Option Care Health, Inc. 10-Q

Item 1. Financial Statements 4 Table of Contents OPTION CARE HEALTH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS) (unaudited) March 31, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 145,600 $ 119,423 Accounts receivable, net 366,285 338,242 Inventories 217,184 183,095 Prepaid expenses and other current assets 76,643 69,496 Total current assets 805,712 710,256 NONCURRENT ASSETS: Property and equipment, net 109,066 111,535 Operating lease right-of-use asset 74,662 74,777 Intangible assets, net 20,669 21,433 Referral sources 337,882 344,587 Goodwill 1,478,500 1,477,564 Deferred income taxes 14,037 27,033 Other noncurrent assets 37,748 23,733 Total noncurrent assets 2,072,564 2,080,662 TOTAL ASSETS $ 2,878,276 $ 2,790,918 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 356,118 $ 279,246 Accrued compensation and employee benefits 42,046 83,503 Accrued expenses and other current liabilities 85,286 71,857 Current portion of operating lease liability 18,689 19,089 Current portion of long-term debt 6,000 6,000 Total current liabilities 508,139 459,695 NONCURRENT LIABILITIES: Long-term debt, net of discount, deferred financing costs and current portion 1,059,449 1,059,900 Operating lease liability, net of current portion 75,479 74,492 Other noncurrent liabilities 13,445 20,945 Total noncurrent liabilities 1,148,373 1,155,337 Total liabilities 1,656,512 1,615,032 STOCKHOLDERS’ EQUITY: Preferred stock; $ 0.0001 par value; 12,500,000 shares authorized, no shares outstanding as of March 31, 2022 and December 31, 2021, respectively — — Common stock; $ 0.0001 par value: 250,000,000 shares authorized, 180,429,758 shares issued and 180,046,036 shares outstanding as of March 31, 2022; 180,309,637 shares issued and 179,925,915 shares outstanding as of December 31, 2021 18 18 Treasury stock; 383,722 shares outstanding, at cost, as of March 31, 2022 and December 31, 2021, respectively ( 2,403 ) ( 2,403 ) Paid-in capital 1,143,388 1,138,855 Retained earnings 70,142 39,867 Accumulated other comprehensive income (loss) 10,619 ( 451 ) Total stockholders’ equity 1,221,764 1,175,886 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 2,878,276 $ 2,790,918 The notes to unaudited condensed consolidated financial statements are an integral part of these statements. 5 Table of Contents OPTION CARE HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended March 31, 2022 2021 NET REVENUE $ 915,784 $ 759,237 COST OF REVENUE 714,848 593,764 GROSS PROFIT 200,936 165,473 OPERATING COSTS AND EXPENSES: Selling, general and administrative expenses 133,969 120,040 Depreciation and amortization expense 14,722 16,339 Total operating expenses 148,691 136,379 OPERATING INCOME 52,245 29,094 OTHER INCOME (EXPENSE): Interest expense, net ( 12,246 ) ( 19,481 ) Equity in earnings of joint ventures 1,267 1,205 Other, net 2 ( 12,401 ) Total other expense ( 10,977 ) ( 30,677 ) INCOME (LOSS) BEFORE INCOME TAXES 41,268 ( 1,583 ) INCOME TAX EXPENSE 10,993 1,278 NET INCOME (LOSS) $ 30,275 $ ( 2,861 ) OTHER COMPREHENSIVE INCOME, NET OF TAX: Change in unrealized gains on cash flow hedges, net of income tax expense of $ 3,763 and $ 0 , respectively 11,070 4,081 OTHER COMPREHENSIVE INCOME 11,070 4,081 NET COMPREHENSIVE INCOME $ 41,345 $ 1,220 EARNINGS (LOSS) PER COMMON SHARE: Earnings (loss) per share, basic $ 0.17 $ ( 0.02 ) Earnings (loss) per share, diluted $ 0.17 $ ( 0.02 ) Weighted average common shares outstanding, basic 179,961 179,808 Weighted average common shares outstanding, diluted 181,681 179,808 The notes to unaudited condensed consolidated financial statements are an integral part of these statements. 6 Table of Contents OPTION CARE HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Three Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 30,275 $ ( 2,861 ) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization expense 15,979 17,716 Non-cash operating lease costs 3,884 3,810 Deferred income taxes - net 12,996 634 Loss on extinguishment of debt — 12,403 Amortization of deferred financing costs 1,049 1,253 Equity in earnings of joint ventures ( 1,267 ) ( 1,205 ) Stock-based incentive compensation expense 4,178 1,205 Other adjustments 291 96 Changes in operating assets and liabilities: Accounts receivable, net ( 28,766 ) 4,450 Inventories ( 34,089 ) ( 15,021 ) Prepaid expenses and other current assets ( 6,241 ) 12,946 Accounts payable 76,872 8,026 Accrued compensation and employee benefits ( 41,481 ) ( 18,208 ) Accrued expenses and other current liabilities 13,520 ( 2,357 ) Operating lease liabilities ( 4,246 ) ( 5,160 ) Other noncurrent assets and liabilities ( 10,273 ) 653 Net cash provided by operating activities 32,681 18,380 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment ( 5,359 ) ( 3,123 ) Net cash used in investing activities ( 5,359 ) ( 3,123 ) CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options, vesting of restricted stock, and related tax withholdings 355 ( 69 ) Proceeds from issuance of debt — 355,200 Repayments of debt ( 1,500 ) ( 2,944 ) Retirement of debt — ( 352,009 ) Deferred financing costs — ( 2,880 ) Debt prepayment fees — ( 2,458 ) Net cash used in financing activities ( 1,145 ) ( 5,160 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 26,177 10,097 Cash and cash equivalents - beginning of the period 119,423 99,265 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 145,600 $ 109,362 Supplemental disclosure of cash flow information: Cash paid for interest $ 5,104 $ 21,502 Cash paid for income taxes $ 61 $ 111 Cash paid for operating leases $ 6,242 $ 6,768 The notes to unaudited condensed consolidated financial statements are an integral part of these statements. 7 Table of Contents OPTION CARE HEALTH, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (IN THOUSANDS) Preferred Stock Common Stock Treasury Stock Paid-in Capital Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive (Loss) Income Total Stockholders’ Equity Balance - December 31, 2020 $ — $ 18 $ ( 2,403 ) $ 1,129,312 $ ( 100,031 ) $ ( 11,172 ) $ 1,015,724 Exercise of stock options, vesting of restricted stock, and related tax withholdings — — — ( 69 ) — — ( 69 ) Stock-based incentive compensation — — — 1,205 — — 1,205 Net loss — — — — ( 2,861 ) — ( 2,861 ) Other comprehensive income — — — — — 4,081 4,081 Balance - March 31, 2021 $ — $ 18 $ ( 2,403 ) $ 1,130,448 $ ( 102,892 ) $ ( 7,091 ) $ 1,018,080 Balance - December 31, 2021 $ — $ 18 $ ( 2,403 ) $ 1,138,855 $ 39,867 $ ( 451 ) $ 1,175,886 Exercise of stock options, vesting of restricted stock, and related tax withholdings — — — 355 — — 355 Stock-based incentive compensation — — — 4,178 — — 4,178 Net income — — — — 30,275 — 30,275 Other comprehensive income — — — — — 11,070 11,070 Balance - March 31, 2022 — 18 ( 2,403 ) 1,143,388 70,142 10,619 1,221,764 The notes to unaudited condensed consolidated financial statements are an integral part of these statements. 8 Table of Contents OPTION CARE HEALTH, INC. NOTES TO UNAUDITED CONDENSED 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. 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 is listed on the Nasdaq Global Select Market as of March 31, 2022. HC I holds approximately 20.7 % of the common stock of the Company. Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 97 full service pharmacies and 57 stand-alone infusion suites. 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 unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States and contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for interim financial reporting. The results of operations for the interim periods presented are not necessarily indicative of the results of operations for the entire year. These unaudited condensed consolidated financial statements do not include all of the information and notes to the financial statements required by GAAP for complete financial statements and should be read in conjunction with the 2021 audited consolidated financial statements, including the notes thereto, as presented in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2022. Principles of Consolidation — The Company’s unaudited condensed consolidated financial statements include the accounts of Option Care Health, Inc. and its subsidiaries. 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 unaudited condensed 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. 9 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. Prepaid expenses and other current assets — Included in prepaid expenses and other current assets are rebates receivable from pharmaceutical and medical supply manufacturers of $ 47.6 million and $ 43.0 million as of March 31, 2022 and December 31, 2021, respectively. There were no other items included in prepaid expenses and other current assets that comprised 5% or more of total current assets. 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 condensed consolidated balance sheets. As of March 31, 2022 and December 31, 2021, the balance of the investments were $ 21.4 million and $ 20.1 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 are recorded in equity in earnings of joint ventures in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). The Company’s proportionate share of earnings was $ 1.3 million and $ 1.2 million for the three months March 31, 2022. and 2021, respectively. Distributions from the investees are treated as cash inflows from operating activities within other adjustments in the unaudited condensed consolidated statements of cash flows. During the three months March 31, 2022 and 2021, the Company did not receive a distribution from the investees. See Footnote 16, Related-Party Transactions , for discussion of related-party transactions with these investees. Immaterial Error Correction — During the three months ended June 30, 2021, the Company identified prior period misstatements related to the net revenue earned by category of payer for the periods ended September 30, 2020, December 31, 2020, March 31, 2021, and June 30, 2021. Certain individual payers were improperly classified as direct government and instead should have been classified as commercial payers. This error over-stated the Company’s government revenues and under-stated the Company’s commercial revenues in those periods. The Company assessed the materiality of these misstatements both quantitatively and qualitatively and determined the correction of these errors to be immaterial to the prior consolidated financial statements taken as a whole. As a result, the Company has corrected the misstatements as disclosed in the following tables: Three Months ended September 30, 2020 Nine Months ended September 30, 2020 Three Months ended December 31, 2020 Twelve Months ended December 31, 2020 Amount % of Revenue Amount % of Revenue Amount % of Revenue Amount % of Revenue Commercial: As Previously Reported $ 644,385 82.4 % $ 1,893,105 85.0 % $ 649,880 80.8 % $ 2,542,985 83.9 % Adjustment 34,321 4.4 % 34,321 1.5 % 40,806 5.1 % 75,127 2.5 % As Revised 678,706 86.8 % 1,927,426 86.5 % 690,686 85.9 % 2,618,112 86.4 % Government: As Previously Reported 127,435 16.3 % 308,830 13.9 % 141,237 17.6 % 450,067 14.8 % Adjustment ( 34,321 ) ( 4.4 ) % ( 34,321 ) ( 1.5 ) % ( 40,806 ) ( 5.1 ) % ( 75,127 ) ( 2.5 ) % As Revised 93,114 11.9 % 274,509 12.4 % 100,431 12.5 % 374,940 12.3 % 10 Table of Contents Three Months ended March 31, 2021 Three Months ended June 30, 2021 Six Months ended June 30, 2021 Amount % of Revenue Amount % of Revenue Amount % of Revenue Commercial: As Previously Reported $ 611,434 80.5 % $ 703,429 81.8 % $ 1,314,862 81.2 % Adjustment 37,073 4.9 % 43,218 5.0 % 80,292 4.9 % As Revised 648,507 85.4 % 746,647 86.8 % 1,395,154 86.1 % Government: As Previously Reported 134,914 17.8 % 145,799 16.9 % 280,714 17.3 % Adjustment ( 37,073 ) ( 4.9 ) % ( 43,218 ) ( 5.0 ) % ( 80,292 ) ( 4.9 ) % As Revised 97,841 12.9 % 102,581 11.9 % 200,422 12.4 % There was no impact to the Company’s consolidated balance sheets, consolidated statements of comprehensive income (loss) or the consolidated statements of cash flows for any of these periods. 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 % and 16 % for the three months March 31, 2022 and 2021. There were no other managed care contracts that represent greater than 10% of revenue for the periods presented. For the three months March 31, 2022 and 2021, approximately 13 % and 13 %, respectively, of the Company’s revenue was reimbursable through direct government healthcare programs, such as Medicare and Medicaid. As of March 31, 2022 and December 31, 2021, approximately 11 % and 11 %, 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, concentration 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, however, Option Care Health offers a financial assistance program for patients that meet certain defined hardship criteria. For the three months March 31, 2022, approximately 75 % of the Company’s pharmaceutical and medical supply purchases were from four vendors. For the three months March 31, 2021, approximately 67 % of the Company’s pharmaceutical and medical supply purchases were from three 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 remains some uncertainty regarding the COVID-19 pandemic, as of March 31, 2022 the Company has been able to maintain adequate levels of supplies and pharmaceuticals to support its operations. 11 Table of Contents 3. BUSINESS COMBINATIONS AND ASSET ACQUISITIONS Infinity Infusion Nursing LLC — In October 2021, pursuant to the equity purchase agreement dated October 1, 2021, the Company completed the 100 % acquisition of the equity interest in Infinity Infusion LLC (“Infinity”) for a purchase price, net of cash acquired of $ 59.6 million. As of March 31, 2022, the Company has finalized the purchase price allocation of the acquisition and no purchase accounting adjustments were made. Wasatch Infusion LLC Acquisition — In December 2021, pursuant to the executed asset purchase agreement on December 29, 2021, the Company completed the acquisition of Wasatch Infusion LLC (“Wasatch”) for a purchase price of $ 19.5 million. As of March 31, 2022, the Company has finalized the purchase price allocation of the acquisition. Certain adjustments were made to preliminary valuation amounts related to accounts receivable, other assets and other assumed liabilities. The following is a final allocation of the consideration transferred to acquired identifiable assets and assumed liabilities (in thousands): Amount Accounts receivable $ 2,688 Inventories 2,038 Intangible assets 4,245 Other assets 769 Accounts payable ( 6,686 ) Other assumed liabilities ( 965 ) Fair value Identifiable assets and liabilities 2,089 Goodwill (1) 17,366 Purchase Price 19,455 (1) Goodwill is attributable to cost synergies from procurement and operational efficiencies and elimination of duplicative administrative costs. 12 Table of Contents 4. REVENUE The following table sets forth the net revenue earned by category of payer for the three months March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Commercial payers $ 786,278 $ 648,507 Government payers 115,205 97,841 Patients 14,301 12,889 Net revenue $ 915,784 $ 759,237 5. INCOME TAXES During the three months ended March 31, 2022 and 2021, the Company recorded tax expense of $ 11.0 million and $ 1.3 million, respectively, which represents an effective tax rate of 26.6 % and negative 80.7 %, respectively. The variance in the Company’s effective tax rate of 26.6 % for the three months ended March 31, 2022 compared to the Company’s Federal statutory rate of 21% is primarily attributable to current and deferred state taxes as well as various non-deductible expenses. The variance in the Company’s effective tax rate of negative 80.7 % for the three months ended March 31, 2021 compared to the Company’s Federal statutory rate of 21% is primarily attributable to the Company only recognizing certain deferred federal and state tax expense and current state tax expense while any tax benefits that would have otherwise been recognized were offset by the Company’s tax valuation allowance in effect during that period. The Company maintains a valuation allowance of $ 13.2 million against certain state net operating losses (“NOL”). 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 all positive and negative evidence in determining if the valuation allowance is fairly stated. The Company’s tax expense for the three months ended March 31, 2022 of $ 11.0 million consists of quarterly tax liabilities attributable to specific state taxing authorities as well as recognized deferred federal and state tax expense. The company’s tax expense for the three months ended March 31, 2021 of $ 1.3 million consists of quarterly tax liabilities attributed to specific state taxing authorities as well as recognized deferred tax expense. The Company has accumulated U.S. federal net operating loss carryovers that are subject to one or more Section 382 limitations. This may limit the Company’s ability to utilize its U.S. federal net operating losses. 13 Table of Contents 6. EARNINGS (LOSS) PER SHARE The Company presents basic and diluted earnings (loss) per share for its common stock. Basic earnings (loss) per share is calculated by dividing the net income (loss) of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) 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 potentially dilutive securities. The earnings (loss) is used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. The computation of diluted shares for the three months March 31, 2022 includes the effect of shares that would be issued in connection with warrants, stock options and restricted stock awards, as these common stock equivalents are dilutive to the earnings per share recorded in those periods. The computation of diluted shares for the three months ended March 31, 2021 excludes the effect of these common stock equivalents as their inclusion would be anti-dilutive to the loss per share recorded in the period. As of March 31, 2022 there were 457,752 warrants, 770,303 stock option awards, and 269,670 restricted stock awards outstanding that were excluded from the calculation of earnings per share as they would be anti-dilutive. As of March 31, 2021 , there were 2,285,784 warrants, 789,586 stock options and 1,080,334 restricted stock awards outstanding that were excluded from the calculation of earnings per share as they would be anti-dilutive. The following table presents the Company’s basic earnings (loss) per share and shares outstanding (in thousands, except per share data): Three Months Ended March 31, 2022 2021 Numerator: Net income (loss) $ 30,275 $ ( 2,861 ) Denominator: Weighted average number of common shares outstanding 179,961 179,808 Earnings (loss) per common share: Earnings (loss) per common share, basic $ 0.17 $ ( 0.02 ) The following table presents the Company’s diluted earnings (loss) per share and shares outstanding (in thousands, except per share data): Three Months Ended March 31, 2022 2021 Numerator: Net income (loss) $ 30,275 $ ( 2,861 ) Denominator: Weighted average number of common shares outstanding 179,961 179,808 Effect of dilutive securities 1,720 — Weighted average number of common shares outstanding, diluted 181,681 179,808 Earnings (loss) per common share: Earnings (loss) per common share, diluted $ 0.17 $ ( 0.02 ) , 14 Table of Contents 7. LEASES During the three months March 31, 2022 and 2021, the Company incurred operating lease expenses of $ 7.3 million and $ 7.5 million, respectively, including short-term lease expense, which were included as a component of selling, general and administrative expense in the unaudited condensed consolidated statements of comprehensive income (loss). As of March 31, 2022, the weighted-average remaining lease term was 6.9 years and the weighted-average discount rate was 5.09 %. Operating leases mature as follows (in thousands): Fiscal Year Ended December 31, Minimum Payments 2022 $ 19,872 2023 20,992 2024 15,416 2025 12,682 2026 9,697 Thereafter 34,371 Total lease payments $ 113,030 Less: Interest ( 18,862 ) Present value of lease liabilities $ 94,168 During the three months March 31, 2022, the Company commenced new leases, extensions and amendments, resulting in non-cash operating activities in the unaudited condensed consolidated statements of cash flow o f $ 3.8 million re lated to increases in the operating lease right-of-use asset and operating lease liabilities, respectively. As of March 31, 2022, the Company did not have any significant operating or financing leases that had not yet commenced. 15 Table of Contents 8. PROPERTY AND EQUIPMENT Property and equipment was as follows as of March 31, 2022 and December 31, 2021 (in thousands): March 31, 2022 December 31, 2021 Infusion pumps $ 36,995 $ 34,547 Equipment, furniture and other 55,267 52,913 Leasehold improvements 96,477 92,229 Computer software, purchased and internally developed 32,764 30,744 Assets under development 14,442 19,924 235,945 230,357 Less: accumulated depreciation 126,879 118,822 Property and equipment, net $ 109,066 $ 111,535 Depreciation expense is recorded within cost of revenue and operating expenses within the unaudited condensed 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 three months March 31, 2022 and 2021 (in thousands): Three Months Ended March 31, 2022 2021 Depreciation expense in cost of revenue $ 1,257 $ 1,377 Depreciation expense in operating expenses 7,188 7,598 Total depreciation expense $ 8,445 $ 8,975 16 Table of Contents 9. GOODWILL AND OTHER INTANGIBLE ASSETS Changes in the carrying amount of goodwill consists of the following activity for the three months ended March 31, 2022 (in thousands): Balance at December 31, 2021 $ 1,477,564 Purchase accounting adjustments 936 Balance at March 31, 2022 $ 1,478,500 There were no changes in the carrying amount of goodwill for the three months March 31, 2021. The carrying amount and accumulated amortization of intangible assets consists of the following as of March 31, 2022 and December 31, 2021 (in thousands): March 31, 2022 December 31, 2021 Gross intangible assets: Referral sources $ 482,407 $ 482,200 Trademarks/names 47,718 47,718 Other amortizable intangible assets 830 1,037 Total gross intangible assets 530,955 530,955 Accumulated amortization: Referral sources ( 144,525 ) ( 137,613 ) Trademarks/names ( 27,476 ) ( 26,936 ) Other amortizable intangible assets ( 403 ) ( 386 ) Total accumulated amortization ( 172,404 ) ( 164,935 ) Total intangible assets, net $ 358,551 $ 366,020 Amortization expense for intangible assets was $ 7.5 million and $ 8.7 million for the three months ended March 31, 2022 and 2021, respectively. 17 Table of Contents 10. INDEBTEDNESS Long-term debt consisted of the following as of March 31, 2022 (in thousands): Principal Amount Discount Debt Issuance Costs Net Balance Asset-based-lending (“ABL”) facility $ — $ — $ — $ — First Lien Term Loan 598,500 ( 9,288 ) ( 12,892 ) 576,320 Senior Notes 500,000 — ( 10,871 ) 489,129 $ 1,098,500 $ ( 9,288 ) $ ( 23,763 ) 1,065,449 Less: current portion ( 6,000 ) Total long-term debt $ 1,059,449 Long-term debt consisted of the following as of December 31, 2021 (in thousands): Principal Amount Discount Debt Issuance Costs Net Balance ABL facility $ — $ — $ — $ — First Lien Term Loan 600,000 ( 9,605 ) ( 13,331 ) 577,064 Senior Notes 500,000 — ( 11,164 ) 488,836 $ 1,100,000 $ ( 9,605 ) $ ( 24,495 ) 1,065,900 Less: current portion ( 6,000 ) Total long-term debt $ 1,059,900 The interest rate on the First Lien Term Loa n was 3.25 % as of March 31, 2022 and December 31, 2021, respectively. The weighted average interest rate incurred on the First Lien Term Loan was 3.25 % and 3.97 % for the three months March 31, 2022 and 2021, respectively. The interest rate on the Senior Notes was 4.375 % as of March 31, 2022 and December 31, 2021. The weighted average interest rate incurred on the Senior Secured Notes was 4.375 % for the three months March 31, 2022. The weighted average interest rate incurred on the Second Lien Notes was 8.98 % for the period January 1, 2021 through January 20, 2021, prior to the repayment of the outstanding balance. Long-term debt matures as follows (in thousands): Fiscal Year Ended December 31, Minimum Payments 2022 $ 4,500 2023 6,000 2024 6,000 2025 6,000 2026 6,000 Thereafter 1,070,000 Total $ 1,098,500 During the three months March 31, 2022 and 2021, the Company engaged in hedging activities to limit its exposure to changes in interest rates. See Note 11, Derivative Instruments , for further discussion. The following table presents the estimated fair values of the Company’s debt obligations as of March 31, 2022 (in thousands): 18 Table of Contents Financial Instrument Carrying Value as of March 31, 2022 Markets for Identical Item (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) First Lien Term Loan $ 576,320 $ — $ 592,515 $ — Senior Notes 489,129 — 472,500 — Total debt instruments $ 1,065,449 $ — $ 1,065,015 $ — See Note 12, Fair Value Measurements , for further discussion. 19 Table of Contents 11. DERIVATIVE INSTRUMENTS The Company uses derivative financial instruments for hedging and non-trading purposes to limit the Company’s exposure to increases in interest rates related to its variable interest rate debt. Use of derivative financial instruments in hedging programs 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. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. 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. In October 2021, the Company entered into an interest rate cap hedge with a notional amount of $ 300 million for a 5 -year term beginning November 30, 2021. The hedge partially offsets risk associated with the First Lien Term Loan Facility’s variable interest rate. The interest rate cap instrument perfectly offsets the terms of the interest rates associated with the variable interest rate of the First Lien Term Loan. The following table summarizes the amount and location of the Company’s derivative instruments in the condensed consolidated balance sheets (in thousands): Fair value - Derivatives in asset position Derivative Balance Sheet Caption March 31, 2022 December 31, 2021 Interest rate cap designated as cash flow hedge Prepaid expenses and other current assets $ 1,408 $ — Interest rate cap designated as cash flow hedge Other noncurrent assets 12,824 — Fair value - Derivatives in liability position Derivative Balance Sheet Caption March 31, 2022 December 31, 2021 Interest rate cap designated as cash flow hedge Accrued expenses and other current liabilities $ — $ 601 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 following table presents the pre-tax gains (losses) from derivative instruments recognized in other comprehensive (loss) income in the Company’s unaudited condensed consolidated statements of comprehensive income (loss) (in thousands): Three Months Ended March 31, Derivative 2022 2021 Interest rate cap designated as cash flow hedge $ 14,833 $ — Interest rate swaps designated as cash flow hedges — 4,081 $ 14,833 $ 4,081 The following table presents the amount and location of pre-tax income (loss) recognized in the Company’s unaudited condensed consolidated statement of comprehensive income (loss) related to the Company’s derivative instruments (in thousands): Three Months Ended March 31, Derivative Income Statement Caption 2022 2021 Interest rate cap designated as cash flow hedge Interest expense $ 694 $ — Interest rate swaps designated as cash flow hedges Interest expense — ( 4,149 ) Interest rate swaps not designated as hedges Interest expense — ( 1 ) $ 694 $ ( 4,150 ) 20 Table of Contents 12. 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 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. 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 10, Indebtedness , for further discussion of the carrying amount and fair value of the first lien term loan. Senior Notes: The fair value of the Senior Notes is derived from a broker quote (Level 2 inputs). See Note 10, Indebtedness , for further discussion of the carrying amount and fair value of the Senior Notes. Interest rate cap: The fair value of the interest rate cap is 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 11, Derivative Instruments , for further discussion of the fair value of the interest rate cap. There were no other assets or liabilities measured at fair value at March 31, 2022 and December 31, 2021. 13. 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 condensed 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. 21 Table of Contents 14. 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 and amended and restated on May 19, 2021, 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, resulting in a total of 9,101,734 shares of common stock are authorized for issuance. The 2018 plan is administered by the Company’s Compensation Committee, a standing committee of the Board of Directors. The Company had stock options, restricted stock and performance stock units outstanding related to the 2018 Plan as of March 31, 2022. As of March 31, 2021, the Company also had incentive units outstanding related to the HC I equity incentive plan, which was implemented in October 2015, for certain officers and employees of the Company. During the three months March 31, 2022 and 2021 total stock-based incentive compensation expense recognized by the Company related to these plans was $ 4.2 million and $ 1.2 million, respectively . 15. STOCKHOLDERS’ EQUITY 2017 Warrants — During the three months March 31, 2022 and 2021, warrant holders did not elect to exercise any warrants to purchase shares of common stock.. As of March 31, 2022 and December 31, 2021, the remaining warrant holders are entitled to purchase 1.4 million shares of common stock, respectively. 2015 Warrants — Warrant holders exercised an immaterial number of warrants to purchase shares of common stock during the three months March 31, 2022. Warrant holders did not elect to exercise any warrants to purchase shares of common stock during the three months ended March 31, 2021. As of March 31, 2022 and December 31, 2021, warrant holders are entitled to purchase 0.9 million shares of common stock, respectively. 16. RELATED-PARTY TRANSACTIONS 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 $ 0.9 million and $ 0.8 million for the three months March 31, 2022 and 2021, respectively. Management fees are recorded in net revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). The Company had amounts due from its joint ventures of $ 1.1 million and amounts due to its joint ventures of $ 0.5 million as of March 31, 2022. Receivables were included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. Payables were included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets. The Company also had amounts due to its joint ventures of $ 1.4 million as of December 31, 2021. These balances primarily relate to cash collections received by the Company on behalf of the joint ventures, offset by certain pharmaceutical inventories and other expenses paid for by the Company on behalf of the joint ventures. 17. SUBSEQUENT EVENTS The Company has evaluated whether any subsequent events occurred since March 31, 2022, and noted the following subsequent event: On April 11, 2022, the Company closed the transaction to acquire Specialty Pharmacy Nursing Network, Inc. (“SPNN”) for $ 60 million in an all-cash transaction. SPNN is a national leader in providing highly skilled specialty nursing resources across a broad portfolio of healthcare providers with over 400 nurses across the country. 22 Table of Contents