(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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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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