QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-11993
OPTION CARE HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware
05-0489664
(State of incorporation)
(I.R.S. Employer Identification No.)
3000 Lakeside Dr.
Suite 300N,
Bannockburn,
IL
60015
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:
312-940-2443
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
OPCH
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐Accelerated filer☑ Non-accelerated filer ☐ Smaller reporting company ☐Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
On November 2, 2021, there were 179,875,193 shares of the registrant’s Common Stock outstanding.
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
(unaudited)
September 30, 2021
December 31, 2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
200,856
$
99,265
Accounts receivable, net
355,650
328,340
Inventories
189,830
158,601
Prepaid expenses and other current assets
64,848
70,806
Total current assets
811,184
657,012
NONCURRENT ASSETS:
Property and equipment, net
106,788
121,149
Operating lease right-of-use asset
71,992
68,795
Intangible assets, net
343,764
351,052
Goodwill
1,428,610
1,428,610
Other noncurrent assets
23,806
20,821
Total noncurrent assets
1,974,960
1,990,427
TOTAL ASSETS
$
2,786,144
$
2,647,439
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
$
318,561
$
282,913
Accrued compensation and employee benefits
64,676
58,899
Accrued expenses and other current liabilities
71,759
64,075
Current portion of operating lease liability
18,893
18,886
Current portion of long-term debt
11,775
9,250
Total current liabilities
485,664
434,023
NONCURRENT LIABILITIES:
Long-term debt, net of discount, deferred financing costs and current portion
1,117,823
1,115,103
Operating lease liability, net of current portion
71,684
70,776
Deferred income taxes
4,519
3,339
Other noncurrent liabilities
8,974
8,474
Total noncurrent liabilities
1,203,000
1,197,692
Total liabilities
1,688,664
1,631,715
STOCKHOLDERS’ EQUITY:
Preferred stock; $0.0001 par value; 12,500,000 shares authorized, no shares outstanding as of September 30, 2021 and December 31, 2020, respectively
—
—
Common stock; $0.0001 par value: 250,000,000 shares authorized, 180,258,555 shares issued and 179,874,833 shares outstanding as of September 30, 2021; 180,178,308 shares issued and 179,794,586 shares outstanding as of December 31, 2020
18
18
Treasury stock; 383,722 shares outstanding, at cost, as of September 30, 2021 and December 31, 2020, respectively
(2,403)
(2,403)
Paid-in capital
1,135,465
1,129,312
Accumulated deficit
(35,600)
(100,031)
Accumulated other comprehensive loss
—
(11,172)
Total stockholders’ equity
1,097,480
1,015,724
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,786,144
$
2,647,439
The notes to unaudited condensed consolidated financial statements are an integral part of these statements.
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 September 30, 2021. See Note 15, Stockholders’ Equity, for further discussion of HC I’s ownership as of September 30, 2021.
Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 98 full service pharmacies. 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 2020 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 March 11, 2021.
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.
Cash and Cash Equivalents — The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
In April 2020, the Company received $11.7 million in Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) grant funds from the federal government, which was reflected in the second quarter 2020 as a cash inflow from financing activities within other financing cash flows in the unaudited condensed consolidated statements of cash flows. During the third quarter 2020, the Company returned the funds as unused to the federal government, which was reflected as a cash outflow from financing activities within other financing cash flows in the unaudited condensed consolidated statements of cash flows.
Prepaid expenses and other current assets — Included in prepaid expenses and other current assets are rebates receivable from pharmaceutical and medical supply manufacturers of $36.9 million and $35.2 million as of September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, the balance of the investments were $20.3 million and $17.0 million, respectively. The investments are increased to reflect the Company’s capital contributions and equity in earnings of the investees. The investments are decreased to reflect the Company’s equity in losses of the investees and for distributions received that are not in excess of the carrying amount of the investments. The Company’s proportionate share of earnings or losses of the investees 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 $1.7 million and $4.6 million for the three and nine months ended September 30, 2021. The Company’s proportionate share of earnings was $0.8 million and $2.4 million for the three and nine months ended September 30, 2020. 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 and nine months ended September 30, 2021, the Company received distributions from the investees of $1.3 million and $1.3 million, respectively. During the three and nine months ended September 30, 2020, the Company received distributions from the investees of $2.3 million and $2.8 million, respectively. 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:
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 approximately16% and 16% for the three and nine months ended September 30, 2021. Revenue related to the Company’s largest payer was approximately 16% and 15% for the three and nine months ended September 30, 2020, respectively. In December 2019, the Company renewed and expanded its multi-year contract with this payer. The contract renewal was effective in February 2020 for a two-year term and auto-renews annually thereafter unless notice is provided. There were no other managed care contracts that represent greater than 10% of revenue for the periods presented.
For the three and nine months ended September 30, 2021, approximately 12% and 12%, respectively, of the Company’s revenue was reimbursable through direct government healthcare programs, such as Medicare and Medicaid. For the three and nine months ended September 30, 2020, approximately 12% and 12%, respectively, of the Company’s revenue was reimbursable through direct government healthcare programs, such as Medicare and Medicaid. As of September 30, 2021 and December 31, 2020, respectively, approximately 11% and 15%, 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 and nine months ended September 30, 2021, approximately 65% and 65%, respectively, of the Company’s pharmaceutical and medical supply purchases were from three vendors. For the three and nine months ended September 30, 2020, approximately 71% and 72%, respectively, 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 September 30, 2021 the Company has been able to maintain adequate levels of supplies and pharmaceuticals to support its operations.
BioCure Asset Acquisition — In April 2021, pursuant to the Asset Purchase Agreement dated April 7, 2021, the Company completed the acquisition of certain assets of BioCure, LLC (“BioCure”) for a purchase price of $18.9 million.
The allocation of the purchase price of BioCure was accounted for as an asset acquisition in accordance with ASC Topic 805, Business Combinations, with the total purchase price being allocated to the assets acquired based on the relative fair value of each asset. The purchase price was allocated to the assets acquired as follows:
Amount
Inventories
$
601
Intangible assets, net
18,251
Total consideration transferred
$
18,852
Intangibles assets, net consists of referral sources which were assigned a useful life of 15 years, amortized on a straight-line basis.
The following table sets forth the net revenue earned by category of payer for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Commercial payers
$
769,524
$
678,706
$
2,164,678
$
1,927,426
Government payers
106,645
93,114
307,067
274,509
Patients
15,768
9,789
39,701
25,962
Net revenue
$
891,937
$
781,609
$
2,511,446
$
2,227,897
5. INCOME TAXES
During the three and nine months ended September 30, 2021, the Company recorded tax expense of $3.1 million and $5.1 million, respectively, which represents an effective tax rate of 8.0% and 7.3%, respectively. During the three and nine months ended September 30, 2020 the Company recorded a tax expense of $0.8 million and $2.3 million, respectively, which represents an effective tax rate of 31.3% and (9.6)%, respectively.
The Company maintains a full valuation allowance of $97.3 million against all of its net U.S. federal and state deferred tax assets with the exception of $0.3 million of estimated 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.
Based on the Company’s full valuation allowance, as noted above, the Company’s tax expense for the three and nine months ended September 30, 2021 of $3.1 million and $5.1 million consists of quarterly tax liabilities attributable 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.
The Company recorded no income tax expense or benefit for the three or nine months ended September 30, 2021 and 2020 associated with the tax provisions of the CARES Act.
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 and nine months ended September 30, 2021 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 nine months ended September 30, 2020 excludes the effect of these common stock equivalents as their inclusion would be anti-dilutive to the loss per share recorded in the period. For the three months ended September 30, 2021 there were 457,754 warrants, 496,929 stock option awards, and 38,536 restricted stock awards outstanding that were excluded from the calculation of earnings per share as they would be anti-dilutive. For the nine months ended September 30, 2021 there were 915,507 warrants, 387,656 stock option awards, and 272,540 restricted stock awards outstanding that were excluded from the calculation of earnings per share as they would be anti-dilutive. For the three months ended September 30, 2020, there were 915,507 warrants, 296,876 stock options and 312,984 restricted stock awards outstanding that were excluded from the calculation of earnings per share as they would be anti-dilutive. For the nine months ended September 30, 2020, there were 2,328,120 warrants, 424,878 stock options and 600,483 restricted stock awards outstanding that were excluded from the calculation of loss 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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Numerator:
Net income (loss)
$
35,476
$
1,663
$
64,431
$
(25,915)
Denominator:
Weighted average number of common shares outstanding
179,872
184,232
179,841
179,220
Earnings (loss) per common share:
Earnings (loss) per common share, basic
$
0.20
$
0.01
$
0.36
$
(0.14)
The following table presents the Company’s diluted earnings (loss) per share and shares outstanding (in thousands, except per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Numerator:
Net income (loss)
$
35,476
$
1,663
$
64,431
$
(25,915)
Denominator:
Weighted average number of common shares outstanding
179,872
184,232
179,841
179,220
Effect of dilutive securities
1,558
590
1,214
—
Weighted average number of common shares outstanding, diluted
During the three and nine months ended September 30, 2021, the Company incurred operating lease expenses of $7.8 million and $22.3 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). During the three and nine months ended September 30, 2020, the Company incurred operating lease expense of $7.6 million and $23.0 million, respectively, including short-term lease expenses, which were included as a component of selling, general and administrative expenses in the unaudited condensed consolidated statements of comprehensive income (loss). As of September 30, 2021, the weighted-average remaining lease term was 6.44 and the weighted-average discount rate was 5.09%.
Operating leases mature as follows (in thousands):
Fiscal Year Ending December 31,
Minimum Payments
2021
$
8,379
2022
22,679
2023
19,324
2024
13,757
2025
11,053
Thereafter
32,682
Total lease payments
$
107,874
Less: Interest
17,297
Present value of lease liabilities
$
90,577
During the three and nine months ended September 30, 2021, the Company commenced new leases, extensions and amendments, resulting in non-cash investing and financing activities in the unaudited condensed consolidated statements of cash flow of $14.5 million related to increases in the operating lease right-of-use asset and operating lease liabilities, respectively. During the three and nine months ended September 30, 2020, the Company commenced new leases, extensions and amendments, resulting in non-cash investing and financing activities in the unaudited condensed consolidated statements of cash flow of $20.1 million related to increases in the operating lease right-of-use asset and operating lease liabilities, respectively. As of September 30, 2021, the Company did not have any significant operating or financing leases that had not yet commenced.
Property and equipment was as follows as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, 2021
December 31, 2020
Infusion pumps
$
34,249
$
31,678
Equipment, furniture and other
53,770
47,886
Leasehold improvements
91,789
87,483
Computer software, purchased and internally developed
29,804
27,799
Assets under development
7,894
10,793
217,506
205,639
Less: accumulated depreciation
110,718
84,490
Property and equipment, net
$
106,788
$
121,149
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 and nine months ended September 30, 2021 and 2020 (in thousands):
There was no change in the carrying amount of goodwill for the three or nine months ended September 30, 2021.
Changes in the carrying amount of goodwill consists of the following activity for the three and nine months ended September 30, 2020 (in thousands):
Balance at December 31, 2019
$
1,425,542
Merger purchase accounting adjustments
2,341
Balance at March 31, 2020
$
1,427,883
Merger purchase accounting adjustments
727
Balance at June 30, 2020
$
1,428,610
Changes
—
Balance at September 30, 2020
$
1,428,610
The carrying amount and accumulated amortization of intangible assets consists of the following as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, 2021
December 31, 2020
Gross intangible assets:
Referral sources
$
456,372
$
438,121
Trademarks/names
44,536
44,536
Other amortizable intangible assets
402
402
Total gross intangible assets
501,310
483,059
Accumulated amortization:
Referral sources
(130,758)
(110,498)
Trademarks/names
(26,403)
(21,146)
Other amortizable intangible assets
(385)
(363)
Total accumulated amortization
(157,546)
(132,007)
Total intangible assets, net
$
343,764
$
351,052
Amortization expense for intangible assets was $7.9 million and $25.5 million for the three and nine months ended September 30, 2021, respectively. Amortization expense for intangible assets was $8.8 million and $26.3 million for the three and nine months ended September 30, 2020, respectively.
Long-term debt consisted of the following as of September 30, 2021 (in thousands):
Principal Amount
Discount
Debt Issuance Costs
Net Balance
Asset-based-lending (“ABL”) facility
$
—
$
—
$
—
$
—
First lien term loan
1,156,919
(8,731)
(18,590)
1,129,598
Second lien notes
—
—
—
—
$
1,156,919
$
(8,731)
$
(18,590)
1,129,598
Less: current portion
(11,775)
Total long-term debt
$
1,117,823
Long-term debt consisted of the following as of December 31, 2020 (in thousands):
Principal Amount
Discount
Debt Issuance Costs
Net Balance
ABL facility
$
—
$
—
$
—
$
—
First lien term loan
915,750
(7,253)
(19,710)
888,787
Second lien notes
245,781
(6,102)
(4,113)
235,566
$
1,161,531
$
(13,355)
$
(23,823)
1,124,353
Less: current portion
(9,250)
Total long-term debt
$
1,115,103
In January 2021, the Company entered into an amendment on the First Lien Term Loan (the “First Lien Credit Agreement Amendment”). The First Lien Credit Agreement Amendment resulted in an additional $250.0 million of incremental First Lien Term Loan indebtedness being issued and reduced the interest rate on all outstanding First Lien Term Loan indebtedness from LIBOR plus 4.25% to LIBOR plus 3.75%. The proceeds of the $250.0 million incremental First Lien Term Loan indebtedness were used to prepay the remaining $245.8 million outstanding balance of the Second Lien Notes. Following the First Lien Credit Agreement Amendment, the First Lien Term Loan is repayable in quarterly installments of $2.9 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026.
The Company assessed whether the repayment of the Second Lien Notes by issuing incremental First Lien Term Loan indebtedness resulted in an insubstantial modification or an extinguishment of the existing debt for each loan in the syndication by grouping lenders as follows: (i) Lenders participating in both the First Lien Term Loan and Second Lien Notes; (ii) previous lenders that exited; and (iii) new lenders. The Company determined that $161.2 million of the First Lien Term Loan was extinguished and $122.9 million of the Second Lien Term Loan was extinguished, which is disclosed as an outflow from financing activities in the condensed consolidated statements of cash flows. The First Lien Term Loan and Second Lien Notes had insubstantial modifications for lenders that participated in both debt instruments, which resulted in a cash outflow from financing activities of $352.0 million in the condensed consolidated statements of cash flows. The Company determined that $356.2 million of new debt was issued related to the First Lien Term Loan, which is disclosed as an inflow from financing activities in the condensed consolidated statements of cash flows. In connection with the prepayment of the Second Lien Notes and incremental First Lien Term Loan indebtedness, the Company incurred $7.2 million in debt issuance costs and third-party fees, of which $3.7 million was capitalized, $0.9 million was expensed as a component of other expense and $2.6 million was expensed as a loss on extinguishment as a component of other expense in the condensed consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2021. Further, $1.0 million of the total fees incurred of $7.2 million was netted against the $356.2 million of proceeds from debt as a component of the cash flows from financing activities, $2.9 million was presented as deferred financing costs as a component of cash flows from financing activities, $2.4 million was presented as debt prepayment fees as a component of cash flows from financing activities, and the remaining $0.9 million was included in cash flows from operating activities in the condensed consolidated statements of cash flows.
The Company recognized a loss on extinguishment of debt of $12.4 million included in the line entitled “Other, net” in the unaudited condensed consolidated statements of comprehensive income (loss) for the nine months ended September 30, 2021, of which $2.6 million related to debt issue costs incurred with the incremental First Lien Term Loan indebtedness and prepayment of the Second Lien Notes, as discussed above, and $9.8 million related to existing deferred financing fees that were written off upon extinguishment. All remaining deferred financing fees that existed prior to the First Lien Credit Agreement
Amendment were attributed to modified loans, and were capitalized and amortized over the remaining term of the First Lien Term Loan.
The interest rate on the First Lien Term Loan was 3.83% and 4.40% as of September 30, 2021 and December 31, 2020, respectively. The weighted average interest rate incurred on the First Lien Term Loan was 3.84% and 5.87% for the three and nine months ended September 30, 2021. The weighted average interest rate incurred on the previous First Lien Term Loan was 4.67% and 5.29% for the three and nine months ended September 30, 2020, respectively. The interest rate on the Second Lien Notes was 8.98% as of December 31, 2020. 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. The weighted average interest rate incurred on the Second Lien Notes was 9.51% and 10.17% for the three and nine months ended September 30, 2020.
Long-term debt matures as follows (in thousands):
Year Ending December 31,
Minimum Payments
2021
$
2,944
2022
11,775
2023
11,775
2024
11,775
2025
11,775
Thereafter
1,106,875
Total
$
1,156,919
In October 2021, the Company entered into an amendment on the First Lien Term Loan, to provide $600 million of refinanced borrowings. In October 2021, the Company also issued $500 million in aggregate principal amount of senior notes. See Note 17, Subsequent Events, for further discussion.
During the three and nine months ended September 30, 2021 and 2020, 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 September 30, 2021 (in thousands):
Financial Instrument
Carrying Value as of September 30, 2021
Markets for Identical Item (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
First lien term loan
$
1,129,598
$
—
$
1,156,919
$
—
Second lien notes
—
—
—
—
Total debt instruments
$
1,129,598
$
—
$
1,156,919
$
—
The following table sets forth the changes in Level 3 measurements for the three months ended March 31, 2021 (in thousands). As the Second Lien Notes were prepaid in Q1, there was no change in the fair value thereafter.
Level 3 Measurements
Second lien notes fair value as of January 1, 2021
$
266,438
Principal prepayment
(245,781)
Change in fair value
(20,657)
Second lien notes fair value as of March 31, 2021
$
—
See Note 12, Fair Value Measurements, for further discussion.
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 August 2019, the Company entered into interest rate swap agreements that reduce the variability in the interest rates on the newly-issued debt obligations following the Merger with BioScrip. The first interest rate swap for $925.0 million notional was effective in August 2019 with $911.1 million designated as a cash flow hedge against the underlying interest rate on the first lien term loan interest payments indexed to one-month London Interbank Offered Rate (“LIBOR”) through August 2021. In accordance with ASU 2017-12, Targeted Improvements to Accounting for Hedges, the Company has determined that the $911.1 million designated cash flow hedge is perfectly effective. The remaining $13.9 million notional amount of the interest rate swap is not designated as a hedging instrument. The first interest rate swap expired in August 2021. The second interest rate swap of $400.0 million notional was effective in November 2019 and was designated as a cash flow hedge against the underlying interest rate on the second lien notes interest payments indexed to three-month LIBOR through November 2020.
In May 2020, the Company elected to pay-in-kind (“PIK”) the second lien note’s quarterly interest payment due in August 2020. Upon making the PIK election, the Company determined that the hedged interest payment would no longer occur, resulting in an ineffective hedge, so the Company discontinued hedge accounting on its $400.0 million notional interest rate swap. As a result, the Company reclassified accumulated comprehensive loss of $3.7 million to interest expense, net in the unaudited condensed consolidated statements of comprehensive income (loss). The gains and losses associated with the $400.0 million notional swap were recognized in net income (loss) through interest expense until the swap expired in November 2020.
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 liability position
Derivative
Balance Sheet Caption
September 30, 2021
December 31, 2020
Interest rate swaps designated as cash flow hedges
Accrued expenses and other current liabilities
$
—
$
11,172
Interest rate swaps not designated as cash flow hedges
The gain and loss associated with the changes in the fair value of the effective portion of the hedging instrument are recorded into other comprehensive (loss) income. The gain and loss associated with the changes in the fair value of the $13.9 million notional amount not designated as a hedging instrument is recognized in net income (loss) through interest expense. The following table presents the pre-tax gains (losses) from derivative instruments recognized in other comprehensive (loss) income in the Company’s unaudited condensed consolidated statements of comprehensive income (loss) (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
Derivative
2021
2020
2021
2020
Interest rate swaps designated as cash flow hedges
$
2,892
$
4,022
$
11,172
$
(11,780)
Interest rate swaps that discontinued hedge accounting
—
—
—
3,746
$
2,892
$
4,022
$
11,172
$
(8,034)
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 September 30,
Nine Months Ended September 30,
Derivative
Income Statement Caption
2021
2020
2021
2020
Interest rate swaps designated as cash flow hedges
Interest expense
$
(2,903)
$
(4,152)
$
(11,298)
$
(8,604)
Interest rate swaps not designated as hedges
Interest expense
—
(41)
(2)
(32)
Interest rate swaps that discontinued hedge accounting
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 ofdifferent 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.
Second lien notes: Prior to the January 2021 debt refinancing, the fair value of the second lien notes was derived from a cash flow model that discounted the cash flows based on market interest rates (Level 3 inputs). See Note 10, Indebtedness, for further discussion of the carrying amount and fair value of the second lien notes.
Interest rate swaps: The fair values of interest rate swaps are derived from the interest rates prevalent in the market and future expectations of those interest rates (Level 2 inputs). The Company determines the fair value of the investments based on quoted prices from third-party brokers. See Note 11, Derivative Instruments, for further discussion of the fair value of interest rate swaps.
There were no other assets or liabilities measured at fair value at September 30, 2021 and December 31, 2020.
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.
Equity Incentive Plans — Under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), approved at the annual meeting by the BioScrip stockholders on May 3, 2018, the Company may issue, among other things, incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, stock grants, and performance units to key employees and directors. The 2018 plan is administered by the Company’s Compensation Committee, a standing committee of the Board of Directors. A total of 9,101,734 shares of common stock are authorized for issuance. The Company had stock options, restricted stock and performance stock units outstanding related to the 2018 Plan as of September 30, 2021. As of September 30, 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 and nine months ended September 30, 2021, total stock-based incentive compensation expense recognized by the Company related to these plans was $2.5 million and $6.2 million, respectively. During the three and nine months ended September 30, 2020, total stock-based incentive compensation expense recognized by the Company related to these plans was $1.2 million and $2.6 million, respectively.
15. STOCKHOLDERS’ EQUITY
During the three and nine months ended September 30, 2021, HC I completed secondary offerings of 29,900,000 and 76,400,000 shares of common stock, respectively. Following these offerings, HC I holds approximately 21.1% of the common stock of the Company.
2017 Warrants — During the three and nine months ended September 30, 2021, warrant holders did not elect to exercise any warrants to purchase shares of common stock. During the three and nine months ended September 30, 2020, warrant holders did not elect to exercise any warrants to purchase shares of common stock. As of September 30, 2021 and December 31, 2020, the remaining warrant holders are entitled to purchase 1.4 million shares of common stock, respectively.
2015 Warrants — During the three and nine months ended September 30, 2021, warrant holders did not elect to exercise any warrants to purchase shares of common stock. During the three and nine months ended September 30, 2020, warrant holders did not elect to exercise any warrants to purchase shares of common stock. As of September 30, 2021 and December 31, 2020, 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 $2.6 million for the three and nine months ended September 30, 2021, respectively. The Company recorded management fee income of $0.8 million and $2.1 million for the three and nine months ended September 30, 2020, respectively. Management fees are recorded in net revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).
The Company had amounts due to its joint ventures of $2.9 million as of September 30, 2021. This payable was included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets. The Company also had amounts due from its joint ventures of $2.4 million as of December 31, 2020. These receivables were included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. 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 September 30, 2021, and noted the following subsequent events:
On October 1, 2021 the Company acquired Infinity Infusion Nursing, LLC (“Infinity”) for $50 million in an all-cash transaction. Infinity is a leader in home infusion services that provide therapy management for patients with acute, chronic and rare disorders through a national network of highly-skilled, specialty nurses.
In October 2021, the Company refinanced its $1,157 million outstanding existing loan due 2026. The Company amended the existing First Lien Term Loan, to provide $600 million of refinanced borrowings (the “New First Lien Term Loan Facility”) which modified certain terms and extended its maturity to 2028. In conjunction with the refinancing, the Company also issued $500 million in aggregate principal of unsecured senior notes due 2029 (collectively, the “Transactions”). In connection with
the Transactions, the Company incurred third party fees of $9.4 million and original issue discount of $1.5 million. The Company also utilized $69.9 million of cash on hand for the Transactions. In conjunction with the Transactions, the Company also 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 New First Lien Term Loan Facility’s variable interest rate.
Item 2. Management’s Discussion and Analysis of Financial Condition andResults 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 146 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”).
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 nine months ended September 30, 2021, the revenue results reflect acute revenue that had mid-single digit growth, while chronic revenue grew in the mid-teens relative to the prior year. 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 nine months ended September 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.
The following results of operations include the accounts of Option Care Health and our subsidiaries for the three and nine months ended September 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, changes in derivatives not designated as hedging instruments related to the interest rate swaps, and reclassification from accumulated other comprehensive income to interest expense upon discontinuing hedge accounting. 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.
The following table presents Option Care Health’s consolidated results of operations for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021 (unaudited)
2020 (unaudited)
2021 (unaudited)
2020 (unaudited)
Amount
% of Revenue
Amount
% of Revenue
Amount
% of Revenue
Amount
% of Revenue
NET REVENUE
$
891,937
100.0
%
$
781,609
100.0
%
$
2,511,446
100.0
%
$
2,227,897
100.0
%
COST OF REVENUE
688,969
77.2
%
607,456
77.7
%
1,944,037
77.4
%
1,729,395
77.6
%
GROSS PROFIT
202,968
22.8
%
174,153
22.3
%
567,409
22.6
%
498,502
22.4
%
OPERATING COSTS AND EXPENSES:
Selling, general and administrative expenses
134,633
15.1
%
123,000
15.7
%
388,930
15.5
%
377,198
16.9
%
Depreciation and amortization expense
15,452
1.7
%
16,597
2.1
%
48,410
1.9
%
54,892
2.5
%
Total operating expenses
150,085
16.8
%
139,597
17.9
%
437,340
17.4
%
432,090
19.4
%
OPERATING INCOME
52,883
5.9
%
34,556
4.4
%
130,069
5.2
%
66,412
3.0
%
OTHER INCOME (EXPENSE):
Interest expense, net
(16,000)
(1.8)
%
(24,583)
(3.1)
%
(52,717)
(2.1)
%
(84,102)
(3.8)
%
Equity in earnings of joint ventures
1,676
0.2
%
790
0.1
%
4,567
0.2
%
2,364
0.1
%
Other, net
4
—
%
(8,344)
(1.1)
%
(12,392)
(0.5)
%
(8,322)
(0.4)
%
Total other expense
(14,320)
(1.6)
%
(32,137)
(4.1)
%
(60,542)
(2.4)
%
(90,060)
(4.0)
%
INCOME (LOSS) BEFORE INCOME TAXES
38,563
4.3
%
2,419
0.3
%
69,527
2.8
%
(23,648)
(1.1)
%
INCOME TAX EXPENSE
3,087
0.3
%
756
0.1
%
5,096
0.2
%
2,267
0.1
%
NET INCOME (LOSS)
$
35,476
4.0
%
$
1,663
0.2
%
$
64,431
2.6
%
$
(25,915)
(1.2)
%
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
Three Months Ended September 30, 2021 Compared to Three Months Ended September 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 September 30, 2021 and September 30, 2020.
Gross Profit
Three Months Ended September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands, except for percentages)
Net revenue
$
891,937
$
781,609
$
110,328
14.1
%
Cost of revenue
688,969
607,456
81,513
13.4
%
Gross profit
$
202,968
$
174,153
$
28,815
16.5
%
Gross profit margin
22.8
%
22.3
%
The increase in net revenue was primarily driven by organic growth in the Company’s portfolio of therapies, consisting of acute revenue that had mid 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 September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands, except for percentages)
Selling, general and administrative expenses
$
134,633
$
123,000
$
11,633
9.5
%
Depreciation and amortization expense
15,452
16,597
(1,145)
(6.9)
%
Total operating expenses
$
150,085
$
139,597
$
10,488
7.5
%
The increase in Selling, general and administrative expenses is primarily due to salaries and benefits, but has decreased as a percentage of revenue to 15.1% for the three months ended September 30, 2021 as compared to 15.7% for the three months ended September 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 stabilization of capital expenditures through completion of Merger integration activities during the year ended December 31, 2020.
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 equity in earnings of joint ventures was primarily attributable to organic growth in both the acute and chronic portfolio of therapies.
The change in other, net is primarily attributable to the loss on extinguishment of debt of $8.3 million incurred in the third quarter of 2020 in conjunction with the $125.0 million repayment of principal on the second lien notes.
Income Tax Expense
Three Months Ended September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands, except for percentages)
Income tax expense
$
3,087
$
756
$
2,331
308.3
%
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 $0.3 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 September 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 8.0% during the three months ended September 30, 2021. During the three months ended September 30, 2020, the effective tax rate was 31.3%. 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.
Changes in unrealized gains on cash flow hedges, net of income taxes
2,892
4,022
(1,130)
(28.1)
%
Other comprehensive income
2,892
4,022
(1,130)
(28.1)
%
Net comprehensive income
$
38,368
$
5,685
$
32,683
574.9
%
The increase in net income 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.
The decrease in changes in unrealized gains on cash flow hedges, net of income taxes, primarily related to the $925.0 million notional swap as the swap expired in August 2021.
Net comprehensive income increased to $38.4 million for the three months ended September 30, 2021, compared to net comprehensive income of $5.7 million for the three months ended September 30, 2020, primarily as a result of the changes in net income, discussed above.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
The following tables present selected consolidated comparative results of operations from the Company’s unaudited condensed consolidated financial statements for the nine month periods ended September 30, 2021 and September 30, 2020.
Gross Profit
Nine Months Ended September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands, except for percentages)
Net revenue
$
2,511,446
$
2,227,897
$
283,549
12.7
%
Cost of revenue
1,944,037
1,729,395
$
214,642
12.4
%
Gross profit
567,409
498,502
$
68,907
13.8
%
Gross profit margin
22.6
%
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
Nine Months Ended September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands, except for percentages)
Selling, general and administrative expenses
$
388,930
$
377,198
$
11,732
3.1
%
Depreciation and amortization expense
48,410
54,892
(6,482)
(11.8)
%
Total operating expenses
$
437,340
$
432,090
$
5,250
1.2
%
Selling, general and administrative expenses increased for the nine months ended September 30, 2021 primarily due to salaries and benefits, but has decreased as a percentage of revenue to 15.5% for the nine months ended September 30, 2021 as compared to 16.9% for the nine months ended September 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.
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 equity in earnings of joint ventures was primarily attributable to organic growth in both the acute and chronic portfolio of therapies.
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
Nine Months Ended September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands, except for percentages)
Income tax expense
$
5,096
$
2,267
$
2,829
124.8
%
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 $0.3 million of estimated state net operating losses (“NOL”). Because of the Company’s full valuation allowance, the Company’s tax expense for the nine months ended September 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 7.3% during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the effective tax rate was negative 9.6%. 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.
Net Income (Loss) and Other Comprehensive Income (Loss)
Nine Months Ended September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands, except for percentages)
Net income (loss)
$
64,431
$
(25,915)
$
90,346
(348.6)
%
Other comprehensive income (loss), net of tax:
Changes in unrealized gains (losses) on cash flow hedges, net of income taxes
11,172
(8,034)
19,206
(239.1)
%
Other comprehensive income (loss)
11,172
(8,034)
19,206
(239.1)
%
Net comprehensive income (loss)
$
75,603
$
(33,949)
$
109,552
(322.7)
%
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 expired in August 2021. The change in unrealized loss for the nine months ended September 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 nine months ended September 30, 2021 and the twelve months ended December 31, 2020, the Company’s primary sources of liquidity were cash on hand of $200.9 million and $99.3 million, respectively, as well as the $165.4 million of borrowings available under its credit facilities (net of $9.6 million undrawn letters of credit issued and outstanding). During the nine months ended September 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.
The Company’s 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 September 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 September 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 3.83% as of September 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 3.83% as of September 30, 2021.
In October 2021, the Company entered into an amendment on the First Lien Term Loan, to provide $600 million of refinanced borrowings. In October 2021, the Company also issued $500 million in aggregate principal amount of senior notes. See Note 17, Subsequent Events, for further discussion.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
The following table presents selected data from Option Care Health’s unaudited condensed consolidated statements of cash flows:
Nine Months Ended September 30,
2021
2020
(unaudited)
(unaudited)
Variance
(in thousands)
Net cash provided by operating activities
$
143,259
$
101,728
$
41,531
Net cash used in investing activities
(30,596)
(12,330)
(18,266)
Net cash used in financing activities
(11,072)
(16,407)
5,335
Net increase in cash and cash equivalents
101,591
72,991
28,600
Cash and cash equivalents - beginning of period
99,265
67,056
32,209
Cash and cash equivalents - end of period
$
200,856
$
140,047
$
60,809
Cash Flows from Operating Activities
The increase in cash flows provided by operating activities is primarily due to higher net income, decrease in interest expense due to the January 2021 debt refinancing, and timing of vendor payments during the nine months ended September 30, 2021 as compared to the nine months ended September 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 (as compared to $125.0 million for the nine months ended September 30, 2020), deferred financing costs of $2.9 million and debt prepayment penalties of 2.5 million. The remaining change in financing activities was related to net proceeds from issuance of common stock in the nine months ended September 30, 2020 with no comparable activity in the nine months ended September 30, 2021.
The following table presents Option Care Health’s commitments and contractual obligations as of September 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)
$
1,156,919
$
8,831
$
26,494
$
1,121,594
$
—
Interest payments on long-term debt obligations (2)
212,126
44,770
88,166
79,190
—
Total
$
1,369,045
$
53,601
$
114,660
$
1,200,784
$
—
(1) Includes aggregate principal payment from the first lien term loan.
(2) Interest payments calculated based on LIBOR rate as of September 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 September 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
probability, realizable upon final settlement of the position. Interest and penalties related to unrecognized tax benefits are reported in income tax expense.
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.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, management evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2021. Based on that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
For a summary of legal proceedings, refer to Note 13, Commitments and Contingencies, of the unaudited condensed consolidated financial statements included in Item 1 of this report.
Item 1A.Risk Factors
There have been no material changes to the risk factors affecting our business, financial condition or results of operations from those set forth in Part I, Item 1A. “Risk Factors” in our Annual Report on form 10-K for the Year ended December 31, 2020, except as modified by the information in the following risk factor, which was modified. Additional risks and uncertainties not currently known to us that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.
As of September 30, 2021, Madison Dearborn Partners is our largest stockholder and has the ability to exercise significant influence over decisions requiring our stockholders’ approval.
As of September 30, 2021, Madison Dearborn Partners controls 21.1% of our common stock through its control of HC Group Holding I, LLC (“HC Group”). As a result, Madison Dearborn Partners has the ability to exercise significant influence over decisions requiring approval of our stockholders including the election of directors, amendments to our certificate of incorporation and approval of significant corporate transactions, such as a merger or other sale of us or our assets. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of us and may negatively affect the market price of our common stock. Also, Madison Dearborn Partners is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete with us. Madison Dearborn Partners or its affiliates may also pursue acquisition opportunities that are complementary to our business and, as a result, those acquisition opportunities may not be available to us. Based on information received from Madison Dearborn Partners, Walgreens is also an equityholder of HC Group and currently maintains its approximately 21% indirect financial interest in us through HC Group.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
