Document



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
OR
o
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
https://cdn.kscope.io/859ea420eeedea861ff999dca7b60a25-optioncarehealthrgb.jpg
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

BioScrip, Inc.
1600 Broadway, Suite 700, Denver, Colorado 80202
(Former name or former address, if changed since last report.)

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 þ     No o

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 þ No o

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 o     Accelerated filer þ     Non-accelerated filer o      Smaller reporting company o Emerging growth company o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ  
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
BIOS
Nasdaq Capital Market

On November 4, 2019, there were 705,849,364 shares of the registrant’s Common Stock outstanding.




TABLE OF CONTENTS
 
 
Page
Number
PART I
 
 
 
 
 
 
 
 
 
 
 
 
PART II 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements

3

Table of Contents

OPTION CARE HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
 
(unaudited)
 
 
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
   Cash and cash equivalents
$
52,789

 
$
36,391

   Accounts receivable, net
336,303

 
310,169

   Inventories
109,235

 
83,340

   Prepaid expenses and other current assets
46,919

 
37,525

Total current assets
545,246

 
467,425

 
 
 
 
NONCURRENT ASSETS:
 
 
 
   Property and equipment, net
131,982

 
93,142

   Operating lease right-of-use asset
68,042

 

   Intangible assets, net
395,078

 
219,713

   Goodwill
1,419,373

 
632,469

   Other noncurrent assets
22,204

 
15,462

Total noncurrent assets
2,036,679

 
960,786

TOTAL ASSETS
$
2,581,925

 
$
1,428,211

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES
 

 
 

Accounts payable
$
213,149

 
$
187,886

Accrued compensation and employee benefits
48,406

 
24,895

Accrued expenses and other current liabilities
29,635

 
23,066

Current portion of operating lease liability
21,540

 

Long-term debt - current portion
6,938

 
4,150

Total current liabilities
319,668

 
239,997

 
 
 
 
NONCURRENT LIABILITIES:
 
 
 
Long-term debt, net of discount, deferred financing costs and current portion
1,259,460

 
535,225

Operating lease liability, net of current portion
62,424

 

Deferred income taxes
1,498

 
33,481

Other noncurrent liabilities
17,193

 
16,683

Total noncurrent liabilities
1,340,575

 
585,389

Total liabilities
1,660,243

 
825,386

COMMITMENTS AND CONTINGENCIES (See Note 14)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock; $0.001 par value; 50,000,000 shares authorized, no shares outstanding as of September 30, 2019. No preferred stock authorized or outstanding as of December 31, 2018.

 

Common stock; $0.0001 par value: 1,000,000,000 shares authorized, 706,943,750 shares issued and 705,207,530 shares outstanding as of September 30, 2019; 570,454,995 shares issued and outstanding as of December 31, 2018.
71

 
57

Treasury stock; 1,736,220 shares outstanding, at cost, as of September 30, 2019; no shares outstanding as of December 31, 2018
(2,399
)
 

Paid-in capital
1,008,037

 
619,578

Management notes receivable

 
(1,619
)
Accumulated deficit
(76,144
)
 
(16,035
)
Accumulated other comprehensive (loss) income
(7,883
)
 
844

Total stockholders’ equity
921,682

 
602,825

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,581,925

 
$
1,428,211


The notes to unaudited condensed consolidated financial statements are an integral part of these statements.

4

Table of Contents

OPTION CARE HEALTH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
NET REVENUE
$
615,880

 
$
493,928

 
$
1,589,638

 
$
1,434,061

COST OF REVENUE
478,107

 
385,683

 
1,252,281

 
1,122,846

GROSS PROFIT
137,773

 
108,245

 
337,357

 
311,215

 
 
 
 
 
 
 
 
OPERATING COSTS AND EXPENSES:
 
 
 
 
 
 
 
Selling, general and administrative expenses
133,475

 
85,929

 
315,815

 
258,314

Depreciation and amortization expense
16,023

 
9,557

 
36,142

 
28,180

      Total operating expenses
149,498

 
95,486

 
351,957

 
286,494

OPERATING (LOSS) INCOME
(11,725
)
 
12,759

 
(14,600
)
 
24,721

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense, net
(21,509
)
 
(11,025
)
 
(44,117
)
 
(34,313
)
Equity in earnings of joint ventures
826

 
301

 
2,018

 
656

Other, net
(6,810
)
 
139

 
(6,679
)
 
(2,170
)
      Total other expense
(27,493
)
 
(10,585
)
 
(48,778
)
 
(35,827
)
 
 
 
 
 
 
 
 
(LOSS) INCOME BEFORE INCOME TAXES
(39,218
)
 
2,174

 
(63,378
)
 
(11,106
)
INCOME TAX EXPENSE (BENEFIT)
3,576

 
383

 
(3,269
)
 
(1,737
)
 
 
 
 
 
 
 
 
NET (LOSS) INCOME
$
(42,794
)
 
$
1,791

 
$
(60,109
)
 
$
(9,369
)
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
 
 
 
 
 
 
 
Change in unrealized (losses) gains on cash flow hedges, net of income taxes of $32, ($34), $259 and ($530), respectively
(8,249
)
 
187

 
(8,727
)
 
1,635

OTHER COMPREHENSIVE (LOSS) INCOME
(8,249
)
 
187

 
(8,727
)
 
1,635

NET COMPREHENSIVE (LOSS) INCOME
$
(51,043
)
 
$
1,978

 
$
(68,836
)
 
$
(7,734
)
 
 
 
 
 
 
 
 
(LOSS) EARNINGS PER COMMON SHARE
 
 
 
 
 
 
 
Net (loss) income per share, basic and diluted
$
(0.07
)
 
$
0.00

 
$
(0.10
)
 
$
(0.02
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic and diluted
651,576

 
570,455

 
597,792

 
570,455


The notes to unaudited condensed consolidated financial statements are an integral part of these statements.

5


OPTION CARE HEALTH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
Nine Months Ended 
 September 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(60,109
)
 
$
(9,369
)
Adjustments to reconcile net loss to net cash provided by operations:
 
 
 
Depreciation and amortization expense
38,997

 
30,447

Non-cash operating lease costs
15,246

 

Deferred income taxes - net
(5,252
)
 
(2,091
)
Loss on extinguishment of debt
5,469

 
72

Amortization of deferred financing costs
3,057

 
2,286

Equity in earnings of joint ventures
(2,018
)
 
(656
)
Stock-based incentive compensation expense
3,898

 
1,671

Other adjustments
1,046

 
640

Changes in operating assets and liabilities:


 


Accounts receivable, net
71,029

 
(32,483
)
Inventories
(6,212
)
 
4,010

Prepaid expenses and other current assets
1,447

 
(593
)
Accounts payable
(36,157
)
 
8,683

Accrued compensation and employee benefits
5,312

 
615

Accrued expenses and other current liabilities
(3,846
)
 
9,309

Operating lease liabilities
(11,922
)
 

Other noncurrent assets and liabilities
(3,415
)
 
(343
)
Net cash provided by operating activities
16,570

 
12,198

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of property and equipment
(13,150
)
 
(20,716
)
Other investing cash flows
636

 

Business acquisitions, net of cash acquired
(700,170
)
 
(9,917
)
Net cash used in investing activities
(712,684
)
 
(30,633
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Redemptions to related parties
(2,000
)
 

Sale of management notes receivable
1,310

 

Exercise of stock options, vesting of restricted stock, and related tax withholdings
(2,497
)
 

Proceeds from debt
981,050

 
1,000

Repayments of debt principal
(2,075
)
 
(4,112
)
Retirement of debt obligations
(226,738
)
 

Deferred financing costs
(36,538
)
 

Net cash provided by (used in) financing activities
712,512

 
(3,112
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
16,398

 
(21,547
)
Cash and cash equivalents - beginning of the period
36,391

 
53,116

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
52,789

 
$
31,569

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
   Cash paid for interest
$
35,531

 
$
32,110

   Cash paid for income taxes
$
1,617

 
$
1,246

Cash paid for operating leases
$
15,248

 



The notes to unaudited condensed consolidated financial statements are an integral part of these statements.

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Table of Contents


OPTION CARE HEALTH, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(IN THOUSANDS)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Paid-in Capital
 
Management Notes Receivable
 
Accumulated Deficit
 
Accumulated Other Comprehensive (Loss)
Income
 
Total Stockholders’ Equity
Balance - December 31, 2017
$

 
$
57

 
$

 
$
617,014

 
$
(1,116
)
 
$
(9,920
)
 
$
70

 
$
606,105

Stockholders' contribution

 

 

 
425

 
(425
)
 

 

 

Interest on management notes receivable

 

 

 

 
(17
)
 

 

 
(17
)
Stock-based incentive compensation

 

 

 
438

 

 

 

 
438

Net loss

 

 

 

 

 
(6,851
)
 

 
(6,851
)
Other comprehensive income

 

 

 

 

 

 
1,030

 
1,030

Balance - March 31, 2018
$

 
$
57

 
$

 
$
617,877

 
$
(1,558
)
 
$
(16,771
)
 
$
1,100

 
$
600,705

Interest on management notes receivable

 

 

 

 
(20
)
 

 

 
(20
)
Stock-based incentive compensation

 

 

 
668

 

 

 

 
668

Net loss

 

 

 

 

 
(4,309
)
 

 
(4,309
)
Other comprehensive income

 

 

 

 

 

 
418

 
418

Balance - June 30, 2018
$

 
$
57

 
$

 
$
618,545

 
$
(1,578
)
 
$
(21,080
)
 
$
1,518

 
$
597,462

Interest on management notes receivable

 

 

 

 
(20
)
 

 

 
(20
)
Stock-based incentive compensation

 

 

 
565

 

 

 

 
565

Net income

 

 

 

 

 
1,791

 

 
1,791

Other comprehensive income

 

 

 

 

 

 
187

 
187

Balance - September 30, 2018
$

 
$
57

 
$

 
$
619,110

 
$
(1,598
)
 
$
(19,289
)
 
$
1,705

 
$
599,985

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 31, 2018
$

 
$
57

 
$

 
$
619,578

 
$
(1,619
)
 
$
(16,035
)
 
$
844

 
$
602,825

Interest on management notes receivable

 

 

 

 
(21
)
 

 

 
(21
)
Stockholders' redemption

 

 

 
(2,000
)
 

 

 

 
(2,000
)
Stock-based incentive compensation

 

 

 
584

 

 

 

 
584

Net loss

 

 

 

 

 
(3,712
)
 

 
(3,712
)
Other comprehensive loss

 

 

 

 

 

 
(505
)
 
(505
)
Balance - March 31, 2019
$

 
$
57

 
$

 
$
618,162

 
$
(1,640
)
 
$
(19,747
)
 
$
339

 
$
597,171

Interest on management notes receivable

 

 

 

 
(18
)
 

 

 
(18
)
Stockholders' redemption

 

 

 
(371
)
 
371

 

 

 

Stock-based incentive compensation

 

 

 
569

 

 

 

 
569

Net loss

 

 

 

 

 
(13,603
)
 

 
(13,603
)
Other comprehensive income

 

 

 

 

 

 
27

 
27

Balance - June 30, 2019
$

 
$
57

 
$

 
$
618,360

 
$
(1,287
)
 
$
(33,350
)
 
$
366

 
$
584,146

Interest on management notes receivable

 

 

 

 
(23
)
 

 

 
(23
)
Repayment of management notes receivable

 

 

 

 
1,310

 

 

 
1,310

Purchase of BioScrip, Inc.

 
14

 

 
387,030

 

 

 

 
387,044

Stock-based incentive compensation

 

 

 
2,745

 

 

 

 
2,745

Exercise of stock options, vesting of restricted stock, and related tax withholdings

 

 
(2,399
)
 
(98
)
 

 

 

 
(2,497
)
Net loss

 

 

 

 

 
(42,794
)
 

 
(42,794
)
Other comprehensive loss

 

 

 

 

 

 
(8,249
)
 
(8,249
)
Balance - September 30, 2019
$

 
$
71

 
$
(2,399
)
 
$
1,008,037

 
$

 
$
(76,144
)
 
$
(7,883
)
 
$
921,682

The notes to unaudited condensed consolidated financial statements are an integral part of these statements.

7

Table of Contents

OPTION CARE HEALTH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND PRESENTATION OF FINANCIAL STATEMENTS
Corporate Organization and Business — HC Group Holdings II, Inc. (“HC II”) was incorporated under the laws of the State of Delaware on January 7, 2015, with its sole shareholder being HC Group Holdings I, LLC. (“HC I”). On April 7, 2015, HC I and HC II collectively acquired Walgreens Infusion Services, Inc. and its subsidiaries from Walgreen Co., and the business was rebranded as Option Care (“Option Care”).
On March 14, 2019, HC I and HC II entered into a definitive agreement (the “Merger Agreement”) to merge with and into a wholly-owned subsidiary of BioScrip, Inc. (“BioScrip”), a national provider of infusion and home care management solutions, along with certain other subsidiaries of BioScrip and HC II. The merger contemplated by the Merger Agreement (the “Merger”) was completed on August 6, 2019 (the “Merger Date”). The Merger was accounted for as a reverse merger under the acquisition method of accounting for business combinations with Option Care being considered the accounting acquirer and BioScrip being considered the legal acquirer.
Under the terms of the Merger Agreement, shares of HC II common stock issued and outstanding immediately prior to the Merger Date were converted into 542,261,567 shares of BioScrip common stock, par value $0.0001 (the “BioScrip common stock”). BioScrip also issued an additional 28,193,428 shares to HC I in respect of certain outstanding unvested contingent restricted stock units of BioScrip, which are held in escrow to prevent dilution related to potential additional vesting on certain share-based instruments. See Note 16, Stockholders’ Equity, for additional discussion of these shares held in escrow. In conjunction with the Merger, holders of BioScrip preferred shares and certain warrants received 3,458,412 additional shares of BioScrip common stock and preferred shares were repurchased for $125.8 million of cash. In addition, all legacy BioScrip debt was settled for $575.0 million. As a result of the Merger, BioScrip’s stockholders hold approximately 19.1% of the combined company, and HC I holds approximately 80.9% of the combined company. 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 was listed on the Nasdaq Capital Market as of September 30, 2019. See Note 3, Business Acquisitions, for further discussion on the Merger.
Option Care Health, and its wholly-owned subsidiaries, provides infusion therapy and other ancillary health care services through a national network of 132 locations. 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 2018 audited consolidated financial statements, including the notes thereto, as presented in the definitive merger proxy with the Securities and Exchange Commission filed on June 26, 2019.
Principles of Consolidation — The Company’s unaudited condensed consolidated financial statements include the accounts of Option Care Health, Inc. and its subsidiaries. The BioScrip results have been included in the consolidated financial results since the Merger Date. All intercompany transactions and balances are eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Leases — The Company has lease agreements for facilities, warehouses, office space and property and equipment. Effective as of January 1, 2019, at the inception of a contract, the Company determines if the contract is a lease or contains an embedded lease arrangement. Operating leases are included in the operating lease right-of-use asset (“ROU asset”) and operating lease liabilities in the condensed consolidated financial statements.

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ROU assets, which represent the Company’s right to use the leased assets, and operating lease liabilities, which represent the present value of unpaid lease payments, are both recognized by the Company at the lease commencement date. The Company utilizes its estimated incremental borrowing rate at the lease commencement date to determine the present value of unpaid lease obligations. The rates were estimated primarily using a methodology dependent on the Company’s financial condition, creditworthiness, and availability of certain observable data. In particular, the Company considered its actual cost of borrowing for collateralized loans and its credit rating, along with the corporate bond yield curve in estimating its incremental borrowing rates. ROU assets are recorded as the amount of operating lease liability, adjusted for prepayments, accrued lease payments, initial direct costs, lease incentives, and impairment of the ROU asset. Tenant improvement allowances used to fund leasehold improvements are recognized when earned and reduce the related ROU asset. Tenant improvement allowances are amortized through the ROU asset as a reduction of expense over the term of the lease.
Leases may contain rent escalations, however the Company recognizes the lease expense on a straight-line basis over the expected lease term. The Company reviews the terms of any lease renewal options to determine if it is reasonably certain that the renewal options will be exercised. The Company has determined that the expected lease term is typically the minimum non-cancelable period of the lease.
The Company has lease agreements that contain both lease and non-lease components, which the Company has elected to account for as a single lease component for all asset classes. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet and are expensed on a straight-line basis over the term of the lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Stock Based Incentive Compensation — The Company accounts for stock-based incentive compensation expense in accordance with Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation (“ASC 718”). Stock-based incentive compensation expense is based on the grant date fair value. The Company estimates the fair value of stock option awards using a Black-Scholes option pricing model and the fair value of restricted stock unit awards using the closing price of the Company’s common stock on the grant date. For awards with a service-based vesting condition, the Company recognizes expense on a straight-line basis over the service period of the award. For awards with performance-based vesting conditions, the Company will recognize expense when it is probable that the performance-based conditions will be met. When the Company determines that it is probable that the performance-based conditions will be met, a cumulative catch-up of expense will be recorded as if the award had been vesting on a straight-line basis from the award date. The award will continue to be expensed on a straight-line basis through the remainder of the vesting period and will be updated if the Company determines that there has been a change in the probability of achieving the performance-based conditions. The Company records the impact of forfeited awards in the period in which the forfeiture occurs.
Prior to the Merger, HCI issued incentive units to certain employees of Option Care, who remained employees of the Company following the Merger. In accordance with ASC 718, the Company recognizes compensation expense on a straight-line basis over the shorter of the vesting period of the award or the employee’s expected eligibility date. HC I also issued equity incentive units to certain members of the Option Care Board of Directors, who remained members of the Board of Directors following the Merger. In accordance with ASC Topic 505, Equity Based Payment to Non-Employees, expense was recognized at grant date. See Note 15, Stock-Based Incentive Compensation, for a further discussion of equity incentive plans.
Concentrations of Business Risk — The Company generates revenue from managed care contracts and other agreements with commercial third-party payers. Revenue related to the Company’s largest payer was approximately 15% and 13% for the three and nine months ended September 30, 2019, respectively. Revenue related to the Company’s largest payer was approximately 16% and 14% for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2019, approximately 13% and 12%, respectively, of the Company’s revenue was reimbursable through Medicare and Medicaid. For the three and nine months ended September 30, 2018, approximately 11% and 11%, respectively, of the Company’s revenue was reimbursable through Medicare and Medicaid. As of September 30, 2019 and December 31, 2018, respectively, approximately 14% and 13%, 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. Concentration of credit risk relating to trade accounts receivable is limited due to the Company’s diversity of patients and payers.
For the three and nine months ended September 30, 2019, approximately 69% and 72%, respectively, of the Company’s pharmaceutical and medical supply purchases were from three vendors. For the three and nine months ended September 30, 2018, approximately 75% and 76%, 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

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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.
Recently-Adopted Accounting Pronouncements — In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases, intended to improve financial reporting about leasing transactions. The new guidance requires entities that lease assets to recognize on their balance sheets the ROU assets and lease liabilities for the rights and obligations created by those leases and to disclose key information about leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018 for public entities and certain not-for-profits. The Company adopted the standard as of January 1, 2019. ASU 2016-02 allows for an optional transition method, which was elected by the Company, and permits the application of the standard as of the effective date without requiring the standard to be applied to the comparative periods presented in the unaudited condensed consolidated financial statements. The Company elected the transition package of three practical expedients allowed by ASU 2016-02, which allows the Company not to reassess prior conclusions about lease identification, lease classification and initial, direct costs. The Company did not elect the practical expedient to use hindsight and, accordingly, the initial lease term did not differ under the new standard versus prior accounting practice. The Company also made a policy election not to apply this standard to any leases with a term of 12 months or less. Adoption of ASU 2016-02 resulted in the Company recording an operating lease liability of $67.0 million and a corresponding ROU asset of $59.9 million in the unaudited condensed consolidated balance sheet as of January 1, 2019. See Note 7, Leases, for further discussion on leases.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The ASU requires that an entity recognizes revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for these goods or services. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017 for public entities and certain not-for-profits. The Company adopted the standard as of January 1, 2018. ASU 2014-09 allows for a modified retrospective approach upon adoption, which was elected by the Company, and permits application of the standard only to contracts that are not completed at the adoption date with no adjustment to the comparative periods presented in the unaudited condensed consolidated financial statements. The Company also elected the practical expedient for the portfolio approach, allowing contracts with similar characteristics and impacts to the financial statements to be evaluated together. ASU 2014-09 requires the Company to recognize revenue as the amount of cash that is ultimately expected to be collected, which resulted in the Company treating its previously-reported provision for doubeful accounts as an implicit price concession and a reduction to revenue. Other than the treatment of bad debt expense, the adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements. See Note 4, Revenue, for further discussion on revenue.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2019-09 modifies when a change to the terms or conditions of share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition, or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The effective date for ASU 2017-09 is for annual or interim periods beginning after December 15, 2017. The Company adopted the standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements — In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The Amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and is to be applied using a modified retrospective transition method. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Immaterial Error Correction — During the three months ended September 30, 2019, the Company identified prior period misstatements in the recording of other noncurrent liabilities that resulted in an overstatement of goodwill and other noncurrent liabilities in the Company’s consolidated balance sheets. 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 by decreasing goodwill and other noncurrent liabilities by $6.5 million in the accompanying condensed consolidated financial statements. The misstatements had no impact on net (loss) income or net cash flows from operating, investing, or financing activities in any of the periods presented.

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3. BUSINESS ACQUISITIONS
Merger with BioScrip, Inc.
Overview and Total Consideration Exchanged — As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, Option Care merged with BioScrip on August 6, 2019. BioScrip was a national provider of infusion and home care management solutions, that partnered with physicians, hospital systems, payers, pharmaceutical manufacturers and skilled nursing facilities to provide patients access to post-acute care services. The Merger of Option Care and BioScrip into Option Care Health creates an expanded national platform and the opportunity to drive economies of scale through procurement savings, facility rationalization and other operating cost savings.
The fair value of purchase consideration transferred on the closing date includes the value of the number of shares of the combined company owned by BioScrip shareholders at closing of the Merger, the value of common shares issued to certain warrant and preferred shareholders in conjunction with the Merger, the fair value of stock-based instruments that were vested or earned as of the Merger, and cash payments made in conjunction with the Merger. The fair value per share of BioScrip’s common stock was $2.67 per share. This is the closing price of the BioScrip common stock on August 6, 2019.
Under the acquisition method of accounting, the calculation of total consideration exchanged is as follows (in thousands):
 
 
Amount
Number of BioScrip common shares outstanding at time of the Merger
 
129,181

Common shares issued to warrant and preferred stockholders at time of the Merger
 
3,458

Total shares of BioScrip common stock outstanding at time of the Merger
 
132,639

BioScrip share price as of August 6, 2019
 
$
2.67

Fair value of common shares
 
$
354,146

Fair value of share-based instruments
 
$
32,898

Cash paid in conjunction with the Merger included in purchase consideration
 
$
714,957

Fair value of total consideration transferred
 
$
1,102,001

Less: cash acquired
 
$
14,787

Fair value of total consideration acquired, net of cash acquired
 
$
1,087,214

Cash paid in conjunction with the Merger includes payments made for settlement of $575.0 million in legacy BioScrip debt, $125.8 million in existing BioScrip preferred shares, and $14.1 million in legacy BioScrip success-based fees owed to third-party advisors. HC II financed these payments primarily through cash on hand and debt financing, which is discussed in Note 11, Indebtedness.
Allocation of Consideration —The Company's allocation of consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed in the Merger is based on estimated fair values as of the Merger Date. The fair values were determined based upon a preliminary valuation and the estimates and assumptions used in such valuation are pending completion and subject to change, which could be significant, within the measurement period, up to one year from the August 6, 2019 acquisition date.
The following is a preliminary estimate of the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, in the Merger as of August 6, 2019 (in thousands):

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Amount
Accounts receivable, net (1)
 
$
97,163

Inventories (2)
 
19,683

Property and equipment, net (3)
 
49,697

Intangible assets, net (4)
 
193,712

Deferred tax assets, net of deferred tax liabilities (5)
 
26,731

Operating lease right-of-use asset (6)
 
22,378

Operating lease liability (6)
 
(28,897
)
Accounts payable (7)
 
(61,420
)
Other assumed liabilities, net of other acquired assets (7)
 
(18,737
)
Total acquired identifiable assets and liabilities
 
300,310

Goodwill (8)
 
786,904

Total consideration transferred
 
$
1,087,214

(1)
Management has valued accounts receivables based on the estimated future collectability of the receivables portfolio, which approximates fair value.
(2)
Inventories are stated at fair value as of the Merger Date.
(3)
The fair value of the property and equipment was determined based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised.
(4)
The preliminary allocation of consideration exchanged to intangible assets acquired is as follows (in thousands):
 
 
Fair Value
 
Weighted Average Estimated Life (in years)
Trademarks/Names
 
$
12,681

 
2
Patient referral sources
 
180,652

 
20
Licenses
 
379

 
1.5
Total intangible assets, net
 
$
193,712

 
18.8
The Company preliminarily valued these intangibles utilizing the multi-period excess earnings method, a form of the income approach.
(5)
Net deferred tax assets represented the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax bases. See Note 5, Income Taxes, for additional discussion of the Company’s combined income tax position subsequent to the Merger.
(6)
The fair value of the operating lease liability and corresponding right-of-use asset (current and long-term) was based on current market rates available to the Company.
(7)
Accounts payable as well as certain other current and non-current assets and liabilities are stated at fair value as of the Merger Date.
(8)
The Merger preliminarily resulted in $786.9 million of goodwill, which is attributable to cost synergies resulting from procurement and operational efficiencies and elimination of duplicative administrative costs. The goodwill created in the Merger is not expected to be deductible for tax purposes.

Pro Forma — Assuming BioScrip had been acquired as of January 1, 2018, and the results of BioScrip had been included in operations beginning on January 1, 2018, the following tables provide estimated unaudited pro forma results of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands). The estimated pro forma net income adjusts for the effect of fair value adjustments related to the Merger, transaction costs and other non-recurring costs directly attributable to the Merger and the impact of the additional debt to finance the Merger.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net revenue
 
$
690,350

 
$
674,890

 
$
2,034,582

 
$
1,959,395

Net loss
 
(18,686
)
 
(7,919
)
 
(54,181
)
 
(59,670
)

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Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the Merger been completed on the date indicated or the future operating results.
For the periods subsequent to the Merger Date that are included in the results of operations for the three and nine months ended September 30, 2019, BioScrip had net revenue of $119.1 million and a net loss of $19.4 million.
Transaction Expenses — Acquisition-related costs were expensed as incurred, with the exception of success-based fees that are included in consideration transferred. The Company recorded transaction costs that are expensed in selling, general and administrative expenses during the three and nine months ended September 30, 2019 of approximately $6.5 million and $19.3 million, respectively. Transaction expenses consisted of professional fees for advisory, consulting and underwriting services as well as other incremental costs directly related to the acquisition.
Baptist Health Asset Acquisition — In August 2018, pursuant to the Purchase and Sale Agreement dated August 8, 2018, Option Care completed the acquisition of certain assets of Baptist Health in Little Rock, Arkansas for a purchase price of $1.0 million.
Home I.V. Specialists, Inc. Acquisition — In September 2018, pursuant to the Stock Purchase Agreement dated September 18, 2018, Option Care completed the acquisition of 100% of the outstanding shares of Home I.V. Specialists, Inc. for a purchase price of $11.6 million, net of cash acquired.
4. REVENUE

On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective approach applied to those contracts that were not completed as of that date. The Company did not record a cumulative catch-up adjustment, as the timing and measurement of revenue for the Company’s customers is similar to its prior revenue recognition model.

ASC 606 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. ASC 606 requires application of a five-step model to determine when to recognize revenue and at what amount. The revenue standard applies to all contracts with customers and revenues are to be recognized when control of the promised goods or services is transferred to the Company’s patients in an amount that reflects consideration expected to be received in exchange for those goods or services.

Adoption of the standard impacted the Company’s results as follows (in thousands):

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Prior to ASC 606 Adoption
 
Adjustments for ASC 606
 
Subsequent to ASC 606 Adoption
 
 
As of September 30, 2019
Condensed Consolidated Balance Sheets
 
 
Accounts receivable, net
 
$
336,303

 
$

 
$
336,303

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
Condensed Consolidated Statement of Comprehensive Income (Loss)
 
 
Net revenue
 
$
1,644,903

 
$
(55,265
)
 
$
1,589,638

Provision for doubtful accounts
 
(55,265
)
 
55,265

 

Operating loss
 
(14,600
)
 

 
(14,600
)
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
Changes in operating cash flows:
 
 
 
 
 
 
Accounts receivable, net
 
71,029

 

 
71,029

 
 
 
 
 
 
 
 
 
As of December 31, 2018
Condensed Consolidated Balance Sheets
 
 
Accounts receivable, net
 
$
310,169

 
$

 
$
310,169

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
Condensed Consolidated Statement of Comprehensive Income (Loss)
 
 
 
 
 
 
Net revenue
 
$
1,479,058

 
$
(44,997
)
 
$
1,434,061

Provision for doubtful accounts
 
(44,997
)
 
44,997

 

Operating Income
 
24,721

 

 
24,721

Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
Changes in operating cash flows:
 
 
 
 
 
 
Accounts receivable, net
 
(32,483
)
 

 
(32,483
)

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 government payers, commercial 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 therapies to patients. For infusion-related therapies, the Company frequently provides 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 outstanding performance obligations relate to contracts with a duration of less than one year. Therefore, the Company has elected to apply the practical expedient provided by ASC 606 and is not required to disclose the aggregate

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amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. Any unsatisfied or partially unsatisfied performance obligations at the end of a reporting period are generally completed prior to the patient being discharged.

The following table sets forth the net revenue earned by category of payer for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2019
 
2018
 
2019
 
2018
Commercial payers
 
$
525,927

 
$
428,873

 
$
1,373,481

 
$
1,256,109

Government payers
 
80,280

 
56,511

 
194,875

 
160,939

Patients
 
9,673

 
8,544

 
21,282

 
17,013

Net revenue
 
$
615,880

 
$
493,928

 
$
1,589,638

 
$
1,434,061


5. INCOME TAXES
During the three and nine months ended September 30, 2019, the Company recorded tax expense (benefit) of $3.6 million and $(3.3) million, respectively, which represents an effective tax rate of (9.1)% and 5.2%, respectively. During the three and nine months ended September 30, 2018, the Company recorded a tax expense (benefit) of $0.4 million and $(1.7) million, respectively, which represents an effective tax rate of 17.6% and 15.6%, respectively.
As a result of the Merger, the Company recorded a full valuation allowance against all of its net U.S. federal and state deferred tax assets with the exception of $1.0 million of estimated state net operating losses (“NOL”). The initial recognition of this valuation allowance by the Company was reflected in the acquired identifiable assets and liabilities of BioScrip as of the Merger Date and did not impact the Company’s tax expense (benefit) for the nine months ended September 30, 2019. Due to the Company’s valuation allowance position as of the Merger Date, the Company recognized no tax benefit for post-Merger activity for the third quarter ended September 30, 2019.
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 months ended September 30, 2019 of $3.6 million consists of quarterly tax liabilities attributable to specific state tax returns as well as the Company’s deferred tax expense recognized during the third quarter of 2019 prior to the Merger. The Company’s tax benefit for the nine months ended September 30, 2019 consists of a deferred tax benefit recognized by the Company prior to the establishment of its valuation allowance at the time of the Merger partially offset by estimated state tax liabilities.
6. (LOSS) EARNINGS PER SHARE
The Company presents basic and diluted (loss) earnings per share for its common stock. Basic (loss) earnings per share is calculated by dividing the net (loss) income of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings 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 dilutive potential common shares.
As a result of the Merger, which has been accounted for as a reverse merger, all historical per share data and number of shares and equity awards were retroactively adjusted. The (loss) earnings is used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. Accordingly, the computation of diluted shares for the three and nine months ended September 30, 2019 excludes the effect of shares that would be issued in connection with stock options and restricted stock awards, as their inclusion would be anti-dilutive to the loss per share. There are no dilutive potential common shares for the three and nine months ended September 30, 2018.

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The following table presents the Company’s basic and diluted (loss) earnings per share and shares outstanding (in thousands, except per share data):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net (loss) income
$
(42,794
)
 
$
1,791

 
$
(60,109
)
 
$
(9,369
)
Denominator:
 

 
 

 
 

 
 

Weighted average number of common shares outstanding
651,576

 
570,455

 
597,792

 
570,455

(Loss) Earnings per Common Share:
 
 
 
 
 
 
 
(Loss) earnings per common share, basic and diluted
$
(0.07
)
 
$
0.00

 
$
(0.10
)
 
$
(0.02
)
7. LEASES

During the three and nine months ended September 30, 2019, the Company incurred operating lease expenses of $7.4 million and $21.5 million, respectively, including short-term lease expenses, which were included as a component of selling, general and administrative expenses in the condensed consolidated statements of comprehensive income (loss). As of September 30, 2019, the weighted-average remaining lease term was 5.3 years and the weighted-average discount rate was 5.41%.
Operating leases mature as follows (in thousands):
Fiscal Year Ending
 
 
December 31
 
Minimum Payments
2019
 
$
6,793

2020
 
24,733

2021
 
19,026

2022
 
14,021

2023
 
10,614

After 2024
 
24,582

Total lease payments
 
$
99,769

Less: Interest
 
15,805

Present value of lease liabilities
 
$
83,964


In addition, the Company had $0.8 million of financing leases outstanding at September 30, 2019 which mature over the next year.
During the three months ended September 30, 2019, the Company did not enter into any significant new operating or financing leases. As of September 30, 2019, the Company did not have any significant operating or financing leases that had not yet commenced.
During the three and nine months ended September 30, 2018, the Company incurred rent expense of $4.5 million and $13.0 million, respectively, under ASC 840, Leases, which were included as a component of selling, general and administrative expenses in the unaudited condensed consolidated statements of comprehensive income (loss).

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8. PROPERTY AND EQUIPMENT

Property and equipment was as follows as of September 30, 2019 and December 31, 2018 (in thousands):
 
September 30, 2019
 
December 31, 2018
Infusion pumps
$
24,786

 
$
20,339

Equipment, furniture, and other
60,569

 
34,433

Leasehold improvements
84,675

 
61,302

Computer software, purchased and internally developed
34,500

 
29,668

Assets under development
4,585

 
5,447

 
209,115

 
151,189

Less accumulated depreciation
77,133

 
58,047

Property and equipment, net
$
131,982

 
$
93,142


Depreciation expense is recorded within cost of revenue and operating expenses within the 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, 2019 and 2018 (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Depreciation expense in cost of revenue
$
1,384

 
$
747

 
$
2,855

 
$
2,265

Depreciation expense in operating expenses
8,522

 
4,680

 
18,849

 
13,522

Total depreciation expense
$
9,906

 
$
5,427

 
$
21,704

 
$
15,787


9. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill consists of the following activity for the three and nine months ended September 30, 2019 (in thousands):
Three Months Ended September 30, 2019
June 30, 2019 - net book value
 
$
632,469

Acquisitions
 
786,904

September 30, 2019 - net book value
 
$
1,419,373

 
 
 
Nine Months Ended September 30, 2019
December 31, 2018 - net book value
 
$
632,469

Acquisitions
 
786,904

September 30, 2019 - net book value
 
$
1,419,373


Changes in the carrying amount of goodwill consists of the following activity for the three and nine months ended September 30, 2018 (in thousands):

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Three Months Ended September 30, 2018
June 30, 2018 - net book value
 
$
627,392

Acquisitions
 
4,492

September 30, 2018 - net book value
 
$
631,884

 
 
 
Nine Months Ended September 30, 2018
December 31, 2017 - net book value
 
$
627,392

Acquisitions
 
4,492

September 30, 2018 - net book value
 
$
631,884


The carrying amount and accumulated amortization of intangible assets consists of the following as of September 30, 2019 and December 31, 2018 (in thousands):
 
 
September 30, 2019
 
December 31, 2018
Gross intangible assets:
 
 
 
 
Referral sources
 
$
438,445

 
$
257,792

Trademarks/names
 
44,702

 
32,000

Other amortizable intangible assets
 
379

 
4,151

Total gross intangible assets
 
483,526

 
293,943

 
 
 
 
 
Accumulated amortization:
 
 
 
 
Referral sources
 
(77,749
)
 
(63,353
)
Trademarks/names
 
(10,657
)
 
(8,000
)
Other amortizable intangible assets
 
(42
)
 
(2,877
)
Total accumulated amortization
 
(88,448
)
 
(74,230
)
Total intangible assets, net
 
$
395,078

 
$
219,713


Amortization expense for intangible assets was $7.5 million and $17.3 million for the three and nine months ended September 30, 2019, respectively. Amortization expense for intangible assets was $4.9 million and $14.7 million for the three and nine months ended September 30, 2018, respectively.
The weighted average amortization period of intangible assets by class and in total as of September 30, 2019 are as follows: 17.1 years for referral sources, 4.1 years for trademarks/names, 1.5 years for other amortizable intangible assets, and 15.9 years for total intangible assets.
10. EQUITY-METHOD INVESTMENTS
The Company’s two equity-method investments totaled $16.1 million and $14.6 million as of September 30, 2019 and December 31, 2018, respectively, and are included in other noncurrent assets in the accompanying condensed consolidated balance sheets. The Company’s related proportionate share of earnings is recorded in equity in earnings of joint ventures in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). For the three and nine months ended September 30, 2019, the Company’s proportionate share of earnings in its investments was $0.8 million and $2.0 million, respectively. For the three and nine months ended September 30, 2018, the Company’s proportionate share of earnings was $0.3 million and $0.7 million, respectively.
Legacy Health Systems — The Company’s 50% ownership interest in this limited liability company, which provides infusion pharmacy services, expands the Company’s presence in the Portland, Oregon market. In 2005, Option Care’s initial cash investment in this joint venture was $1.3 million. The Company received a capital distribution from this investment of $0.5 million for the three and nine months ended September 30, 2019. The Company did not receive a capital distribution from this investment for the three or nine months ended September 30, 2018. The following presents condensed financial information as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 (in thousands).

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Consolidated statements of comprehensive income (loss) data:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net revenue
 
$
5,814

 
$
5,572

 
$
15,210

 
$
15,728

Cost of revenue
 
4,083

 
3,853

 
10,882

 
11,132

Gross profit
 
1,731

 
1,719

 
4,328

 
4,596

Net income
 
670

 
402

 
1,177

 
1,225

Equity in net income
 
335

 
201

 
588

 
612

 
Consolidated balance sheet data:
 
 
As of
 
 
September 30, 2019
 
December 31, 2018
Current assets
 
$
6,358

 
$
5,666

Noncurrent assets
 
4,072

 
3,403

Current liabilities
 
572

 
119

Noncurrent liabilities
 
740

 
8


Vanderbilt Health Services — The Company’s 50% ownership interest in this limited liability company, which provides infusion pharmacy services, expands the Company’s presence in the Nashville, Tennessee market. In 2009, Option Care contributed both cash and certain operating assets into the joint venture for a total initial investment of $1.1 million. The following presents condensed financial information as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 (in thousands).
Consolidated statements of comprehensive income (loss) data:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net revenue
 
$
9,638

 
$
7,659

 
$
28,701

 
$
22,055

Cost of revenue
 
7,473

 
5,718

 
21,989

 
16,943

Gross profit
 
2,165

 
1,941

 
6,712

 
5,112

Net income
 
982

 
199

 
2,859

 
88

Equity in net income
 
491

 
100

 
1,430

 
44

 
Consolidated balance sheet data:
 
 
As of
 
 
September 30, 2019
 
December 31, 2018
Current assets
 
$
10,095

 
$
6,517

Noncurrent assets
 
2,206

 
1,008

Current liabilities
 
1,116

 
192

Noncurrent liabilities
 
1,061

 
68


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11. INDEBTEDNESS
Long-term debt consisted of the following as of September 30, 2019 (in thousands):
 
 
Principal Amount
 
Discount
 
Debt Issuance Costs
 
Net Balance
ABL Facility
 
$

 
$

 
$

 
$

First Lien Term Loan
 
925,000

 
(8,681
)
 
(23,590
)
 
892,729

Second Lien Notes
 
400,000

 
(11,876
)
 
(14,455
)
 
373,669

 
 
$
1,325,000

 
$
(20,557
)
 
$
(38,045
)
 
1,266,398

Less: current portion
 
 
 
 
 
 
 
(6,938
)
Total long-term debt
 
 
 
 
 
 
 
$
1,259,460

Long-term debt consisted of the following as of December 31, 2018 (in thousands):
 
 
Principal Amount
 
Discount
 
Debt Issuance Costs
 
Net Balance
Previous Revolving Credit Facility
 
$

 
$

 
$

 
$

Previous First Lien Term Loan
 
401,513

 
(1,062
)
 
(5,678
)
 
394,773

Previous Second Lien Term Loan
 
150,000

 

 
(5,398
)
 
144,602

 
 
$
551,513

 
$
(1,062
)
 
$
(11,076
)
 
539,375

Less: current portion
 
 
 
 
 
 
 
(4,150
)
Total long-term debt
 
 
 
 
 
 
 
$
535,225

Retired Debt Obligations — During 2015, Option Care entered into two credit arrangements administered by Bank of America, N.A. and U.S. Bank. The agreements provided for up to $645.0 million in senior secured credit facilities through an $80.0 million revolving credit facility (the “Previous Revolving Credit Facility”), a $415.0 million first lien term loan (the “Previous First Lien Term Loan”), and a $150.0 million second lien term loan (the “Previous Second Lien Term Loan”, and together with the Previous First Lien Term Loan, the “Previous Term Loans”, and the Previous Term Loans, together with the Previous Revolving Credit Facility, the “Previous Credit Facilities”). Amounts borrowed under the credit agreements were secured by substantially all of the assets of the Company.
The Company incurred an original issue discount in conjunction with entering into the Previous First Lien Term Loan of $2.1 million, and also incurred an aggregate of $21.1 million in debt issuance costs to obtain the two credit agreements. These costs were recorded as a reduction to the carrying amount in the condensed consolidated balance sheets and were being amortized over the term of the related debt using the effective interest method for the Previous Term Loans and the straight-line method for the Previous Revolving Credit Facility.
On August 6, 2019, the Company repaid the outstanding balance of Previous Term Loans and retired the outstanding Previous Credit Facilities by entering into two new credit arrangements and a notes indenture, described below under “New Debt Obligations”. At the time of repayment, the outstanding balance of the Previous First Lien Term Loan was $393.8 million, which was comprised of principal of $399.4 million, net of debt issuance costs of $0.9 million and deferred financing costs of $4.7 million. The balance of the Previous Second Lien Term Loan was $145.8 million, which was comprised of principal of $150.0 million, net of deferred financing costs of $4.2 million. Proceeds from the two new credit arrangements and notes indenture were also used, in part, to repay the outstanding debt of BioScrip as of the Merger Date of $575.0 million.
The interest rate on the Previous First Lien Term Loan was 6.10% as of December 31, 2018 and the interest rate on the Previous Second Lien Term Loan was 11.15% as of December 31, 2018. The weighted average interest rate paid on the Previous First Lien Term Loan was 6.06% and 6.20% for the three and nine months ended September 30, 2019, respectively, prior to the retirement of the debt obligations. The weighted average interest paid on the Previous Second Lien Term Loan was 11.02% and 11.36% for the three and nine months ended September 30, 2019, respectively, prior to the retirement of the debt obligations. The weighted average interest rate paid on the Previous First Lien Term Loan was 5.83% and 6.38% for the three and nine months ended September 30, 2018. The weighted average interest paid on the Previous Second Lien Term Loan was 11.09% and 10.68% for the three and nine months ended September 30, 2018.

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New Debt Obligations — In conjunction with the Merger, the Company entered into an asset-based-lending revolving credit facility administered by Bank of America, N.A., as the administrative agent and a first lien term loan facility administered by Bank of America, N.A. and ACF Finco I LP, as joint lead arrangers and bookrunners. The Company also issued senior secured second lien PIK toggle floating rate notes due 2027 (the “Second Lien Notes”) under an indenture with Ankura Trust Company, LLC, as trustee and collateral agent for the Second Lien Notes. The two new credit agreements and the indenture were entered into on August 6, 2019 and provide for up to $1,475.0 million in senior secured credit facilities through a $150.0 million asset-based-lending revolving credit facility (the “ABL Facility”), a $925.0 million first lien term loan (the “First Lien Term Loan”, and together with the ABL Facility, the “Loan Facilities”), and a $400.0 million issuance of Second Lien notes.
The ABL Facility provides for borrowings up to $150.0 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. Interest on the ABL Facility is charged on Base Rate loans at Base Rate, as defined, plus 1.25% to 1.75%, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. Interest on the ABL Facility is charged on Eurocurrency Rate Loans at the Eurocurrency Rate, as defined, plus 2.25% to 2.75%, depending on the historical excess availability as a percentage of the Line Cap, as defined in the ABL Facility credit agreement. The ABL Facility contains commitment fees payable on the unused portion 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%. Borrowings under the ABL Facility are secured by a first priority security interest in the Company’s and each of its subsidiaries’ inventory, accounts receivable, cash, deposit accounts and certain assets and property related thereto (the “ABL Priority Collateral”), in each case subject to certain exceptions, and a third priority security interest in the Term Loan Priority Collateral, as defined below. The Company had no outstanding borrowings under the ABL Facility at September 30, 2019. The Company had $9.6 million of undrawn letters of credit issued and outstanding, resulting in net borrowing availability under the ABL of $140.4 million as of September 30, 2019.
The principal balance of the First Lien Term Loan is repayable in quarterly installments commencing in March 2020 of $2.3 million plus interest, with a final payment of all remaining outstanding principal due on August 6, 2026. Interest on the First Lien Term Loan is 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 is 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 6.61% as of September 30, 2019. The weighted average interest rate incurred was 6.67% for the period August 6, 2019 through September 30, 2019. Amounts borrowed under the First Lien Term Loan are secured by a first priority security interest in each of the Company’s subsidiaries’ capital stock (subject to certain exceptions) and substantially all of the Company’s property and assets (other than the ABL Priority Collateral), (the “Term Loan Priority Collateral”), in each case subject to certain exceptions, and a second priority security interest in the ABL Priority Collateral.
The Second Lien Notes mature on August 6, 2027. Interest on the Second Lien Notes is payable quarterly and is at the greater of 1% or the London Interbank Offered Rate (“LIBOR”), plus 8.75%. The Company elected to pay-in-kind the first quarterly interest payment, due in November 2019, which will result in the Company capitalizing the interest payment to the principal balance on the interest payment date. The interest rate on the Second Lien Notes was 10.89% as of September 30, 2019. The weighted average interest incurred was 10.89% for the period August 6, 2019 through September 30, 2019.
The Company assessed whether the repayment of the Previous Term Loans and subsequent issuance of the First Lien Term Loan and the Second Lien Notes 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 Previous Credit Facilities and the new Loan Facilities and Second Lien Notes; (ii) previous lenders that exited; and (iii) new lenders. The Company determined that $226.7 million of the Previous First Lien Term Loan was extinguished and none of the Previous Second Lien Term Loan was extinguished, which is disclosed as an outflow from financing activities in the condensed consolidated statements of cash flows. The Company determined that $752.4 million of new debt was issued related to the First Lien Term Loan and $250.0 million of new debt was issued related to the Second Lien Notes, which is disclosed as an inflow from financing activities in the condensed consolidated statements of cash flows. In connection with the issuance of the First Lien Term Loan, the Second Lien Notes, and the ABL Facility, the Company incurred $59.1 million in debt issuance costs and third-party fees, of which $54.6 million was capitalized, $1.3 million was expensed as a component of other expense and $3.2 million was expensed as a loss on extinguishment as a component of other expense. Further, $21.3 million of the total fees incurred of $59.1 million was netted against the $981.1 million of proceeds from debt as a component of the cash flows from financing activities, $36.5 million was presented as deferred financing costs as a component of cash flows from financing activities, and the remaining $1.3 million was included in cash flows from operating activities.
The Company recognized a loss on extinguishment of debt of $5.5 million, of which $3.2 million related to debt issue costs incurred with the issuance of the Loan Facilities and Second Lien Notes, as discussed above, and $2.3 million related to

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deferred financing fees on the Previous Credit Facilities, which were written off upon extinguishment. All remaining deferred financing fees related to the Previous Credit Facilities of $7.6 million were attributed to modified loans, which are capitalized and will be amortized over the remaining term of the Loan Facilities and Second Lien Notes.
Long-term debt matures as follows (in thousands):
Fiscal Year Ending December 31,
 
Minimum Payments
2019
 
$

2020
 
9,250

2021
 
9,250

2022
 
9,250

2023
 
9,250

2024 and beyond
 
1,288,000

Total
 
$
1,325,000

During the three and nine months ended September 30, 2019, the Company engaged in hedging activities to limit its exposure to changes in interest rates. See Note 12, Derivative Instruments, for further discussion.
The following table presents the estimated fair values of the Company’s debt obligations as of September 30, 2019 (in thousands):
Financial Instrument
 
Carrying Value as of September 30, 2019
 
Markets for Identical Item (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
First Lien Term Loan
 
$
892,729

 
$

 
$
922,688

 
$

Second Lien Notes
 
373,669

 

 

 
394,653

Total debt instruments
 
$
1,266,398

 
$

 
$
922,688

 
$
394,653

The following table sets forth the changes in Level 3 measurements for the nine months ended September 30, 2019 (in thousands):
 
 
Level 3 Measurements
Previous Term Loans fair value as of January 1, 2019
 
$
551,882

Change in fair value
 
(369
)
Repayments of debt principal
 
(2,075
)
Retirements of Previous Term Loans
 
(549,438
)
Issuance of Second Lien Notes as of August 6, 2019
 
388,000

Change in fair value
 
6,653

Second Lien Notes fair value as of September 30, 2019
 
$
394,653

See Note 13, Fair Value Measurements, for further discussion.
12. DERIVATIVE INSTRUMENTS
The Company uses derivative financial instruments for hedging and non-trading purposes to limit the Company’s exposure to increases in interest rates related to its variable interest rate debt. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative financial instrument will change. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including reviewing credit ratings when appropriate.

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During 2017, Option Care entered into interest rate caps that reduce the risk of increased interest payments due to interest rates rising. The hedges offset the risk of rising interest rates through 2020 on the first $250.0 million of the Previous First Lien Term Loan. The interest rate caps perfectly offset the terms of the interest rates associated with the variable interest rate Previous First Lien Term Loan. Option Care entered into the interest rate caps as a cash flow hedge for a notional amount of $1.9 million. In April 2019, Option Care terminated its interest rate caps and received cash proceeds of $1.7 million, net of early termination fees. In conjunction with the termination of the interest rate caps, Option Care discontinued the hedge accounting associated with the interest rate caps.
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. 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 LIBOR through August 2021. In accordance with ASU 2017-12, Targeted Improvements to Accounting for Hedges, the Company has determined that the hedges are perfectly effective. The remaining $13.9 million notional amount of the interest rate swap is not designated as a hedging instrument.
The second interest rate swap of $400.0 million notional will become effective in November 2019 and will be 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. The interest rate designated as a cash flow hedge is expected to be perfectly effective at offsetting the terms of the interest rates associated with the Company’s variable interest rate Second Lien Notes. The following table summarizes the amount and location of the Company’s derivative instruments in the condensed consolidated balance sheets (in thousands):
 
 
Fair value - Derivatives in asset position
Derivative
 
Balance Sheet Caption
 
September 30, 2019
 
December 31, 2018
Interest rate caps designated as cash flow hedges
 
Prepaids and other current assets
 
$

 
$
2,627

Total derivatives
 
 
 
$

 
$
2,627

 
 
Fair value - Derivatives in liability position
Derivative
 
Balance Sheet Caption
 
September 30, 2019
 
December 31, 2018
Interest rate swaps designated as cash flow hedges
 
Other non-current liabilities
 
$
7,883

 
$

Interest rate swaps not designated as hedges
 
Other non-current liabilities
 
120

 

Total derivatives
 
 
 
$
8,003

 
$

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 are recognized in net income 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 condensed consolidated statements of comprehensive income (loss) (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
Derivative
2019
 
2018
 
2019
 
2018
Interest rate caps designated as cash flow hedges
$
(398
)
 
$
221

 
$
(1,103
)
 
$
2,165

Interest rate swaps designated as cash flow hedges
(7,883
)
 

 
(7,883
)
 

 
$
(8,281
)
 
$
221

 
$
(8,986
)
 
$
2,165

The following table presents the amount and location of pre-tax income (loss) recognized in the Company’s condensed consolidated statement of comprehensive income (loss) related to the Company’s derivative instruments (in thousands):

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Three months ended September 30,
 
Nine months ended September 30,
Derivative
 
Income Statement Caption
 
2019
 
2018
 
2019
 
2018
Interest rate caps designated as cash flow hedges
 
Interest expense
 
$
269

 
$
89

 
$
(125
)
 
$
158

Interest rate swaps designated as cash flow hedges
 
Interest expense
 
129

 

 
129

 

Interest rate swaps not designated as hedges
 
Interest expense
 
(118
)
 

 
(118
)
 

 
 
 
 
$
280

 
$
89

 
$
(114
)
 
$
158

The Company expects to reclassify $5.8 million of total interest rate costs from accumulated other comprehensive loss against interest expense during the next 12 months.
13. FAIR VALUE MEASUREMENTS

Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and gives the lowest priority to unobservable inputs (Level 3 measurements). The categories within the valuation hierarchy are described as follows:

Level 1 — Inputs to the fair value measurement are quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs to the fair value measurement include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3 — Inputs to the fair value measurement are unobservable inputs or valuation techniques.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

First Lien Term Loan: The fair value of the First Lien Term Loan is derived from a broker quote on the loans in the syndication (Level 2 inputs) See Note 11, Indebtedness, for further discussion on the carrying amount and fair value of the First Lien Term Loan.
Second Lien Notes: The fair value of the Second Lien Notes is derived from a cash flow model that discounted the cash flows based on market interest rates (Level 3 inputs) See Note 11, Indebtedness, for further discussion on 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 12, Derivative Instruments, for further discussion on the fair value of interest rate swaps.
Interest rate caps: The fair values of interest rate caps 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. In April 2019, Option Care terminated its interest rate caps. The total investment in interest rate caps as Level 2 assets was $0 million and $2.6 million as of September 30, 2019 and December 31, 2018, respectively. See Note 12, Derivative Instruments, for further discussion on the fair value of interest rate caps.
There were no other assets or liabilities measured at fair value at September 30, 2019 or December 31, 2018.
14. 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

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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.
15. STOCK-BASED INCENTIVE COMPENSATION
Equity Incentive Plans — Under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), approved at the annual meeting by the BioScrip stockholders on May 3, 2018, 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 16,406,939 shares of common stock were initially authorized for issuance under the 2018 Plan.
Stock Options — During the three and nine months ended September 30, 2019, the Company recognized compensation expense related to stock options of $0.5 million. The Company did not recognize any compensation expense related to stock options prior to the Merger.
Restricted Stock — During the three and nine months ended September 30, 2019, the Company recognized compensation expense related to restricted stock awards of $1.7 million. The Company did not recognize any compensation expense related to restricted stock awards prior to the Merger.
HC I Incentive Units — During the three and nine months ended September 30, 2019, the Company recognized compensation expense related to HC I incentive units of $0.5 million and $1.7 million, respectively. During the three and nine months ended September 30, 2018, the Company recognized compensation expense related to HC I incentive units of $0.6 million and $1.7 million, respectively. See Note 17, Related-Party Transactions, for further discussion of this management equity ownership plan.
16. STOCKHOLDERS’ EQUITY
2017 Warrants — Prior to the Merger, BioScrip issued warrants to certain debt holders pursuant to a Warrant Purchase Agreement dated as of June 29, 2017. In conjunction with the Merger, the 2017 Warrants were amended to entitle the purchasers of the warrants to purchase 8.3 million shares of common stock. The 2017 Warrants have a 10-year term and an exercise price of $2.00 per share, and may be exercised by payment of the exercise price in cash or surrender of shares of common stock into which the 2017 Warrants are being converted in an aggregate amount sufficient to pay the exercise price. The 2017 Warrants were assumed by the Company in conjunction with the Merger. The 2017 Warrants are classified as equity instruments, and the fair value of these warrants of $14.1 million was recorded in paid-in capital as of the Merger Date.
2015 Warrants — Prior to the Merger, BioScrip issued warrants pursuant to a Common Stock Warrant Agreement dated as of March 9, 2015 which entitle the holders to purchase 3.7 million shares of common stock. The 2015 Warrants have a 10-year term and have exercise prices in a range of $5.17 per share to $6.45 per share. The 2015 Warrants were assumed by the Company in conjunction with the Merger and are classified as equity instruments, and the fair value of these warrants of $4.6 million was recorded in paid in capital as of the Merger Date.
Home Solutions Restricted Stock — In conjunction with BioScrip’s 2016 acquisition of Home Solutions, Inc., 7.1 million restricted shares of common stock were issued, of which 3.1 million of these units vest upon the closing price of the Company’s common stock averaging at or above $4.00 per share over 20 consecutive trading days prior to December 31, 2019 and 4.0 million of these units vest upon the closing price of the Company’s common stock averaging at or above $5.00 per share over 20 consecutive trading days prior to December 31, 2019. The restricted stock expires on December 31, 2019. As discussed in Note 1, Nature of Operations and Presentation of Financial Statements, 28,193,428 common shares issued to HC I in conjunction with the Merger are held in escrow to prevent dilution related to the vesting of the Home Solutions restricted stock. In the event the Home Solutions restricted stock expires unvested, the 28,193,428 common shares held in escrow will be returned to the Company and canceled.

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Treasury Stock — During the three and nine months ended September 30, 2019, 1,146,065 shares were surrendered to satisfy tax withholding obligations on the exercise of stock options and the vesting of restricted stock awards with a cost basis of $2.4 million. At September 30, 2019, the Company held 1,736,220 shares of treasury stock. No treasury stock existed prior to the Merger.
Preferred Stock — In conjunction with the Merger, all legacy BioScrip preferred stock was settled, and no preferred stock is outstanding as of September 30, 2019. There was no preferred stock existing as of December 31, 2018.
17. RELATED-PARTY TRANSACTIONS
Management Equity Ownership Plan — In October 2015, HC I implemented an equity ownership and incentive plan for certain officers and employees of Option Care. The officers were able to purchase membership units in HC I and could fund a portion of the purchase with a loan from Option Care. These loans were treated as a shareholder contribution in Option Care. For the nine months ended September 30, 2019 and 2018, $0 and $0.4 million, respectively, were credited to paid-in capital related to HC I membership units purchased with a loan from Option Care. There were no shareholder redemptions during the three months ended September 30, 2019. During the nine months ended September 30, 2019, shareholder redemptions totaled $2.4 million, comprised of a cash distribution to HC I of $2.0 million and notes redeemed of $0.4 million.
During the three months ended September 30, 2019, prior to the Merger, Option Care sold its notes receivable from management, along with all accrued interest expense, to a third-party bank. Option Care received cash proceeds of $1.3 million, which represented payment of $1.1 million in outstanding notes receivable from management and payment of $0.2 million in accrued interest expense. Notes receivable from management of $0 and $1.6 million remained outstanding as of September 30, 2019 and December 31, 2018, respectively. The notes receivable from management and associated interest receivable are recorded in management notes receivable as a reduction to equity on the Company’s condensed consolidated balance sheets as of December 31, 2018.
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 $0.6 million and $1.8 million for the three and nine months ended September 30, 2019, respectively. The Company recorded management fee income of $0.6 million and $1.6 million for the three and nine months ended September 30, 2018, 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 $3.1 million as of September 30, 2019. The Company also had amounts due to its joint ventures of $0.9 million and amounts due from its joint ventures of $0.1 million as of December 31, 2018. These payables were included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets and 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 purchased by the Company on behalf of the joint ventures.

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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. 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.
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 definitive merger proxy filed with the Securities and Exchange Commission on June 26, 2019, as well as the Company’s unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this 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 132 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 as of September 30, 2019. See Note 3, Business Acquisitions, of the unaudited condensed consolidated financial statements for further discussion on the Merger.
Merger Integration Execution
The Merger of Option Care and BioScrip into Option Care Health has created an opportunity to realize cost synergies while continuing to drive organic growth in chronic and acute therapies through our expanded national platform. Option Care

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Health is well-positioned to leverage the investments in corporate infrastructure and drive economies of scale as a result of the Merger. The forecasted synergy categories are as follows:
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 believe the achievement of these synergies 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