# Option Care Health, Inc. (OPCH) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Option Care Health, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1014739/000101473922000009/bios-20211231.htm
Accession: 0001014739-22-000009
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OPCH/
All MD&A years: /company/OPCH/mda/
Next year: /company/OPCH/mda/fy2022/ (FY 2022)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year-to-year and the primary factors that accounted for those changes as well as how certain accounting principles affect our consolidated financial statements.

Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors throughout this Annual Report and specifically under the caption “Forward-Looking Statements” in this Annual Report. In addition, the following discussion of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 8 in this Annual Report.

Business Overview

Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 154 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”).

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”) (the “Merger”), a national provider of infusion and home care management solutions, which 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. and the combined company’s stock, par value $0.0001, was listed on the Nasdaq Capital Market. Effective February 3, 2020, the Company was listed on the Nasdaq Global Select Market under the ticker symbol “OPCH”. See Note 3, Business Acquisitions, of the consolidated financial statements for further discussion of the Merger.

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Update on the Impact of the COVID-19 Pandemic

The primary operations of the Company focus on providing infusion therapy services and based on the recent impact of the pandemic across the healthcare ecosystem, the Company began experiencing a related impact across a number of facets beginning in March 2020. The Company has been disrupted by both positive and negative referral patterns, experienced challenges in our staffing, and ability to procure personal protection equipment and key drugs. The Company anticipates that the pandemic could affect its operations for an extended period; however, at this time it 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” for further discussion of risks.

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Composition of Results of Operations

The following results of operations include the accounts of Option Care Health and our subsidiaries for the years ended December 31, 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, First Lien Term Loan, Senior Notes, as well as interest payments on the Company’s previous $400.0 million senior secured lien PIK toggle floating rate notes due 2027 that were fully prepaid in January 2021 (“the Second Lien Notes”) amortization of discount and deferred financing fees and changes in derivatives not designated as hedging instruments related to the interest rate swaps. Refer to the “Liquidity and Capital Resources” section below for further discussion of these outstanding borrowings.

Equity in Earnings of Joint Ventures. Equity in earnings of joint ventures consists of our proportionate share of equity earnings or losses from equity investments in two infusion joint ventures with health systems.

Other, Net. Other income (expense) primarily includes current year loss on extinguishment of debt incurred in connection with 2021 debt refinancings and miscellaneous non-operating expenses.

Income Tax (Benefit) 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 (losses) gains on cash flow hedges, net of income tax expense. Change in unrealized (losses) gains on cash flow hedges, net of income taxes, consists of the gains and losses associated with the changes in the fair value of hedging instruments related to the interest rate caps and interest rate swaps, net of income taxes.

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Results of Operations

The following table presents Option Care Health’s consolidated results of operations for the years ended December 31, 2021 and 2020 (in thousands). For discussion of Option Care Health’s consolidated results of operations for the year ended December 31, 2020 compared to 2019, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on 10-K filed with the Securities and Exchange Commission on March 11, 2021.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","2020"],["","","Amount","","% of Revenue","","Amount","","% of Revenue"],["NET REVENUE","","$","3,438,640","","","100.0%","","$","3,032,610","","","100.0%"],["COST OF REVENUE","","2,659,034","","","77.3%","","2,350,346","","","77.5%"],["GROSS PROFIT","","779,606","","","22.7%","","682,264","","","22.5%"],["OPERATING COSTS AND EXPENSES:"],["Selling, general and administrative expenses","","525,707","","","15.3%","","500,199","","","16.5%"],["Depreciation and amortization expense","","63,058","","","1.8%","","71,310","","","2.4%"],["Total operating expenses","","588,765","","","17.1%","","571,509","","","18.8%"],["OPERATING INCOME","","190,841","","","5.5%","","110,755","","","3.7%"],["OTHER INCOME (EXPENSE):"],["Interest expense, net","","(67,003)","","","(1.9)%","","(107,770)","","","(3.6)%"],["Equity in earnings of joint ventures","","6,030","","","0.2%","","3,313","","","0.1%"],["Other, net","","(13,374)","","","(0.4)%","","(11,541)","","","(0.4)%"],["Total other expense","","(74,347)","","","(2.2)%","","(115,998)","","","(3.8)%"],["INCOME (LOSS) BEFORE INCOME TAXES","","116,494","","","3.4%","","(5,243)","","","(0.2)%"],["INCOME TAX (BENEFIT) EXPENSE","","(23,404)","","","(0.7)%","","2,833","","","0.1%"],["NET INCOME (LOSS)","","$","139,898","","","4.1%","","$","(8,076)","","","(0.3)%"],["OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:"],["Change in unrealized gains (losses) on cash flow hedges, net of income taxes of $0 and $0, respectively","","10,721","","","0.3%","","(3,977)","","","(0.1)%"],["OTHER COMPREHENSIVE INCOME (LOSS)","","10,721","","","0.3%","","(3,977)","","","(0.1)%"],["NET COMPREHENSIVE INCOME (LOSS)","","$","150,619","","","4.4%","","$","(12,053)","","","(0.4)%"]]
[[/GREPCENT_TABLE]]

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following tables present selected consolidated comparative results of operations for the years ended December 31, 2021 and 2020:

Gross Profit

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance"],["","(in thousands, except for percentages)"],["Net revenue","$","3,438,640","","","$","3,032,610","","","$","406,030","","","13.4","%"],["Cost of revenue","2,659,034","","","2,350,346","","","308,688","","","13.1","%"],["Gross profit","$","779,606","","","$","682,264","","","$","97,342","","","14.3","%"],["Gross profit margin","22.7","%","","22.5","%"]]
[[/GREPCENT_TABLE]]

The 13.4% increase in net revenue was primarily driven by organic growth in the Company’s portfolio of therapies. For the year ended December 31, 2021, the revenue results reflect mid single-digits revenue growth for acute therapies, while revenue for chronic therapies grew in the mid-teens relative to the prior year. The increase in cost of revenue was primarily driven by the revenue growth. 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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance"],["","(in thousands, except for percentages)"],["Selling, general and administrative expenses","$","525,707","","","$","500,199","","","$","25,508","","","5.1","%"],["Depreciation and amortization expense","63,058","","","71,310","","","(8,252)","","","(11.6)","%"],["Total operating expenses","$","588,765","","","$","571,509","","","$","17,256","","","3.0","%"]]
[[/GREPCENT_TABLE]]

Selling, general and administrative expenses increased for the year ended December 31, 2021 primarily due to salaries and benefits, but has decreased as a percentage of revenue to 15.3% for the year ended December 31, 2021 as compared to 16.5% for the year ended December 31, 2020 primarily due to disciplined expense management, the leverage of established infrastructure, and Merger synergy realization.

The decrease in depreciation and amortization was attributable to a reduction in capital expenditures, due to more efficient capital expenditures given investments in prior years and the completion of Merger integration activities during the year ended December 31, 2020. There was also a decrease in amortization expense attributed to certain intangible assets whose useful life expired partway through 2021.

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Other Income (Expense)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance"],["","(in thousands, except for percentages)"],["Interest expense, net","$","(67,003)","","","$","(107,770)","","","$","40,767","","","(37.8)","%"],["Equity in earnings of joint ventures","6,030","","","3,313","","","2,717","","","82.0","%"],["Other, net","(13,374)","","","(11,541)","","","(1,833)","","","15.9","%"],["Total other expense","$","(74,347)","","","$","(115,998)","","","$","41,651","","","(35.9)","%"]]
[[/GREPCENT_TABLE]]

The decrease in interest expense was attributable to the debt refinancing of the First Lien Term Loan and prepayment of the Second Lien Notes in January 2021. In addition, the decrease is attributable to the debt refinancing of the First Lien Term Loan and issuance of Senior Notes in October 2021. See Note 11, Indebtedness, of the consolidated financial statements.

The increase in equity of joint ventures was primarily attributable to organic growth and improved profitability in the Company’s two joint ventures.

The increase in other, net relates to the loss on extinguishment of debt of $13.4 million incurred in conjunction with the January 2021 and October 2021 debt refinancings. See Note 11, Indebtedness, of the consolidated financial statements for more information.

Income Tax (Benefit) Expense

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance"],["","(in thousands, except for percentages)"],["Income tax (benefit) expense","$","(23,404)","","","$","2,833","","","$","(26,237)","","","(926.1)","%"]]
[[/GREPCENT_TABLE]]

The Company’s tax benefit for the year ended December 31, 2021 is comprised of a change in deferred tax assets and liabilities, state tax liabilities, and the release of valuation allowance, resulting in a negative effective tax rate of 20.1%. The Company’s tax expense for year ended December 31, 2020 is comprised of a deferred tax benefit offset by a change in valuation allowance, a change in deferred tax assets and liabilities, and state tax liabilities. This resulted in an effective tax rate of negative 54.0% for the year ended December 31, 2020. These effective tax rates differ from the Company’s 21% federal statutory rate primarily due to changes in the valuation allowance, certain state and local taxes and non-deductible costs.

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Net Income (Loss) and Other Comprehensive Income (Loss)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance"],["","(in thousands, except for percentages)"],["Net income (loss)","$","139,898","","","$","(8,076)","","","$","147,974","","","(1,832.3)","%"],["Other comprehensive income (loss), net of tax:"],["Changes in unrealized gains (losses) on cash flow hedges, net of income taxes","10,721","","","(3,977)","","","14,698","","","(369.6)","%"],["Other comprehensive income (loss)","10,721","","","(3,977)","","","14,698","","","(369.6)","%"],["Net comprehensive income (loss)","$","150,619","","","$","(12,053)","","","$","162,672","","","(1,349.6)","%"]]
[[/GREPCENT_TABLE]]

The change in net income (loss) was primarily attributable to contribution margin from additional revenue related to the factors described in the above sections, and the release of the Company’s valuation allowance as referenced in the Income Tax (Benefit) Expense section above.

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 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 swap.

Liquidity and Capital Resources

For the years ended December 31, 2021 and 2020, the Company’s primary sources of liquidity were cash on hand of $119.4 million and $99.3 million, respectively, as well as borrowings under its credit facilities, described further below. During the year ended December 31, 2021 and 2020, the Company’s positive cash flows from operations have 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, investment in capital expenditures in both facilities and technology, and the pursuit of acquisitions. Ongoing operating cash outflows are associated with procuring and dispensing 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. In addition to these ongoing investing and financing activities, during the year ended December 31, 2021, the Company entered into debt refinancing transactions further described below under Credit Facilities.

Our business strategy includes the deployment of capital to pursue acquisitions that complement our operations. 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.

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Credit Facilities

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 was repayable in quarterly installments, beginning in March 2021, of $2.9 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026.

In October 2021, the Company refinanced its $1,157.0 million outstanding existing First Lien Term Loan due 2026. The Company amended the existing First Lien Term Loan, to provide $600 million of refinanced borrowings (the “First Lien Term Loan Facility”). The refinancing changed the interest rate from LIBOR plus 3.75% to, at the Company’s option, either (i) LIBOR (or a comparable successor rate, with a floor of 0.50% per annum) plus an applicable margin of 2.75% for Eurocurrency Rate Loans (as such term is defined in the First Lien Term Loan Agreement) and (ii) a base rate determined in accordance with the New First Lien Term Loan Agreement, plus 1.75% for Base Rate Loans (as such term is defined in the First Lien Term Loan Agreement). The First Lien Term Loan Facility is repayable in quarterly installments of $1.5 million plus interest and extended its maturity to October 27, 2028. In conjunction with the refinancing, the Company also issued $500.0 million in aggregate principal of unsecured senior notes (“Senior Notes”). The Senior Notes bear interest at a rate of 4.375% per annum payable semi-annually in arrears on October 31 and April 30 of each year, commencing April 30, 2022. The Senior Notes mature on October 31, 2029. In October 2021, the Company also entered into an agreement to amend its existing asset-based lending revolving credit facility (“ABL Facility”). The ABL Facility bears interest at a rate equal to, at the Borrowers’ election, either (i) a base rate determined in accordance with the ABL Credit Agreement plus an applicable margin, which is equal to between 0.25% and 0.75% based on the historical excess availability as a percentage of the Line Cap (as such term is defined in the ABL Credit Agreement) and (ii) LIBOR (or a comparable successor rate, with a floor of 0.00% per annum) plus an applicable margin, which is equal to between 1.25% and 1.75% based on the historical excess availability as a percentage of the Line Cap. The ABL Facility matures on October 27, 2026.

Interest payments over the course of long-term debt obligations total an estimated $300.9 million based on final maturity dates of the Company’s credit facilities. Interest payments are calculated based on the LIBOR rate as of December 31, 2021. Actual payments are based on changes in LIBOR and exclude the interest rate derivative agreement the Company entered into in connection with the debt refinancing in October 2021.

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Cash Flows

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following table presents selected data from Option Care Health’s consolidated statements of cash flows for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance"],["","(in thousands)"],["Net cash provided by operating activities","$","208,569","","","$","127,392","","","$","81,177"],["Net cash used in investing activities","(111,541)","","","(26,334)","","","(85,207)"],["Net cash used in financing activities","(76,870)","","","(68,849)","","","(8,021)"],["Net increase in cash and cash equivalents","20,158","","","32,209","","","(12,051)"],["Cash and cash equivalents - beginning of period","99,265","","","67,056","","","32,209"],["Cash and cash equivalents - end of period","$","119,423","","","$","99,265","","","$","20,158"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

The increase in cash provided by operating activities for the year ended December 31, 2021 was primarily due to higher net income, and decrease in interest expense due to the January and October 2021 debt refinancings as compared to the prior year.

Cash Flows from Investing Activities

The increase in cash flows used in investing activities is primarily due to acquisitions made in the year ended December 31, 2021, which are described in Note 3, Business Acquisitions, of the consolidated financial statements.

Cash Flows from Financing Activities

The increase in cash flows used in financing activities is related to the January and October refinancing activities in the current year. The prior year cash used in financing activities consisted of the $174.0 million prepayment of the Second Lien Notes, which was partially offset by $118.9 million of proceeds from the issuance of common stock, as well as principal payments on the First Lien Term Loan.

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Critical Accounting Estimates

The Company prepares its 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 following discussion is not intended to be a comprehensive list of all the accounting policies, estimates or judgments made in the preparation of our financial statements. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Summary of Significant Accounting Policies, within the notes to the consolidated financial statements included in Item 8 of this Annual Report.

Revenue Recognition and Accounts Receivable

Net revenue is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services. Revenues are from commercial payers, government payers, and patients for goods and services provided and are based on a gross price based on payer contracts, fee schedules, or other arrangements less any implicit price concessions.

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.

The Company assesses the expected consideration to be received at the time of patient acceptance based on the verification of the patient’s insurance coverage, historical information with the patient, similar patients, or the payer. Performance obligations are determined based on the nature of the services provided by the Company. The majority of the Company’s performance obligations are to provide infusion services to deliver medicine, nutrients, or fluids directly into the body.

The Company provides a variety of infusion-related therapies to patients, which frequently include multiple deliverables of pharmaceutical drugs and related nursing services. After applying the criteria from ASC 606, the Company concluded that multiple performance obligations exist in its contracts with its customers. Revenue is allocated to each performance obligation based on relative standalone price, determined based on reimbursement rates established in the third-party payer contracts. Pharmaceutical drug revenue is recognized at the time the pharmaceutical drug is delivered to the patient, and nursing revenue is recognized on the date of service.

The Company’s accounts receivable is reported at the net realizable value amount that reflects the consideration the Company expects to receive in exchange for providing services, which is inclusive of adjustments for price concessions. The majority of accounts receivable are due from private insurance carriers and governmental health care programs, such as Medicare and Medicaid.

Price concessions may result from patient hardships, patient uncollectible accounts sent to collection agencies, lack of recovery due to not receiving prior authorization, differing interpretations of covered therapies in payer contracts, different pricing methodologies, or various other reasons.

Included in accounts receivable are earned but unbilled gross receivables. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources.

After applying the criteria from ASC 606, an allowance for doubtful accounts is established only as a result of an adverse change in the payers’ ability to pay outstanding billings. The Company did not have an allowance for doubtful accounts as of December 31, 2021 or 2020. The Company recorded an allowance for implicit price concessions based on its historical experience of additional revenue being recorded or revenue being written off when amounts received are greater than or less than the originally estimated net realizable value. The detailed assessments included, among other factors, (i) current over/under payments which had not yet been applied to an account, (ii) historical contractual adjustments, and (iii) an estimate for

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contractual adjustments expected to be realized in the future. Contractual allowance estimates are adjusted to actual amounts as cash is received and claims are settled.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company tests goodwill for impairment annually, or more frequently whenever events or circumstances indicate impairment may exist. Goodwill is stated at cost less accumulated impairment losses. The Company completes its goodwill impairment test annually in the fourth quarter.

Circumstances that could trigger an interim impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reporting units; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; and the results of testing for recoverability of a significant asset group within a reporting unit.

A qualitative impairment analysis was performed in the fourth quarter of 2021, 2020 and 2019 to assess whether it is more likely than not that the fair value of the Company’s reporting unit is less than its carrying value. The Company assessed relevant events and circumstances including macroeconomic conditions, industry and market considerations, overall financial performance, entity-specific events, and changes in the Company’s stock price. The Company determined that there was no goodwill impairment in 2021, 2020, or 2019.

The determination of fair value and the allocation of that value to individual assets and liabilities within the reporting unit requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which the Company competes; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, and capital expenditures. Actual financial results could differ from those estimates due to inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit, the amount of the goodwill impairment charge, or both.

Business Acquisitions

The Company accounts for business acquisitions in accordance with ASC Topic 805 (“ASC 805”), Business Combinations, with assets and liabilities being recorded at their acquisition date fair values and goodwill being calculated as the purchase price in excess of the net identifiable assets. The application of ASC 805 requires management to make estimates and assumptions when determining the acquisition date fair values of acquired assets and assumed liabilities. Management’s estimates and assumptions include, but are not limited to, the future cash flows an asset is expected to generate and the weighted-average cost of capital. See Note 3, Business Acquisitions, for further discussion of business acquisitions.

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. The Company also considers known or expected limitations on its ability to utilize its deferred tax assets in the future, such as limitations provided for under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). 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.

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