What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-06 · 123 added, 57 removed, 181 unchanged (50% of the section changed)

23 unchanged sentences

(“Option Care”).

On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc.

(“BioScrip”) (the “Merger”), a national provider of infusion and home care management solutions, which was completed on August 6, 2019 (the “Merger Date”).

The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer.

Following the close of the transaction, BioScrip was rebranded as Option Care Health, Inc.

and the combined company’s stock, par value $0.0001, was listed on the Nasdaq Global Select Market as of March 31, 2021.

Update on the Impact of the COVID-19 Pandemic

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however, the Company did experience an increase in patient transfers from hospital and outpatient settings which positively affected revenues.

For the three months ended March 31, 2021, the revenue results reflect flat acute revenues relative to the prior year while chronic revenue had low double-digit growth.

For the three and six months ended June 30, 2021, the revenue results reflect acute revenue that had high and mid-single digit growth, respectively, relative to the prior year while chronic revenue grew in the mid-teens.

Option Care Health continues to collaborate with payers and health systems to transition patients into the home or one of our alternate treatment sites to receive vital infusion therapy.

The Company continued to experience cost inefficiencies during the three months ended March 31, 2021 with respect to clinical labor and other staffing challenges.

The integration-related initiatives that were accelerated during the year ended December 31, 2020 continue to offset the negative impacts resulting from the COVID-19 pandemic.

Further, to date, the Company has experienced no material deceleration in cash collections and collaboration with payers continues to be productive The Company anticipates that the pandemic could affect its operations for an extended period;

however, at this time it cannot confidently forecast the duration nor the ultimate financial impact on its operations.

“Risk Factors” under the caption “The COVID-19 pandemic could adversely impact our business, results of operations, cash flows and financial position” include in our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion of risks.

The Company continued to experience cost inefficiencies during the three and six months ended June 30, 2021 with respect to clinical labor and other staffing challenges.

Integration-related initiatives that were accelerated during the year ended December 31, 2020 continue to offset the negative impacts resulting from the COVID-19 pandemic.

Further, to date, the Company has experienced no material deceleration in cash collections and collaboration with payers continues to be productive.

The Company anticipates that the pandemic could affect its operations for an extended period;

however, at this time cannot confidently forecast the duration nor the ultimate financial impact on its operations.

“Risk Factors” under the caption “The COVID-19 pandemic could adversely impact our business, results of operations, cash flows and financial position” included in our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion of risks.

Composition of Results of Operations

The following results of operations include the accounts of Option Care Health and our subsidiaries for the three months ended March 31, 2021 and 2020.

The following results of operations include the accounts of Option Care Health and our subsidiaries for the three and six months ended June 30, 2021 and 2020.

Gross profit represents our net revenue less cost of revenue.

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Other income (expense) primarily includes loss on extinguishment of debt incurred in connection with the 2021 debt refinancing and miscellaneous non-operating expenses.

Income Tax Expense (Benefit) .

Income Tax Expense .

The Company is subject to taxation in the United States and various states.

The Company’s income tax expense (benefit) is reflective of the current federal and state tax rates.

The Company’s income tax expense is reflective of the current federal and state tax rates.

Change in unrealized gains (losses) on cash flow hedges, net of income tax expense (benefit) .

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Results of Operations

The following table presents Option Care Health’s consolidated results of operations for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended March 31,

2021 (unaudited) 2020 (unaudited)

Amount % of Revenue Amount % of Revenue

The following table presents Option Care Health’s consolidated results of operations for the three and six months ended June 30, 2021 and 2020 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2021 (unaudited) 2020 (unaudited) 2021 (unaudited) 2020 (unaudited)

Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue

NET REVENUE $ 860,272 100.0 % $ 740,848 100.0 % $ 1,619,509 100.0 % $ 1,446,288 100.0 %

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Total other expense (15,545) (1.8) % (30,406) (4.1) % (46,222) (2.9) % (57,923) (4.0) %

LOSS BEFORE INCOME TAXES (1,583) (0.2) % (18,869) (2.7) %

INCOME (LOSS) BEFORE INCOME TAXES 32,547 3.8 % (7,198) (1.0) % 30,964 1.9 % (26,067) (1.8) %

INCOME TAX EXPENSE 731 0.1 % 470 0.1 % 2,009 0.1 % 1,511 0.1 %

NET LOSS $ (2,861) (0.4) % $ (19,910) (2.8) %

NET INCOME (LOSS) $ 31,816 3.7 % $ (7,668) (1.0) % $ 28,955 1.8 % $ (27,578) (1.9) %

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

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NET COMPREHENSIVE INCOME (LOSS) $ 36,015 4.2 % $ (3,092) (0.4) % $ 37,235 2.3 % $ (39,634) (2.7) %

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

The following tables present selected consolidated comparative results of operations from Option Care Health’s unaudited condensed consolidated financial statements for the three month periods ended March 31, 2021 and March 31, 2020.

Three Months Ended March 31,

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Three Months Ended June 30,

(unaudited) (unaudited) Variance

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Gross profit margin 23.1 % 22.4 %

The increase in net revenue was primarily driven by organic growth in the Company’s portfolio of therapies, consisting of acute revenue that had high single digit growth relative to the prior year while chronic revenue grew in the mid-teens.

The increase in cost of revenue was driven by the growth in revenue.

The increase in gross profit was primarily related to contribution margin from the increase in net revenue.

The slight increase in gross profit margin was driven by mix shift toward higher profit therapies.

Operating Expenses

Three Months Ended June 30,

(unaudited) (unaudited) Variance

(in thousands, except for percentages)

Selling, general and administrative expenses $ 134,257 $ 124,918 $ 9,339 7.5 %

Depreciation and amortization expense 16,619 18,194 (1,575) (8.7) %

Total operating expenses $ 150,876 $ 143,112 $ 7,764 5.4 %

Selling, general and administrative expenses increased for the three months ended June 30, 2021 primarily due to salaries and benefits, but has decreased as a percentage of revenue to 15.6% for the three months ended June 30, 2021 as compared to 16.9% for the three months ended June 30, 2020, as our revenue has grown at a faster pace than our selling, general and administrative expenses.

The decrease in depreciation and amortization was primarily related to a reduction in capital expenditures corresponding with the completion of Merger integration activities during the year ended December 31, 2020.

Other Income (Expense)

Three Months Ended June 30,

(unaudited) (unaudited) Variance

(in thousands, except for percentages)

Interest expense, net $ (17,236) $ (31,432) $ 14,196 (45.2) %

Equity in earnings of joint ventures 1,686 1,012 674 66.6 %

Other, net 5 14 (9) (64.3) %

Total other expense $ (15,545) $ (30,406) $ 14,861 (48.9) %

The decrease in interest expense was primarily attributable to the debt refinancing of the first lien term loan and prepayment of the second lien notes in January 2021, as well as the reduction in the outstanding debt balance due to retirement of debt obligations which were completed during 2020.

See Note 10, Indebtedness , of the unaudited condensed consolidated financial statements.

Income Tax Expense

Three Months Ended June 30,

(unaudited) (unaudited) Variance

(in thousands, except for percentages)

Income tax expense $ 731 $ 470 $ 261 55.5 %

The Company maintains a full valuation allowance, established at the time of Merger, against all of its net U.S.

federal and state deferred tax assets with the exception of approximately $0.4 million of estimated state net operating losses (“NOL”).

Because of the Company’s full valuation allowance, the Company’s tax expense for the three months ended June 30, 2021 only consists of quarterly tax liabilities attributable to separate company state tax returns as well as recognized deferred tax expense.

These tax expense items resulted in an effective tax rate of 2.2% during the three months ended June 30, 2021.

During the three months ended June 30, 2020, the effective tax rate was negative 6.5%.

The variance in the year-over-year effective tax rates is primarily attributable to changes in the valuation allowance combined with year-over-year variances in income (loss) before income taxes for the Company.

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

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

Three Months Ended June 30,

(unaudited) (unaudited) Variance

(in thousands, except for percentages)

Net income (loss) $ 31,816 $ (7,668) $ 39,484 (514.9) %

Other comprehensive income (loss), net of tax:

Changes in unrealized gains (losses) on cash flow hedges, net of income taxes 4,199 4,576 (377) (8.2) %

Other comprehensive income (loss) 4,199 4,576 (377) (8.2) %

Net comprehensive income (loss) $ 36,015 $ (3,092) $ 39,107 (1,264.8) %

The change in net income (loss) was primarily attributed to contribution margin from additional revenue related to organic growth and realization of Merger-related integration savings that resulted in total operating expenses decreasing as a percentage of revenue.

Net comprehensive income was $36.0 million for the three months ended June 30, 2021, compared to net comprehensive loss of $3.1 million for the three months ended June 30, 2020, primarily as a result of the changes in net income (loss), discussed above.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

The following tables present selected consolidated comparative results of operations from the Company’s unaudited condensed consolidated financial statements for the six month periods ended June 30, 2021 and June 30, 2020.

Six Months Ended June 30,

(unaudited) (unaudited) Variance

(in thousands, except for percentages)

Net revenue $ 1,619,509 $ 1,446,288 $ 173,221 12.0 %

Cost of revenue 1,255,068 1,121,939 $ 133,129 11.9 %

Gross profit 364,441 324,349 $ 40,092 12.4 %

Gross profit margin 22.5 % 22.4 %

The increase in net revenue was primarily driven by organic growth in the Company’s portfolio of therapies.

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The increase in gross profit was primarily related to contribution margin from the increase in net revenue.

The slight decrease in gross profit margin was driven by mix shift toward lower profit chronic therapies.

The slight increase in gross profit margin was driven by mix shift toward higher profit therapies.

Operating Expenses

Three Months Ended March 31,

Six Months Ended June 30,

(unaudited) (unaudited) Variance

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Total operating expenses $ 287,255 $ 292,493 $ (5,238) (1.8) %

Selling, general and administrative expenses decreased for the three months ended March 31, 2021 due to a full period of synergy realization from Merger integration activities as well as spending reductions to offset the impacts of the COVID-19 pandemic.

The decrease in depreciation and amortization was primarily related to completing Merger integration activities during the year ended December 31, 2020.

Selling, general and administrative expenses increased slightly for the six months ended June 30, 2021 primarily due to salaries and benefits, but has decreased as a percentage of revenue to 15.7% for the six months ended June 30, 2021 as compared to 17.6% for the six months ended June 30, 2020 due to Merger synergy realization.

Other Income (Expense)

Three Months Ended March 31,

Six Months Ended June 30,

(unaudited) (unaudited) Variance

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Total other expense $ (46,222) $ (57,923) $ 11,701 (20.2) %

The decrease in interest expense was primarily attributable to the debt refinancing of the first lien term loan and prepayment of the second lien notes during the three months ended March 31, 2021, as well as the reduction in the outstanding debt balance due to retirement of debt obligations which were completed during 2020.

See Note 10, Indebtedness , of the unaudited condensed consolidated financial statements.

The increase in other, net relates to the loss on extinguishment of debt of $12.4 million incurred in the first quarter of 2021 in conjunction with the refinancing of the first lien term loan and prepayment of all outstanding principal of the second lien notes.

Income Tax Expense (Benefit)

Three Months Ended March 31,

Income Tax Expense

Six Months Ended June 30,

(unaudited) (unaudited) Variance

(in thousands, except for percentages)

Income tax expense (benefit) $ 1,278 $ 1,041 $ 237 22.8 %

Income tax expense $ 2,009 $ 1,511 $ 498 33.0 %

The Company maintains a full valuation allowance, established at the time of Merger, against all of its net U.S.

federal and state deferred tax assets with the exception of approximately $0.4 million of estimated state net operating losses (“NOL”).

Because of the Company’s full valuation allowance, the Company’s tax expense for the three months ended March 31, 2021 only consists of quarterly tax liabilities attributable to separate company state tax returns as well as recognized deferred tax expense.

These tax expense items resulted in an effective tax rate of negative 80.7% during the three months ended March 31, 2021.

During the three months ended March 31, 2020, the effective tax rate was negative 5.5%.

Because of the Company’s full valuation allowance, the Company’s tax expense for the six months ended June 30, 2021 only consists of quarterly tax liabilities attributable to separate company state taxing authorities as well as recognized deferred tax expense.

These tax expense items created an effective tax rate of 6.5% during the six months ended June 30, 2021.

During the six months ended June 30, 2020, the effective tax rate was negative 5.8%.

Net Loss and Other Comprehensive Income (Loss)

Three Months Ended March 31,

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

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

Six Months Ended June 30,

(unaudited) (unaudited) Variance

(in thousands, except for percentages)

Net loss $ (2,861) $ (19,910) $ 17,049 (85.6) %

Net income (loss) $ 28,955 $ (27,578) $ 56,533 (205.0) %

Other comprehensive income (loss), net of tax:

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Net comprehensive income (loss) $ 37,235 $ (39,634) $ 76,869 (193.9) %

The change in net loss was primarily attributed to contribution margin from additional revenue related to organic growth and realizing a full quarter of integration savings that resulted in total operating expenses decreasing as a percentage of revenue.

The change in net income (loss) was primarily attributed to contribution margin from additional revenue related to organic growth and realizing Merger-related integration savings that resulted in total operating expenses decreasing as a percentage of revenue.

The change in unrealized gains (losses) on cash flow hedges, net of income taxes, primarily related to the increase in fair value on the $925.0 million notional swap as the swap nears maturity in August 2021.

The change in unrealized loss for the three months ended March 31, 2020 related to decreases in variable interest rates, resulting in a corresponding liability on the fair value of the interest rate swaps.

Net comprehensive income was $1.2 million for the three months ended March 31, 2021, compared to net comprehensive loss of $36.5 million for the three months ended March 31, 2020, as a result of the changes in net income (loss), discussed above, along with the impact of the interest rate swaps.

The change in unrealized loss for the six months ended June 30, 2020 related to the decrease in the variable interest rates during 2020, partially offset by the $3.7 million reclassification from accumulated other comprehensive income to interest expense upon discontinuing hedge accounting on the $400.0 million notional interest rate swap.

The change in net comprehensive income (loss) was the result of the change in net income (loss), described above, further increased by the impact of the fair value of the interest rate swaps.

Liquidity and Capital Resources

For the three months ended March 31, 2021 and the twelve months ended December 31, 2020, the Company’s primary sources of liquidity were cash on hand of $109.4 million and $99.3 million, respectively, as well as the $165.4 million of borrowings available under its credit facilities.

During the three months ended March 31, 2021 and the year ended December 31, 2020, the Company’s positive cash flows from operations enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as pursue acquisitions.

For the six months ended June 30, 2021 and the twelve months ended December 31, 2020, the Company’s primary sources of liquidity were cash on hand of $157.5 million and $99.3 million, respectively, as well as the $165.4 million of borrowings available under its credit facilities.

During the six months ended June 30, 2021 and the year ended December 31, 2020, the Company’s positive cash flows from operations enabled investments in pharmacy and information technology infrastructure to support growth and create additional capacity in the future, as well as pursue acquisitions.

The Company’s primary uses of cash include supporting our ongoing business activities and investing in various acquisitions and our infrastructure to support additional business volumes.

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The revolving credit facility contains commitment fees payable on the unused portion of the ABL facility ranging from 0.25% to 0.375%, depending on various factors including the Company’s leverage ratio, type of loan and rate type, and letter of credit fees of 2.5%.

The Company had no outstanding borrowings under the ABL facility at March 31, 2021.

The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL facility of $165.4 million as of March 31, 2021.

The Company had no outstanding borrowings under the ABL facility at June 30, 2021.

The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL facility of $165.4 million as of June 30, 2021.

The principal balance of the first lien term loan was initially repayable in quarterly installments of $2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026.

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Interest was initially 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 3.85% as of June 30, 2021.

The second lien notes initially matured on August 6, 2027.

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See Note 10, Indebtedness , of the unaudited condensed consolidated financial statements included in Item 1 of this report for further discussion.

The interest rate on the first lien term loan was 3.86% as of March 31, 2021.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

The interest rate on the first lien term loan was 3.85% as of June 30, 2021.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

The following table presents selected data from Option Care Health’s unaudited condensed consolidated statements of cash flows:

Three Months Ended March 31,

Six Months Ended June 30,

(unaudited) (unaudited) Variance

2 unchanged sentences

Net cash used in investing activities (25,660) (8,728) (16,932)

Net cash used in financing activities (5,160) (2,862) (2,298)

Net cash (used in) provided by financing activities (8,113) 6,381 (14,494)

Net increase in cash and cash equivalents 58,261 51,043 7,218

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Cash Flows from Operating Activities

Cash flows from operating activities for the three months ended March 31, 2021 were relatively consistent with the prior year as working capital efficiencies and timing of vendor payments continued to drive positive cash flows from operations.

The increase in cash flows provided by operating activities is primarily due to higher net income, working capital efficiencies and timing of vendor payments during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

Cash Flows from Investing Activities

The decrease in cash flows used in investing activities is primarily due to the amount of investments in our pharmacies and infrastructure.

The increase in cash flows used in investing activities is primarily due to the BioCure asset acquisition in the current year.

Cash Flows from Financing Activities

The increase in cash used in financing activities is related to the current year debt refinancing, which resulted in proceeds of debt of $355.2 million, retirement of debt obligations of $352.0 million, deferred financing costs of $2.9 million and debt prepayment penalties of 2.5 million.

The remaining cash used in financing activities was related to quarterly repayments of debt principal of $2.9 million during the three months ended March 31, 2021 compared to $2.3 million for the three months ended March 31, 2020.

The remaining change in financing activities was related to receipt of $11.7 million of CARES Act funds in Q2 2020 with no comparable activity in the six months ended June 30, 2021.

Commitments and Contractual Obligations

The following table presents Option Care Health’s commitments and contractual obligations as of March 31, 2021, as well as its long-term obligations that changed materially from the Company’s annual report on form 10-K (in thousands):

The following table presents Option Care Health’s commitments and contractual obligations as of June 30, 2021, as well as its long-term obligations that changed materially from the Company’s annual report on form 10-K (in thousands):

Payments Due by Period

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(1) Includes aggregate principal payment from the first lien term loan.

(2) Interest payments calculated based on LIBOR rate as of March 31, 2021.

(2) Interest payments calculated based on LIBOR rate as of June 30, 2021.

Actual payments are based on changes in LIBOR.

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Off-Balance Sheet Arrangements

As of March 31, 2021, Option Care Health did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

As of June 30, 2021, Option Care Health did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Critical Accounting Policies and Estimates

3 unchanged sentences

The Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates.

There have been no significant changes in the critical accounting estimates from those described in the Company’s audited consolidated financial statements and related notes, as presented in our Annual report on 10-K for the year ended December 31, 2020, hereby incorporated by reference.

The company’s critical accounting policies and estimates as presented in our Annual report on 10-K for the year ended December 31, 2020 are hereby incorporated by reference.

In addition, the following critical accounting policy should be considered:

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 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.

Changes in projected future earnings could affect the recorded valuation allowance in the future.

On a quarterly basis, the Company evaluates all positive and negative evidence in determining if the valuation allowance is fairly stated.

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.

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis