Option Care Health, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context requires otherwise, references in this report to "Option Care Health," the “Company,” “we,” “us” and “our” refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. (“Option Care Health”, or the “Company”) should be read in conjunction with the audited consolidated financial statements and related notes, as presented in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2021, as well as the Company’s unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act’), including statements regarding our expectations, beliefs, future plans and strategies, anticipated events or trends concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Such forward-looking statements include, but are not limited to, the effect of the novel coronavirus (“COVID-19”) on our business, financial condition and results of operations. This Quarterly Report contains, among others, forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described in Item 1A “Risk Factors”. Investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various factors. Do not place undue reliance on such forward-looking statements as they speak only as of the date they are made. Except as required by law, the Company assumes no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Business Overview Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 144 locations around the United States. The Company contracts with managed care organizations, third-party payers, hospitals, physicians, and other referral sources to provide pharmaceuticals and complex compounded solutions to patients for intravenous delivery in the patients’ homes or other nonhospital settings. Our services are provided in coordination with, and under the direction of, the patient’s physician. Our multidisciplinary team of clinicians, including pharmacists, nurses, dietitians and respiratory therapists, work with the physician to develop a plan of care suited to each patient’s specific needs. We provide home infusion services consisting of anti-infectives, nutrition support, bleeding disorder therapies, immunoglobulin therapy, and other therapies for chronic and acute conditions. HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care, Inc. (“Option Care”). 23 Table of Contents Update on the Impact of the COVID-19 Pandemic The primary operations of the Company focus on providing infusion therapy services and based on the recent impact of the pandemic across the healthcare ecosystem, the Company began experiencing a related impact across a number of facets beginning in March 2020. The Company relies upon patient referrals from multiple sources, including but not limited to patients discharged from acute care settings (e.g., hospitals) and patients requiring treatment for chronic conditions from specialty physicians. As expected, the pandemic has negatively affected new patient referrals for both acute and chronic conditions; however, the Company did experience an increase in patient transfers from hospital and outpatient settings which positively affected revenues. For the 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 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. See Item 1A. “Risk Factors” under the caption “The COVID-19 pandemic could adversely impact our business, results of operations, cash flows and financial position” included in our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion of risks. 24 Table of Contents Composition of Results of Operations The following results of operations include the accounts of Option Care Health and our subsidiaries for the three and six months ended June 30, 2021 and 2020. Gross Profit Gross profit represents our net revenue less cost of revenue. Net Revenue. Infusion and related health care services revenue is reported at the estimated net realizable amounts from third-party payers and patients for goods sold and services rendered. When pharmaceuticals are provided to a patient, revenue is recognized upon delivery of the goods. When nursing services are provided, revenue is recognized when the services are rendered. Due to the nature of the health care industry and the reimbursement environment in which the Company operates, certain estimates are required to record revenue and accounts receivable at their net realizable values at the time goods or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payers may result in adjustments to amounts originally recorded. Cost of Revenue. Cost of revenue consists of the actual cost of pharmaceuticals and other medical supplies dispensed to patients. In addition to product costs, cost of revenue includes warehousing costs, purchasing costs, depreciation expense relating to revenue-generating assets, such as infusion pumps, shipping and handling costs, and wages and related costs for the pharmacists, nurses, and all other employees and contracted workers directly involved in providing service to the patient. The Company receives volume-based rebates and prompt payment discounts from some of its pharmaceutical and medical supplies vendors. These payments are recorded as a reduction of inventory and are accounted for as a reduction of cost of revenue when the related inventory is sold. Operating Costs and Expenses Selling, General and Administrative Expenses . Selling, general and administrative expenses consist principally of salaries for administrative employees that directly and indirectly support the operations, occupancy costs, marketing expenditures, insurance, and professional fees. Depreciation and Amortization Expense. Depreciation within this caption includes infrastructure items such as computer hardware and software, office equipment and leasehold improvements. Depreciation of revenue-generating assets, such as infusion pumps, is included in cost of revenue. Other Income (Expense) Interest Expense, Net . Interest expense consists principally of interest payments on the Company’s outstanding borrowings under the ABL Facility, the first lien term loan and second lien notes, amortization of discount and deferred financing fees, and changes in derivatives not designated as hedging instruments related to the interest rate swaps. Refer to the “Liquidity and Capital Resources” section below for further discussion of these outstanding borrowings. Equity in Earnings of Joint Ventures . Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion joint ventures with health systems. Other, Net . Other income (expense) primarily includes loss on extinguishment of debt incurred in connection with the 2021 debt refinancing and miscellaneous non-operating expenses. Income Tax Expense . The Company is subject to taxation in the United States and various states. 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) . Change in unrealized gains (losses) on cash flow hedges, net of income taxes, consists of the gains and losses associated with the changes in the fair value of derivatives designated as hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes. 25 Table of Contents Results of Operations 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 % COST OF REVENUE 661,304 76.9 % 574,528 77.6 % 1,255,068 77.5 % 1,121,939 77.6 % GROSS PROFIT 198,968 23.1 % 166,320 22.4 % 364,441 22.5 % 324,349 22.4 % OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 134,257 15.6 % 124,918 16.9 % 254,297 15.7 % 254,198 17.6 % Depreciation and amortization expense 16,619 1.9 % 18,194 2.5 % 32,958 2.0 % 38,295 2.6 % Total operating expenses 150,876 17.5 % 143,112 19.3 % 287,255 17.7 % 292,493 20.2 % OPERATING INCOME 48,092 5.6 % 23,208 3.1 % 77,186 4.8 % 31,856 2.2 % OTHER INCOME (EXPENSE): Interest expense, net (17,236) (2.0) % (31,432) (4.2) % (36,717) (2.3) % (59,519) (4.1) % Equity in earnings of joint ventures 1,686 0.2 % 1,012 0.1 % 2,891 0.2 % 1,574 0.1 % Other, net 5 — % 14 — % (12,396) (0.8) % 22 — % Total other expense (15,545) (1.8) % (30,406) (4.1) % (46,222) (2.9) % (57,923) (4.0) % 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 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: Change in unrealized gains (losses) on cash flow hedges, net of income tax expense (benefit) of $0, $0, $0 and $0, respectively 4,199 0.5 % 4,576 0.6 % 8,280 0.5 % (12,056) (0.8) % OTHER COMPREHENSIVE INCOME (LOSS) 4,199 0.5 % 4,576 0.6 % 8,280 0.5 % (12,056) (0.8) % NET COMPREHENSIVE INCOME (LOSS) $ 36,015 4.2 % $ (3,092) (0.4) % $ 37,235 2.3 % $ (39,634) (2.7) % 26 Table of Contents Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 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 June 30, 2021 and June 30, 2020. Gross Profit Three Months Ended June 30, 2021 2020 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net revenue $ 860,272 $ 740,848 $ 119,424 16.1 % Cost of revenue 661,304 574,528 86,776 15.1 % Gross profit $ 198,968 $ 166,320 $ 32,648 19.6 % 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, 2021 2020 (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. 27 Table of Contents Other Income (Expense) Three Months Ended June 30, 2021 2020 (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, 2021 2020 (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. 28 Table of Contents Net Income (Loss) and Other Comprehensive Income (Loss) Three Months Ended June 30, 2021 2020 (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. 29 Table of Contents 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. Gross Profit Six Months Ended June 30, 2021 2020 (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. 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 Six Months Ended June 30, 2021 2020 (unaudited) (unaudited) Variance (in thousands, except for percentages) Selling, general and administrative expenses $ 254,297 $ 254,198 $ 99 — % Depreciation and amortization expense 32,958 38,295 (5,337) (13.9) % Total operating expenses $ 287,255 $ 292,493 $ (5,238) (1.8) % 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. 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. 30 Table of Contents Other Income (Expense) Six Months Ended June 30, 2021 2020 (unaudited) (unaudited) Variance (in thousands, except for percentages) Interest expense, net $ (36,717) $ (59,519) $ 22,802 (38.3) % Equity in earnings of joint ventures 2,891 1,574 1,317 83.7 % Other, net (12,396) 22 (12,418) (56445.5) % 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 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. 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 Six Months Ended June 30, 2021 2020 (unaudited) (unaudited) Variance (in thousands, except for percentages) 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 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%. 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 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. 31 Table of Contents Net Income (Loss) and Other Comprehensive Income (Loss) Six Months Ended June 30, 2021 2020 (unaudited) (unaudited) Variance (in thousands, except for percentages) Net income (loss) $ 28,955 $ (27,578) $ 56,533 (205.0) % Other comprehensive income (loss), net of tax: Changes in unrealized gains (losses) on cash flow hedges, net of income taxes 8,280 (12,056) 20,336 (168.7) % Other comprehensive income (loss) 8,280 (12,056) 20,336 (168.7) % Net comprehensive income (loss) $ 37,235 $ (39,634) $ 76,869 (193.9) % 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 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 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. Ongoing operating cash outflows are primarily associated with procuring and dispensing prescription drugs, personnel and other costs associated with servicing patients, as well as paying cash interest on the outstanding debt. Ongoing investing cash flows are primarily associated with capital projects related to business acquisitions, the improvement and maintenance of our pharmacy facilities and investment in our information technology systems. Ongoing financing cash flows are primarily associated with the quarterly principal payments on our outstanding debt. Our business strategy includes the selective acquisition of additional infusion pharmacies and other related healthcare businesses. We continue to evaluate acquisition opportunities and view acquisitions as a key part of our growth strategy. The Company historically has funded its acquisitions with cash with the exception of the Merger. The Company may require additional capital in excess of current availability in order to complete future acquisitions. It is impossible to predict the amount of capital that may be required for acquisitions, and there is no assurance that sufficient financing for these activities will be available on acceptable terms. Short-Term and Long-Term Liquidity Requirements The Company’s ability to make principal and interest payments on any borrowings under our credit facilities and our ability to fund planned capital expenditures will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, regulatory and other conditions. Based on our current level of operations and planned capital expenditures, we believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. We may require additional borrowings under our credit facilities and alternative forms of financings or investments to achieve our longer-term strategic plans. 32 Table of Contents Credit Facilities The Company’s asset-based-lending (“ABL”) revolving credit facility provides for borrowings up to $175.0 million, which matures on August 6, 2024. The ABL facility bears interest at a per annum rate that is determined by the Company’s periodic selection of rate type, either the Base Rate or the Eurocurrency Rate. The Base Rate is charged between 1.25% and 1.75% and the Eurocurrency Rate is charged between 2.25% and 2.75% based on the historical excess availability as a percentage of the Line Cap, as defined in the ABL facility credit agreement. The revolving credit facility contains commitment fees payable on the unused portion of the ABL facility ranging from 0.25% to 0.375%, depending on various factors including the Company’s leverage ratio, type of loan and rate type, and letter of credit fees of 2.5%. The Company had no outstanding borrowings under the ABL facility at 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. The quarterly principal payments commenced in March of 2020. Interest on the first lien term loan was initially 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 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. Interest on the second lien notes was initially payable quarterly at London Interbank Offered Rate (“LIBOR”), plus 8.75%. The Company paid the second and third quarterly interest payments, due in February 2020 and May 2020. The Company elected to pay-in-kind the quarterly interest payment due in August 2020, which resulted in the Company capitalizing the interest payment to the principal balance on the interest payment date. In August 2020, the Company prepaid $125.0 million of the outstanding principal balance. In December 2020, the Company utilized available cash on hand to prepay an additional $49.0 million of the outstanding principal balance, reducing the outstanding principal balance to $245.8 million as of December 31, 2020. During the three months ended March 31, 2021, the Company entered into an amendment on the first lien term loan (the “First Lien Credit Agreement Amendment”). The First Lien Credit Agreement Amendment resulted in an additional $250.0 million of incremental first lien term loan indebtedness being issued and reduced the interest rate on all outstanding first lien term loan indebtedness from LIBOR plus 4.25% to LIBOR plus 3.75%. The proceeds of the $250.0 million incremental first lien term loan indebtedness were used to prepay the remaining $245.8 million outstanding balance of the second lien notes. Following the First Lien Credit Agreement Amendment, the first lien term loan is repayable in quarterly installments of $2.9 million plus interest, with a final payment of all outstanding principal due on August 6, 2026. 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 3.85% as of June 30, 2021. 33 Table of Contents Cash Flows 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: Six Months Ended June 30, 2021 2020 (unaudited) (unaudited) Variance (in thousands) Net cash provided by operating activities $ 92,034 $ 53,390 $ 38,644 Net cash used in investing activities (25,660) (8,728) (16,932) 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 Cash and cash equivalents - beginning of period 99,265 67,056 32,209 Cash and cash equivalents - end of period $ 157,526 $ 118,099 $ 39,427 Cash Flows from Operating Activities 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 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 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. 34 Table of Contents Commitments and Contractual Obligations 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 Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years (in thousands) Long-term debt obligations (1) $ 1,159,862 $ 11,775 $ 23,550 $ 23,550 $ 1,100,987 Interest payments on long-term debt obligations (2) 227,563 48,052 88,849 87,008 3,654 Total $ 1,387,425 $ 59,827 $ 112,399 $ 110,558 $ 1,104,641 (1) Includes aggregate principal payment from the first lien term loan. (2) Interest payments calculated based on LIBOR rate as of June 30, 2021. Actual payments are based on changes in LIBOR. Calculated interest payments exclude interest rate swap agreements the Company entered into in connection with the long-term debt obligations. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Off-Balance Sheet Arrangements As of 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 The Company prepares its unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), which requires the Company to make estimates and assumptions. The Company evaluates its estimates and judgments on an ongoing basis. Estimates and judgments are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period presented. The Company’s actual results may differ from these estimates, and different assumptions or conditions may yield different estimates. 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: 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 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 35 Table of Contents probability, realizable upon final settlement of the position. Interest and penalties related to unrecognized tax benefits are reported in income tax expense. 36 Table of Contents Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to our exposure to market risk from those included in our Annual Report on Form 10-K for the year ended December 31, 2020, hereby incorporated by reference.