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May 7, 2020, 4:57 p.m. EDT

10-Q: OPTION CARE HEALTH, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this report to "Option Care Health," the "Company," "we," "us" and "our" refer to Option Care Health, Inc. and its consolidated subsidiaries. The following discussion and analysis of the financial condition and results of operations of Option Care Health, Inc. ("Option Care Health", or the "Company") should be read in conjunction with the audited consolidated financial statements and related notes, as presented in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2020, as well as the Company's unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report.

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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. With the onset of the pandemic, the Company has experienced variability in the referral trends of patients from acute care settings as hospitals have reduced their non-pandemic related census. Similarly, the Company has also experienced variability in the referral trends of patients with chronic conditions, as patient visits to specialty physician practices has been reduced under general guidelines for non-essential social interactions. The Company's operations involve the compounding of therapeutic drugs in sterile cleanroom facilities by pharmacists and pharmacy technicians, the transportation of such drugs to the patients' home or alternate infusion treatment site and the administration of the drug by a licensed healthcare professional. Due to personal disruption experienced by employees of the Company, the ability to efficiently resource the compounding, delivery and administration of therapies has been negatively impacted given staffing challenges and availability. This has resulted in higher wage costs in the form of overtime expenditures, migration of clinical resources to additional markets and utilization of contract labor resources. In addition to direct labor investments, the Company has experienced similar impacts on the indirect support functions, as employees have generally migrated to a virtual, remote establishment.







                     Selling, General and Administrative Expenses Savings. Merged
                     corporate infrastructure has created significant opportunity for
                     streamlining corporate and administrative costs, including headcount
                     and functional spend.
                     Network Optimization. The previous investments in technology and
                     compounding pharmacies, along with the overlapping geographic
                     footprint, allows for facility rationalization and the optimization
                     of assets.
                     Procurement Savings. The enhanced scale of the Company generates
                     supply chain efficiencies through increased purchasing leverage. The
                     Company's platform is also positioned to be the partner of choice
                     for pharmaceutical manufacturers seeking innovative distribution
                     channels and patient support models to access the market.
        


We continue to make progress on the achievement synergies, which will enable the delivery of high-quality, cost-effective solutions to providers across the country and help facilitate the introduction of new therapies to the marketplace while improving the profitability profile of the Company.

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Acquisitions

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Other, Net. Other income (expense) primarily includes miscellaneous non-operating expenses and third-party fees paid in conjunction with debt issuances and debt extinguishments, as they occur.







                                                                 Three Months Ended March 31,
                                                       2020 (unaudited)                 2019 (unaudited)
                                                    Amount     % of Revenue          Amount     % of Revenue
        NET REVENUE                             $  705,440            100.0  %   $  476,492            100.0  %
        COST OF REVENUE                            547,411             77.6  %      378,298             79.4  %
        GROSS PROFIT                               158,029             22.4  %       98,194             20.6  %
        OPERATING COSTS AND EXPENSES:
        Selling, general and administrative
        expenses                                   129,280             18.3  %       82,787             17.4  %
        Depreciation and amortization expense       20,101              2.8  %        9,969              2.1  %
           Total operating expenses                149,381             21.2  %       92,756             19.5  %
        OPERATING INCOME                             8,648              1.2  %        5,438              1.1  %
        OTHER INCOME (EXPENSE):
        Interest expense, net                      (28,087 )           (4.0 )%      (11,045 )           (2.3 )%
        Equity in earnings of joint ventures           562              0.1  %          549              0.1  %
        Other, net                                       8                -  %          (76 )              -  %
           Total other expense                     (27,517 )           (3.9 )%      (10,572 )           (2.2 )%
        LOSS BEFORE INCOME TAXES                   (18,869 )           (2.7 )%       (5,134 )           (1.1 )%
        INCOME TAX EXPENSE (BENEFIT)                 1,041              0.1  %       (1,422 )           (0.3 )%
        NET LOSS                                $  (19,910 )           (2.8 )%   $   (3,712 )           (0.8 )%
        OTHER COMPREHENSIVE LOSS, NET OF TAX:
        Change in unrealized losses on cash
        flow hedges, net of income tax benefit
        of $0, and $242, respectively              (16,632 )           (2.4 )%         (505 )           (0.1 )%
        OTHER COMPREHENSIVE LOSS                   (16,632 )           (2.4 )%         (505 )           (0.1 )%
        NET COMPREHENSIVE LOSS                  $  (36,542 )           (5.2 )%   $   (4,217 )           (0.9 )%
        


Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

The following tables present selected consolidated comparative results of operations from Option Care Health's unaudited condensed consolidated financial statements for the three month periods ended March 31, 2020 and March 31, 2019.

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        Gross Profit
                                        Three Months Ended March 31,
                                 2020             2019
                             (unaudited)      (unaudited)          Variance
                                   (in thousands, except for percentages)
        Net revenue         $    705,440     $    476,492     $ 228,948    48.0 %
        Cost of revenue          547,411          378,298       169,113    44.7 %
        Gross profit        $    158,029     $     98,194     $  59,835    60.9 %
        Gross profit margin         22.4 %           20.6 %
        


The increase in net revenue was primarily driven by additional revenue following the Merger of $193.7 million as well as growth in the Company's portfolio of therapies. The increase in cost of revenue was driven by the impact of the Merger and organic growth. The increase in gross profit was primarily related to contribution margin from additional revenue from the Merger. The increase in gross margin percentage was primarily driven by therapy mix shift.







        Operating Expenses
                                                              Three Months Ended March 31,
                                                  2020              2019
                                               (unaudited)       (unaudited)              Variance
                                                         (in thousands, except for percentages)
        Selling, general and administrative
        expenses                             $     129,280     $      82,787     $   46,493          56.2 %
        Depreciation and amortization
        expense                                     20,101             9,969         10,132         101.6 %
           Total operating expenses          $     149,381     $      92,756     $   56,625          61.0 %
        


Operating expenses increased for the three months ended March 31, 2020 due to the impact of the Merger.







        Other Income (Expense)
                                                             Three Months Ended March 31,
                                                  2020             2019
                                              (unaudited)      (unaudited)              Variance
                                                        (in thousands, except for percentages)
        Interest expense, net                $    (28,087 )   $    (11,045 )   $  (17,042 )       154.3  %
        Equity in earnings of joint ventures          562              549             13           2.4  %
        


The increase in interest expense was primarily attributable to the interest expense on the new debt issued in conjunction with the Merger. The balance of debt increased from $539.1 million at March 31, 2019 to $1,285.6 million at March 31, 2020. See Note 11, Indebtedness, of the unaudited condensed consolidated financial statements.

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        Income Tax Expense (Benefit)
                                                  Three Months Ended March 31,
                                          2020             2019
                                      (unaudited)      (unaudited)           Variance
                                             (in thousands, except for percentages)
        


The Company continues to maintain 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 $0.7 million of estimated state net operating losses ("NOL"). Because of the Company's full valuation allowance, the Company's tax expense for the three months ended March 31, 2020 only consists of quarterly tax liabilities attributable to separate company state tax returns as well as recognized deferred tax expense. These tax expense items created a negative quarterly effective tax rate of 5.5% during the three months ended March 31, 2020. During the three months ended March 31, 2019, the effective tax rate was 27.7%. The variance in the year-over-year effective tax rates is primarily attributable to the valuation allowance established by the Company at the time of the Merger. 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.







                                                             Three Months Ended March 31,
                                                  2020             2019
                                              (unaudited)      (unaudited)              Variance
                                                        (in thousands, except for percentages)
        Net loss                             $    (19,910 )   $     (3,712 )   $  (16,198 )       436.4 %
        Other comprehensive loss, net of
        tax:
        Changes in unrealized losses on cash
        flow hedges, net of income taxes          (16,632 )           (505 )      (16,127 )     3,193.5 %
        Other comprehensive loss                  (16,632 )           (505 )      (16,127 )     3,193.5 %
        Net comprehensive loss               $    (36,542 )   $     (4,217 )   $  (32,325 )       766.5 %
        


The change in net loss was primarily related to the increased interest expense on the increased indebtedness.

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Short-Term and Long-Term Liquidity Requirements . . .

May 07, 2020

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