various state tax audits, and believes that the outcome of these audits will not have a material impact on the Company. The Company recorded no income tax expense or benefit for the year ended December 31, 2020 associated with the tax provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). However, certain adjustments were made to the Company’s components of deferred tax assets and liabilities to reflect the tax provisions of the CARES Act. These adjustments were the result of the CARES Act’s tax provisions associated with interest expense limitations and bonus depreciation on leasehold improvements. These adjustments to the Company’s components of deferred tax assets and liabilities were offset by one another or the Company’s valuation allowance. 7. (LOSS) EARNINGS PER SHARE The Company presents basic and diluted (loss) earnings per share for its common stock. Basic (loss) earnings per share is calculated by dividing the net (loss) income of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per share is determined by adjusting the profit or loss and the weighted average number of shares of common stock outstanding for the effects of all dilutive potential common shares. As a result of the Merger, all historical per share data and number of shares and equity awards were retroactively adjusted. The (loss) earnings is used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. Accordingly, the computation of diluted shares for the years ended December 31, 2020 and 2019 excludes the effect of shares that would be issued in connection with warrants, stock options and restricted stock awards, as their inclusion would be anti-dilutive to the loss per share. As of December 31, 2020 there were 2,285,784 warrants, 412,831 stock options and 549,650 restricted stock awards outstanding that were excluded from the calculation as they would be anti-dilutive. As of December 31, 2019 there were 2,328,120 warrants, 644,975 stock options and 231,562 restricted stock awards outstanding that were excluded from the calculation as they were anti-dilutive. There were no dilutive potential common shares for the years ended December 31, 2018. The following table presents the Company’s basic and diluted (loss) earnings per share and shares outstanding (in thousands, except per share data): Year Ended December 31, 2020 2019 2018 Numerator: Net loss $ ( 8,076 ) $ ( 75,920 ) $ ( 6,115 ) Denominator: Weighted average number of common shares outstanding 180,971 156,280 142,614 Loss per Common Share: Loss per common share, basic and diluted $ ( 0.04 ) $ ( 0.49 ) $ ( 0.04 ) 64 Table of Contents 8. LEASES On January 1, 2018, the Company adopted ASC 842, Leases, using an optional transition method that permitted application of the standards as of the effective date without requiring the standard to be applied to the comparative periods presented in the consolidated financial statements. The Company elected the transition package of three practical expedients, which allowed the Company not to reassess prior conclusions about lease identification, lease classification and initial, direct costs. The Company did not elect the practical expedient to use hindsight and accordingly, the initial lease term did not differ under the new standards versus prior accounting practice. During the years ended December 31, 2020 and 2019, the Company incurred operating lease expenses of $ 30.8 million and $ 25.8 million including short-term lease expenses, which were included as a component of selling, general and administrative expenses in the consolidated statements of comprehensive income (loss). As of December 31, 2020, the weighted-average remaining lease term was 6.7 years and the weighted-average discount rate was 5.18 %. Operating leases mature as follows (in thousands): Year Ending December 31 Minimum Payments 2021 $ 23,770 2022 19,216 2023 15,804 2024 11,684 2025 9,369 2026 and beyond 30,168 Total lease payments 110,011 Less: Interest ( 20,349 ) Present value of lease liabilities $ 89,662 During the year ended December 31, 2020, the Company commenced new leases, extensions and amendments, resulting in non-cash investing and financing activities in the consolidated statements of cash flows of $ 29.1 million related to the increases in the operating lease right-of-use asset and operating lease liabilities, respectively. During the year ended December 31, 2019, the Company did not enter into any significant new operating or financing leases. As of December 31, 2020, the Company did not have any significant operating or financing leases that had not yet commenced. During the year ended December 31, 2018, the Company incurred rent expense of $ 17.3 million, under ASC Topic 840, Leases , which was included as a component of selling, general and administrative expenses in the consolidated statements of comprehensive income (loss). 65 Table of Contents 9. PROPERTY AND EQUIPMENT Property and equipment was as follows as of December 31, 2020 and 2019 (in thousands): December 31, 2020 December 31, 2019 Infusion pumps $ 31,678 $ 30,416 Equipment, furniture and other 47,886 51,454 Leasehold improvements 87,483 80,916 Computer software, purchased and internally developed 27,799 34,884 Assets under development 10,793 14,150 205,639 211,820 Less: accumulated depreciation 84,490 78,622 Property and equipment, net $ 121,149 $ 133,198 Depreciation expense is recorded within cost of revenue and operating expenses within the consolidated statements of comprehensive income (loss), depending on the nature of the underlying fixed assets. The depreciation expense included in cost of revenue relates to revenue-generating assets, such as infusion pumps. The depreciation expense included in operating expenses is related to infrastructure items, such as furniture, computer and office equipment, and leasehold improvements. The following table presents the amount of depreciation expense recorded in cost of revenue and operating expenses for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year ended December 31, 2020 2019 2018 Depreciation expense in cost of revenue $ 6,586 $ 4,179 $ 2,993 Depreciation expense in operating expenses 36,180 27,629 18,490 Total depreciation expense $ 42,766 $ 31,808 $ 21,483 During the year ended December 31, 2018, one company location was destroyed by a hurricane, resulting in a loss of $ 0.6 million of property and equipment. A business casualty loss was recorded as a component of operating costs and expenses within the consolidated statements of comprehensive income (loss). During the year ended December 31, 2019, $ 0.6 million in proceeds were received related to recovery of property and equipment. These proceeds resulted in a gain on business casualty loss of $ 0.6 million recorded as a component of selling, general, and administrative expenses in the consolidated statements of comprehensive income (loss) during the year ended December 31, 2019. These proceeds were reflected as a component of cash flows from investing activities in the consolidated statement of cash flows. 66 Table of Contents 10. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is not amortized, but is evaluated for impairment annually in the fourth quarter of the fiscal year, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. 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 management 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 the 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. Changes in the carrying amount of goodwill consist of the following activity for the years ended December 31, 2020, 2019 and 2018 (in thousands): Balance at December 31, 2017 $ 627,392 Acquisitions 5,077 Balance at December 31, 2018 $ 632,469 Acquisitions 793,073 Balance at December 31, 2019 $ 1,425,542 Purchase accounting adjustments 3,068 Balance at December 31, 2020 $ 1,428,610 67 Table of Contents The carrying amount and accumulated amortization of intangible assets consists of the following as of December 31, 2020 and 2019 (in thousands): December 31, 2020 December 31, 2019 Gross intangible assets: Referral sources $ 438,121 $ 438,121 Trademarks/names 44,536 44,536 Other amortizable intangible assets 402 402 Total gross intangible assets 483,059 483,059 Accumulated amortization: Referral sources ( 110,498 ) ( 84,295 ) Trademarks/names ( 21,146 ) ( 12,748 ) Other amortizable intangible assets ( 363 ) ( 106 ) Total accumulated amortization ( 132,007 ) ( 97,149 ) Total intangible assets, net $ 351,052 $ 385,910 Amortization expense for intangible assets was $ 35.1 million, $ 26.1 million and $ 19.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Expected future amortization expense for intangible assets recorded at December 31, 2020, is as follows (in thousands): 2021 $ 32,015 2022 28,338 2023 28,338 2024 28,338 2025 28,338 2026 and beyond 205,685 Total $ 351,052 68 Table of Contents 11. INDEBTEDNESS Long-term debt consisted of the following as of December 31, 2020 (in thousands): Principal Amount Discount Debt Issuance Costs Net Balance ABL Facility $ — $ — $ — $ — First Lien Term Loan 915,750 ( 7,253 ) ( 19,710 ) 888,787 Second Lien Notes 245,781 ( 6,102 ) ( 4,113 ) 235,566 $ 1,161,531 $ ( 13,355 ) $ ( 23,823 ) 1,124,353 Less: current portion ( 9,250 ) Total long-term debt $ 1,115,103 Long-term debt consisted of the following as of December 31, 2019 (in thousands): Principal Amount Discount Debt Issuance Costs Net Balance ABL Facility $ — $ — $ — $ — First Lien Term Loan 925,000 ( 8,399 ) ( 22,825 ) 893,776 Second Lien Notes 412,256 ( 11,672 ) ( 7,864 ) 392,720 $ 1,337,256 $ ( 20,071 ) $ ( 30,689 ) 1,286,496 Less: current portion ( 9,250 ) Total long-term debt $ 1,277,246 Retired Debt Obligations — Prior to the Merger, the Company had two credit arrangements that 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”). The principal balance on the Previous First Lien Term Loan was repayable in quarterly installments of $ 1.0 million. On August 6, 2019, the Company repaid the outstanding balance of Previous Term Loans and retired the outstanding Previous Credit Facilities by entering into two new credit arrangements and a notes indenture, described below under “New Debt Obligations”. The weighted average interest rate paid on the Previous First Lien Term Loan was 6.20 % for the year ended December 31, 2019, prior to the retirement of the debt obligations. The weighted average interest paid on the Previous Second Lien Term Loan was 11.36 % for the year ended December 31, 2019, prior to the retirement of the debt obligations. 69 Table of Contents New Debt Obligations — In conjunction with the Merger, the Company entered into an asset-based-lending revolving credit facility administered by Bank of America, N.A. The Company also issued senior secured second lien PIK toggle floating rate notes due 2027 (the “Second Lien Notes”) under an indenture with Ankura Trust Company, LLC. The two new credit agreements and the indenture were entered into on August 6, 2019 and 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 (the “First Lien Term Loan”, and together with the ABL Facility, the “Loan Facilities”), and a $ 400.0 million issuance of Second Lien Notes. The ABL Facility initially provided for borrowings up to $ 150.0 million, which matures on August 6, 2024. During the year ended December 31, 2020, the Company increased the borrowing capacity of its ABL Facility from $ 150.0 million to $ 175.0 million. The ABL Facility bears interest at a per annum rate initially provided that is determined by the Company’s periodic selection of rate type, either the Base Rate or the Eurocurrency Rate. Interest on the ABL Facility is charged on Base Rate loans at the greater of Base Rate, as defined, or 0.25 % plus 1.25 % to 1.75 %, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. Interest on the ABL Facility is charged on Eurocurrency Rate Loans at the Eurocurrency Rate, as defined, plus 2.25 % to 2.75 %, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. The ABL Facility contains commitment fees payable on the unused portion 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 %. Borrowings under the ABL Facility are secured by a first priority security interest in the Company’s and each of its subsidiaries’ inventory, accounts receivable, cash, deposit accounts and certain assets and property related thereto (the “ABL Priority Collateral”), in each case subject to certain exceptions, and a third priority security interest in the Term Loan Priority Collateral, as defined below. The Company had no outstanding borrowings under the ABL Facility at December 31, 2020 and 2019. 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 which commenced in March 2020 of $ 2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026. 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 % and 6.20 % as of December 31, 2020 and 2019, respectively. The weighted average interest rate incurred was 5.09 % for the year ended December 31, 2020. The weighted average interest rate incurred was 6.47 % for the period August 6, 2019 through December 31, 2019. Amounts borrowed under the First Lien Term Loan are secured by a first priority security interest in each of the Company’s subsidiaries’ capital stock (subject to certain exceptions) and substantially all of the Company’s property and assets (other than the ABL Priority Collateral), (the “Term Loan Priority Collateral”), in each case subject to certain exceptions, and a second priority security interest in the ABL Priority Collateral. The Second Lien Notes mature on August 6, 2027. Interest on the Second Lien Notes is payable quarterly and is at London Interbank Offered Rate (“LIBOR”), plus 8.75 %. The Company elected to pay-in-kind (“PIK”) the first quarterly interest payment, due in November 2019, which resulted in the Company capitalizing $ 12.3 million in interest to the principal balance on the interest payment date. The Company also elected to PIK the quarterly interest payment due in August 2020, which resulted in the Company capitalizing $ 7.5 million in interest expense to the principal balance of the Second Lien Notes on the interest payment date. In connection with the PIK elections, the Company was charged an additional 1.00 % in interest expense on those quarterly interest payments. The interest rate on the Second Lien Notes was 8.98 % and 10.66 % as of December 31, 2020 and 2019. The weighted average interest incurred was 9.39 % for the year ended December 31, 2020. The weighted average interest incurred was 11.45 % for the period August 6, 2019 through December 31, 2019. During the year ended December 31, 2020, the Company completed a public offering of stock for proceeds of $ 118.9 million. Those proceeds, along with additional cash on hand, were used to prepay $ 174.0 million of the Second Lien Notes, which is reflected as a cash outflow from financing activities in the Company’s consolidated statements of cash flows. The Company recognized a loss on extinguishment of debt of $ 11.5 million, of which $ 3.5 million related to the prepayment penalty and $ 8.0 million related to deferred financing fees which were written off upon extinguishment. The $ 3.5 million prepayment penalty was reflected as a cash outflow from financing activities in the Company’s consolidated statements of cash flows. The loss on extinguishment was recorded as a component of other, net in the Company’s consolidated statements of comprehensive income (loss). See Note 16, Stockholders’ Equity , for further discussion of the public offering. 70 Table of Contents During the year ended December 31, 2019, the Company assessed whether the repayment of the Previous Term Loans and subsequent issuance of the First Lien Term Loan and the Second Lien Notes resulted in an insubstantial modification or an extinguishment of the existing debt for each loan in the syndication by grouping lenders as follows: (i) Lenders participating in both the Previous Credit Facilities and the new Loan Facilities and Second Lien Notes; (ii) previous lenders that exited; and (iii) new lenders. The Company determined that $ 226.7 million of the Previous First Lien Term Loan was extinguished and none of the Previous Second Lien Term Loan was extinguished, which is disclosed as an outflow from financing activities in the consolidated statements of cash flows. The Company determined that $ 752.4 million of new debt was issued related to the First Lien Term Loan and $ 250.0 million of new debt was issued related to the Second Lien Notes, which is disclosed as an inflow from financing activities in the consolidated statements of cash flows. In connection with the issuance of the First Lien Term Loan, the Second Lien Notes, and the ABL Facility, the Company incurred $ 52.6 million in debt issuance costs and third-party fees, of which $ 48.1 million was capitalized, $ 1.3 million was expensed as a component of other expense and $ 3.2 million was expensed as a loss on extinguishment as a component of other expense. Further, $ 21.3 million of the total fees incurred of $ 52.6 million was netted against the $ 981.1 million of proceeds from debt as a component of the cash flows from financing activities, $ 30.0 million was presented as deferred financing costs as a component of cash flows from financing activities, and the remaining $ 1.3 million was included in cash flows from operating activities. During the year ended December 31, 2019, the Company recognized a loss on extinguishment of debt of $ 5.5 million, of which $ 3.2 million related to debt issue costs incurred with the issuance of the Loan Facilities and Second Lien Notes, as discussed above, and $ 2.3 million related to deferred financing fees on the Previous Credit Facilities, which were written off upon extinguishment. All remaining deferred financing fees related to the Previous Credit Facilities of $ 7.6 million were attributed to modified loans, which are capitalized and will be amortized over the remaining term of the Loan Facilities and Second Lien Notes. Long-term debt matures as follows (in thousands): Year Ending December 31, Minimum Payments 2021 $ 9,250 2022 9,250 2023 9,250 2024 9,250 2025 9,250 2026 and beyond 1,115,281 Total $ 1,161,531 In January 2021, the Company entered into an amendment on the First Lien Term Loan, which resulted in an additional $ 250.0 million of incremental First Lien Term Loan indebtedness being issued, which was used to prepay the remaining $ 245.8 million outstanding balance of the Second Lien Notes. See Note 19, Subsequent Events , for further discussion. During the year ended December 31, 2020, the Company engaged in hedging activities to limit its exposure to changes in interest rates. See Note 12, Derivative Instruments , for further discussion. 71 Table of Contents The following table presents the estimated fair values of the Company’s debt obligations as of December 31, 2020 (in thousands): Financial Instrument Carrying Value as of December 31, 2020 Markets for Identical Item (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) First Lien Note Facility $ 888,787 $ — $ 913,461 $ — Second Lien Note Facility 235,566 — — 266,438 Total debt instruments $ 1,124,353 $ — $ 913,461 $ 266,438 The following table sets forth the changes in Level 3 measurements for the year ended December 31, 2020 (in thousands): Level 3 Measurements Second Lien Notes fair value as of January 1, 2020 $ 411,119 Principal prepayment ( 174,000 ) Interest rate PIK 7,525 Change in fair value 21,794 Second Lien Notes fair value as of December 31, 2020 $ 266,438 See Note 13, Fair Value Measurements , for further discussion. 12. DERIVATIVE INSTRUMENTS The Company utilizes derivative financial instruments for hedging and non-trading purposes to limit the Company’s exposure to its variable interest rate risk. Use of derivative financial instruments in hedging strategies subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative financial instrument will change. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including reviewing credit ratings when appropriate. During 2017, Option Care entered into interest rate caps that reduce the risk of increased interest payments due to rising interest rates. The hedges offset the risk of rising interest rates through 2020 on the first $ 250.0 million of the Previous First Lien Term Loan. The interest rate caps perfectly offset the terms of the interest rates associated with the variable interest rate Previous First Lien Term Loan. Option Care entered into the interest rate caps as a cash flow hedge for a notional amount of $ 1.9 million. In April 2019, Option Care terminated its interest rate caps and received cash proceeds of $ 1.7 million, net of early termination fees. In conjunction with the termination of the interest rate caps, Option Care discontinued the hedge accounting associated with the interest rate caps. In August 2019, the Company entered into interest rate swap agreements that reduce the variability in the interest rates on the newly-issued debt obligations. The first interest rate swap for $ 925.0 million notional was effective in August 2019 with $ 911.1 million designated as a cash flow hedge against the underlying interest rate on the First Lien Term Loan interest payments indexed to one-month LIBOR through August 2021. In accordance with ASU 2017-12, Targeted Improvements to Accounting for Hedges , the Company has determined that the $ 911.1 million designated cash flow hedge is perfectly effective. The remaining $ 13.9 million notional amount of the first interest rate swap is not designated as a hedging instrument. The second interest rate swap for $ 400.0 million notional was effective in November 2019 and was designated as a cash flow hedge against the underlying interest rate on the Second Lien Notes interest payment indexed to three-month LIBOR through November 2020. In May 2020, the Company elected to PIK the Second Lien Notes’ quarterly interest payment due in August 2020. Upon making the PIK election, the Company determined that the hedged interest payment would no longer occur, resulting in an ineffective hedge, so the Company discontinued hedge accounting on its $ 400.0 million notional interest rate swap. As a result, the Company reclassified accumulated comprehensive loss of $ 3.7 million to interest expense, net in the consolidated statements of comprehensive income (loss). The gains and losses associated with the $ 400.0 million notional swap were recognized in net income (loss) through interest expense until the swap expired in November 2020. See Note 11, Indebtedness , for further discussion of the PIK. 72 Table of Contents The following table summarizes the amount and location of the Company’s derivative instruments in the consolidated balance sheets (in thousands): Fair value - Derivatives in liability position Derivative Balance Sheet Caption December 31, 2020 December 31, 2019 Interest rate swaps designated as cash flow hedges Accrued expenses and other current liabilities $ 11,172 $ 1,275 Interest rate swaps not designated as hedges Accrued expenses and other current liabilities 170 — Interest rate swaps designated as cash flow hedges Other noncurrent liabilities — 5,920 Interest rate swaps not designated as hedges Other noncurrent liabilities — 90 Total derivatives $ 11,342 $ 7,285 The gain and loss associated with the changes in the fair value of the effective portion of the hedging instrument are recorded into other comprehensive (loss) income. The gain and loss associated with the changes in the fair value of the $ 400.0 million notional swap and the $ 13.9 million notional amount not designated as a hedging instrument are recognized in net income (loss) through interest expense. The following table presents the pre-tax gains (losses) from derivative instruments recognized in other comprehensive (loss) income in the Company’s consolidated statements of comprehensive income (loss) (in thousands): Years Ended December 31, Derivative 2020 2019 2018 Interest rate caps designated as cash flow hedges $ — $ ( 1,103 ) $ 1,008 Interest rate swaps designated as cash flow hedges ( 7,723 ) ( 7,195 ) — Interest rate swaps that discontinued hedge accounting 3,746 — — Total $ ( 3,977 ) $ ( 8,298 ) $ 1,008 The following table presents the amount and location of pre-tax income (loss) recognized in the Company’s consolidated statement of comprehensive income (loss) related to the Company’s derivative instruments (in thousands): Year Ended December 31, Derivative Income Statement Caption 2020 2019 2018 Interest rate caps designated as cash flow hedges Interest expense $ — $ ( 125 ) $ 300 Interest rate swaps designated as cash flow hedges Interest expense ( 12,799 ) ( 115 ) — Interest rate swaps not designated as hedges Interest expense ( 34 ) ( 92 ) — Interest rate swaps that discontinued hedge accounting Interest expense ( 3,746 ) — — Total $ ( 16,579 ) $ ( 332 ) $ 300 The Company expects to reclassify $ 11.2 million of total interest rate costs from accumulated other comprehensive loss against interest expense during the next 12 months. 73 Table of Contents 13. FAIR VALUE MEASUREMENTS Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and gives the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs within the fair value hierarchy are defined in Note 2, Summary of Significant Accounting Policies. While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. First Lien Term Loan : The fair value of the First Lien Term Loan is derived from a broker quote on the loans in the syndication (Level 2 inputs). See Note 11, Indebtedness , for further discussion of the carrying amount and fair value of the First Lien Term Loan. Second Lien Notes : The fair value of the Second Lien Notes is derived from a cash flow model that discounted the cash flows based on market interest rates (Level 3 inputs). See Note 11, Indebtedness , for further discussion of the carrying amount and fair value of the Second Lien Notes. Interest rate swaps : The fair values of interest rate swaps are derived from the interest rates prevalent in the market and future expectations of those interest rates (Level 2 inputs). The Company determines the fair value of the investments based on quoted prices from third-party brokers. See Note 12, Derivative Instruments , for further discussion of the fair value of the interest rate swaps. Interest rate caps : The fair values of interest rate caps are derived from the interest rates prevalent in the market and future expectations of those interest rates (Level 2 inputs). The Company determines the fair value of the investments based on quoted prices from third-party brokers. In April 2019, Option Care terminated its interest rate caps. See Note 12, Derivative Instruments , for further discussion of the fair value of the interest rate caps. There were no other assets or liabilities measured at fair value at December 31, 2020 or 2019. 14. COMMITMENTS AND CONTINGENCIES The Company is involved in legal proceedings and is subject to investigations, inspections, audits, inquiries, and similar actions by governmental authorities, arising in the normal course of the Company’s business. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. From time to time, the Company may also be involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property, and other matters. Gain contingencies, if any, are recognized when they are realized. The results of legal proceedings are often uncertain and difficult to predict, and the costs incurred in litigation can be substantial, regardless of the outcome. The Company believes that its defenses and assertions in pending legal proceedings have merit and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s consolidated balance sheets. However, substantial unanticipated verdicts, fines, and rulings may occur. As a result, the Company may from time to time incur judgments, enter into settlements, or revise expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid. 74 Table of Contents 15. STOCK-BASED INCENTIVE COMPENSATION Equity Incentive Plans — Under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), approved at the annual meeting by the BioScrip stockholders on May 3, 2018, the Company may issue, among other things, incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, stock grants, and performance units to key employees and directors. The 2018 plan is administered by the Company’s Compensation Committee, a standing committee of the Board of Directors. A total of 4,101,735 shares of common stock were initially authorized for issuance under the 2018 Plan. Stock Options — Options granted under the 2018 Plan typically vest over a three - or four-year period and, in certain instances, may fully vest upon a change in control of the Company. The options also typically have an exercise price that may not be less than 100% of its fair market value on the date of grant and are exercisable seven to ten years after the date of grant, subject to earlier termination in certain circumstances. Compensation expense from stock options is recognized on a straight-line basis over the requisite service period. During the years ended December 31, 2020 and 2019, the Company recognized compensation expense related to stock options of $ 0.4 million and $ 0.4 million. The Company did not recognize any compensation expense related to stock options prior to the Merger. The weighted average grant-date fair value of options granted during the year ended December 31, 2020 was $ 5.94 . The Company did no t grant any options during the years ended December 31, 2019 or 2018. The fair value of stock options granted was estimated on the date of grant using a Black-Scholes pricing model. The assumptions used to compute the fair value of options for the year ended December 31, 2020 are as follows: Expected volatility 45.7 % Risk-free interest rate 0.53 % Expected life of options 6.3 years Dividend rate — A summary of stock option activity for the year ended December 31, 2020 is as follows: Options Weighted Average Exercise Price Aggregate Intrinsic Value (thousands) Weighted Average Remaining Contractual Life Balance at December 31, 2019 644,975 $ 15.36 $ 2,754 Granted 204,928 $ 13.34 $ 471 Exercised ( 266,065 ) $ 7.63 $ 2,548 Forfeited and expired ( 171,007 ) $ 26.36 $ 88 Balance at December 31, 2020 412,831 $ 14.77 $ 1,320 6.7 years Exercisable at December 31, 2020 197,735 $ 16.51 $ 789 4.2 years During the year ended December 31, 2020, shares were surrendered to satisfy tax withholding obligations on the exercise of stock options with a cost basis of $ 2.7 million. During the year ended December 31, 2019, shares were surrendered to satisfy tax withholding obligations on the exercise of stock options with a cost basis of $ 0.4 million, which are all held as treasury stock as of December 31, 2020. During the year ended December 31, 2020, $ 0.4 million of cash was received from stock option exercises under share-based payment arrangements. No cash was received from stock option exercises under share-based payment arrangements for the years ended December 31, 2019 or 2018. 75 Table of Contents The maximum term of stock options under these plans is ten years . Options outstanding as of December 31, 2020 expire on various dates ranging from January 2021 through March 2030. The following table outlines the outstanding and exercisable stock options as of December 31, 2020: Options Outstanding Options Exercisable Range of Option Exercise Price Outstanding Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life Options Exercisable Weighted Average Exercise Price $ 0.00 - $ 8.24 9,901 $ 6.52 6.1 years 9,901 $ 6.52 $ 8.24 - $ 16.52 345,180 $ 12.08 7.5 years 130,084 $ 10.27 $ 16.52 - $ 24.76 25,500 $ 22.61 2.7 years 25,500 $ 22.61 $ 24.76 - $ 33.00 15,000 $ 30.41 2.3 years 15,000 $ 30.41 $ 33.00 - $ 41.28 — $ — 0.0 years — $ — $ 41.28 - $ 49.52 12,500 $ 44.16 1.3 years 12,500 $ 44.16 $ 49.52 - $ 57.76 3,500 $ 56.24 2.0 years 3,500 $ 56.24 $ 57.76 - $ 66.00 — $ — 0.0 years — $ — $ 66.00 - $ 74.28 1,250 $ 66.52 2.6 years 1,250 $ 66.52 All options 412,831 197,735 As of December 31, 2020, there was $ 1.0 million of unrecognized compensation expense related to unvested option grants that is expected to be recognized over a weighted-average period of 1.8 years. Restricted Stock — Restricted stock grants subject solely to an employee’s continued service with the Company generally will become fully vested within one to four years from the grant date and, in certain instances, may fully vest upon a change in control of the Company. Restricted stock grants subject solely to a Director’s continued service with the Company generally will become fully vested within one year from the date of grant. Compensation expense from restricted stock is recognized on a straight-line basis over the requisite service period. During the years ended December 31, 2020 and 2019, the Company recognized compensation expense related to restricted stock awards of $ 2.3 million and $ 1.9 million, respectively. The Company did not recognize any compensation expense related to restricted stock awards prior to the Merger. A summary of restricted stock award activity for the year ended December 31, 2020 is as follows: Restricted Stock Weighted Average Grant Date Fair Value Balance at December 31, 2019 231,562 $ 10.68 Granted 490,557 $ 13.32 Vested and issued ( 120,782 ) $ 12.15 Forfeited and expired ( 51,687 ) $ 12.92 Balance at December 31, 2020 549,650 $ 13.26 During the year ended December 31, 2020, shares were surrendered to satisfy tax withholding obligations on the vesting of restricted stock awards with a cost basis of $ 0.3 million. During the year ended December 31, 2019, shares were surrendered to satisfy tax withholding obligations on the vesting of restricted stock awards with a cost basis of $ 2.1 million, of which $ 2.0 million is held as treasury stock as of December 31, 2019. As of December 31, 2020, there was $ 6.0 million in unrecognized compensation expense related to unvested restricted stock awards that is expected to be recognized over a weighted average period of 1.7 years. The total fair value of restricted stock awards vested during the years ended December 31, 2020, 2019 and 2018 was $ 1.5 million, $ 1.9 million and $ 0 , respectively. 76 Table of Contents HC I Incentive Units — Beginning in October 2015, HC I implemented an equity incentive plan for certain officers and employees of the Company. Incentive units are equity-based awards subject to time and performance vesting restrictions. The compensation expense related to this plan has been reflected in the Company’s financial statements. In accordance with ASC Topic 718, Compensation-Stock Compensation , compensation expense is recognized on a straight-line basis over the vesting period of the award or the employee’s retirement eligible date, if earlier. During the years ended December 31, 2020, 2019 and 2018, the Company recognized compensation expense related to the HC I incentive units of $ 0.2 million, $ 1.9 million and $ 2.1 million, respectively. No awards were issued during the year ended December 31, 2020. The fair value of each award was determined using a Monte-Carlo simulation with the following weighted average assumptions: Risk-free interest rate (1) 2.25 % Average time to liquidity (years) (2) 2.1 years Volatility (3) 47.00 % Discount for lack of marketability (4) 30.00 % Weighted-average grant-date fair value per share $ 1.13 (1) Represents the US Treasury security rate for the expected time to liquidity event. (2) Represents the period of time expected prior to liquidity event. (3) Based on historical volatility of comparable public companies. (4) Represents a discount taken to reflect the private nature of the investment. 77 Table of Contents 16. STOCKHOLDERS’ EQUITY On January 3, 2020, the Company’s board of directors and HC I, the stockholder of a majority of the Company’s common stock, approved a reverse stock split of the Company’s issued and outstanding common stock on a one share for four share basis and appropriately amended the Company’s Third Amended and Restated Certificate of Incorporation to reflect the change. On February 3, 2020, the reverse stock split became effective. 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 financial statements. All common shares, warrants and stock awards presented in the consolidated financial statements have been retrospectively adjusted for the reverse stock split. During the year ended December 31, 2020, the Company completed a public offering of 20,700,000 shares of the Company’s common stock at a price of $ 12.50 per share, consisting of 10,000,000 shares of common stock issued and sold by the Company and 10,700,000 shares of common stock sold by HC I. The Company received net proceeds from the offering of $ 118.9 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Also, during the year ended December 31, 2020, HC I completed an additional secondary offering of 10,600,000 shares of common stock. Following the offerings, HC I holds approximately 63.6 % of the common stock of the Company. The Company used the proceeds from the offering, along with additional cash on hand, to repay $ 174.0 million on the principal balance of its Second Lien Notes outstanding. See Note 11, Indebtedness , for further discussion of the repayment of the Second Lien Notes. 2017 Warrants — Prior to the Merger, BioScrip issued warrants to certain debt holders pursuant to a Warrant Purchase Agreement dated as of June 29, 2017. In conjunction with the Merger, the 2017 Warrants were amended to entitle the purchasers of the warrants to purchase 2.1 million shares of common stock. The 2017 Warrants have a 10-year term and an exercise price of $ 8.00 per share and may be exercised by payment of the exercise price in cash or surrender of shares of common stock into which the 2017 Warrants are being converted in an aggregate amount sufficient to pay the exercise price. The 2017 Warrants are classified as equity instruments, and the fair value of these warrants of $ 14.1 million was recorded in paid-in capital as of the Merger Date. During the years ended December 31, 2020 and 2019, warrant holders exercised warrants to purchase 0.0 million and 0.7 million shares of common stock. No proceeds were received from these exercises as the warrant holders elected to surrender shares to pay the exercise price. At December 31, 2020 and 2019, the remaining warrant holders are entitled to purchase 1.4 million shares of common stock, respectively. 2015 Warrants — Prior to the Merger, BioScrip issued warrants pursuant to a Common Stock Warrant Agreement dated as of March 9, 2015 which entitle the holders to purchase 0.9 million shares of common stock. The 2015 Warrants have a 10-year term and have exercise prices in a range of $ 20.68 per share to $ 25.80 per share. The 2015 Warrants were assumed by the Company in conjunction with the Merger and are classified as equity instruments, and the fair value of these warrants of $ 4.6 million was recorded in paid in capital as of the Merger Date. Home Solutions Restricted Stock — In conjunction with BioScrip’s 2016 acquisition of Home Solutions, Inc., 1.8 million restricted shares of common stock were issued, of which 0.8 million of these units vest upon the closing price of the Company’s common stock averaging at or above $ 16.00 per share over 20 consecutive trading days prior to December 31, 2019 and 1.0 million of these units vest upon the closing price of the Company’s common stock averaging at or above $ 20.00 per share over 20 consecutive trading days prior to December 31, 2019. The restricted stock expired on December 31, 2019. As discussed in Note 1, Nature of Operations and Presentation of Financial Statements , 7,048,357 common shares issued to HC I in conjunction with the Merger were set aside to prevent dilution related to the vesting of the Home Solutions restricted stock. During the year ended December 31, 2020, this matter was resolved with no common shares being issued to Home Solutions, Inc., and the 7,048,357 shares, at $ 0.0001 par value, set aside were cancelled as unvested and removed from the Company’s common shares issued and outstanding. Treasury Stock — During the year ended December 31, 2019, 290,117 shares were surrendered to satisfy tax withholding obligations on the exercise of stock options and the vesting of restricted stock awards with a cost basis of $ 2.5 million, of which $ 2.4 million remains held in treasury as of December 31, 2020 and 2019. At December 31, 2020 and 2019, the Company held 383,722 shares of treasury stock. Preferred Stock — In conjunction with the Merger, all legacy BioScrip preferred stock was settled, and no preferred stock is outstanding as of December 31, 2020 or 2019. 78 Table of Contents 17. RELATED-PARTY TRANSACTIONS Management Services — In conjunction with the Option Care acquisition from Walgreen Co. in 2015, the Company entered into two separate Management Services Agreements with Madison Dearborn Partners VI-B, L.P. and Walgreen Co. Each Management Services Agreement required the Company to pay $ 0.3 million to each party quarterly beginning July 1, 2015 for on-going management, consulting and financial services provided to the Company. Following the close of the Merger, both Management Services Agreements were terminated. The Company did not incur any management services expense during the year ended December 31, 2020. In 2019, prior to the Merger, the Company incurred $ 1.5 million of management services expense, which has been reflected as a component of selling, general and administrative expense in the consolidated statements of comprehensive income (loss) for the year ended December 31, 2019. During the year ended December 31, 2018, management services expense of $ 2.0 million was recorded as a component of selling, general, and administrative expense in the consolidated statements of comprehensive income (loss). Management Equity Ownership Plan — In October 2015, HC I implemented an equity ownership and incentive plan for certain officers and employees of Option Care. The officers were able to purchase membership units in HC I and could fund a portion of the purchase with a loan from Option Care. These loans were treated as a shareholder contribution in Option Care. For the years ended December 31, 2020, 2019 and 2018, $ 0 , $ 0 and $ 0.4 million, respectively, were credited to paid-in capital related to HC I membership units purchased with a loan from Option Care. There were no shareholder redemptions during the year ended December 31, 2020. During the year ended December 31, 2019, shareholder redemptions totaled $ 2.4 million, comprised of a cash distribution to HC I of $ 2.0 million and notes redeemed of $ 0.4 million. There were no shareholder redemptions during the year ended December 31, 2018. During the year ended December 31, 2019, prior to the Merger, Option Care sold its notes receivable from management, along with all accrued interest expense, to a third-party bank. Option Care received cash proceeds of $ 1.3 million, which represented payment of $ 1.1 million in outstanding notes receivable from management and payment of $ 0.2 million in accrued interest expense. There were no notes receivable from management outstanding as of December 31, 2020 and 2019. As of December 31, 2018, notes receivable from management and associated interest receivable of $ 1.6 million are recorded in management notes receivable as a reduction to equity in the Company’s consolidated statements of stockholders’ equity. Transactions with Equity-Method Investees — The Company provides management services to its joint ventures such as accounting, invoicing and collections in addition to day-to-day managerial support of the operations of the businesses. The Company recorded management fee income of $ 2.9 million, $ 2.5 million and $ 2.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Management fees are recorded in net revenues in the accompanying consolidated statements of comprehensive income (loss). The Company had amounts due from its joint ventures of $ 2.4 million as of December 31, 2020. The Company had amounts due to its joint ventures of $ 4.3 million as of December 31, 2019. These receivables were included in prepaid expenses and other current assets in the accompanying balance sheets and these payables were included in accrued expenses and other current liabilities in the accompanying balance sheets. These balances primarily relate to cash collections received by the Company on behalf of the joint ventures, offset by certain pharmaceutical inventories purchased by the Company on behalf of the joint ventures. 79 Table of Contents 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of unaudited quarterly financial information for the years ended December 31, 2020 and 2019 is as follows (in thousands except per share amounts). First Quarter Second Quarter Third Quarter Fourth Quarter Year ended December 31, 2020 Net revenue $ 705,440 $ 740,848 $ 781,609 $ 804,713 Gross profit 158,029 166,320 174,153 183,762 Operating income 8,648 23,208 34,556 44,343 Net (loss) income $ ( 19,910 ) $ ( 7,668 ) $ 1,663 $ 17,839 (Loss) earnings per share, basic $ ( 0.11 ) $ ( 0.04 ) $ 0.01 $ 0.10 (Loss) earnings per share, diluted $ ( 0.11 ) $ ( 0.04 ) $ 0.01 $ 0.10 First Quarter Second Quarter Third Quarter Fourth Quarter Year ended December 31, 2019 Net revenue $ 476,492 $ 497,266 $ 615,880 $ 720,779 Gross profit 98,194 101,390 137,773 175,642 Operating income (loss) 5,438 ( 8,005 ) ( 11,725 ) 13,973 Net loss $ ( 3,712 ) $ ( 13,603 ) $ ( 42,794 ) $ ( 15,811 ) Loss per share, basic $ ( 0.03 ) $ ( 0.10 ) $ ( 0.26 ) $ ( 0.09 ) Loss per share, diluted $ ( 0.03 ) $ ( 0.1 ) $ ( 0.26 ) $ ( 0.09 ) The net loss in the third quarter of 2019 included transaction expenses, integration costs and loss on extinguishment of debt incurred in conjunction with the Merger. 19. SUBSEQUENT EVENTS The Company has evaluated whether any subsequent events occurred since December 31, 2020 and noted the following subsequent event: 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. In connection with the First Lien Credit Agreement Amendment and prepayment of the Second Lien Notes the Company incurred debt prepayment penalties of $ 4.9 million, third party fees of $ 1.3 million and original issue discount of $ 1.0 million. 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. In February 2021, HC I completed a secondary offering of 17,250,000 shares of the Company’s common stock. Following the offering, HC I holds approximately 54 % of the Company’s common stock. 80 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.